Pier 1 2016 Annual Report Download - page 37

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Company’s key drivers of cash flows are sales, management of inventory levels, vendor payment terms, management of
expenses and capital expenditures. The Company’s focus remains on managing inventory purchases, managing those
inventories, and continuing to evolve the Company’s merchandise offerings while also maximizing its revenues, seeking out ways
to make its cost base more efficient and effective and preserving liquidity. While there can be no assurance that the Company will
sustain positive cash flows or profitability over the long-term, given the Company’s cash position and the various liquidity options
available, the Company believes it has sufficient liquidity to fund its obligations, including debt-related payments, capital
expenditure requirements, cash dividends and share repurchases through fiscal 2017.
OFF-BALANCE SHEET ARRANGEMENTS
Other than the operating leases, letters of credit and purchase obligations discussed above, the Company has no off-balance
sheet arrangements.
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. 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 — Revenue is recognized upon customer receipt or delivery for retail sales. A reserve has been
established for estimated merchandise returns based upon historical experience and other known factors. Should actual returns
differ from the Company’s estimated reserve for merchandise returns, revisions to the estimate may be required. The Company’s
revenues are reported net of discounts and returns, net of sales tax, and include wholesale sales and royalties. Amounts billed to
customers for shipping and handling are included in net sales.
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 merchandise 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 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
PIER 1 IMPORTS, INC. 2016 Form 10-K 31