7. REVENUE RECOGNITION

Adoption of ASC 606

Effective February 4, 2018, we adopted ASC 606 for 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 periods 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		ASC 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 programs, 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 consolidated balance sheets.

Revenues

The following table sets forth supplemental products and services sales information for the Company (in thousands):


	Fiscal Year
	2018		2017		2016
Net sales:
Men's tailored clothing product	$	1,385,320	$	1,351,881	$	1,343,875
Men's non-tailored clothing product		988,973		1,008,663		1,018,907
Women's clothing product		68,518		70,630		73,509
Other (1)		11,936		8,643		9,631
Total retail clothing product		2,454,747		2,439,817		2,445,922
Rental services		399,146		428,355		457,444
Alteration services		148,067		150,005		161,895
Retail dry cleaning services (2)		2,551		34,844		33,140
Total alteration and other services		150,618		184,849		195,035
Total retail sales		3,004,511		3,053,021		3,098,401
Corporate apparel clothing product		235,391		251,325		280,302
Total net sales	$	3,239,902	$	3,304,346	$	3,378,703

⁽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. See Note 3 for additional information.

See Note 18 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 an accrual for estimated sales returns. For rental and alteration services, we transfer control and recognize revenue at a point in time, upon receipt of the completed service 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 Programs

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 programs represent a customer option that is a material right and, accordingly, is a performance obligation in the contract with our customer. Therefore, we 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 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.

During the fourth quarter of 2018, we redeemed certain loyalty members’ cumulative outstanding points into reward certificates prior to them reaching 500 total points, and these certificates expired on February 2, 2019. In addition, we finalized our decision to implement an expiration policy for loyalty program points beginning in the second quarter of fiscal 2019. As a result of these changes in the loyalty programs, we recorded a decrease to our deferred revenue liability related to outstanding loyalty program points of $17.6 million, $14.3 million net of income taxes, or $0.28 earnings per diluted share.

Our estimate of the expected usage 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 programs.

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. Pre-tax breakage income of $3.1 million was recognized during fiscal 2018. 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. Pre-tax breakage income of $3.2 million and $2.9 million was recognized during fiscal 2017 and 2016, respectively.

Sales Returns

Revenue from merchandise product sales 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 $6.4 million at February 2, 2019, 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 $3.2 million at February 2, 2019. In prior years, we recognized an accrual for estimated sales returns on a net basis, which as of February 3, 2018, totaled $4.0 million and is recorded within accrued expenses and other current liabilities in our consolidated balance sheet.

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)		February 2, 2019
	As Adjusted
Contract liabilities	$	141,552	$	(18,724)	$	122,828

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. See Note 11 for additional information on our accrued expenses and other current liabilities.

The amount of revenue recognized for fiscal 2018 that was included in the opening contract liability balance was $101.4 million. This revenue primarily consists of recognition of deposits for completed transactions, redeemed certificates related to our loyalty programs, gift card redemptions and the impact of changes related to our loyalty programs of $17.6 million.

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 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 Year Ended February 2, 2019
	As		Amounts Under		Effect of Change
	Reported		Legacy GAAP		Increase/(Decrease)
Net sales:
Total retail sales	$	3,004,511	$	2,979,703	$	(24,808)
Corporate apparel clothing product		235,391		243,610		8,219
Costs and expenses:
Total retail cost of sales		1,691,963		1,690,986		(977)
Total corporate apparel clothing product cost of sales		170,472		177,124		6,652
Selling, general and administrative expenses		974,054		970,703		(3,351)
Provision for income taxes		19,436		15,856		(3,580)
Net earnings		83,240		67,907		(15,333)
Diluted net earnings per common share	$	1.64	$	1.34	$	(0.30)

The decrease of $0.30 between the as reported and amounts under legacy GAAP columns primarily relates to the changes to our loyalty programs of $17.6 million, or $0.28 per diluted share.


Balance Sheet	February 2, 2019
	As		Amounts Under		Effect of Change
	Reported		Legacy GAAP		Increase/(Decrease)
Assets:
Accounts receivable, net	$	73,073	$	74,932	$	1,859
Inventories		830,426		840,769		10,343
Other current assets		70,712		67,523		(3,189)
Liabilities:
Accrued expenses and other current liabilities		282,029		229,962		(52,067)
Deferred taxes, net and other liabilities		125,022		113,055		(11,967)
Equity:
Accumulated deficit	$	(468,048)	$	(447,557)	$	20,491