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Accounting change shreds LNT profits

CLIFTON, N.J. — Hit by a change in the way it accounts for vendor allowances, and then by a downturn in business that took a bite out of sales, second-quarter profits at Linens 'n Things slumped 84.6 percent, to $879,000 from $5.7 million.

The big dive at the bottom line was triggered almost entirely by a non-cash item — a change in accounting that requires the home furnishings retailer to pull out of this year's results, at least on paper, the cash it takes in from suppliers in the form of charge-backs, slotting fees, markdown money and allowances.

Put the vendor allowances back in to this year's numbers to create an apples-to-apples comparison, and earnings declined at a more moderate pace of 13.8 percent, stung by a slowdown in traffic and sales.

Underlining the crucial importance of chargebacks and allowances to a retailer's bottom line — as they become a profit center in themselves — Linens 'n Things took in $4.1 million in the form of vendor allowances during the quarter, but made only $879,000 from the act of selling merchandise. Putting it another way — more than 82 percent of the retailer's real second quarter profit came from the substantial sums of cash it siphons out of its suppliers.

Sales at the big-box specialty retailer increased by 10.5 percent, to $578.7 million from $523.7 million last year. Same-store sales were virtually flat, edging up just 0.2 percent, hit by "a slowdown in guest traffic during the quarter," said CEO Norman Axelrod.

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