CHANNEL STUFFING Report Says Enterasys Boosted Product Shipments.(INTERNET & TECHNOLOGY)

Byline: Mike Angell

Stuffing a turkey is good. Stuffing the channel isn't. In fact, accusing a company of "channel stuffing" is roughly the equivalent of calling the company a turkey.

A Morgan Stanley report puts that charge to Enterasys Networks Inc. The company, and some other analysts, disagree.

The report says the network gear maker boosted product shipments to resellers in August. At times, such a practice is derisively called channel stuffing. It's a way some companies record goods as sold, though the products weren't sold to an end user per se. The resellers still must sell them.

Recording revenue on sales to resellers is OK by generally accepted accounting standards. But too much of this has negative implications and can lead to charges of channel stuffing.

The Morgan Stanley report helped spark a 30% one-day drop in Enterasys' shares. The stock fell 3.86 to 9.19 on Aug. 20. It now trades near 10.

The company confirms that it boosted shipments to resellers. But its executives and other analysts say that's not channel stuffing. The analysts and Bob Gagalis, chief financial officer for Enterasys, say the company is just preparing for what it hopes will be a strong September. Still, Gagalis says, the company might change some of its accounting practices to avoid such worries in the future.