Pier 1 2012 Annual Report Download - page 37

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 or if regulations change, actual gift card breakage may differ from the
amounts recorded. For all periods presented, estimated gift card breakage was recognized 30 months after the
original issuance and was $3.8 million, $4.2 million, and $4.6 million in fiscal 2012, 2011, and 2010,
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
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.
Insurance provision – The Company maintains insurance for workers’ compensation and general
liability claims with deductibles of $1,000,000 per occurrence. 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 loss development factors as well as information obtained from and
projections made by the Company’s insurance carrier and third party claims administrators. The recorded
liabilities for workers’ compensation and general liability insurance, including those claims occurring in prior
years but not yet settled and reserves for fees, at February 25, 2012 were $17.4 million and $6.0 million,
respectively, compared to $17.7 million and $5.8 million, respectively, as of February 26, 2011.
The assumptions made in determining the above estimates are reviewed monthly and the liability adjusted
accordingly as new facts are developed. Changes in circumstances and conditions affecting the assumptions used
in determining the liabilities could cause actual results to differ from the Company’s recorded amounts.
Defined benefit plans – The Company maintains supplemental retirement plans (the “Plans”) for certain
of its current and former executive officers. The Plans provide that upon death, disability, reaching retirement
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