NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of August 1, 2021 and August 2, 2020, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, the Condensed Consolidated Statements of Stockholders’ Equity for the thirteen and twenty-six weeks then ended and the Condensed Consolidated Statements of Cash Flows for the twenty-six weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and twenty-six weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of January 31, 2021, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
The results of operations for the thirteen and twenty-six weeks ended August 1, 2021 are not necessarily indicative of the operating results of the full year.
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. These financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
COVID-19
In March 2020, we announced the temporary closures of all of our retail store operations to protect our employees, customers and the communities in which we operate and to help contain the COVID-19 pandemic. As of August 1, 2021, all of our U.S.-based and the majority of our global retail stores have reopened for in-person shopping. However, we continue to experience intermittent closures or restrictions on retail capacity in certain geographies, in accordance with state and local guidelines, which may continue to impact our store traffic and retail revenues in the future and result in future store impairments. We continue to operate our e-commerce sites and distribution centers and continue to deliver products to our customers. However, we have experienced, and expect to continue to experience, delays in inventory receipts, increased raw material costs and higher shipping-related charges as a result of port slowdowns and congestion, as well as shipping container and foam shortages, due in part to the impact from COVID-19.
New Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU was effective for us in the first quarter of fiscal 2021. The adoption of this ASU did not have an impact on our financial condition, results of operations or cash flows.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU is intended to ease the potential accounting and financial reporting burden of reference rate reform, including the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance provides optional expedients and scope exceptions for transactions if certain criteria are met. These transactions include contract modifications, hedge accounting, and the sale or transfer of debt securities classified as held-to-maturity. We may elect to apply the provisions of the new standard prospectively through December 31, 2022. Unlike other topics, the provisions of this update are only available until December 31, 2022, by which time the reference rate replacement activity is expected to be completed. We have yet to elect an adoption date, but do not believe the adoption would have a material impact on our financial condition, results of operations or cash flows.
NOTE B. BORROWING ARRANGEMENTS
Credit Facility
We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders, at such lenders’ option, to increase the revolver by up to $250,000,000 to provide for a total of $750,000,000 of unsecured revolving credit. Our credit facility also provided for a $300,000,000 unsecured term loan facility (“term loan”). In February 2021, prior to maturity, we repaid the full outstanding balance of $300,000,000 on our term loan.
During the second quarter of fiscal 2021 and for year-to-date fiscal 2021, we had no borrowings under the revolver. Additionally, as of August 1, 2021, $12,927,000 in issued but undrawn standby letters of credit were outstanding under the revolver. The standby letters of credit were primarily issued to secure the liabilities associated with workers’ compensation and other insurance programs. We had no borrowings during the second quarter of fiscal 2020, and for year-to-date fiscal 2020, we had borrowings of $487,823,000 under the revolver (at a year-to-date weighted average interest rate of 2.48%) all of which were repaid prior to the end of fiscal 2020. The revolver matures on January 8, 2023, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may elect to extend the maturity date subject to lender approval.
The interest rate applicable to the revolver is variable, and may be elected by us as: (i) the LIBOR plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% or (ii) a base rate as defined in the credit facility, plus an applicable margin ranging from 0% to 0.775%.
In addition to the credit facility, during the second quarter of fiscal 2020 we entered into a new agreement (the “364-Day Credit Agreement”) for an additional $200,000,000 unsecured revolving line of credit. Under the 364-Day Credit Agreement, the interest rate was variable and could be elected by us as: (i) LIBOR plus an applicable margin based on our leverage ratio ranging from 1.75% to 2.50% or (ii) a base rate as defined in the agreement, plus an applicable margin ranging from 0.75% to 1.50%. During the second quarter of fiscal 2021 and for year-to-date fiscal 2021, we had no borrowings under the 364-Day Credit Agreement. We did not renew the 364-Day Credit Agreement upon its maturity in May 2021.
The credit facility contains and the 364-Day Credit Agreement contained certain restrictive loan covenants, including, among others, a financial covenant requiring a maximum leverage ratio (funded debt adjusted for lease and rent expense to earnings before interest, income tax, depreciation, amortization and rent expense), and covenants limiting our ability to incur indebtedness, grant liens, make acquisitions, merge or consolidate, and dispose of assets. As of August 1, 2021, we were in compliance with our covenants under the credit facility and, based on current projections, we expect to remain in compliance with our covenants under the credit facility throughout the next 12 months.
Letter of Credit Facilities
As of August 1, 2021, we had three unsecured letter of credit reimbursement facilities for a total of $35,000,000. The letter of credit facilities contains covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility, plus an applicable margin based on our leverage ratio. As of August 1, 2021, an aggregate of $8,404,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. On August 22, 2021, we renewed all three of our letter of credit facilities on substantially similar terms and extended each of these facilities' maturity dates until August 22, 2022. The latest expiration date possible for any future letters of credit issued under the facilities is January 19, 2023.
NOTE C. STOCK-BASED COMPENSATION
Equity Award Programs
Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights, restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 42,720,000 shares. As of August 1, 2021, there were approximately 7,489,000 shares available for future grant. Awards may be granted under the Plan to officers, employees and non-employee members of the board of directors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.
Stock Awards
Annual grants of stock awards are limited to 1,000,000 shares on a per person basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, disability, death, merger or a similar corporate event. Stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member).
Stock-Based Compensation Expense
During the thirteen and twenty-six weeks ended August 1, 2021, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $19,930,000 and $46,260,000, respectively. During the thirteen and twenty-six weeks ended August 2, 2020, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses of $13,692,000 and $33,395,000, respectively.
Restricted Stock Units
The following table summarizes our restricted stock unit activity during the twenty-six weeks ended August 1, 2021:
|
|
|
|
|
|
|
|
|
Shares
|
|
Balance at January 31, 2021
|
3,118,884
|
|
|
Granted
|
371,890
|
|
|
Granted, with vesting subject to performance conditions
|
107,075
|
|
|
Released 1
|
(1,064,620)
|
|
|
Cancelled
|
(93,749)
|
|
|
Balance at August 1, 2021
|
2,439,480
|
|
|
Vested plus expected to vest at August 1, 2021
|
2,250,339
|
|
1Excludes 228,666 incremental shares released due to achievement of performance conditions above target.
NOTE D. 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 and common stock equivalents outstanding 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.
The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:
|
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|
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|
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|
|
|
|
|
|
In thousands, except per share amounts
|
Net Earnings
|
|
Weighted
Average Shares
|
|
Earnings
Per Share
|
|
Thirteen weeks ended August 1, 2021
|
|
|
|
|
|
|
Basic
|
$
|
246,070
|
|
|
74,786
|
|
|
$
|
3.29
|
|
|
Effect of dilutive stock-based awards
|
|
|
1,798
|
|
|
|
|
Diluted
|
$
|
246,070
|
|
|
76,584
|
|
|
$
|
3.21
|
|
|
Thirteen weeks ended August 2, 2020
|
|
|
|
|
|
|
Basic
|
$
|
134,564
|
|
|
77,783
|
|
|
$
|
1.73
|
|
|
Effect of dilutive stock-based awards
|
|
|
1,481
|
|
|
|
|
Diluted
|
$
|
134,564
|
|
|
79,264
|
|
|
$
|
1.70
|
|
|
Twenty-six weeks ended August 1, 2021
|
|
|
|
|
|
|
Basic
|
$
|
473,872
|
|
|
75,293
|
|
|
$
|
6.29
|
|
|
Effect of dilutive stock-based awards
|
|
|
2,223
|
|
|
|
|
Diluted
|
$
|
473,872
|
|
|
77,516
|
|
|
$
|
6.11
|
|
|
Twenty-six weeks ended August 2, 2020
|
|
|
|
|
|
|
Basic
|
$
|
169,987
|
|
|
77,522
|
|
|
$
|
2.19
|
|
|
Effect of dilutive stock-based awards
|
|
|
1,319
|
|
|
|
|
Diluted
|
$
|
169,987
|
|
|
78,841
|
|
|
$
|
2.16
|
|
Stock-based awards of 8,000 and 15,000 were excluded from the computation of diluted earnings per share for the thirteen and twenty-six weeks ended August 1, 2021, respectively, as their inclusion would be anti-dilutive. Stock-based awards of 2,000 and 4,000 were excluded from the computation of diluted earnings per share for the thirteen and twenty-six weeks ended August 2, 2020, respectively, as their inclusion would be anti-dilutive.
NOTE E. SEGMENT REPORTING
We identify our operating segments according to how our business activities are managed and evaluated. Each of our brands are operating segments. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.
The following table summarizes our net revenues by brand for the thirteen and twenty-six weeks ended August 1, 2021 and August 2, 2020.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
In thousands
|
August 1, 2021
|
|
August 2, 2020
|
|
August 1, 2021
|
|
August 2, 2020
|
|
Pottery Barn
|
$
|
732,323
|
|
|
$
|
563,276
|
|
|
$
|
1,411,378
|
|
|
$
|
1,042,891
|
|
|
West Elm
|
579,636
|
|
|
380,552
|
|
|
1,056,953
|
|
|
695,982
|
|
|
Williams Sonoma
|
255,455
|
|
|
243,133
|
|
|
521,062
|
|
|
442,435
|
|
|
Pottery Barn Kids and Teen
|
273,937
|
|
|
235,987
|
|
|
510,004
|
|
|
424,539
|
|
|
Other 1
|
106,988
|
|
|
67,829
|
|
|
197,971
|
|
|
120,133
|
|
|
Total 2
|
$
|
1,948,339
|
|
|
$
|
1,490,777
|
|
|
$
|
3,697,368
|
|
|
$
|
2,725,980
|
|
1Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham.
2Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $116.1 million and $77.6 million for the thirteen weeks ended August 1, 2021 and August 2, 2020, respectively, and approximately $216.0 million and $132.7 million for the twenty-six weeks ended August 1, 2021 and August 2, 2020, respectively.
Long-lived assets by geographic location are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
August 1, 2021
|
|
August 2, 2020
|
|
U.S.
|
$
|
2,021,577
|
|
|
$
|
2,076,079
|
|
|
International
|
149,750
|
|
|
155,787
|
|
|
Total
|
$
|
2,171,327
|
|
|
$
|
2,231,866
|
|
NOTE F. COMMITMENTS AND CONTINGENCIES
We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our Condensed Consolidated Financial Statements taken as a whole.
NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS
Stock Repurchase Program
During the thirteen weeks ended August 1, 2021, we repurchased 834,294 shares of our common stock at an average cost of $162.84 per share for a total cost of approximately $135,859,000 under our current stock repurchase program. During the twenty-six weeks ended August 1, 2021, we repurchased 2,625,019 shares of our common stock at an average cost of $171.96 per share for a total cost of approximately $451,388,000 under our current stock repurchase program. As of August 1, 2021, there was approximately $567,974,000 remaining under our current stock repurchase program. On August 25, 2021, we announced a new $1,250,000,000 stock repurchase authorization, which is an increase of approximately $700,000,000 to our current stock repurchase program and superseded the remaining amount outstanding under our prior stock repurchase authorization.
During the thirteen and twenty-six weeks ended August 2, 2020, we did not repurchase any shares of our common stock.
As of August 1, 2021 and August 2, 2020, we held treasury stock of $711,000 and $599,000, respectively, that represents the cost of shares available for issuance that are intended to satisfy future stock-based award settlements in certain foreign jurisdictions.
Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions.
Dividends
We declared cash dividends of $0.59 and $0.48 per common share during the thirteen weeks ended August 1, 2021 and August 2, 2020, respectively. We declared cash dividends of $1.18 and $0.96 per common share during the twenty-six weeks ended August 1, 2021 and August 2, 2020, respectively. On August 25, 2021, we announced a 20.3% increase in our quarterly cash dividend from $0.59 to $0.71 per share. Our quarterly cash dividend may be limited or terminated at any time.
NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS
We have retail and e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with the derivative financial instruments are measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with the ASC 815, Derivatives and Hedging.
Cash Flow Hedges
We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 12 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold.
Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded in cost of goods sold. Based on the rates in effect as of August 1, 2021, we expect to reclassify a net pre-tax loss of approximately $1,124,000 from OCI to cost of goods sold over the next 12 months.
As of August 1, 2021 and August 2, 2020, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:
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|
|
|
|
|
|
|
|
|
|
|
In thousands
|
August 1, 2021
|
|
August 2, 2020
|
|
Contracts designated as cash flow hedges
|
$
|
19,500
|
|
|
$
|
6,800
|
|
Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and twenty-six weeks ended August 1, 2021 and August 2, 2020.
The effect of derivative instruments in our Condensed Consolidated Financial Statements from gains or losses recognized in income was not material for the thirteen and twenty-six weeks ended August 1, 2021 and August 2, 2020.
The fair values of our derivative financial instruments are presented in other current assets and or other current liabilities in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I. We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.
NOTE I. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy established by ASC 820, Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows:
•Level 1: inputs which include quoted prices in active markets for identical assets or liabilities;
•Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and
•Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.
The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.
Foreign Currency Derivatives and Hedging Instruments
We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use mid-market pricing as a practical expedient for fair value measurements. Key inputs for foreign currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates.
The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and non-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts we entered into are subject to credit risk-related contingent features or collateral requirements.
Long-lived Assets
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. We measure property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. We measure right-of-use assets on a nonrecurring basis using Level 2 inputs that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate commensurate with the risk.
The significant unobservable inputs used in the fair value measurement of our store assets are sales growth/decline, gross margin, employment costs, lease escalations, market rental rates, changes in local real estate markets in which we operate, inflation and the overall economics of the retail industry. Significant fluctuations in any of these inputs individually could significantly impact our measurement of fair value.
During the thirteen and twenty-six weeks ended August 1, 2021, no impairment charges were recognized. During the thirteen and twenty-six weeks ended August 2, 2020, we recognized impairment charges of $4,689,000 and $16,514,000, respectively,
related to the impairment of property and equipment and $1,666,000 and $5,461,000, respectively, related to the impairment of operating lease right-of-use assets, due to lower projected revenues and fair market values resulting from the impact of COVID-19.
There were no transfers in and out of Level 3 categories during the thirteen and twenty-six weeks ended August 1, 2021 or August 2, 2020.
NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Foreign Currency
Translation
|
|
Cash Flow
Hedges
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Balance at January 31, 2021
|
$
|
(6,398)
|
|
|
$
|
(719)
|
|
|
$
|
(7,117)
|
|
|
Foreign currency translation adjustments
|
3,700
|
|
|
—
|
|
|
3,700
|
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
(665)
|
|
|
(665)
|
|
|
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1
|
—
|
|
|
153
|
|
|
153
|
|
|
Other comprehensive income (loss)
|
3,700
|
|
|
(512)
|
|
|
3,188
|
|
|
Balance at May 2, 2021
|
$
|
(2,698)
|
|
|
$
|
(1,231)
|
|
|
$
|
(3,929)
|
|
|
Foreign currency translation adjustments
|
(3,522)
|
|
|
—
|
|
|
(3,522)
|
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
65
|
|
|
65
|
|
|
Reclassification adjustment for realized (gain) loss on derivative financial instruments1
|
—
|
|
|
337
|
|
|
337
|
|
|
Other comprehensive income (loss)
|
(3,522)
|
|
|
402
|
|
|
(3,120)
|
|
|
Balance at August 1, 2021
|
$
|
(6,220)
|
|
|
$
|
(829)
|
|
|
$
|
(7,049)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2020
|
$
|
(14,593)
|
|
|
$
|
6
|
|
|
$
|
(14,587)
|
|
|
Foreign currency translation adjustments
|
(5,276)
|
|
|
—
|
|
|
(5,276)
|
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
549
|
|
|
549
|
|
|
Reclassification adjustment for realized (gain) loss on derivative financial instruments 1
|
—
|
|
|
(37)
|
|
|
(37)
|
|
|
Other comprehensive income (loss)
|
(5,276)
|
|
|
512
|
|
|
(4,764)
|
|
|
Balance at May 3, 2020
|
$
|
(19,869)
|
|
|
$
|
518
|
|
|
$
|
(19,351)
|
|
|
Foreign currency translation adjustments
|
6,737
|
|
|
—
|
|
|
6,737
|
|
|
Change in fair value of derivative financial instruments
|
—
|
|
|
(200)
|
|
|
(200)
|
|
|
Reclassification adjustment for realized (gain) loss on derivative financial instruments1
|
—
|
|
|
(107)
|
|
|
(107)
|
|
|
Other comprehensive income (loss)
|
6,737
|
|
|
(307)
|
|
|
6,430
|
|
|
Balance at August 2, 2020
|
$
|
(13,132)
|
|
|
$
|
211
|
|
|
$
|
(12,921)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Refer to Note H for additional disclosures about reclassifications out of accumulated other comprehensive income.
NOTE K. REVENUE
The majority of our revenues are generated from sales of merchandise to our customers through our e-commerce websites, our direct mail catalogs, or at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. The remainder of our revenues are primarily generated from sales to our franchisees and other wholesale transactions, breakage income related to stored-value cards, and incentives received from credit card issuers in connection with our private label and co-branded credit cards.
We recognize revenue as control of promised goods or services are transferred to our customers. We record a liability at each period end where we have an obligation to transfer goods or services for which we have received consideration or have a right to consideration. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services.
See Note E for the disclosure of our net revenues by operating segment.
Merchandise Sales
Revenues from the sale of our merchandise through our e-commerce websites, our direct mail catalogs, at our retail stores, as well as to our franchisees and wholesale customers are, in each case, recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores or delivered to the customer. For merchandise picked up in the store, control is transferred at that time. For merchandise delivered to the customer, control is transferred when either delivery has been completed or, for certain merchandise, upon conveyance of the merchandise to the carrier for delivery. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.
Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of August 1, 2021 and August 2, 2020, we recorded a liability for expected sales returns of approximately $28,315,000 and $48,773,000, respectively, within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $7,798,000 and $17,496,000, respectively, within other current assets in our Condensed Consolidated Balance Sheet.
Stored-value Cards
We issue stored-value cards that may be redeemed on future merchandise purchases. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Revenue from estimated unredeemed stored-value cards (breakage) is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately four years, the majority of which is recognized within one year of the card issuance. Breakage revenue is not material to our Condensed Consolidated Financial Statements.
Credit Card Incentives
We enter into agreements with credit card issuers in connection with our private label and co-branded credit cards whereby we receive cash incentives in exchange for promised services, such as licensing our brand names and marketing the credit card program to customers. Services promised under these agreements are interrelated and are thus considered a single performance obligation. Revenue is recognized over time as we transfer promised services throughout the contract term.
Customer Loyalty Programs
We have customer loyalty programs which allow members to earn points for each qualifying purchase. Points earned enable members to receive certificates that may be redeemed on future merchandise purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The allocated consideration for the points earned by our loyalty program members is deferred based on the standalone selling price of the points and recorded within gift card and other deferred revenue within our Condensed Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be redeemed, based on historical redemption patterns. This measurement is applied to our portfolio of performance obligations for points earned, as all obligations have similar economic characteristics. We believe the impact to our Condensed Consolidated Financial Statements would not be materially different if this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed by the customer. These obligations relate to contracts with terms less than one year, as our certificates generally expire within six months from issuance.
Deferred Revenue
We defer revenue when cash payments are received in advance of satisfying performance obligations, primarily associated with our stored-value cards, merchandise sales, and incentives received from credit card issuers. As of August 1, 2021 and August 2, 2020, we had recorded $406,450,000 and $293,104,000 for gift card and other deferred revenue in our Condensed Consolidated Balance Sheet, substantially all of which is expected to be recognized into revenue within the next 12 months.