An SEC MD&A Comment Example

By: George M. Wilson, SEC Institute

Many of us are finalizing disclosures in our Form 10-K (or perhaps a 10-Q) for December 31, 2017. Here is a reminder and issue to consider as you review your MD&A.

In our workshops when we discuss the SEC review process for MD&A we always mention the Staff’s focus on deeper analysis of causal factors and drivers in MD&A. Here is an SEC comment that highlights both issues. It presents a nicely balanced approach based on the nature of the company’s business to the issues raised by the Staff.

The Staff’s Comment:

 

  1. We note that your discussion of results of operations identifies certain events and trends affecting revenues and expenses. However, your current discussion lacks sufficient analysis and quantification of the underlying reasons for changes in your results of operations. For example, you state that for the year ended February 2, 2014, revenue increased $54.9 million from the net addition of 53 stores and Blue Tomato sales during fiscal 2013 that were not comparable to the prior year, partially offset by the effect of the 53rd week included in fiscal 2012 results and comparable store sale decrease of 0.3% for fiscal 2013. Please provide expanded discussion of the underlying reasons of your revenue growth, including quantified information with respect to key drivers such as price, volume and other key variables that management uses to manage the business. Also, please expand the discussion of results of operations for all periods discussed to quantify the effect of the events disclosed and to describe their underlying causes. For additional guidance, please refer to SEC Release 33-8350, available on the SEC website at www.sec.gov./rules/interp/33-8350.htm. Please provide a draft of your proposed disclosure.

 

The Company’s Response

We believe that our discussion of the results of operations identifies and discloses the key performance indicators used to manage our business and that we believe are material to our investors. In particular, as a retailer that offers a diversity of merchandise, including men’s and women’s apparel, footwear, accessories and hardgoods, the sales results of any one product category are not material to understanding our results of operations. Rather, we believe that due to our diversification model, comparable sales is a key performance indicator. Accordingly, in response to the Staff’s comment, we will provide additional disclosures on the quantification of our net sales results by comparable sales, geographic region, new stores and other relevant categories (such as the presence of an additional week during a fiscal period) in future filings. As an example, please refer below for our expanded quantification of the reasons for our revenue growth related to fiscal 2013 compared with fiscal 2012 (emphasis on modifications added):

Fiscal 2013 had 52 weeks versus 53 weeks in fiscal 2012. Net sales numbers for fiscal 2012 include an additional week and fiscal 2013 comparable sales are compared to the comparable sales for the 52 weeks ended February 2, 2013. Net sales were $724.3 million for fiscal 2013 compared to $669.4 million for fiscal 2012, an increase of $54.9 million or 8.2%. The increase reflected a $65.9 million increase due to the net addition of 53 stores (made up of 53 new stores in North America and six new stores in Europe offset by six store closures in North America) and Blue Tomato sales during fiscal 2013 that were not comparable to the prior year, partially offset by a $9.3 million decrease due to the impact of the 53rd week included in fiscal 2012 results and a $1.7 million decrease due to comparable sales for fiscal 2013. By region, North American sales increased $35.2 million and European sales increased $19.7 million during fiscal 2013 compared to fiscal 2012.

The 0.3% decrease in comparable sales was a result of a 1.0% decrease for our comparable in-store sales, partially offset by a 5.4% increase for our comparable ecommerce sales. Total ecommerce sales represented 12.3% of sales for fiscal 2013, compared to 11.2% of sales for fiscal 2012, increasing due to Blue Tomato ecommerce sales that were not comparable to the prior year and the growth in comparable ecommerce sales mentioned above. The decrease in comparable sales was primarily driven by a decline in comparable transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased due to an increase in units per transaction, partially offset by a decrease in average unit retail due to changes in sales product mix. Comparable sales decreases in men’s apparel, footwear and boy’s apparel were partially offset by comparable sales increases in junior’s apparel, hardgoods and accessories. For information as to how we define comparable sales, see “General” above.

Furthermore, we will continue to review our discussion on results of operations and enhance the disclosure to provide analysis and quantification, as appropriate, in accordance with SEC Release 33-8350.

 

 

As always, your thoughts and comments are welcome!

 

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