Restoration Hardware 2012 Annual Report Download - page 141

Reserves for shrinkage are estimated and recorded throughout the period as a percentage of net sales based
on historical shrinkage results and current inventory levels. Actual shrinkage is recorded throughout the year
based upon periodic cycle counts and the results of the Company’s annual physical inventory count. Actual
inventory shrinkage and obsolescence can vary from estimates due to factors including the mix of the Company’s
inventory (which ranges from large furniture to decorative accessories) and execution against loss prevention
initiatives in the Company’s stores, distribution centers, off-site storage locations and with its third-party
transportation providers.
Due to these factors, the Company’s obsolescence and shrinkage reserves contain uncertainties. Both
estimates have calculations that require management to make assumptions and to apply judgment regarding a
number of factors, including market conditions, the selling environment, historical results and current inventory
trends. If actual obsolescence or shrinkage estimates change from the Company’s original estimates, the
Company will adjust its inventory reserves accordingly throughout the period. Management does not believe that
changes in the assumptions used in these estimates would have a significant effect on the Company’s net income
(loss) or inventory balances. The Company’s inventory reserve balances were $5.9 million and $5.6 million as of
February 2, 2013 and January 28, 2012, respectively.
Prepaid Catalog and Advertising Expenses
Advertising expenses primarily represent the costs associated with the Company’s catalog mailings, as well
as print and website marketing. All advertising costs are expensed as incurred, with the exception of prepaid
catalog expenses. Prepaid catalog expenses consist primarily of third-party incremental direct costs to prepare,
print and distribute catalogs. Such costs are capitalized as prepaid catalog expenses and are amortized over their
expected period of future benefit. Such amortization is based upon the ratio of actual revenues to the total of
actual and estimated future revenues on an individual catalog basis. Estimated future revenues are based upon
various factors such as the total number of catalogs and pages circulated, the probability and magnitude of
consumer response and the assortment of merchandise offered. Each catalog is generally fully amortized within
an eight- to nine-month period, with the majority of the amortization occurring within the first five to six months.
Prepaid catalog expenses are evaluated for realizability on a regular basis by comparing the carrying amount
associated with each catalog to the estimated probable remaining future sales associated with that catalog. The
Company had $43.8 million and $28.6 million of prepaid catalog costs that are included in prepaid expense and
other current assets on the consolidated balance sheets as of February 2, 2013, and January 28, 2012,
respectively.
Advertising costs, recorded in selling, general and administrative expenses, were $98.8 million, $66.9
million, and $56.1 million in fiscal 2012, fiscal 2011, and fiscal 2010, respectively.
Property and Equipment
Property and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation
is calculated using the straight-line method, generally using the following useful lives:
Category of Property and Equipment Useful Life
Building 40 years
Furniture, fixtures and equipment 3 to 7 years
Machinery and equipment 3 to 5 years
Computer software 3 years
The cost of leasehold improvements and lease acquisitions is amortized over the lesser of the useful life of
the asset or the applicable lease term.
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Form 10-K