Ross 2006 Annual Report Download - page 41

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Trade letters of credit. We had $26.0 million and $16.5 million in trade letters of credit outstanding at February 3, 2007 and
January 28, 2006, respectively.
Other Activities
Albertsons real estate transaction. In October 2006, we announced an agreement with Albertsons LLC to acquire certain
leasehold rights to 46 former Albertsons sites in California, Florida, Texas, Arizona, Colorado and Oklahoma. We plan to incor-
porate about 40 of these sites into our 2007 expansion program. This real estate opportunity allowed us to acquire a substantial
number of store sites in several of our established, top performing markets. We expect to realize incremental contributions to
earnings and cash flow from these additional locations beginning in fiscal year 2007. We expect these leases will be finalized
over the next several months.
Distribution center purchase. In May 2006, we exercised our option to purchase our Fort Mill, South Carolina distribution
center and paid cash in the amount of $87.3 million to acquire the facility from the lessor. We estimated the fair value of the
components of the facility and the related equipment using various valuation techniques, including appraisals, market prices,
and cost data. The amounts we recorded for each component were based on these fair value estimates.
Critical Accounting Policies
The preparation of our consolidated financial statements requires our management to make estimates and assumptions that affect
the reported amounts. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experi-
ence and on various other factors that management believes to be reasonable. We believe the following critical accounting policies
describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Merchandise inventory. Our merchandise inventory is stated at the lower of cost or market, with cost determined on a weighted
average cost basis. We purchase manufacturer overruns and canceled orders both during and at the end of a season which are
referred to as "packaway" inventory. Packaway inventory is purchased with the intent that it will be stored in our warehouses until
a later date, which may even be the beginning of the same selling season in the following year.
Included in the carrying value of our merchandise inventory is a provision for shortage. The shortage reserve is based on histori-
cal shortage rates as evaluated through our periodic physical merchandise inventory counts and cycle counts. If actual market
conditions, markdowns, or shortage are less favorable than those projected by us, or if sales of the merchandise inventory are
more difficult than anticipated, additional merchandise inventory write-downs may be required.
Long-lived assets. We record a long-lived asset impairment charge when events or changes in circumstances indicate that the
carrying amount of a long-lived asset may not be recoverable based on estimated future cash flows. An impairment loss would
be recognized if analysis of the undiscounted cash flow of an asset group was less than the carrying value of the asset group.
If our actual results differ materially from projected results, an impairment charge may be required in the future. During 2004,
we recognized an impairment charge of $15.8 million before taxes to write-down the carrying value of our Newark Facility. In
the course of performing our annual analysis, we determined that no other long-lived asset impairment charge was required for
fiscal 2006, 2005, or 2004.
Depreciation and amortization expense. Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, typically rang-
ing from five to twelve years for equipment and 20 to 40 years for real property. The cost of leasehold improvements is amortized
over the lesser of the useful life of the asset or the applicable lease term.
Lease accounting. Beginning in the first quarter of 2006, we implemented prospectively FASB Staff Position (“FSP”) 13-1,
“Accounting for Rental Costs Incurred During a Construction Period,” which requires that rental costs incurred during a construc-
tion period be expensed, not capitalized. Implementation of this new standard did not have a significant impact on our financial
results for the year ended February 3, 2007. When a lease contains “rent holidays” or requires fixed escalations of the minimum
lease payments, we record rental expense on a straight-line basis over the term of the lease and the difference between the
average rental amount charged to expense and the amount payable under the lease is recorded as deferred rent. We amortize