Note 2 – Revenue Recognition

On February 1, 2018, the Company adopted Accounting Standard Codification Topic 606 (“ASC 606”) using the modified retrospective method as of January 31, 2018. The Company recognized a cumulative effect adjustment to the opening balance of stockholders’ equity at February 1, 2018 that reduced stockholders’ equity by $53.7 million, net of tax, as a result of the adoption of ASC 606.

Prospectively, the adoption of ASC 606 primarily affects the timing of recognition of certain adjustments that are recorded in net sales for the wholesale operations segment. Under ASC 606, revenue is recognized upon the transfer of goods to customers in an amount that reflects the expected consideration to be received in exchange for these goods. The difference between the amount initially billed and the amount collected represents variable consideration. Variable consideration includes trade discounts, end of season markdowns, sales allowances, cooperative advertising, return liabilities and other customer allowances. Under ASC 606, the Company estimates the anticipated variable consideration and records this estimate as a reduction of revenue in the period the related product revenue is recognized. Prior to adopting ASC 606, certain components of variable consideration were recorded at a later date when the liability was known or incurred.

The adoption of ASC 606 also resulted in prospectively changing the presentation of certain items on the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Income and Comprehensive Income. Under the prior guidance, the liability recorded in connection with variable consideration was recorded as a reduction to accounts receivable. With the adoption of ASC 606, these amounts have been classified as a current liability under “Customer refund liabilities” in the Condensed Consolidated Balance Sheet. Additionally, the Company now classifies cooperative advertising as a reduction of net sales in the Condensed Consolidated Statements of Income and Comprehensive Income. Previously, cooperative advertising was recorded in selling, general and administrative expenses. ASC 606 requires that costs expected to be incurred when products are returned should be accrued for upon the sale of the product as a component of cost of goods sold. These restocking costs were previously recognized when incurred and recorded in selling, general and administrative expenses.

The following tables summarize the impact of adopting ASC 606 on the Company’s Condensed Consolidated Balance Sheet as of October 31, 2018 and the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended October 31, 2018:


	October 31, 2018
	(In thousands)
	As Reported		Without Adoption of ASC 606		Impact of Adoption of ASC 606
Assets
Accounts receivable	$	819,636	$	646,333	$	173,303
Inventories		616,162		653,664		(37,502)
Prepaid expenses and other current assets		82,933		48,991		33,942
Deferred income tax assets, net		28,336		11,792		16,544

Liabilities
Accrued expenses		137,878		136,627		1,251
Customer refund liabilities		235,400		—		235,400

Equity
Retained earnings		734,800		785,164		(50,364)


	For the three months ended October 31, 2018
	(In thousands, except per share amounts)
	As Reported		Without Adoption of ASC 606		Impact of Adoption of ASC 606
Net sales	$	1,072,982	$	1,081,879	$	(8,897)
Cost of goods sold		690,882		690,367		515
Selling, general and administrative expenses		232,052		240,916		(8,864)
Operating profit		140,015		140,563		(548)
Income tax expense		33,843		34,039		(196)
Net income		94,025		94,377		(352)

Net income per common share
Basic		1.91		1.92		(0.01)
Diluted		1.86		1.87		(0.01)


	For the nine months ended October 31, 2018
	(In thousands, except per share amounts)
	As Reported		Without Adoption of ASC 606		Impact of Adoption of ASC 606
Net sales	$	2,309,423	$	2,322,675	$	(13,252)
Cost of goods sold		1,461,252		1,458,494		2,758
Selling, general and administrative expenses		632,983		653,602		(20,619)
Operating profit		186,320		181,711		4,609
Income tax expense		39,877		38,632		1,245
Net income		113,987		110,623		3,364

Net income per common share
Basic		2.32		2.25		0.07
Diluted		2.26		2.20		0.06

The adoption of ASC 606 had no net impact on the Company’s cash flows from operations.

Disaggregation of Revenue

In accordance with ASC 606, the Company elected to disclose its revenues by segment. Each segment presents its own characteristics with respect to the timing of revenue recognition and the type of customer. In addition, disaggregating revenues using a segment basis is consistent with how the Company’s Chief Operating Decision Maker manages the Company. The Company identified the wholesale operations segment and the retail operations segment as distinct sources of revenue.

Wholesale Operations Segment. Wholesale revenues include sales of products to retailers under owned, licensed and private label brands, as well as sales related to the Vilebrequin business. Wholesale revenues also include revenues from license agreements related to trademarks owned by the DKNY, Donna Karan, G.H. Bass, Andrew Marc and Vilebrequin businesses. Wholesale revenues are recognized when control transfers to the customer. The Company considers control to have been transferred when the Company has transferred physical possession of the product, the Company has a right to payment for the product, the customer has legal title to the product and the customer has the significant risks and rewards of the product. Wholesale revenues are adjusted by variable considerations arising from implicit or explicit obligations. As of October 31, 2018, revenues from license agreements represented an insignificant portion of wholesale revenues.

Retail Operations Segment. Retail store revenues are generated by direct sales to consumers through company-operated stores and product sales through the Company’s owned websites for the DKNY, Donna Karan, Wilsons, G.H. Bass, Andrew Marc and Karl Lagerfeld Paris businesses. Retail stores primarily consist of Wilsons Leather, G.H. Bass and DKNY retail stores, substantially all of which are operated as outlet stores. Retail operations segment revenues are recognized at the point of sale when the customer takes possession of the goods and tenders payment. E-commerce revenues primarily consist of sales to consumers through the Company’s e-commerce platforms. E-commerce revenue is recognized when a customer takes possession of the goods. Retail sales are recorded net of applicable sales tax.

Variable Consideration. The difference between the amount initially billed and the amount collected represents variable consideration. The Company may provide customers with discounts, rebates, credit returns and price reductions. The Company may also contribute to customers’ promotional activities or incur charges for compliance violations. These adjustments to the initial selling price often occur after the sales process is completed.

The Company identified the following elements of variable consideration:

Markdowns. Markdown allowances consist of accommodations in the form of price reductions to wholesale customers for purchased merchandise. In general, markdowns are granted to full price customers, such as department stores. Markdowns may vary year-over-year and are granted based on the performance of Company merchandise at customer retail stores.

Term Discounts. Term discounts represent a discount from the initial wholesale sales price to certain wholesale customers consistent with customary industry practice.

Sales Allowances. Sales allowances are reductions of the selling price agreed upon with wholesale customers. Sales allowances may be contractual or may be granted on a case-by-case basis. Non-contractual sales allowances may be granted in connection with billing adjustments and, in some cases, for product related issues.

Advertising Allowances. Advertising allowances consist of the Company’s financial participation in the promotional efforts of its wholesale customers. Wholesale customers may charge back a portion of the advertising expense incurred against open invoices. Advertising programs are generally agreed upon at the beginning of a season.

Other Allowances. General allowances consist of price reductions granted to a wholesale customer and may relate to the Company’s participation in costs incurred by the customer during the sales process, as well as price differences, shortages and charges for operational non-compliance.

Return of Merchandise. For wholesale customers, the Company may make accommodations for returns of merchandise that is underperforming at a customer’s retail stores. For retail customers, as a matter of Company policy, whether merchandise is purchased at the Company’s stores or on its e-commerce platforms, the consumer has up to 90 days to return merchandise from the date of purchase.

Variable consideration is estimated based on historical experience, current contractual and statutory requirements, specific known events and industry trends. The reserves for variable consideration are recorded under customer refund liabilities. As of October 31, 2018, customer refund liabilities amounted to $235.4 million. Customer refund liabilities were recorded as a reduction to accounts receivable as of January 31, 2018 and October 31, 2017. Historical return rates are calculated on a product line basis. The remainder of the historical rates for variable consideration are calculated by customer by product lines.

Contract Liabilities

The Company’s contract liabilities, which are recorded within accrued expenses in the accompanying Condensed Consolidated Balance Sheets, primarily consist of gift card liabilities and advance payments from licensees. In some of its retail concepts, the Company also runs a limited loyalty program where customers accumulate points redeemable for cash discount certificates that expire 90 days after issuance. Total contract liabilities were $4.2 million and $6.0 million at October 31, 2018 and January 31, 2018, respectively. The Company recognized $2.8 million in revenue for the three months ended October 31, 2018, which related to contract liabilities that existed at July 31, 2018. The Company recognized $4.9 million in revenue for the nine months ended October 31, 2018, which related to contract liabilities that existed at January 31, 2018. There were no contract assets recorded as of October 31, 2018 and January 31, 2018. Substantially all of the advance payments from licensees as of October 31, 2018 are expected to be recognized as revenue within the next twelve months.