Quarterly report pursuant to Section 13 or 15(d)

Revenue Recognition

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Revenue Recognition
9 Months Ended
Nov. 02, 2019
Revenue Recognition  
Revenue Recognition

6. Revenue Recognition

Adoption of ASC 606

Effective February 4, 2018, we adopted ASC 606, Revenue from Contracts with Customers and all related amendments (“ASC 606”), to all contracts using the modified retrospective approach.  We recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings.  The adoption had no impact to our previously reported results of operations or cash flows.  

The following table depicts the cumulative effect of the changes made to our February 3, 2018 balance sheet for the adoption of ASC 606 (in thousands):

Reported

Adjusted

Balance at

Impact of

Balance at

February 3,

Adoption of

February 3,

    

2018

    

ASC 606

    

2018

 

Assets:

Accounts receivable, net

$

36,288

$

(303)

$

35,985

Other current assets

 

77,228

 

2,753

 

79,981

Current assets - discontinued operations

182,862

(17,837)

165,025

Liabilities:

Accrued expenses and other current liabilities

246,946

52,673

299,619

Current liabilities - discontinued operations

62,188

(20,295)

41,893

Deferred taxes, net and other liabilities

160,163

(12,555)

147,608

Non-current liabilities - discontinued operations

4,028

614

4,642

Equity:

Accumulated deficit

$

(479,166)

$

(35,824)

$

(514,990)

The adoption of ASC 606 primarily impacted the timing of revenue recognition related to our customer loyalty program, gift cards and e-commerce sales, as discussed in more detail below.  In addition, for our corporate apparel business which has been reclassified to discontinued operations, certain deferred revenue balances along with related inventory amounts were eliminated as part of the cumulative adjustment to opening retained earnings.  Also, for estimated sales returns, we recognize allowances for estimated sales returns on a gross basis rather than a net basis on the condensed consolidated balance sheets.

Revenues

The following table depicts the disaggregation of revenue by major source (in thousands):

For the Three Months Ended

For the Nine Months Ended

    

November 2, 2019

    

November 3, 2018

    

November 2, 2019

    

November 3, 2018

 

Net sales:

    

    

    

    

Men's tailored clothing product

$

326,036

$

342,972

$

1,001,467

$

1,055,213

Men's non-tailored clothing product

 

229,514

 

227,069

 

687,257

 

691,780

Women's clothing product

15,029

15,109

51,207

52,138

Other (1)

 

3,275

 

3,297

 

9,602

 

8,748

Total retail clothing product

 

573,854

 

588,447

 

1,749,533

 

1,807,879

Rental services

 

120,021

 

124,697

 

334,090

 

350,019

Alteration services

 

35,606

 

38,597

 

106,665

 

114,049

Retail dry cleaning services (2)

 

 

 

 

2,551

Total alteration and other services

 

35,606

 

38,597

 

106,665

 

116,600

Total net sales

$

729,481

$

751,741

$

2,190,288

$

2,274,498

(1) Other consists of franchise and licensing revenues and gift card breakage.  Franchise revenues are generally recognized at a point in time while licensing revenues consist primarily of minimum guaranteed royalty amounts recognized over an elapsed time period.
(2) On March 3, 2018, we completed the divestiture of our MW Cleaners business.  Please see Note 3 for additional information.

Additional net sales information is as follows (in thousands):

For the Three Months Ended

For the Nine Months Ended

    

November 2, 2019

    

November 3, 2018

    

November 2, 2019

    

November 3, 2018

 

Net sales:

    

    

    

    

Men's Wearhouse(1)

$

438,088

$

454,927

$

1,289,364

$

1,347,933

Jos. A. Bank

168,432

169,318

501,383

510,821

K&G

 

71,859

 

72,610

 

242,245

 

245,535

Moores

 

51,102

 

54,886

 

157,296

 

167,658

MW Cleaners(2)

 

 

 

 

2,551

Total net sales

$

729,481

$

751,741

$

2,190,288

$

2,274,498

(1) Consists of Men's Wearhouse, Men's Wearhouse and Tux and Joseph Abboud.
(2) On March 3, 2018, we completed the divestiture of our MW Cleaners business.  Please see Note 3 for additional information.

For retail clothing product revenue, we transfer control and recognize revenue at a point in time, upon sale or shipment of the merchandise, net of actual sales returns and an accrual for estimated sales returns.  For rental and alteration services, we transfer control and recognize revenue at a point in time, upon receipt by the customer.  Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services.  Sales, use and value added taxes we collect from our customers and are remitted to governmental agencies are excluded from revenue.    

Loyalty Program

We maintain a customer loyalty program for our Men’s Wearhouse, Men’s Wearhouse and Tux, Jos. A. Bank and Moores brands in which customers receive points for purchases. Points are generally equivalent to dollars spent on a one-to-one basis, excluding any sales tax dollars, and, historically, did not expire.  During the fourth quarter of 2018, we finalized our decision to implement an expiration policy for loyalty program points beginning in the second quarter of fiscal 2019, which was completed.  Upon reaching 500 points, customers are issued a $50 rewards certificate which they may redeem for purchases at our stores or online. Generally, reward certificates earned must be redeemed no later than six months from the date of issuance.  We believe our loyalty programs represents a customer option that is a material right and, accordingly, is a performance obligation in the contract with our customer.  Therefore, we record our obligation for future point redemptions using a deferred revenue model.  

When loyalty program members earn points, we recognize a portion of the transaction as revenue for merchandise product sales or services and defer a portion of the transaction representing the value of the related points. The value of the points is recorded in deferred revenue on our condensed consolidated balance sheet and recognized into revenue when the points are converted into a rewards certificate and the certificate is used.

We account for points earned and certificates issued that will not be redeemed by loyalty members, which we refer to as breakage. We review our breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

Our estimate of the expected usage of points and certificates requires significant management judgment. Current and future changes to our assumptions or to loyalty program rules may result in material changes to the deferred revenue balance as well as recognized revenues from the loyalty programs.  

Gift Card Breakage

Proceeds from the sale of gift cards are recorded as a liability and are recognized as net sales from products and services when the cards are redeemed.  Our gift cards do not have expiration dates.  In addition, we recognize revenue for gift cards for which the likelihood of redemption is deemed to be remote and for which there is no legal obligation to remit the value of such unredeemed gift cards to any relevant jurisdictions (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We review our gift card breakage estimate based on our historical redemption patterns.  

Sales Returns

Revenue from merchandise product sales is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. Our refund liability for sales returns was $5.8 million at November 2, 2019, which is included in accrued and other current liabilities and represents the expected value of the refund that will be due to our customers.  We also have a corresponding asset included in other current assets that represents the right to recover products from customers associated with sales returns of $2.8 million at November 2, 2019.  

Contract Liabilities

The following table summarizes the opening and closing balances of our contract liabilities (in thousands):

Balance at

Increase

Balance at

    

February 2, 2019

    

(Decrease)

    

November 2, 2019

Contract liabilities

$

121,796

$

(3,058)

$

118,738

Balance at

Increase

Balance at

    

February 3, 2018

    

(Decrease)

    

November 3, 2018

As Adjusted

Contract liabilities

$

139,809

$

1,139

$

140,948

Contract liabilities include cash payments received from customers in advance of our performance, including amounts which are refundable.  These liabilities primarily consist of customer deposits related to rental product or custom clothing transactions since we typically receive payment from our customers prior to our performance and deferred revenue related to our loyalty programs and unredeemed gift cards.  These amounts are primarily included as “Customer deposits, prepayments and refunds payable,” “Loyalty program liabilities” and “Unredeemed gift cards,” respectively, within the accrued expenses and other current liabilities line item on our condensed consolidated balance sheet.  Please see Note 10 for additional information on our accrued expenses and other current liabilities.

The amount of revenue recognized for the three months and nine months ended November 2, 2019 that was included in the respective opening contract liability balance was $8.2 million and $75.6 million, respectively.  The amount of revenue recognized for the three and nine months ended November 3, 2018 that was included in the opening contract liability balance was $10.1 million and $75.0 million, respectively. This revenue primarily consists of recognition of deposits for completed transactions as well as redeemed certificates related to our loyalty program and gift card redemptions.