October 17, 2023
Securities Litigation: Inflation Disclosure in the Crosshairs
As Meredith blogged back in August, disclosures concerning the impact of inflation have been getting increased attention in Staff comment letters. Now, it looks like plaintiffs’ lawyers are scrutinizing those disclosures pretty closely as well. Over on “The D&O Diary,” blog Kevin LaCroix recently blogged about a purported class action lawsuit filed against Advance Auto Parts last week premised on alleged shortcomings in the company’s disclosure about the impact of inflation and other macroeconomic factors on its business. This excerpt highlights the statements that gave rise to the lawsuit:
On November 16, 2022, in its quarterly earnings call, the company announced its “strategic pricing initiatives” aimed to help grow margins in 2023. The company’s CEO said that “our goal overall is to cover cost increases.” The CEO said that these initiatives were based on the company’s research showing that in the professional category, availability rather than prices was the more important factor in sales.
On its quarterly earnings call on February 28, 2023, the company said that it was continuing to execute “disciplined inventory and pricing actions.” During the call, the company’s CEO dismissed the impact of the U.S. economy and other macroeconomic factors on sales and margins. While acknowledging that the company remains “cautious surrounding the macroeconomic backdrop, including with respect to the pressure on low-to-middle income consumers,” the CEO confirmed the company’s 2023 guidance.
However, in its quarterly earnings call on May 31, 2023, the CEO said that “our financial results in the first quarter were well below expectations, noting that the company’s pricing initiatives produced “less price realization than plans,” and that the company had been “unable to price to cover product costs in the quarter.”
In their lawsuit, the plaintiffs allege that the company’s statements violated Rule 10b-5. They contend, among other things, that these statements misrepresented the efficacy of the company’s strategic pricing initiative and “created the false impression that inflation and macroeconomic factors had an insubstantial impact on the Company’s margins.”
Kevin addresses the issues likely to be raised by the company in its motion to dismiss and seems to think the plaintiffs may face an uphill battle to establish that the statements at issue were made with scienter. But he also points out that as companies continue to face economic headwinds associated with inflation and higher interest rates, more of them may face lawsuits like this one.
– John Jenkins