Albertsons 2012 Annual Report Download - page 32

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receives vendor funds for a variety of merchandising activities: placement of the vendors’ products in the
Company’s advertising; display of the vendors’ products in prominent locations in the Company’s stores;
supporting the introduction of new products into the Company’s retail stores and distribution system; exclusivity
rights in certain categories; and to compensate for temporary price reductions offered to customers on products
held for sale at retail stores. The Company also receives vendor funds for buying activities such as volume
commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early
payment of merchandise purchases. The majority of the vendor fund contracts have terms of less than a year,
with a small proportion of the contracts longer than one year.
The Company recognizes vendor funds for merchandising activities as a reduction of Cost of sales when the
related products are sold. Vendor funds that have been earned as a result of completing the required performance
under the terms of the underlying agreements but for which the product has not yet been sold are recognized as
reductions of inventory. The amount and timing of recognition of vendor funds as well as the amount of vendor
funds to be recognized as a reduction to ending inventory requires management judgment and estimates.
Management determines these amounts based on estimates of current year purchase volume using forecast and
historical data and review of average inventory turnover data. These judgments and estimates impact the
Company’s reported gross profit, operating earnings (loss) and inventory amounts. The historical estimates of the
Company have been reliable in the past, and the Company believes the methodology will continue to be reliable
in the future. Based on previous experience, the Company does not expect significant changes in the level of
vendor support. However, if such changes were to occur, cost of sales and advertising expense could change,
depending on the specific vendors involved. If vendor advertising allowances were substantially reduced or
eliminated, the Company would consider changing the volume, type and frequency of the advertising, which
could increase or decrease its advertising expense. Similarly, the Company is not able to assess the impact of
vendor advertising allowances on increasing revenues as such allowances do not directly generate revenue for the
Company’s stores. For fiscal 2012, a 1 percent change in total vendor funds earned, including advertising
allowances, with no offsetting changes to the base price on the products purchased, would impact gross profit by
less than 10 basis points.
Inventories
Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventory consists of
finished goods. Approximately 78 percent and 79 percent of the Company’s inventories were valued using the
last-in, first-out (“LIFO”) method for fiscal 2012 and 2011, respectively. The Company uses a combination of the
retail inventory method (“RIM”) and replacement cost method to determine the current cost of its inventory
before any LIFO reserve is applied. Under RIM, the current cost of inventories and the gross margins are
calculated by applying a cost-to-retail ratio to the current retail value of inventories. Under the replacement cost
method, the most current unit purchase cost is used to calculate the current cost of inventories. The first-in,
first-out method (“FIFO”) is used to determine cost for some of the remaining highly perishable inventories. If
the FIFO method had been used to determine cost of inventories for which the LIFO method is used, the
Company’s inventories would have been higher by approximately $342 and $282 as of February 25, 2012 and
February 26, 2011, respectively.
During fiscal 2012, 2011 and 2010, inventory quantities in certain LIFO layers were reduced. These reductions
resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared
with the cost of fiscal 2012, 2011 and 2010 purchases. As a result, Cost of sales decreased by $19, $11 and $22
in fiscal 2012, 2011 and 2010, respectively.
In addition, the Company evaluates physical inventory shortages throughout the year based on actual physical
counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to
provide for estimated shortages as of the financial statement date. Although the Company has sufficient current
and historical information available to record reasonable estimates for inventory shortages, it is possible that
actual results could differ. As of February 25, 2012, each 25 basis point change in the estimated inventory
shortages would impact the allowances for inventory shortages by approximately $13.
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