Are the financial statements effectively highlighting Digital transformation?

Reporting an increase in online sales in the earnings statement is a must. Beyond the mention that digital sales grew by 26% YoY to $575 million of the total sales (1), highlighting the internalization of digital transformation within the organization and importance of the future digital roadmap is necessary. Not providing guidance during the earnings call on how digital transformation is enabling online sales is no longer an option (my other blog on laying your foundation).

An HBR article (3) elegantly words that

“Quarterly sales numbers are important, but they are also a deceptively comfortable way to manage a growth company …a death knell for innovation and long-term success and can disguise the real issues facing the company’s prospects.”

A quick look at Target’s Q3’16 balance sheet (1) and you will notice that Total Assets decreased YoY by about $2.85 billion (6.87%) to $38.6 billion. Of this

  • PPE increased by $606 million (2.2%) to $27.5 billion
  • Fixtures and Equipment increased by $184 million (3.5%) to $5.5 billion
  • Computer hardware and software decreased by 114 million (4.2%) to $2.538 billion

The number of stores is relatively flat at 1800 compared to 1805 in Oct 2015. The drop in the mid-size stores is offset by the increase in the small-size stores.

An Interpretation 

In the income statement, you find that cost of sales (CoS) has decreased by $969 million (7.8%). Year on Year comparison shows that CoS reduced from 70.6% of the sales to 69.8% of the sales. I could assume this is a result of product mix or better supply chain execution (if most of this is related to Cost of Goods Sold). The SGA expense also reduced YoY by $397 million (10.8%).

As retailers focus more on digital transformation by embracing data management and data science, I would expect an increase in the hiring of data scientists. Indeed tells us that they don’t come cheap. The drop in SGA with an almost flat store count, makes me wonder if the in-store staff headcount remained the same and there was a consolidation of shared services staff along with an increase in offshore resources.

 

 

 

 

Highlighting digital innovation

I was looking for some mention in the balance sheet, income statement or in the earnings notes regarding an increase in software spend to allude towards an emphasis on digital innovation. What I observed was that the Computer Hardware and Software entry on the balance sheet and the OpEx income statement decreased. This net reduction does signal an efficiency in execution. However, without a separate call out for the software spend, it does leave room for questions on whether the Capex related Software and the OpEx related software spend decreased as well. We could argue that there wasn’t a need for additional need for software spend. That surely is not the case. A 26% YoY increase in digital sales could be a combination of better forecasting, procurement, inventory management and fundamentally better data management.

does leave room for questions on whether the Capex related Software and the OpEx related software spend decreased as well

A look into Amazon’s Q3 earnings

To contrast this, I analyzed Amazon’s Quarterly earnings statement (2). They had something new to announce against 13 of the 29 highlights noted in the first three pages. For an enterprise that reports $32.7 billion in quarterly sales, that’s probably equivalent to multiple small to mid-size companies working autonomously at a startup pace towards the same goal – digital dominance. Amazon announced 29% increase in YoY sales. In their income statement, under operating expense, they have a line item for Technology & Content, the spend on which has grown YoY by 29% to $4.135 billion (interesting coincidence on the number 29). There is no mention of Computer or Software in the balance statement. However, the supplemental financial information does indicate internal-use software & website development along with the purchase of property and equipment at a 37% YoY increase. Also, General and Administration increased by $176 million (38%) to $639 million for Q3 2016. From my earlier discussion, I can assume that this increase in G&A is due to the diversity of businesses and growth in hiring of high-value individuals.

something new to announce against 13 of the29 highlights

More meat in the financial statements

The takeaway for me from this is that highlighting new offerings, technological innovations, calling out Technology as a separate line item in financial statements and increasing spend on software sends strong signals to the market about the importance and adoption of digital transformation.

An absence of such transparency can convey a me-too message without much meat behind it.

Reference

  1. Comparable digital channel sales grew 26 percent and contributed 0.7 percentage points to comparable sales growth. Target’s Q3 2016 earnings release
  2. AMAZON.COM ANNOUNCES THIRD QUARTER SALES UP 29% TO $32.7 BILLION
  3. Stop Letting Quarterly Numbers Dictate Your Strategy

Leave a Reply

Your email address will not be published. Required fields are marked *