Summary of Significant Accounting Policies | 12 Months Ended |
Feb. 01, 2014 |
Accounting Policies [Abstract] | ' |
Summary of Significant Accounting Policies | ' |
Summary of Significant Accounting Policies |
Nature of the Business |
The Wet Seal, Inc. and its subsidiaries (“the Company”) is a national multi-channel specialty retailer selling fashion apparel and accessory items designed for female customers aged 13 to 34 years old through its stores and e-commerce websites. The Company operates two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “Arden B.” The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand. |
The Company’s fiscal year ends on the Saturday closest to the end of January. The reporting periods include 52 weeks of operations ended February 1, 2014 (fiscal 2013), 53 weeks of operations ended February 2, 2013 (fiscal 2012) and 52 weeks of operations ended January 28, 2012 (fiscal 2011). |
Principles of Consolidation |
The consolidated financial statements include the accounts of The Wet Seal, Inc. and its subsidiaries, which are all wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. |
Basis of Presentation |
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). |
Estimates and Assumptions |
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. |
The Company’s most significant areas of estimation and assumption are: |
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• | determination of the appropriate amount and timing of markdowns to clear unproductive or slow-moving inventory; | | | | | | | | | | | |
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• | estimation of future cash flows used to assess the recoverability of long-lived assets; | | | | | | | | | | | |
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• | estimation of the net deferred income tax asset valuation allowance; | | | | | | | | | | | |
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• | determination of the revenue recognition pattern for cash received under the Company’s Wet Seal division frequent buyer program; | | | | | | | | | | | |
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• | estimation of ultimate redemptions of awards under the Company’s Arden B division customer loyalty program; | | | | | | | | | | | |
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• | estimation of expected customer merchandise returns; | | | | | | | | | | | |
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• | estimation of expected gift card, gift certificate, and store credit breakage; | | | | | | | | | | | |
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• | determination of the appropriate assumptions to use to estimate the fair value of stock-based compensation for purposes of recording stock-based compensation; | | | | | | | | | | | |
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• | estimation of costs of legal loss contingencies; and | | | | | | | | | | | |
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• | estimation, including the use of actuarially determined methods, of self-insured claim losses under workers’ compensation and employee health care plans. | | | | | | | | | | | |
Cash and Cash Equivalents |
The Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates their fair market value. As of February 1, 2014, cash equivalents principally consist of investments in money market funds invested in U.S. Treasury securities and U.S. government agency securities. Cash accounts at banks are currently insured by the Federal Deposit Insurance Corporation up to $250,000. At February 1, 2014, the Company had cash balances in excess of federally insured limits of approximately $19.3 million. |
Short-term Investments |
The Company’s short-term investments at February 1, 2014 consisted of interest-bearing bonds of various U.S. Government agencies and certificates of deposits, had maturities that were less than one year and were carried at amortized cost plus accrued income due to the Company’s intent to hold to maturity. |
Merchandise Inventories |
Merchandise inventories are stated at the lower of cost or market. Market is determined based on the estimated net realizable value, which generally is the merchandise selling price. Cost is calculated using the retail inventory method. Under the retail inventory method, inventory is stated at its current retail selling value and then is converted to a cost basis by applying a cost-to-retail ratio based on beginning inventory and the fiscal year purchase activity. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins. |
Markdowns are recorded when the sales value of the inventory has diminished. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise, and fashion trends. When a decision is made to permanently markdown merchandise, the resulting gross margin reduction is recognized in the period the markdown is recorded. Total markdowns, including permanent and promotional markdowns, on a cost basis, in fiscal 2013, 2012, and 2011 were $91.0 million, $108.2 million, and $86.4 million, respectively, and represented 17.2%, 18.6%, and 13.9% of net sales, respectively. |
The Company accrued for planned but unexecuted markdowns, including markdowns related to slow moving merchandise, as of February 1, 2014, and February 2, 2013, of $4.7 million and $3.9 million, respectively. To the extent the Company’s estimates differ from actual results, additional markdowns may be required that could reduce the Company’s gross margin, operating income, and the carrying value of inventories. |
Equipment and Leasehold Improvements |
Equipment and leasehold improvements are stated at cost. Expenditures for betterment or improvement are capitalized, while expenditures for repairs and maintenance that do not significantly increase the life of the asset are expensed as incurred. |
Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets. Furniture, fixtures, and equipment are typically depreciated over three to five years. Leasehold improvements and the cost of acquiring leasehold rights are amortized over the lesser of the term of the lease or 10 years. |
Long-Lived Assets |
The Company evaluates the carrying value of long-lived assets for impairment quarterly or whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the estimated undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets, based on discounted estimated future cash flows using the Company’s weighted average cost of capital. With regard to store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, the Company considers the assets at each individual store to represent an asset group. In addition, the Company has considered the relevant valuation techniques that could be applied without undue cost and effort and has 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. |
The Company conducts its quarterly impairment evaluation at the individual store level using the guidance under applicable accounting standards. The quarterly analysis includes the Company's estimates of future cash flows using only the cash inflows and outflows that are directly related to each store over the remaining lease term. Key assumptions made by the Company and included within the cash flow estimates are future sales and gross margin projections. The Company determines the future sales and gross margin projections by considering each store's recent and historical performance, the Company's overall performance trends and projections and the potential impact of strategic initiatives on future performance. |
The Company's evaluations during fiscal 2013, 2012, and 2011 included impairment testing of 80, 157, and 20 stores and resulted in 67, 116, and 18 stores being impaired, respectively, as their projected future cash flows were not sufficient to cover the net carrying value of their assets. As such, the Company recorded the following non-cash charges related to its retail stores within asset impairment in the consolidated statements of operations, to write down the carrying values of these stores' long-lived assets to their estimated fair values (in thousands except for number of stores). |
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| | Fiscal Year Ended |
| | February 1, 2014 | | February 2, 2013 | | January 28, 2012 |
Aggregate carrying value of all long-lived assets impaired | | $ | 15,829 | | | $ | 27,086 | | | $ | 4,590 | |
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Less: Impairment charges | | 14,873 | | | 27,000 | | | 4,503 | |
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Aggregate carrying value of long-lived assets not impaired | | $ | 956 | | | $ | 86 | | | $ | 87 | |
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Number of stores with asset impairment | | 67 | | | 116 | | | 18 | |
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Of the 5 remaining stores that were tested and not impaired during fiscal 2013, as of February 1, 2014, one could be deemed to be at risk of future impairment. When making this determination, the Company considered the potential impact that reasonably possible changes to sales and gross margin performance versus the Company's current projections for these stores could have on their current estimated cash flows. |
As noted above, the Company considers the positive impact expected from its strategic initiatives when determining the key assumptions to use within the projected cash flows for each store during its quarterly analysis. If the Company is not able to achieve its projected key financial metrics, and strategic initiatives being implemented do not result in significant improvements in the Company's current financial performance trend, the Company may incur additional impairment in the future for those stores tested and not deemed to be impaired in its most recent quarterly analysis, as well as for additional stores not tested in its most recent quarterly analysis. |
Deferred Financing Costs |
Costs incurred to obtain financing are amortized over the terms of the respective debt agreements using the interest method. Amortization of deferred financing costs, which was included within interest expense in the consolidated statements of operations, was $0.1 million, $0.1 million, and $0.1 million in fiscal 2013, 2012, and 2011, respectively. |
Revenue Recognition |
Sales are recognized upon purchases by customers at the Company’s retail store locations. Taxes collected from the Company’s customers are recorded on a net basis. For e-commerce sales, revenue is recognized at the estimated time goods are received by customers. Customers typically receive goods within four days of being shipped. Shipping and handling fees billed to customers for e-commerce sales are included in net sales. For fiscal 2013, 2012, and 2011, shipping and handling fee revenues were $2.2 million, $2.3 million and $3.0 million, respectively, within net sales on the consolidated statements of operations. |
The Company has recorded accruals to estimate sales returns by customers based on historical sales return results. Its sales return policy allows customers to return merchandise within 30 days of original purchase. Both Wet Seal and Arden B retail store merchandise may be returned for refund of original method of payment within fourteen days of the original purchase date. Store returns made between fifteen and thirty days of purchase will be accepted for merchandise credit or exchange only. For e-commerce sales, merchandise may be returned within 30 days for a full refund. Actual return rates have historically been within management’s estimates and the accruals established. As the accrual for merchandise returns is based on estimates, the actual returns could differ from the accrual, which could impact net sales. The accrual for merchandise returns is recorded in accrued liabilities on the consolidated balance sheets and was $0.1 million at February 1, 2014 and $0.2 million at February 2, 2013. |
The Company recognizes the sales from gift cards, gift certificates and store credits as they are redeemed for merchandise. Prior to redemption, the Company maintains an unearned revenue liability for gift cards, gift certificates and store credits until the Company is released from such liability. The Company’s gift cards, gift certificates and store credits do not have expiration dates; however, over time, a percentage of gift cards, gift certificates and store credits are not redeemed or recovered (“breakage”). Based upon historical redemption trend data, the Company determined that the likelihood of redemption of unredeemed gift cards, gift certificates and store credits two years after their issuance is remote and, accordingly, adjusts its unearned revenue liability quarterly to record breakage as additional sales for gift cards, gift certificates and store credits that remained unredeemed two years after their issuance. The Company’s net sales for fiscal 2013, 2012, and 2011 included benefits of $1.2 million, $1.1 million and $1.1 million, respectively, to reduce its unearned revenue liability for estimated unredeemed amounts. The unearned revenue for gift cards, gift certificates and store credits is recorded in accrued liabilities in the consolidated balance sheets and was $4.7 million and $5.4 million at February 1, 2014 and February 2, 2013, respectively. If actual redemptions ultimately differ from the assumptions underlying the Company’s breakage adjustments, or the Company’s future experience indicates the likelihood of redemption of gift cards, gift certificates and store credits becomes remote at a different point in time after issuance, the Company may recognize further significant adjustments to its accruals for such unearned revenue, which could have a significant effect on the Company’s net sales and results of operations. |
The Company maintains a frequent buyer program, the fashion insider card, through its Wet Seal division. Under the program, customers receive a 10% to 20% discount on all purchases made during a 12-month period and are provided $5-off coupons that may be used on purchases during such period. The annual membership fee of $20 is nonrefundable. Discounts received by customers on purchases using the fashion insider program are recognized at the time of such purchases. |
The Company recognizes membership fee revenue under the fashion insider program on a straight-line basis over the 12-month membership period. From time to time, the Company tests alternative program structures, and promotions tied to the program, and may decide to further modify the program in ways that could affect customer usage patterns. As a result of this program testing and potential further modifications, the Company believes it is appropriate to maintain straight-line recognition of membership fee revenue. The Company may, in the future, determine that recognition of membership fee revenue on a different basis is appropriate, which would affect net sales. The unearned revenue for this program is recorded in accrued liabilities in the consolidated balance sheets and was $5.5 million and $5.7 million at February 1, 2014 and February 2, 2013, respectively. |
The Company maintains a customer loyalty program through its Arden B division. Under the program, customers accumulate points based on purchase activity. Once a loyalty program 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 unearned revenue and awards redeemed by the member for merchandise are recorded as an increase to net sales. |
The Company converts into fractional awards the points accumulated by customers who have not made purchases within the preceding 18 months. Similar to all other awards currently being granted under the program, such fractional awards expire if unredeemed after 60 days. The unearned revenue for this program is recorded in accrued liabilities on the consolidated balance sheets and was $0.8 million and $1.1 million at February 1, 2014 and February 2, 2013, respectively. If actual redemptions ultimately differ from accrued redemption levels, or if the Company further modifies the terms of the program in a way that affects expected redemption value and levels, the Company could record adjustments to the unearned revenue accrual, which would affect net sales. |
Cost of Sales |
Cost of sales includes the cost of merchandise; markdowns; inventory shortages; inbound freight; payroll expenses associated with buying, planning and allocation; inspection cost; processing, receiving and other warehouse costs; rent and other occupancy costs; and depreciation and amortization expense associated with the Company’s stores and distribution center. |
Leases |
The Company recognizes rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is recognized as an adjustment to deferred rent in the consolidated balance sheets. Also, cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred rent and are amortized using the straight-line method over the lease term as an offset to rent expense. |
Store Preopening Costs |
Store opening and preopening costs are charged to expense as they are incurred. |
Advertising Costs |
Costs for advertising related to visual merchandising, in-store signage, promotions, and e-commerce marketing, are expensed as incurred. Total advertising expenses were $4.6 million, $5.7 million, and $4.6 million in fiscal 2013, 2012, and 2011, respectively. |
Vendor Discounts |
The Company receives certain discounts from its vendors in accordance with agreed-upon payment terms. These discounts are reflected as a reduction of merchandise inventories in the period they are received and charged to cost of sales when the items are sold. |
Income Taxes |
The Company's provision for income taxes, deferred tax assets and reserves for unrecognized tax benefits reflect its best assessment of estimated future taxes to be paid and tax benefits to be realized. The Company is subject to income taxes in the United States federal jurisdiction as well as various state jurisdictions within the United States. Significant judgments and estimates are required in determining the consolidated provision for income taxes. |
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense and net operating loss ("NOLs"), pursuant to applicable accounting standards. In evaluating the Company's ability to recover its deferred tax assets within the jurisdictions from which they arise, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized using all available positive and negative evidence, including its 3-year cumulative operating results, projected future taxable income and tax planning strategies. In projecting future taxable income, the Company begins with historical results adjusted for the results of changes in accounting policies and incorporated assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates used to manage the business. These estimates are based on the Company's best judgment made at the time based on current and projected circumstances and conditions. In accordance with the applicable accounting standards, the Company maintains a valuation allowance for a deferred tax asset when it is deemed it to be more likely than not that some or all of the deferred tax asset will not be realized. As a result of the Company’s evaluation during fiscal 2012, it concluded that it was more likely than not the Company would not realize its net deferred tax assets and the Company recorded a $71.1 million increase to provision for income taxes in order to establish a valuation allowance against its deferred tax assets. The Company has discontinued recognizing income tax benefits related to its NOLs until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the benefits from its deferred tax assets. For further information, see Note 4 - "Income Taxes." |
Pursuant to applicable accounting standards, the Company is required to accrue for the estimated additional amount of taxes for uncertain tax positions if it is deemed to be more likely than not that the Company would be required to pay such additional taxes. |
The Company is required to file federal and state income tax returns in the United States. The preparation of these income tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company accrues an amount for its estimate of additional tax liability, including interest and penalties, for any uncertain tax positions taken or expected to be taken in an income tax return. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available. Historically, additional taxes paid as a result of the resolution of the Company’s uncertain tax positions have not differed materially from the Company’s expectations. For further information, see Note 4 - "Income Taxes." |
Comprehensive (Loss) Income |
Employers are required to recognize the over or under funded status of defined benefit plans and other postretirement plans in the statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive (loss) income. Other comprehensive (loss) income in the consolidated balance sheets is the difference between the carrying value of the accrued liability year over year under the Company’s supplemental employee retirement plan (see Note 11 - "Supplemental Employee Retirement Plan"). |
Insurance/Self-Insurance |
The Company uses a combination of insurance and self-insurance for its workers’ compensation and employee health care programs. A portion of the employee health care plan is funded by employees. Under the workers’ compensation insurance program, the Company is liable for a deductible of $0.25 million for each individual claim and an aggregate annual liability of $1.4 million. Under the employee group health plan, the Company is liable for a deductible of $0.175 million for each individual claim and an aggregate monthly liability of $0.5 million. The monthly aggregate liability is subject to adjustment based on the number of participants in the plan each month. For both of the insurance plans, the Company records a liability for the costs associated with reported claims and a projected estimate for unreported claims considering historical experience and industry standards. The Company adjusts these liabilities based on historical claims experience, demographic factors, severity factors, and other actuarial assumptions. A significant change in the number or dollar amount of claims could cause the Company to revise its estimates of potential losses, which would affect its reported results. The following summarizes the activity within the Company’s accrued liability for the self-insured portion of unpaid claims and estimated unreported claims: |
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| Fiscal Year Ended | |
| 1-Feb-14 | | 2-Feb-13 | | 28-Jan-12 | |
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Balance at beginning of year | $ | 2,148 | | | $ | 1,926 | | | $ | 1,468 | | |
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Accruals | 6,425 | | | 6,718 | | | 6,841 | | |
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Payment of claims | (6,462 | ) | | (6,496 | ) | | (6,383 | ) | |
Balance at end of year | $ | 2,111 | | | $ | 2,148 | | | $ | 1,926 | | |
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Stock-Based Compensation |
The Company accounts for share-based compensation arrangements in accordance with applicable accounting standards, which require the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Refer to Note 3 - "Stock-Based Compensation," for further information. |
Recently Adopted and Not Yet Adopted Accounting Pronouncements |
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In February 2013, the Financial Accounting Standards Board (“FASB”) issued amended guidance on the disclosure of accumulated other comprehensive income. The amendments in this update require an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. As the guidance related only to presentation and disclosure of information, the adoption did not have a material impact on the Company's consolidated financial statements. |