SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|12 Months Ended|
Feb. 01, 2020
|SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES|
|SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES||
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business—Tailored Brands, Inc. and its subsidiaries (the “Company”, “we”, “us”, and “our”) is a leading omni-channel specialty apparel retailer of menswear, including suits, formalwear and a broad selection of polished and business casual offerings. We also offer a full selection of special occasion offerings including tuxedo and suit rental product (collectively “rental product”). We serve our customers through an expansive omni-channel network including over 1,400 stores in the United States (“U.S.”) and Canada as well as our branded e-commerce websites at www.menswearhouse.com and www.josbank.com.
Our retail stores operate under the Men’s Wearhouse, Men’s Wearhouse and Tux, Jos. A. Bank Clothiers (“Jos. A. Bank”), Moores Clothing for Men (“Moores”) and K&G names and carry a wide selection of exclusive and non-exclusive merchandise brands. In addition, we offer our customers alteration services and most of our K&G stores also offer women’s career and casual apparel, sportswear and accessories, including shoes, and children’s apparel. Also, prior to its divestiture in 2018, we conducted retail dry cleaning, laundry and heirlooming operations through MW Cleaners in Texas. See Note 3 for information on our divestiture of MW Cleaners.
On August 16, 2019, we completed the sale of MWUK Limited, our UK corporate apparel operations conducted by Dimensions, Alexandra, and Yaffy to Project Dart Bidco Limited, pursuant to a Share Purchase Agreement entered into on that same date. In addition, we also completed the sale of Twin Hill Acquisition Company, Inc. (“Twin Hill”), to TH Holdco Inc., pursuant to a Stock Purchase Agreement entered into on August 16, 2019. The aggregate consideration for all of the outstanding equity of MWUK Limited and Twin Hill (collectively, the “corporate apparel business”) was approximately $62 million, subject to certain working capital adjustments. See Note 2 for additional information. Unless noted otherwise, discussion in these notes to the consolidated financial statements pertain to our continuing operations.
We follow the standard fiscal year of the retail industry, which is a 52-week or 53-week period ending on the Saturday closest to January 31. The periods presented in these financial statements are the fiscal years ended February 1, 2020 (“fiscal 2019”), February 2, 2019 (“fiscal 2018”), and February 3, 2018 (“fiscal 2017”). Each of these periods had 52 weeks except for fiscal 2017, which consisted of 53 weeks.
Principles of Consolidation— The consolidated financial statements include the accounts of Tailored Brands, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in the consolidated financial statements.
Reclassifications— Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates— The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment information— As a result of the sale of our corporate apparel business, we reassessed our segment reporting presentation. We determined that the results from our four retail brands: Men’s Wearhouse/Men’s Wearhouse and Tux, Jos. A. Bank, K&G and Moores represent separate operating segments that should continue to be aggregated into a reportable segment and, as a result, we have only one reportable segment. See Note 7 for revenue information by brand and by major source. Long-lived assets of our Canadian operations were $32.3 million and $36.6 million as of February 1, 2020 and February 2, 2019, respectively.
Cash and Cash Equivalents— Cash and cash equivalents includes all cash in banks, cash on hand and all highly liquid investments with an original maturity of three months or less.
Accounts Receivable—Accounts receivable consists of our receivables from third-party credit card providers and other trade receivables. Collectability is reviewed regularly and recorded net of an allowance for uncollectible accounts, which is adjusted as necessary. As of February 1, 2020 and February 2, 2019, the allowance for uncollectible accounts was $0.8 million and $0.9 million, respectively.
Inventories—Inventories are valued at the lower of cost and net realizable value. Cost is determined based on the average cost method. Our inventory cost also includes estimated procurement and distribution costs (warehousing, freight, hangers and merchandising costs) associated with the inventory, with the balance of such costs included in cost of sales. Procurement and distribution costs are generally allocated to inventory based on the ratio of annual product purchases to inventory cost. We make assumptions, based primarily on historical experience, as to items in our inventory that may be damaged, obsolete or salable only at marked down prices to reflect the net realizable value of these items.
Assets Held for Sale—Assets held for sale are measured at the lower of their carrying amount or fair value less costs to sell. As of February 1, 2020, assets held for sale totaled $34.9 million including $30.0 million related to the Joseph Abboud tradename, which we sold in the first quarter of 2020. See Note 23 for additional information. The remaining $4.9 million of assets held for sale are primarily related to recently closed distribution centers which we intend to sell in fiscal 2020. As we believe the fair value less costs to sell for the assets held for sale exceeds their carrying amount, no adjustment to their carrying value was recorded in fiscal 2019.
Property and Equipment—Property and equipment are stated at cost. Normal repairs and maintenance costs are charged to earnings as incurred and additions and major improvements are capitalized. The cost of assets retired or otherwise disposed of and the related allowances for depreciation are eliminated from the accounts in the period of disposal and the resulting gain or loss is credited or charged to earnings.
Buildings are depreciated using the straight-line method over their estimated useful lives ofto 25 years. Depreciation of leasehold improvements is computed on the straight-line method over the term of the lease, which is generally to ten years based on the initial lease term plus first renewal option periods that are reasonably certain of being exercised, or the useful life of the assets, whichever is shorter. Furniture, fixtures and equipment are depreciated using primarily the straight-line method over their estimated useful lives of to 15 years.
Depreciation expense was $102.4 million, $98.1 million and $100.1 million for fiscal 2019, 2018 and 2017, respectively.
Rental Product—Rental product is amortized to cost of sales based on the cost of each unit rented. The cost of each unit rented is estimated based on the number of times the unit is expected to be rented and the average cost of the rental product. Lost, damaged and retired rental product is also charged to cost of sales. Rental product is amortized to expense generally over a four year period. We make assumptions, based primarily on historical experience, as to the number of times each unit can be rented. Amortization expense was $34.3 million, $35.1 million and $38.0 million for fiscal 2019, 2018 and 2017, respectively.
Impairment of Long-Lived Assets—Long-lived assets, such as property and equipment, operating lease right-of-use assets and identifiable intangibles with finite useful lives, are periodically evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level of which there are identifiable cash flows, which is generally at a store level. Assets are reviewed using factors including, but not limited to, our future operating plans and projected cash flows. The determination of whether impairment has occurred is based on an estimate of undiscounted future cash flows directly related to the assets, compared to the carrying value of the assets. If the sum of the undiscounted future cash flows of the assets does not exceed the carrying value of the assets, full or partial impairment may exist. If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. Fair value is determined using an income approach, which requires discounting the estimated future cash flows associated with the asset.
Asset impairment charges totaled $3.4 million, $1.0 million and $3.5 million for fiscal 2019, 2018 and 2017, respectively. The $3.4 million and $1.0 million of asset impairment charges recorded in fiscal 2019 and 2018, respectively, relates to long-lived assets at our Joseph Abboud store and other underperforming stores. Of the $3.5 million recorded in fiscal 2017, $1.2 million relates to fixed assets in our tuxedo shops within Macy’s (see Note 4 for additional information) and the remainder relates to underperforming stores.
Goodwill and Other Indefinite-Lived Intangible Assets—Goodwill and other indefinite-lived intangible assets are initially recorded at their fair values. Identifiable intangible assets with an indefinite useful life, including goodwill, are not amortized but are evaluated annually for impairment. 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, 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.
For purposes of our goodwill impairment evaluation, each of our merchandising brands are separate reporting units. Goodwill has been assigned to the reporting units based on prior business combinations related to the reporting units and our annual impairment assessment occurs on the last day of the second month of our fiscal fourth quarter.
Our goodwill assessment consists of either using a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a quantitative impairment test, if necessary. In performing the qualitative assessment, we consider many factors in evaluating whether the carrying value of the asset may not be recoverable, including macroeconomic conditions, retail industry considerations, recent financial performance and declines in stock price and market capitalization.
Indefinite-lived intangible assets are not subject to amortization but are reviewed at least annually for impairment. The indefinite-lived intangible asset impairment evaluation is performed by comparing the fair value of the indefinite-lived intangible assets to their carrying values. Similar to the goodwill approach described above, our annual impairment assessment for indefinite-lived intangible assets contemplates the use of either a qualitative approach to determine whether it is more likely than not that the fair value of the assets is less than their respective carrying values or a quantitative impairment test, if necessary.
We estimate the fair values of these intangible assets based on an income approach using the relief-from-royalty method. This approach is dependent upon a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. If the carrying value exceeds its estimated fair value, an impairment loss is recognized in the amount by which the carrying amount exceeds the estimated fair value of the asset.
As a result of our annual impairment evaluations, we believe that, as of February 1, 2020, none of our goodwill and indefinite-lived intangible assets are impaired.
Derivative Financial Instruments—Derivative financial instruments are recorded in the consolidated balance sheet at fair value as other current assets, other assets, accrued expenses and other current liabilities or other liabilities. For derivative instruments for which hedge accounting was not designated, the gain or loss is recorded in cost of sales in the consolidated statements of (loss) earnings. For derivative instruments that qualify for hedge accounting treatment, the effective portion of the derivative is recorded as a component of other comprehensive income (loss) and reclassified to earnings in the period when the hedged item affects earnings. Gains and losses on derivative instruments are reflected within cash flow from operating activities on the statement of cash flows. See Note 19 for further information regarding our derivative instruments.
Self-Insurance— We self-insure significant portions of our workers’ compensation and employee medical costs. We estimate our liability for future payments under these programs based on historical experience and various assumptions as to participating employees, health care costs, number of claims and other factors, including industry trends and information provided to us by third parties. We also use actuarial estimates. If the number of claims or the costs associated with those claims were to increase significantly over our estimates, additional charges to earnings could be necessary to cover required payments.
Sabbatical Leave—Beginning in fiscal 2016, employees no longer earn a sabbatical leave and, as a result, we are no longer accruing benefits for sabbatical leave. The accrued liability for sabbatical leave earned prior to fiscal 2016, which is included in accrued expenses and other current liabilities in the consolidated balance sheets, was $1.5 million and $2.4 million as of fiscal 2019 and 2018, respectively.
Income Taxes—Income taxes are accounted for using the asset and liability method. Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and subsequently adjusted to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse. The deferred tax assets are reduced, if necessary, by a valuation allowance if the future realization of those tax benefits is not more likely than not. See Note 9 for further information regarding income taxes, including impacts related to the Tax Cuts and Jobs Act (the “Tax Reform Act”).
The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and/or penalties related to uncertain tax positions are recognized in income tax expense.
Revenue Recognition— Effective February 4, 2018, we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, revenue is recognized when performance obligations under the terms of the contracts with our customers are satisfied. See Note 7 for additional discussion related to revenue recognition.
Leases— Effective February 3, 2019, we adopted ASC 842, Leases ("ASC 842"). The adoption of ASC 842 resulted in a significant increase in our assets and liabilities given our considerable number of operating leases. See Note 17 for additional discussion related to leases.
Advertising—Advertising costs are expensed as incurred or, in the case of media production costs, when the advertisement first appears.
New Store Costs—Promotion and other costs associated with the opening of new stores are expensed as incurred.
Store Closures and Relocations—Costs associated with store closures or relocations are charged to expense when the liability is incurred.
Share-Based Compensation—In recognizing share-based compensation, we follow the provisions of the authoritative guidance regarding share-based awards. This guidance establishes fair value as the measurement objective in accounting for stock awards and requires the application of a fair value based measurement method in accounting for compensation cost, which is recognized over the requisite service period.
During the first quarter of fiscal 2017, we adopted Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation. ASU 2016-09 simplified several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The recognition of excess tax benefits and deficiencies related to the vesting of stock-based awards in the statement of earnings and presentation of excess tax benefits on the statement of cash flows were adopted prospectively, with no adjustments made to prior periods. In addition, upon adoption, we did not change our policy on accounting for forfeitures, which is to estimate the number of awards expected to be forfeited and adjusting the estimate as needed. Overall, the adoption of ASU 2016-09 did not have a material impact on our financial statements.
We use the Black-Scholes option pricing model to estimate the fair value of stock options and stock appreciation rights on the date of grant. The fair value of deferred stock units, performance units, and restricted stock is determined based on the number of shares granted and the quoted closing price of our common stock on the date of grant. Awards settled in cash are classified as liabilities and the fair value of awards settled in cash will be remeasured at each reporting period until the awards are settled.
The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period. Compensation expense for performance-based awards is recorded based on the amount of the award ultimately expected to vest and the level and likelihood of the performance condition to be met. For grants with a service condition
only that are subject to graded vesting, we recognize expense on a straight-line basis over the requisite service period for the entire award.
Share-based compensation expense, including cash settled awards, recognized for fiscal 2019, 2018 and 2017 was $8.6 million, $17.7 million and $24.1 million, respectively. Total income tax benefit recognized in net (loss) earnings for share-based compensation arrangements was $2.2 million, $4.4 million and $9.1 million for fiscal 2019, 2018 and 2017, respectively. See Note 15 for additional disclosures regarding share-based compensation.
Foreign Currency Translation—Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rates in effect at each balance sheet date. Equity is translated at applicable historical exchange rates. Income, expense and cash flow items are translated at average exchange rates during the year. Resulting translation adjustments are reported as a separate component of comprehensive (loss) income.
Comprehensive (Loss) Income—Comprehensive (loss) income includes all changes in equity during the periods presented that result from transactions and other economic events other than transactions with shareholders. We present comprehensive (loss) income in a separate statement in the accompanying consolidated financial statements.
(Loss) earnings per share— Basic (loss) earnings per common share is computed by dividing net (loss) earnings by the weighted-average common shares outstanding during the period. Diluted (loss) earnings per common share is calculated using the treasury stock method. See Note 5 for disclosures regarding (loss) earnings per share.
Treasury stock— Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Gains and losses on the subsequent reissuance of shares are credited or charged to capital in excess of par value using the average-cost method. Upon retirement of treasury stock, the amounts in excess of par value are charged entirely to accumulated deficit.
Recent Accounting Pronouncements—We have considered all new accounting pronouncements and have concluded that the following new pronouncements may have a material impact on our results of operations, financial condition, or cash flows.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption of ASU 2018-15 is permitted. We will adopt ASU 2018-15 in the first quarter of fiscal 2020 and do not expect the adoption to have a material impact on our financial position, results of operations or cash flows.
The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef