HOW NEW ACCOUNTING REALITIES WILL BUFFET EQUITY VALUATION

For reasons too obvious to cite, much more attention is being paid to financial reporting at publicly held companies. And those in the food-distribution sector are no exception.One indication of the increased attention to financial reports was illustrated well in recent days when a bellwether firm outside the food business -- General Electric Co. -- issued its first-quarter financials. It's instructive

For reasons too obvious to cite, much more attention is being paid to financial reporting at publicly held companies. And those in the food-distribution sector are no exception.

One indication of the increased attention to financial reports was illustrated well in recent days when a bellwether firm outside the food business -- General Electric Co. -- issued its first-quarter financials. It's instructive to see what happened at GE since it's the nation's largest company, as measured by market capitalization, and it's grappling with many financial issues faced elsewhere.

GE issued financial results that, on their face, were impressive in terms of earnings growth, namely a 17% rise. But, since GE and other companies face a mandated change in accounting methods having to do with the write-down of goodwill, GE's earnings plunged by 2.7% after considering that. The effect of the extraordinary charge, coupled with a number of other concerns about GE's accounting, caused its equity value to sink by 9% on the very day numbers were issued.

What's going on with goodwill? Well, in the past companies could amortize diminishing value of acquired assets, if any, over a protracted period of time. That caused the effect of declining value to be small for any given quarter. New regulations now require companies to gulp the bitter pill by recognizing diminished asset value, or goodwill, all at once.

Now, to bring this a little closer to home, this arcane issue of goodwill has already buffeted one company in the food-distribution sector, Safeway. To be sure, Safeway's situation is far from that of GE's, but there is this similarity: Safeway recognized the full lessened value of two of its acquisitions, Dominick's and Randall's, when it reported first-quarter results. Safeway bought Dominick's for $1.2 billion in 1998 and Randall's for $1.3 billion the following year.

This month, as was earlier reported, Safeway wrote down the value of Dominick's by $589 million and of Randall's by $111 million. That gave Safeway a combined hit of $700 million against its quarterly earnings, plunging it into the loss column by nearly $368 million. Absent that extraordinary charge, though, Safeway would have earned $332 million for the quarter, against $284 million for the same quarter the previous year. Safeway's stock fell $1.02 per share on the news of the loss, but now seems to be stabilizing in the $43-$44 per-share range. That's probably because Safeway's underlying earnings are acceptable and its acquisitions have added, in the aggregate, some $3 billion in value, considering Vons, Carrs and Genuardi's.

Further illustration of the sensitivity of accounting issues occurred lately when Ahold's equity value slumped as investors grew suspicious of that company's reporting methods. Ahold, the food retailer based in the Netherlands, had issued an annual earnings report based on Dutch accounting requirements, then later reiterated earnings based on U.S. requirements. That resulted in sharply lower stated earnings for its 2001 fiscal year.

It's fair to expect that equity values will remain volatile for a time as new accounting realities continue to flow through the system.