6. Revenue Recognition

Adoption of ASC 606

Effective February 4, 2018, we adopted ASC 606, Revenue from Contracts with Customers and all related amendments (“ASC 606”), to all contracts using the modified retrospective approach. We recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings. The adoption had no impact to our previously reported results of operations or cash flows. The comparative period information has not been restated and continues to be reported under the accounting standards in effect for the period presented.

The following table depicts the cumulative effect of the changes made to our February 3, 2018 balance sheet for the adoption of ASC 606 (in thousands):


	Reported				Adjusted
	Balance at		Impact of		Balance at
	February 3,		Adoption of		February 3,
	2018		ASU 606		2018
Assets:
Accounts receivable, net	$	79,783	$	(303)	$	79,480
Inventories		851,931		(17,837)		834,094
Other current assets		78,252		2,753		81,005
Liabilities:
Accrued expenses and other current liabilities		285,537		32,378		317,915
Deferred taxes, net and other liabilities		164,191		(11,941)		152,250
Equity:
Accumulated deficit		(479,166)		(35,824)		(514,990)

The adoption of ASC 606 primarily impacted the timing of revenue recognition related to our customer loyalty program, gift cards and e-commerce sales within our retail segment, as discussed in more detail below. In addition, for our corporate apparel segment, certain deferred revenue balances along with related inventory amounts were eliminated as part of the cumulative adjustment to opening retained earnings. Also, for estimated sales returns, we now recognize allowances for estimated sales returns on a gross basis rather than a net basis on the condensed consolidated balance sheets.

Revenues

The following table depicts the disaggregation of revenue by major source (in thousands):


	For the Three Months Ended				For the Six Months Ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Net sales:
Men's tailored clothing product	$	356,504	$	341,182	$	712,241	$	673,812
Men's non-tailored clothing product		229,105		234,093		464,711		462,792
Women's clothing product		17,447		18,100		37,029		37,927
Other (1)		2,732		1,619		5,451		4,048
Total retail clothing product		605,788		594,994		1,219,432		1,178,579
Rental services		125,095		151,978		225,322		246,798
Alteration services		37,031		37,227		75,452		75,613
Retail dry cleaning services (2)		—		8,799		2,551		17,313
Total alteration and other services		37,031		46,026		78,003		92,926
Total retail sales		767,914		792,998		1,522,757		1,518,303
Corporate apparel clothing product		55,516		57,760		118,637		115,361
Total net sales	$	823,430	$	850,758	$	1,641,394	$	1,633,664

⁽¹⁾

Other consists of franchise and licensing revenues and gift card breakage. Franchise revenues are generally recognized at a point in time while licensing revenues consist primarily of minimum guaranteed royalty amounts recognized over an elapsed time period.

⁽²⁾

On March 3, 2018, we completed the divestiture of our MW Cleaners business. Please see Note 2 for additional information.

Please see Note 16 for additional information regarding our reporting segments.

Retail Segment

For retail clothing product revenue, we transfer control and recognize revenue at a point in time, upon sale or shipment of the merchandise, net of actual sales returns and a provision for estimated sales returns. For rental and alteration services, we transfer control and recognize revenue at a point in time, upon receipt by the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, use and value added taxes we collect from our customers and are remitted to governmental agencies are excluded from revenue.

Loyalty Program

We maintain a customer loyalty program for our Men’s Wearhouse, Men’s Wearhouse and Tux, Jos. A. Bank and Moores brands in which customers receive points for purchases. Points are generally equivalent to dollars spent on a one‑to‑one basis, excluding any sales tax dollars, and do not expire. Upon reaching 500 points, customers are issued a $50 rewards certificate which they may redeem for purchases at our stores or online. Generally, reward certificates earned must be redeemed no later than six months from the date of issuance. We believe our loyalty program represents a customer option that is a material right and, accordingly, is a performance obligation in the contract with our customer. Therefore, we will record our obligation for future point redemptions using a deferred revenue model. In prior years, we used an incremental cost approach where we accrued the estimated costs of the anticipated certificate redemptions when the certificates were issued and charged such costs to cost of sales.

When loyalty program members earn points, we recognize a portion of the transaction as revenue for merchandise product sales or services and defer a portion of the transaction representing the value of the related points. The value of the points is recorded in deferred revenue on our condensed consolidated balance sheet and recognized into revenue when the points are converted into a rewards certificate and the certificate is used.

We account for points earned and certificates issued that will never be redeemed by loyalty members, which we refer to as breakage. We review our breakage estimates at least annually based upon the latest available information regarding redemption and expiration patterns.

Our estimate of the expected expiration of points and certificates requires significant management judgment. Current and future changes to our assumptions or to loyalty program rules may result in material changes to the deferred revenue balance as well as recognized revenues from the loyalty program. For example, during fiscal 2018, we plan to test potential changes to our loyalty program in order to improve the effectiveness of the program.

Gift Card Breakage

Proceeds from the sale of gift cards are recorded as a liability and are recognized as net sales from products and services when the cards are redeemed. Our gift cards do not have expiration dates. In addition, we recognize revenue for gift cards for which the likelihood of redemption is deemed to be remote and for which there is no legal obligation to remit the value of such unredeemed gift cards to any relevant jurisdictions (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We review our gift card breakage estimate based on our historical redemption patterns. In prior years, we recognized income from breakage of gift cards as a reduction of SG&A when the likelihood of redemption of the gift card was remote.

Sales Returns

Revenue from merchandise product sales and services is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. Our refund liability for sales returns was $5.9 million at August 4, 2018, which is included in accrued and other current liabilities and represents the expected value of the refund that will be due to our customers. We also have a corresponding asset included in other current assets that represents the right to recover products from customers associated with sales returns of $2.6 million at August 4, 2018. In prior years, we recognized a provision for estimated sales returns on a net basis.

Corporate Apparel Segment

For our corporate apparel segment, we sell corporate clothing and uniforms to workforces under a contract or by purchase order. We transfer control and recognize revenue at a point in time, generally upon delivery of the product to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, use and value added taxes we collect from our customers and are remitted to governmental agencies are excluded from revenue.

Contract Liabilities

The following table summarizes the opening and closing balances of our contract liabilities (in thousands):


	Balance at		Increase		Balance at
	February 3, 2018		(Decrease)		August 4, 2018
	As Adjusted
Contract liabilities	$	141,552	$	21,858	$	163,410

Contract liabilities include cash payments received from customers in advance of our performance, including amounts which are refundable. These liabilities primarily consist of customer deposits related to rental product or custom clothing transactions since we typically receive payment from our customers prior to our performance and deferred revenue related to our loyalty programs and unredeemed gift cards. These amounts are included as “Customer deposits, prepayments and refunds payable,” “Loyalty program liabilities” and “Unredeemed gift cards,” respectively, within the accrued expenses and other current liabilities line item on our consolidated balance sheet. Please see Note 10 for additional information on our accrued expenses and other current liabilities.

The amount of revenue recognized for the three and six months ended August 4, 2018 that was included in the opening contract liability balance was $62.4 million and $104.1 million, respectively. This revenue primarily consists of recognition of deposits for completed transactions as well as redeemed certificates related to our loyalty program and gift card redemptions.

Practical Expedients and Impact on Fiscal 2018 Results

Due to the short term nature of a significant portion of our contracts with customers, we have elected to apply the practical expedients under ASC 606 to: (1) not adjust the consideration for the effects of a significant financing component, (2) recognize incremental costs of obtaining a contract as expense when incurred and (3) not disclose the value of our unsatisfied performance obligations for contracts with an original expected duration of one year or less.

In accordance with ASC 606, the following tables reflect the impact on our fiscal 2018 condensed consolidated statement of earnings and balance sheet as if we had continued to apply accounting standards in effect last year (“Legacy GAAP”) (in thousands, except per share amounts):


Statement of Earnings
	For the Three Months Ended August 4, 2018
	As		Amounts Under		Effect of Change
	Reported		Legacy GAAP		Increase/(Decrease)
Net sales:
Total retail sales	$	767,914	$	762,538	$	(5,376)
Corporate apparel clothing product		55,516		57,394		1,878
Costs and expenses:
Total retail cost of sales		413,912		413,640		(272)
Total corporate apparel clothing product cost of sales		40,616		42,054		1,438
Selling, general and administrative expenses		242,255		241,847		(408)
Provision for income taxes		9,884		9,172		(712)
Net earnings		49,238		45,694		(3,544)
Diluted net earnings per common share	$	0.97	$	0.90	$	(0.07)

	For the Six Months Ended August 4, 2018
	As		Amounts Under		Effect of Change
	Reported		Legacy GAAP		Increase/(Decrease)
Net sales:
Total retail sales	$	1,522,757	$	1,520,626	$	(2,131)
Corporate apparel clothing product		118,637		123,896		5,259
Costs and expenses:
Total retail cost of sales		839,986		839,966		(20)
Total corporate apparel clothing product cost of sales		87,282		91,529		4,247
Selling, general and administrative expenses		493,349		492,604		(745)
Provision for income taxes		14,265		14,200		(65)
Net earnings		63,147		62,858		(289)
Diluted net earnings per common share	$	1.24	$	1.24	$	—


Balance Sheet	August 4, 2018
	As		Amounts Under		Effect of Change
	Reported		Legacy GAAP		Increase/(Decrease)
Assets:
Accounts receivable, net	$	65,099	$	67,978	$	2,879
Inventories		786,510		799,258		12,748
Other current assets		87,491		84,904		(2,587)
Liabilities:
Accrued expenses and other current liabilities		313,319		262,711		(50,608)
Deferred taxes, net and other liabilities		146,484		134,517		(11,967)
Equity:
Accumulated deficit	$	(470,377)	$	(434,842)	$	35,535