Neiman Marcus 2008 Annual Report Download - page 49

Table of Contents
The areas requiring significant management judgment related to the valuation of our inventories include 1) setting the
original retail value for the merchandise held for sale, 2) recognizing merchandise for which the customer's perception of value has
declined and appropriately marking the retail value of the merchandise down to the perceived value and 3) estimating the shrinkage
that has occurred between physical inventory counts. These judgments and estimates, coupled with the averaging processes within the
retail method can, under certain circumstances, produce varying financial results. Factors that can lead to different financial results
include 1) determination of original retail values for merchandise held for sale, 2) identification of declines in perceived value of
inventories and processing the appropriate retail value markdowns and 3) overly optimistic or conservative estimation of shrinkage. In
prior years, we have made no material changes to our estimates of shrinkage or markdown requirements on inventories held as of the
end of our fiscal years. We do not believe that the assumptions used in these estimates at August 1, 2009 will change significantly
based upon our prior experience or that changes in these estimates, if any, will have a material effect on our future operating
performance.
Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise
we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we
earn in connection with the sales of the vendor's merchandise. These allowances result in an increase to gross margin when we earn
the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to
acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are
sold. The amounts of vendor allowances we received did not have a significant impact on the year-over-year change in gross margin
during fiscal years 2009, 2008 or 2007. We received vendor allowances of $107.7 million, or 3.0% of revenues, in fiscal year 2009,
$109.6 million, or 2.4% of revenues, in fiscal year 2008 and $96.1 million, or 2.2% of revenues, in fiscal year 2007.
Long-lived Assets. Property and equipment are stated at cost less accumulated depreciation. For financial reporting purposes,
we compute depreciation principally using the straight-line method over the estimated useful lives of the assets. Buildings and
improvements are depreciated over five to 30 years while fixtures and equipment are depreciated over three to 15 years. Leasehold
improvements are amortized over the shorter of the asset life or the lease term (which may include renewal periods when exercise of
the renewal option is at our discretion and considered reasonably assured at the inception of the lease). Costs incurred for the
development of internal computer software are capitalized and amortized using the straight-line method over three to ten years.
To the extent we remodel or otherwise replace or dispose of property and equipment prior to the end of the assigned
depreciable lives, we could realize a loss or gain on the disposition. To the extent assets continue to be used beyond their assigned
depreciable lives, no depreciation expense is incurred. We reassess the depreciable lives of our long-lived assets in an effort to reduce
the risk of significant losses or gains at disposition and the utilization of assets with no depreciation charges. The reassessment of
depreciable lives involves utilizing historical remodel and disposition activity and forward-looking capital expenditure plans.
We assess the recoverability of the carrying values of our store assets, consisting of property and equipment, customer lists
and favorable lease commitments, annually and upon the occurrence of certain events (e.g., opening a new store near an existing store
or announcing plans for a store closing). The recoverability assessment requires judgment and estimates of future store generated cash
flows. The underlying estimates of cash flows include estimates for future revenues, gross margin rates and store expenses. We base
these estimates upon the stores' past and expected future performance. New stores may require two to five years to develop a customer
base necessary to generate the cash flows of our more mature stores. To the extent our estimates for revenue growth and gross margin
improvement are not realized, future annual assessments could result in impairment charges.
Indefinite-Lived Intangible Assets and Goodwill. Indefinite-lived intangible assets, such as tradenames, and goodwill, are
not subject to amortization. Rather, we assess the recoverability of indefinite-lived intangible assets and goodwill in the fourth quarter
of each fiscal year and upon the occurrence of certain events.
The recoverability assessment with respect to each of the tradenames used in our operations requires us to estimate the fair
value of the tradename as of the assessment date. Such determination is made using discounted cash flow techniques. Inputs to the
valuation model include:
• future revenue and profitability projections associated with the tradename;
• estimated market royalty rates that could be derived from the licensing of our tradenames to third parties in order to
establish the cash flows accruing to the benefit of the Company as a result of our ownership of our tradenames; and
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