(2)

Net Sales

Ollie’s recognizes retail sales in its stores when merchandise is sold and the customer takes possession of merchandise. Also, included in net sales, is revenue allocated to certain redeemed discounts earned via the Ollie’s Army loyalty program and gift card breakage. Net sales are presented net of returns and sales tax. The Company provides an allowance for estimated retail merchandise returns based on prior experience.

Adoption of ASU 2014-09, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than present standards.

The Company adopted ASU 2014-09 as of February 4, 2018 using the modified retrospective transition method. Results for reporting periods beginning after February 4, 2018 are presented pursuant to the requirements of the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under prior guidance.

The Company recorded a net reduction to the opening balance of retained earnings of $5.6 million as of February 4, 2018 due to the cumulative impact of adopting ASU 2014-09, with the impact primarily related to the changes in revenue recognition associated with the Company’s customer loyalty program and gift card breakage.

The cumulative effect of changes to the Company’s consolidated February 4, 2018 balance sheet for the adoption of ASU 2014-09 was as follows (in thousands):

	Balance at February 3, 2018		Adjustments Due to ASU 2014-09			Balance at February 4, 2018

Assets
Inventories	$	255,185	$	339		$	255,524

Liabilities
Accrued expenses and other		46,327		7,853			54,180
Deferred income taxes		59,073		(1,923	)		57,150

Equity
Retained earnings		213,019		(5,591	)		207,428

The Company has determined the adoption of ASU 2014-09 has changed the presentation for the following:

Revenue is deferred for the Ollie’s Army loyalty program where members accumulate points that can be redeemed for discounts on future purchases. The Company has determined it has an additional performance obligation to Ollie’s Army members at the time of the initial transaction. The Company allocates the transaction price to the initial transaction and the discount awards based upon its relative standalone selling price, which considers historical redemption patterns for the award. Revenue is recognized as those discount awards are redeemed. Discount awards which are issued upon the achievement of specified point levels expire 90 days from the date of issuance. At the end of each fiscal period, unredeemed discount awards and accumulated points to earn a future discount award, are reflected as a liability. Discount awards are combined in one homogeneous pool and are not separately identifiable. Therefore, the revenue recognized consisted of discount awards redeemed that were included in the deferred revenue balance at the beginning of the period as well as discount awards issued during the current period. The following table is a reconciliation of the liability related to this program (in thousands):

Balance at February 3, 2018	$	8,321
Revenue deferred		2,575
Revenue recognized		(2,364	)
Balance at May 5, 2018	$	8,532

Gift card breakage for gift card liabilities not subject to escheatment is recognized as revenue in proportion to the redemption of gift cards rather than when redemption of the gift card was considered remote. Ollie’s gift cards do not expire. The rate applied to redemptions is based upon a historical breakage rate. Gift cards are combined in one homogenous pool and are not separately identifiable. Therefore, the revenue recognized consisted of gift cards that were included in the liability at the beginning of the period as well as gift cards that were issued during the period. The following table is a reconciliation of the gift card liability (in thousands):

Balance at February 3, 2018	$	1,223
Gift card issuances		908
Gift card redemption and breakage		(990	)
Balance at May 5, 2018	$	1,141

Sales return allowance is recorded on a gross basis on the condensed consolidated balance sheet as a refund liability and an asset for recovery rather than as a net liability. The allowance for estimated retail merchandise returns is based on prior experience.

The adoption of ASU 2014-09 did not have a material impact on the Company’s condensed consolidated income statement and statement of cash flows for the thirteen weeks ended May 5, 2018. As a result of the adoption of ASU 2014-09, the Company’s balance sheet at May 5, 2018 reflected an additional liability of $8.5 million related to the Ollie’s Army loyalty program which would not have been recorded prior to adoption. Other changes to the condensed consolidated balance sheet at May 5, 2018 were not significant.