Comprehensive Case Analysis Instructions_OMBA (1).docx
Income Statement CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) shares in Millions, $ in Millions12 Months Ended Feb. 03, 2018Jan. 28, 2017Jan. 30, 2016 Income Statement [Abstract] Total net sales$ 12,506$ 12,547$ 12,625 Costs and expenses/(income): Cost of goods sold (exclusive of depreciation and amortization shown separately below)8,1748,0718,074 Selling, general and administrative (SG&A)3,4683,5383,775 Pension2119162 Depreciation and amortization570609616 Real estate and other, net(146)(111)3 Restructuring and management transition3032684 Total costs and expenses12,39012,15212,714 Operating income/(loss)116395(89) Loss on extinguishment of debt333010 Net interest expense325363405 Income/(loss) before income taxes(242)2(504) Income tax expense/(benefit)(126)19 Net income/(loss)$ (116)$ 1$ (513) Earnings/(loss) per share: Basic (in dollars per share)$ (0.37)$ 0$ (1.68) Diluted (in dollars per share)$ (0.37)$ 0$ (1.68) Weighted average shares – basic311.1308.1305.9 Weighted average shares – diluted311.1313305.9 Balance Sheet CONSOLIDATED BALANCE SHEETS - USD ($) $ in MillionsFeb. 03, 2018Jan. 28, 2017 Current assets: Cash in banks and in transit$ 116$ 125 Cash short-term investments342762 Cash and cash equivalents458887 Merchandise inventory2,7622,854 Prepaid expenses and other190160 Total current assets3,4103,901 Property and equipment4,2814,599 Prepaid pension610 Other assets661618 Total Assets8,4139,118 Current liabilities: Merchandise accounts payable973977 Other accounts payable and accrued expenses1,1191,164 Current portion of capital leases, financing obligation and note payable815 Current maturities of long-term debt232263 Total current liabilities2,3322,419 Long-term capital leases, financing obligation and note payable212219 Long-term debt3,7804,339 Deferred taxes143204 Other liabilities567583 Total Liabilities7,0347,764 Stockholders' Equity Common stock156154 Additional paid-in capital4,7054,679 Reinvested earnings/(accumulated deficit)(3,122)(3,006) Accumulated other comprehensive income/(loss)(360)(473) Total Stockholders’ Equity1,3791,354 Total Liabilities and Stockholders’ Equity$ 8,413$ 9,118 Shareholders' Equity CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) shares in Millions, $ in MillionsTotalCommon Stock Additional Paid-in Capital Reinvested Earnings/(Loss)Accumulated Other Comprehensive Income/(Loss) Balance as of the beginning of the period at Jan. 31, 2015$ 1,914$ 152$ 4,606$ (2,494)$ (350) Shares balance as of the beginning of the period at Jan. 31, 2015304.9 Increase (Decrease) in Stockholders' Equity [Roll Forward] Net income/(loss)(513)(513) Other comprehensive income/(loss)(141)(141) Stock-based compensation and other49$ 148 Stock-based compensation, shares1.2 Balance as of the end of the period at Jan. 30, 20161,309$ 1534,654(3,007)(491) Shares balance as of the end of the period at Jan. 30, 2016306.1 Increase (Decrease) in Stockholders' Equity [Roll Forward] Net income/(loss)11 Other comprehensive income/(loss)1818 Stock-based compensation and other26$ 125 Stock-based compensation, shares2.2 Balance as of the end of the period at Jan. 28, 20171,354$ 1544,679(3,006)(473) Shares balance as of the end of the period at Jan. 28, 2017308.3 Increase (Decrease) in Stockholders' Equity [Roll Forward] Net income/(loss)(116) Other comprehensive income/(loss)113113 Stock-based compensation and other28$ 226 Stock-based compensation, shares3.7 Balance as of the end of the period at Feb. 03, 2018$ 1,379$ 156$ 4,705$ (3,122)$ (360) Shares balance as of the end of the period at Feb. 03, 2018312 Cash Flows CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Millions12 Months Ended Feb. 03, 2018Jan. 28, 2017Jan. 30, 2016 Cash flows from operating activities Net income/(loss)$ (116)$ 1$ (513) Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: Restructuring and management transition74(1)10 Asset impairments and other charges6325 Net gain on sale of non-operating assets0(5)(9) Net gain from sale of operating assets(119)(73)(9) Loss on extinguishment of debt333010 Depreciation and amortization570609616 Benefit plans106(39)127 Stock-based compensation253544 Other comprehensive income tax benefits(60)(12)0 Deferred taxes(63)90 Change in cash from: Inventory92(133)(69) Prepaid expenses and other assets(15)1119 Merchandise accounts payable(4)52(72) Income taxes(12)(6)4 Accrued expenses and other(63)(147)257 Net cash provided by/(used in) operating activities454334440 Cash flows from investing activities Capital expenditures(395)(427)(320) Proceeds from sale of non-operating assets0213 Proceeds from sale of operating assets1549611 Joint venture return of investment9130 Insurance proceeds received for damage to property and equipment300 Net cash provided by/(used in) investing activities(229)(316)(296) Cash flows from financing activities Proceeds from issuance of long-term debt02,1880 Proceeds from borrowings under the credit facility8046670 Payments of borrowings under the credit facility(804)(667)0 Net proceeds from financing obligation02160 Premium on early retirement of debt(30)00 Payments of capital leases, financing obligation and note payable(16)(29)(33) Payments of long-term debt(599)(2,349)(520) Financing costs(9)(49)(4) Proceeds from stock issued under stock plans520 Excess tax benefits from stock-based compensation000 Tax withholding payments for vested restricted stock(5)(10)(5) Net cash provided by/(used in) financing activities(654)(31)(562) Net increase/(decrease) in cash and cash equivalents(429)(13)(418) Cash and cash equivalents at beginning of period8879001,318 Cash and cash equivalents at end of period$ 458$ 887$ 900 Notes Significant Accounting Policies (Policy)12 Months Ended Feb. 03, 2018 Accounting Policies [Abstract] Revenue Recognition, Sales of GoodsTotal net sales, which exclude sales taxes and are net of estimated returns, are generally recorded when payment is received and the customer takes possession of the merchandise. Revenue Recognition, Sales of ServicesService revenue is recorded at the time the customer receives the benefit of the service, such as salon, portrait, optical or custom decorating. Commissions earned on sales generated by licensed departments are included as a component of total net sales. Shipping and handling fees charged to customers are also included in total net sales with corresponding costs recorded as cost of goods sold. We provide for estimated future returns based primarily on historical return rates and sales levels. Revenue Recognition, Gift CardsGift Card Revenue Recognition At the time gift cards are sold, no revenue is recognized; rather, a liability is established for the face amount of the card. The liability is relieved and revenue is recognized when gift cards are redeemed for merchandise or services. We escheat a portion of unredeemed gift cards according to Delaware escheatment requirements that govern remittance of the cost of the merchandise portion of unredeemed gift cards over five years old. After reflecting the amount escheated, any remaining liability (referred to as breakage) is relieved and recognized as a reduction of SG&A expenses as an offset to the costs of administering the gift card program. Though our gift cards do not expire, it is our historical experience that the likelihood of redemption after 60 months is remote. The liability for gift cards is recorded in other accounts payable and accrued expenses on the Consolidated Balance Sheets. Customer Loyalty ProgramCustomer Loyalty Program Customers who spend a certain amount with us using our private label card or registered third party credit cards receive certificates, redeemable for merchandise or services in our stores the following two months. In accordance with the incremental cost method, we estimate the net cost of the rewards that will be redeemed and record this as cost of goods sold as rewards points are accumulated. Other administrative costs of the loyalty program are recorded in SG&A expenses as incurred. Cost of Goods SoldCost of Goods Sold (Exclusive of Depreciation and Amortization) Cost of goods sold includes costs directly related to bringing merchandise to its final selling destination. These costs include the cost of the merchandise (net of discounts or allowances earned), sourcing and procurement costs, buying and brand development costs, including buyers’ salaries and related expenses, royalties and design fees, freight costs, warehouse operating expenses, merchandise examination, inspection and testing, store merchandise distribution center expenses, including rent, and shipping and handling costs incurred on sales via the Internet. Vendor AllowancesVendor Allowances We receive vendor support in the form of cash payments or allowances for a variety of reimbursements such as cooperative advertising, markdowns, vendor shipping and packaging compliance, defective merchandise and the purchase of vendor specific fixtures. We have agreements in place with each vendor setting forth the specific conditions for each allowance or payment. Depending on the arrangement, we either recognize the allowance as a reduction of current costs or defer the payment over the period the related merchandise is sold. If the payment is a reimbursement for costs incurred, it is generally offset against those related costs; otherwise, it is treated as a reduction to the cost of merchandise. Markdown reimbursements related to merchandise that has been sold are negotiated and documented by our buying teams and are credited directly to cost of goods sold in the period received. Vendor allowances received prior to merchandise being sold are deferred and recognized as a reduction of inventory and credited to cost of goods sold based on an inventory turnover rate. Vendor compliance credits reimburse us for incremental merchandise handling expenses incurred due to a vendor’s failure to comply with our established shipping or merchandise preparation requirements. Vendor compliance credits are recorded as a reduction of merchandise handling costs. Selling, General and Administrative ExpensesSelling, General and Administrative Expenses SG&A expenses include the following costs, except as related to merchandise buying, sourcing, warehousing or distribution activities: salaries, marketing costs, occupancy and rent expense, utilities and maintenance, pre-opening expenses, costs related to information technology, administrative costs related to our home office and district and regional operations, real and personal property and other taxes (excluding income taxes) and credit/debit card fees (net of income earned on our private label credit card and co-branded MasterCard® programs). Advertising Cost, ExpensedAdvertising costs, which include newspaper, television, Internet search marketing, radio and other media advertising, are expensed either as incurred or the first time the advertisement occurs. Cooperative Advertising ProgramsFor cooperative advertising programs offered by national brands that require proof of advertising to be provided to the vendor to support the reimbursement of the incurred cost, we offset the allowances against the related advertising expense. Programs that do not require proof of advertising are monitored to ensure that the allowance provided by each vendor is a reimbursement of costs incurred to advertise for that particular vendor’s label. Income Taxes Income Taxes We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense in our Consolidated Statements of Operations. Earnings/(Loss) per ShareEarnings/(Loss) per Share Basic earnings/(loss) per share (EPS) is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income/(loss) by the weighted-average number of common shares outstanding during the period plus the number of additional common shares that would have been outstanding if the potentially dilutive shares had been issued. Potentially dilutive shares include stock options, unvested restricted stock units and awards and a warrant outstanding during the period, using the treasury stock method. Potentially dilutive shares are excluded from the computations of diluted EPS if their effect