Neiman Marcus 2003 Annual Report Download - page 47

Merchandise Inventories and Cost Of Goods Sold. The Company utilizes the retail method of accounting for substantially all of its
merchandise inventories. Merchandise inventories are stated at the lower of cost or market. The retail inventory method is widely
used in the retail industry due to its practicality.
Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a
calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of inventories. The cost of the inventory
reflected on the consolidated balance sheet is decreased by charges to cost of goods sold at the time the retail value of the inventory is
lowered through the use of markdowns. Hence, earnings are negatively impacted when merchandise is marked down.
The Company's sales activities are conducted during two primary selling seasons — Fall and Spring. The Fall selling season is
conducted primarily in the Company's first and second quarters and the Spring selling season is conducted primarily in the third and
fourth quarters. During each season, the Company records markdowns to reduce the retail value of its inventories. Factors considered
in determining markdowns include current and anticipated demand, customer preferences, age of merchandise and fashion trends.
During the season, the Company records both temporary and permanent markdowns. Temporary markdowns are recorded at the time
of sale and reduce the retail value of only the goods sold. Permanent markdowns are designated primarily for clearance activity and
reduce the retail value of all goods subject to markdown that are held by the Company. At the end of each selling season, the
Company records permanent markdowns for clearance goods remaining in ending inventory.
The areas requiring significant management judgment related to the valuation of the Company's inventories include 1) setting the
original retail value for the merchandise held for sale, 2) recognizing merchandise for which the customer's perception of value has
declined and appropriately marking the retail value of the merchandise down to the perceived value and 3) estimating the shrinkage
that has occurred between physical inventory counts. These judgments and estimates, coupled with the averaging processes within the
retail method can, under certain circumstances, produce varying financial results. Factors that can lead to different financial results
include 1) setting original retail values for merchandise held for sale incorrectly, 2) failure to identify a decline in perceived value of
inventories and process the appropriate retail value markdowns and 3) overly optimistic or conservative shrinkage estimates. The
Company believes it has the appropriate merchandise valuation and pricing controls in place to minimize the risk that its inventory
values would be materially misstated.
Consistent with industry business practice, the Company receives allowances from certain of its vendors in support of the merchandise
purchased by the Company for resale. Certain allowances are received to reimburse the Company for markdowns taken and/or to
support the gross margins earned by the Company in connection with the sales of the vendor's merchandise. These allowances result
in an increase to gross margin when the allowances are earned by the Company and approved by the vendor. Other allowances
received by the Company represent reductions to the amounts paid by the Company to acquire the merchandise. These allowances
reduce the cost of the acquired merchandise and are recognized as an increase to gross margin at the time the goods are sold. The
amounts of vendor reimbursements received by the Company did not have a significant impact on the year-over-year change in gross
margin in 2004, 2003 or 2002.
The Company obtains certain merchandise, primarily precious jewelry, on a consignment basis in order to expand its product
assortment. Consignment merchandise with a cost basis of approximately $220.4 million at July 31, 2004 and approximately $214.0
million at August 2, 2003 is not reflected in the consolidated balance sheets.
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