Pottery Barn 2014 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, 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 warehouse and transportation providers.
Accordingly, there is no shrinkage reserve at year-end.
Our obsolescence and shrinkage reserve calculations contain estimates 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. 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 1, 2015 and February 2, 2014, our inventory obsolescence reserves were
$10,244,000 and $10,406,000, 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 e-commerce
revenues for the period to the total estimated e-commerce revenues over the life of the catalog on an individual
catalog basis. Estimated e-commerce 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 probable 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 $330,070,000, $325,708,000 and $318,338,000 in fiscal 2014, fiscal 2013 and fiscal
2012, respectively.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using the straight-line method over the
following estimated useful lives:
Leasehold improvements Shorter of estimated useful life or lease term (generally 3 – 22 years)
Fixtures and equipment 2 – 20 years
Buildings and building improvements 10 – 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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