Discontinued Operations

12 Months Ended

Jan. 30, 2016

Discontinued Operations and Disposal Groups [Abstract]

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

Our discontinued operations for 2015, 2014, and 2013, were comprised of the following:

(In thousands)	2015			2014			2013
Canadian operations	$	165		$	(35,998	)	$	(40,918	)
Wholesale business	(164		)	(248		)	(4,371		)
KB Toys matters	—			9			5,248
Other	(1		)	—			—
Total loss from discontinued operations, pretax	$	—		$	(36,237	)	$	(40,041	)

Canadian Operations

During the fourth quarter of 2013, we announced our intention to wind down our Canadian operations. We began the wind down activities during the fourth quarter of 2013, which included the closing of our Canadian distribution centers. We completed the wind down activities during the first quarter of 2014, which included the closure of our Canadian stores and corporate offices. Therefore, we determined the results of our Canadian operations should be reported as discontinued operations. The results of our Canadian operations historically consisted of sales of product to retail customers, the costs associated with those products, and selling and administrative expenses, including personnel, purchasing, warehousing, distribution, occupancy and overhead costs. In the first quarter of 2014, the results of our Canadian operations also included significant contract termination costs of $23.0 million, severance charges of $2.2 million and a loss on the realization of our cumulative translation adjustment on our investment in our Canadian operations of $5.1 million.

In addition to the costs associated with our Canadian operations, we reclassified to discontinued operations the direct expenses incurred by our U.S. operations to facilitate the wind down. These costs primarily consist of professional fees. We also reclassified the income tax benefit that our U.S. operations was expected to, and did, generate as a result of the wind down of our Canadian operations, based principally on our ability to recover a worthless stock deduction in the foreseeable future. During 2015, 2014, and 2013, the amount of this income tax expense (benefit) that we recognized was approximately $0.2 million, $(13.8) million, and $(24.4) million, respectively.

The loss from discontinued Canadian operations presented in our consolidated statements of operations was comprised of the following:

(In thousands)	2015			2014			2013
Net sales	$	—		$	6,040		$	177,157
Cost of sales (exclusive of depreciation expense shown separately below)	3			3,356			119,221
Gross margin	(3		)	2,684			57,936
Selling and administrative expenses	(224		)	33,419			95,713
Depreciation expense	—			2			1,894
Operating profit (loss)	221			(30,737		)	(39,671		)
Interest expense	—			(18		)	(46		)
Other income (expense)	(56		)	(5,243		)	(1,201		)
Income (loss) from discontinued operations before income taxes	165			(35,998		)	(40,918		)
Income tax expense (benefit)	206			(13,771		)	(24,397		)
Loss from discontinued operations	$	(41	)	$	(22,227	)	$	(16,521	)

Wholesale Business

During the third quarter of 2013, we announced our intention to wind down the operations of our wholesale business. During the fourth quarter of 2013, we executed our wind down plan and ceased the operations of our wholesale business; therefore, we determined the results of our wholesale business should be reported as discontinued operations. The results of operations of our wholesale business primarily consisted of sales of product to wholesale customers, the costs associated with those products, and selling and administrative expenses, including personnel, purchasing, warehousing, distribution, occupancy and overhead costs.

KB Toys Matters

We acquired the KB Toys business from Melville Corporation (now known as CVS New York, Inc., and together with its subsidiaries “CVS”) in May 1996. As part of that acquisition, we provided, among other things, an indemnity to CVS with respect to any losses resulting from KB Toys' failure to pay all monies due and owing under any KB Toys lease or mortgage obligation. While we controlled the KB Toys business, we provided guarantees with respect to a limited number of additional KB Toys store leases. We sold the KB Toys business to KB Acquisition Corp. (“KBAC”), an affiliate of Bain Capital, pursuant to a Stock Purchase Agreement. KBAC similarly agreed to indemnify us with respect to all lease and mortgage obligations. These guarantee and lease obligations are collectively referred to as the “KB Lease Obligations.”

On January 14, 2004, KBAC and certain affiliated entities (collectively referred to as “KB-I”) filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the United States Code. In 2007, we reduced our liabilities for potential remaining claims to zero for the KB-I bankruptcy. During the fourth quarter of 2013, we received a final distribution from the KB-I bankruptcy estate in the amount of $2.1 million.

On August 30, 2005, in connection with the acquisition by an affiliate of Prentice Capital Management of majority ownership of KB-I, KB-I emerged from its 2004 bankruptcy (the KB Toys business that emerged from bankruptcy is hereinafter referred to as “KB-II”). In 2007, we entered into an agreement with KB-II and various Prentice Capital entities which we believe provides a cap on our liability under the existing KB Lease Obligations and an indemnity from the Prentice Capital entities with respect to any renewals, extensions, modifications or amendments of the KB Lease Obligations which otherwise could potentially expose us to additional incremental liability beyond the date of the agreement, September 24, 2007. Under the agreement, KB-II is required to update us periodically with respect to the status of any remaining leases for which they believe we have a guarantee or indemnification obligation. In addition, we have the right to request a statement of the net asset value of Prentice Capital Offshore in order to monitor the sufficiency of the indemnity.

On December 11, 2008, KB-II filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the United States Code. Based on information provided to us by KB-II, we believe that we continue to have KB Lease Obligations with respect to certain KB Toys stores (“KB-II Bankruptcy Lease Obligations”). In the fourth fiscal quarter of 2008, we recorded a charge in the amount of $5.0 million, pretax, in income (loss) from discontinued operations to reflect the estimated amount that we expect to pay for KB-II Bankruptcy Lease Obligations. In the fourth quarter of 2013, we recorded approximately $3.1 million in income for the KB-II Bankruptcy Lease Obligations to reduce the amount on our consolidated balance sheet to zero as of February 1, 2014. We based this reversal on the following factors: (1) we had not received any new demand letters from landlords during the past two years; (2) all prior demands against us by landlords had been settled or paid or the landlords had stopped pursuing their demands; (3) the KB-II bankruptcy occurred more than five years prior to the end of 2013 and most of the lease rejections occurred more than two years prior to the end of 2013; and (4) we believed that the likelihood of new claims against us was remote, and, if incurred, the amount would be immaterial.