Goodwill and intangibles

12 Months Ended

Jan. 28, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and other indefinite-lived intangible assets, such as indefinite-lived trade names, are evaluated for impairment annually and more frequently if events or conditions are identified indicating the carrying value of a reporting unit or an indefinite-lived intangible asset may not be recoverable. In evaluating goodwill and indefinite-lived trade names for impairment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value. If the Company concludes that it is not more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value, then no further testing is required. However, if the Company concludes that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value, then an impairment test is performed to identify a potential impairment and measure the amount of impairment to be recognized, if any. When the carrying amount of the reporting unit or an indefinite-lived intangible assets exceeds its fair value, an impairment charge is recorded.

The impairment test for goodwill involves estimating the fair value of the reporting unit through either estimated discounted future cash flows or market-based methodologies. The impairment test for other indefinite-lived intangible assets involves estimating the fair value of the asset, which is typically performed using the relief from royalty method for indefinite-lived trade names.

Fiscal 2021

During Fiscal 2021, the Company performed its annual evaluation of its indefinite-lived intangible assets, including goodwill and trade names for impairment indicators. The Company noted that no impairment indicators existed at the date of the annual evaluation. Additionally, due to various impacts of COVID-19 to the Company’s business during the first quarter Fiscal 2021, the Company

determined a triggering event had occurred that required an interim impairment assessment for all of its reporting units and indefinite-lived intangible assets. As part of the assessment, it was determined that an increase in the discount rates was required to reflect the prevailing uncertainty inherent in the forecasts due to current market conditions and potential COVID-19 impacts. This higher discount rate, in conjunction with revised long-term projections associated with certain aspects of the Company’s forecast, resulted in lower than previously projected long-term future cash flows for the reporting units and indefinite-lived intangible assets which negatively affected the valuation compared to previous valuations. As a result of the interim impairment assessment, during the first quarter of Fiscal 2021, the Company recognized pre-tax impairment charges related to goodwill of $10.7 million in the consolidated statements of operations within its North America reportable segment related to R2Net and Zales Canada goodwill.

In conjunction with the interim impairment tests noted above, during the first quarter of Fiscal 2021 the Company determined that the fair values of indefinite-lived intangible assets related to certain Zales trade names were less than their carrying value. Accordingly, in the first quarter of Fiscal 2021, the Company recognized pre-tax impairment charges within asset impairments on the consolidated statements of operations of $83.3 million within its North America reportable segment.

Fiscal 2022

In the second quarter of Fiscal 2022, the annual testing date of R2Net was changed from the last day of the fiscal year to the last day of the fourth period of each fiscal year. R2Net represents a reporting unit within the Company’s North America reportable segment. The new impairment testing date was preferable, as this date corresponds with the testing date for the other North America reporting units. This allows information and assumptions to be applied consistently to all reporting units.

In connection with the acquisition of Rocksbox on March 29, 2021, the Company recognized $11.6 million of definite-lived intangible assets and $4.6 million of goodwill, which are reported in the North America reportable segment. The weighted-average amortization period of the definite-lived intangibles assets acquired is eight years.

In connection with the acquisition of Diamonds Direct on November 17, 2021, the Company recognized $126.0 million of indefinite-lived intangible assets related to the Diamonds Direct trade name and $251.2 million of goodwill, which are reported in the North America reportable segment. Refer to Note 4 for additional information.

During Fiscal 2022, the Company did not identify any events or conditions that would indicate that it was more likely than not that the carrying values of the reporting units and indefinite-lived intangible assets exceed their fair values.

Fiscal 2023

During Fiscal 2023, the Company completed its annual evaluation of its indefinite-lived intangible assets, including goodwill and trade names, and through the qualitative assessment, the Company did not identify any events or conditions that would indicate that it was more likely than not that the carrying values of the reporting units and indefinite-lived trade names exceeded their fair values.

In connection with the acquisition of Blue Nile on August 19, 2022, the Company recognized $96.0 million of indefinite-lived intangible assets and $258.0 million of goodwill, which are reported in the North America reportable segment. Refer to Note 4 for additional information.

During Fiscal 2023, the Company did not identify any events or conditions that would indicate that it was more likely than not that the carrying values of the reporting units and indefinite-lived intangible assets exceed their fair values.

The uncertainty related to the current macroeconomic environment, such as rising interest rates and the heightened inflationary pressure on consumers’ discretionary spending, could negatively affect the share price of the Company’s stock, as well as key assumptions used to estimate fair value, such as sales trends, margin trends, long-term growth rates and discount rates. Thus, an adverse change in any of these factors could result in a risk of impairment in the Company’s goodwill or indefinite-lived trade names in future periods, including those from recent acquisitions.

Goodwill

The following table summarizes the Company’s goodwill by reportable segment:


(in millions)	North America
Balance at January 30, 2021 (1)	$	238.0
Acquisitions	246.6


Balance at January 29, 2022 (1)	$	484.6
Acquisitions (2)	267.1


Balance at January 28, 2023 (1)	$	751.7

(1) For the periods presented, the carrying amount of goodwill is presented net of accumulated impairment losses of $576.0 million.

(2) The change in goodwill during the period primarily represents the acquisition of Blue Nile and the finalization of the purchase price allocation of Diamonds Direct. Refer to Note 4 for additional information.

Intangibles

Definite-lived intangible assets include trade names, technology and customer relationship assets. Indefinite-lived intangible assets consist of trade names. Both definite and indefinite-lived assets are recorded within intangible assets, net on the consolidated balance sheets. Intangible liabilities, net consists of unfavorable contracts and is recorded within accrued expense and other current liabilities and other liabilities on the consolidated balance sheets.

The following table provides additional detail regarding the composition of intangible assets and liabilities:


	January 28, 2023				January 29, 2022
(in millions)	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Intangible assets, net:


Definite-lived intangible assets	$	15.8	$	(7.6)	$	8.2	$	15.8	$	(5.3)	$	10.5
Indefinite-lived intangible assets (1)	399.2		—		399.2		303.7		—		303.7
Total intangible assets, net	$	415.0	$	(7.6)	$	407.4	$	319.5	$	(5.3)	$	314.2




Intangible liabilities, net	$	(38.0)	$	32.6	$	(5.4)	$	(38.0)	$	30.8	$	(7.2)

(1) The change in the indefinite-lived intangible asset balances during the periods presented was due to the addition of Blue Nile trade name of $96.0 million and the impact of foreign currency translation.

Amortization expense relating to intangible assets was $2.3 million in Fiscal 2023 (Fiscal 2022: $1.1 million; Fiscal 2021: $0.9 million). Unfavorable contracts are classified as liabilities and recognized over the term of the underlying contract. Amortization relating to intangible liabilities was $1.8 million in Fiscal 2023 (Fiscal 2022: $3.3 million; Fiscal 2021: $5.4 million). Expected future amortization for intangible assets and intangible liabilities recorded at January 28, 2023 follows:


(in millions)	Intangible assets amortization		Intangible liabilities amortization
Fiscal 2024	$	1.9	$	(1.8)
Fiscal 2025	1.3		(1.8)
Fiscal 2026	1.2		(1.8)
Fiscal 2027	1.2		—
Fiscal 2028	1.2		—
Thereafter	1.4		—
Total	$	8.2	$	(5.4)