The Scramble for Gift-Card Cash
Quick, how many gift cards were in your Christmas stocking, and how many will you actually get around to spending? Needham (Mass.)-based researcher TowerGroup (MA) estimates that of the $97 billion worth of plastic cards purchased in 2007, nearly $8 billion has gone unused, although no one has an exact count.
Just what happens to that pile of cash has become a matter of some controversy. A lot of states—roughly half—claim that at least part of the unspent balances should go to them under their unclaimed-property laws. Other states let that excess dribble back onto retailers' income statements under varying conditions. Naturally, stores issuing the cards are scrambling to ensure the most advantageous accounting.
Half the cards snapped up by shoppers last year were bought in November and December, and most will be redeemed by the end of January. That alone will give retailers, who had a dismal holiday season, a boost, since they can't claim revenue from selling a card until the customer uses it to make a purchase. Until then, the card balance generally appears on the corporate balance sheet as a liability since, presumably, at some point a customer will trade it for merchandise.
It's what happens to the cash on all those gift cards that are misplaced, ignored, or only partly spent that's at the heart of the debate. For individual retailers, unspent balances can range anywhere from 2% to more than 10% of all gift-card sales, according to accounting and consulting firm Deloitte & Touche.
Who gets to keep that money depends on where the retailer locates its card division. Some states, including Delaware and New York, demand unspent balances be sent to them after periods ranging from two to five years. (If the card is used after that point, the retailer generally honors it but can apply to the state for a reimbursement.) Other states, including Florida and Virginia, allow retailers to hang on to the money. In those cases, after periods ranging from 18 months to seven years, the retailer can move the money from the balance sheet directly into operating income.
Investors who want to know how much of a retailer's profit comes from moving the merchandise and how much from simply pocketing unspent card balances face a challenge, since few retailers disclose any details about gift-card income. Still, it clearly can add up. In the past two years, electronics retailer Best Buy (BBY), which currently has $471 million in unspent balances on its books and issues its cards from Virginia, added $135 million in unspent gift cash to its total operating income of $3.6 billion. And teen chain store Hot Topic (HOTT) fed more than $3 million into profits in a single quarter when unspent cards accounted for 22% of its $13.9 million in 2005 fourth-quarter operating profits.
But for a retailer, just setting up a card operation in a state such as Virginia that doesn't attempt to collect unspent balances isn't always enough. Other states with different policies will claim a portion, based on how much value remains on cards held by their residents, unless retailers can show that they don't know who holds the cards.
New York, for example, is trying to haul in as many unspent dollars as it can. In the past three years it's brought in $19 million in unspent balances, and State Comptroller Thomas P. DiNapoli has had talks with other states about trying to push for a uniform federal solution.
The problem of unspent card balances could be solved another way. In Japan, card balances are stored in cell phones rather than on plastic, which makes them much more accessible. Should that technology come to the U.S., it could sharply reduce the number of cards that are simply lost or forgotten.