Pier 1 2008 Annual Report Download - page 42

March 3, 2007 for fiscal 2008 and 2007, respectively. Fair value was determined through analyses of
discounted future cash flows for the applicable reporting units. The analysis resulted in a write-down of
goodwill and intangible assets, included in selling, general and administrative expenses, of approximately
$192,000 in fiscal 2008 and $4,422,000, primarily related to Pier 1 Kids, in fiscal 2007. As of March 1, 2008
and March 3, 2007, the Company’s intangible assets totaled $573,000 and $1,206,000, respectively. The
Company had no goodwill remaining as of the end of fiscal 2008 or fiscal 2007.
Revenue recognition — Revenue is recognized upon customer receipt or delivery for retail sales, including
sales under deferred payment promotions on the Company’s proprietary credit card in fiscal 2007 and prior
years. A reserve has been established for estimated merchandise returns based upon historical experience and
other known factors. The reserves for estimated merchandise returns at the end of fiscal years 2008 and 2007
were $1,559,000 and $3,215,000, respectively. The Company’s revenues are reported net of discounts and
returns, net of sales tax and third-party credit card fees, and include wholesale sales and royalties received
from franchise stores and Sears Roebuck de Mexico S.A. de C.V. Amounts billed to customers for shipping
and handling are included in net sales and the costs incurred by the Company for these items are recorded in
cost of sales.
Gift cards — Revenue associated with gift cards is recognized when merchandise is sold and a gift card
is redeemed as payment. Gift card breakage is estimated and recorded as income based upon an analysis of
the Company’s historical data and expected trends in redemption patterns and represents the remaining unused
portion of the gift card liability for which the likelihood of redemption is remote. If actual redemption patterns
vary from the Company’s estimates, actual gift card breakage may differ from the amounts recorded. For all
periods presented, gift card breakage was recognized after a period of 30 months from the original issuance
and was $1,699,000, $6,222,000 and $5,062,000 in fiscal 2008, 2007 and 2006, respectively. Gift card
breakage decreased in the current year as a result of increased redemption rates on more recently issued gift
cards.
Leases — The Company leases certain property consisting principally of retail stores, warehouses, and
material handling and office equipment under leases expiring through fiscal 2022. Most retail store locations
are leased for primary terms of ten years with varying renewal options and rent escalation clauses. Escalations
occurring during the primary terms of the leases are included in the calculation of the minimum lease
payments, and the rent expense related to these leases is recognized on a straight-line basis over this lease
term, including free rent periods prior to the opening of its stores. The portion of rent expense applicable to a
store before opening is included in selling, general and administrative expenses. Once opened for business,
rent expense is included in cost of sales. Certain leases provide for additional rental payments based on a
percentage of sales in excess of a specified base. This additional rent is accrued when it appears that the sales
will exceed the specified base. Construction allowances received from landlords are initially recorded as lease
liabilities and amortized as a reduction of rental expense over the primary lease term. The Company’s lease
obligations are operating leases under SFAS No. 13, “Accounting for Leases.”
Advertising costs — Advertising production costs are expensed the first time the advertising takes place.
Advertising costs were $55,122,000, $109,540,000 and $92,245,000 in fiscal 2008, 2007 and 2006, respec-
tively. Prepaid advertising at the end of fiscal years 2008 and 2007 was $2,096,000 and $1,556,000,
respectively.
Defined benefit plans — The Company maintains supplemental retirement plans (the “Plans”) for certain
of its current and former executive officers. The Plans provide that upon death, disability, reaching retirement
age or certain termination events, a participant will receive benefits based on highest compensation, years of
service and years of plan participation. These benefit costs are dependent upon numerous factors, assumptions
and estimates. Benefit costs may be significantly affected by changes in key actuarial assumptions such as the
discount rate, compensation increase rates, or retirement dates used to determine the projected benefit
obligation. Additionally, changes made to the provisions of the Plans may impact current and future benefit
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)