Famous Footwear 2012 Annual Report Download - page 53

2012 BROWN SHOE COMPANY, INC. FORM 10-K 51
Customer discounts represent reserves against our accounts receivable for discounts that our wholesale customers may take
based on meeting certain order, payment or return guidelines. We estimate the reserve needed for customer discounts based
upon customer net sales and respective agreement terms. The Company recognized a provision for customer discounts of
$4.5 million in 2012, $3.8 million in 2011 and $6.9 million in 2010.
Inventories
All inventories are valued at the lower of cost or market with 86% of consolidated inventories using the last-in, first-out
(“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based
on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates
of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. If the first-in,
first-out (“FIFO”) method had been used, consolidated inventories would have been $4.4 million and $5.0 million higher at
February 2, 2013 and January 28, 2012, respectively. Substantially all inventory is finished goods.
The costs of inventory, inbound freight and duties, markdowns, shrinkage and royalty expense are classified in cost of
goods sold. Costs of warehousing and distribution are classified in selling and administrative expenses and are expensed
as incurred. Such warehousing and distribution costs totaled $79.1 million, $76.5 million and $65.0 million in 2012, 2011 and
2010, respectively. Costs of overseas sourcing oces and other inventory procurement costs are reflected in selling and
administrative expenses and are expensed as incurred. Such sourcing and procurement costs totaled $24.3 million,
$21.7 million and $21.3 million in 2012, 2011 and 2010, respectively.
The Company applies judgment in valuing inventories by assessing the net realizable value of inventories based on current
selling prices. At the Famous Footwear segment, markdowns are recognized when it becomes evident that inventory items
will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes gross profit rate at Famous
Footwear to be lower than the initial markup during periods when permanent price reductions are taken to clear product.
At the Company’s other divisions, generally markdown reserves reduce the carrying values of inventories to a level where,
upon sale of the product, the Company will realize its normal gross profit rate. The Company believes these policies reflect
the dierence in operating models between Famous Footwear and other segments. Famous Footwear periodically runs
promotional events to drive sales to clear seasonal inventories. The other segments rely on permanent price reductions to
clear slower-moving inventory.
Markdowns are recorded to reflect expected adjustments to sales prices. In determining markdowns, management considers
current and recently recorded sales prices, the length of time the product is held in inventory and quantities of various
product styles contained in inventory, among other factors. The ultimate amount realized from the sale of certain products
could dier from management estimates. The Company physically counts all merchandise inventory on hand at least
annually and adjusts the recorded balance to reflect the results of the physical counts. The Company records estimated
shrinkage between physical inventory counts based on historical results.
Computer Software Costs
The Company capitalizes certain costs in other assets, including internal payroll costs incurred in connection with the
development or acquisition of software for internal use. Other assets on the consolidated balance sheets include $53.7 million
and $59.4 million of unamortized computer software costs as of February 2, 2013 and January 28, 2012, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is provided over the estimated useful
lives of the assets or the remaining lease terms, where applicable, using the straight-line method.
Interest
Capitalized Interest
Interest costs applicable to major asset additions are capitalized during the construction or development period and
amortized over the lives of the related assets. The Company did not capitalize interest in 2012. In 2011 and 2010, the
Company capitalized interest of less than $0.1 million and $1.3 million, respectively.
Interest Expense
Interest expense includes interest for borrowings under both the Company’s short-term and long-term debt. Interest
expense includes fees paid under the short-term revolving credit agreement for the unused portion of its line of credit.
Interest expense also includes the amortization of deferred debt issuance costs as well as the accretion of certain discounted
noncurrent liabilities.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests.
The Company adopted the provisions of Accounting Standards Codification (“ASC”), Intangibles-Goodwill and Other
(ASC Topic 350) Testing Goodwill for Impairment, which permits, but does not require, a company to qualitatively assess
indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired. If, after completing the
qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis is
prepared to estimate fair value. If the recorded values of these assets are not recoverable, based on either the assessment
screen or discounted cash flow analysis, management performs the next step, which compares the fair value of the reporting
unit to the recorded value of the tangible and intangible assets of the reporting units. Goodwill is considered impaired if the
fair value of the tangible and intangible assets exceeds the fair value of the reporting unit.
The Company reviewed goodwill for impairment utilizing a discounted cash flow analysis. A fair-value-based test is applied
at the reporting unit level, which is generally at or one level below the operating segment level. The test compares the
fair value of the Company’s reporting units to the carrying value of those reporting units. This test requires significant
assumptions, estimates and judgments by management, and is subject to inherent uncertainties and subjectivity. The fair
value of goodwill is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate
to compute a net present value of future cash flows. Projected net sales, gross profit, selling and administrative expense,
capital expenditures, depreciation, amortization and working capital requirements are based on the Company’s internal