Fair Value Measurements

3 Months Ended

Apr. 30, 2011

4. Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.

Financial Instruments

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.

	•		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•		Level 3 — Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of April 30, 2011 and May 1, 2010, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and short and long-term investments, including ARS and auction rate preferred securities.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of April 30, 2011 and May 1, 2010:


	Fair Value Measurements at April 30, 2011
			Quoted Market
			Prices in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
(In thousands)	Amount		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents
Cash	$	251,002	$	251,002	$	—	$	—
Commercial paper		43,830		43,830		—		—
Treasury bills		25,288		25,288		—		—
Money-market		154,548		154,548		—		—

Total cash and cash equivalents	$	474,668	$	474,668	$	—	$	—
Short-term investments
Commercial paper	$	13,695	$	13,695	$	—	$	—
Corporate bonds		21,232		21,232		—		—
Treasury bills		73,143		73,143		—		—
Term-deposits		18,743		18,743		—		—
State and local government ARS		3,700		—		—		3,700

Total short-term investments	$	130,513	$	126,813	$	—	$	3,700
Long-term investments
State and local government ARS	$	5,500	$	—	$	—	$	5,500
ARS Call Option		415		—		—		415

Total long-term investments	$	5,915	$	—	$	—	$	5,915

Total	$	611,096	$	601,481	$	—	$	9,615


	Fair Value Measurements at May 1, 2010
			Quoted Market
			Prices in Active				Significant
			Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable		Inputs
(In thousands)	Amount		(Level 1)		Inputs (Level 2)		(Level 3)
Cash and cash equivalents
Cash	$	116,190	$	116,190	$	—	$	—
Treasury bills		132,296		132,296		—		—
Money-market		286,753		286,753		—		—

Total cash and cash equivalents	$	535,239	$	535,239	$	—	$	—
Short-term investments
State and local government ARS	$	9,025	$	—	$	—	$	9,025

Total short-term investments	$	9,025	$	—	$	—	$	9,025
Long-term investments
Student-loan backed ARS	$	148,874	$	—	$	—	$	148,874
State and local government ARS		25,167		—		—		25,167
Auction rate preferred securities		13,449		—		—		13,449

Total long-term investments	$	187,490	$	—	$	—	$	187,490

Total	$	731,754	$	535,239	$	—	$	196,515

The Company uses a discounted cash flow model to value its Level 3 investments. For April 30, 2011, the assumptions in the Company’s model included different recovery periods, ranging from two to 14 months depending on the type of security, varying discount factors for yield, ranging from 0.22% to 1.99%, and illiquidity of 0.50%. For May 1, 2010, the assumptions in the Company’s model included different recovery periods, ranging from two months to 11 years depending on the type of security, varying discount factors for yield, ranging from 0.2% to 5.0%, and illiquidity, ranging from 0.3% to 4.0%. These assumptions are subjective. They are based on the Company’s current judgment and its view of current market conditions. The use of different assumptions would result in a different valuation and related charge.

As a result of the discounted cash flow analysis, no net impairment loss was recorded for the 13 weeks ended April 30, 2011. For the 13 weeks ended May 1, 2010, the Company recognized a net recovery of $1.1 million ($0.7 million, net of tax), which reduced the total cumulative impairment recognized in OCI as of May 1, 2010 to $9.2 million ($5.7 million, net of tax) from $10.3 million ($6.4 million, net of tax) at the end of Fiscal 2009. The reversal of temporary impairment was primarily driven by favorable changes in the discount rate. These amounts were recorded in OCI and resulted in an increase in the investments’ estimated fair values. No net impairment loss was recorded in earnings during the 13 weeks ended May 1, 2010.

The reconciliation of the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:


	Level 3 (Unobservable inputs)
							Student
							Loan-
				Auction-			Backed			Auction-
				Rate			Auction-			Rate
				Municipal			Rate			Preferred
(In thousands)	Total			Securities			Securities			Securities

Carrying value at January 30, 2010	$	202,448		$	40,244		$	149,431		$	12,773
Settlements		(7,075	)		(6,275	)		(800	)		—
Gains:
Reported in OCI		1,142			223			243			676

Balance at May 1, 2010	$	196,515		$	34,192		$	148,874		$	13,449

As of April 30, 2011, the Company’s Level 3 (unobservable inputs) included $9.2 million and $0.4 million in auction rate municipal securities and the ARS Call Option, respectively. There was no change in the carrying value of these Level 3 assets during the 13 weeks ended April 30, 2011.

Non-Financial Assets

The Company’s non-financial assets, which include goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and the Company is required to evaluate the non-financial instrument for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value. As a result of the Company’s annual goodwill impairment test performed as of January 29, 2011, the Company concluded that its goodwill was not impaired. During the 13 weeks ended April 30, 2011, there were no triggering events that prompted an asset impairment test of the Company’s goodwill.

Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. Based on the decision to close all M+O stores in Fiscal 2010, the Company determined that the M+O stores not previously impaired would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. Therefore, during the 13 weeks ended May 1, 2010, the M+O stores not previously impaired were written down to their fair value, resulting in a loss on impairment of assets of $18.0 million. The fair value of those stores were determined by estimating the amount and timing of net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located.

Refer to Note 13 to the Consolidated Financial Statements for additional information regarding the discontinued operations of M+O

- Definition

This element represents the disclosure related to the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods.

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