Pottery Barn 2008 Annual Report Download - page 60

Reserves for shrinkage are estimated, at the concept and channel level, as a percentage of net sales based on
historical shrinkage results, expectations of future shrinkage and current inventory levels. Actual shrinkage is
recorded at year-end based on the results of our physical inventory count and can vary from our estimates due to
such factors as changes in operations within our distribution centers, the mix of our inventory (which ranges from
large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, off-site
storage locations, and our third party transportation providers.
Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have
calculations that require management to make assumptions and to apply judgment regarding a number of factors,
including market conditions, the selling environment, historical results and current inventory trends. If actual
obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly.
Management does not believe that changes in the assumptions used in these estimates would have a significant
effect on our inventory balances. We have made no material changes to our assumptions included in the
calculations of the obsolescence and shrinkage reserves. In addition, we do not believe a 10% change in our
inventory reserves would have a material effect on net earnings. As of February 1, 2009 and February 3, 2008,
our inventory reserves were $20,647,000 and $9,475,000, respectively.
Advertising and Prepaid Catalog Expenses
Advertising expenses consist of media and production costs related to catalog mailings, e-commerce advertising
and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the
initial advertisement, with the exception of prepaid catalog expenses. Prepaid catalog expenses consist primarily
of third party incremental direct costs, including creative design, paper, printing, postage and mailing costs for all
of our direct response catalogs. Such costs are capitalized as prepaid catalog expenses and are amortized over
their expected period of future benefit. Such amortization is based upon the ratio of actual revenues to the total of
actual and estimated future revenues on an individual catalog basis. Estimated future revenues are based upon
various factors such as the total number of catalogs and pages circulated, the probability and magnitude of
consumer response and the assortment of merchandise offered. Each catalog is generally fully amortized over a
six to nine month period, with the majority of the amortization occurring within the first four to five months.
Prepaid catalog expenses are evaluated for realizability on a monthly basis by comparing the carrying amount
associated with each catalog to the estimated probable remaining future profitability (remaining net revenues less
merchandise cost of goods sold, selling expenses and catalog related-costs) associated with that catalog. If the
catalog is not expected to be profitable, the carrying amount of the catalog is impaired accordingly.
Total advertising expenses (including catalog advertising, e-commerce advertising and all other advertising
costs) were approximately $328,019,000, $379,468,000 and $365,829,000 in fiscal 2008, fiscal 2007 and fiscal
2006, respectively.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets below.
Leasehold improvements Shorter of estimated useful life or lease term (generally 2 – 22 years)
Fixtures and equipment 2 – 20 years
Buildings and building improvements 10 – 40 years
Capitalized software 2 – 10 years
Corporate aircraft 20 years (20% salvage value)
Internally developed software costs are capitalized in accordance with the American Institute of Certified Public
Accountants Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.”
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