Restoration Hardware 2014 Annual Report Download - page 84

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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
or inventory balances. The Company’s inventory reserve balances were $14.6 million and $9.3 million as of
January 31, 2015 and February 1, 2014, respectively.
Advertising Expenses
Advertising expenses primarily represent the costs associated with the Company’s catalog mailings, as well
as print and website marketing. Total advertising costs, recorded in selling, general and administrative expenses,
were $114.7 million, $83.0 million, and $98.8 million in fiscal 2014, fiscal 2013, and fiscal 2012, respectively.
Capitalized Catalog Costs
Capitalized catalog costs consist primarily of third-party incremental direct costs to prepare, print and
distribute Source Books. Such costs are capitalized and 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 Source Book basis. Estimated future revenues are based upon various factors such as the total
number of Source Books and pages circulated, the probability and magnitude of consumer response and the
merchandise assortment offered. Each Source Book is generally fully amortized within a twelve-month period
after they are mailed and the majority of the amortization occurs within the first six to ten months, with the
exception of the Holiday Source Books, which are generally fully amortized within a six-month period after they
are mailed. Capitalized catalog costs are evaluated for realizability on a regular basis by comparing the carrying
amount associated with each Source Book to the estimated probable remaining future sales associated with that
Source Book.
The Company’s catalog amortization calculation requires management to make assumptions and to apply
judgment regarding a number of factors, including market conditions, the selling environment and the probability
and magnitude of consumer response to certain Source Books and merchandise assortment offered. If actual
revenues associated with the Company’s Source Books differ from its original estimates, the Company adjusts its
catalog amortization schedules accordingly. Management does not believe that changes in the assumptions used
in these estimates would have a significant effect on the Company’s net income as changes in the assumptions do
not impact the total cost of the Source Books to be amortized. However, changes in the assumptions could impact
the timing of the future catalog amortization expense recorded to the consolidated statement of operations.
During fiscal 2013, the Company modified its Source Book strategy and eliminated its Fall Source Book. The
Company therefore made changes to its assumptions regarding the estimated future revenues and the period over
which such revenues would be earned related to its Spring 2013 Source Books. As a result, the amortization period
for the Spring 2013 Source Books increased from an eight- to nine-month period to a twelve-month period.
The Company had $46.9 million and $49.3 million of capitalized catalog costs that are included in prepaid
expense and other current assets on the consolidated balance sheets as of January 31, 2015, and February 1, 2014,
respectively.
Website and Print Advertising
Website and print advertising expenses, which include e-commerce advertising, web creative content and
direct marketing activities such as print media, radio and other media advertising, are expensed as incurred or
upon the release of the content or the initial advertisement.
80