Pier 1 2015 Annual Report Download - page 37

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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.
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
distribution center using vendor invoices, the cost of warehousing and transporting product to the stores and other direct costs
associated with purchasing merchandise. 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 maintains a reserve for estimated
shrinkage since the last physical count, when actual shrinkage was recorded. The amount of the reserve 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 $1.0 million 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 broker, actuary, insurance carriers and third
party claims administrators. The recorded liabilities for workers’ compensation and general liability claims include claims occurring
in prior years but not yet settled and reserves for fees.
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 for certain of its current and former executive
officers. These plans provide that upon death, disability, reaching retirement age or certain termination events, a participant will
receive benefits based on highest compensation, years of service and years of plan participation. The benefit costs are
dependent upon numerous factors, assumptions and estimates. Benefit costs may be significantly affected by changes in key
actuarial assumptions such as discount rates, compensation rates or retirement dates used to determine the projected benefit
obligation. Additionally, changes made to the provisions of the plans may impact current and future benefit costs.
Stock-based compensation — The Company’s stock-based compensation relates to stock options, restricted stock awards
and director deferred stock units. Accounting guidance requires all companies to measure and recognize compensation expense
at an amount equal to the fair value of share-based payments granted. Compensation expense is recognized for any unvested
stock option awards and restricted stock awards on a straight-line basis or ratably over the requisite service period. Stock option
exercise prices equal the fair market value of the shares on the date of the grant. The fair value of stock options is calculated
using a Black-Scholes option pricing model. For time-based and certain performance-based restricted stock awards,
compensation expense is measured and recorded using the closing price of the Company’s stock on the date of grant. If the
date of grant for stock options or restricted stock awards occurs on a day when the Company’s stock is not traded, the closing
price on the last trading day before the date of grant is used. The time-based awards typically vest ratably over the requisite
service period provided that the participant is employed on the vesting date. A portion of the performance-based shares vests
upon the Company satisfying certain performance targets. Performance-based shares are considered granted for accounting
purposes on the date the performance targets are set. The Company records compensation expense for these awards with a
performance condition when it is probable that the condition will be achieved. The compensation expense ultimately recognized,
if any, related to these awards will equal the grant date fair value for the number of shares for which the performance condition
PIER 1 IMPORTS, INC. 2015 Form 10-K 31