Hunton Retail Law Resource

COVID-19 has had an unprecedented effect on the retail industry across the United States, as many retailers grapple with government mandates that either require closure or impose stringent restrictions on being open, employment and supply chain disruptions, and an overall decline in consumer demand as market conditions remain volatile and unemployment rates continue to rise. The devastating consequences of the coronavirus began to come into focus at the same time many companies were preparing to issue quarterly or annual results and convene investor calls.

In light of the timing of these releases and COVID-19’s impact on businesses across the country, Jay Clayton, the chairman of the Securities and Exchange Commission (SEC), and Bill Hinman, the director of the SEC’s Division of Corporation Finance, issued a joint statement urging maximum transparency in earning-related disclosures and other filings with respect to current operations and “future operating plans under various COVID-19-related mitigation conditions.” This statement followed disclosure guidance previously issued on March 25, 2020, by the Division of Corporation Finance regarding coronavirus-related concerns that public companies should reflect on as many prepare earnings-related disclosures and other filings, as well as a public statement on April 3 from the SEC’s chief accountant on the importance of high-quality financial reporting.

The Clayton-Hinman joint statement acknowledged the significant uncertainty looming for most businesses as a result of the coronavirus, but nonetheless emphasized the need for expansive disclosure about the pandemic’s impact on current and future operations and financial condition. Chairman Clayton and Director Hinman noted the expectation that such updates should become less difficult over time as more information about COVID-19 becomes available. The statement included three specific requests for public companies to consider as they prepare earnings-related filings and other disclosures: (1) the company’s current position, operationally and financially; (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing; and (3) how the company’s operations and financial condition may change as efforts to fight COVID-19 progress. In addressing current and future operations, Chairman Clayton and Director Hinman stressed that if a public company receives financial assistance to help with COVID-19-related losses, including from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), or other similar state or federal measures, to the extent such financial support could be deemed to have material effect on the company’s financial condition, the support should be disclosed with the nature, amount and effect of the assistance.

Following the SEC’s guidance, many public retailers have opted to include COVID-19-related disclosures in earning-releases and other public filings with the SEC. Indeed, there has been an almost universal trend toward enhanced risk factors and disclosures in the Management Discussion and Analysis (MD&A) section regarding the coronavirus pandemic and its effect on operations and financial and market conditions. Some retailers have also filed Form 8-K reports disclosing intraperiod results to provide investors more information about the expected impacts of COVID-19 on business disruptions and financial performance.

Retailers that have enhanced their risk factors to include coronavirus concerns have largely focused on the materially adverse effect the pandemic has had and could continue to have on current and future business and financial operations. Risk factors addressing COVID-19 almost always stress the substantial uncertainty surrounding the long-term effects of the coronavirus and include an expectation that significant business disruptions to operations and financial conditions will continue should the pandemic’s impact be sustained for a long period of time. Some large retailers have also disclosed information related to the practical implications of COVID-19, such as disruptions to future construction plans or other projects due to coronavirus-related concerns.

Many large retailers have also enhanced disclosures in the MD&A section to include more information about COVID-19’s impact on business and financial performance, with a particular focus on liquidity and how such companies are managing and improving their liquidity position. Some retailers have also acknowledged the pandemic’s effect on credit markets, which may impact the availability liquidity. Many MD&A disclosures by retailers have also warned of reduced revenue and cash flow if the ongoing material adverse effects from the COVID-19 pandemic continue.

The Division of Corporation Finance has issued several comment letters highlighting certain issues with coronavirus-related disclosures. The comment letters span across various industries and thus do not necessarily focus on retailers. Nonetheless, the letters are indicative of the types of concerns the staff at the SEC will likely focus on as they review earnings-related disclosures and other filings. In general, the comment letters request in some way or another further disclosure and specificity with respect to the reasonable and likely effects of COVID-19 on a business’s operations and financial condition. One company, for example, received a comment letter requesting further disclosure on how mandatory closures or cancellations of events and the future spread of COVID-19 could impact the company’s operations and financial condition. Another issuer received a comment letter requesting “specific, tailored and thorough disclosure,” about coronavirus and, in a second follow-up comment letter, the SEC staff reissued the comment to make the issuer refocus on “the material impact COVID 19 may have … in both the near and long term including any potential impact on … the [issuer]’s ability to finance its debt.” The foregoing illustrates that despite significant unknowns, the SEC staff still expect earnings-related disclosures and other filings to include information about the pandemic’s effect on operations and financial condition with reasonable specificity.

Although these comment letters are not retail-focused, many retailers have experienced devastating and unprecedented disruption to business operations and financial condition due to COVID-19. As a result, the comment letters serve as a helpful tool for retailers to use as they prepare filings to meet the SEC’s expectations. In light of the guidance described above, including the comment letters and the joint statement issued by Chairman Clayton and Director Hinman, retailers should continue to focus on increasing disclosure about COVID-19 and ensure reasonable specificity with respect to the likely effects on current and future business operations and financial performance.