6.1 Consumer

6.1.1 Retail, Wholesale, and Distribution

The SEC staff’s comments to registrants in the retail, wholesale, and distribution industry have continued to focus on (1) greater transparency in registrants’ disclosures within MD&A about material trends and uncertainties that affect results of operations and (2) non-GAAP measures. Such comments have also focused on climate-related disclosures in a manner consistent with the staff’s focus on that topic across industries (see Section 3.1.5 for a discussion of comments on climate-related disclosures that have been or may be issued to registrants in general). Recent comments on MD&A have requested additional discussion and explanation related to factors driving revenue and operational performance, noting that some factors discussed on earnings calls, such as inflation, macroeconomic factors, or inventory shrink, are not likewise disclosed in MD&A.

For registrants in this industry as well as those in other industries, the presentation of non-GAAP measures remains a hot topic of SEC comments. Registrants continue to receive comments on (1) whether there is undue prominence of non-GAAP measures, (2) enhancing the disclosure related to the purpose and use of such measures, and (3) identification and clear labeling of non-GAAP measures. In addition, the SEC staff has frequently commented on a registrant’s non-GAAP measures when (1) adjustments appear to be normal recurring cash operating expenses and (2) the registrant has not provided the required quantitative reconciliation to the most directly comparable GAAP measure. See Section 3.4 for a discussion of non-GAAP comment letter trends.

6.1.1.1 MD&A

Examples of SEC Comments

You disclose your merchandise margins decreased by [X] basis points as a result of actions to reduce targeted . . . inventory overages, item-level deals provided . . . during the holiday season and higher inventory shrink due to increased theft. The results of . . . these events and pricing actions taken by you appear to have caused a material change in the relationship between cost of goods sold and revenues. Please describe to us and disclose in quantitative terms the extent to which these factors and your actions impacted your income from operations as well as your gross profit margin for the [fiscal year].
Please revise your disclosure to include discussion of how your operations are impacted by the differing sales channels on which your products are offered. In this regard, we note your disclosure . . . that your “e-commerce channel has been [y]our fastest-growing business over the last several years.” We also noted, you present retail store data which shows a decline in retail stores year over year with an overall increase to your net revenues. To the extent results and trends are not materially consistent across all sales channels, please quantify in dollars and/or percentage change the impact each sales channel had and is expected to have on your results of operations. Refer to Item 303 of Regulation S-K.
We note that the change in net sales was driven by lower sales in both stores and digital, and that the impact of higher average ticket was offset by lower units per transaction. Please quantify the extent to which changes in net sales are attributable to changes in prices or to changes in the volume of goods being sold. Refer to Item 303(b)(2)(iii) of Regulation S-K.
We note your disclosure that company comparable store sales for the third quarter of fiscal [year 2] decreased by [X]% compared to the same period in fiscal [year 1] and that comparable store sales for the year-to date period of fiscal [year 2] decreased [Y]% compared to the same period in fiscal [year 1]. Please revise your discussion to provide more robust insight from management as to the underlying reasons for the declines in your comparable store sales and to clarify whether management expects this trend to continue in the future.
Please expand your discussions of sales for each year to quantify in dollars the increase in sales from new stores and the increase in comparable store net sales. Please also expand your discussions of gross profit, selling, general and administrative expenses and operating income, to quantify the impact that each material variable or factor had on your results of operations.
You state that the current inflationary environment has impacted your results. In future filings, please expand to identify the principal factors contributing to the inflationary pressures you experienced and clarify the resulting impact it has had on you.
Please tell us the percentage of revenue generated from sales to [X] Members and the percentage of revenue from sales to non-members during each of fiscal [year 1] and the [first quarter of fiscal year 2]. To the extent that you are experiencing different trends in revenue or gross profit from members and non-members, please tell us how you considered discussing and quantifying these trends in MD&A. We remind you that your MD&A disclosure should include a robust discussion of known trends or uncertainties that you reasonably expect have had, or will have, a material impact on your sales.
Please revise your definition of [gross merchandise value (GMV)] to state whether it includes shipping charges or the merchandise value of items that are returned.
We note your disclosure . . . of supply chain disruptions in the second half of the year. Please specify whether these challenges have materially impacted your results of operations or capital resources and quantify, to the extent possible, how your sales, profits, and/or liquidity have been impacted. Discuss any known trends or uncertainties resulting from mitigation efforts undertaken, if any.

The SEC staff may ask registrants to provide additional quantitative disclosures related to drivers of changes between periods or qualitative disclosures about known trends, including inflationary or macroeconomic impacts on operations. The staff may also review transcripts from a company’s earnings call and may comment on metrics or impacts on operations discussed by management on the earnings call that are not also discussed in MD&A. In addition, the staff frequently asks registrants to improve their MD&A (e.g., by including operational and statistical measures) to help investors see registrants’ performance through the eyes of management.

Many retailers consider same-store sales a key operating metric; accordingly, same-store sales are often discussed in MD&A to help explain fluctuations in results of operations. Because there can be variability in the way same-store sales are calculated, registrants should (1) clearly define same-stores sales, (2) disclose how same-stores sales are calculated, and (3) describe any key assumptions and limitations to the metric. The SEC staff often asks registrants in the retail sector to enhance their disclosures about metrics such as same-store sales and elaborate on any factors that could affect year-to-year comparability.

Online retailers that sell on behalf of third parties will often quote GMV to provide additional disclosure of the value of the merchandise that runs through their systems. In such instances, the SEC staff may ask registrants to clearly define GMV.

Further, the SEC staff has frequently commented on a registrant’s non-GAAP measures, including, as noted in Section 6.1.1, when (1) adjustments appear to be normal recurring cash operating expenses and (2) the registrant has not provided the required quantitative reconciliation to the most directly comparable GAAP financial measure.

See Sections 3.1 and 3.4 for additional information.

6.1.1.2 Gross Profit or Cost of Sales

Examples of SEC Comments

You present two amounts for revenues — total revenues and net revenues. If total revenues represent your ASC 606 revenues, please relabel the profit measure you currently call net revenues to better reflect what it actually represents. Also, tell us whether this profit measure is fully burdened with all amounts that would be required to be included in gross profit. If it is not fully burdened, please tell us in detail how it is not.
It appears cost of revenue excludes a portion of depreciation and amortization expense. We also note that you present gross profit. Please tell us in detail what depreciation and amortization is included in cost of revenue. In addition, tell us your consideration of SAB Topic 11:B.

The SEC staff often asks registrants to disclose the types of expenses that are included in or excluded from the cost-of-sales line item and to support their determination of the types of costs included in cost of sales in accordance with Regulation S-X, Rule 5-03(b)(2).

As a related matter, the SEC staff may also ask registrants to support their consideration of SAB Topic 11.B when they elect not to allocate depreciation and amortization to cost of sales. SAB Topic 11.B states, in part:

If cost of sales or operating expenses exclude charges for depreciation, depletion and amortization of property, plant and equipment, the description of the line item should read somewhat as follows: “Cost of goods sold (exclusive of items shown separately below)” or “Cost of goods sold (exclusive of depreciation shown separately below).” [D]epreciation, depletion and amortization should not be positioned in the income statement in a manner which results in reporting a figure for income before depreciation.

Under Rule 5-03, a subtotal line item for gross margin (or a similar measure, such as gross profit) is not required on the face of the income statement. However, if a registrant presents a subtotal for the measure, it should not exclude any applicable depreciation and amortization since such exclusion would result in the presentation of a “figure for income before depreciation.” Further, reporting cost of sales that is not fully burdened and excludes other expenses, such as stock compensation expense, is not permitted in the financial statements since this would be reporting a non-GAAP financial measure.

See Section 2.9.2.2 for additional information.

6.1.1.3 Segment and Entity-Wide Disclosures

Examples of SEC Comments

Please tell us your consideration of reporting revenue by product and services, or groups of similar products and services, such as [Product 1] and [Product 2], pursuant to ASC 280-10-50-40.
Explain to us how you evaluated the aggregation criteria in ASC 280-10-50-11 in determining you have only one reportable segment. In doing so, explain in sufficient detail how you determined your operating segments have similar economic characteristics. We note from your most recent Forms 10-K and 10-Q that retail store and e-commerce comparable sales increases were materially different for all periods presented. We further note management’s statements during your fourth quarter . . . earnings call that e-commerce sales have margins below that of your brick and mortar business.
You disclose you have three operating segments (North America, EMEA and Asia Pacific). You further indicate you have aggregated these operating segments into one reportable segment based upon their shared customer base and similar economic characteristics. Please explain to us in detail how the customer base is shared and how this meets the applicable criteria for aggregation contained in ASC 280-10-50-11. Likewise, demonstrate how the economic characteristics are similar among the three separate geographic operating segments and how you determined the segments can be expected to essentially have the same future prospects. In your response, tell us the measure(s) you consider to be economically similar and why such measure(s) was selected.

Given that registrants in the retail, wholesale, and distribution industry typically have multiple distribution channels (e.g., stores, catalogs, the Internet), geographic locations, and store concepts and brands, the SEC staff frequently asks such registrants about the identification and aggregation of their operating segments, particularly when they disclose only one reportable segment. In addition, when a registrant changes its segments, it should clearly disclose the new operating and reportable segments and any related changes to reporting units. ASC 280 also requires disclosure of revenue by similar products or services on an entity-wide basis. The SEC staff may object to overly broad views of what constitute “similar” products and services and frequently asks registrants to specifically disclose their similar products and services in accordance with ASC 280-10-50-40, unless it is impracticable to do so. See Section 2.20 for more information about SEC staff comments related to segment reporting.

6.1.2 Transportation, Hospitality, and Services

The SEC staff’s comments to registrants in the transportation, hospitality, and services (THS) industry have focused on non-GAAP measures and key operating metrics.

6.1.2.1 Non-GAAP Measures and Key Operating Metrics

Registrants in the THS industry continue to receive comments from the SEC staff on the use of non-GAAP measures. The SEC staff often question registrants regarding (1) the undue prominence of their non-GAAP measures, (2) their failure to properly reconcile a non-GAAP measure to the most directly comparable GAAP measure, and (3) their use of adjustments in forming non-GAAP measures that appear to represent normal recurring cash operating expenses or are based on individually tailored accounting principles. For additional considerations, see Section 3.4.