Fair Value Measurements

3 Months Ended

Mar. 30, 2013

Fair Value Measurements

Note K – Fair Value Measurements

The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In developing its fair value estimates, the Company uses the following hierarchy:

Level 1:   Quoted prices in active markets for identical assets or liabilities.

Level 2:   Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3:   Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows or option pricing models using the Company’s own estimates and assumptions or those expected to be used by market participants.

The fair values of cash and cash equivalents, receivables, accounts payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

The fair values of foreign currency contracts and fuel contracts are the amounts receivable or payable to terminate the agreements at the reporting date, taking into account current exchange rates and commodity prices. The values are based on market-based inputs or unobservable inputs that are corroborated by market data. At the end of the first quarter of 2013, the amounts receivable or payable under foreign currency and fuel contracts were not significant.

The Company records its senior notes payable at par value, adjusted for amortization of a fair value hedge which was cancelled in 2005. The fair value of the Senior Notes and the Senior Secured Notes are considered Level 2 fair value measurements and are based on market trades of these securities on or about the dates below.

	March 30, 2013				December 29, 2012				March 31, 2012
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
6.25% senior notes	$	150,015	$	150,000	$	149,953	$	153,750	$	150,027	$	155,637
9.75% senior secured notes	$	250,000	$	295,000	$	250,000	$	265,938	$	250,000	$	259,379

Fair Value Estimates Used in Impairment Analyses

North American Retail Division

Because of declining sales in recent periods, the Company has conducted a detailed quarterly store impairment analysis. The analysis uses input from retail store operations and the Company’s accounting and finance personnel that organizationally report to the Chief Financial Officer. These projections are based on management’s estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options, where applicable, and resulting cash flows and, by their nature, include judgments about how current initiatives will impact future performance. If the anticipated cash flows of a store cannot support the carrying value of its assets, the assets are impaired and written down to estimated fair value using Level 3 inputs. The Company recognized store asset impairment charges of $5 million and $18 million in the first quarters of 2013 and 2012, respectively.

The first quarter 2013 impairment charge reflects 36 stores that were reduced to estimated salvage value of $1 million and assets for 24 locations that were reduced to estimated fair value of $5 million based on their projected cash flows, discounted at 14%. The remaining value after asset impairment charges will be depreciated over the remaining useful lives. These and other lower-performing locations are particularly sensitive to changes in projected cash flows over the forecast period and additional impairment is possible in future periods if results are below projections. A 100 basis point decrease in sales used in these estimates would have increased impairment by approximately $1.7 million. Independent of the sensitivity on sales assumptions, a 50 basis point decrease in gross margin would have increased the impairment by approximately $1.1 million. The interrelationship of having both of those inputs change as indicated would have resulted in impairment approximately $0.1 million less than the sum of the two individual inputs.

The Company will continue to evaluate initiatives to improve performance and lower operating costs. To the extent that forward-looking sales and operating assumptions are not achieved and are subsequently reduced, additional impairment charges may result. Additionally, unless store performance improves, future impairment charges may result. However, at the end of the first quarter of 2013, the impairment analysis reflects the Company’s best estimate of future performance, including the intended future use of the Company’s retail store assets.

Fair Value Estimates Used for Paid-in-Kind Dividends

The Company’s Board of Directors can elect to pay quarterly dividends on the preferred stock in cash or in-kind. Dividends paid-in-kind are measured at fair value, using Level 3 inputs. The Company uses a binomial simulation that captures the call, conversion, and interest rate reset features as well the optionality of paying the dividend in-kind or in cash. The Board of Directors and Company’s management consider then-current and estimated future liquidity factors in making that quarterly decision.

Dividends were paid in cash for the first quarter of 2013. For the first quarter of 2012, dividends were paid-in-kind and the simulation was based on a beginning stock price of $3.45, stock price volatility of 60.7%, a risk free rate of 3.4%, credit spread of 16.5% and a beginning liquidity measure of approximately $245 million. The calculation resulted in a fair value estimate of approximately $8.2 million for the first quarter of 2012.