Closeout sales

Closeout sales: Closeout sales are sales of licensed product made outside its normal full-price channel at a reduced price in order to clear it: excess and end-of-season inventory, discontinued styles and outgoing model years sold to off-price retailers, jobbers or liquidators, and, where the agreement groups them together, irregulars and seconds. Licensing agreements deal with them in a clause of their own rather than through the deduction stack, because the licensor's concern is where its mark ends up as well as what it earns. The clause can set a separate royalty rate for closeout units; a deemed-value floor, under which net sales for a unit cannot fall below a stated share of standard wholesale price or below cost; a requirement for the licensor's written approval before disposal; a restriction to named accounts or approved channels; a cap on closeout volume expressed as a share of the period's sales or units; a requirement to remove or deface the mark; a separate reporting category; or an outright prohibition. One agreement can combine several of these, and two agreements in the same portfolio can treat an identical shipment in opposite ways.

Two reporting errors follow from treating a closeout as an ordinary low-priced sale. The first is running it through the deduction stack as a markdown: the unit reports at its low realised value, no deduction check questions it, and the clause that actually governs it — a separate rate, a floor or a prohibition — is never applied. The second is reporting at invoice value under a floor clause, which under-reports every closeout unit by construction. Both are avoided only when closeout status is an attribute on the sales line at the time of sale — carried by the account, the channel or an order type that marks the disposal — rather than a reclassification made at period close. A line that does not say it is a closeout cannot pick up the alternative rate or the floor, and a volume cap measured at close is only discovered once it has been exceeded. Reporting the units correctly does not discharge the cap or the approval requirement; those are compliance obligations sitting on the same line. Closeout rules can also change at termination: a sell-off period can permit channels the term prohibited, or prohibit channels the term allowed, so the rule that applies is decided by the transaction date.