The spreading controversy over improper backdating of stock options has caught up several multichannel retailers. Two of them, Sharper Image Corp. and The Children’s Place, disclosed this month that they have been notified they could lose their listings on the NASDAQ stock exchange because of delays in filing financial reports stemming from reviews of stock option practices.
Both companies said they anticipated the NASDAQ notices because they put off filing financial reports with the U.S. Securities and Exchange Commission while they conducted reviews related to stock option grants. Sharper Image, No. 87 in the Internet Retailer Top 500 Guide, said the resources devoted to the review had prevented it from providing auditors with the information they needed to complete the financial reports. The company said it would seek a hearing before NASDAQ on the delisting notice.
The Children’s Place, No. 244, in the Internet Retailer Top 500 Guide, issued a statement saying it would respond to the NASDAQ notice.
The companies are among several multichannel retailers affected by the increased scrutiny of stock option practices. The SEC this week filed charges against two former executives of Apple Inc., No. 15, in the Internet Retailer Top 500 Guide, in connection with backdating of stock options. The SEC said it would not file charges against Apple. After an internal review, Apple said in December it would take an $84 million charge for options that were backdated between 1997 and 2002.
Backdating can increase the value of stock options, which can lead to understating of compensation expenses and overstating of company earnings. Backdating is not illegal if properly disclosed.
Several retailers are acknowledging that they did not always provide the required disclosure. Barnes & Noble Inc. this month reported that its internal review reported that backdating of stock options led to $45.5 million in additional grants. The company said its wholly owned subsidiary, Barnes & Noble.com, No. 30 in the Internet Retailer Top 500 Guide, would take a $10 million charge in connection with the option review.
Bed Bath & Beyond Inc., No. 113 in the Internet Retailer Top 500 Guide, also has announced a review of its stock options procedures.
Glass Lewis & Co., which researches publicly traded companies, says at least 257 companies are conducting internal reviews of their stock option practices, have conducted such reviews or are being investigated by the SEC or Department of Justice. Among the other retailers that have completed internal reviews are Staples Inc., No. 3 in the Internet Retailer Top 500 Guide; Gap Inc., No. 24 in the Internet Retailer Top 500 Guide; Home Depot, No. 41 in the Internet Retailer Top 500 Guide; bebe Stores Inc., No. 258 in the Internet Retailer Top 500 Guide; and Restoration Hardware Inc., No. 273 in the Internet Retailer Top 500 Guide.
All five companies have reported some discrepancies, and all said there was no evidence of intentional wrongdoing. Home Depot reported in October that its review of 26 years of option grants led it to conclude that it understated expenses by $200 million during that time. Staples reported in November it was taking a $10.8 million expense as a result of its review of 10 years of option grants.
Gap reviewed 10 years of options grants and last fall recorded a $4.5 million additional compensation expense, “which is not a material impact for a company our size,” a spokesman says. Restoration Hardware added $1.2 million to expenses last fall after its review. Bebe Stores added $155,000 to employment expenses in fiscal 2006 after finding errors in dating options.
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