Channel Stuffing or Poor Predicting?
A reader recently pointed out the fact that LoJack (NasdaqGS: LOJN) appears to be "channel stuffing" its international sales. What exactly is "channel stuffing" and how does one detect whether it's taking place?
Channel stuffing is the practice of selling more products to one's customers than the customers can sell to their customers. (For a more detailed description, see
here.) In the short-term, this can increase sales (and therefore profits), but it can't be sustained forever since the customer's inventories will continue to bloat until there is finally a day of reckoning.
To determine whether a company in which you are considering investing is stuffing its channels, the first stop is the revenue recognition note to the financial statements. For example, here is what LoJack has to say about how it recognizes revenues from international customers:
Revenue relating to sales to our third party installation partners is recognized upon shipment, which is prior to the installation of the related products in the consumer’s vehicle. Revenue from the sales of products and components of the LoJack System to international licensees is recognized upon shipment to the licensee or when payment becomes reasonably assured.
Basically, LoJack recognizes a sale once it has shipped the product to its international 'licensee', or customer. While this is not the most conservative method of accounting (since the product has not actually been installed in anyone's vehicle at the time the sale is recognized), it is not all that unusual.
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