The difference between the EPS numbers reported by the analyst tracking services and the EPS in accordance with GAAP are due to pro-forma numbers presented by The Great Atlantic and Pacific Tea Company (GAP). These pro-forma differences are specifically related to a program called “Project Great Renewal” that was implemented by the board of directors of GAP. This project was implemented to improve the performance of the company. In the third quarter of fiscal year 1998, GAP closed two warehouse facilities in Canada. In the fourth quarter of fiscal year 1998, the board of directors decided to close 127 stores and dispose of two other properties. In the fourth quarter, GAP reported a Project Great Renewal charge of $213,153,000. This
…show more content…
Companies can use these to manipulate and smooth earnings. By presenting and classifying certain events as unusual and nonrecurring, managers can use pro-forma earnings to try to “explain” why EPS should be higher. As a result, there can be a lot of manipulation going on. Pro-forma financial statements are not as highly regulated as GAAP statements, so there is even more opportunity for manipulation.
Analysts seem to pay attention to a company’s pro-forma earnings. I do not agree with this practice. GAAP is in place for a reason, and that is to provide a consistent and regulated method for financial reporting. If companies are allowed to “explain” away negative earnings through pro-forma earnings, then where are the goals of consistency and comparability? This practice is not good for investors at all, especially if a company is consistently using pro-forma earnings to smooth earnings. Analysts should focus more on GAAP EPS. This will keep all companies under the same reporting practices. It may be useful to consider pro-forma earnings, but GAAP EPS should be more highly favored.
In the case of GAP, I believe that their pro-forma financial statements are representative of the significant amount of restructuring costs that the company had. It seems that this was a legitimate unusual, nonrecurring expense. I believe that the GAAP EPS shows the true performance of GAP for the fourth quarter. Sometimes pro-forma