| Summary of Significant Accounting Policies | (2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.
(b) Fiscal Year
The Company’s fiscal year ends on the Saturday closest to January 31 of each year. The years ended February 2, 2019, February 3, 2018 and January 28, 2017 are referred to as fiscal 2018, fiscal 2017 and fiscal 2016, respectively, in the accompanying consolidated financial statements. Fiscal year 2017 is comprised of 53 weeks, while fiscal years 2018 and 2016 are each comprised of 52 weeks.
(c) Cash and Cash Equivalents/Concentration of Credit Risk
For purposes of the consolidated balance sheets and consolidated statements of cash flows, the Company considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents. Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents. The Company places its cash and cash equivalents in what it believes to be high credit quality banks and institutional money market funds. The Company maintains cash accounts that exceed federally insured limits.
(d) Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or net realizable value as determined by the retail inventory method for store inventory and the average cost method for distribution center inventory. Under the retail inventory method, the cost of inventory is determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. Merchandise markdowns are reflected in the inventory valuation when the retail price of an item is lowered in the stores. Inventory is recorded net of an allowance for shrinkage based on the most recent physical inventory counts.
(e) Property and Equipment, net
Property and equipment, net are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the lesser of the estimated useful lives (primarily three to five years for computer equipment and furniture, fixtures and equipment, five years for leasehold improvements, seven years for major purchased software systems, and fifteen to twenty years for buildings and building improvements) of the related assets or the relevant lease term.
(f) Impairment of Long-Lived Assets
If facts and circumstances indicate that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. Non-cash impairment expense related primarily to leasehold improvements and fixtures and equipment at underperforming stores totaled $1.3 million, $0.5 million and $0.3 million in fiscal 2018, 2017 and 2016, respectively.
(g) Insurance Liabilities
The Company is largely self-insured for workers’ compensation costs and employee medical claims. The Company’s self-insured retention or deductible, as applicable, for each claim involving workers’ compensation and employee medical is limited to $250,000 and $100,000, respectively. Self-insurance liabilities are based on the total estimated costs of claims filed and estimates of claims incurred but not reported, less amounts paid against such claims. Current and historical claims data, together with information from actuarial studies, are used in developing the estimates. The insurance liabilities that are recorded are primarily influenced by the frequency and severity of claims and the Company’s growth. If the underlying facts and circumstances related to the claims change, then the Company may be required to record more or less expense which could be material in relation to results of operations.
(h) Stock-Based Compensation
The Company recognizes compensation expense associated with all nonvested restricted stock and restricted stock units based on an estimate of the grant-date fair value of each equity award. Grants of time-based nonvested restricted stock are valued based on the closing stock price on the grant date, while grants of performance-based restricted stock units are valued at an estimate of fair market value using a lattice model. See Note 8 for additional information on the Company’s stock-based compensation plans.
(i) Revenue Recognition
The Company’s primary source of revenue is derived from the sale of clothing and accessories to its customers with the Company’s performance obligations satisfied at the point of sale when the customer pays for their purchase and receives the merchandise. Sales taxes collected by the Company from customers are excluded from revenue. Revenue from layaway sales is recognized at the point in time when the merchandise is paid for and control of the goods is transferred to the customer, thereby satisfying the Company’s performance obligation. Non-refundable layaway service fees are recognized in revenue when collected by the Company from customers. The Company defers revenue from the sale of gift cards and recognizes the associated revenue upon the redemption of the cards by customers to purchase merchandise. Breakage on gift cards is minimal as the cards are generally subject to escheat regulations of the state in which the gift card subsidiary is located.
Sales Returns
The Company allows customers to return merchandise for up to thirty days after the date of sale. Expected refunds to customers are recorded based on estimated margin using historical return information. Under Accounting Standard Update (“ASU”) 2014-09, the Company recorded an estimated refund liability of $0.3 million, included in the line item “Accrued expenses,” and the carrying value of a return asset of $0.2 million, presented separately from inventory, included in the line item “Prepaid and other current assets” on the consolidated balance sheets. The cumulative effect of the changes made to the February 2, 2019 consolidated balance sheet from the modified retrospective adoption of ASU 2014-09 on retained earnings was immaterial.
Disaggregation of Revenue
The Company’s retail operations represent a single operating segment based on the way the Company manages its business. Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation. The Company’s retail stores sell similar products, use similar processes to sell those products, and sell their products to similar classes of customers.
In the following table, the Company’s revenue is disaggregated by major product line. The percentage of net sales related to each classification of its merchandise assortment for fiscal 2018, 2017 and 2016 was as follows:
Percentage of Net Sales
2018
2017
2016
Accessories
32
%
32
%
31
%
Children’s
23
%
23
%
23
%
Ladies’
22
%
23
%
24
%
Men’s
17
%
17
%
17
%
Home
6
%
5
%
5
%
(j) Cost of Sales
Cost of sales includes the cost of inventory sold during the period and transportation costs, including inbound freight related to inventory sold and freight from the distribution centers to the stores, net of discounts and allowances. Distribution center costs, store occupancy expenses and advertising expenses are not considered components of cost of sales and are included as part of selling, general and administrative expenses. Depreciation is also not considered a component of cost of sales and is included as a separate line item in the consolidated statements of operations. Distribution center costs (exclusive of depreciation) for fiscal 2018, 2017 and 2016 were $17.6 million, $17.4 million and $17.2 million, respectively.
(k) Earnings per Share
Basic earnings per common share amounts are calculated using the weighted average number of common shares outstanding for the period. Diluted earnings per common share amounts are calculated using the weighted average number of common shares outstanding plus the additional dilution for all potentially dilutive securities, such as nonvested restricted stock and stock options. During loss periods, diluted loss per share amounts are based on the weighted average number of common shares outstanding because the inclusion of common stock equivalents would be antidilutive.
The following table provides a reconciliation of the number of average common shares outstanding used to calculate basic earnings per share to the number of common shares and common stock equivalents outstanding used in calculating diluted earnings per share for fiscal 2018, 2017 and 2016:
2018
2017
2016
Weighted average number of common shares outstanding
13,030,063
14,058,008
14,656,753
Incremental shares from assumed vesting of nonvested restricted stock
39,631
57,887
5,519
Average number of common shares and common stock equivalents outstanding
13,069,694
14,115,895
14,662,272
The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method. This method assumes that the proceeds the Company receives from the exercise of stock options are used to repurchase common shares in the market. Prior to the adoption of ASU No. 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, in the first quarter of fiscal 2017, the Company included as assumed proceeds the amount of compensation costs attributed to future services and not yet recognized, and the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of outstanding options and vesting of nonvested restricted stock. Following the adoption of ASU No. 2016-09, the assumed proceeds include only the amount of compensation costs attributed to future services and not yet recognized but does not include any tax benefits arising from the assumed exercise of outstanding options and the vesting of nonvested restricted stock. For fiscal 2018, 2017 and 2016, respectively, there were 0, 0 and 4,000 options outstanding to purchase shares of common stock excluded from the calculation of diluted earnings per share because of antidilution. For fiscal 2018, 2017 and 2016, respectively, there were 124,000, 125,000 and 237,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.
(l) Advertising
The Company expenses advertising as incurred. Advertising expense for fiscal 2018, 2017 and 2016 was $1.7 million, $2.0 million and $2.5 million, respectively.
(m) Operating Leases
The Company leases all of its store properties and accounts for the leases as operating leases. Many lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives and minimum rent expense on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use.
For scheduled rent escalation clauses during the lease terms or for rental payments commencing “rent holidays” at a date other than the date of initial occupancy, the Company records minimum rent expense on a straight-line basis over the terms of the leases. Tenant improvement allowances are included in accrued expenses (current portion) and other long-term liabilities (noncurrent portion) and are amortized over the lease term. Changes in the balances of tenant improvement allowances are included as a component of operating activities in the consolidated statements of cash flows.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of net sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
The Company is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The Company included a liability of $0.8 million as of both February 2, 2019 and February 3, 2018 in other long-term liabilities, representing estimated expenses that would be incurred upon the termination of the Company’s operating leases .
(n) Store Opening and Closing Costs
New and relocated store opening period costs are charged directly to expense when incurred. When the Company decides to close or relocate a store, the Company records an expense for the present value of expected future rent payments, net of sublease income, if any, in the period that a store closes or relocates. All store opening and closing costs are included in selling, general and administrative expenses.
(o) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(p) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates made by management include those used in the valuation of inventory, property and equipment, self-insurance liabilities, leases and income taxes. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.
(q) Business Reporting Segments
The Company is a value-priced retailer of urban fashion apparel and accessories for the entire family. The retail operations represent a single operating segment based on the way the Company manages its business. Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation. The Company’s retail stores sell similar products, use similar processes to sell those products, and sell their products to similar classes of customers. All sales and assets are located within the United States.
(r) Recent Accounting Pronouncements
Recently Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance requires an entity to recognize revenue on contracts with customers relating to the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this, an entity is required to identify the contract with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize revenue when (or as) the entity satisfies each performance obligation. In August of 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods in the year of adoption. The Company adopted ASU 2014-09 in fiscal 2018 beginning February 4, 2018 using the modified retrospective approach. The Company’s primary source of revenue is derived from the sale of clothing and accessories to its customers with the Company’s performance obligations satisfied immediately when the customer pays for their purchase and receives the merchandise. As such, adoption of the new standard did not have a material impact on the Company’s consolidated balance sheet, results of operations or cash flows. Additionally, the adoption of the ASU did not result in significant changes to the Company’s business processes, controls, systems.
Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which amends the existing guidance in ASC Topic 840, Leases. Additional amendments to the standard were issued subsequent to the initial release. The new standard requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for leases with such obligations representing the discounted value of future lease payments. The Company will adopt the requirements of the new lease standard effective February 3, 2019, the first day of fiscal 2019. As part of the implementation process, the Company has assessed its lease arrangements and evaluated practical expedient and accounting policy elections. The Company is finalizing its evaluation of processes and controls, and has implemented necessary modifications to its existing lease system. In adopting the new lease standard, the Company will elect the optional transition method which will apply the standard as of the effective date, but will not apply the standard to the comparative periods previously presented in its consolidated financial statements. At the adoption date, the Company expects to recognize a cumulative effect adjustment to retained earnings as a result of the impairment of certain ROU assets. The new standard provides optional practical expedients in transition. The Company is electing the transition package of practical expedients allowed by the standard which permits it to not reassess prior conclusions regarding lease classification, identification and initial direct costs. Further, the Company is electing a short-term lease exception policy which permits it to not apply the recognition requirements of this standard to short-term leases (leases with terms of 12 months or less), as well as an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The Company is not electing the hindsight practical expedient.
The adoption of ASU 2016-02 will have a material impact on the Company's consolidated balance sheet due to the recognition of ROU assets and lease liabilities related to operating leases. The Company expects to record operating lease liabilities totaling approximately $130 million to $150 million based on the present value of the remaining minimum rental payments using a discount rate as of the date of adoption. The Company also expects to record corresponding ROU assets based on the operating lease liabilities as adjusted for prepaid and deferred rent, unamortized lease incentives and other transition adjustments. These estimates may differ from the actual amounts recorded upon adoption in fiscal 2019 as they are based on transition procedures completed to date. The Company does not expect a material impact to its consolidated statement of operations or consolidated statement of cash flows. |
