Famous Footwear 2013 Annual Report Download - page 51

2013 BROWN SHOE COMPANY, INC. FORM 10-K 49
by reviewing inventory levels on the retail floors, sell-through rates, historical dilution, current gross margin levels, and other
performance indicators of our major retail customers. Product returns and customer deductions are estimated using historical
experience and anticipated future trends. Co-op advertising allowances are estimated based on customer agreements. The
Company recognized a provision for customer allowances of $45.1 million in 2013, $44.8 million in 2012, and $48.4 million in 2011.
Customer discounts represent reserves against our accounts receivable for discounts that our wholesale customers may take
based on meeting certain order, payment, or return guidelines. We estimate the reserves needed for customer discounts based
upon customer net sales and respective agreement terms. The Company recognized a provision for customer discounts of
$4.8 million in 2013, $4.3 million in 2012, and $3.5 million in 2011.
Inventories
All inventories are valued at the lower of cost or market with 93% of consolidated inventories using the last-in, first-out
(“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based
on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates
of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. If the first-in,
first-out (“FIFO”) method had been used, consolidated inventories would have been $4.0 million and $4.4 million higher at
February 1, 2014 and February 2, 2013, respectively. Substantially all inventory is finished goods.
The costs of inventory, inbound freight and duties, markdowns, shrinkage, and royalty expense are classified in cost of
goods sold. Costs of warehousing and distribution are classified in selling and administrative expenses and are expensed
as incurred. Such warehousing and distribution costs totaled $75.1 million, $72.0 million, and $66.1 million in 2013, 2012,
and 2011, respectively. Costs of overseas sourcing oces and other inventory procurement costs are reflected in selling
and administrative expenses and are expensed as incurred. Such sourcing and procurement costs totaled $20.2 million,
$21.9 million, and $21.7 million in 2013, 2012, and 2011, respectively.
The Company applies judgment in valuing inventories by assessing the net realizable value of inventories based on
current selling prices. At the Famous Footwear segment, markdowns are recognized when it becomes evident that
inventory items will be sold at retail prices less than cost, plus the cost to sell the product. This policy causes the gross
profit rate at Famous Footwear to be lower than the initial markup during periods when permanent price reductions are
taken to clear product. At the Company’s other segments, generally markdown reserves reduce the carrying values of
inventories to a level where, upon sale of the product, the Company will realize its normal gross profit rate. The Company
believes these policies reflect the dierence in operating models between Famous Footwear and other segments.
Famous Footwear periodically runs promotional events to drive sales to clear seasonal inventories. The other segments
rely on permanent price reductions to clear slower-moving inventory.
Markdowns are recorded to reflect expected adjustments to sales prices. In determining markdowns, management
considers current and recently recorded sales prices, the length of time the product is held in inventory, and quantities
of various product styles contained in inventory, among other factors. The ultimate amount realized from the sale of
certain products could dier from management estimates. The Company performs physical inventory counts or cycle
counts on all merchandise inventory on hand throughout the year and adjusts the recorded balance to reflect the results.
The Company records estimated shrinkage between physical inventory counts based on historical results.
Computer Software Costs
The Company capitalizes certain costs in other assets, including internal payroll costs incurred in connection with the
development or acquisition of software for internal use. Other assets on the consolidated balance sheets include
$45.6 million and $53.3 million of computer software costs as of February 1, 2014 and February 2, 2013, respectively,
which are net of accumulated amortization of $79.9 million and $69.2 million as of the end of the respective periods.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is provided over the estimated useful
lives of the assets or the remaining lease terms, where applicable, using the straight-line method.
Interest Expense
Interest expense includes interest for borrowings under both the Company’s short-term and long-term debt. Interest
expense includes fees paid under the short-term revolving credit agreement for the unused portion of its line of credit.
Interest expense also includes the amortization of deferred debt issuance costs and debt discount as well as the accretion
of certain discounted noncurrent liabilities.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment
tests. The Company adopted the provisions of Accounting Standards Codification (“ASC”), Intangibles-Goodwill and Other
(ASC Topic 350) Testing Goodwill for Impairment, which permits, but does not require, a company to qualitatively assess
indicators of a reporting unit’s fair value when it is unlikely that a reporting unit is impaired. If, after completing the
qualitative assessment, a company believes it is likely that a reporting unit is impaired, a discounted cash flow analysis
is prepared to estimate fair value. If the recorded values of these assets are not recoverable, based on either the
assessment screen or discounted cash flow analysis, management performs the next step, which compares the fair
value of the reporting unit to the recorded value of the tangible and intangible assets of the reporting units. Goodwill is
considered impaired if the fair value of the tangible and intangible assets exceeds the fair value of the reporting unit.