Although many businesses operate on a fiscal year distinct from the calendar year, some use a distinctive 52/53-week fiscal year. This reporting convention can enhance the comparability of periods and the convenience of reporting timeframes, but it also comes with disadvantages and may not be fully understood by market participants. This article reviews the use of the 52/53-week convention of the past several decades and notes that although its use may be declining overall, it remains popular in certain industries.
Accounting professionals are well aware that companies have choices about how to define a fiscal year. After all, many businesses operate on a fiscal year that does not coincide with the calendar year. In some industries, a variation of the fiscal year concept known as the 52/53-week fiscal year is also common. In fact, the National Retail Federation encourages the use of a 52/53-week fiscal year, also known as the 4-5-4 calendar (https://bit.ly/3GqbUfx). The basic idea of this calendar is to think in terms of 52 weeks rather than 12 months. This approach results in a fiscal year with 364 days (52 weeks × 7 days), which means there is one remaining day each year (or two days in a leap year). Those extra days accumulate such that approximately every five to six years, an extra week must be added to the fiscal year. Thus, a company operating under this reporting convention has a 53-week fiscal year every five to six years.
The following is a deeper look at the 52/53-week reporting convention. First, there is a discussion of the benefits, disadvantages, and best practices involved in choosing a 52/53-week fiscal year. This is followed by a review of some of the unintended capital market consequences associated with this reporting convention. The article concludes with data on the popularity of this reporting structure over time and across industries.
Benefits of a 52/53-Week Reporting Convention
The primary reason to choose a 52/53-week fiscal year is comparability. In many industries (e.g., retail, apparel, restaurants, hotels) sales can fluctuate dramatically between week-days and weekends. In addition, the number of weekends in a calendar month varies from one year to the next. The solution is to create a fiscal year in which the same number of weekends appears in comparable months, and in which holiday periods are lined up. For example, Bloomin’ Brands noted that the primary reason the company switched to a 52/53-week fiscal year in 2014 was to improve comparability between periods because of these aforementioned reasons (https://bit.ly/3nmUHw2). The 52/53-week fiscal year improves comparability between periods by dividing the year into four quarters that each have three months based on a 4 weeks/5 weeks/4 weeks format (totaling 13 weeks per quarter). This format also has the benefit of lining up internal accounting procedures with external financial reporting, as many managers choose to look at comparable monthly periods from an internal perspective regardless of the external reporting framework.
As explained by Mark Bauman (“The Effect of the 53-Week Year on Annual Growth Rates,” The CPA Journal, April 2013, pp. 65–67), another benefit of choosing a 52/53-week fiscal year is that the end of every period always occurs on the same day of the week, and companies can choose whichever day best suits their needs. Such a schedule can be helpful for planning manufacturing schedules and various end-of-period accounting activities. For example, Kopin Corporation in 2004 stated that changing to a 52/53-week year end “was made to better match our production and shipping cycle, which is organized on a weekly basis” (https://bit.ly/3rhmLSQ). In addition, some manufacturers that use the 52/53-week fiscal year choose Friday to be the last day of their reporting period, because that always gives them the weekend to count inventory without causing a disruption to production (Rick Johnston, Andrew J. Leone, Sundaresh Ramnath, and Ya-wen Yang, “14-Week Quarters,” Journal of Accounting and Economics, 2012, vol. 53, pp. 271–289).
Disadvantages of a 52/53-Week Reporting Convention
One disadvantage of the 52/53-week reporting convention is that equal quarter length, and year-over-year comparable monthly periods come at the cost of traditional month-to-month comparisons because some fiscal months have four weeks and some have five weeks. A similar problem exists when comparing traditional months (i.e., not all months have the same number of days), but the differences are usually only one day (and no more than three days). Several firms have adopted a system that overcomes this problem by creating 13 four-week periods (https://cnb.cx/3tjE746). In that system, however, one quarter has an extra four-week period (month), meaning one quarter is much longer than all the rest.
Another disadvantage of using a less common reporting structure is that reporting periods may not align with customer and vendor reporting periods. For example, Excel Switching Corporation stated that the company would move away from a 52/53-week year in 1998 “to better synchronize the Registrant’s fiscal periods with the majority of its customers and suppliers” (https://bit.ly/33wTVp4).
Best Practices of a 52/53-Week Reporting Convention
There are a few best practices that managers should consider when contemplating a 52/53-week reporting convention. First, reporting periods should end on a day that makes sense for the company (for inventory counts, production schedules, timekeeping schedules, etc.). For example, Learning Tree International, Inc. chooses to end its reporting periods on Fridays because its courses run based on calendar weeks; this allows for efficiencies with recognition of revenue and direct costs related to courses (https://bit.ly/3qoQH07). Second, because the fiscal year always ends on the same day of the week in a specific calendar month, managers can choose to define the year end as either the last date on which that day of the week occurs in the specific month, or on whatever date that day of the week falls on that is closest to the end of the specific month. For example, Apple Inc.’s fiscal year is defined as ending on the last Saturday of September, so its fiscal year always ends on one of the last seven dates in September (i.e., September 24–30). On the other hand, The Home Depot, Inc.’s fiscal year is defined as ending on the Sunday nearest to January 31, so its fiscal year always ends on one of seven dates from January 28 through February 3. Third, as with any fiscal year selection process, year (and quarter) ends should be at convenient times of the year; many entities choose a slower time of the year. For example, it is rare to see a retail business with a December 31 year end. Finally, keeping all subsidiaries on the same reporting structure eases the consolidation process. In fact, issues related to consolidation (e.g., from merger and acquisition activity) are commonly cited as reasons why a company switches either to or away from a 52/53-week fiscal year. For example, Clark Holdings Inc. switched to a 52/53-week fiscal year due to the acquisition of a company in 2008 (https://bit.ly/3qnN0HS), and Monterey Gourmet Foods switched from a 52/53-week fiscal year in 2005 “to accommodate the consolidation process of newly acquired subsidiaries” (https://bit.ly/3zVlUuU).
Do Capital Markets Understand the 52/53-Week Year End?
Interestingly, there is evidence to suggest that capital market participants overlook non-standard reporting periods. For example, Johnston, Leone, Ramnath, and Yang (“14-Week quarters,” Journal of Accounting and Economics, 2012) found that for entities using 52/53-week financial reporting conventions, financial analysts do not incorporate the sales and earnings effects of the extra week in 14-week fiscal quarters into their forecasts of firm performance. Thus, on average, they underestimate both revenues and earnings in such quarters. Forecast estimation errors recur, albeit in the opposite direction, four fiscal quarters later in a year following a 14-week quarter. In a similar vein, investors do not appear to incorporate the impact of the additional week in 14-week quarters, and their surprise at the “unexpected” increase in revenues and earnings results in stock price adjustments that lead to abnormal stock returns. These results would not be expected in a fully efficient market.
In addition to analysts and investors overlooking a 53rd week when it arises, other researchers have studied opportunistic behavior, such as whether these longer periods give rise to executive pay increases. Jorgensen, Rock, and Simpson [“What a Difference a Day Makes (In Executive Compensation),” working paper, 2016] found that companies which use a 52/53-week fiscal year increase CEO pay in 53-week years, but do not appear to adjust CEO compensation back down in subsequent 52-week years. Differences in corporate governance characteristics among companies (e.g., the relative independence of the board of directors) do not mitigate this phenomenon, notwithstanding the Dodd-Frank Act’s requirement that shareholder “say-onpay” votes must occur at least once every three years.
Following the theme of opportunistic behavior, there is also anecdotal evidence that managers use the 52/53-week reporting convention to their advantage in other ways. In 2018, New Brunswick (NB) Liquor Corporation added a 53rd week to the provincially owned corporation’s fiscal year, but management did not raise corporate profit targets to reflect the extra week of sales. This resulted in inflated corporate bonuses and enabled management to avoid reporting an earnings decline that would otherwise have occurred. Not only did NB Liquor’s management fail to disclose the change in its fiscal year reporting convention—it actually ascribed an “unusually” large C$9 million increase in sales to good management (https://bit.ly/3nnXgOG).
Are Companies Choosing the 52/53-Week Reporting Convention More or Less Often?
Identifying companies that report on a 52/53-week convention is a nontrivial task. To begin, the authors used the Python programming language to extract fiscal year–end dates from 10-K filings for all filings available on the SEC’s Edgar system during 1996–2017. These dates were then compared with reporting dates in the Compustat database, because the Compustat database standardizes dates to the closest month-end. Thus, date differences between these two sources serve as an initial identifier of years where the company is operating on a 52/53-week reporting convention. This condition, however, is not a perfect identification tool, because companies that use the 52/53-week reporting convention will occasionally have fiscal years that fall on the end of the month, just by nature of the calendar. Therefore, the authors manually checked the coding for all companies that had at least one year that was initially identified as a year where the company employed the 52/53-week reporting convention (thanks to Michelle Wilson for assistance).
Exhibit 1 presents the breakdown of companies operating on a 52/53-week year-end convention over time. For the 1996–2017 period, 11.9% of all fiscal years were reported under the 52/53-week convention, which suggests that this is not an insignificant phenomenon. The raw number of entities using this reporting convention has decreased over time, but so has the total number of entities. On a relative basis, Exhibit 1 shows that the percentage of companies using this reporting convention in a given year is also decreasing over time. In 1996, 15.1% of companies used a 52/53-week reporting convention; in 2017, only 8.5% used that approach. Although it appears there is a decline in the popularity of this reporting convention over time, this data does not provide insights as to why this occurred.
Use of 52/53-Week Fiscal Year Over Time
One potential reason for a decline in the popularity of the 52/53-week reporting convention could be that existing companies are switching away from its use. To examine this possibility, Exhibit 2 presents the number of companies that switched to or from a 52/53-week year end across the sample period. Interestingly, there does not appear to be a dramatic difference between companies switching to or from this reporting convention. In fact, over the sample period there are more companies switching to a 52/53-week reporting convention (181) than switching away from this convention (139). Overall, this does not appear to be the cause of the decline.
Companies Changing Reporting Convention, By Year
Another potential reason for the decline in popularity could be due to a shift away from this convention in certain industries, or to a trend whereby the industries in which this convention is popular are declining (or consolidating) such that the relative size of those industries is decreasing. Exhibit 3 presents the industry breakdown of companies using the Fama-French 30 industry classification system derived from Standard Industrial Classification (SIC) codes. From Exhibit 1, the total number of publicly traded companies covered by the Compustat database has decreased from 6,015 in 1996 to 4,733 in 2017; those two years are represented in Exhibit 3. As expected, Exhibit 3 also shows that the 52/53-week reporting convention is most common in certain industries. In 2017, the following industries all have greater than 50% of companies operating on a 52/53-week reporting convention: apparel; textiles; retail; and restaurants, hotels, motels. Given that the National Retail Federation encourages the use of the 52/53-week fiscal year, it is somewhat surprising that only 58% of firms in the retail industry in 2017 follow that recommendation.
Industry Breakdown of Companies, 1996 vs. 2017
The final column of Exhibit 3 presents the difference between the percentage of companies in an industry that used a 52/53-week reporting convention in 1996 versus 2017. The data shows that, although some industries have increased usage of the 52/53-week reporting convention between 1996 and 2017, many industries have decreased usage. It appears that the overall decline in usage over time shown in Exhibit 1 is due, at least in part, to a general decline in usage across many, but not all, industries. Although this may at first seem inconsistent with Exhibit 2 (showing more firms switching to a 52/53-week reporting convention during the sample period), Exhibit 2 does not account for new companies entering and others exiting the sample period.
Table 3 also presents evidence that is consistent with a relative decline in the importance of certain industries that also happen to have high concentrations of firms reporting under the 52/53-week convention. For example, in 1996 the retail industry made up 5.8% of all publicly traded companies. In 2017, however, the industry made up only 3.3% of all publicly traded companies. In fact, all industries that had at least 10% of entities reporting under the 52/53-week convention saw declines in the industry’s relative size between 1996 and 2017. On the other hand, the two industries with the largest increases in relative size (banking, insurance, real estate, trading and healthcare, medical equipment, pharmaceutical products) had only 0.4% and 2.2% of entities reporting under the 52/53-week convention, respectively. Thus, the most salient explanation for the decline of businesses using the 52/53-week reporting convention appears to be that the relative size of the industries where that convention is most common has decreased.
A Relative Decline?
The 52/53-week reporting convention is quite popular in some industries. Management teams choose this reporting convention primarily for comparability across time. Despite its relative popularity, capital market participants are not always attuned to the idiosyncrasies of this reporting convention. Overall, the percentage of publicly traded companies that operate under this convention has declined over time. This does not, however, appear to be due to a lack of popularity within certain industries, but rather a decline in the relative size of those industries over time.