Restoration Hardware 2014 Annual Report Download - page 89

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The Company reserves for projected merchandise returns. Merchandise returns are often resalable
merchandise and are refunded by issuing the same payment tender of the original purchase. Merchandise
exchanges of the same product and price are not considered merchandise returns and, therefore, are excluded
when calculating the sales returns reserve.
The Company’s customers may return purchased items for a refund. The Company provides an allowance
for sales returns, net of cost of goods sold, based on historical return rates.
A summary of the allowance for sales returns, presented net of cost of goods sold, is as follows (in
thousands):
Fiscal Year Ended
January 31,
2015
February 1,
2014
February 2,
2013
As Revised (1)
Balance at beginning of fiscal year $ 12,142 $ 5,206 $ 3,181
Provision for sales returns 87,217 86,541 84,783
Actual sales returns (89,124) (79,605) (82,758)
Balance at end of fiscal year $ 10,235 $ 12,142 $ 5,206
(1) Refer to discussion in Revision of Prior Period Financial Statement Disclosures above.
Deferred Revenue and Customer Deposits
Deferred revenue represents the revenue associated with orders that have been shipped by the Company to
its customers but have not yet been received by the customer. As the Company recognizes revenue when the
merchandise is received by its customers, it is included as deferred revenue on the consolidated balance sheets
while in-transit.
Customer deposits represent payments made by customers on custom orders. At the time of purchase the
Company collects deposits for all custom orders equivalent to 50% of the customer purchase price. Custom order
deposits are recognized as revenue when the merchandise is received by the customer or at the time of
cancellation of the order by the customer.
Gift Cards, Gift Certificates and Merchandise Credits
The Company sells gift cards, gift certificates and issues merchandise credits to its customers in its stores
and through its websites and product catalogs. Such gift cards, gift certificates and merchandise credits do not
have expiration dates. Revenue associated with gift cards, gift certificates and merchandise credits is deferred
until either (i) redemption of the gift cards, gift certificate and merchandise credits or (ii) when the likelihood of
redemption is remote and there exists no legal obligation to remit the value of unredeemed gift cards, gift
certificates or merchandise credits to the relevant jurisdictions (breakage). The breakage rate is based on
monitoring of cards and certificates issued, actual card and certificate redemptions and the Company’s analysis
of when it believes it is remote that redemptions will occur.
Redeemed gift cards, gift certificates and merchandise credits are recorded in net revenues. Breakage
resulted in a reduction of selling, general and administrative expenses on the consolidated statements of
operations of $3.1 million, $2.9 million, and $1.8 million in fiscal 2014, fiscal 2013, and fiscal 2012,
respectively.
Self Insurance
The Company maintains insurance coverage for significant exposures, as well as those risks that, by law,
must be insured. In the case of the Company’s health care coverage for employees, the Company has a managed
85