A retailer is posting strong earnings growth in its bricks-and-mortar business, but its fledgling Internet operation is posting losses. In making their earnings estimates, should Wall Street analysts ignore those losses and focus only on the profitable business, or should they took at the company’s retailing operations as a whole, which means lowering their profit forecasts to reflect the dot-com losses? That is the crux of the battle among a growing number of companies, and recently a behind-the scenes conflict heated up because Staples, Inc. was able to persuade many analysts to submit estimates for the office supplier’s first quarter, omitting losses from its Stapes.com division. Most retailers, including Wal-Mart, lump their Internet results in with everything else. Staple’s competitor, Office Depot, which is making money on its Internet business, rolls the Internet side into its overall results. Toys “R” Us and Block-buster also include losses from their Internet operations in their overall results.
REQUIRED:
Explain why Staples might want to separate the losses from its new start-up operation, and provide some reasons that company management may offer to justify the action. Do you think the losses should be reported, separated, included with the overall results, or ignored?