Foot Locker 2013 Annual Report Download - page 52

Merchandise Inventories
Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using the retail
inventory method (‘‘RIM’’). The RIM is commonly used by retail companies to value inventories at cost and calculate
gross margins due to its practicality. Under the retail method, cost is determined by applying a cost-to-retail per-
centage across groupings of similar items, known as departments. The cost-to-retail percentage is applied to
ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department
basis. The RIM is a system of averages that requires management’s estimates and assumptions regarding markups,
markdowns and shrink, among others, and as such, could result in distortions of inventory amounts.
Significant judgment is required for these estimates and assumptions, as well as to differentiate between pro-
motional and other markdowns that may be required to correctly reflect merchandise inventories at the lower
of cost or market. The Company provides reserves based on current selling prices when the inventory has not
been marked down to market. The failure to take permanent markdowns on a timely basis may result in an
overstatement of cost under the retail inventory method. The decision to take permanent markdowns includes
many factors, including the current environment, inventory levels, and the age of the item. Management
believes this method and its related assumptions, which have been consistently applied, to be reasonable.
Vendor Reimbursements
In the normal course of business, the Company receives allowances from its vendors for markdowns taken.
Vendor allowances are recognized as a reduction in cost of sales in the period in which the markdowns are
taken. Vendor allowances contributed 20 basis points to the 2013 gross margin rate. The Company also has
volume-related agreements with certain vendors, under which it receives rebates based on fixed percentages
of cost purchases. These volume-related rebates are recorded in cost of sales when the product is sold and
were not significant to the 2013 gross margin rate.
The Company receives support from some of its vendors in the form of reimbursements for cooperative adver-
tising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed
upon with vendors for specific advertising campaigns and catalogs. Cooperative income, to the extent that it
reimburses specific, incremental and identifiable costs incurred to date, is recorded in SG&A in the same period
as the associated expenses are incurred. Cooperative reimbursements amounted to approximately 18 percent
and 14 percent of total advertising and catalog costs, respectively, in 2013. Reimbursements received that are
in excess of specific, incremental and identifiable costs incurred to date are recognized as a reduction to the
cost of merchandise and are reflected in cost of sales as the merchandise is sold. Such amounts were not
significant in 2013.
Impairment of Long-Lived Assets, Goodwill and Other Intangibles
The Company performs an impairment review when circumstances indicate that the carrying value of long-lived
tangible and intangible assets with finite lives may not be recoverable. Management’s policy in determining
whether an impairment indicator exists, a triggering event, comprises measurable operating performance cri-
teria at the division level as well as qualitative measures. If an analysis is necessitated by the occurrence of a
triggering event, the Company uses assumptions, which are predominately identified from the Company’s stra-
tegic long-range plans, in determining in performing an impairment review. In the calculation of the fair value
of long-lived assets, the Company compares the carrying amount of the asset with the estimated future cash
flows expected to result from the use of the asset. If the carrying amount of the asset exceeds the estimated
expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing
the carrying amount of the asset with its estimated fair value. The estimation of fair value is measured by
discounting expected future cash flows at the Company’s weighted-average cost of capital. Management
believes its policy is reasonable and is consistently applied. Future expected cash flows are based upon esti-
mates that, if not achieved, may result in significantly different results.
The Company reviews goodwill for impairment annually during the first quarter of its fiscal year or more fre-
quently if impairment indicators arise. The review of impairment consists of either using a qualitative approach
to determine whether it is more likely than not that the fair value of the assets is less than their respective
carrying values or a two-step impairment test, if necessary. In performing the qualitative assessment, we con-
sider many factors in evaluating whether the carrying value of goodwill may not be recoverable, including
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