Pottery Barn 2013 Annual Report Download - page 56

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, distribution centers, off-site storage locations, and with our third party
transportation providers. Accordingly, there is no shrinkage reserve at year-end.
Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates include
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
throughout the year. 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 throughout the year. In addition, we do not believe a
10% change in our inventory reserves would have a material effect on net earnings. As of February 2, 2014 and
February 3, 2013, our inventory obsolescence reserves were $10,406,000 and $12,273,000, 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 estimated direct-to-customer
revenues for the period to the total estimated direct-to-customer revenues over the life of the catalog on an
individual catalog basis. Estimated direct-to-customer revenues over the life of the catalog 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 future profitability (net revenues less merchandise cost of goods
sold, selling expenses and catalog-related costs) of that catalog. If the estimated future profitability of the catalog
is below its carrying amount, the catalog is impaired accordingly.
Total advertising expenses (including catalog advertising, e-commerce advertising and all other advertising
costs) were approximately $325,708,000, $318,338,000 and $301,316,000 in fiscal 2013, fiscal 2012 and fiscal
2011, 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 5 – 40 years
Capitalized software 2 – 10 years
We review the carrying value of all long-lived assets for impairment, primarily at a store level, whenever events
or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Our impairment
analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of
these assets. Impairment may result when the carrying value of the asset exceeds the estimated undiscounted
future cash flows over its remaining useful life. For store impairment, our estimate of undiscounted future cash
flows over the store lease term is based upon our experience, historical operations of the stores and estimates of
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