Home Depot’s revenue has doubled since 2008, but retail space has not increased. how? By investing in technology. Investors, however, know almost nothing about Home Depot’s tech spending, as the project may have been swallowed by the SG&A black hole. Will the SEC consider requiring U.S. companies to disclose “technology policy and spending footnotes”?
An instructor at the Boston Latin School is teaching FORTRAN computers using an IBM 1130 computer … [+]
I am teaching my business fundamental analysis course. Today, we discuss the important issue of rough corporate disclosure of capital expenditures. In my previous column, I complained about poor disclosures related to maintenance and growth capex and R&D. I would like to add a more important question to this list: information on technology spending by non-R&D-intensive companies.
As a case study, consider Home Depot. The company has barely added brick-and-mortar stores since the real estate recession hit in 2008. Home Depot had 235 million square feet of retail space in February 2008. They ended February 2022 with 240.5 million square feet of retail space. However, they managed to double their revenue from around $77 billion in 2008 to $151 billion by 2021.
How can a retail company double revenue without adding any significant store space? The Home Depot achieved this feat by using information technology to (1) optimize the supply chain; (2) enable a hybrid business model where customers can place orders from their mobile phones and pick them up in stores; (3) by refining them across its more than 2,300 Which of the specific 40,000+ products actually carried in the store. However, as an investor, how much do I really know about the investment amount to build such a technology? hardly.
In Home Depot’s 2021 85-page 10-K, the word “technology” appears about 33 times. Most discussions related to technology are high-level vague statements of the following types:
“We continue to focus on enhanced sales IT tools to help us: (1) build a connected shopping experience tailored to customer shopping intent and location; (2) deliver the best value in the market; (3) Optimize our product portfolio.”
“Our sales team, while working with our inventory and supply chain teams and our supplier partners, is leveraging technology to adjust our assortment, introduce alternatives when needed, and build depth in high-demand products. “
It’s better than nothing but little insight. If Home Depot were to double sales by doubling the number of stores, they would leave some footprint of capital spending decisions on the balance sheet under property, plant and equipment (PPE). Presumably there will be more questions about their real estate optimization strategy. So why is the investment and analyst community silent on the “hidden capex” of technology? Why is the SEC or the investor community so low on a hidden capex requirement that allows Home Depot to double its revenue without adding a lot of real estate?
So, where is the technology spending? Presumably spend somewhere in SG&A (Sales, General and Administration). how much did you spend? What exactly is it? We have no clue. Companies are increasingly investing resources in technology to achieve a variety of valuable business outcomes, including (1) improving operational efficiency; (2) improving customer experience; (3) automating existing processes; (4) increasing employee productivity; (5) New product development; (6) Strengthen hybrid work; (7) Comply with compliance requirements; (8) Improve network security.
The SEC’s proposed new rules to enhance cybersecurity disclosures cover a small but important aspect of these eight functions. What about disclosures related to the other seven functions of technology spending?
So, what should be done? I propose that the SEC require companies to disclose a “Technology Policy and Spending Footnote” detailing the following:
· Company policies and procedures related to technology spending. This is broadly similar to the technical version of the PPE accounting policy footnote. The note will disclose the nature of information technology (IT) infrastructure spending, and whether the infrastructure is in-house or outsourced.
· Dollar spending on infrastructure during the year. Infrastructure will be clearly broken down into hardware and software spending by the business.
· Dollar expenditures for personnel upskilling and/or technology-related training.
· Estimated useful life (narrow rather than broad) of such dollar expenditures.
· What portion of the dollar expense is capitalized on the balance sheet rather than reflected in the expense under the item specified in the income statement?
· Process, if any, for assessing impairment of capitalised technology expenditure.
Of course, these suggested disclosure items are meant to be a start. I hope the investment community can come up with better data points that they want to see related to technology spending by mainstream US companies.
Without better disclosure of the kind of technology spending highlighted, investors and analysts cannot truly understand how modern businesses use their assets to generate revenue and profits.