North Face 2015 Annual Report Download - page 62

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Recent performance by the brand has been negatively impacted by isolated events such as an unseasonably
cold Spring in 2014 and supplier issues in 2015. However, VF is optimistic about the brand because of the one-
off nature of these recent occurrences that negatively impacted sales, the success of recent product introductions,
and continued operational growth in Europe. Key assumptions developed by VF management and used in our
quantitative analysis of the Reef®reporting unit and trademark asset include:
• Modest revenue growth in the wholesale channel driven by door expansion with existing and new
customers
• Strong growth in the e-commerce business
• Modest gross margin expansion based on updated strategies
• Increased leverage of selling, general and administrative expenses on higher revenues
• Improved profitability over historical levels based on the assumptions discussed above
• Market-based discount rates
• Royalty rate based on active license agreements of the brand
Actual results for the Reef®reporting unit may vary from projected results. Accordingly, management
performed sensitivity analysis on the impairment models and concluded that the reporting unit goodwill and
trademark intangible asset were not impaired, even with significant negative changes made to key assumptions.
For example, a 50% decrease in the forecasted cumulative average revenue growth rate used in the trademark
intangible asset impairment model did not cause its estimated fair value to decline below carrying value.
Similarly for goodwill, a 50% decrease in projected cash flows did not cause the estimated fair value of the
reporting unit to decline below its carrying value. Separately, a 100 basis point increase in the discount rate did
not cause the estimated fair values of the Reef®reporting unit or trademark intangible asset to decline below their
respective carrying values.
Rock & Republic®impairment analysis
As of the beginning of the fourth quarter of 2015, VF performed a quantitative impairment analysis of the
trademark intangible asset for the Rock & Republic®brand and concluded that the trademark was not impaired.
The estimated fair value of the trademark intangible asset exceeded its carrying value of $58.1 million by 4%.
The Rock & Republic®brand was acquired in 2011 and has an exclusive wholesale distribution and licensing
arrangement with Kohl’s Corporation. Recent performance of the brand has been negatively impacted by
challenging consumer trends in the women’s denim category.
VF expects that recent price changes, new product launches, and increased marketing and supply chain
initiatives in collaboration with Kohl’s will improve the brand’s performance in future periods. Key assumptions
developed by VF management and used in our quantitative analysis of the Rock & Republic®trademark asset
include:
• Modest revenue growth, primarily driven by the licensing business
• Market-based discount rates
• Royalty rate based on the current exclusive agreement with Kohl’s
In February 2016, VF and Kohl’s agreed to renew the contract for an additional three-year term, with four
optional three-year renewal periods. The terms of the agreement are consistent with the assumptions used in our
analysis. However, actual results for the Rock and Republic®brand may vary from projected
results. Additionally, because our quantitative analysis shows that the estimated fair value of the trademark is
essentially equal to its carrying value, any negative variances from our assumptions would result in a decrease in
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