Neiman Marcus 2009 Annual Report Download - page 103

Table of Contents
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) determination of original retail values for merchandise held for sale, 2) identification of declines in perceived value
of inventories and processing the appropriate retail value markdowns and 3) overly optimistic or conservative estimation of shrinkage.
In prior years, we have made no material changes to our estimates of shrinkage or markdown requirements on inventories held as of
the end of our fiscal years. We do not believe that the assumptions used in these estimates at July 31, 2010 will change significantly
based upon our prior experience or that changes in these estimates, if any, will have a material effect on our future operating
performance.
Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise
we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we
earn in connection with the sales of the vendor's merchandise. These allowances result in an increase to gross margin when we earn
the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to
acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are
sold. The amounts of vendor allowances we receive fluctuate based on the level of markdowns taken and did not have a significant
impact on the year-over-year change in gross margin during fiscal years 2010, 2009 or 2008. We received vendor allowances of
$81.2 million, or 2.2% of revenues, in fiscal year 2010, $107.7 million, or 3.0% of revenues, in fiscal year 2009 and $109.6 million, or
2.4% of revenues, in fiscal year 2008.
We obtain certain merchandise, primarily precious jewelry, on a consignment basis in order to expand our product
assortment. Consignment merchandise held by us with a cost basis of $256.2 million at July 31, 2010 and $283.0 million at August 1,
2009 is not reflected in our consolidated balance sheets.
Cost of goods sold also includes delivery charges we pay to third-party carriers and other costs related to the fulfillment of
customer orders not delivered at the point-of-sale.
Long-lived Assets. Property and equipment are stated at cost less accumulated depreciation. For financial reporting purposes,
we compute depreciation principally using the straight-line method over the estimated useful lives of the assets. Buildings and
improvements are depreciated over five to 30 years while fixtures and equipment are depreciated over three to 15 years. Leasehold
improvements are amortized over the shorter of the asset life or the lease term (which may include renewal periods when exercise of
the renewal option is at our discretion and considered reasonably assured at the inception of the lease). Costs incurred for the
development of internal computer software are capitalized and amortized using the straight-line method over three to ten years.
To the extent we remodel or otherwise replace or dispose of property and equipment prior to the end of the assigned
depreciable lives, we could realize a loss or gain on the disposition. To the extent assets continue to be used beyond their assigned
depreciable lives, no depreciation expense is incurred. We reassess the depreciable lives of our long-lived assets in an effort to reduce
the risk of significant losses or gains at disposition and utilization of assets with no depreciation charges. The reassessment of
depreciable lives involves utilizing historical remodel and disposition activity and forward-looking capital expenditure plans.
We assess the recoverability of the carrying values of our store assets, consisting of property and equipment, customer lists
and favorable lease commitments, annually and upon the occurrence of certain events. The recoverability assessment requires
judgment and estimates of future store generated cash flows. The underlying estimates of cash flows include estimates for future
revenues, gross margin rates and store expenses. We base these estimates upon the stores' past and expected future performance. New
stores may require two to five years to develop a customer base necessary to generate the cash flows of our more mature stores. To the
extent our estimates for revenue growth and gross margin improvement are not realized, future annual assessments could result in
impairment charges.
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