Using Sentieo To Quantify the Upcoming Lease Accounting Changes

A major change in lease accounting reporting for public companies is coming up in 2019 (for fiscal years starting after December 15, 2018, to be precise). In essence, leases will be recorded on the balance sheet, resulting in an increase in both assets and liabilities. The change enhances the comparability of balance sheets between companies in the same industries that choose to lease vs. own. For the accounting enthusiasts, we recommend PwC’s 316-page pdf Guide to Lease Accounting and EY’s 397-page guide.

What can analysts using Sentieo do to be better prepared for 2019? We recommend the following DocSearch query for an efficient update on company estimates of the impact within your coverage universe: ASU 2016-02 BEFORE250 (million OR billion)

This query will search for the new standard mentions before a numerical disclosure (up to 250 words). Below, we’ve highlighted a few of the results from our own searches.

Walmart Stores (WMT) “estimates total assets and liabilities will increase approximately $14.5 billion to $16.5 billion upon adoption, before considering deferred taxes.”

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Ross Stores (ROSS) is indicating around $4 billion.

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Dollar Tree (DLTR) is looking at a range of $5.5-$6.5 billion.

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Besides retail, we are seeing more substantive changes coming in transportation.

Union Pacific (UNP) is looking at around $2 billion impact.

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Hawaiian Airlines (HA) will be adding around $500 million from its aircraft and engine leases.

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XPO Logistics (XPO) has around $2 billion in operating leases.

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To find out more about how the Sentieo platform can make your research process better, get in touch with us here.

Balance Sheet Seasonality Visualization

One of the most fundamental questions in financial analysis is understanding business seasonality. Seasonality is not always a yes-or-no question, but rather a continuum: some business are distinctly seasonal, and some less so. We all “know” that most tax preparation happens at a certain time of the year, while retail stocks vary quite a bit. But while revenue/Income Statement seasonality is “obvious,” in this post we will focus on Balance Sheet seasonality. We will use Ulta Beauty Inc. (ULTA) as an example.

As is the case with many retailers, ULTA skews towards Q4 (FYE is January). We can see how revenue and EBIT spike in Q4, but how does this affect Balance Sheet items? (chart viewer)

Let’s start with Cash and Equivalents on the Balance Sheet. The YoY balance will vary (for example, ULTA has used cash for share buybacks) but we can see that cash is at a low point in Q3 and spikes in Q4: the holiday season sales in Q4 build-up cash, while the inventory build-up into Q3 for the holiday selling season depletes cash. Unlike a B2B business, revenues translate to cash fairly quickly: consumers pay for their purchases in cash/card so there are no material Accounts Receivable. (chart viewer)

Speaking of Inventory on the Balance Sheet, we see the seasonality there, too. Inventory YoY increases as the company has more stores, but comparing Q3 to Q4, we can see the build-up and draw-down over Q3 and Q4. (chart viewer)

Since Inventory levels are related to sales, we can see the seasonality when we compare Inventory to Sales using the Days Sales Outstanding metric. We see the distinctive build-up into Q3 and then drop-down in Q4. Adding a 4-quarter moving average shows us that the company has gotten more efficient recently as managing inventory. (chart viewer)

Since ULTA is building up inventory into the holiday shopping season, we would expect that we can see a seasonable increase in Accounts Payable, as vendors ship product into Inventory but are not paid fully right away. The spikes then drop by Q4 end, as bills get paid. (chart viewer)

Similar to the Days Sales Outstanding in relation to Inventory, we can see the seasonality in Days Payables Outstanding in relation to Ulta’s payables. (chart viewer)

Our final highlight is Property, Plant and Equipment (PP&E) on the Balance Sheet: it also exhibits seasonality. In Ulta’s case, this line item grows through capital expenditures, mostly for new stores. We can see that how the balance of the account flatlines in sync with the selling season: the company opens very few stores during the main selling season, and then ramps back up into the new year. (chart viewer)

If you are interested in how the Sentieo platform can make your research process more efficient, please get in touch.

What Equity Analysts Need To Do About “606”

One of the most substantial recent changes in public company accounting is ASC 606: Revenues from Contracts with Customers. The changes affect a wide range of public filers, from SaaS companies to real estate managers, to fast food franchisors. This post will focus on what analysts can do to efficiently see what has changed in their coverage universe. For the accounting enthusiasts who want to know more about the changes themselves, we recommend KPMG’s 1,100-page implementation guide.

As the implementations have been rolling in the filers’ SEC filings, we find that two Doc Searches can help analysts find the adjustments provided by the companies.

For income statement changes, we use IN:TABLE search for revenue within 200 words of “606.” In Sentieo, analysts can search specific company documents, docs from several companies (tickers entered manually or in a saved watchlist), or general search (which can be modified by factors such as market cap, headquarters location, specific filing forms, sector, and many others).

For balance sheet changes, we use IN:TABLE search for equity, within 200 words of 606.

Using these searches enabled us to find what we need, in a fraction of the time that older search methods require. Here are some of our findings.

Intuit (INTU), parent of QuickBooks and TurboTax, went from a loss to almost break-even in its third quarter under the new standard.

SaaS company AutoDesk (ADSK): we see that both revenues and the closely watched ARR numbers are affected.

Dunkin’ Brands (DNKN), franchisor of Dunkin and Baskin Robbins, analyzed the applicability of 606 to its revenue streams (franchise fees, advertising fund fees, products, rents), and Sentieo provides a detailed breakdown.

Our balance sheet search mentioned above picked up some notable changes, too.

Commercial real estate broker and manager Jones Lang LaSalle (JLL) saw several changes in its balance sheet, notably the creation of several new line items related to the adoption of 606.

SVB Financial (SIVB), parent of Silicon Valley Bank, also reported major changes in its accounts receivable and its deferred revenues on its balance sheet.

Finally, telecom Sprint Corporation (S) saw balance sheet adjustments in a few categories, including the addition of $1.2 billion of customer contract acquisitions on the Assets side, and a $1.3 billion swing from negative accumulated earnings to positive.

If you’d like to learn more about how using Sentieo can help your process, get in touch.