The Ones Writing It Off

<December 11, 2025>

In the Seinfeld episode “The Package” (season 8), Jerry asks Kramer to return his broken stereo for a refund. Instead of returning it, Kramer smashes the stereo, puts it in a box, and tries to defraud the post office.

Jerry: What happened to my stereo? It's all smashed up.

Kramer: That's right. Now it looks like it was broken during shipping, and I insured it for $400.

Jerry: But you were supposed to get me a refund.

Kramer: You can't get a refund. Your warranty expired two years ago.

Jerry: So we’re going to make the Post Office pay for my new stereo?

Kramer: It's just a write off for them.

Jerry: How is it a write off?

Kramer: They just write it off.

Jerry: Write it off what?

Kramer: Jerry, all these big companies they write off everything.

Jerry: You don't even know what a write off is.

Kramer: Do you?

Jerry: No. I don't.

Kramer: But they do, and they’re the ones writing it off.

Kramer was right—and it’s not just big corporations. Small-cap companies also rely on write-offs, using them to sweep mistakes under the rug. We’ve seen it all over the years. Whether tied to acquisitions, bloated inventory, or costly restructurings, write-offs are the executive equivalent of a mulligan—a convenient do-over when things go wrong.

Earlier in our careers, large write-offs were rare and treated as significant events. Over time, however, corporations have shifted from the occasional “big bath” to a steady stream of supposedly one-time or non-operating expenses. What was once an exception has now become routine.

Earnings that exclude these items are called adjusted earnings—a metric that, in practice, allows companies to take perpetual write-offs. Management teams carefully guide analysts on which expenses to include and which to ignore. These adjustments typically appear at the end of earnings reports, often taking up pages of disclosures. Over time, the lists have gotten longer and longer.

Kroger (KR) reported earnings last week and, as usual, provided extensive disclosures on its adjusted results. The adjusted income statement and accompanying footnotes stretched across several pages of the press release. As with most companies today, Kroger’s adjusted earnings came in significantly higher than its GAAP numbers.

When earnings are released, investors focus almost entirely on adjusted earnings, often overlooking the actual results. Unsurprisingly, most companies manage to beat the adjusted earnings estimates they themselves guided analysts to expect. Wall Street cheers, investors celebrate, and the cycle repeats. It’s a highly profitable game for executives loaded with stock options and for investors aggressively positioned in equities.

In recent years, the gap between actual and adjusted earnings has been widening. In fact, without these adjustments, companies in the Russell 2000 wouldn’t be profitable in aggregate. It’s worth asking: would investment strategists still recommend rotating into small-cap stocks if their decisions were based on actual earnings? With this gap continuing to expand, we think it’s important for investors to be careful when valuing stocks on current or forward adjusted earnings—on which most analysts and strategists rely. 

On May 15, 2025, Dick’s Sporting Goods (DKS) announced it would acquire Foot Locker (FL) for $2.5 billion. Given Dick’s strong performance and Foot Locker’s ongoing challenges, the deal came as a surprise. In our view, the potential upside did not justify the financial and operational risks associated with attempting to turn around a struggling retailer.

On November 25, 2025, Dick’s released its Q3 results, including the initial impact of the Foot Locker acquisition. The press release was titled, “DICK'S Sporting Goods, Inc. Reports Third Quarter Results; Raises 2025 Outlook for the DICK'S Business”. Our immediate reaction was: what exactly is “Dick’s Business”? Reading further, it became clear that Dick’s was separating the newly acquired Foot Locker operations for reporting purposes. In other words, adjusted earnings for “Dick’s Business” would exclude Foot Locker results entirely.

Excluding Foot Locker’s results had a significant effect on adjusted earnings. On a GAAP basis, Dick’s earnings per share were $0.86. Once Foot Locker was excluded, adjusted EPS for “Dick’s Business” jumped to $2.78. The company also removed “the dilutive effect of the 9.6 million shares issued as part of the Foot Locker acquisition.”  By excluding the negative impact from the Foot Locker acquisition, Dick’s was able to raise its 2025 earnings guidance to $14.25-$14.55 from $13.90-$14.50 previously.

Excluding Foot Locker’s results will continue to benefit adjusted earnings as management attempts to turn around underperforming stores and reduce inventory. In Q3, Foot Locker reported a 4.7% decline in same-store sales and an operating loss of $46 million. Results are expected to remain weak in Q4, with gross margins dropping 1,000-1,500 basis points and same-store comps falling in the mid-to high single digits. Management plans aggressive inventory reductions, resulting in $500-$750 million in pretax charges. What could have been seen as an earnings disaster is largely being overlooked, allowing both the company and investors to avoid the negative consequences of the Foot Locker acquisition.   

We suspect that once Foot Locker’s inventories are cleared and the division returns to profitability, its results will be folded back into adjusted earnings. In the meantime, the additional costs of the acquisition are largely being ignored or forgiven by investors. Since the earnings release, Dick’s stock is up 12% (as of 12/5/25). In effect, through adjusted earnings, companies have found a way to exclude much of the risk associated with acquisitions—which is significant, considering most acquisitions destroy value.

While the adjusted earnings game has helped inflate and prolong the current market cycle, we believe it is being pushed to extremes. Real costs of running a business—or even financing an acquisition—are routinely excluded from adjusted earnings. With each new expense left out, the quality of the earnings used to justify current equity valuations continues to decline.

With both corporations and investors benefiting, few are willing to challenge what we see as an increasingly abusive accounting practice. Perhaps we’re just envious of not being able to exclude our own mistakes from performance! Regardless, in a world fixated on adjusted earnings, we remain focused on actual results and their impact on balance sheets, cash flows, and what we believe businesses are worth.

Kramer was right—they are the ones writing it off, and they’ll continue to do so until there’s meaningful pushback against the practice of adjusting earnings. As long as stocks respond favorably to earnings that “beat” estimates by excluding whatever management considers non-core or one-time, few have an incentive to question it. With each passing earnings season, we’re increasingly amazed at what investors are willing to accept. Companies and Wall Street may set the rules of the adjusted earnings game, but it’s ultimately up to investors to decide whether to keep playing along. 

Eric Cinnamond

eric@palmvalleycapital.com

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Definitions:

Earnings per share (EPS): The amount of a company’s profit that belongs to each share of its stock. It’s calculated by taking the company’s total profit and dividing it by the number of shares that are currently outstanding.

Adjusted earnings: Non-GAAP adjusted earnings are financial metrics that exclude certain items not considered part of a company's core operations, such as one-time expenses or non-cash items, to provide a clearer picture of ongoing performance.

Write-off: A corporate write-off is an accounting entry that reduces a company's taxable income by recognizing losses from uncollectible debts, damaged inventory, or other unrecoverable expenses. This process helps maintain accurate financial records and ensures compliance with accounting standards.

Russell 2000: The Russell 2000 is a stock market index that tracks the performance of approximately 2,000 small-cap companies in the U.S., representing the smallest segment of the broader Russell 3000 Index. It is commonly used as a benchmark for small-cap investments and reflects the performance of smaller publicly traded companies.

Basis points (bps): A basis point (BPS) is a way to show changes in interest rates or yields. One basis point equals one-hundredth of a percentage point, making it a precise way to discuss even very small rate movements. Basis points are typically expressed with the abbreviations "bp," "bps," or "bips."

Same store sales (comps): Same-store comps, or same-store sales, refer to a financial metric that measures the revenue performance of retail locations that have been open for at least one year, excluding new or closed stores. This metric helps assess organic growth by comparing sales from the same period in different years, providing insights into the health of existing stores.

GAAP: GAAP stands for Generally Accepted Accounting Principles, which are a set of standardized rules and guidelines used in the United States for preparing and reporting financial statements. These principles ensure consistency, transparency, and accuracy in financial reporting across different organizations.