Hunton Retail Law Resource

The ongoing effects of the Covid-19 pandemic and other recent socio-political events will present a number of disclosure questions for publicly-traded retailers completing their second fiscal quarters.

On the Covid-19 front, one trend that is gaining momentum is updating the narrative from the initial uncertainty around the pandemic (appropriate in March-April) to a more contemporary, more sophisticated discussion of risks related to reopening businesses and risks of a second wave, which is what the SEC seems to expect based on the passage of time and society’s greater familiarity with the pandemic.  Disclosures that frame the pandemic as if it is still a surprise or complete mystery may no longer be well-received by investors or the SEC.

More generally, while preparing upcoming SEC quarterly reports and offering documents, public retailers should consider the following issues for disclosure:

• long-term prospects and ability of the enterprise to continue as an ongoing concern;
• updated risk factors, giving effect to the most recent developments and moving past hypothetical Covid-19 discussions to better capture a particular company’s actual experiences since March;
• historical and forward-looking impact of recent events on the business, including the impact on customers, revenue and expenses;
• changes in executive and employee compensation;
• liquidity position, including cash burn rate, reliance on government stimulus programs, material impairments and other material capital expenditures;
• material supply chain interruptions;
• effects of reopening stores, migration to online sales, issues concerning operations at less than 100% capacity due to government orders, and risks around re-closure; and
• some investors and other stakeholder groups have begun to place increased emphasis on ESG topics in light of recent events, including human capital, employee safety and diversity disclosure.

The SEC has issued a number of recent interpretive statements regarding these issues.  For example, the SEC staff recently issued updated disclosure guidance for Covid-19 matters regarding operations, liquidity and capital resources.  The SEC’s chief accountant has emphasized the need for high-quality financial reports during times of stress, and has warned against inadequate internal controls over financial reporting.  And for public retailers continuing to operate their corporate secretary and financial reporting functions on a remote basis, the SEC staff also extended indefinitely limited relief from the requirement to obtain “wet” signatures on SEC filings.

To encourage public companies to be candid in their assessments of the future, senior SEC officials have stated that in light of “the uncertainty in our current business environment, we would not expect to second-guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.”

Finally, regulatory and Congressional oversight of the private sector has begun to intensify.  Even retailers that did not accept stimulus funds now face an uptick in public scrutiny and regulatory interest.  Public retailers should also consider the need to make SEC disclosures regarding the pendency of a government investigation.