Zumiez Has Company

Back on September 23, I posted an article that highlighted, among other things, Zumiez?s valuation and management of its issue with auction rate securities. I said that I thought other companies would be having similar issues if they weren?t already. Guess what? They are, and I didn?t want to leave Zumiez hanging out there like they were the only one.

Bebe Stores, Abercrombie & Fitch, Urban Outfitters, and Buckles all reported in their recent quarterly or annual reports issues of valuation or impairment or both to their auction rate securities (ARS). The only other report that?s been issued is from Nike. They did not report this issue.

Bebe said that as of July 5th they had an ARS portfolio of $236 million net of an impairment charge of $7.8 million. Abercrombie indicated they began to experience failure of auctions for these securities on February 13, 2008. ?For the thirteen and twenty-six week periods ended August 2, 2008, the Company recorded an unrealized gain of $0.9 million and an unrealized loss of $17.9 million, respectively, all related to ARS.?

Urban Outfitters, in its September 9 quarterly report, didn?t take any meaningful impairment charges, but they did note that $52.1 million out of a total of $91.1 million had been ?classified as long-term assets in marketable securities in the Company?s Condensed Consolidated Balance Sheet as of July 31, 2008 due to ARS auction failures.? It isn?t unusual to classify ARS securities as long-term, but that $52.1 million was classified as Level 3. That is, the value was estimated based on ?Unobservable inputs that reflect the reporting entity?s own assumptions,? whatever that means.

Buckles reported that their ARSs were $55.8 million at August 2, down from $145.8 million at February 2. They?ve taken a charge of $1.55 million during the first half of fiscal 2008. They do not report any of their ARS?s as level 3.

As you can see, there are choices here about how to account for these things and each company?s valuation approach is different. There?s quite a bit of complexity here, and it probably won?t be helped by the fact that ?The Justice Department is ramping up criminal investigations into the collapse of the market for investments known as auction-rate securities,? according to an October 2 (page A6) Wall Street Journal article.

It will be interesting to see what the next quarterly statements show. My guess is that some companies (and not necessarily the ones I mention in this story) will have to bite the bullet harder. I?m also wondering how the uncertainty as to the values of these securities and how long they are going to have to be held impacts a company?s overall financing. First, if you can?t sell them, you don?t have the cash available for financing your operations. Second, one has to wonder what your friendly banker, who is already concerned about market conditions and may have his or her own funding constraints, is thinking when they look upon these assets that may not be quite the collateral they thought they were. Will it make them nervous in funding the company?

I hope some companies don?t end up with their ARS in a sling. Sorry, I just couldn?t resist.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line.

For more information, visit www.jeffharbaugh.com.