Fair Value Measurements

9 Months Ended

Sep. 28, 2013

Fair Value Measurements

Note L – Fair Value Measurements

The Company measures fair value 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. In developing its fair value estimates, the Company uses the following hierarchy:

Level 1:	Quoted prices in active markets for identical assets or liabilities.
Level 2:	Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3:	Significant unobservable inputs that are not corroborated by market data. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows or option pricing models using the Company’s own estimates and assumptions or those expected to be used by market participants.

The fair values of cash and cash equivalents, receivables, accounts payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

The fair values of foreign currency contracts and fuel contracts are the amounts receivable or payable to terminate the agreements at the reporting date, taking into account current exchange rates and commodity prices. The values are based on market-based inputs or unobservable inputs that are corroborated by market data. At the end of the third quarter of 2013, the amounts receivable or payable under foreign currency and fuel contracts were not significant.

The fair value of the Senior Secured Notes is considered a Level 2 fair value measurement and is based on market trades of these securities on or about the dates below.

	September 28, 2013				December 29, 2012				September 29, 2012
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
9.75% senior secured notes	$	250,000	$	295,625	$	250,000	$	265,938	$	250,000	$	255,938

Fair Value Estimates Used in Impairment Analyses

North American Retail Division

Because of declining sales in recent periods, the Company has conducted a detailed quarterly store impairment analysis. The analysis uses input from retail store operations and the Company’s accounting and finance personnel that organizationally report to the Chief Financial Officer. These projections are based on management’s estimates of store-level sales, gross margins, direct expenses, exercise of future lease renewal options, where applicable, and resulting cash flows and, by their nature, include judgments about how current initiatives will impact future performance. If the anticipated cash flows of a store cannot support the carrying value of its assets, the assets are impaired and written down to estimated fair value using Level 3 inputs. The Company recognized store asset impairment charges of $5 million and $14 million, in the third quarter and year-to-date 2013, respectively, and $73 million and $115 million, in the third quarter and year-to-date 2012, respectively.

The third quarter 2013 impairment charge reflects 16 locations that were reduced to estimated fair value of $2 million based on their projected cash flows, discounted at 13% and 109 stores reduced to estimated salvage value of $3 million. A 100 basis point decrease in sales used in these estimates would have increased the impairment charge by approximately $1 million. Independent of the sensitivity on sales assumption, a 50 basis point decrease in gross margin would have increased the impairment charge by approximately $3 million. The interrelationship of having both of those inputs change as indicated would have increased the impairment charge by approximately $6 million.

The Company will continue to evaluate initiatives to improve performance and lower operating costs. To the extent that forward-looking sales and operating assumptions are not achieved and are subsequently reduced, or in certain circumstances, even if store performance is as anticipated, additional impairment charges may result. However, at the end of the third quarter of 2013, the impairment analysis reflects the Company’s best estimate of future performance, including the intended future use of the Company’s retail store assets.

Fair Value Estimates Used for Paid-in-Kind Dividends

The Company’s Board of Directors can elect to pay quarterly dividends on the preferred stock in cash or in-kind. Dividends paid-in-kind are measured at fair value, using Level 3 inputs. The Company uses a binomial simulation that captures the call, conversion, and interest rate reset features as well as the optionality of paying the dividend in-kind or in cash. The Board of Directors and Company’s management consider then-current and estimated future liquidity factors in making that quarterly decision.

Dividends were paid in cash for the first three quarters of 2013 and paid-in-kind for the first three quarters of 2012. For the third quarter of 2012, the simulation was based on a beginning stock price of $2.56, stock price volatility of 64.2%, a risk free rate of 2.8%, and credit spread of 13.5%. The calculation resulted in a fair value estimate of approximately $7.7 million for the third quarter of 2012. A stock price volatility of 55% or 75% would have increased the estimate by $0.7 million or decreased the estimate by $0.6 million, respectively. Using a beginning of period stock price of $1.50 or $3.50 would have decreased the estimate by $1.7million or increased the estimate by $1.1 million, respectively. Assuming all future dividends would be paid in cash would have increased the estimate by $1.3 million. Assuming all future dividends would be paid-in-kind would have had no significant impact on the estimate.

Goodwill Impairment

The estimated fair value of the International Division’s reporting unit that recognized a goodwill impairment charge during the third quarter of 2013 was prepared by Company finance and accounting personnel that organizationally report to the Chief Financial Officer. The estimated value was developed using discounted cash flows and market data, where available. The cash flows were projected to decrease, level off and turn positive and were discounted at 13%. The reporting unit carrying value exceeded the estimated fair value such that all goodwill was impaired.