Fair Value Measurements

We follow the guidance in ASC Topic 820, “Fair Value Measurement” (“ASC 820”) as it relates to financial and nonfinancial assets and liabilities. ASC 820 prioritizes inputs used in measuring fair value into a hierarchy of three levels:

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.

Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.

In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:



	Level 1						Level 2						Level 3
	November 1, 2014		February 1, 2014		November 2, 2013		November 1, 2014		February 1, 2014		November 2, 2013		November 1, 2014		February 1, 2014		November 2, 2013
	(In thousands)
Assets:
Cash equivalents ¹	$	80,005	$	82,378	$	36,265	$	—	$	—	$	—	$	—	$	—	$	—
Total	$	80,005	$	82,378	$	36,265	$	—	$	—	$	—	$	—	$	—	$	—

Liabilities:
GoJane performance plan liability ²	$	—	$	—	$	—	$	—	$	—	$	—	$	5,915	$	7,416	$	7,350
Exit costs obligation ³	—		—		—		—		—		—		2,889		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	8,804	$	7,416	$	7,350

¹Cash and cash equivalents include money market investments valued as Level 1 inputs in the fair value hierarchy. The fair value of cash and cash equivalents approximates their carrying value due to their short-term maturities.

² Under the terms of the fiscal 2012 GoJane acquisition agreement, the purchase price also includes contingent cash payments of up to an aggregate of $8.0 million if certain financial metrics are achieved by the GoJane business during the five year period beginning on the acquisition date (the "GJ Performance Plan"). These performance payments are not contingent upon continuous employment by the two individual stockholders. The GJ Performance Plan liability is measured at fair value using Level 3 inputs as defined in the fair value hierarchy. The fair value of the contingent payments as of the acquisition date was estimated to be $7.0 million. This was based on a weighted average expected achievement probability and a discount rate over the expected payment stream. Each quarter, we remeasure the GJ Performance Plan liability at fair value.

³ In accordance with the lease assignment for the 34th Street store, we placed $2.4 million in escrow for payment of real estate taxes. We recorded an exit cost obligation related to the real estate taxes at fair value of $2.0 million on the cease-use date. Additionally, the above exit costs obligation includes $1.0 million of lease costs related to four P.S. from Aéropostale stores with previously executed leases that will not open in connection with our restructuring program. These exit cost liabilities are measured at fair value using Level 3 inputs as defined in the fair value hierarchy. This was based on a discount rate over the expected payment streams. Each quarter we remeasure these liabilities at fair value.

The following table provides a reconciliation of the beginning and ending balances of the GJ Performance Plan measured at fair value using significant unobservable inputs (Level 3):



	39 weeks ended
	November 1, 2014			November 2, 2013
	(In thousands)
Balance at beginning of period	$	7,416		$	7,019
Accretion of interest expense	99			331
GoJane consideration payment	(1,600		)	—
Balance at end of period	$	5,915		$	7,350

The $5.9 million liability as of November 1, 2014 was included in non-current liabilities. Of the $7.4 million liability as of November 2, 2013, $1.6 million was included in accrued expenses and other current liabilities and the balance was included in non-current liabilities.

The following table provides a reconciliation of the beginning and ending balances of the Exit Cost Obligations measured at fair value using significant unobservable inputs (Level 3):



	39 weeks ended
	November 1, 2014			November 2, 2013
	(In thousands)
Balance at beginning of period	$	—		$	—
Fair value of exit costs obligations at cease-use date	3,009			—
Accretion of rent expense	245			—
Payments	(365		)	—
Balance at end of period	$	2,889		$	—

Of the $2.9 million liability as of November 1, 2014, $0.8 million was included in accrued expenses and other current liabilities and the balance was included in non-current liabilities.

Non-Financial Assets

Our non-financial assets, which include fixtures, equipment and improvements and intangible assets, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an impairment test is required and we are required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at a new cost based on its measured fair value.

We recorded asset impairment charges, all of which was included in the cost of sales, of approximately $12.5 million during the third quarter of 2014 primarily for 59 stores. We recorded asset impairment charges of approximately $64.6 million during the first thirty-nine weeks of 2014 for primarily 277 stores. Of these charges, $34.1 million was included in cost of sales. The remaining $30.5 million was included in restructuring charges, as it related to the P.S. from Aéropostale stores to be exited. We recorded store asset impairment charges of approximately $5.1 million during the third quarter of 2013 for primarily 25 stores and $13.6 million during the first thirty-nine weeks of 2013 for primarily 72 stores. These charges were included in cost of sales. These amounts included the write-down of long-lived assets at stores that were assessed for impairment because of (a) changes in circumstances that indicated the carrying value of assets may not be recoverable, or (b) management’s intention to relocate or close stores. Impairment charges were primarily related to revenues and/or gross margins not meeting targeted levels at the respective stores as a result of macroeconomic conditions, location related conditions and other factors that are negatively impacting the sales and cash flows of these locations.

Long-lived assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets is determined by estimating the amount and timing of net future discounted cash flows. We estimate future cash flows based on our experience, current trends and local market conditions. Based upon future results of operations at the store level, additional impairment charges may be recorded in future periods if loss trends continue and/or the current cash flow projections are not achieved.

The table below sets forth by level within the fair value hierarchy the fair value of long-lived assets for which impairment was recognized for the first thirty-nine weeks of 2014 and the first thirty-nine weeks of 2013:



	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value		Total Losses
	(In thousands)
November 1, 2014:
Long-lived assets held and used	$	—	$	—	$	6,488	$	6,488	$	64,611

November 2, 2013:
Long-lived assets held and used	$	—	$	—	$	5,431	$	5,431	$	13,624