NOTE 2: Fair Value Measurements
Fair value is defined 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. The authoritative guidance for fair value measurements establishes a three-level hierarchy, which encourages an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the hierarchy are defined as follows:
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• | Level 1 - inputs to the valuation techniques that are quoted prices in active markets for identical assets or liabilities |
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• | Level 2 - inputs to the valuation techniques that are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly |
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• | Level 3 - inputs to the valuation techniques that are unobservable for the assets or liabilities |
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following tables present the Company’s financial assets measured at fair value on a recurring basis as of January 31, 2014 and February 1, 2013, classified by fair value hierarchy:
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| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
(In millions) | January 31, 2014 |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
Available-for-sale securities: | | | | | | | |
Money market funds | $ | 128 |
| | $ | 128 |
| | $ | — |
| | $ | — |
|
Certificates of deposit | 21 |
| | 21 |
| | — |
| | — |
|
Municipal obligations | 18 |
| | — |
| | 18 |
| | — |
|
Municipal floating rate obligations | 18 |
| | — |
| | 18 |
| | — |
|
Total short-term investments | $ | 185 |
| | $ | 149 |
| | $ | 36 |
| | $ | — |
|
| | | | | | | |
Available-for-sale securities: | |
| | |
| | |
| | |
|
Municipal floating rate obligations | $ | 265 |
| | $ | — |
| | $ | 265 |
| | $ | — |
|
Municipal obligations | 14 |
| | — |
| | 14 |
| | — |
|
Total long-term investments | $ | 279 |
| | $ | — |
| | $ | 279 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
(In millions) | February 1, 2013 |
| | Level 1 |
| | Level 2 |
| | Level 3 |
|
Available-for-sale securities: | | | | | | | |
Money market funds | $ | 49 |
| | $ | 49 |
| | $ | — |
| | $ | — |
|
Municipal obligations | 56 |
| | — |
| | 56 |
| | — |
|
Municipal floating rate obligations | 14 |
| | — |
| | 14 |
| | — |
|
Other | 6 |
| | — |
| | 6 |
| | — |
|
Total short-term investments | $ | 125 |
| | $ | 49 |
| | $ | 76 |
| | $ | — |
|
| | | | | | | |
Available-for-sale securities: | |
| | |
| | |
| | |
|
Municipal floating rate obligations | $ | 230 |
| | $ | — |
| | $ | 230 |
| | $ | — |
|
Municipal obligations | 41 |
| | — |
| | 41 |
| | — |
|
Total long-term investments | $ | 271 |
| | $ | — |
| | $ | 271 |
| | $ | — |
|
There were no transfers between Levels 1, 2 or 3 during any of the periods presented.
When available, quoted prices were used to determine fair value. When quoted prices in active markets were available, investments were classified within Level 1 of the fair value hierarchy. When quoted prices in active markets were not available, fair values were determined using pricing models, and the inputs to those pricing models were based on observable market inputs. The inputs to the pricing models were typically benchmark yields, reported trades, broker-dealer quotes, issuer spreads and benchmark securities, among others.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
For the years ended January 31, 2014 and February 1, 2013, the Company’s only significant assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition were certain assets subject to long-lived asset impairment.
The Company reviews the carrying amounts of long-lived assets whenever certain events or changes in circumstances indicate that the carrying amounts may not be recoverable. With input from store operations, the Company’s accounting and finance personnel that organizationally report to the chief financial officer, assess the performance of retail stores quarterly against historical patterns and projections of future profitability for evidence of possible impairment. An impairment loss is recognized when the carrying amount of the asset (disposal) group is not recoverable and exceeds its fair value. The Company estimated the fair values of assets subject to long-lived asset impairment based on the Company’s own judgments about the assumptions that market participants would use in pricing the assets and on observable market data, when available. The Company classified these fair value measurements as Level 3.
In the determination of impairment for operating locations, the Company determined the fair values of individual operating locations using an income approach, which required discounting projected future cash flows. When determining the stream of projected future cash flows associated with an individual operating location, management made assumptions, incorporating local market conditions and inputs from store operations, about key variables including the following unobservable inputs: sales growth rates, gross margin, controllable expenses, such as payroll and occupancy expense, and asset residual values. In order to calculate the present value of those future cash flows, the Company discounted cash flow estimates at a rate commensurate with the risk that selected market participants would assign to the cash flows. In general, the selected market participants represented a group of other retailers with a location footprint similar in size to the Company’s.
During 2013, 15 operating locations experienced a triggering event and were evaluated for recoverability. One of the 15 operating locations was determined to be impaired due to a decline in recent cash flow trends and an unfavorable sales outlook, resulting in an impairment loss of $26 million. The discounted cash flow model used to estimate the fair value of the impaired operating location assumed average annual sales growth rates ranging from 2.0% to 5.0% over the remaining life of the location and applied a discount rate of approximately 6%.
The remaining 14 operating locations that experienced a triggering event during 2013 were determined to be recoverable and, therefore, were not impaired. For 11 of these 14 locations, the expected undiscounted cash flows substantially exceeded the net book value of the location’s assets. A 10% reduction in projected sales used to estimate future cash flows at the latest date these 11 operating locations were evaluated for impairment would have resulted in the impairment of four of these locations and increased recognized impairment losses by $39 million.
Three of the operating locations with a net book value of $25 million had expected undiscounted cash flows that exceeded the net book value of its assets by less than a substantial amount. A 10% reduction in projected sales used to estimate future cash flows at the date these operating locations were evaluated for impairment would have resulted in the impairment of these three locations and increased recognized impairment losses by $23 million.
We analyzed other assumptions made in estimating the future cash flows of the operating locations evaluated for impairment, but the sensitivity of those assumptions was not significant to the estimates.
In the determination of impairment for excess properties held-for-use and held-for-sale, which consisted of retail outparcels and property associated with relocated or closed locations, the fair values were determined using a market approach based on estimated selling prices. The Company determined the estimated selling prices by obtaining information from property brokers or appraisers in the specific markets being evaluated or negotiated non-binding offers to purchase. The information obtained from property brokers or appraisers included comparable sales of similar assets and assumptions about demand in the market for these assets.
During 2013, the Company incurred total impairment charges of $19 million for 42 excess property locations. A 10% reduction in the estimated selling prices for these excess properties at the dates the locations were evaluated for impairment would have increased impairment losses by approximately $6 million.
The following tables present the Company’s non-financial assets measured at estimated fair value on a nonrecurring basis and the resulting long-lived asset impairment losses included in earnings, excluding costs to sell for excess properties held-for-sale. Because assets subject to long-lived asset impairment were not measured at fair value on a recurring basis, certain fair value measurements presented in the table may reflect values at earlier measurement dates and may no longer represent the fair values at January 31, 2014 and February 1, 2013.
Fair Value Measurements - Nonrecurring Basis
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| | | | | | | | | | | | | | | |
| January 31, 2014 | | February 1, 2013 |
(In millions) | Fair Value Measurements |
| | Impairment Losses |
| | Fair Value Measurements |
| | Impairment Losses |
|
Assets-held-for-use: | | | | | | | |
Operating locations | $ | 13 |
| | $ | (26 | ) | | $ | 19 |
| | $ | (55 | ) |
Excess properties | 56 |
| | (17 | ) | | 33 |
| | (17 | ) |
Assets-held-for-sale: | | | | | |
| | |
|
Excess properties | 4 |
| | (2 | ) | | 8 |
| | (4 | ) |
Total | $ | 73 |
| | $ | (45 | ) | | $ | 60 |
| | $ | (76 | ) |
Fair Value of Financial Instruments
The Company’s financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt and are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. The fair values of the Company’s unsecured notes classified as Level 1 were estimated using quoted market prices. The fair values of the Company’s mortgage notes classified as Level 2 were estimated using discounted cash flow analyses, based on the future cash outflows associated with these arrangements and discounted using the applicable risk-free borrowing rate.
Carrying amounts and the related estimated fair value of the Company’s long-term debt, excluding capitalized lease obligations, are as follows:
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| | | | | | | | | | | | | | | |
| January 31, 2014 | | February 1, 2013 |
| Carrying |
| | Fair |
| | Carrying |
| | Fair |
|
(In millions) | Amount |
| | Value |
| | Amount |
| | Value |
|
Unsecured notes (Level 1) | $ | 9,617 |
| | $ | 10,630 |
| | $ | 8,627 |
| | $ | 9,860 |
|
Mortgage notes (Level 2) | 17 |
| | 19 |
| | 19 |
| | 22 |
|
Long-term debt (excluding capitalized lease obligations) | $ | 9,634 |
| | $ | 10,649 |
| | $ | 8,646 |
| | $ | 9,882 |
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