| Summary of Significant Accounting Policies | Note A: Summary of Significant Accounting Policies
We are a specialty retailer of high-quality products for the home.
These products, representing distinct merchandise strategies
— Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm,
PBteen, Williams Sonoma Home, Rejuvenation, and Mark and Graham
— are marketed through e-commerce websites, direct mail
catalogs and 629 stores. We have retail and/or e-commerce
businesses in the U.S., Puerto Rico, Canada, Australia and the
United Kingdom, and ship our products to customers worldwide. Our
catalogs reach customers throughout the U.S. and Australia. In
addition, we have unaffiliated franchisees that operate stores
and/or e-commerce e-commerce
Consolidation
The Consolidated Financial Statements include the accounts of
Williams-Sonoma, Inc. and its subsidiaries. All intercompany
transactions and balances have been eliminated.
Fiscal Year
Our fiscal year ends on the Sunday closest to January 31,
based on a 52 or 53-week year. Fiscal 2016, a 52-week year, ended
on January 29, 2017; Fiscal 2015, a 52-week year, ended on
January 31, 2016; and Fiscal 2014, a 52-week year, ended on
February 1, 2015.
Use of Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses
and related disclosures of contingent assets and liabilities. These
estimates and assumptions are evaluated on an ongoing basis and are
based on historical experience and various other factors that we
believe to be reasonable under the circumstances. Actual results
could differ from these estimates.
Cash Equivalents
Cash equivalents include highly liquid investments with an original
maturity of three months or less. As of January 29, 2017, we
were invested primarily in demand deposit accounts and money market
funds. Book cash overdrafts issued, but not yet presented to the
bank for payment, are reclassified to accounts payable.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at their carrying values, net of an
allowance for doubtful accounts. Accounts receivable consist
primarily of credit card, franchisee and landlord receivables for
which collectability is reasonably assured. Receivables are
evaluated for collectability on a regular basis and an allowance
for doubtful accounts is recorded, if necessary. Our allowance for
doubtful accounts was not material to our financial statements as
of January 29, 2017 and January 31, 2016.
Merchandise Inventories
Merchandise inventories, net of an allowance for excess quantities
and obsolescence, are stated at the lower of cost (weighted average
method) or market. To determine if the value of our inventory
should be reduced below cost, we consider current and anticipated
demand, customer preferences and age of the merchandise. The
significant estimates used in inventory valuation are obsolescence
(including excess and slow-moving inventory and lower of cost or
market reserves) and estimates of inventory shrinkage. We reserve
for obsolescence based on historical trends, aging reports,
specific identification and our estimates of future sales and
selling prices.
Reserves for shrinkage are estimated and recorded throughout the
year as a percentage of net sales based on historical shrinkage
results, expectations of future shrinkage and current inventory
levels. Actual shrinkage is recorded at year-end based on the
results of our physical inventory counts and can vary from our
estimates due to such factors as changes in operations, the mix of
our inventory (which ranges from large furniture to small tabletop
items) and execution against loss prevention initiatives in our
stores, distribution facilities, off-site storage locations, and
with our third-party warehouse and transportation providers.
Accordingly, there is no shrinkage reserve at year-end.
Historically, actual shrinkage has not differed materially from our
estimates.
Our obsolescence and shrinkage reserve calculations contain
estimates that require management to make assumptions and to apply
judgment regarding a number of factors, including market
conditions, the selling environment, historical results and current
inventory trends. If actual obsolescence or shrinkage estimates
change from our original estimate, we will adjust our reserves
accordingly throughout the year. We have made no material changes
to our assumptions included in the calculations of the obsolescence
and shrinkage reserves throughout the year. As of January 29,
2017 and January 31, 2016, our inventory obsolescence reserves
were $13,770,000 and $9,782,000, respectively.
Advertising and Prepaid Catalog Expenses
Advertising expenses consist of media and production costs related
to e-commerce advertising, catalog mailings and other direct
marketing activities. All advertising costs are expensed as
incurred, or upon the release of the initial advertisement, with
the exception of prepaid catalog expenses. Prepaid catalog expenses
consist primarily of third-party incremental direct costs,
including creative design, paper, printing, postage and mailing
costs for all of our direct response catalogs. Such costs are
capitalized as prepaid catalog expenses and amortized over their
expected period of future benefit, generally three months.
Total advertising expenses (including e-commerce advertising,
catalog advertising and other advertising costs) were approximately
$347,474,000, $333,276,000 and $330,070,000 in fiscal 2016, fiscal
2015 and fiscal 2014, respectively.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the following estimated useful
lives of the assets:
Leasehold improvements Shorter of estimated useful life or lease term
(generally 5 – 22 years)
Fixtures and equipment
2 – 20 years
Buildings and building improvements
10
– 40 years
Capitalized software
2 – 10 years
We review the carrying value of all long-lived assets for
impairment, primarily at an individual store level, whenever events
or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. Our impairment analyses determine
whether projected cash flows from operations are sufficient to
recover the carrying value of these assets. Impairment may result
when the carrying value of the asset exceeds the estimated
undiscounted future cash flows over its remaining useful life. For
store impairment, our estimate of undiscounted future cash flows
over the store lease term is based upon our experience, the
historical operations of the stores and estimates of future store
profitability and economic conditions. The estimates of future
store profitability and economic conditions require estimating such
factors as sales growth, gross margin, employment costs, lease
escalations, inflation and the overall economics of the retail
industry, and are therefore subject to variability and difficult to
predict. Actual future results may differ from those estimates. If
a long-lived asset is found to be impaired, the amount recognized
for impairment is equal to the difference between the asset’s
net carrying value and its fair value. Long-lived assets are
measured at fair value on a nonrecurring basis using Level 3 inputs
as defined in the fair value hierarchy. The fair value is based on
the present value of estimated future cash flows using a discount
rate that approximates our weighted average cost of capital.
During fiscal 2016, fiscal 2015 and fiscal 2014, we recorded asset
impairment charges of approximately $1,765,000, $2,100,000 and
$241,000, respectively, related to our retail stores, which is
recorded within selling, general and administrative expenses.
Goodwill
Goodwill is not amortized, but rather is subject to impairment
testing annually (on the first day of the fourth quarter), or
between annual tests whenever events or changes in circumstances
indicate that the fair value of a reporting unit may be below its
carrying amount. We first perform a qualitative assessment to
evaluate goodwill for potential impairment. If based on that
assessment it is more likely than not that the fair value of the
reporting unit is below its carrying value, a two-step quantitative
test is necessary. The first step of the quantitative impairment
test requires determining the fair value of the reporting unit. We
use the income approach, whereby we calculate the fair value based
on the present value of estimated future cash flows using a
discount rate that approximates our weighted average cost of
capital. The process of evaluating the potential impairment of
goodwill is subjective and requires significant estimates and
assumptions about the future such as sales growth, gross margins,
employment rates, capital expenditures, inflation and future
economic and market conditions. Actual future results may differ
from those estimates. If the carrying value of the reporting
unit’s assets and liabilities, including goodwill, exceeds
its fair value, goodwill may be impaired. We then must perform a
second step of comparing the implied fair value of the goodwill to
its carrying value to determine the impairment charge, if any.
At January 29, 2017 and January 31, 2016, we had goodwill of
$18,680,000 and $18,703,000, respectively, included in other assets
primarily related to our fiscal 2011 acquisition of Rejuvenation
Inc. In fiscal 2016, we performed a qualitative assessment of
potential goodwill impairment and determined it was more likely
than not that the fair value of each of our reporting units
exceeded its carrying value. Accordingly, no further impairment
testing of goodwill was performed and we did not recognize any
goodwill impairment in fiscal 2016. In fiscal 2015 and fiscal 2014,
we performed a quantitative goodwill impairment test and determined
that the fair value of both our reporting units substantially
exceeded their carrying value. Accordingly, we did not recognize
any goodwill impairment in fiscal 2015 or fiscal 2014.
Self-Insured Liabilities
We are primarily self-insured for workers’ compensation,
employee health benefits and product and general liability claims.
We record self-insurance liability reserves based on claims filed,
including the development of those claims, and an estimate of
claims incurred but not yet reported. Factors affecting these
estimates include future inflation rates, changes in severity,
benefit level changes, medical costs and claim settlement patterns.
Should a different number of claims occur compared to what was
estimated, or costs of the claims increase or decrease beyond what
was anticipated, reserves may need to be adjusted accordingly. We
determine our workers’ compensation liability and product and
general liability claims reserves based on an actuarial analysis of
historical claims data. Self-insurance reserves for workers’
compensation, employee health benefits and product and general
liability claims were $24,988,000 and $25,290,000 as of
January 29, 2017 and January 31, 2016, respectively.
Customer Deposits
Customer deposits are primarily comprised of deferred revenues
related to unredeemed gift cards, merchandise credits and
undelivered merchandise. We maintain a liability for unredeemed
gift cards and merchandise credits until the earlier of redemption,
escheatment or four years as we have concluded that the likelihood
of our gift cards being redeemed beyond four years from the date of
issuance is remote. Income from unredeemed gift cards and
merchandise credits, which is recorded in other income within
selling, general and administrative expense, is not material to our
consolidated financial statements. Our gift cards and merchandise
credits have no expiration dates.
Deferred Rent and Lease Incentives
For leases that contain fixed escalations of the minimum annual
lease payment during the original term of the lease, we recognize
rental expense on a straight-line basis over the lease term,
including the construction period, and record the difference
between rent expense and the amount currently payable as deferred
rent. Deferred lease incentives include construction allowances
received from landlords, which are amortized on a straight-line
basis over the lease term, including the construction period.
For any store or facility closure where a lease obligation still
exists, we record the estimated future liability associated with
the rental obligation on the cease use date.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and debt approximate their estimated
fair values. We use derivative instruments to hedge against foreign
currency exchange rate fluctuations. The assets or liabilities
associated with our derivative financial instruments are recorded
at fair value in either other current or long-term assets or other
current or long-term liabilities. The fair value of our foreign
currency derivative instruments is measured using the income
approach whereby we use observable market data at the measurement
date and standard valuation techniques to convert future amounts to
a single present value amount. These observable inputs include spot
rates, forward rates, interest rates and credit derivative market
rates (refer to Notes L and M for additional information).
Revenue Recognition
We recognize revenues and the related cost of goods sold (including
shipping costs) at the time the products are delivered to our
customers. Revenue is recognized for retail sales (excluding
home-delivered merchandise) at the point of sale in the store and,
for home-delivered merchandise and e-commerce sales, when the
merchandise is delivered to the customer. Discounts provided to
customers are accounted for as a reduction of sales. We record a
reserve for estimated product returns in each reporting period.
Shipping and handling fees charged to the customer are recognized
as revenue at the time the products are delivered to the customer.
Revenues are presented net of any taxes collected from customers
and remitted to governmental authorities. We recognize revenues
from sales to franchisees at the time merchandise ownership is
transferred to the franchisee.
Sales Returns Reserve
Our customers may return purchased items for an exchange or refund.
We record a reserve for estimated product returns, net of cost of
goods sold, based on historical return trends together with current
product sales performance. A summary of activity in our sales
returns reserve is as follows:
In
thousands
Fiscal 2016 1
Fiscal 2015 1
Fiscal 2014 1
Balance at beginning of year $ 19,113 $ 14,782 $ 15,954
Provision for sales returns 303,694 321,421 311,911
Actual sales returns
(306,749 )
(317,090 )
(313,083 )
Balance at end of year
$ 16,058
$ 19,113
$ 14,782
1 Amounts are shown net of cost of
goods sold.
Vendor Allowances
We receive allowances or credits from certain vendors for volume
rebates. We treat such volume rebates as an offset to the cost of
the product or services provided at the time the expense is
recorded. These allowances and credits received are recorded in
both cost of goods sold and in selling, general and administrative
expenses.
Cost of Goods Sold
Cost of goods sold includes cost of goods, occupancy expenses and
shipping costs. Cost of goods consists of cost of merchandise,
inbound freight expenses, freight-to-store expenses and other
inventory related costs such as shrinkage, damages and
replacements. Occupancy expenses consist of rent, depreciation and
other occupancy costs, including common area maintenance, property
taxes and utilities. Shipping costs consist of third-party delivery
services and shipping materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of
non-occupancy related costs associated with our retail stores,
distribution facilities, customer care centers, supply chain
operations (buying, receiving and inspection) and corporate
administrative functions. These costs include employment,
advertising, third-party credit card processing and other general
expenses.
Stock-Based Compensation
We account for stock-based compensation arrangements by measuring
and recognizing compensation expense in our Consolidated Financial
Statements for all stock-based awards using a fair value based
method. Restricted stock units are valued using the closing price
of our stock on the date prior to the date of grant. The fair value
of each stock-based award is amortized over the requisite service
period.
Foreign Currency Translation
Some of our foreign operations have a functional currency other
than the U.S. dollar. Assets and liabilities are translated into
U.S. dollars using the current exchange rates in effect at the
balance sheet date, while revenues and expenses are translated at
the average exchange rates during the period. The resulting
translation adjustments are recorded as other comprehensive income
within stockholders’ equity. Foreign currency exchange gains
and losses are recorded in selling, general and administrative
expenses (except for those discussed in Note L).
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the
weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed as net earnings
divided by the weighted average number of common shares outstanding
plus common stock equivalents for the period. Common stock
equivalents consist of shares subject to stock-based awards with
exercise prices less than or equal to the average market price of
our common stock for the period, to the extent their inclusion
would be dilutive.
Income Taxes
Income taxes are accounted for using the asset and liability
method. Under this method, deferred income taxes arise from
temporary differences between the tax basis of assets and
liabilities and their reported amounts in our Consolidated
Financial Statements. We record reserves for our estimates of the
additional income tax liability that is more likely than not to
result from the ultimate resolution of foreign and domestic tax
examinations. At any one time, many tax years are subject to
examination by various taxing jurisdictions. The results of these
audits and negotiations with taxing authorities may affect the
ultimate settlement of these issues. We review and update the
estimates used in the accrual for uncertain tax positions as more
definitive information becomes available from taxing authorities,
upon completion of tax examination, upon expiration of statutes of
limitation, or upon occurrence of other events.
In order to compute income tax on an interim basis, we estimate
what our effective tax rate will be for the full fiscal year and
adjust these estimates throughout the year as necessary.
Adjustments to our income tax provision due to changes in our
estimated effective tax rate are recorded in the interim period in
which the change occurs. The tax expense (or benefit) related to
items other than ordinary income is individually computed and
recognized when the items occur. Our effective tax rate in a given
financial statement period may be materially impacted by changes in
the mix and level of our earnings in various taxing
jurisdictions.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with
Customers Revenue from Contracts with
Customers: Principal versus Agent Considerations Identifying Performance Obligations and Licensing
In January 2016, the FASB issued ASU 2016-01, Recognition and
Measurement of Financial Assets and Financial Liabilities
In February 2016, the FASB issued ASU 2016-02, Leases
In March 2016, the FASB issued ASU 2016-09, Improvements to
Employee Share-Based Payment Accounting
In October 2016, the FASB issued ASU 2016-16, Intra-Entity
Transfers of Assets Other than Inventory
In January 2017, the FASB issued ASU 2017-04, Simplifying the
Test for Goodwill Impairment, |
