| Summary of Significant Accounting Policies | Summary of Significant Accounting Policies Cash and Cash Equivalents We consider all short-term investments with an initial maturity of 90 days or less when purchased to be cash equivalents. Marketable Securities Marketable debt securities are classified as available-for-sale and held-to-maturity and are carried at fair value and amortized cost plus accrued income, respectively. Unrealized holding gains and losses, net of income taxes, on available-for-sale debt securities are reflected as a separate component of stockholders’ equity until realized. For the purposes of computing realized and unrealized gains and losses, cost is determined on a specific identification basis. We classify all marketable securities within current assets on our accompanying Consolidated Balance Sheets, including those with maturity dates beyond twelve months, as they are available to support our current operational liquidity needs. Merchandise Inventories Merchandise inventories are comprised of finished goods offered for sale at our retail stores and online. Inventories are stated at the lower of cost or net realizable value using the retail inventory method. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio. We believe that the retail inventory method approximates cost. Shipping and handling costs for merchandise shipped to customers of $10.8 million , $7.9 million and $8.1 million in fiscal years 2018 , 2017 and 2016 , respectively, are included in cost of goods sold in the accompanying Consolidated Statements of Income. We review our inventory levels to identify slow-moving merchandise and generally use markdowns to clear this merchandise. At any given time, merchandise inventories include items that have been marked down to management’s best estimate of their fair market value at retail price, with a proportionate write-down to the cost of the inventory. Our management bases the decision to mark down merchandise primarily upon its current sell-through rate and the age of the item, among other factors. These markdowns may have an adverse impact on earnings, depending on the extent and amount of inventory affected. Markdowns are recorded as an increase to cost of goods sold in the accompanying Consolidated Statements of Income. Total markdowns, including permanent and promotional markdowns, on a cost basis were $49.5 million , $50.0 million and $49.2 million in fiscal years 2018 , 2017 and 2016 , respectively. In addition, we accrued $0.6 million and $1.1 million for planned but unexecuted markdowns, including markdowns related to slow moving merchandise, as of February 2, 2019 and February 3, 2018 , respectively. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Equipment is depreciated over five to seven years. Furniture and fixtures are depreciated over five years. Computer software is depreciated over three years. Leasehold improvements and the cost of acquiring leasehold rights are amortized over the lesser of the term of the lease or the estimated useful life of the improvement. The cost of assets sold or retired and the related accumulated depreciation is removed from the accounts with any resulting gain or loss included in net income. Repairs and maintenance costs are charged directly to expense as incurred. Major renewals, replacements and improvements that substantially extend the useful life of an asset are capitalized and depreciated. Impairment of Long-Lived Assets Impairments are recorded on long-lived assets used in operations whenever events or changes in circumstances indicate that the net carrying amounts may not be recoverable. Important factors that could result in an impairment review include, but are not limited to, significant under-performance relative to historical or planned operating results, significant changes in the manner of use of the assets or significant changes in business strategies. An evaluation is performed using estimated undiscounted future cash flows from operating activities compared to the carrying value of related assets for the individual stores. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the difference between the carrying value and the estimated fair value of the assets based on the discounted cash flows of the assets using a rate that approximates the weighted average cost of capital. With regard to retail store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, we consider the assets at each individual retail store to represent an asset group. In addition, we have considered the relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance. Refer to "Note 11: Fair Value Measurements", for further information. Operating Leases We lease our retail stores under non-cancellable operating leases. Most store leases include tenant allowances from landlords, rent escalation clauses and/or contingent rent provisions. We recognize rent expense on a straight-line basis over the lease term, excluding contingent rent, and record the difference between the amount charged to expense and the rent paid as a deferred rent liability. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when the achievement of the specified sales that triggers the contingent rent is probable. Deferred Rent and Tenant Allowances Deferred rent is recognized when a lease contains fixed rent escalations. We recognize the related rent expense on a straight-line basis starting from the date of possession and record the difference between the recognized rental expense and cash rent payable as deferred rent. Deferred rent also includes tenant allowances received from landlords in accordance with negotiated lease terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease starting at the date of possession. Revenue Recognition Revenue is recognized for store sales when the customer receives and pays for the merchandise at the register, net of estimated returns. Taxes collected from our customers are recorded on a net basis. For e-commerce sales, we recognize revenue, net of sales taxes and estimated sales returns, and the related cost of goods sold at the time the merchandise is shipped to the customer. Prior to the adoption of the new revenue recognition standard in fiscal 2018, we deferred e-commerce revenue for goods that were in-transit to the customer, typically within four days of shipment. Refer to "Accounting Standard Adopted in Fiscal 2018" in this Note 2 to the Consolidated Financial Statements for further information. Amounts related to shipping and handling that are billed to customers are reflected in net sales, and the related costs are reflected in cost of goods sold in the Consolidated Statements of Income. For fiscal years 2018 , 2017 and 2016 , shipping and handling fee revenue included in net sales was $2.7 million , $3.3 million , and $3.3 million , respectively. We accrue for estimated sales returns by customers based on historical sales return results. As of February 2, 2019 and February 3, 2018, our reserve for sales returns was $1.4 million and $1.1 million , respectively. We recognize revenue from gift cards as they are redeemed for merchandise. Prior to redemption, we maintain a current liability for unredeemed gift card balances. The customer liability balance was $8.7 million as of February 2, 2019 and $9.2 million as of February 3, 2018 , and is included in deferred revenue on the accompanying Consolidated Balance Sheets. Our gift cards do not have expiration dates and in most cases there is no legal obligation to remit unredeemed gift cards to relevant jurisdictions. Based on actual historical redemption patterns, we determined that a small percentage of gift cards are unlikely to be redeemed (which we refer to as gift card “breakage”). Based on our historical gift card breakage rate, we recognize breakage revenue over the redemption period in proportion to actual gift card redemptions. Prior to adoption of the new revenue standard in fiscal 2018, for fiscal years 2017 and 2016, breakage was recognized two full fiscal years after the gift cards were activated when the probability of redemption was considered remote. Refer to "Accounting Standards Adopted in Fiscal 2018", for further information. Revenue recognized from gift cards was $17.9 million in fiscal 2018 , $18.5 million in fiscal 2017 and $20.2 million in fiscal 2016 . The following table summarizes net sales from our retail stores and e-commerce (in thousands): Fiscal Year Ended February 2, February 3, January 28, 2017 Retail stores $ 508,853 $ 501,053 $ 492,572 E-commerce 89,625 75,846 76,380 Total net sales $ 598,478 $ 576,899 $ 568,952 The following table summarizes the percent of net sales by department: Fiscal Year Ended February 2, February 3, January 28, 2017 Mens 35 % 35 % 33 % Womens 25 % 25 % 26 % Accessories 18 % 19 % 19 % Footwear 12 % 11 % 11 % Boys 6 % 6 % 6 % Girls 4 % 4 % 5 % Total net sales 100 % 100 % 100 % The following table summarizes the percent of net sales by third-party and proprietary branded merchandise: Fiscal Year Ended February 2, February 3, January 28, 2017 Third-party 75 % 74 % 72 % Proprietary 25 % 26 % 28 % Total net sales 100 % 100 % 100 % Loyalty Program We have a customer loyalty program where customers accumulate points based on purchase activity. Once a loyalty member achieves a certain point level, the member earns awards that may be redeemed for merchandise. Unredeemed awards and accumulated partial points are accrued as deferred revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. We expire unredeemed awards after 45 days from date of issuance and accumulated partial points 365 days after the last purchase activity. A liability is estimated based on the standalone selling price of awards and partial points earned and estimated redemptions. The deferred revenue for this program was $1.7 million as of February 2, 2019 and $1.2 million as of February 3, 2018. Revenue recognized from our loyalty program was $1.7 million in fiscal 2018, $1.3 million in fiscal 2017 and $0.6 million in fiscal 2016. Cost of Goods Sold Cost of goods sold includes product costs and buying, distribution and occupancy costs as follows: • Costs of products sold include: • freight expenses associated with merchandise received from our vendors into our distribution centers; • vendor allowances; • cash discounts on payments to merchandise vendors; • physical inventory losses; and • markdowns of inventory. • Buying, distribution and occupancy costs include: • payroll, benefit costs, and incentive compensation for merchandising personnel; • customer shipping and handling expenses; • costs associated with operating our distribution and fulfillment center, including payroll and benefit costs for our distribution center, occupancy costs, and depreciation; • freight expenses associated with shipping merchandise inventories from our distribution center to our stores and e-commerce customers; and • store occupancy costs, including rent, maintenance, utilities, property taxes, business licenses, security costs and depreciation. Selling, General and Administrative Expenses • Payroll, benefit costs and incentive compensation for store, regional, e-commerce and corporate employees; • Occupancy and maintenance costs of corporate office facilities; • Depreciation related to corporate office assets; • Advertising and marketing costs, net of reimbursement from vendors; • Tender costs, including costs associated with credit and debit card interchange fees; • Long-lived asset impairment charges; • Legal provisions; • Other administrative costs such as supplies, consulting, audit and tax preparation fees, travel and lodging; and • Charitable contributions. Store Pre-opening Costs Store pre-opening costs consist primarily of occupancy costs, which are included in cost of goods sold, and payroll expenses, which are included in selling, general and administrative expenses, in the accompanying Consolidated Statements of Income. Advertising We expense advertising costs as incurred, except for direct-mail advertising expenses which are recognized at the time of mailing. Advertising costs include such things as production and distribution of print and digital catalogs; print, online and mobile advertising costs; radio advertisements; and grand openings and other events. Advertising expense, which is classified in selling, general and administrative expenses in the accompanying Consolidated Statements of Income, was $13.2 million , $12.1 million and $15.4 million in fiscal years 2018 , 2017 and 2016 , respectively. Share-Based Compensation We apply the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation (“ASC 718”), for accounting for equity instruments exchanged for employee services. Under the provisions of this standard, share-based compensation expense is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). Changes in these inputs and assumptions can materially affect the measurement of the estimated fair value of award and related share-based compensation expense. Refer to “Note 12: Share-Based Compensation”, for further information. Income Taxes We account for income taxes and the related accounts using the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”). Under this method, we accrue income taxes payable or refundable and recognize deferred tax assets and liabilities based on differences between GAAP and tax bases of assets and liabilities. We measure deferred tax assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse, and recognize the effect of a change in enacted rates in the period of enactment. We establish assets and liabilities for uncertain positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognition threshold. We include in income tax expense any interest and penalties related to uncertain tax positions. We have included the impact of the Tax Act in our financial results for the period ended February 2, 2019 and February 3, 2018. The Securities and Exchange Commission ("SEC") issued interpretive guidance under Staff Accounting Bulletin No. 118 ("SAB 118") that allowed for a measurement period up to one year after the December 22, 2017 enactment date of the Tax Act to finalize the recording of the related tax impacts. Our accounting for the income tax effects of the new tax legislation, based on available guidance and interpretation, is included in our provision. Refer to “Note 14: Income Taxes”, for further information. Earnings per Share Basic earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to restricted stock and outstanding options to purchase common stock. Incremental shares of 490 thousand , 270 thousand and 33 thousand in fiscal years 2018 , 2017 and 2016 , respectively, were used in the calculation of diluted earnings per share. Refer to “Note 15: Earnings Per Share”, for further information. Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents. At February 2, 2019 and February 3, 2018 , and at various times throughout these years, we had cash in financial institutions in excess of the $250,000 amount insured by the Federal Deposit Insurance Corporation. We typically invest our cash in highly rated, short-term commercial paper, interest-bearing money market funds, municipal bonds and certificates of deposit. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions 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 net sales and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. New Accounting Standards Not Yet Adopted In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (ASC 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months at inception of the lease, regardless of lease classification. ASC 842 became effective for us on February 3, 2019 and we will adopt the standard using the additional modified retrospective transition method on the effective date. By electing this additional transition method, we will not be required to recast our comparative financial statements or provide disclosures required by the new standard for comparative periods. We will elect the 'package of practical expedients', which allowed us not to continue to reassess our previous conclusions about lease identification, lease classification and initial direct costs. In addition, we will elect the practical expedient to not separate lease and non-lease components for all of our leases. We will not elect the use of the hindsight practical expedient. We implemented a lease system in connection with the adoption of ASC 842 and we are currently in the process of finalizing the impact of adopting the standard, including the calculation of the present value of future minimum lease payments at the effective date, as well as updating business processes and internal controls over financial reporting. We expect the adoption of ASC 842 will have a material effect on our financial statements. The most significant impact on our consolidated financial statements will relate to (1) the recognition of right-of-use assets and lease liabilities on our balance sheet for our retail store, distribution warehouse and corporate office operating leases based on the present value of total fixed payments of $324 million ; (2) the recognition of lease expense associated with the inclusion of non-lease components in our minimum rental payments as a result of electing the practical expedient to combine lease and non-lease components; and (3) the significant new quantitative and qualitative disclosure requirements. We do not expect a significant change in our lease portfolio between now and adoption. During the fiscal year ended February 1, 2020, we currently expect to recognize additional occupancy costs of approximately $ 2 million as a result of adopting ASC 842. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which modifies or replaces existing models for impairment of trade and other receivables, debt securities, loans, beneficial interests held as assets, purchased-credit impaired financial assets and other instruments. The new standard requires entities to estimate expected losses over the life of the financial asset and recognize an allowance for estimated credit losses upon recognition of the financial instrument. ASU 2016-13 will become effective for us in the first quarter of fiscal 2020, with early adoption permitted and must be adopted using the modified retrospective method. We are in the process of evaluating the impact of adopting the new standard on our consolidated financial statements and related disclosures. Accounting Standard Adopted in Fiscal 2018 On February 4, 2018, we adopted FASB ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606"), using the modified retrospective transition method, which under ASC 606, means the standard applies retrospectively with the cumulative effect recognized in the opening retained earnings balance in fiscal 2018. Comparative information for prior year fiscal periods has not been adjusted and continues to be reported under the previous standard ASC 605. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to our customers at an amount we expect to be entitled to in exchange for those goods or services. The adoption of this standard requires us to recognize gift card breakage income in proportion to redemptions as they occur. The new guidance also requires enhanced disclosures, such as disaggregation of revenues and revenue recognition policies that require significant judgment and identification of performance obligations to customers. The adoption of ASC 606 resulted in a net cumulative effect adjustment that increased the opening balance of retained earnings by $1.4 million , as well as the following impacts: • Breakage revenue is now recognized over time in proportion to actual customer redemptions. Breakage revenue was previously recognized two full fiscal years after the gift cards were activated when the probability of redemption was considered remote. • Revenue for merchandise shipped to the customer from a distribution center or store is now recognized at the shipping point, whereas it was previously recognized upon customer receipt. The impact of the adoption of ASC 606 on the Consolidated Balance Sheet as of February 2, 2019 was as follows (in thousands): As reported Balances without adoption of ASC 606 Effect of Adoption Increase (Decrease) Merchandise inventories $ 55,809 $ 56,429 $ (620 ) Other assets 2,185 2,721 (536 ) Accrued expenses 18,756 18,593 163 Deferred revenue 10,373 13,627 (3,254 ) Retained earnings 13,335 11,442 1,893 The impact of the adoption of ASC 606 on our Consolidated Statements of Income for fiscal 2018 was as follows (in thousands): As reported Balances without adoption of ASC 606 Effect of Adoption Increase (Decrease) Net sales $ 598,478 $ 597,439 $ 1,039 Cost of goods sold 417,582 417,152 430 Gross profit 180,896 180,287 609 |
