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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2019

The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending December 29, 2019 (“fiscal year 2019”) and fiscal year 2018 are 52-week years. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years.

Change in Accounting Principle

In the fourth quarter of fiscal year 2018, the Company made a voluntary change in its accounting policy for the classification of certain expenses. Historically, the Company has presented store occupancy costs and buying costs in cost of goods sold. Under the new policy, the Company is presenting these expenses within selling, general and administrative expenses (“SG&A”). In addition, the Company changed the classification of depreciation and amortization (exclusive of supply chain-related depreciation included in cost of sales) from direct store expenses (“DSE”) and SG&A to a separate financial statement line item and combined DSE and store pre-opening costs into SG&A. These reclassifications had no impact on sales, income from operations, net income or earnings per share. In addition, there was no cumulative effect to retained earnings, equity, or net assets.

The Company made this voluntary change in accounting policy in order to better reflect the direct costs of acquiring products and making them available to its customers in cost of sales. Store occupancy costs and buying costs, which are largely sales and marketing driven, are more appropriately reflected in SG&A. The new presentation of operating expenses now largely disaggregates cash from non-cash operating expenses, which the Company believes provides better information to its financial statement users. The Company believes these changes are preferable because they enhance the comparability of its financial statements with those of many of its industry peers and align with how the Company internally manages and reviews costs and margin. These changes in presentation have been retrospectively applied to all prior periods. Refer to the table below for the impact to the thirteen and twenty-six weeks ended July 1, 2018, as currently presented:

	Thirteen weeks ended July 1, 2018
	Unadjusted		Change in Accounting Principle			As Adjusted
Cost of sales	$	941,281	$	(58,069	)	$	883,212
Gross profit		380,412		58,069			438,481
Direct store expenses		272,973		(272,973	)		—
Selling, general and administrative expenses		43,437		306,976			350,413
Depreciation and amortization (exclusive of depreciation included in cost of sales)		—		26,341			26,341
Store pre-opening costs		2,275		(2,275	)		—

	Twenty-six weeks ended July 1, 2018
	Unadjusted		Change in Accounting Principle			As Adjusted
Cost of sales	$	1,841,425	$	(115,626	)	$	1,725,799
Gross profit		767,464		115,626			883,090
Direct store expenses		535,568		(535,568	)		—
Selling, general and administrative expenses		84,884		604,303			689,187
Depreciation and amortization (exclusive of depreciation included in cost of sales)		—		52,486			52,486
Store pre-opening costs		5,595		(5,595	)		—

Revenue Recognition

The Company does not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current period from performance obligations satisfied in previous periods, or any remaining performance obligations as of the June 30, 2019. The Company had a net gift card liability balance of $8.6 million as of June 30, 2019 and $14.6 million as of December 30, 2018. The Company recognized $1.9 million and $7.3 million in gift card revenue during the thirteen and twenty-six weeks ended June 30, 2019, respectively.

Restricted Cash

Restricted cash relates to defined benefit plan forfeitures as well as health and welfare restricted funds of approximately $1.5 million and $0.7 million as of June 30, 2019 and December 30, 2018, respectively. These balances are included in Prepaid expenses and other current assets in the consolidated balance sheets.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (ASC 842).” ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than twelve months. Recognition, measurement and presentation of expenses will depend on classification as a financing or operating lease.

The Company adopted the standard as of December 31, 2018, the first day of fiscal year 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.

The adoption of the standard resulted in the recognition of operating lease assets and liabilities of approximately $1.0 billion and $1.1 billion, respectively, as of December 31, 2018, including recognition of operating lease assets and liabilities for certain third-party operated distribution center locations. Included in the measurement of the new lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and unfavorable and favorable leasehold interests. Additionally, the Company initially recognized a cumulative effect adjustment, which increased retained earnings by $21 million, net of tax. This adjustment was driven by the derecognition of approximately $114 million of lease obligations and $93 million of net assets related to leases that had been classified as financing lease obligations under the former failed-sale leaseback guidance, and are now classified as operating leases as of the transition date. During the thirteen weeks ended June 30, 2019, the Company reduced the initial cumulative effect adjustment recorded to retained earnings by $9.9 million, net of tax, to correct for an immaterial adjustment related to the adoption impact of certain tenant incentives, with a corresponding decrease to operating lease assets of $13.1 million and deferred tax liabilities of $3.2 million.

This reclassification also resulted in the recognition of rent expense beginning December 31, 2018, which was previously reported as interest expense under the former failed sale-leaseback guidance. Lastly, the adoption of this standard resulted in a change in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not have any impact on the Company’s liquidity or cash flows.

Refer to Note 5, “Leases”, for additional information related to the Company’s updated lease accounting policy.

Recently Issued Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this update eliminate the second step of the goodwill impairment test and provide that an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, “Compensation —Retirement Benefits —Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the Disclosure Requirements for Defined Benefit Plans.” The amendments in this update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The guidance will be effective for the Company for its fiscal year 2020, with early adoption permitted. The Company does not expect this ASU to materially impact the Company’s disclosures.

No other new accounting pronouncements issued or effective during the thirteen weeks ended June 30, 2019 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

Fair Value Measurements

3. Fair Value Measurements

The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments, impairment analysis of goodwill, intangible assets and long-lived assets.

The following tables present the fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 30, 2018:

June 30, 2019	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	515,000	$	—	$	515,000
Interest rate swap liability		—		6,156		—		6,156
Total liabilities	$	—	$	521,156	$	—	$	521,156

Interest rate swap asset	$	—	$	—	$	—	$	—
Total assets	$	—	$	—	$	—	$	—

December 30, 2018	Level 1		Level 2		Level 3		Total
Long-term debt	$	—	$	453,000	$	—	$	453,000
Total liabilities	$	—	$	453,000	$	—	$	453,000

Interest rate swap asset	$	—	$	1,522	$	—	$	1,522
Total assets	$	—	$	1,522	$	—	$	1,522

The Company’s interest rate swaps are considered Level 2 in the hierarchy and are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets.

The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill impairment evaluation as described above is based upon Level 3 inputs. Closed store reserves are recorded at net present value to approximate fair value which is classified as Level 3 in the hierarchy. The weighted average cost of capital is estimated using information from comparable companies and management’s judgment related to the risk associated with the operations of the stores.

Cash, cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable and other accrued liabilities, and accrued salaries and benefits approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, the fair value of the long-term debt approximated carrying value as of June 30, 2019 and December 30, 2018.