Pier 1 2007 Annual Report Download - page 33

the Notes to Consolidated Financial Statements for additional information regarding the beneficial interest in
securitized receivables.
Inventories — The Company’s inventory is comprised of finished merchandise and is stated at the lower
of average cost or market, cost being determined on a weighted average inventory method. Cost is calculated
based upon the actual landed cost of an item at the time it is received in the Company’s warehouse using
actual vendor invoices, the cost of warehousing and transporting product to the stores and other direct costs
associated with purchasing products. Carrying values of inventory are analyzed and to the extent that the cost
of inventory exceeds the expected selling prices less reasonable costs to sell, provisions are made to reduce the
carrying amount of the inventory. The Company reviews its inventory levels in order to identify slow-moving
merchandise and uses merchandise markdowns to sell such merchandise. Markdowns are recorded to reduce
the retail price of such slow-moving merchandise as needed. Since the determination of carrying values of
inventory involves both estimation and judgment with regard to market values and reasonable costs to sell,
differences in these estimates could result in ultimate valuations that differ from the recorded asset.
The Company recognizes known inventory losses, shortages and damages when incurred and makes a
provision for estimated shrinkage. The amount of the provision is estimated based on historical experience
from the results of its physical inventories. Inventory is physically counted at substantially all locations at least
once in each 12-month period, at which time actual results are reflected in the financial statements. Physical
counts were taken at substantially all stores and distribution centers during each period presented in the
financial statements. Although inventory shrinkage rates have not fluctuated significantly in recent years,
should actual rates differ from the Company’s estimates, revisions to the inventory shrinkage expense may be
required. Most inventory purchases and commitments are made in U.S. dollars.
Impairment of long-lived assets — Long-lived assets such as buildings, equipment, furniture and fixtures,
and leasehold improvements are reviewed for impairment at least annually and whenever an event or change
in circumstances indicates that their carrying values may not be recoverable. If the carrying values exceed the
sum of the expected undiscounted cash flows, the assets are considered impaired. For store level long-lived
assets, expected cash flows are estimated based on management’s estimate of changes in sales, merchandise
margins, and expenses over the remaining expected terms of the leases. Impairment is measured as the amount
by which the carrying value of the asset exceeds the fair value of the asset. Fair value is determined by
discounting expected cash flows. Impairment, if any, is recorded in the period in which the impairment
occurred. The Company recorded $31.9 million and $5.6 million in impairment charges in fiscal 2007 and
fiscal 2006, respectively. As the projection of future cash flows requires the use of judgment and estimates, if
actual results differ from the Company’s estimates, additional charges for asset impairments may be recorded
in the future. For store level assets, if management had increased its assumptions of comparable store sales
declines by an additional 3% over the next four years, additional impairment charges of approximately
$5.0 million would have been recorded in fiscal 2007.
Insurance provision — The Company is self-insured with respect to medical coverage offered to eligible
employees except that claims in excess of $200,000 per occurrence per year are covered by a purchased
insurance policy. The Company records a provision for estimated claims that have been incurred but not
reported. Such claim amounts are estimated based on historical average claims per covered individual per
month and on the average historical lag time between the covered event and the time it is paid by the
Company. The liability for estimated medical claims incurred but not reported at March 3, 2007 was
$2.9 million.
During fiscal 2007, the Company maintained insurance for workers’ compensation and general liability
claims with a deductible of $1,000,000 and $750,000, respectively, per claim. The liability recorded for such
claims is determined by estimating the total future claims cost for events that occurred prior to the balance
sheet date. The estimates consider historical claims development factors as well as information obtained from
and projections made by the Company’s insurance carrier and underwriters. The recorded liabilities for
workers’ compensation and general liability claims at March 3, 2007 were $17.3 million and $6.3 million,
respectively.
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