So there we were, sitting around the Calcbench virtual breakroom, wondering how we should finish up the rest of the year. Then the intern piped up: “Why don’t we form a SPAC? Everyone else is doing it!”
Ummm, no, we politely told the intern. But he had raised an interesting point: how many groups are launching SPACs these days?
For those not in the know, Special Purpose Acquisition Companies (SPACs) are investment vehicles that investors with lots of money can use to take firms public quickly. The SPAC is essentially a publicly traded holding company, which then uses its funds to acquire operating firms. The acquisition closes, and presto — that target’s operations are now part of the publicly traded SPAC.
SPACs use a dedicated SIC code when filing financial statements. This means Calcbench can identify all the SPACs that have been cropping up lately, and see what revenues, operating income, assets, and liabilities these folks have been reporting.
First, a lot of SPACs have come onto the scene lately. Take a look at the numbers in Figure 1, below.
The number of SPACs filing statements with the U.S. Securities & Exchange Commission more than doubled in one year, from 80 firms in Q3 2019 to 170 in Q3 2020. Moreover, most of that surge happened in the last six months!
Then we peeked at the assets these firms have, since the value of assets is what drives a SPAC’s ability to make acquisitions. Here are some factoids to digest along with your turkey leftovers:
Of the 170 SPACs we found in Q3 2020, only 11 reported any revenue at all — and almost all of that revenue came from two firms! Infrastructure & Energy Alternatives ($IEA) reported $552.2 million, and AgroFresh Solutions ($AGFS) reported $52.8 million. No other SPAC even cracked $1 million in revenue.
Meanwhile, 157 of 170 firms reported an operating loss in the third quarter (and seven firms reported exactly zero dollars of operating income) and 165 of 170 reported negative operating cash flow.
The bottom line is that scores of SPACs have cropped up in the last six months. A fair number of them have a respectable amount of assets to pursue their acquisition dreams, but almost all of them are operating at a loss right now.
Who are these SPACs, and what do they want to do? You can use our Interactive Disclosures database to research specific firms and their filings, and some do tell a rather, um, interesting tale.
One of our favorites was Yacht Finders ($YTFD), which apparently launched in the early 2000s to act as an online database of yachts, matching buyers and sellers. By 2007 that business idea was taking on water, so the firm sailed into the SPAC business instead.
“The company’s business plan now consists of exploring potential targets for a business combination through the purchase of assets, share purchase or exchange, merger or similar type of transaction,” the firm said in its most recent quarterly report.
Well, that’s one way to keep your options open. Although as of third-quarter this year, Yacht Finders had no assets and no income.
Anyway, there are plenty of other SPACs in the sea. You can find them using the SIC code 6770, and then use our Interactive Disclosure page or our Multi-Company page to research any or all of them to your heart’s content.
One detail in the new rules caught our eye: that firms will not need to tag the data in their MD&A in a machine-readable format such as XBRL. Tagging would allow analysts to find data in the MD&A more quickly and export it to Excel or other analytical tools for whatever number crunching you want to do — but it would also impose new costs on filers to comply with that rule, and the SEC commissioners decided that firms’ compliance costs are high enough already. So no tagging of MD&A disclosures.
For Calcbench users, however, a critical question follows.
Who cares? We’ve already been tagging data in firms’ MD&A disclosures for years! You get it as part of the package, and that’s not going to change no matter what rules the SEC does or doesn’t adopt.
The technical details of how we parse and tag a firm’s MD&A disclosures aren’t important here. If you really want to know, email us at email@example.com; we’d be happy to set up an appointment to geek out on the subject of structured data for hours.
Suffice to say, Calcbench subscribers can already access that level of analytical detail in the MD&A through our Interactive Disclosures page, or the standardized metrics we provide on the Multi-Company page, or the segments analysis we offer on the Segments, Rollforwards & Breakouts page. You get the idea — parsing financial data is our job, and we’re always striving to bring that data to you in ways that let you find exactly what you want, when you want it.
We’re sticklers for keeping your mask on here at Calcbench — but it looks like everything else is coming off as usual at strip club operator RCI Hospitality Holdings, which just posted an update to earnings.
RCI ($RICK, naturally) published its guidance on Nov. 19. Let’s peep at what the business had to say.
On the perky side: October revenue from its clubs and restaurants totaled $15.3 million — the firm’s best performance since April, when all 48 locations were closed due to covid lockdowns. October sales were up 34 percent over September, and equaled 97 percent of October 2019 sales.
Moreover, all of RCI’s locations still operate under at least some occupancy restrictions. So if the business is seeing almost the same volume of revenue as it did prior to the pandemic but with fewer people allowed inside, we presume that means its establishments are generating more revenue per customer (although the guidance doesn’t specifically say that.)
OK, good news so far. Can RCI keep it up?
That’s less clear. The company warns in its guidance that our current second wave of the pandemic is leading to new occupancy restrictions and closures. For example, the firm had 47 locations open in October, but only 42 were open as of Nov. 19. (The five locations that closed were all strip clubs; the 10 sports bars RCI operates under the Bombshells brand all remain open.)
If there are no additional closings or restrictions, RCI estimates November sales will be around $11 million to $12 million.
For comparison purposes, revenue for the year-ago quarter was $48.4 million. That averages to $16.1 million per month, or $32.2 million for two months. This quarter, RCI is looking at $27.3 million for the first two months of the quarter ($15.3 million in October plus $12 million in November) if nothing gets any worse. We all hope that is the case, but who knows what coronavirus may bring.
Our latest quarterly snapshot of financial performance is now ready for your review, and the numbers confirm a tale most of us probably suspected already: lots of firms racking up debt so they have enough cash to weather difficult economic circumstances, and lots of other turbulence across most line items on the income statement.
We try to publish these snapshot reports every quarter, collecting and comparing financial data for a large pool of firms. For Q3 2020, we looked at the disclosures of more than 2,500 firms across dozens of industries. Large retailers are excluded because most of them don’t have third quarters that end on Sept. 30; and large financial firms are excluded because that sector’s financial statements are so different from everyone else.
Still, 2,500 firms across dozens of other industries gives us a good look at what happened in Q3 2020, and how that performance compared to Q3 2019. Some of our findings, for all firms as a whole:
Figure 1, below, shows year-over-year changes visually:
None of that should surprise people. Since the pandemic arrived earlier this year, operating expenses have gone up for many firms, while revenue declined. Firms also scrambled for cash to keep themselves liquid, and primarily did so by tapping lines of credit or raising debt. The big pieces of this puzzle all fit together.
And Looking by Industry…
Calcbench also tracked the 2,500 firms in our sample by SIC code, the classification system used to group firms by industry. So our Q3 snapshot report also lets people see how 20 specific industries fared across eight major financial metrics. For example…
Here’s how revenue changed year-over-year for all 20 industry sectors we tracked:
You can download the full report (or our other prior reports) for free from our Research Page. Remember, if you have other ideas of research we should do or projects where you can’t quite find that piece of financial data you’re looking for — drop us a line at firstname.lastname@example.org. We’re here to help!
Good news for all you data fanatics, eager to export yet more corporate disclosures into Excel so you can perform whatever analysis you’re hoping to do: Calcbench has added new capability to let you pull data from earnings releases.
Here’s how it works.
First, you need an earnings release. Perhaps you have one because you’ve set up your Calcbench email alerting functions and been notified that one of your favorite firms just filed an 8-K earnings release; or maybe you were skimming our Recent Filings page and a firm’s release caught your eye. We randomly selected Cornerstone Building Brands ($CNR), which filed its latest earnings release on Nov. 10.
Anyway, you have the earnings release displayed on your screen. What then? Look for the small Excel icon along the top of the main display panel, next to the firm’s ticker and the ‘8-K: Results’ descriptor. See Fig. 1, below; we’ve pointed to the icon with a blue arrow.
When you click on that icon, an Excel spreadsheet will download with all the earnings release data organized into neat rows and columns. It will look something like Figure 2, below:
There’s a lot going on in that spreadsheet, so let us explain. Some of the columns track details that might not be urgent to financial analysts, such as tag identifiers or Securities and Exchange Commission filing codes. In Figure 2, we shaded in orange the columns that are most important to financial analysts. Those columns won’t be shaded in your own download, but some examples include:
Once you have that data in Excel — well, what you do with it next is your choice. Calcbench simply strives to provide all the data you want, in a manner that lets you use the data however you want. This is one more step toward our goal. Enjoy!
We have another glimpse today into the pandemic’s effect on the economy from AvalonBay Communities ($AVB), the apartment rental giant that just filed its third-quarter report.
Avalon manages more than 86,000 apartments across 294 locations. So one might assume that amid a nationwide moratorium on evictions and higher unemployment, Avalon’s revenue streams and other operating metrics would suffer.
One would be correct.
Q3 revenue was $567.4 million, 3.4 percent below the year-earlier period and 5.7 percent lower than the $600.6 million Avalon reported in Q1 just prior to the pandemic’s arrival. Meanwhile, operating expenses, property taxes, general administration, interest, depreciation — they all rose from the year-earlier period, to the point that pretax income plummeted 49 percent from the year-earlier period, to $147.7 million.
More interesting to us, however, are the details of how Avalon’s revenue and operations are changing. How many people are falling behind on their rent? How much are vacancies rising? How much is rent falling, since that could suggest lower cash flows into the future? (That’s why landlords are always more willing to give you a month’s free rent rather than to cut rent, you know; so they can keep prices higher come lease renewal.)
The table below, grabbed from the Management Discussion & Analysis, offers excellent detail into what’s happening across the seven geographic markets where Avalon does business. As you can see, revenue rental is down for the first nine months of 2020 (Avalon generates essentially all its revenue from rentals), but average rental rates and occupancy rates are down, too — particularly in the metro New York area.
Beyond the numbers, however, are the narrative disclosures. Consider this statement from Avalon management:
Rental and other income decreased $19,995,000, or 3.4 percent, and increased $14,933,000, or 0.9 percent, for the three and nine months ended September 30, 2020 compared to the prior year periods.
The decrease for the three months ended September 30, 2020 is primarily due to an increase of $15,373,000 in uncollectible lease revenue as a result of the COVID-19 pandemic, of which $13,101,000 relates to residential and $2,272,000 relates to commercial, as well as decreased occupancy and rental rates at our Established Communities, partially offset by additional rental income generated from development completions, development under construction and in lease-up and acquired operating communities.
In other words, Avalon saw a significant spike in uncollectible revenue in the third quarter, which accounted for 77 percent of its revenue decline in the period. Ugh.
The question then becomes whether conditions will improve for Avalon any time soon. Let’s recall that a second federal stimulus package is still nowhere in sight, and job losses started to mount in October after a summer of the first federal stimulus package at least kinda sorta keeping the economy afloat.
Now the economy is in sink-or-swim territory — and Avalon’s Q3 wasn’t going swimmingly even before we reached this point.
The lesson to learn here: whether you’re negotiating a lease or analyzing financial data, read the fine print. Lord knows what you’ll find.
Real estate firm CBRE Group ($CBRE) filed its third-quarter report just before Halloween, and we decided to take a look. After all, selling and managing commercial real estate during a pandemic must be a frightful experience these days.
A glance at the income statement did not disappoint. Revenue, operating income, pretax income, net income: all were higher in Q3 2020 than they were in Q2 2020, but all were also still woefully lower than where they were in Q3 2019. See Figure 1, below.
Quite simply, CBRE has been sailing along a robust real estate market for most of the 2010s and into the first month of 2020 — when, as the company said in its Management Discussion & Analysis, “this healthy backdrop changed abruptly in the first quarter of 2020 with the emergence of the COVID‑19 pandemic.”
No surprise, but how has business changed, exactly? Which parts of CBRE are suffering?
We first looked at the Segments portion of CBRE’s footnote disclosures. That gave us some sense of CBRE’s operating divisions; the company reports three operating segments, and (see Fig. 2, below) two of them have actually increased in the first nine months of 2020 — but not enough to eclipse the 16.2 percent drop in its second-largest segment, advisory services.
Those disclosures are better than nothing — but do they really tell us that much? What goes into “Global Workplace Solutions” that is still growing respectably? What about the advisory practice taking things on the chin?
So we moved to CBRE’s Management Discussion & Analysis. That’s where we hit paydirt.
There, CBRE broke down its revenue streams in much more detail, under the guise of letting investors compare the total mix of revenue streams this year to the mix of revenue streams last year. See Figure 3, below.
(In the filing, CBRE’s table also compares the first nine months of 2019 and 2020, but we couldn’t capture a decent image of the whole display.)
To calculate each line item’s change from 2019 to 2020 you do need to do some math, but only some math. For example, fees from global workplace solutions rose 5.6 percent from the year-ago quarter, while revenue from advisory leasing plunged 31.4 percent.
Reading CBRE’s MD&A also provides more context for what all those lines of revenue are, and how the pandemic is shaping them. Here’s one useful paragraph:
COVID-19 is putting downward pressure on parts of our business and creating larger opportunities in other parts. The severe economic effects of the pandemic continued to weigh heavily on higher-margin property lease and sales revenue in the Advisory Services segment. However, global industrial leasing revenue, fueled by e-commerce, and project management activities for occupier clients were resilient during the third quarter. Also, during the third quarter, our Continental Europe business showed signs of recovery and benefited from our diverse service offering during the period.
Our point: you can find a lot of data and insight in the footnotes, although you might need to look in more than one disclosure, or across several disclosures, to get the best picture. It’s a good thing our Interactive Disclosures page, our Trace function, and lots of other features bring exactly that precision and versatility to your fingertips!
As you all know because you hang on every word of this blog, Calcbench hosted its first-ever live webinar on Oct. 19 to discuss goodwill assets and impairments: why those things are important to financial analysis, how you can research data about goodwill, and what that data has been telling us lately.
You can view the entire one-hour discussion on YouTube if you like. Meanwhile, we wanted to review some of the big themes in that presentation and connect them to other goodwill examples we’ve seen lately.
First, our guest speakers Dan Gode of New York University and P.J. Patel of Valuation Research Corp. talked about the growth in goodwill assets on the corporate balance sheet generally.
In general, that growth should not be a surprise; over the last two decades, M&A activity has inexorably tilted toward more knowledge-based businesses and industries, where goodwill can account for a significant portion of the value that an acquisition target brings. So one should expect goodwill to become a larger part of the balance sheet.
Second, while goodwill impairments do happen, those write-downs do tend to take some time to emerge. As Patel noted, after a deal closes, executives typically need several years to achieve the “synergies” so breathlessly promoted at time of acquisition— or, perhaps, to conclude that those synergies aren’t as bountiful as first presumed. Then impairment enters the picture.
As fate would have it, while we were writing this post, health insurance giant Centene Corp. ($CNC) filed its quarterly report for Q3 2020. Included in that report were details of Centene’s acquisition of WellCare earlier this year for a total of $19.55 billion in cash and stock — where goodwill accounted for $11.71 billion of that amount.
You can see the purchase price allocation here, with goodwill listed at the bottom:
So why did this example of goodwill intrigue us? Because in the footnotes below the table, Centene management had this to say about that $11.71 billion:
Goodwill is estimated at $11,171 million and primarily relates to synergies expected from the acquisition and the assembled workforce of WellCare. The assignment of goodwill to the company’s respective segments has not been completed at this time, but the majority of goodwill is expected to be allocated to the managed care segment.
Synergies! Mentioned right there in the first sentence of the disclosure!
We cannot speculate on how skillfully Centene will or won’t extract those expected synergies. Our points are only that (1) an analyst should always check back on announced acquisitions, because purchase price allocation (like Figure 1, above) often isn’t reported until one or two quarters after the breathless press release; and (2) always read the footnote disclosures, because that’s where the juicy stuff like purchase price allocation gets reported.
The Centene example above just streaked across our radar today on our Recent Filings page. In our webinar, we examined the goodwill balances of Analog Devices ($ADI) as well as Roper Technologies ($ROP). Analog is fascinating because most of its goodwill is tied to one large acquisition the company closed in 2017; Roper is interesting because it has done many smaller deals over time.
We also talk about how coronavirus has affected goodwill impairments, and whether it will keep affecting impairments in the future. (Short answer from our speakers: probably not.)
As always, Calcbench subscribers can choose your own goodwill adventure when sifting through our database archives:
And just because we’re so proud, here’s our webinar that you can play right here and now. Enjoy!
Calcbench friends. We heard you. In response to client and prospect requests to see all the data in press releases, we’ve launched improvements to our tools.
Now you can:
-Grab bulk data from the press releases
-Access time series press release data
-Save time (get every single line item within the press release with a mouse click)
Here’s a quick ‘How To’ for retrieving non-GAAP data using the Excel Add In
Calcbench continues to evolve its platform. Look forward to programmatic access to the full press release.
Your feedback is always welcome. Email email@example.com for suggestions to improve our platform.
Do We Have a Goodwill Bubble? Goodwill is an accounting concept that represents the amount an acquiring company pays for a target beyond that target’s identifiable assets.
More technically — goodwill is the premium the acquirer pays for the net assets it buys while acquiring the target. Goodwill might represent the target’s brand reputation among customers, the loyalty and skill of employees, the potential future growth in earnings thanks to those things, and so forth. It’s a proxy for the synergies the acquirer hopes to achieve from the acquisition and use of the target’s assets.
One important point: goodwill only appears on a company’s balance sheet when the company completes an acquisition. You don’t get to record goodwill assets for whatever brand reputation, employee loyalty, and the like that your company might generate naturally.
For the last 20 years, accounting rules have directed companies to record goodwill as an asset on their books and test it annually for impairment. Goodwill also tends to accumulate over time — because companies do more deals, which means more goodwill, added to whatever goodwill you were already carrying.
The practical result: over time, goodwill becomes a more and more significant part of the corporate balance sheet. The only time when goodwill might decrease is when the company decides that, oops, those expected synergies didn’t materialize like we expected, so we need to write off (that is, impair) part of the value.
So how much is goodwill accumulating on corporate balance sheets? We decided to investigate.
To do that, we examined goodwill as a percentage of total assets and of stockholders’ equity (net assets) for both the S&P 500 and all companies. To calculate the percentage, we summed up goodwill for all companies in each group, and then divided that number by the sum of total assets or shareholder equity.
As you can see from the chart below, goodwill represents about 5 to 10 percent of total assets, and 30 to 40 percent of equity. S&P 500 companies have more goodwill on their books, which is understandable because they engage in corporate acquisitions more often.
We can also see that goodwill is increasingly a more significant part of companies’ balance sheets; the lines fluctuate from year to year, but the trend for all four is unmistakably up.
Is this a bubble that may burst?
For all companies collectively, perhaps not. We’d need some widespread, long-term, cataclysmic economic event to trigger massive impairments, and even amid today’s tumultuous circumstances, that seems unlikely.
For specific industries, on the other hand, that’s much more possible. Consider how the pandemic hammered tourism, retail, and hospitality. Or perhaps rising interest rates would trigger an economic squeeze in a sector like real estate.
You get the idea. We might not be in the midst of one massive goodwill bubble, so much as we’re floating along numerous smaller, industry-specific bubbles. Which ones might burst? How much splatter would that generate?
Calcbench itself isn’t sure. But we do have the data to let you conduct your own investigation— and if you find something interesting, you’re always welcome to drop us a line at firstname.lastname@example.org.
(For additional analysis of goodwill, check out a comment letter sent by the CFA institute to the FASB here.)
Calcbench makes it easier for analysts to extract numbers from earnings press-releases. In this post we will focus on the Non-GAAP numbers, those numbers not in the income statement, balance sheet and statement of cash flows.
As an example we will get non-cash compensation expense allocated to research and development for software companies, i.e. stock options awarded to software engineers. This example assumes, that you have a Calcbench account, sign up for a free trial @ calcbench.com/join and have installed the Windows version of the Excel Add-in from calcbench.com/excel.
1. Open the Disclosure Viewer
2. Find the relevant Earnings Press Release in the Disclosure Viewer
3. Click on the piece of data you want. This will insert the formula for the fact
4. Parameterize the period arguments to the inserted formula
5. Add more periods and drag the parameterized formula over.
Non-cash compensation for the software industry is collected @ https://www.dropbox.com/s/8dtcoiea7conkvs/r%26d%20stock%20based%20compensation.xlsx?dl=0.
Faithful readers of the Calcbench blog know that we often talk about the importance of goodwill assets on the balance sheet, and how the potential impairment of goodwill is always something to keep in mind.
Today we have a great example of what we mean: circuit manufacturer Analog Devices ($ADI).
Analog came to our attention because we had been compiling a list of S&P 500 firms whose goodwill assets were a high portion of total assets. Analog placed near the top of that ranking, with $12.26 billion in goodwill against $21.4 billion in total assets — a ratio of 57 percent.
But wait, one of our interns said. Didn’t Analog do a big acquisition a few years ago? How much did goodwill account for that deal?
So we opened our Interactive Disclosures database, and researched what Analog has been reporting for business combinations disclosures. Sure enough, Analog had acquired Linear Technologies in 2016 for $15.7 billion. Buried in the disclosures was the purchase price allocation Analog reported for that deal. We shaded the goodwill item in blue:
So Analog is carrying $12.26 billion in goodwill on the balance sheet — and 86 percent of that amount is tied up in this single deal with Linear. That’s a mighty big bet to place on one acquisition.
Now let’s review quarterly revenue at Analog from the start of 2017 through Q2 2020:
Hmmm. Clearly revenue popped in the middle of 2017 as Linear’s business started showing up on Analog’s financial statements. We even found an old press release from that time where Analog said it expected Linear to add at least $160 million to Q2 revenue for 2017.
Since then, however, the trend has not been impressive. So was the $10.5 billion allocated to goodwill in that deal actually worth it?
It’s not Calcbench’s place to answer that question. We simply provide the data — and in this case, when you review the data, suddenly that question about Linear seems like a fair one to ask.
We also peeked at the balance sheet for Analog Devices. The firm has $8.1 billion in liabilities, and $11.77 billion in shareholder equity. In other words, almost all of Analog’s shareholder equity is tied up in the goodwill from that Linear deal.
That is, if the Linear deal turned out to be a disaster and the company had to impair the whole $10.5 billion, shareholder equity would pretty much evaporate. Yes, such an extreme example is unlikely — but even a more modest impairment would still result in a substantial reduction of equity.
Our point is simply that analysts following Analog need to consider its goodwill balances carefully. That line item is far more consequential to firm value than one might assume at first glance. Hence we obsess over goodwill and impairments all the time around here.
While we’re on the subject, let’s also give a shameless plug for our first-ever Calcbench webinar, happening on Tuesday, Oct. 20 at 12:30 pm ET — where an in-depth look at goodwill and impairment will be the subject. It’s free and will be a great time, so register today!
This blog will outline the importance of and the steps to getting data out of the press releases that Calcbench has been collecting for the past two years.
Corporate press releases are released ahead of the quarterly earnings call that the company has with analysts and investors. The press release has information that won’t necessarily get into the 10-Q / 10-K. For those reasons, it becomes important for users to get this data.
Historically, users only had access to this data by manually collecting the releases and then inserting data (hand keying information) into their spreadsheets/databases.
Today, that has changed.
Using Calcbench, a client can get this data in a few different ways.
First, they can simply view it online. They can collect data from the web by exporting it. Or, they can bypass the web and access this data DIRECTLY through our Excel Add In or the Calcbench API.
See below from the income statement section of Paychex 8-K that came in on the morning of October 6, 2020. Also, note that this information collection process pertains not only to the Income statement but also to the Balance Sheet and the Cash Flow statement. Calcbench also captures tables of data as well, including GAAP to NON-GAAP reconciliation tables.
Visit Calcbench disclosures page and retrieve the 8-K in full or read it online. Or, for more information on our earnigngs press release tools, go to: https://www.calcbench.com/home/earnings_release_data
Well here’s one firm living high on the hog: Conagra Brands ($CAG), which just reported solid quarterly results because people are still stuck eating at home. That sort of thing tends to help one of the largest food businesses around.
Conagra manufactures brands including Slim Jim, Healthy Choice, Duncan Hines, and Reddi Whip. Its largest customers include supermarket retailers Walmart ($WMT) and Kroger ($KR) which account for roughly 33 and 11 percent of sales, respectively.
So what do the numbers tell us? That people are eating — and eating enough to keep Conagra in a strong position, even with all the coronavirus uncertainty otherwise whipping around the economy.
First we looked at Conagra’s segment disclosures, which show a 12 percent increase in quarterly sales from the year-ago period. See Figure 1, below.
Every operating division saw better numbers this year than last, with the exception of foodservice — but that’s the division that sells to restaurants, catering services, and similar commercial customers, so one would expect that division to decline. The rest look good.
OK, that’s clear enough, but one impressive quarter does not a trend make. So we used the Multi-Company database page to study Conagra’s quarterly sales from the start of 2019 through Q3 2020 and compare them year over year. See Figure 2, below.
We can see a definite pop in sales from the second quarter of this year that continued to Conagra’s most recent quarter, which ended on Aug. 30. The pattern makes sense; everyone panicked in the spring and stocked up on food ahead of the corona-pocalypse; and then continued to buy more food over the summer as life reached a semi-stable state. Which still included vast numbers of us eating at home.
Will Conagra’s Q4 2020 show a similar trend? Circle back to the data in three months and see what you find.
But wait! Isn’t it also true that while revenue might be going up, costs are also rising? That’s definitely a thing for many firms. So what’s the scoop for Conagra?
We jumped over to the Interactive Disclosures page and pulled up Conagra’s Management Discussion & Analysis. As one would expect, the firm had a section devoted to pandemic concerns. There, we found this paragraph disclosing both the good and the bad about coronavirus and the company:
During the first quarter of fiscal 2021, our operating margins saw improvement largely due to favorable fixed cost leverage, reduced travel expenses, and lower trade promotional activity on certain brands. That benefit was partially offset by several factors including higher transportation and warehousing costs, temporary plant closures, employee safety and sanitation costs, and employee compensation costs, which accounted for an estimated $34 million of incremental costs in the first quarter.
So there you have it. Yes, the pandemic is pushing Conagra’s costs upward, but revenue is rising even higher. There are worse sandwiches life might force you to eat.
At least one business seems to be motoring along despite the pandemic: Thor Industries ($THO), maker of RVs and related motorhomes, which apparently are more popular these days since nobody is flying.
Thor filed its annual report on Sept. 28, and compared to 2019 the numbers on the income statement all seem respectable. Sales, gross profits, pre-tax income, and net income were all higher for Thor’s fiscal year that ended on July 31.
Meanwhile, the numbers in the footnotes (read the footnotes, people!) tell a somewhat quirky tale that offers plenty of food for thought.
Segment revenue. Yes, total revenue for Thor rose 3.8 percent, from $7.86 billion in 2019 to $8.17 billion this year — but North America sales actually fell, from $6.2 billion to $5.5 billion. Revenue growth came entirely from the European market, where sales soared by $1 billion. See Figure 1, below.
Also interesting to see that while sales rose year-over-year, 2020 sales were still considerably lower than what Thor saw in 2018. Moreover, that growth in Europe revenue comes from the acquisition of a large European RV maker, which Thor acquired in February 2019. So this isn’t a story of an RV firm prevailing over the pandemic; it’s the story of an RV firm trying to regain prior success after an awful prior year.
Dealers and inventory. Thor also tells an interesting story about the inventory of its RVs held by dealers. For example, earlier this spring Thor shut down its manufacturing plants during the pandemic. With no new RVs rolling out of the plants, the inventory dealers had on site then started to fall (because they had no new RVs to replenish old RVs they had sold).
The practical upshot: the backlog of orders for Thor RVs has soared. As the company describes it:
Thor’s North American RV backlog as of July 31, 2020 increased $3,063,316, or 265.9%, to $4,215,319 compared to $1,152,003 as of July 31, 2019… In recent periods, dealer inventory levels have decreased materially based on recent production interruptions from March through May 2020 due to the COVID-19 pandemic, coupled with strong retail demand for RVs given the perceived safety of RV travel during the COVID-19 pandemic, a strong desire to socially distance and the reduction in commercial air travel and cruises.
Thor then goes on to cite rosy predictions for industry sales in 2021. The RV trade association projects unit shipments (that is, wholesale RV sales to dealers) to rise as much as 19.5 percent next year.
So far, so good. Then we noticed…
Repurchase obligations. Along with those shipments and sales to dealers, Thor also extends repurchase agreements for unsold inventory if a dealer goes into default with its bankers.
Hmmm. Now we’re into contingent liability territory.
Thor first mentions that concern in its disclosure of Risk Factors, blandly stating: “We may incur larger-than-average repurchase obligations if there is an increase in the number of financing defaults by our independent dealers.”
Well, what does that mean? How large a potential liability are we talking about?
Thankfully, the disclosures also include a section for contingent liabilities. There, we can see that those liabilities have trended downward over the last year:
The Company’s total commercial commitments under standby repurchase obligations on dealer inventory financing as of July 31, 2020 and July 31, 2019 were $1,876,922 and $2,961,019, respectively. The commitment term is generally up to eighteen months.
Thor goes on to explain that it covers such liabilities by deferring a portion of each sale and stashing that money in a reserve account. As of July 31, 2020, that reserve had $7.7 million, down from $9.5 million the prior year.
So there you have it: a respectable income statement from Thor, but also a much more complex picture once you start digging into the data. Perhaps we’ll send an update as the Calcbench team drives cross-country in our company Airstream.
Calcbench has been taking a deep look at the retail sector lately, and how firms in that line of business have weathered coronavirus and recession. We reviewed the filings of 45 large, well-known retailers to see what they’ve been disclosing, how their financial performance has fared, and more.
For a quick summary of what we reviewed, see below:
Overall, the picture for retailers this year is mixed. Some, such as Apple ($AAPL), Walmart ($WMT), and Lululemon have performed deftly and admirably. Others, less so. We’ll revisit major players in this sector from time to time, especially next spring as annual reports for 2021 start hitting the streets.
Meanwhile, we’re always eager to hear from you about what else we should examine: other sectors to review, or specific disclosure items (supply chain finance, accounts receivable, cash from operations) regardless of industry. Drop us a line at email@example.com any time.
We continue our look at the retail sector today with a dive into one of the most painful facts of life in corporate reporting: impairments.
Nobody likes them; they can ruin net income for the quarter, and in extreme cases can leave the balance sheet reeling. But with coronavirus lockdowns and recession ravaging the retail sector, impairments were inevitable.
How inevitable, exactly? We took a look.
Among the 40+ large retailers we’ve been examining for Retail Week, impairments totaled $2.19 billion for second-quarter 2020.
The good news is that $2.19 billion is actually lower than the $3.54 billion those same firms reported in the first quarter of this year. The bad news… well, take a look at Figure 1, below. That’s what these firms have been reporting for impairments since the start of 2018.
Like, wow. No other quarter in the last two years comes remotely close to what our retail sample reported in the first two quarters of this year. That bump in the middle of 2019? The amount was $469.8 million for all 46 firms we examined, in the second quarter of 2019. Macy’s ($M) and Walgreens Boots Alliance ($WBA) both have declared asset impairments larger than that amount individually this year.
OK, so impairments soared earlier this year. Next question: how much have those impairments hammered the retailers’ balance sheets?
Not that much, thankfully. Total assets for this sample group grew rather nicely over the last 10 quarters, from $1.06 trillion at the start of 2018 to $1.253 trillion in Q2 2020. So even though impairments spiked this year, they still didn’t nick assets to any material degree.
On the other hand, as you can see in Figure 2, below, impairments as a percentage of assets still — soared? Spiked? Shot up? We’re running out of verbs to describe it.
For context, we didn’t even include prior quarters because the percentage was essentially zero.
Individual impairment charges happened in numbers great and small.
For example, Macy’s took a $3.15 billion charge in Q1. Almost all of that ($3.07 billion) was an impairment of goodwill, stemming from the unprecedented disruption of coronavirus. As the company said in its disclosure:
The Company determined the fair value of each of its reporting units using a market approach, an income approach, or a combination of both, where appropriate. Relative to the prior assessment, as part of this current assessment, it was determined that an increase in the discount rate applied in the valuation was required to align with market-based assumptions and company-specific risk. This higher discount rate, in conjunction with revised long-term projections, resulted in lower fair values of the reporting units.
More interesting is the disclosure from Walgreens-Boots Alliance. Yes, the firm did record a $2 billion impairment in Q2, as seen in this table reconciling adjusted net income of $919 million to an actual, GAAP-approved net loss of $1.58 billion.
Except, Walgreens doesn’t give a clear sense of where that number came from. In the Goodwill section of disclosures, it identifies a $1.67 billion impairment in the goodwill of its retail pharmacy brand — but that’s all it says. Nothing further to explain how you get from that $1.67 to the $2 billion actually recorded.
Only when you crack open Management Discussion & Analysis and search “impairment” do you find this meager statement:
In addition, due to the significant impact of COVID-19 on the financial performance of the Retail Pharmacy International division, the company completed a quantitative impairment analysis for goodwill and certain intangibles in Boots UK, which resulted in the recording of non-cash pre-tax impairment charges of $2.0 billion.
Uh, thanks, guys. Glad to see you’re so sparing with electrons to type out that data.
So we look forward to what Q3 will bring the retail sector, and what other trends might emerge as we analyze the many more retail firms that submit Q2 filings over the weeks to come.
We continue our look at the retail sector this week with a review of an important performance metric for this sector: inventory turnover.
Inventory turnover measures how many times a company has sold and restocked inventory during a given period. More simply: it measures how quickly a retailer is moving goods off its shelves. Generally speaking, the higher the number, the better.
Coronavirus has hammered operations for large retailers, with store closures, supply chain disruptions, and a recession that has left millions of consumers with fewer dollars to spend. So we wondered: have those forces shown up in inventory turnover?
We reviewed two years’ worth of quarterly filings among 40 large retailers — from Abercrombie & Fitch ($ANF) to Walmart ($WMT), with lots more high-profile brands in between — to see what we could find.
The short answer is: drawing broad conclusions about the whole sector is messy. Financial analysis will need to do a firm-by-firm review to see what’s really going on.
Figure 1, below, shows average inventory turnover among our 40 sample retailers for Q2 2018 through Q2 2020.
The zig-zag nature of this chart shows how much inventory turnover in the retail industry depends on the specific quarter. For example, inventory turnover is typically higher in calendar Q4 because that’s holiday season, when retailers design their operations to churn out sales as quickly as possible.
What struck us was the low inventory turnover for Q1 2020 — an average of 5.34, and a median of 3.61; compared to 5.54 and 3.99 in Q1 2019. Then note the sharp rebound in Q2 2020, to levels above Q2 2019.
That makes sense; if stores were suddenly closing earlier this year in Q1, sales would stall. Then stores reopened in Q2, and perhaps pent-up demand led to a spike in buying.
Then again, those are just broad averages across 40 firms. When you look at specific retailers to see how inventory turnover has fared this year, a more varied picture emerges. Numerous firms saw their inventory turnover decline from Q1 to Q2, meaning their ability to get goods off the shelves slowed. See Table 1, below.
What’s interesting here is that Apple ($AAPL) and Casey’s General Stores ($CASY) have markedly higher inventory turnover to begin with. For Apple, that probably is a manifestation of the firm’s e-commerce prowess: you can jump online, place an order, and within a few days your iWhatever is at your doorstep. (We wrote about the importance of e-commerce in our previous Retail Week post.)
Casey’s, meanwhile, sells small-dollar items that people need all the time. Perhaps it’s little surprise that other firms with lots of convenience items — CVS Health Corp., Rite Aid, and Walgreens Boots Alliance, for example — all have inventory turnover well above 10, too.
Calcbench subscribers can research inventory turnover and several other notable performance metrics themselves. We have a few options for you.
First, you can use the Multi-Company database page. Create the peer group of companies you want to research, and then enter any of several performance metrics we track in the “Standardized Metrics” field in the upper left portion of your screen. You might want to track:
You can also find these metrics on our Bulk Data Query page, which lets you research all sorts of data for large groups of firms — either individually or as a group; including by average or total amounts. Performance and liquidity metrics are listed at the bottom.
Today Calcbench kicks off another of our occasional in-depth looks at a business sector, this time examining the retail industry.
Retail firms have taken it on the chin in 2020 with the double-whammy of pandemic and recession. So what have those pressures meant for business operations and financial disclosures? That’s what we want to explore.
First up: in-store sales versus e-commerce.
We selected this subject after reading the latest quarterly filing for Lululemon Athletica ($LULU), the sporting apparel business that mostly sells yoga pants. Lulu filed its second-quarter report on Sept. 9, and the gap between store sales and e-commerce is just striking.
In-store sales fell by 55 percent in Q2 2020 compared to the year-earlier period. That shouldn’t be a surprise, since vast swaths of North America (which accounts for roughly 80 percent of Lulu sales) had shut down retail stories or otherwise told people to stay home.
But what were those prospective customers doing while stuck at home? Apparently ordering yoga pants online, because e-commerce sales jumped by 154 percent for Q2 2020. In fact, e-commerce sales rose so much in Q2 that they more than made up for declines from in-store sales.
See Figure 1, below. Total Q2 sales figures are high-lighted in blue.
Now, if you do the math, it’s clear that e-commerce sales have not been enough to keep revenue moving in the right direction for the first half of 2020 — which means that the numbers must have been worse in Q1. So we used our handy “Add Previous Period” feature to see what those numbers were. They are in Figure 2, below.
So Lululemon had begun a pivot to e-commerce in Q1 2020 when the pandemic arrived, and then ramped up that pivot dramatically in Q2. Net income is still down sharply from the year-earlier period ($86.8 million in second-quarter 2020 versus $125 million in second-quarter 2019), but the segment disclosures suggest an impressive bit of repositioning, all things considered.
Intrigued by Lululemon’s disclosures, we looked for other retailers’ disclosure of e-commerce revenue, too.
Specifically, we assembled a list of more than 40 large, high-profile retailers; everyone from Abercrombie & Fitch ($ANF) to Walmart ($WMT). We then strolled over to our Segments, Rollforwards, & Breakouts database to see which ones report e-commerce.
Spoiler: not many.
If you search for “commerce” in the operating segments filter, only four reported any data: Walmart, Party City ($PRTY), Tilly’s ($TLYS), and Signet Jewelers ($SIG). Applause goes to Signet for also breaking out e-commerce revenue by geography; and to Walmart for breaking out e-commerce revenue by major operating brand.
Still, four out of 48 major retailers ain’t much. We also looked under “online” and “direct” (for direct to consumer, as Lulu describes the segment) and found none others.
Walmart’s disclosure of e-commerce is tricky. Yes, the company does report those numbers — but not in table format. You either need to read the footnotes closely, where Calcbench does find the numbers because they are tagged; or search in our Segments disclosure database, where we present the tagged numbers.
See Figure 3, below, for what we mean. You’d need to read that written passage high-lighted in blue, below, to see that Walmart essentially doubled its e-commerce revenue from Q2 2019 to Q2 2020.
Still, the pivot to e-commerce revenue is going to be crucial for retailers — especially if they want to compete against Amazon ($AMZN), which has been building e-commerce expertise for 25 years. So the more retail firms disclose about this operating segment, the better.
Not long ago the Securities and Exchange Commission adopted new rules to reduce the amount of disclosure that firms need to make about business risks, legal proceedings, climate change, and other issues.
Those changes go into effect within 30 days of their being published in the Federal Register, which typically happens within a few weeks. So on a practical basis, companies could start filings disclosures according to this new, slimmer standard by the end of this year.
That poses an immediate question for financial analysts: How do you figure out exactly what has changed from one filing to the next?
Like, sure, you could easily see that overall disclosure was reduced from one quarter to the next — but the devil is always in the details. So how do you pinpoint exactly what has changed, to determine what has happened to some point you consider telling or important?
As always, Calcbench has your back. Here’s how you do it.
Start on our Interactive Disclosures page. Pull up the relevant filing for whatever company you’re researching. Figure 1, below, shows the commitments and contingencies disclosure for Apple ($AAPL) in its second-quarter 2020 filing from earlier this summer.
These are the disclosures Apple provides about various lawsuits it is facing, from consumers, regulators, investors, or others. (We chose Apple to demonstrate our search features only because it’s a high-profile name, and have no idea how significant the disclosed matters actually are.)
Notice the third tab on the top, “Compare to Previous Disclosures.” Click on that, and you see a three column display akin to Figure 2, below.
The column on the left is the original disclosure you were looking at; in this case, Apple’s Q2 2020 report. The column on the right is the prior period: Q1 2020.
The column in the middle shows what text has changed between the two periods. Text that was removed from the prior period is shaded in red; text that was added to the current disclosure is shaded in green.
That’s how you can identify textual changes in disclosure quickly and easily.
In this specific case, we zoomed into civil litigation over Apple’s iOS operating system. If you squint, you can see that in February 2020 Apple agreed to settle this litigation, and will ultimately pay somewhere between $310 million to $500 million to plaintiffs. That’s the paragraph shaded in green.
You can use our Compare to Previous Period feature for any disclosure a company makes: MD&A, risk factors, contingencies, segment disclosures, or whatever else you want to research. So however disclosures might change under new SEC reporting rules, Calcbench remains ready to help you find the information you need.
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