EXPRESS, INC. The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section entitled "Risk Factors." All references herein to "2019" and "2018" refer to the 52-week periods endedFebruary 1, 2020 andFebruary 2, 2019 , respectively. This section of this Annual Report on Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedFebruary 2, 2019 , which was filed with theSecurities and Exchange Commission onMarch 19, 2019 . Overview Express is a leading fashion brand for women and men. Since 1980, Express has provided the latest apparel and accessories to help customers build a wardrobe for every occasion, offering fashion and quality at an attractive value. The Company operates nearly 600 retail and factory outlet stores inthe United States andPuerto Rico , as well as an online destination. 2019 vs. 2018 •Net sales decreased 5% to$2.0 billion •Comparable sales decreased 5% •Comparable retail sales (includes both retail stores and e-commerce sales) decreased 6% •Comparable outlet sales decreased 1% •Gross margin percentage decreased 180 basis points to 27.3% •Operating (loss)/income decreased$246.1 million to a loss of$217.9 million •Net (loss)/income decreased$174.0 million to a loss of$164.4 million •Diluted earnings per share decreased$2.62 to a loss of$2.49
Outlook
The outbreak of the Coronavirus ("COVID-19") continues to grow both in the U.S.
and globally, and related government and private sector responsive actions may
adversely affect our business operations. It is impossible to predict the effect
and ultimate impact of the COVID-19 pandemic as the situation is rapidly
evolving.
The spread of COVID-19 has caused public health officials to recommend
precautions to mitigate the spread of the virus, especially when congregating in
heavily populated areas, such as malls and shopping centers. In addition, we
announced on March 17, 2020 that will be closing all Express and Express Factory
Outlet stores until March 27, 2020 , and our website and mobile app will remain
available to customers. There is significant uncertainty around the breadth and
duration of these store closures and other business disruptions related to
COVID-19, as well as its impact on the U.S. economy, consumer willingness to
visit malls and shopping centers, and employee willingness to staff our stores
once they re-open. While we anticipate our future results to be adversely
impacted, the extent to which COVID-19 impacts our future results will depend on
future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of COVID-19
and the actions taken to contain it or treat its impact.
As we move forward, we will be focused on our new corporate strategy announced
in January 2020 , the EXPRESSway Forward and its four foundational elements:
product, brand, customer and execution. While we expect our results to remain
challenging in the near-term, we believe that by focusing on these foundational
elements we have a significant opportunity to improve the trend of the business
and return the business to long term profitable growth. The following defines
each area and provides an update on each priority:
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Product
We will put product first. The new product vision is call Express Edit. This
vision is about standing for certain elements of fashion and style that we know
matter to our customers. This includes providing the customer with a wardrobe
that has the functionality to cover multiple needs and wearing occasions. In the
fourth quarter, we introduced new products that resonated with our customers. We
expect that implementation of this new product vision will take some time and we
will see incremental impact throughout the next year.
Brand
We believe we have an opportunity to reinvigorate our brand. To accomplish this we have clarified our new brand purpose: Creating Confidence and Inspiring Self Expression. We are working to bring this new brand positioning to life and expect to launch the campaign in the fall of 2020. We believe this will allow us to capture the position in the market for a dual fashion brand that helps customers dress for every day and any occasion.
Customer
We need to be more effective at engaging our customers and attracting new ones. We are building strategies and developing tactics to communicate with customers differently. We are using a marketing mix model tool to assess where we are spending our marketing dollars and which channels deliver the best return on investment. We are also using multi-touch attribution tool to evaluate the real-time performance of our in-market messages and track the customer's journey to purchase, both online and offline. Going forward we plan to relaunch the Express loyalty program and reissue the Express credit card.
Execution
We will execute with precision to accelerate sales and profitability. To this end, we have completed the redesign of our go-to-market process and have begun driving stronger cross functional alignment. The goal is to increase our speed to market by 20-25%. In addition, we have been focused on inventory optimization, which includes eliminating unproductive inventory and optimizing the composition of our assortment. This led to the decrease in inventory in the fourth quarter compared to the fourth quarter of last year. We are focused on improving the performance of our brick and mortar stores by reducing time spent on non-selling activities and improving conversion and other metrics through improved merchandise flow and a better customer experience.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales, comparable sales, cost of goods sold, buying and occupancy costs, gross profit/gross margin, and selling, general, and administrative expenses. The following table describes and discusses these measures.
Financial Measures Description
Discussion
Net Sales Revenue from the sale of merchandise, less
Our business is seasonal, and we have
returns and discounts, as well as shipping historically realized a higher portion
and handling revenue related to e-commerce, of our net sales in the third and
revenue from the rental of our LED sign in fourth quarters, due primarily to the
Times Square , gift card breakage, revenue
impact of the holiday season.
earned from our private label credit card Generally, approximately 46% of our
agreement, and revenue earned from our annual net sales occur in the Spring
franchise agreements. season (first and second quarters) and
54% occur in the Fall season (third
and fourth quarters).
25-------------------------------------------------------------------------------- T a ble of Contents Financial Measures Description
Discussion
Comparable Sales Comparable sales is a measure of the amount of sales Our business and our comparable sales
generated in a period relative to the amount of are subject, at certain times, to
sales generated in the comparable prior year period. calendar shifts, which may occur
Comparable sales for 2019 was calculated using the during key selling periods close to
52-week period ended February 1, 2020 as compared
to holidays such as Easter,
the 52-week period ended February 2, 2019 . and Christmas, and regional
fluctuations for events such as sales
Comparable retail sales includes: tax holidays. We believe comparable
•Sales from retail stores that were open 12months sales provides a useful measure for
or more as of the end of the reporting period investors by removing the impact of
•E-commerce sales new stores and closed stores.
Management uses comparable sales as a
Comparable outlet sales includes: useful measure in measuring continuing
•Sales from outlet stores that were open 12months store performance.
or more as of the end of the reporting period,
including conversions
Comparable sales excludes:
•Sales from stores where the square footage has
changed by more than 20% due to remodel or
relocation activity
•Sales from stores in a phased remodel where a
portion of the store is under construction and
therefore not productive selling space
•Sales from stores where the store cannot open due
to weather damage or other catastrophe
Cost of goods sold, Includes the following: Our cost of goods sold typically
buying and occupancy •Direct cost of purchased merchandise increases in higher volume quarters
costs •Inventory shrink and other adjustments because the direct cost of purchased
•Inbound and outbound freight merchandise is tied to sales.
•Merchandising, design, planning and allocation, and
manufacturing/production costs The primary drivers of the costs of
•Occupancy costs related to store operations (such individual goods are raw materials,
as rent and common area maintenance, utilities, and labor in the countries where our
depreciation on assets) merchandise is sourced, and logistics
•Logistics costs associated with our e-commerce costs associated with transporting our
business merchandise.
Buying and occupancy costs related to
stores are largely fixed and do not
necessarily increase as volume
increases.
Changes in the mix of products sold by
type of product or by channel may also
impact our overall cost of goods sold,
buying and occupancy costs.
26-------------------------------------------------------------------------------- T a ble of Contents Financial Measures Description
Discussion
Gross Profit/Gross Margin Gross profit is net sales minus cost of Gross profit/gross margin is impacted by
goods sold, buying and occupancy costs. the price at which we are able to sell our
Gross margin measures gross profit as a merchandise and the cost of our product.
percentage of net sales.
We review our inventory levels on an
on-going basis in order to identify
slow-moving merchandise and generally use
markdowns to clear such merchandise. The
timing and level of markdowns are driven
primarily by seasonality and customer
acceptance of our merchandise and have a
direct effect on our gross margin.
Any marked down merchandise that is not
sold is marked-out-of-stock. We use
third-party vendors to dispose of this
marked-out-of-stock merchandise.
Selling, General, and Includes operating costs not included in With the exception of store payroll,
Administrative Expenses cost of goods sold, buying and occupancy certain marketing expenses, and incentive
costs such as: compensation, selling, general, and
•Payroll and other expenses related to administrative expenses generally do not
operations at our corporate offices vary proportionally with net sales. As a
•Store expenses other than occupancy costs result, selling, general, and
•Marketing expenses, including production, administrative expenses as a percentage of
mailing, print, and digital advertising net sales are usually higher in lower
costs, among other things volume quarters and lower in higher volume
quarters.
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Fiscal Year Comparison
Net Sales
2019 2018
Net sales (in thousands) $ 2,019,194 $ 2,116,344
Comparable retail sales (6) % (1) %
Comparable outlet sales (1) % (1) %
Total comparable sales percentage change (5) % (1) %
Gross square footage at end of period (in thousands) 5,052 5,367
Number of: Stores open at beginning of period 631 635 New retail stores - - New outlet stores 31 39 Retail stores converted to outlets (27) (29) Closed stores (40) (14) Stores open at end of period 595 631
[[Image Removed: expr-20200201_g2.jpg]]
Net sales decreased by approximately $97.2 million , or 5%, between 2019 and
2018. Comparable retail sales decreased 6% in 2019 compared to 2018. The
decrease in comparable retail sales resulted primarily from a decrease in
transactions and in-store average dollar sales per transaction. We attribute
these reductions to decreased traffic at our retail and outlet stores, as well
as increased promotions. Non-comparable sales increased $5.2 million , which was
driven primarily by new outlet store openings, partially offset by store
closings.
Gross Profit
The following table shows cost of goods sold, buying and occupancy costs, gross
profit in dollars, and gross margin percentage for the stated periods:
2019 2018
(in thousands, except percentages)
Cost of goods sold, buying and occupancy costs $ 1,468,619 $ 1,501,433
Gross profit $ 550,575 $ 614,911
Gross margin percentage 27.3 % 29.1 %
The 180 basis point decrease in gross margin percentage, or gross profit as a
percentage of net sales, in 2019 compared to 2018 was compromised of a 90 basis
point decrease in merchandise margin and a 90 basis point increase in buying and
occupancy
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costs as a percentage of net sales. The decrease in merchandise margin was
primarily driven by actions to move through clearance inventory and product that
did not fit with our evolving product strategy. This was partially offset by
being more strategic with our promotional activity during the year. The increase
in buying and occupancy costs as a percentage of net sales was primarily the
result of the decrease in sales.
Selling, General, and Administrative Expenses
The following table shows selling, general, and administrative expenses in
dollars and as a percentage of net sales for the stated periods:
2019 2018
(in thousands, except percentages)
Selling, general, and administrative expenses $ 564,332 $ 587,348 Selling, general, and administrative expenses, as a percentage of net sales
27.9 % 27.8 %
The $23.0 million decrease in selling, general, and administrative expenses in
2019 compared to 2018 was the result of decreases in marketing expenses of $8.6
million , store payroll of $7.9 million , home office payroll, including incentive
and stock-based compensation, of $5.9 million , and e-commerce photography of
$2.8 million . In addition, the CEO departure in 2018 resulted in $5.4 million in
additional expense in 2018. These decreases were partially offset by a $7.9
million increase in professional fees primarily the result of initiatives
implemented during 2019.
Impairment of Intangible Assets
The following table shows intangible asset impairment costs for the stated
periods:
2019 2018
(in thousands)
Impairment of intangible assets
In the fourth quarter of 2019, we performed an impairment test of our indefinite-lived intangible assets. This analysis was performed using market and income approaches, and was more significantly weighted towards the market approach due to a reduction in market capitalization throughout the year. We believe the decline in market capitalization was the result of decreased profitability. As a result of this impairment test, we recognized a non-cash impairment charge totaling$197.6 million related to our indefinite lived intangible assets. Refer to Note 5 of the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the impairment. Restructuring Costs The following table shows restructuring costs for the stated periods: 2019 2018 (in thousands) Restructuring costs$ 7,337 $ 166 Restructuring costs of$7.3 million in 2019 represent the costs in connection with the announcement of the Company's new strategy and the restructuring of the Company's work force to align to this strategy. These costs include$6.0 million in severance charges and$1.3 million in professional and other fees. Refer to Note 13 of the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the restructuring costs. Interest (Income)/Expense, Net The following table shows interest (income)/expense in dollars for the stated periods: 2019 2018 (in thousands)
Interest (income)/expense, net
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The $3.0 million decrease in net interest (income)/expense, net in 2019
represents interest earned on investments. The decrease compared to 2018 was the
result of the adoption of the new lease accounting standard and elimination of
interest expense related to our flagship stores. Refer to Note 4 of the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K for additional information regarding our leases.
Other Expense, Net
The following table shows other expense in dollars for the stated periods:
2019 2018
(in thousands)
Other expense, net $ -
The$7.9 million decrease in other expense in 2019 compared to 2018 was the result of the$8.4 million impairment of our equity method investment inHomage, LLC , a privately held retail apparel company based inColumbus, Ohio ("Homage") in 2018. Income Tax (Benefit)/Expense The following table shows income tax (benefit)/expense in dollars for the stated periods: 2019 2018 (in thousands) Income tax (benefit)/expense$ (50,526) $ 10,660 The effective tax rate was 23.5% in 2019 compared to 52.5% in 2018. The effective tax rate for 2019 includes a non-cash tax benefit of approximately$49.7 million related to the impairment of intangible assets, offset by a net tax expense of approximately$2.0 million attributable to certain discrete items, predominately related to a tax shortfall for share-based compensation. The effective tax rate for 2018 includes a net tax expense of approximately$3.7 million attributable to certain discrete items, predominately related to income tax reform related non-deductible executive compensation including the impact of our CEO transition, and no tax benefit associated with the impairment of our equity investment in Homage. Refer to Note 6 of the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the tax rate. Adjusted Net (Loss)/Income The following table presents adjusted operating (loss)/income, adjusted net (loss)/income, and adjusted diluted earnings per share, each a non-GAAP financial measure, for the stated periods which eliminate certain non-core operating costs: 2019 2018 (in thousands, except per share amounts) Operating (Loss)/Income$ (217,865) $ 28,215 Adjusted Operating (Loss)/Income (Non-GAAP)$ (11,194) $ 33,651 Net (Loss)/Income$ (164,358) $ 9,630 Adjusted Net (Loss)/Income (Non-GAAP)$ (8,414) $ 23,553 Diluted Earnings Per Share$ (2.49) $ 0.13 Adjusted Diluted Earnings Per Share (Non-GAAP) $
(0.13)
We supplement the reporting of our financial information determined under GAAP
with certain non-GAAP financial measures: adjusted operating (loss)/income,
adjusted net (loss)/income, and adjusted diluted earnings per share. We believe
that these non-GAAP measures provide additional useful information to assist
stockholders in understanding our financial results and assessing our prospects
for future performance. Management believes adjusted operating (loss)/income,
adjusted net (loss)/income, and adjusted diluted earnings per share are
important indicators of our business performance because they exclude items that
may not be indicative of, or are unrelated to, our underlying operating results,
and provide a better baseline for analyzing trends in our business. In addition,
adjusted operating (loss)/income is used as a performance measure to determine
short-term cash incentive compensation, and adjusted diluted earnings per share
is used as a performance measure in our
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executive compensation program for purposes of determining the payout of the
long-term incentive awards. Since non-GAAP financial measures are not
standardized, it may not be possible to compare these financial measures with
other companies' non-GAAP financial measures having the same or similar names.
These adjusted financial measures should not be considered in isolation or as a
substitute for reported operating (loss)/income, net (loss)/income, and reported
diluted earnings per share. These non-GAAP financial measures reflect an
additional way of viewing our operations that, when viewed with our GAAP results
and the below reconciliations to the corresponding GAAP financial measures,
provide a more complete understanding of our business. We strongly encourage
investors and stockholders to review our financial statements and publicly-filed
reports in their entirety and not to rely on any single financial measure.
The table below reconciles the non-GAAP financial measures, adjusted operating
(loss)/income, adjusted net (loss)/income, and adjusted diluted earnings per
share, with the most directly comparable GAAP financial measures, operating
(loss)/income, net (loss)/income, and diluted earnings per share.
2019
Weighted Average
(in thousands, except per share Income Tax Diluted Earnings Diluted Shares
amounts) Operating Loss Impact Net Loss per Share Outstanding
Reported GAAP Measure $ (217,865) $ (164,358) $ (2.49) 66,133
Impairment of Intangible Assets 197,618
147,891 2.24
Impact of Restructuring 7,337 (1,834) (a) 5,503 0.08
Impact of CEO Departure - 822 (b) 822 0.01
Impact of Other Executive
Departures 1,716 12 (c) 1,728 0.03
Adjusted Non-GAAP Measure $ (11,194) $ (8,414) $ (0.13) 66,133
(a)Items tax affected at the applicable deferred or statutory rate.
(b)Represents the tax impact of the expiration of the former CEO's non-qualified
stock options.
(c)Represents the tax impact of executive departure costs offset by the tax
impact related to the expiration of the executive non-qualified stock options.
2018
Weighted Average
(in thousands, except per Income Tax Diluted Earnings Diluted Shares
share amounts) Operating Income Impact Net Income per Share Outstanding
Reported GAAP Measure $ 28,215 $ 9,630 $ 0.13 73,239
Impact of CEO Departure 5,436 $ (1,386) 4,050 0.06
162(m) impact as a result of
CEO departure - 1,473 1,473 0.02
Equity method investment
impairment (a) - 8,400 0.12
Adjusted Non-GAAP Measure $ 33,651
(a) The tax effect of the
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Liquidity and Capital Resources
A summary of cash provided by or used in operating, investing, and financing
activities is shown in the following table:
2019 2018
(in thousands)
Provided by operating activities $ 90,710 $ 73,717
Used in investing activities (37,039) (49,778)
Used in financing activities (18,202) (88,491)
Increase/(decrease) in cash and cash equivalents 35,469 (64,552)
Cash and cash equivalents at end of period
Our business relies on cash flows from operations as our primary source of liquidity, with the majority of those cash flows being generated in the fourth quarter of the year. Our primary operating cash needs are for merchandise inventories, payroll, store rent, and marketing. Net cash provided by operating activities was$90.7 million in 2019 compared to$73.7 million in 2018. The increase in cash flows from operating activities in 2019 was primarily driven by lower inventory purchases in 2019 and the timing of payments on accounts payable balances, partially offset by lower net income after removing the impact of impairment and other adjustments to reconcile to operating cash flows for 2019. In addition to cash flow from operations, we have access to additional liquidity, as needed, through borrowings under our Revolving Credit Facility. OnMay 24, 2019 , we amended and restated our Revolving Credit Facility. The borrowing capacity under the facility remains at$250.0 million , but the expiration date of the facility has been extended toMay 24, 2024 . As ofFebruary 1, 2020 , we had$197.7 million available for borrowing under our Revolving Credit Facility. OnMarch 17, 2020 , we provided notice to the lenders under our Revolving Credit Facility of our request to borrow$165.0 million with a proposed borrowing date ofMarch 20, 2020 . We did this as a precautionary measure in order to increase our cash position, preserve financial flexibility and maintain liquidity and flexibility in response to the COVID-19 outbreak that caused public health officials to recommend precautions that would mitigate the spread of the virus, including warning against congregating in heavily populated areas such as malls and shopping centers, and led to the closure of all of ourExpress and Express Factory Outlet stores untilMarch 27, 2020 . We intend to hold the proceeds from the incremental Revolving Credit Facility borrowings on our balance sheet and, in accordance with the terms of the Revolving Credit Facility, may use the proceeds in the future for working capital, general corporate or other purposes permitted thereunder. We also have outstanding letters of credit in the amount of$12.7 million , primarily related to our third party logistics contract. Refer to Item 9B and Notes 7 and 15 of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information on our Revolving Credit Facility. We also use cash for investing activities. Our capital expenditures consist primarily of new and remodeled store construction and fixtures and information technology projects. We had capital expenditures of approximately$37.0 million in 2019 and$49.8 million in 2018. The decrease in 2019 was primarily driven by reduced capital expenditures related to remodels, as well as a reduction in information technology capital expenditures. In addition, we use cash for financing activities. We repurchased$15.6 million and$83.2 million of common stock, including commissions, under share repurchase programs in 2019 and 2018, respectively. Our liquidity position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within three to five days of the related sale, and have up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors. Forward-Looking Liquidity Discussion We believe that cash generated from operations and borrowings under our Revolving Credit Facility will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. 32 -------------------------------------------------------------------------------- T a ble of Contents Contractual Obligations We enter into long-term contractual obligations and commitments in the normal course of business. As ofFebruary 1, 2020 , our contractual future cash obligations are set forth in the following table. Payment
due by Period
Contractual Obligations: Total Less than 1 Year 1-3 Years 3-5 Years More Than 5 Years
(in thousands)
Operating Leases(1) $ 1,286,786 $ 255,308 $ 455,855 $ 351,693 $ 223,930
Purchase Obligations(2) 245,239 245,239 - - -
Other Long Term Obligations(3) 11,564 9,612 1,260 692 -
Total(4) $ 1,543,589 $ 510,159 $ 457,115 $ 352,385 $ 223,930
(1) We enter into operating leases in the normal course of business. Our future
operating lease obligations could change if we were to modify current leases, or
if we were to enter into additional operating leases. These amounts also include
all contractual lease commitments related to our flagship locations. Common area
maintenance, real estate tax, and other customary charges included in our
operating lease agreements are also included above. Refer to Note 4 of the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K for additional information regarding leases.
(2) Purchase obligations are made up of merchandise purchase orders and
unreserved fabric commitments.
(3) Other obligations consist of employment related agreements and obligations
under other long-term agreements.
(4) On March 17, 2020 , we provided notice to the lenders of our Revolving Credit
Facility of our request to borrow $165.0 million with a proposed borrowing date
of March 20, 2020 . The above table does not include increased amounts owed as a
result of this event.
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Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
our assets, liabilities, revenues, and expenses, as well as the related
disclosure of contingent assets and liabilities at the date of the financial
statements. Management evaluates its accounting policies, estimates, and
judgments on an on-going basis. Management bases its estimates and judgments on
historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions and conditions.
Management evaluated the development and selection of its critical accounting
policies and estimates and believes that the following policies involve a higher
degree of judgment or complexity and are most significant to reporting our
results of operations and financial position and are, therefore, discussed as
critical. The following critical accounting policies reflect the significant
estimates and judgments used in the preparation of our Consolidated Financial
Statements. More information on all of our significant accounting policies can
be found in Note 2 to our Consolidated Financial Statements included elsewhere
in this Annual Report on Form 10-K.
Description of Policy Judgments and Uncertainties Effect if Actual Results Differ
from Assumptions
Returns Reserve
We recognize retail sales at the Our accounting methodology for We have no reason to believe that
time the customer takes possession estimating our returns reserve there will be a material change in
of the merchandise. We reserve for contains uncertainties because it the future estimates or assumptions
sales returns through estimates requires management to make we use to measure our returns
based on historical experience and assumptions that merchandise returns reserve. However, if actual results
various other assumptions that in the future will follow the pattern are not consistent with our
management believes to be of returns in prior periods. Our estimates or assumptions, we may be
reasonable. estimates for these items are based exposed to losses or gains that
primarily on historical transaction could be material.
We have not made any material experience.
changes in the accounting A 100 basis point change in the
methodology used to determine our rate of returns as of February 1,
returns reserve over the past two 2020 would not have had a material
years. impact on pre-tax income.
Inventories - Lower of Cost or Net Realizable Value
Inventories are principally valued Our accounting methodology for We have no reason to believe that
at the lower of cost or net determining the lower of cost or net there will be a material change in
realizable value on a realizable value adjustment contains the future estimates or assumptions
weighted-average cost basis. We uncertainties because it requires we use to measure the lower of cost
record a lower of cost or net management to make assumptions and or net realizable value adjustment.
realizable value adjustment for our estimates that are based on factors However, if actual results are not
inventories if the cost of specific such as merchandise seasonality, consistent with our estimates or
inventory items on hand exceeds the historical trends, and estimated assumptions, we may be exposed to
amount we expect to realize from the inventory levels, including losses or gains that could be
ultimate sale or disposal of the sell-through of remaining units. material.
inventory.
A 100 basis point increase or
We have not made any material decrease in the lower of cost or
changes in the accounting net realizable value adjustment
methodology used to determine the would not have had a material
lower of cost or net realizable impact on the inventory balance or
value adjustment over the past two pre-tax income as of and for the
years. year ended February 1, 2020.
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Description of Policy Judgments and Uncertainties Effect if Actual Results Differ from
Assumptions
Property, Plant, and Equipment (including Right of Use ("ROU") Assets)
Property, Plant, and Equipment, Our analysis for impairment requires We have no reason to believe that
including ROU assets, are reviewed judgment surrounding identification there will be a material change in
for impairment if indicators of of appropriate triggering events. the future estimates or assumptions
impairment are present. The This judgment can be affected by we use in this evaluation. However,
impairment review is performed at factors such as expectations for if we become aware of additional
the store level by comparing the future store performance, real estate triggering events there is potential
carrying value of the asset to the demand, and economic conditions that that additional stores could be
undiscounted cash flows derived can be difficult to predict. required to be tested for impairment
from the asset group. If the and could be impaired. These events
undiscounted cash flows of the could include further deterioration
asset are less than the carrying in store operating results,
value of the respective asset increased store labor costs, our
group, then the carrying value is inability to implement our cost
compared to the estimated fair savings initiatives, or lower mall
value as determined using the traffic.
discounted store cash flows or
market-based rental information,
and a loss is recognized for the
difference.
We have not made any material
changes in the triggering events
used to evaluate our property,
plant and equipment, except to
include impairment tests for our
ROU assets in our analysis.
Intangible Assets
Intangible assets with indefinite Our consideration of indefinite lived There are inherent uncertainties
lives, primarily tradenames, are intangible assets for impairment related to our assessment and, if
reviewed for impairment annually in requires judgments surrounding future actual results are not consistent
the fourth quarter and may be operating performance, economic with our estimates or assumptions,
reviewed more frequently if conditions, and business plans, among we may be exposed to impairment
indicators of impairment are other factors. losses that could be material. Refer
present. The impairment review is to Note 5 of our Consolidated
performed by assessing qualitative Financial Statements included
factors to determine whether it is elsewhere in this Annual Report on
more likely than not that the fair Form 10-K for the results of our
value of the asset is less than its impairment test in the current year.
carrying amount. If the qualitative
factors indicate it is more likely
than not the fair value is less
than the book value, a quantitative
test is performed. The quantitative
test includes consideration of
market (level 1) and income
approaches.
Deferred Taxes
Deferred tax assets and liabilities Our deferred tax asset and liability We have no reason to believe that
are recognized for the estimated balances contain uncertainty because there will be a material change in
future tax consequences of changes in tax laws, rates, or future the future estimates or assumptions
temporary differences that taxable income may differ from we use to calculate our deferred
currently exist between the tax estimates and judgments made by taxes. However, if future tax rates
basis and the financial reporting management. are changed, we do not achieve our
basis of our assets and cost savings initiatives, or if
liabilities. Deferred tax assets actual results are not consistent
and liabilities are measured using with our estimates, we may need to
the enacted tax rates in effect in adjust the carrying value of our
the years when those temporary deferred tax balances. An increase
differences are expected to or decrease in the valuation
reverse. The effect on deferred allowance would result in a
taxes from a change in tax rate is respective increase or decrease in
recognized in earnings in the our effective tax rate in the period
period that includes the enactment the increase or decrease occurs.
date of the change. Valuation
allowances are established against
deferred tax assets when it is more
likely than not that the
realization of those deferred tax
assets will not occur.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements and their estimated effect on the
Company's Consolidated Financial Statements are described in Note 1 of our
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
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