Rue 21 2012 Annual Report Download - page 50

rue21, inc.
Notes to Consolidated Financial Statements — Continued
Deferred Rent and Tenant Allowances
Deferred rent is recognized when a lease contains a predetermined fixed escalation of minimum rent. The
Company recognizes the related rent expense on a straight-line basis from possession date and records the
difference between the recognized rental expense and the amounts payable under the lease as deferred rent liability.
Also included in deferred rent are tenant allowances received from landlords in accordance with negotiated lease
terms. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of
the lease (including the pre-opening build-out period). The short-term portion of deferred rent is recorded in accrued
expenses and other current liabilities and the long-term portion is included in deferred rent, tenant allowances and
other long-term liabilities in the accompanying Consolidated Balance Sheets.
Insurance and Self-Insurance
The Company uses a combination of insurance and self-insurance for a number of risk management activities
including workers’ compensation, general liability, automobile liability, and employee-related health care benefits, a
portion of which is paid by the employees. Costs related to claims are accrued based on known claims and historical
experiences of incurred but not reported claims received from our insurers. The Company believes that it has
adequately reserved for its self-insurance liability, which is capped through the use of stop-loss contracts and
specified retentions with insurance companies. However, any significant variation of future claims from historical
trends could cause actual results to differ from the accrued liability.
Revenue Recognition
Revenue is recognized upon purchase of merchandise by customers. Allowances for sales returns are recorded
as a reduction of net sales in the periods in which the sales are recognized. Consistent with our merchandise return
policy of 30 days, the allowance for sales returns at each period end is calculated and recorded based upon an
estimate of expected returns over a subsequent 30-day period. The allowance for sales returns was $0.7 million,
$0.6 million, and $0.4 million for the fiscal years 2012, 2011, and 2010 respectively. Sales tax collected from
customers is excluded from revenue and is included as part of accrued expenses and other current liabilities on the
Company’s Consolidated Balance Sheets.
Deferred revenue is established upon the purchase of gift cards by customers, and revenue is recognized upon
redemption of gift cards for merchandise. The Company evaluated unredeemed gift cards and determined that the
likelihood of certain gift cards being redeemed by the customer after 18 months was remote, based upon historical
redemption patterns of gift cards. We have established a wholly-owned subsidiary to administer the gift card
program within a state jurisdiction that does not require remittance of unclaimed property. For those gift cards that
were determined redemption would be remote, the Company reversed the liability, and recorded gift card breakage
income. Gift card breakage income of $0.7 million, $0.8 million and $0.3 million was recognized for the fiscal
years 2012, 2011, and 2010, respectively. Gift card breakage income is recorded as reduction to cost of goods sold.
Cost of Goods Sold
Cost of goods sold includes costs related to merchandise sold, distribution and warehousing, freight from the
distribution center to the stores, store occupancy, and buying and merchandising department expenses. Cost of
goods sold is reduced by certain vendor allowances received, primarily for markdowns, merchandise marked out of
stock and vendor non-compliance charges.
Selling, General and Administrative Expense
Selling, general and administrative expense includes administration, share-based compensation and store
expenses but excludes store occupancy costs and freight to stores.
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