Restoration Hardware 2015 Annual Report Download - page 57

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54
Revenue Recognition
We recognize revenues and the related cost of goods sold when merchandise is received by our customers. Revenues from
direct-to-customer and home-delivered sales are recognized when the merchandise is delivered to the customer. Revenues from “cash-
and-carry” store sales are recognized at the point of sale in the store. Discounts or other accommodations provided to customers are
accounted for as a reduction of sales.
We recognize shipping and handling fees as revenue when the merchandise is received by our customers. Costs of shipping and
handling are included in cost of goods sold.
Sales tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities.
We reserve for projected merchandise returns based on actual, historical experience and various other assumptions that we
believe to be reasonable. Actual merchandise returns are monitored regularly and have not been materially different from the estimates
recorded. Merchandise returns are granted for various reasons, including delays in product delivery, product quality issues, customer
preference and other similar matters. Product returned often represents merchandise that can be resold. Amounts refunded to
customers are generally made by issuing the same payment tender as used in 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.
Our customers may return purchased items for a refund. We provide an allowance for sales returns, net of cost of goods sold,
based on historical return rates.
Merchandise Inventories
Our merchandise inventories are comprised of finished goods and are carried at the lower of cost or market, with cost
determined on a weighted-average cost method and market determined based on the estimated net realizable value. To determine if the
value of inventory should be marked down below original cost, we consider current and anticipated demand, customer preference and
the merchandise age. The inventory value is adjusted periodically to reflect current market conditions, which requires management
judgments that may significantly affect the ending inventory valuation, as well as gross margin. The significant estimates used in
inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and
estimates of inventory shrinkage. We adjust our inventory for obsolescence based on historical trends, aging reports, specific
identification and our estimates of future retail sales prices.
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 our annual physical inventory count. Actual inventory shrinkage and obsolescence can vary from estimates due to factors
including the mix of our inventory (which ranges from large furniture to decorative accessories) and execution against loss prevention
initiatives in our stores, distribution centers, off-site storage locations and with third-party transportation providers.
Due to these factors, our 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 observed obsolescence or periodic updates of our
shrinkage estimates differ from our original estimates, we adjust our 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 our net
income or inventory balances. We have not made any material changes to our assumptions included in the calculations of the
obsolescence and shrinkage reserves during the periods presented or recorded significant adjustments related to the physical inventory
process.
Advertising Expenses
Advertising expenses primarily represent the costs associated with our catalog mailings, as well as print and website marketing.