REVENUES

Impact of Adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

On February 4, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of that date. Topic 606 provides a five-step analysis of transactions to determine when and how revenue is recognized, based upon the core principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Adoption of the standard resulted in a cumulative-effect adjustment to retained earnings of $4.8 million as of February 4, 2018 related to loyalty points issued under the Company's loyalty program ("Rewards") within the Famous Footwear segment. Topic 606 requires a deferral of revenue associated with loyalty points using a relative stand-alone selling price method rather than the incremental cost approach the Company used previously. The standard also requires the reclassification of the returns reserve from receivables to other accrued expenses and the reclassification of the return asset from inventories to prepaid expenses and other current assets in the consolidated balance sheets. The comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

The impact of the adoption of Topic 606 on the consolidated balance sheet as of February 2, 2019 was as follows:



	February 2, 2019
($ thousands)	As reported		Balances without adoption of Topic 606		Effect of change Higher/(Lower)

Balance Sheet
Assets
Current assets:
Receivables, net	$	191,722	$	183,107	$	8,615
Inventories, net	683,171		690,655		(7,484		)
Prepaid and other current assets	66,479		59,132		7,347

Liabilities
Current liabilities:
Income taxes	6,388		8,195		(1,807		)
Other accrued expenses	137,057		120,233		16,824

Equity
Retained earnings	519,346		524,263		(4,917		)

Adoption of the standard also required various changes that impacted the statement of earnings (loss). These changes generally result in either a shift in the timing of revenue recognition or the reclassification of an item from one caption on the statement of earnings (loss) to another. As disclosed above, the primary impact is related to deferring revenue at a higher rate for the Company's loyalty program. There are also reclassifications related to income received under co-op marketing arrangements with the Company's vendors and the recognition of certain sales transactions in the Company's retail stores on a net commission basis rather than recording on a gross basis. The impact of all changes related to Topic 606 to the consolidated statement of earnings (loss) for 2018 was as follows:



	2018
($ thousands)	As reported		Balances without the adoption of Topic 606		Effect of change (Lower)/Higher

Statement of Earnings (Loss)
Net sales	$	2,834,846	$	2,837,738	$	(2,892	)
Cost of goods sold	1,678,502		1,678,363		139
Gross profit	1,156,344		1,159,375		(3,031		)
Selling and administrative expenses	1,041,765		1,044,440		(2,675		)
Impairment of goodwill and intangible assets	98,044		98,044		—
Restructuring and other special charges, net	16,134		16,134		—
Operating earnings	$	401	$	757	$	(356	)

The adoption of Topic 606 had an immaterial impact on the Company's net loss or loss per share for 2018.

Disaggregation of Revenues

The following table disaggregates revenue by segment and major source for 2018:



	2018
($ thousands)	Famous Footwear		Brand Portfolio		Total


Retail stores	$	1,469,857	$	166,903	$	1,636,760
Landed wholesale	—		762,994		762,994
First-cost wholesale	—		94,734		94,734
E-commerce	136,327		186,599		322,926
Licensing and royalty	—		16,501		16,501
Other ⁽¹⁾	624		307		931
Net sales	$	1,606,808	$	1,228,038	$	2,834,846
⁽¹⁾Includes breakage revenue from unredeemed gift cards.

Retail stores

The majority of the Company's revenue is generated from retail sales where control is transferred and revenue is recognized at the point of sale. Retail sales are recorded net of estimated returns and exclude sales tax. The Company carries a returns reserve and a corresponding return asset for expected returns of merchandise.

Retail sales to members of the Rewards program include two performance obligations: the sale of merchandise and the delivery of points that may be redeemed for future purchases at Famous Footwear. The transaction price is allocated to the separate performance obligations based on the relative stand-alone selling price. The stand-alone selling price for the points is estimated using the retail value of the merchandise earned, adjusted for estimated breakage based upon historical redemption patterns. The Company has elected to adopt the practical expedient that allows entities to disregard the effect of the time value of money between payment for and receipt of goods when the sale does not include a financing element. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. Upon adoption of Topic 606 as of February 4, 2018, the Rewards program liability, included in other accrued expenses on the consolidated balance sheets, increased $6.4 million, from $8.1 million to $14.5 million.

Landed wholesale

Landed sales are wholesale sales in which the merchandise is shipped directly to the customer from the Company’s warehouses. Many landed customers arrange their own transportation of merchandise and, with limited exceptions, control is transferred at the time of shipment.

First-cost wholesale

First-cost sales are wholesale sales in which the Company purchases merchandise from an international factory that manufactures the product. Revenue is recognized at the time the merchandise is delivered to the customer’s designated freight forwarder and control is transferred to the customer.

E-commerce

The Company also generates revenue from sales on websites maintained by the Company that are shipped from the Company's distribution centers or retail stores directly to the consumer, picked up directly by the consumer from the Company's stores, sales to online-only retailers and e-commerce sales from our wholesale customers' websites that are fulfilled on a drop-ship basis (collectively referred to as "e-commerce"). The Company transfers control and recognizes revenue for merchandise sold that is shipped directly to an individual consumer upon delivery to the consumer.

Licensing and royalty

The Company has license agreements with third parties allowing them to sell the Company’s branded product, or other merchandise that uses the Company’s owned or licensed brand names. These license agreements provide the licensee access to the Company's symbolic intellectual property, and revenue is therefore recognized over the license term. For royalty contracts that do not have guaranteed minimums, the Company recognizes revenue as the licensee's sales occur. For royalty contracts that have guaranteed minimums, revenue for the guaranteed minimum is recognized on a straight-line basis during the term, until such time that the cumulative royalties exceed the total minimum guarantee. Up-front payments are recognized over the contractual term to which the guaranteed minimum relates.

Contract Balances

Revenue is recorded at the transaction price, net of estimates for variable consideration for which reserves are established, including returns, allowances and discounts. Variable consideration is estimated using the expected value method and given the large number of contracts with similar characteristics, the portfolio approach is applied to determine the variable consideration for each revenue stream. Reserves for projected returns are based on historical patterns and current expectations.

Information about significant contract balances from contracts with customers is as follows:



($ thousands)	February 2, 2019		February 3, 2018
Customer allowances and discounts	$	25,090	$	20,259
Rewards program liability	14,637		8,130
Returns reserve	13,841		8,332
Gift card liability	5,426		5,509

Changes in contract balances with customers generally reflect differences in relative sales volume for the period presented. In addition, during 2018, the Rewards program liability increased $14.2 million due to purchases and $6.4 million due to the adoption of Topic 606 and decreased $14.1 million due to expirations and redemptions. The change in the balance of the returns reserve is primarily due to the impact of account reclassifications required by adoption of Topic 606 on February 4, 2018 and the acquisition of Vionic in October 2018, as further described in Note 2 to the consolidated financial statements.