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Chargebacks Case in Point: Linens'n Things

As a lesson in how quickly chargebacks add up, or how crucial they are to a retailer's bottom line, consider the case of Linens' n Things. The retailer discovered just how much chargebacks can mean to the bottom line — and potentially to a company's stock price and the value of the stock and options it doles out to executives.

During 2004, under a new set of accounting rules mandated by the federal Securities and Exchange Commission, the retailer said it banked $13.3 million from chargebacks and allowances. As it turned out, that represented somewhat more than a fifth, or 21.1%, of the entire year's profit of $63.1 million, making chargebacks a major profit center for the retailer.

Digging deeper into the numbers, it's clear the specialty retailer was sometimes making more money off its suppliers than it was by ringing up sales. During that the third quarter of 2004, Linens'n Things just barely made money — a skimpy $30,000 — without the $7.9 million in pre-tax cash that it took from its suppliers.

Ditto the second quarter of the same year, when chargebacks and vendor allowances brought in $4.1 million. Without that sometimes grudging contribution from vendors, the specialty chain made only $879,000 from the act of selling merchandise.

In fact, more than 82% of the retailer's real second quarter profit derived from the substantial sums of cash it siphoned out of its suppliers. That's not chump change.

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