Over the past eight months of this pandemic, we have all seen the rise of e-commerce as a vital necessity for most companies.  For many companies, e-commerce has significantly outperformed their existing sales channels and consumers have now become acclimated to a seamless “omnichannel” shopping experience where they can purchase online and wait for delivery or pick-up curbside or in the store. A recent WSJ article proclaims that the embrace of digital commerce is here to stay even after the pandemic.

In light of the surge in e-commerce activity, it makes sense that many companies are separately calling out their e-commerce sales and growth performance in their quarterly earnings calls, SEC filings and investor presentations.

Disaggregated Revenue Disclosure Requirement

As companies continue to focus on their sales channel disclosures, one potential sleeper issue could be the new revenue recognition standard’s requirement on disclosure of disaggregated revenues.  Under ASC 606-10-50-5, a public company must “disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.”

Additionally, per the implementation guidance in ASC 606-10-55-90, when selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how the information about the entity’s revenue has been presented for other purposes, including the following:

  1. Disclosures presented outside of the financial statements such as MD&A, earnings releases and investor presentations.
  2. Information regularly reviewed by our Chief Operating Decision Maker (CODM).
  3. Any other information similar to the information identified in (1) and (2) that is used by the company or users of the financial statements to evaluate the company’s financial performance or make resource allocation decisions. (emphasis added)

In determining the categories to include, ASC 606-10-55-91 says that an entity should consider the following examples:

  • The type of good or service (e.g., major product lines).
  • Geographical region (e.g., country or region).
  • Market or type of customer (e.g., government or non-government customers).
  • Type of contract (e.g., fixed-price or time-and-materials).
  • Contract duration (e.g., short- or long-term).
  • Timing of transfer of goods or services (e.g., point-in-time or over time).
  • Sales channels (e.g., direct to customers or through intermediaries).

Based on an ASC 606 implementation survey compiled by Deloitte in 2018, it found the most common categories of revenue disaggregation were product/service type, geography, contract type and customer type, in that order.  The 2018 Deloitte survey also found that revenue disaggregation in the sales channel category was not observed in the data set.

While the ultimate analysis will rest with the company’s accounting staff and its outside auditor, we are interested to see whether the continued focus on e-commerce in public company earnings materials and investor presentations will result in more companies concluding they should disaggregate revenues by sales channels, including e-commerce sales.

Moreover, this recent SEC comment letter exchange demonstrates that disaggregate revenue continues to be of interest to the Staff, particularly when the registrant discusses e-commerce in its earnings materials and SEC filings as a significant driver of results.

For ease of reference, we have repeated below the relevant SEC comment as well as the registrant’s response.  In the exchange, the SEC Staff noted the company’s disclosures related to e-commerce sales in its MD&A discussion and in the company’s quarterly earnings calls, and  the Staff asked the company to explain its consideration for disclosure of disaggregated revenues for the company’s direct-to-consumer segment by sales channel (i.e., e-commerce channel and in-store sales).  In its response, the company was able to explain to the SEC Staff why disaggregation by sales channel was not appropriate given its facts and circumstances.  However, this comment exchange serves as a helpful reminder to companies to consider this issue as they are preparing their financial statements and accompanying public disclosures. (For another example of a recent SEC comment letter exchange on disaggregated revenue, see here.)

Notes to Condensed Consolidated Financial Statements

    1. General
      Revenue Recognition, page 11
    2. We note your disclosures of sales related to e-commerce channels in your MD&A discussion and on your quarterly earnings calls. We also note that sales from your ecommerce channels increased by 428.2% and were a key driver to the quarter ended June 30, 2020. Please tell us your consideration for disclosure of disaggregated revenues for your Direct-to-consumer segment by sales channel (i.e., e-commerce channel and in-store sales) pursuant to ASC 606-10-55-89 through 91. In your response, tell us the amount of e-commerce sales recognized during the periods presented and also for fiscal 2019.
  1. Response:

Pursuant to ASC 606-10-50-5, we considered the appropriate level of disaggregation that describes how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors within the Company’s direct-to-consumer segment. Following the implementation guidance in ASC 606-10-55-90, we also considered (a) disclosures presented outside of the financial statements such as MD&A, earnings releases and investor presentations, (b) information regularly reviewed by our Chief Operating Decision Maker (“CODM”) and (c) any other information similar to the information identified in (a) and (b) that is used by the Company or users of the financial statements to evaluate the Company’s financial performance or make resource allocation decisions. In determining the categories to include, we considered the examples found in ASC 606-10-55-91: (a) the type of good or service (e.g., major product lines), (b) geographical region (e.g., country or region), (c) market or type of customer (e.g., government or non-government customers), (d) type of contract (e.g., fixed-price or time-and-materials), (e) contract duration (e.g., short- or long-term), (f) timing of transfer of goods or services (e.g., point-in-time or over time) and (g) sales channels (e.g., direct to customers or through intermediaries). The following summarizes our analysis of the aforementioned examples:

    1. Type of good or service – Substantially all merchandise sold by the Company is footwear. Similar merchandise is offered across multiple channels.
    2. Geographical region – The Company’s revenue in the direct-to-consumer segment is predominantly domestic, with e-commerce and stores serving similar geographies.
    3. Market or type of customer – All customers in the direct-to-consumer segment are consumers.
    4. Type of contract – All revenue contracts in the direct-to-consumer segment represent a single performance obligation and are governed by point of sale orders for our products.
    5. Contract duration – All revenue contracts in the direct-to-consumer segment are short-term in nature.
    6. Timing of transfer of goods or services – We recognize revenue at the point in time that control of the ordered product is transferred to the customer, which is typically at a retail store location or upon shipment to the consumer.
    7. Sales channels – Merchandise in the direct-to-consumer segment is sold directly to consumers through an integrated retail concept. We manage this segment as an omni-channel offering where the in store and e-commerce sales are intrinsically linked.

As noted in the example of categories above, there are no significant differences between the sales from retail stores or e-commerce that would require additional disaggregation of our direct-to-consumer segment. Because (1) we sell similar merchandise across geographies, to the same type of customer (i.e., consumers) and across sales channels, and (2) the nature of all our contracts are similar (i.e., point of sale orders that are recognized at a point in time), we believe the nature, amount, timing and uncertainty of revenue and cash flows are generally affected by the same economic factors within our direct-to-consumer segment.

In certain instances, the Company may provide further information regarding the performance of sales to provide investors with context regarding the Company’s overall financial performance during a given period. Information by sales channel for our direct-to-consumer segment is not referenced or discussed consistently in the Company’s periodic or annual filings as it is often not significant to the Company’s segment revenue on a quarterly or annual basis but may become meaningful in a given period. That is, the information is not regularly provided to our investors because revenue for each channel is typically driven by the same economic factors. Further, when information is provided because of a significant change, we do not provide revenue amounts by channel; rather, disaggregated information is provided using other metrics (e.g., growth) to provide context on any significant changes associated with segment revenue in a particular period.

In Q2 2020, we were heavily impacted by the unique facts and circumstances of the COVID-19 pandemic and its immediate impact on the global economy. In response, the Company’s additional disclosures regarding e-commerce sales provided additional transparency and incremental information regarding known trends in the marketplace for that period. The Company believed that the additional disclosures regarding the increase in its e-commerce sales, which had a more significant impact as a result of the Company’s retail store closures during the second quarter, was meaningful to disclose to investors. We do not expect to provide the same disclosures on a recurring basis unless they continue to be significant and relevant in explaining segment performance or indicate a strategic shift in the manner in which the Company assesses sales performance. If they are significant and relevant to a given period, we believe it is important to give investors context as to the economic factors that affect our segment revenue. We do not, however, believe that the unique facts and circumstances that have significantly changed revenue by channel will regularly affect the manner in which the Company reviews performance for the direct-to-consumer segment in the long-term.

E-commerce sales have not been material on a historical basis, and we do not expect the outsized growth trend in the period to continue, as the majority of our retail stores have now reopened. Our e-commerce sales were $106.8 million for the three months ended June 30, 2020 and $131.8 million for the six months ended June 30, 2020, $20.2 million for the three months ended June 30, 2019 and $35.4 million for the six months ended June 30, 2019, and $63.2 million for the fiscal year ended December 31, 2019.

The Company continues to evaluate the impacts the COVID-19 pandemic will have on its future financial performance as there remains uncertainty, as to the length and severity and will evaluate the related disclosures in future filings on Form 10-Q and Form 10-K, as well as in its earnings release, investor presentation and other materials as appropriate.

If you have any questions regarding any of the topics covered in this blog post, please feel free to email the author directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.