Express 2014 Annual Report Download - page 53

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Inventories
Inventories are principally valued at the lower of cost or market on a weighted-average cost basis. The Company
writes down inventory, the impact of which is reflected in cost of goods sold, buying and occupancy costs in the
Consolidated Statements of Income and Comprehensive Income, if the cost of specific inventory items on hand
exceeds the amount the Company expects to realize from the ultimate sale or disposal of the inventory. These
estimates are based on management’s judgment regarding future demand and market conditions and analysis of
historical experience. The lower of cost or market adjustment to inventory as of January 31, 2015 and February 1,
2014 was $11.4 million and $11.5 million, respectively.
The Company also records an inventory shrink reserve calculated as a percentage of cost of goods sold for
estimated merchandise inventory losses for the period between the last physical inventory count and the balance
sheet date. This estimate is based on management’s analysis of historical results.
Advertising
Advertising production costs are expensed at the time the promotion first appears in media, stores, or on the
website, except for direct response advertising costs that relate primarily to the production and distribution of the
Company’s catalogs. Direct response advertising costs are amortized over the expected future revenue stream,
which is typically 1 to 3 months from the date materials are mailed. Total advertising expense totaled $104.6
million, $85.9 million, and $85.8 million in 2014, 2013, and 2012, respectively. Advertising costs are included in
selling, general, and administrative expenses in the Consolidated Statements of Income and Comprehensive
Income.
Private Label Credit Card
The Company has an agreement with a third party to provide customers with private label credit cards (the “Card
Agreement”). Each private label credit card bears the logo of the Express brand and can only be used at the
Company’s retail store locations and website. A third-party financing company is the sole owner of the accounts
issued under the private label credit card program and absorbs the losses associated with non-payment by the
private label card holders and a portion of any fraudulent usage of the accounts. Pursuant to the Card Agreement,
the Company receives reimbursement funds from the third-party financing company for expenses the Company
incurs based on usage of the private label credit cards. These reimbursement funds are used by the Company to
fund marketing programs associated with the private label credit card and are recognized when the amounts are
fixed or determinable and collectability is reasonably assured, which is generally at the time the private label
credit cards are used or specified transactions occur. The funds received related to these private label credit cards
are classified in selling, general, and administrative expenses in the Consolidated Statements of Income and
Comprehensive Income.
Loyalty Program
The Company maintains a customer loyalty program (“Loyalty Program”) in which customers earn points
towards rewards for qualifying purchases and other marketing programs. The Loyalty Program was previously
restricted to holders of the Company’s private label credit cards. However, beginning in 2011, a tender agnostic
program was piloted that opened the Loyalty Program to non-private label credit card holders. The Company
rolled this program out in the United States in the first quarter of 2012. Upon reaching specified point values,
customers are issued a reward, which they may redeem for purchases at the Company’s U.S. stores or on its
website. Generally, rewards earned must be redeemed within 60 days from the date of issuance. The Company
accrues for the anticipated costs related to redemptions of the certificates as points are earned. To calculate this
expense, the Company estimates margin rates and makes assumptions related to card holder redemption rates,
which are both based on historical experience. This expense is included within cost of goods sold, buying and
occupancy costs in the Consolidated Statements of Income and Comprehensive Income. The loyalty liability is
included in accrued expenses on the Consolidated Balance Sheets.
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