Stein Mart 2012 Annual Report Download - page 38

STEIN MART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables in thousands, except per share amounts)
F-10
During the second quarter of 2012, we updated certain assumptions on our obligations for unused gift and merchandise return card
balances. In 2012, 2011 and 2010, we recognized $3.0 million, $1.0 million and $10.3 million, respectively, of breakage income on unused
gift and merchandise return cards. Breakage income is recognized when the likelihood of the card being redeemed by the customer is
remote and we have determined that there is no legal obligation to remit card balances to relevant jurisdictions. We follow the Redemption
Recognition Method to account for breakage of unused cards where breakage is recognized as cards are redeemed for the purchase of
merchandise based upon a historical breakage rate over an estimated redemption period. Breakage income is recorded within Selling,
general and administrative expenses (“SG&A”) in the Consolidated Statements of Income.
Co-Brand and Private Label Credit Card Programs. We offer a co-branded credit card and a private label credit card under the Stein
Mart brand. These cards are issued by a third-party bank, GE Capital Retail Bank (“GE”). GE extends credit directly to cardholders and
provides all servicing for the credit card accounts and bears all credit and fraud losses. Once a card is activated, the co-branded credit
card customers are eligible to participate in the credit card rewards program, which provides for an incentive to cardholders in the form of
reward certificates upon the cumulative purchase of an established amount. Stein Mart cardholders also receive special promotional offers
and advance notice of in-store sales events. In 2012, 2011 and 2010, we recognized $2.3 million, $6.5 million and $5.5 million,
respectively, of income from these programs which are recorded within SG&A in the Consolidated Statements of Income.
Operating Leases. We lease all of our retail stores under operating leases. Certain lease agreements contain rent holidays, and/or rent
escalation clauses. Except for contingent rent, we recognize rent expense on a straight-line basis over the lease term and record the
difference between the amount charged to expense and the rent paid as a deferred rent liability. Contingent rent, determined based on a
percentage of sales in excess of specified levels, is recognized as rent expense when achievement of the specified sales that triggers the
contingent rent is probable. Construction allowances and other such lease incentives are recorded as a deferred rent liability and are
amortized on a straight-line basis as a reduction of rent expense.
Advertising Expense. Advertising costs are expensed as incurred. Advertising expenses of $52.4 million, $56.6 million and $53.8 million
are reflected in SG&A expenses in the Consolidated Statements of Income for 2012, 2011 and 2010, respectively.
Income Taxes. We follow the guidance in ASC Topic 740, Income Taxes, which requires recognition of deferred tax assets and liabilities
for the expected future income tax consequences of events that have been included in the consolidated financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying
amounts and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance for amounts that do not satisfy required realization criteria. See Note 7
for further discussion.
Share-Based Compensation. We follow the guidance in ASC Topic 718, Stock Compensation, to record share-based compensation.
Pursuant to the guidance, we recognize expense in the financial statements for the fair values of all share-based payments to employees
over the employees’ requisite service periods.
Earnings Per Share (“EPS”). We follow the guidance of ASC Topic 260, Earnings Per Share, which clarifies that unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and are to be included in the computation of EPS under the two-class method. Our restricted stock awards are considered “participating
securities” because they contain non-forfeitable rights to dividends. Under the two-class method, EPS is computed by dividing earnings
allocated to common shareholders by the weighted-average number of common shares outstanding for the period. In applying the two-
class method, earnings are allocated to both common stock shares and participating securities based on their respective weighted-average
shares outstanding for the period.