Fair Value Measurements

12 Months Ended

Jan. 31, 2015

FAIR VALUE MEASUREMENTS

The Company measures its financial assets and liabilities at fair value on a recurring basis and measures its nonfinancial assets and liabilities at fair value as required or permitted.

Fair value is defined as the price that would be received pursuant to the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. In order to determine the fair value of certain assets and liabilities, the Company applies the three-level hierarchy of valuation techniques based upon whether the inputs reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s assumptions of market participant valuation (unobservable inputs) and requires the use of observable inputs if such data is available without undue cost and effort. The hierarchy is as follows:


•	Level 1 — quoted prices for identical instruments in active markets.


•	Level 2 — inputs other than Level 1 inputs, which are observable either directly or indirectly.


•	Level 3 — unobservable inputs.

Level 3 assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may result in a significantly lower or higher fair value measurement.

Recurring Fair Value Measurements

Derivative Liability

The Series B Preferred shares are required to be measured at fair value each reporting period. The fair value of the Series B Preferred shares was estimated using an option-pricing model that requires Level 3 inputs, which are highly subjective and determined using the following significant assumptions:



	January 31, 2015	February 1, 2014	February 2, 2013
Stock price	$2.75	$2.88	$2.02
Conversion price	$1.75	$1.75	$1.75
Expected volatility	77%	73%	68%
Expected term (in years)	6.9	7.9	8.9
Risk free interest rate	1.49%	2.40%	2.04%
Expected dividends	$—	$—	$—

The following table presents the activity recorded for the derivative liability during the fiscal periods as follows:



	Fiscal Year Ended
	January 31, 2015			February 1, 2014		February 2, 2013
	(In thousands)
Beginning balance	$	30,720		$	20,082	$	20,076
(Gain) loss on change in fair value	(2,272		)	10,638		6
Ending balance	$	28,448		$	30,720	$	20,082

Changes in the fair value of the derivative liability are included in (gain) loss on derivative liability in the accompanying Consolidated Statements of Operations and Comprehensive Operations.

Money Market Funds

As of January 31, 2015, the Company did not hold any amounts in money market funds, compared to $20 million held in money market funds at February 1, 2014. The fair value of money market funds is determined based on “Level 1” inputs in accordance with ASC 820, which consist of quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

Non-Recurring Fair Value Measurements

On a non-recurring basis, using a discounted cash flow model, the Company measures certain of its long-lived assets at fair value based on Level 3 inputs including, but not limited to, moderate comparable store sales and margin growth, projected operating costs based primarily on historical trends, and an estimated weighted-average cost of capital rate. During fiscal 2014, 2013 and 2012 the Company recorded $2.2 million, $3.2 million and $5.3 million of store impairment charges in the accompanying Consolidated Statements of Operations and Comprehensive Operations. During the third quarter of 2014, the Company determined that certain software previously capitalized for internal use was abandoned, and as a result, the Company recorded an impairment charge of $1.1 million.

Fair Value of Other Financial Instruments

The provisions of ASC 825, “Financial Instruments” (“ASC 825”), provide companies with an option to report selected financial assets and liabilities at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We have not elected to apply the fair value option to any specific financial assets or liabilities.

The table below details the fair values and carrying values for mortgage debt and the components of long-term debt as of January 31, 2015, and February 1, 2014. The Company uses a discounted cash flow model to estimate the fair value of its debt for each reporting period, which contains certain Level 3 inputs, including but not limited to current market interest rates for similar long-term obligations. These fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of these financial instruments.



	January 31, 2015
	Carrying Value			Fair Value
	(In thousands)
Mortgage Debt	$	27,928		$	26,938
Term Loan	75,623			74,706
Term Loan discount	(8,586		)	(8,586		)
	$	94,965		$	93,058

	February 1, 2014
	Carrying Value			Fair Value
	(In thousands)
Mortgage Debt	$	27,978		$	28,982
Term Loan	70,293			69,252
Term Loan discount	(11,582		)	(11,582		)
	$	86,689		$	86,652

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, approximated fair value due to their short maturities. The fair value of long-term debt is estimated based on discounting future cash flows utilizing current rates for debt of a similar type and remaining maturity.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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