Pier 1 2011 Annual Report Download - page 37

Download and view the complete annual report

Please find page 37 of the 2011 Pier 1 annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 144

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s consolidated financial statements in accordance with accounting
principles generally accepted in the United States requires the use of estimates that affect the reported value of
assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results of which form the basis for the
Company’s conclusions. The Company continually evaluates the information used to make these estimates as the
business and the economic environment changes. Historically, actual results have not varied materially from the
Company’s estimates, with the exception of the impairment of long-lived assets, the early retirement of
participants in its defined benefit plans, and income taxes as discussed below. The Company does not currently
anticipate a significant change in its assumptions related to these estimates. Actual results may differ from these
estimates under different assumptions or conditions. The Company’s significant accounting policies can be found
in Note 1 of the Notes to Consolidated Financial Statements. The policies and estimates discussed below include
the financial statement elements that are either judgmental or involve the selection or application of alternative
accounting policies and are material to the Company’s financial statements. Unless specifically addressed below,
the Company does not believe that its critical accounting policies are subject to market risk exposure that would
be considered material and as a result, has not provided a sensitivity analysis. The use of estimates is pervasive
throughout the consolidated financial statements, but the accounting policies and estimates considered most
critical are as follows:
Revenue recognition – The Company recognizes revenue from retail sales, net of sales tax and third-
party credit card fees, upon customer receipt or delivery of merchandise. The Company records an allowance for
estimated merchandise returns based upon historical experience and other known factors. Should actual returns
differ from the Company’s estimates and current provision for merchandise returns, revisions to the estimated
merchandise returns may be required.
Gift cards – Revenue associated with gift cards is recognized when merchandise is sold and a gift card is
redeemed as payment. Gift card breakage is estimated and recorded as income based upon an analysis of the
Company’s historical data and expected trends in redemption patterns and represents the remaining unused
portion of the gift card liability for which the likelihood of redemption is remote. If actual redemption patterns
vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. For all
periods presented, gift card breakage was recognized at 30 months from the original issuance and was $4.2
million, $4.6 million, and $4.1 million in fiscal 2011, 2010, and 2009, respectively.
Inventories – The Company’s inventory is comprised of finished merchandise and is stated at the lower
of weighted average cost or market value. Cost is calculated based upon the actual landed cost of an item at the
time it is received in the Company’s warehouse using 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 majority of inventory purchases and commitments are made in U.S. dollars in order
to limit the Company’s exposure to foreign currency fluctuations.
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
31