Albertsons 2015 Annual Report Download - page 43

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Vendor Funds
The Company receives funds from many of the vendors whose products the Company buys for resale in its stores. These
vendor funds are provided to increase the sell-through of the related products. The Company 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 2015, 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, Net
Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventory consists of finished goods.
Inventories are recorded net of vendor allowances and cash discounts. The Company evaluates inventory shortages (shrink)
throughout each fiscal 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 end of each fiscal year.
To value discrete inventory items at lower of cost or market before application of any last-in, first-out (“LIFO”) reserve, the
Company uses the weighted average cost method, the retail inventory method (“RIM”) or replacement cost method. Inventories
were valued at the lower of cost or market under the following methods as of February 28, 2015: weighted average cost
method, 54 percent; replacement cost method, 24 percent; and RIM, 22 percent.
The replacement cost approach under the FIFO method is predominantly utilized in determining the value of high turnover
perishable items, including produce, deli, bakery, meat and floral. Under the replacement cost method applied on a LIFO basis,
the most recent purchase cost is used to calculate the current cost of inventory before application of any LIFO reserve. The
replacement cost approach results in inventories valued at the lower of cost or market because of the high inventory turnover
and the resulting low inventory days supply on hand combined with infrequent vendor price changes for these items of
inventory.
RIM is used in valuing retail inventories. Under this method, the valuation of inventories is at cost and the resulting gross
margins are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories. RIM is an averaging
method that has been widely used in the retail industry. Inherent in the RIM calculations are certain significant management
judgments and estimates, including inventory shortages and cost-to-retail ratios, which impacts the ending inventory valuation
at cost, as well as the resulting gross margins. Management consistently applies its application of RIM valuations by product
category and believes that the Company’s RIM provides an inventory valuation that reasonably approximates cost. For fiscal
2015, a 1 percent change in the cost-to-retail ratios used to value inventories would impact Gross profit by less than 10 basis
points.
As of February 28, 2015 and February 22, 2014, approximately 55 percent and 57 percent, respectively, of the Company’s
inventories were valued under the LIFO method. During fiscal 2014 and 2013, 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