Fair Value Measurements

6 Months Ended

Jul. 28, 2012

Fair Value Measurements

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 July 28, 2012 and July 30, 2011, 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.

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 July 28, 2012 and July 30, 2011:

	Fair Value Measurements at July 28, 2012
(In thousands)	Carrying Amount		Quoted Market Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable  Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents:
Cash	$	623,277	$	623,277	$	—	$	—
Money-market		44,789		44,789		—		—
Treasury bills		23,011		23,011		—		—
Commercial paper		5,000		5,000		—		—
Total cash and cash equivalents	$	696,077	$	696,077	$	—	$	—
Short-term investments:
Treasury bills	$	5,995	$	5,995	$	—	$	—
Total short-term investments	$	5,995	$	5,995	$	—	$	—
Long-term investments:
ARS Call Option	$	254	$	—	$	—	$	254
Total long-term investments	$	254	$	—	$	—	$	254
Total	$	702,326	$	702,072	$	—	$	254

	Fair Value Measurements at July 30, 2011
(In thousands)	Carrying Amount		Quoted Market Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents:
Cash	$	287,753	$	287,753	$	—	$	—
Money-market		74,387		74,387		—		—
Commercial paper		23,996		23,996		—		—
Treasury bills		3,163		3,163		—		—
Total cash and cash equivalents	$	389,299	$	389,299	$	—	$	—
Short-term investments:
Treasury bills	$	76,262	$	76,262	$	—	$	—
Corporate bonds		16,111		16,111		—		—
Term-deposits		15,427		15,427		—		—
Commercial paper		9,997		9,997		—		—
State and local government ARS		6,900		—		—		6,900
Total short-term investments	$	124,697	$	117,797	$	—	$	6,900
Long-term investments:
ARS Call Option	$	648	$	—	$	—	$	648
Total long-term investments	$	648	$	—	$	—	$	648
Total	$	514,644	$	507,096	$	—	$	7,548

The Company uses a discounted cash flow model to value its Level 3 investments. Excluding the ARS Call Option, there were no Level 3 investments at July 28, 2012. At July 30, 2011, the assumptions in the Company’s model included different recovery periods, ranging from two months to 11 months, a discount factor for yield of 0.2% and illiquidity of 0.5%. These assumptions are subjective. They are based on the Company’s current judgment and its view of current market conditions. The use of different reasonable assumptions would not result in a material change to the valuation.

As a result of the discounted cash flow analysis, no impairment loss was recorded for the 26 weeks ended July 28, 2012 or July 30, 2011.

The fair value of the ARS Call Option described in Note 3 to the Consolidated Financial Statements was also estimated using a discounted cash flow model. The model considered potential changes in yields for securities with similar characteristics to the underlying ARS and evaluated possible future refinancing opportunities for the issuers of the ARS. The analysis then assessed the likelihood that the options would be exercisable as a result of the underlying ARS being redeemed or traded in a secondary market at an amount greater than the exercise price prior to the end of the option term. Changes in the fair value of the ARS Call Option are recorded within the Consolidated Statements of Operations and Retained Earnings.

The reconciliation of the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) for the 26 weeks ended July 28, 2012 and July 30, 2011 is as follows.

	Level 3 (Unobservable inputs)
(In thousands)	Total			Auction-Rate Municipal Securities			ARS Call Option
Carrying value at January 28, 2012	$	6,347		$	5,500		$	847
Settlements		(5,789	)		(5,500	)		(289	)
Losses:
Reported in earnings		(304	)		—			(304	)
Balance at July 28, 2012	$	254		$	—		$	254

(In thousands)	Total			Auction-Rate Municipal Securities			ARS Call Option
Carrying value at January 29, 2011	$	9,615		$	9,200		$	415
Settlements		(2,300	)		(2,300	)		—
Gains:
Reported in earnings		233			—			233
Balance at July 30, 2011	$	7,548		$	6,900		$	648

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 28, 2012, the Company concluded that its goodwill was not impaired.

Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. During the second quarter Fiscal 2012, certain long-lived assets related to all 22 77kids and one aerie store were determined to be unable to recover their respective carrying values and were written down to their fair value, resulting in a loss on impairment of assets of $17.1 million. $16.6 million of the total loss on impairment of assets relates to 77kids stores, which were determined to not to be able to generate sufficient cash flows due to the Company’s decision to exit the brand.

The fair value of the Company’s 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.