Organization and Summary of Significant Accounting Policies (Policies)	12 Months Ended
Feb. 02, 2013
Organization and Business Activities	Organization and Business Activities We are a mall and web-based specialty retailer of apparel, accessories, music and gift items for young men and women whose lifestyles reflect a passion for music, fashion and pop culture. We primarily operate under two concepts: Hot Topic and Torrid. We launched a new test retail concept, Blackheart, during the fourth quarter of fiscal 2012. Music and pop culture are the overriding inspirations at Hot Topic, and Torrid is focused on providing the best in fashion to young plus-size women. At our Hot Topic stores and our website hottopic.com, we sell a selection of licensed and non-licensed apparel, accessories and gift items that are influenced by popular music artists and pop culture trends, designed to appeal to young men and women. We also sell a limited assortment of music CDs/vinyl LPs and DVDs at Hot Topic. At our Torrid stores and on our website torrid.com, we sell on-trend fashion apparel, lingerie and accessories inspired by and designed to fit the young, voluptuous woman who wears a size 12 and up. We generate revenues primarily through our retail stores in the United States of America, Puerto Rico and Canada, and online through our websites. We were incorporated in California in 1988 and opened our first Hot Topic store the following year in fiscal 1989. We opened our first Torrid store in fiscal 2001. We currently have one reportable segment given the similarities of the economic characteristics among the Hot Topic and Torrid concepts and the relatively immaterial business operations of our Blackheart test concept. During the second quarter of fiscal 2011, the operations of ShockHound, an online digital music website launched in fiscal 2008, were discontinued. Refer to “NOTE 2 – Business Events” contained in these consolidated financial statements and notes for more information concerning the discontinuation of ShockHound’s operations. Merger On March 6, 2013, we entered into an agreement and plan of merger with Sycamore Partners, discussed in more detail in “NOTE 15 – Subsequent Events” contained in these consolidated financial statements and notes.
Principles of Consolidation	Principles of Consolidation Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of Hot Topic, Inc. and our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Fiscal Year	Fiscal Year Our fiscal year ends on the Saturday nearest to January 31. References to fiscal 2013 refer to the 52-week period ending February 1, 2014. References to fiscal 2012 refer to the 53-week period ended February 2, 2013. References to fiscal 2011, 2010, 2009 and 2008 refer to the 52-week periods ended January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009.
Use of Estimates	Use of Estimates We are required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with generally accepted accounting principles. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Our most significant estimates relate to the valuation of inventory balances, the valuation of our auction rate security, the determination of sales returns, the assessment of expected cash flows used in evaluating long-lived assets for impairment, the determination of gift card breakage and estimates related to certain strategic business changes made during fiscal 2011 and 2010. The estimation process required to prepare our consolidated financial statements requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Our actual results could differ materially from those estimates.
Cash and Cash Equivalents	Cash and Cash Equivalents We consider all highly liquid investments with maturities of less than three months when purchased to be cash equivalents. All credit and debit card transactions that process in less than seven days are classified as cash and cash equivalents. The amounts due from third party financial institutions for these transactions classified as cash totaled $3.8 million and $2.9 million as of the end of fiscal 2012 and 2011, respectively. Cash used primarily for working capital purposes is maintained with various major financial institutions in amounts which are in excess of the Federal Deposit Insurance Corporation, or FDIC, insurance limits. We are potentially exposed to a concentration of credit risk when cash deposits in banks are in excess of FDIC limits. Excess cash and cash equivalents, which represent the majority of our cash and cash equivalents balance, are held primarily in diversified money market funds.
Fair Value of Financial Instruments	Fair Value of Financial Instruments We consider carrying amounts of cash and cash equivalents, receivables and accounts payable to approximate fair value because of the short maturity of these financial instruments.
Short-Term and Long-Term Investments	Short-Term and Long-Term Investments Our short-term investments consist of highly-rated interest-bearing municipal bonds that have maturities that are less than one year and are accounted for as available for sale. As of the end of fiscal 2012 and 2011, short-term investments consisted of municipal bonds of $6.2 million and $16.5 million, respectively. Refer to “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes for further discussion on how we determined the fair value of our short-term investments. The associated unrealized net gains and losses in fiscal 2012 and 2011, respectively, were immaterial and have been recorded in the consolidated statements of comprehensive income (loss). As of the end of fiscal 2012 and 2011, our long-term investment comprised of an auction rate security. Our auction rate security is a AAA/A3-rated debt instrument with a maturity of 25 years. It is accounted for as available for sale and backed by pools of student loans guaranteed by the U.S. Department of Education. Its interest rate is reset through an auction process, most commonly at intervals of approximately 4 weeks. This same auction process is designed to provide a means by which this security can be sold and prior to 2008 had provided a liquid market for it. There continues to be uncertainty in the global credit and capital markets, which has resulted in the failure of auctions representing the auction rate security we hold as the amount of securities submitted for sale in those auctions exceed the amount of bids. While we have continued to earn and receive interest on our auction rate security through the date of this report, we concluded that its estimated fair value no longer approximates par value. Due to the lack of availability of observable market quotes on our auction rate security, the fair market value of this security has been based on a valuation model using current assumptions. Refer to “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes for further discussion on how we determined the fair value of our auction rate security investment. As of the end of fiscal 2012 and 2011, the fair value of our auction rate security remained the same at $1.7 million. This fair value reflects a cumulative decline of $0.4 million from the par value. This cumulative $0.4 million decline ($0.2 million net of tax) is deemed temporary as we have the ability to hold this security and we do not have the intent to sell it below par value. Furthermore, it is not likely that we will be required to sell the security before the recovery of its amortized cost basis. If uncertainties in the credit and capital markets continue, we may incur additional losses, some of which may be other-than-temporary, which could negatively affect our financial condition or results of operations. In addition, in the event that we decide to sell this security and it becomes likely that we will be required to sell the security before the recovery of its amortized cost basis, we may be required to recognize impairment charges against income. We have classified our auction rate security as a non-current asset on our consolidated balance sheet, as we do not expect it to successfully auction and recover its full or par value within the next 12 months. In fiscal 2012, we recorded immaterial unrealized gains for our auction rate security in the consolidated statements of comprehensive income (loss). In fiscal 2011, we recorded unrealized gains of $0.1 million ($0.1 million net of tax), for our auction rate security in the consolidated statements of comprehensive income (loss). The $0.1 million unrealized gain in fiscal 2011 primarily represents a $149,000 recovery in fair value which was previously temporarily impaired, offset by a $52,000 decrease in fair value. The consolidated statements of comprehensive income (loss) is comprised of unrealized gains and losses from short-term and long-term investments, net of all related taxes, as well as foreign currency translation adjustments.
Inventories	Inventories Inventories are valued at the lower of average cost or market, on a weighted average cost basis, using the retail method. Under the retail method, inventory is stated at its current retail selling value and then is converted to a cost basis by applying an average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the purchase activity for the month. Throughout the year, we review our inventory levels in order to identify slow-moving merchandise and use permanent markdowns to sell through selected merchandise. We record a charge to cost of goods sold for permanent markdowns. Inherent in the retail method are certain significant management judgments and estimates including initial merchandise markup, future sales, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins. To the extent our estimated markdowns at period-end prove to be insufficient, additional future markdowns will need to be recorded. Physical inventories are conducted during the year to determine actual inventory on hand and shrinkage. We accrue our estimated inventory shrinkage for the period between the last physical count and current balance sheet date. Thus, the difference between actual and estimated shrink amounts may cause fluctuations in quarterly results, but not for the full fiscal year results.
Property and Equipment	Property and Equipment Property and equipment are recorded at cost less accumulated depreciation, or in the case of capitalized leases, at the present value of future minimum lease payments. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Application and development costs associated with internally developed software such as salaries of employees and payments made to third parties and consultants working on the software development are capitalized. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Capitalized internal use software costs are amortized using the straight-line method over their estimated useful lives, generally three years. In fiscal 2012, 2011 and 2010, we amortized approximately $1.2 million, $1.5 million and $1.8 million, respectively. Additionally, as of the end of fiscal 2012 and 2011, the net book value of capitalized internal use software totaled approximately $3.3 million and $2.5 million, respectively. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets (3 to 20 years). Leasehold improvements are amortized using the straight-line method over the shorter of the respective lease terms or the 10 year estimated useful life of the assets. We assess property and equipment for impairment whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable.
Valuation of Long-Lived Assets	Valuation of Long-Lived Assets We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For our Hot Topic and Torrid concepts, we group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Factors we consider important that could trigger an impairment review of our stores or online operations include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate, which we currently estimate to be approximately 13%, determined by management. These cash flows are calculated by netting future estimated sales of each store against estimated cost of goods sold, occupancy costs and other store operating expenses such as payroll, supplies, repairs and maintenance and credit/debit card fees. The discount rate, the estimated sales and the aforementioned costs and expenses used for this nonrecurring fair value measurement are considered significant Level 3 inputs as defined in “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes. Changes in these assumptions may cause the fair value to be significantly impacted. In the event future performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges. While we believe recently opened stores will provide sufficient cash flow, material changes in results could result in future impairment charges. In fiscal 2012, 2011 and 2010, we recorded store impairment charges of $0.5 million, $2.4 million (of which $0.9 million related to the cost reduction plan described in “NOTE 2 – Business Events” contained in these consolidated financial statements and notes) and $3.1 million (of which $1.2 million related to the cost reduction plan described in “NOTE 2 –Business Events” contained in these consolidated financial statements and notes), respectively, which are included in selling, general and administrative expenses in our consolidated statements of operations. During the third quarter of fiscal 2010, we concluded that ShockHound’s assets had become impaired due to its slower than expected revenue growth. Revenues from partnerships entered into in the earlier part of fiscal 2010, as well as other revenues, did not build as much as we had anticipated. In the third quarter of fiscal 2010, we recorded a full impairment charge of $3.0 million to selling, general and administrative expenses in our consolidated statements of operations.
Self-Insurance	Self-Insurance We are self-insured for certain losses related to medical and workers compensation claims although we maintain stop loss coverage with third party insurers to limit our total liability exposure. The estimate of our self-insurance liability involves uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. When estimating our self-insurance liability, we consider a number of factors, which include historical claim experience and valuations provided by independent third party actuaries. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.
Revenue Recognition	Revenue Recognition Revenue is generally recognized at our retail store locations at the point at which the customer receives and pays for the merchandise at the register. For online sales, revenue is recognized upon delivery to the customer. Sales are recognized net of merchandise returns, which are reserved for based on historical experience. As of the end of fiscal 2012, 2011 and 2010, net merchandise returns were $25.2 million, $24.3 million and $23.6 million, respectively. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. Shipping and handling revenues from our websites are included as a component of net sales. We recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed. Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods. During the fourth quarter of fiscal 2012, we performed an analysis of historical customer redemption patterns and based on the results of this analysis, we revised our estimated gift card breakage rate to 6% from the previous 5% to 6% range. In addition, the results of our analysis led us to conclude that customer redemption of our oldest gift cards was remote. These changes to our gift card beakage estimate resulted in additional gift card breakage income of $0.8 million recognized in net sales during the fourth quarter of fiscal 2012. While customer redemption patterns result in estimated gift card breakage, changes in our customers’ behavior could impact the amount that ultimately is unused and could affect the amount recognized as a component of net sales. In fiscal 2012, 2011 and 2010, we recognized $1.6 million (which includes the $0.8 million additional gift card breakage income described above), $0.9 million and $1.1 million, respectively, as a component of sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed.
Cost of Goods Sold, Including Buying, Distribution and Occupancy Costs	Cost of Goods Sold, Including Buying, Distribution and Occupancy Costs Cost of goods sold, including buying, distribution and occupancy costs includes: merchandise costs; freight; inventory shrink; payroll expenses associated with the merchandising and distribution departments; distribution center expenses including rent, common area maintenance charges, real estate taxes, depreciation, utilities, supplies and maintenance; and store expenses including rents, common area maintenance charges, real estate taxes and depreciation.
Vendor Allowances	Vendor Allowances We receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and pricing. Allowances received from vendors related to damaged merchandise and pricing are reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the items are sold. Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are received as these allowances are received after goods have been sold or marked down. In fiscal 2012, 2011 and 2010, we received vendor allowances of $6.0 million, $8.3 million and $8.5 million, respectively, substantially all of which were accounted for as a reduction of cost of goods sold. Most of the vendor allowances that we receive are based on on-going agreements and negotiations with vendors. We receive vendor allowances from substantially all of our vendors.
Selling, General and Administrative Expenses	Selling, General and Administrative Expenses Selling, general and administrative expenses include: payroll expenses associated with stores; store operating expenses; store pre-opening costs; marketing expenses; and payroll and other expenses associated with headquarters and administrative functions.
Store Pre-Opening Costs	Store Pre-Opening Costs These are costs incurred in connection with the opening of a new store and are expensed as incurred.
Shipping and Handling Costs	Shipping and Handling Costs We classify shipping and handling costs in costs of goods sold, including buying, distribution and occupancy costs in the accompanying consolidate statements of operations.
Rent Expense	Rent Expense Rent expense under our operating leases typically provides for fixed non-contingent rent escalations. We recognize rent expense on a straight-line basis over the non-cancelable term of the lease, commencing when we take possession of the property. Construction allowances are recorded as a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each lease. Our leases are discussed in more detail in “NOTE 9 – Commitments and Contingencies” contained in these consolidated financial statements and notes.
Advertising Costs	Advertising Costs Advertising costs are expensed the first time the event occurs or as incurred. During fiscal 2012, 2011 and 2010, advertising expenses were $7.8 million, $7.4 million and $8.5 million, respectively, and advertising reimbursements from vendors for these years were immaterial. As of the end of fiscal 2012 and 2011, the amount of advertising costs reported as prepaid advertising was immaterial.
Income Taxes	Income Taxes We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not that some portion or the entire asset will not be realized. We prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We include interest and penalties related to uncertain tax positions in income tax expense.
Stock-Based Payments	Stock-Based Payments We account for stock-based compensation expense by estimating the fair value of stock options granted, except for certain stock options granted in March 2011 that are subject to the vesting determination described in “NOTE 3 – Stock-Based Compensation” contained in these consolidated financial statements and notes, using the Black-Scholes option-pricing formula and a single option award approach. We estimated the fair value of the stock options granted in March 2011 that are subject to the vesting determination using a Monte Carlo simulation valuation model. Both of the option-pricing models used require the input of highly subjective assumptions, including the option’s expected life, price volatility of the underlying stock, risk free interest rate, early exercise behavior and expected dividend rate. As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.
Earnings (Loss) Per Share	Earnings (Loss) Per Share Basic earnings or loss per share is computed by dividing net income or net loss, respectively, by the weighted average number of common shares outstanding for the period. Diluted earnings per share is applicable only in periods of net income and is computed by dividing net income by the weighted average number of common shares outstanding for the period and potentially dilutive common stock equivalents outstanding for the period. Periods of net loss require the diluted computation to be the same as the basic computation.
Comprehensive Income (Loss)	Comprehensive Income (Loss) Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to shareholders. Other comprehensive (loss) income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity. Components of our comprehensive income (loss) include net income (loss), foreign currency translation adjustments and gains/losses associated with our short-term and long-term investments.
Impact of Recently Issued Accounting Pronouncements	Impact of Recently Issued Accounting Pronouncements In May 2011, the Financial Accounting Standards Board, or FASB, issued new guidance that results in a consistent definition of fair value and common requirements for measurement of, and disclosure about, fair value between U.S. Generally Accepted Accounting Pronouncements, or GAAP, and International Financial Reporting Standards, or IFRS. The new guidance changes some fair value measurement principles and disclosure requirements under U.S. GAAP. Several new disclosures about Level 3 measurements are required, including quantitative information about the significant unobservable inputs disclosed and a description of the valuation processes used by us. The new guidance was effective for interim or fiscal years beginning on or after December 15, 2011, with early adoption prohibited. Our adoption of this new guidance on January 29, 2012 did not have a material impact on our financial condition or results of operations. In June 2011, the FASB issued a final standard requiring entities to present net income (loss) and other comprehensive income (loss) in either a single continuous statement or in two separate, but consecutive, statements of net income (loss) and other comprehensive income (loss). The new standard eliminates the option to present items of other comprehensive income (loss) in the statement of changes in equity. The new requirements do not change which components of comprehensive income (loss) are recognized in net income (loss) or other comprehensive income (loss), or when an item of other comprehensive income (loss) must be reclassified to net income (loss). Also, earnings (loss) per share computations do not change. The new requirements were effective for interim and fiscal years beginning after December 15, 2011, with early adoption permitted. Full retrospective application was required. As this standard related only to the presentation of other comprehensive income (loss), our adoption of this new guidance on January 29, 2012 did not have a material impact on our financial condition or results of operations. In February 2013, the FASB issued new guidance requiring entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. It requires entities to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income (loss). This disclosure is required only if the amount reclassified is required under U.S. GAAP to be reclassified to net income (loss) in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income (loss), a cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts is required. The new guidance is effective for interim or fiscal years beginning on or after December 15, 2012, with early adoption permitted. The adoption of this new guidance is not expected to have a material impact on our financial condition or results of operations.

Organization and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Feb. 02, 2013

Organization and Business Activities We are a mall and web-based specialty retailer of apparel, accessories, music and gift items for young men and women whose lifestyles reflect a passion for music, fashion and pop culture. We primarily operate under two concepts: Hot Topic and Torrid. We launched a new test retail concept, Blackheart, during the fourth quarter of fiscal 2012. Music and pop culture are the overriding inspirations at Hot Topic, and Torrid is focused on providing the best in fashion to young plus-size women. At our Hot Topic stores and our website hottopic.com, we sell a selection of licensed and non-licensed apparel, accessories and gift items that are influenced by popular music artists and pop culture trends, designed to appeal to young men and women. We also sell a limited assortment of music CDs/vinyl LPs and DVDs at Hot Topic. At our Torrid stores and on our website torrid.com, we sell on-trend fashion apparel, lingerie and accessories inspired by and designed to fit the young, voluptuous woman who wears a size 12 and up. We generate revenues primarily through our retail stores in the United States of America, Puerto Rico and Canada, and online through our websites. We were incorporated in California in 1988 and opened our first Hot Topic store the following year in fiscal 1989. We opened our first Torrid store in fiscal 2001. We currently have one reportable segment given the similarities of the economic characteristics among the Hot Topic and Torrid concepts and the relatively immaterial business operations of our Blackheart test concept. During the second quarter of fiscal 2011, the operations of ShockHound, an online digital music website launched in fiscal 2008, were discontinued. Refer to “NOTE 2 – Business Events” contained in these consolidated financial statements and notes for more information concerning the discontinuation of ShockHound’s operations.

Merger On March 6, 2013, we entered into an agreement and plan of merger with Sycamore Partners, discussed in more detail in “NOTE 15 – Subsequent Events” contained in these consolidated financial statements and notes.

Principles of Consolidation

Principles of Consolidation Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of Hot Topic, Inc. and our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year

Fiscal Year Our fiscal year ends on the Saturday nearest to January 31. References to fiscal 2013 refer to the 52-week period ending February 1, 2014. References to fiscal 2012 refer to the 53-week period ended February 2, 2013. References to fiscal 2011, 2010, 2009 and 2008 refer to the 52-week periods ended January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009.

Use of Estimates

Use of Estimates We are required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with generally accepted accounting principles. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Our most significant estimates relate to the valuation of inventory balances, the valuation of our auction rate security, the determination of sales returns, the assessment of expected cash flows used in evaluating long-lived assets for impairment, the determination of gift card breakage and estimates related to certain strategic business changes made during fiscal 2011 and 2010. The estimation process required to prepare our consolidated financial statements requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Our actual results could differ materially from those estimates.

Cash and Cash Equivalents

Cash and Cash Equivalents We consider all highly liquid investments with maturities of less than three months when purchased to be cash equivalents. All credit and debit card transactions that process in less than seven days are classified as cash and cash equivalents. The amounts due from third party financial institutions for these transactions classified as cash totaled $3.8 million and $2.9 million as of the end of fiscal 2012 and 2011, respectively. Cash used primarily for working capital purposes is maintained with various major financial institutions in amounts which are in excess of the Federal Deposit Insurance Corporation, or FDIC, insurance limits. We are potentially exposed to a concentration of credit risk when cash deposits in banks are in excess of FDIC limits. Excess cash and cash equivalents, which represent the majority of our cash and cash equivalents balance, are held primarily in diversified money market funds.

Fair Value of Financial Instruments

Fair Value of Financial Instruments We consider carrying amounts of cash and cash equivalents, receivables and accounts payable to approximate fair value because of the short maturity of these financial instruments.

Short-Term and Long-Term Investments

Short-Term and Long-Term Investments Our short-term investments consist of highly-rated interest-bearing municipal bonds that have maturities that are less than one year and are accounted for as available for sale. As of the end of fiscal 2012 and 2011, short-term investments consisted of municipal bonds of $6.2 million and $16.5 million, respectively. Refer to “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes for further discussion on how we determined the fair value of our short-term investments. The associated unrealized net gains and losses in fiscal 2012 and 2011, respectively, were immaterial and have been recorded in the consolidated statements of comprehensive income (loss).

As of the end of fiscal 2012 and 2011, our long-term investment comprised of an auction rate security. Our auction rate security is a AAA/A3-rated debt instrument with a maturity of 25 years. It is accounted for as available for sale and backed by pools of student loans guaranteed by the U.S. Department of Education. Its interest rate is reset through an auction process, most commonly at intervals of approximately 4 weeks. This same auction process is designed to provide a means by which this security can be sold and prior to 2008 had provided a liquid market for it. There continues to be uncertainty in the global credit and capital markets, which has resulted in the failure of auctions representing the auction rate security we hold as the amount of securities submitted for sale in those auctions exceed the amount of bids. While we have continued to earn and receive interest on our auction rate security through the date of this report, we concluded that its estimated fair value no longer approximates par value. Due to the lack of availability of observable market quotes on our auction rate security, the fair market value of this security has been based on a valuation model using current assumptions. Refer to “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes for further discussion on how we determined the fair value of our auction rate security investment.

As of the end of fiscal 2012 and 2011, the fair value of our auction rate security remained the same at $1.7 million. This fair value reflects a cumulative decline of $0.4 million from the par value. This cumulative $0.4 million decline ($0.2 million net of tax) is deemed temporary as we have the ability to hold this security and we do not have the intent to sell it below par value. Furthermore, it is not likely that we will be required to sell the security before the recovery of its amortized cost basis. If uncertainties in the credit and capital markets continue, we may incur additional losses, some of which may be other-than-temporary, which could negatively affect our financial condition or results of operations. In addition, in the event that we decide to sell this security and it becomes likely that we will be required to sell the security before the recovery of its amortized cost basis, we may be required to recognize impairment charges against income. We have classified our auction rate security as a non-current asset on our consolidated balance sheet, as we do not expect it to successfully auction and recover its full or par value within the next 12 months.

In fiscal 2012, we recorded immaterial unrealized gains for our auction rate security in the consolidated statements of comprehensive income (loss).

In fiscal 2011, we recorded unrealized gains of $0.1 million ($0.1 million net of tax), for our auction rate security in the consolidated statements of comprehensive income (loss). The $0.1 million unrealized gain in fiscal 2011 primarily represents a $149,000 recovery in fair value which was previously temporarily impaired, offset by a $52,000 decrease in fair value.

The consolidated statements of comprehensive income (loss) is comprised of unrealized gains and losses from short-term and long-term investments, net of all related taxes, as well as foreign currency translation adjustments.

Inventories

Inventories Inventories are valued at the lower of average cost or market, on a weighted average cost basis, using the retail method. Under the retail method, inventory is stated at its current retail selling value and then is converted to a cost basis by applying an average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the purchase activity for the month. Throughout the year, we review our inventory levels in order to identify slow-moving merchandise and use permanent markdowns to sell through selected merchandise. We record a charge to cost of goods sold for permanent markdowns. Inherent in the retail method are certain significant management judgments and estimates including initial merchandise markup, future sales, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins. To the extent our estimated markdowns at period-end prove to be insufficient, additional future markdowns will need to be recorded. Physical inventories are conducted during the year to determine actual inventory on hand and shrinkage. We accrue our estimated inventory shrinkage for the period between the last physical count and current balance sheet date. Thus, the difference between actual and estimated shrink amounts may cause fluctuations in quarterly results, but not for the full fiscal year results.

Property and Equipment

Property and Equipment Property and equipment are recorded at cost less accumulated depreciation, or in the case of capitalized leases, at the present value of future minimum lease payments. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Application and development costs associated with internally developed software such as salaries of employees and payments made to third parties and consultants working on the software development are capitalized. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Capitalized internal use software costs are amortized using the straight-line method over their estimated useful lives, generally three years. In fiscal 2012, 2011 and 2010, we amortized approximately $1.2 million, $1.5 million and $1.8 million, respectively. Additionally, as of the end of fiscal 2012 and 2011, the net book value of capitalized internal use software totaled approximately $3.3 million and $2.5 million, respectively.

Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets (3 to 20 years).

Leasehold improvements are amortized using the straight-line method over the shorter of the respective lease terms or the 10 year estimated useful life of the assets.

We assess property and equipment for impairment whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable.

Valuation of Long-Lived Assets

Valuation of Long-Lived Assets We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For our Hot Topic and Torrid concepts, we group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Factors we consider important that could trigger an impairment review of our stores or online operations include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate, which we currently estimate to be approximately 13%, determined by management. These cash flows are calculated by netting future estimated sales of each store against estimated cost of goods sold, occupancy costs and other store operating expenses such as payroll, supplies, repairs and maintenance and credit/debit card fees. The discount rate, the estimated sales and the aforementioned costs and expenses used for this nonrecurring fair value measurement are considered significant Level 3 inputs as defined in “NOTE 7 – Fair Value Measurements” contained in these consolidated financial statements and notes. Changes in these assumptions may cause the fair value to be significantly impacted. In the event future performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges. While we believe recently opened stores will provide sufficient cash flow, material changes in results could result in future impairment charges.

In fiscal 2012, 2011 and 2010, we recorded store impairment charges of $0.5 million, $2.4 million (of which $0.9 million related to the cost reduction plan described in “NOTE 2 – Business Events” contained in these consolidated financial statements and notes) and $3.1 million (of which $1.2 million related to the cost reduction plan described in “NOTE 2 –Business Events” contained in these consolidated financial statements and notes), respectively, which are included in selling, general and administrative expenses in our consolidated statements of operations. During the third quarter of fiscal 2010, we concluded that ShockHound’s assets had become impaired due to its slower than expected revenue growth. Revenues from partnerships entered into in the earlier part of fiscal 2010, as well as other revenues, did not build as much as we had anticipated. In the third quarter of fiscal 2010, we recorded a full impairment charge of $3.0 million to selling, general and administrative expenses in our consolidated statements of operations.

Self-Insurance

Self-Insurance We are self-insured for certain losses related to medical and workers compensation claims although we maintain stop loss coverage with third party insurers to limit our total liability exposure. The estimate of our self-insurance liability involves uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. When estimating our self-insurance liability, we consider a number of factors, which include historical claim experience and valuations provided by independent third party actuaries. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

Revenue Recognition

Revenue Recognition Revenue is generally recognized at our retail store locations at the point at which the customer receives and pays for the merchandise at the register. For online sales, revenue is recognized upon delivery to the customer. Sales are recognized net of merchandise returns, which are reserved for based on historical experience. As of the end of fiscal 2012, 2011 and 2010, net merchandise returns were $25.2 million, $24.3 million and $23.6 million, respectively. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. Shipping and handling revenues from our websites are included as a component of net sales.

We recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed. Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods. During the fourth quarter of fiscal 2012, we performed an analysis of historical customer redemption patterns and based on the results of this analysis, we revised our estimated gift card breakage rate to 6% from the previous 5% to 6% range. In addition, the results of our analysis led us to conclude that customer redemption of our oldest gift cards was remote. These changes to our gift card beakage estimate resulted in additional gift card breakage income of $0.8 million recognized in net sales during the fourth quarter of fiscal 2012. While customer redemption patterns result in estimated gift card breakage, changes in our customers’ behavior could impact the amount that ultimately is unused and could affect the amount recognized as a component of net sales. In fiscal 2012, 2011 and 2010, we recognized $1.6 million (which includes the $0.8 million additional gift card breakage income described above), $0.9 million and $1.1 million, respectively, as a component of sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed.

Cost of Goods Sold, Including Buying, Distribution and Occupancy Costs

Cost of Goods Sold, Including Buying, Distribution and Occupancy Costs Cost of goods sold, including buying, distribution and occupancy costs includes: merchandise costs; freight; inventory shrink; payroll expenses associated with the merchandising and distribution departments; distribution center expenses including rent, common area maintenance charges, real estate taxes, depreciation, utilities, supplies and maintenance; and store expenses including rents, common area maintenance charges, real estate taxes and depreciation.

Vendor Allowances

Vendor Allowances We receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and pricing. Allowances received from vendors related to damaged merchandise and pricing are reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the items are sold. Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are received as these allowances are received after goods have been sold or marked down. In fiscal 2012, 2011 and 2010, we received vendor allowances of $6.0 million, $8.3 million and $8.5 million, respectively, substantially all of which were accounted for as a reduction of cost of goods sold. Most of the vendor allowances that we receive are based on on-going agreements and negotiations with vendors. We receive vendor allowances from substantially all of our vendors.

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses Selling, general and administrative expenses include: payroll expenses associated with stores; store operating expenses; store pre-opening costs; marketing expenses; and payroll and other expenses associated with headquarters and administrative functions.

Store Pre-Opening Costs

Store Pre-Opening Costs These are costs incurred in connection with the opening of a new store and are expensed as incurred.

Shipping and Handling Costs

Shipping and Handling Costs We classify shipping and handling costs in costs of goods sold, including buying, distribution and occupancy costs in the accompanying consolidate statements of operations.

Rent Expense

Rent Expense Rent expense under our operating leases typically provides for fixed non-contingent rent escalations. We recognize rent expense on a straight-line basis over the non-cancelable term of the lease, commencing when we take possession of the property. Construction allowances are recorded as a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each lease. Our leases are discussed in more detail in “NOTE 9 – Commitments and Contingencies” contained in these consolidated financial statements and notes.

Advertising Costs

Advertising Costs Advertising costs are expensed the first time the event occurs or as incurred. During fiscal 2012, 2011 and 2010, advertising expenses were $7.8 million, $7.4 million and $8.5 million, respectively, and advertising reimbursements from vendors for these years were immaterial. As of the end of fiscal 2012 and 2011, the amount of advertising costs reported as prepaid advertising was immaterial.

Income Taxes

Income Taxes We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not that some portion or the entire asset will not be realized.

We prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We include interest and penalties related to uncertain tax positions in income tax expense.

Stock-Based Payments

Stock-Based Payments We account for stock-based compensation expense by estimating the fair value of stock options granted, except for certain stock options granted in March 2011 that are subject to the vesting determination described in “NOTE 3 – Stock-Based Compensation” contained in these consolidated financial statements and notes, using the Black-Scholes option-pricing formula and a single option award approach. We estimated the fair value of the stock options granted in March 2011 that are subject to the vesting determination using a Monte Carlo simulation valuation model. Both of the option-pricing models used require the input of highly subjective assumptions, including the option’s expected life, price volatility of the underlying stock, risk free interest rate, early exercise behavior and expected dividend rate. As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

Earnings (Loss) Per Share

Earnings (Loss) Per Share Basic earnings or loss per share is computed by dividing net income or net loss, respectively, by the weighted average number of common shares outstanding for the period. Diluted earnings per share is applicable only in periods of net income and is computed by dividing net income by the weighted average number of common shares outstanding for the period and potentially dilutive common stock equivalents outstanding for the period. Periods of net loss require the diluted computation to be the same as the basic computation.

Comprehensive Income (Loss)

Comprehensive Income (Loss) Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to shareholders. Other comprehensive (loss) income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income (loss), but excluded from net income (loss) as these amounts are recorded directly as an adjustment to shareholders’ equity. Components of our comprehensive income (loss) include net income (loss), foreign currency translation adjustments and gains/losses associated with our short-term and long-term investments.

Impact of Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board, or FASB, issued new guidance that results in a consistent definition of fair value and common requirements for measurement of, and disclosure about, fair value between U.S. Generally Accepted Accounting Pronouncements, or GAAP, and International Financial Reporting Standards, or IFRS. The new guidance changes some fair value measurement principles and disclosure requirements under U.S. GAAP. Several new disclosures about Level 3 measurements are required, including quantitative information about the significant unobservable inputs disclosed and a description of the valuation processes used by us. The new guidance was effective for interim or fiscal years beginning on or after December 15, 2011, with early adoption prohibited. Our adoption of this new guidance on January 29, 2012 did not have a material impact on our financial condition or results of operations.

In June 2011, the FASB issued a final standard requiring entities to present net income (loss) and other comprehensive income (loss) in either a single continuous statement or in two separate, but consecutive, statements of net income (loss) and other comprehensive income (loss). The new standard eliminates the option to present items of other comprehensive income (loss) in the statement of changes in equity. The new requirements do not change which components of comprehensive income (loss) are recognized in net income (loss) or other comprehensive income (loss), or when an item of other comprehensive income (loss) must be reclassified to net income (loss). Also, earnings (loss) per share computations do not change. The new requirements were effective for interim and fiscal years beginning after December 15, 2011, with early adoption permitted. Full retrospective application was required. As this standard related only to the presentation of other comprehensive income (loss), our adoption of this new guidance on January 29, 2012 did not have a material impact on our financial condition or results of operations.

In February 2013, the FASB issued new guidance requiring entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. It requires entities to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income (loss) by the respective line items of net income (loss). This disclosure is required only if the amount reclassified is required under U.S. GAAP to be reclassified to net income (loss) in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income (loss), a cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts is required. The new guidance is effective for interim or fiscal years beginning on or after December 15, 2012, with early adoption permitted. The adoption of this new guidance is not expected to have a material impact on our financial condition or results of operations.