Description of Business and Significant Accounting Policies

12 Months Ended

Jan. 28, 2012

Description Of Business And Significant Accounting Policies Abstract

Description of Business and Significant Accounting Policies

NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of business:  Stage Stores, Inc. (the “Company”) is a Houston, Texas-based retailer, which operates both department stores and off-price stores.  Its department stores, which operate under the Bealls, Goody’s, Palais Royal, Peebles and Stage names, offer moderately priced, nationally recognized brand name and private label apparel, accessories, cosmetics and footwear for the entire family.  Its off-price stores, which are called Steele’s, offer brand name family apparel, accessories, shoes and home décor at significant savings to department store prices.  The Company also has an eCommerce website.  As of January 28, 2012, the Company operated 813 stores located in 40 states.   The Company operates its stores under the six nameplates of Bealls, Goody’s, Palais Royal, Peebles, Stage and Steele’s.

Principles of consolidation:  The consolidated financial statements include the accounts of Stage Stores, Inc. and its subsidiaries, Specialty Retailers, Inc., a Texas corporation, and Specialty Retailers (TX) LLC, a Texas limited liability company.  All intercompany transactions have been eliminated in consolidation.  The Company reports in a single operating segment – the operation of retail department stores.  Revenues from customers are derived from merchandise sales.  The Company does not rely on any major customer as a source of revenue.

Fiscal year: References to a particular year are to the Company’s fiscal year which is the 52- or 53-week period ending on the Saturday closest to January 31st of the following calendar year.  For example, a reference to “2009” is a reference to the fiscal year ended January 30, 2010, “2010” is a reference to the fiscal year ended January 29, 2011 and “2011” is a reference to the fiscal year ended January 28, 2012.  2009, 2010 and 2011 consisted of 52 weeks.

Use of estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  On an ongoing basis, the Company evaluates its estimates, including those related to inventory, deferred tax assets, intangible asset, long-lived assets, sales returns, gift card breakage, pension obligations, self-insurance and contingent liabilities.  Actual results could differ from these estimates.  Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances.

Cash and cash equivalents: The Company considers highly liquid investments with initial maturities of less than three months to be cash equivalents.

Concentration of credit risk: Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash.  The Company’s cash management and investment policies restrict investments to low-risk, highly-liquid securities and the Company performs periodic evaluations of the relative credit standing of the financial institutions with which it deals.

Merchandise inventories:  The Company values merchandise inventories using the lower of cost or market with cost determined using the weighted average cost method.  The Company capitalizes distribution center costs associated with preparing inventory for sale, such as distribution payroll, benefits, occupancy, depreciation and other direct operating expenses as part of merchandise inventories. The Company also includes in inventory the cost of freight to the Company’s distribution centers and to stores as well as duties and fees related to import purchases.

Vendor allowances:  The Company receives consideration from its merchandise vendors in the form of allowances and reimbursements.  Given the promotional nature of the Company’s business, the allowances are generally intended to offset the Company’s costs of handling, promoting, advertising and selling the vendors’ products in its stores.  Vendor allowances related to the purchase of inventory are recorded as a reduction to the cost of inventory until sold.  Vendor allowances are recognized as a reduction of cost of goods sold or the related selling expense when the purpose for which the vendor funds were intended to be used has been fulfilled and amounts have been authorized by vendors.

Stock-based compensation:  The Company recognizes compensation expense in an amount equal to the fair value of share-based payments granted to employees and independent directors.  That cost is recognized ratably in selling, general and administrative expense over the period during which an employee or independent director is required to provide service in exchange for the award.

Property, equipment and leasehold improvements:  Additions to property, equipment and leasehold improvements are recorded at cost and depreciated over their estimated useful lives using the straight-line method.  The estimated useful lives of leasehold improvements do not exceed the term of the related lease, including applicable available renewal options where appropriate.  The estimated useful lives in years are generally as follows:

Buildings & improvements	20
Store and office fixtures and equipment	5-10
Warehouse equipment	5-15
Leasehold improvements - stores	5-15
Leasehold improvements - corporate office	10-20

Impairment of long-lived assets:  Property, plant and equipment and other long-lived assets are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  For long-lived assets to be held and used, the Company bases its evaluation on impairment indicators such as the nature of the assets’ physical condition, the future economic benefit of the asset, any historical or future profitability measurements and other external market conditions or factors that may be present.  If such impairment indicators are present or other factors exist that indicate the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist.  If an impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset.  Management’s judgment is necessary to estimate fair value.  Accordingly, actual results could vary from those estimates.

Intangible asset and impairment of intangible assets:  As a part of the acquisition of Peebles in 2003, the Company acquired the rights to the tradename and trademark (collectively the “Tradename”) of “Peebles,” which was identified as an indefinite life intangible.  The value of the Tradename was determined to be $14.9 million at the time of the Peebles acquisition.  Indefinite life intangible assets are not amortized but are tested for impairment annually or more frequently when indicators of impairment exist.  The Company completed its annual impairment test during the fourth quarter of 2011 and determined there was no impairment.

Insurance recoveries:  During 2008, Hurricanes Ike and Gustav forced the temporary closure of a significant number of the Company’s stores in the Gulf Coast region.  The stores were covered by both property damage and business interruption insurance and the Company settled its claims with insurance companies during 2009.  The Company received total proceeds of $7.5 million and $0.4 million for property damage and business interruption claims, respectively, and recognized a gain of $1.8 million in 2009, which is included in the Consolidated Statements of Income as a reduction in selling, general and administrative expenses.

The Company incurred other casualty losses during 2011 and 2010. The Company received total insurance proceeds of $1.7 million and $0.8 million during 2011 and 2010, respectively, and recognized a net gain of $0.4 million and a net loss of $0.3 million, respectively, which are included in the Consolidated Statements of Income as selling, general and administrative expenses.

           Debt issuance costs:  Debt issuance costs are accounted for as a deferred charge and amortized on a straight-line basis over the term of the related financing agreement.  The balance of debt issuance costs, net of accumulated amortization of $2.9 million and $2.6 million, is $1.3 million and $0.5 million at January 28, 2012 and January 29, 2011, respectively.

Revenue recognition:  Net sales, which excludes sales tax and are net of estimated returns, are recorded at point of sale in stores when payment is received and the customer takes possession of merchandise and at time of shipment for eCommerce sales.  Shipping and handling fees charged to customers are also included in net sales with the corresponding costs recorded as costs of goods sold.  The Company records deferred revenue on its balance sheet for the sale of gift cards and recognizes this revenue upon the redemption of gift cards in net sales.  The Company similarly records deferred revenue on its balance sheet for merchandise credits issued related to customer returns and recognizes this revenue upon the redemption of the merchandise credits. 

Gift card and merchandise credit liability:  Unredeemed gift cards and merchandise credits are recorded as a liability.  Gift card and merchandise credit breakage income (“breakage income”) represents the balance of gift cards and merchandise credits for which the Company believes the likelihood of redemption is remote.  Breakage income is recognized based on usage or historical redemptions.  The Company’s gift cards and merchandise credits are considered to be a large pool of homogeneous transactions.  The Company uses historical data to determine the breakage rate and objectively determines the estimated time period of actual redemptions.  The Company recognized approximately $0.8 million, $0.8 million and $0.9 million of breakage income in 2011, 2010 and 2009, respectively, which is included in the Consolidated Statements of Income as a reduction in selling, general and administrative expenses.

Store opening expenses:  Costs related to the opening of new stores and the rebranding of current stores to a new nameplate are expensed as incurred.  Store opening expenses include the rent accrued during the rent holiday period on new and relocated stores.

Advertising expenses:  Advertising costs are charged to operations when the related advertising takes place.  Advertising costs were $64.7 million, $63.4 million and $62.1 million, for 2011, 2010 and 2009, respectively, which are net of advertising allowances received from vendors of $16.9 million, $16.3 million and $13.0 million, respectively.

Rent expense:  The Company records rent expense on a straight-line basis over the lease term, including the build out period, and where appropriate, applicable available lease renewal option periods.  The difference between the payment and expense in any period is recorded as deferred rent in other long-term liabilities in the Consolidated Balance Sheets.  The Company records construction allowances from landlords when contractually earned as a deferred rent credit in other long-term liabilities.  Such deferred rent credit is amortized over the related term of the lease, commencing the date the Company contractually earned the construction allowance, as a reduction of rent expense.  The deferred rent credit was $59.5 million and $63.3 million as of January 28, 2012 and January 29, 2011, respectively.

Certain leases provide for contingent rents that are not measurable at inception.  These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level.  These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.

Income taxes:  The provision for income taxes is computed based on the pretax income included in the Consolidated Statements of Income.  The asset and liability approach is used to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of assets and liabilities.  A valuation allowance is established if it is more likely than not that some portion of the deferred tax asset will not be realized.  See Note 12 for additional disclosures regarding income taxes and deferred income taxes.

Earnings per share: Basic earnings per share is computed using the weighted average number of common shares outstanding during the measurement period.  Diluted earnings per share is computed using the weighted average number of common shares as well as all potentially dilutive common share equivalents outstanding during the measurement period.  Stock options, stock appreciation rights (“SARs”) and non-vested stock grants were the only potentially dilutive share equivalents the Company had outstanding at January 28, 2012.

Under Accounting Standards Codification (“ASC”) 260-10, Earnings Per Share, non-vested stock grants that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the calculation of basic and diluted earnings per share pursuant to the two-class method.  The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings.  In 2011, all non-vested stock granted contained non-forfeitable rights to dividends and are considered participating securities under ASC 260-10.  As such, earnings per share (“EPS”) has been calculated under the two-class method for 2011.

The following tables show the computation of basic and diluted earnings per share for the fiscal years ended 2011, 2010 and 2009 (in thousands, except per share amounts):

	Fiscal Year
	2011			2010		2009
Basic EPS:
Net Income	$	30,960		$	37,640	$	28,721
Less: Allocation of earnings to participating securities		(375	)
Net income allocated to common shares		30,585
Basic weighted average shares outstanding		33,021			37,656		38,029
Basic EPS	$	0.93		$	1.00	$	0.76

	Fiscal Year
	2011			2010		2009
Diluted EPS:
Net Income	$	30,960		$	37,640	$	28,721
Less: Allocation of earnings to participating securities		(373	)
Net income allocated to common shares		30,587
Basic weighted average shares outstanding		33,021			37,656		38,029
Add: Dilutive effect of stock awards		257			354		384
Diluted weighted average shares outstanding		33,278			38,010		38,413
Diluted EPS	$	0.92		$	0.99	$	0.75

The following table summarizes the number of options and SARs to purchase shares of common stock that were outstanding but were not included in the computation of diluted earnings per share because the exercise price of the options and SARs was greater than the average market price of the common shares (in thousands):

	Fiscal Year
	2011		2010		2009
Number of anti-dilutive stock options and SARs outstanding		1,910		2,746		2,635

Recent accounting standards: In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income, which eliminates the current option to present components of other comprehensive income as part of the statements of changes in stockholders’ equity and requires entities to present comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  The amendments do not change the components of other comprehensive income.  For public companies, the new disclosure requirements are effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted and will have presentation changes only.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”).  ASU 2011-04 clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles and requires additional disclosures about fair value measurements.  For public companies, the amendments in ASU 2011-04 are effective for fiscal years and interim periods beginning after December 15, 2011.  The Company does not expect the adoption of the provisions under ASU 2011-04 to have a material impact on the Company’s consolidated financial statements.