Quarterly report pursuant to Section 13 or 15(d)

Goodwill and Other Intangible Assets

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Goodwill and Other Intangible Assets
9 Months Ended
Nov. 03, 2018
Goodwill and Other Intangible Assets  
Goodwill and Other Intangible Assets

13.  Goodwill and Other Intangible Assets

 

Goodwill

 

Goodwill allocated to our reportable segments and changes in the net carrying amount of goodwill for the nine months ended November 3, 2018 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

    

Retail

    

Apparel

    

Total

 

Balance at February 3, 2018

 

$

94,305

 

$

25,987

 

$

120,292

 

Goodwill impairment charge

 

 

 —

 

 

(23,991)

 

 

(23,991)

 

Goodwill of divested business (see Note 2)

 

 

(13,588)

 

 

 —

 

 

(13,588)

 

    Translation adjustment

 

 

(1,242)

 

 

(1,996)

 

 

(3,238)

 

Balance at November 3, 2018

 

$

79,475

 

$

 —

 

$

79,475

 

 

Goodwill is evaluated for impairment at least annually. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. Such events or circumstances could include, but are not limited to, new significant negative industry or economic trends, unanticipated changes in the competitive environment, decisions to significantly modify or dispose of operations and a significant sustained decline in the market price of our stock.

 

During the third quarter of 2018, sales, profitability and cash flow of our corporate apparel reporting unit underperformed in comparison to our forecast.  The performance of our corporate apparel business was and continues to be impacted by increasing uncertainty surrounding Brexit, which is resulting in lower replenishment demand from existing accounts in the United Kingdom (“UK”).  In addition, in the third quarter of 2018, we received notification from a significant U.S. customer of their decision not to renew their existing agreement with us in 2019. As a result of the continued uncertainty surrounding Brexit and the notification from our U.S. customer, we appropriately lowered our forecast of sales, profitability and cash flow for the corporate apparel reporting unit for the fourth quarter of 2018 and future years.

   

As a result of the factors above, we determined that a triggering event occurred during the third quarter of 2018 and an interim goodwill impairment test for our corporate apparel reporting unit was required.  We concluded that the reporting unit’s goodwill was fully impaired and recorded a non-cash goodwill impairment charge of $24.0 million during the third quarter of 2018, which is included as a separate line in the condensed consolidated statement of earnings.  As of November 3, 2018, October 28, 2017, and February 3, 2018, accumulated goodwill impairment totaled $804.0 million, $778.5 million and $780.0 million, respectively. 

 

Consistent with the procedures followed in our annual impairment test, we estimated the fair value of the reporting unit using a combined income and market comparable approach.  Our income approach uses projected future cash flows that are discounted using a weighted‑average cost of capital analysis that reflects current market conditions.  The market comparable approach primarily considers market price multiples of comparable companies and applies those price multiples to certain key drivers of the reporting unit.  We believe these two approaches are appropriate valuation techniques and we weighted the two values equally as an estimate of reporting unit fair value for the purposes of our impairment testing. 

 

Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions. Critical assumptions used in the interim impairment test for the corporate apparel reporting unit included:

 

·

The potential future cash flows of the reporting unit.  The income approach relies on the timing and estimates of future cash flows. The projections use management’s estimates of economic and market conditions over the projected period, including growth rates in revenue, gross margin and expense (all Level 3 inputs in the fair value hierarchy). 

·

Selection of an appropriate discount rate.  The income approach requires the selection of an appropriate discount rate, which is based on a weighted‑average cost of capital analysis. The discount rate is affected by changes in short‑term interest rates and long‑term yield as well as variances in the typical capital structure of marketplace participants. The weighted‑average cost of capital used to discount the cash flows for the interim goodwill impairment test was 13.5%, which is 100 basis points higher than the last annual test, reflecting the increasing uncertainty surrounding Brexit.

·

Selection of comparable companies within the industry.  For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant key drivers from a group of companies that are comparable to the reporting unit being tested and applying those price multiples to the key drivers of the reporting unit. The determination of the market comparable also involves a degree of judgment. Earnings multiples used in the market comparable approach for the interim goodwill impairment test ranged from 5.5 to 8.0.

 

During the third quarter of 2018, we also performed an interim impairment test of the intangible assets of the corporate apparel reporting unit totaling $10.7 million, consisting of a customer relationship asset with a carrying value of $8.2 million and tradenames with a carrying value of $2.5 million and determined, as of November 3, 2018, that none were impaired.

 

Intangible Assets 

 

The gross carrying amount and accumulated amortization of our identifiable intangible assets are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

November 3,

    

October 28,

 

February 3,

 

 

    

2018

    

2017

    

2018

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

Carrying amount:

 

 

 

 

 

 

 

 

 

 

Trademarks, tradenames and franchise agreements

 

$

16,048

 

$

16,074

 

$

16,273

 

Favorable leases

 

 

12,695

 

 

13,475

 

 

13,229

 

Customer relationships

 

 

26,343

 

 

26,612

 

 

28,713

 

Total carrying amount

 

 

55,086

 

 

56,161

 

 

58,215

 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

Trademarks, tradenames and franchise agreements

 

 

(10,709)

 

 

(10,404)

 

 

(10,558)

 

Favorable leases

 

 

(5,629)

 

 

(4,856)

 

 

(5,010)

 

Customer relationships

 

 

(18,153)

 

 

(16,078)

 

 

(17,992)

 

Total accumulated amortization

 

 

(34,491)

 

 

(31,338)

 

 

(33,560)

 

Total amortizable intangible assets, net

 

 

20,595

 

 

24,823

 

 

24,655

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

Trademarks and tradename

 

 

144,238

 

 

144,249

 

 

144,332

 

Total intangible assets, net

 

$

164,833

 

$

169,072

 

$

168,987

 

 

Pre-tax amortization expense associated with intangible assets subject to amortization totaled $1.0 million and $2.9 million for the three and nine months ended November 3, 2018.  Pre-tax amortization expense associated with intangible assets subject to amortization totaled $1.0 million and $3.1 million for the three and nine months ended October 28, 2017.  Pre-tax amortization associated with intangible assets subject to amortization at November 3, 2018 is estimated to be $0.9 million for the remainder of fiscal 2018,  $3.7 million for fiscal 2019,  $3.5 million for fiscal 2020,  $3.4 million for fiscal 2021 and $2.1 million for fiscal 2022.