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(the &#8220;Company,&#8221; &#8220;we,&#8221; &#8220;us,&#8221; &#8220;its&#8221; and &#8220;our&#8221;) is a leading multi-channel specialty retailer of action sports related apparel, footwear, accessories and hardgoods, focusing on skateboarding, snowboarding, surfing, motocross and bicycle motocross (&#8220;BMX&#8221;) for young men and women. At February&#160;2, 2013, we operated 500 stores; 472 in the United States (&#8220;U.S.&#8221;), 20 in Canada and eight in Europe. We operate under the names Zumiez and Blue Tomato. Additionally, we operate ecommerce websites at www.zumiez.com and www.blue-tomato.com. We completed the acquisition of Snowboard Dachstein Tauern GmbH and Blue Tomato Graz Handel GmbH (collectively, &#8220;Blue Tomato&#8221;) during the fiscal year ended February&#160;2, 2013. Blue Tomato is a multi-channel retailer for board sports and related apparel and footwear that operates primarily in the European marketplace. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Fiscal Year&#8212;</b>We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January&#160;31. Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. Fiscal 2012 was a 53-week period ending February&#160;2, 2013. Fiscal 2011 was a 52-week period ending January&#160;28, 2012. 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Actual results could differ from these estimates and assumptions. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Fair Value of Financial Instruments&#8212;</b>We disclose the estimated fair value of our financial instruments. Financial instruments are generally defined as cash, evidence of ownership interest in an entity or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. Our financial instruments, other than those presented in Note 12, &#8220;Fair Value Measurements,&#8221; include cash and cash equivalents, receivables, payables and other liabilities. The carrying amounts of cash and cash equivalents, receivables, payables and other liabilities approximate fair value because of the short-term nature of these instruments. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Cash and Cash Equivalents&#8212;</b>We consider all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Concentration of Risk&#8212;</b>We maintain our cash and cash equivalents in accounts with major financial institutions in the form of demand deposits, money market accounts and state and local municipal securities. Deposits in these financial institutions may exceed the amount of federal deposit insurance provided on such deposits. We have not experienced any losses on our deposits of cash and cash equivalents. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Marketable Securities&#8212;</b>Our marketable securities primarily consist of state and local municipal securities, corporate debt securities and variable-rate demand notes. Variable-rate demand notes are considered highly liquid. Although the variable-rate demand notes have long-term nominal maturity dates, the interest rates generally reset weekly. Despite the long-term nature of the underlying securities of the variable-rate demand notes, we have the ability to quickly liquidate these securities, which have an embedded put option that allows the bondholder to sell the security at par plus accrued interest. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2">Generally accepted accounting principles require recording an investment impairment charge at the point we believe an investment has experienced a decline in value that is other-than-temporary. In determining whether an other-than-temporary impairment has occurred, we review information about the underlying investment that is publicly available such as analyst reports, applicable industry data and other pertinent information and assess our intent to hold the security and whether it is more likely than not we will be required to sell any investment before recovery of its amortized cost basis. The investment would be written down to its current market value at the time the impairment is deemed to have occurred. Future adverse changes in market conditions, continued poor operating results of underlying investments or other factors could result in further losses that may not be reflected in an investment&#8217;s current carrying value, possibly requiring an additional impairment charge in the future. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"> We use the specific identification method to determine any realized gains or losses from the sale of our marketable securities classified as available-for-sale. Realized gains or losses from the sale of our marketable securities classified as available-for-sale are recorded in other income (expense), net on the consolidated statements of income. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Inventories&#8212;</b>Merchandise inventories are valued at the lower of cost or fair market value. The cost of merchandise inventories are based upon an average cost methodology. Merchandise inventories may&#160;include items that have been written down to our best estimate of their net realizable value. Our decisions to write-down our merchandise inventories are based on their current rate of sale, the age of the inventory, the profitability of the inventory and other factors. Actual final sales prices to customers may&#160;be higher or lower than our estimated sales prices and could result in a fluctuation in gross profit. Historically, any additional write-downs have not been significant. We have reserved for inventory at February&#160;2, 2013 and January&#160;28, 2012 in the amounts of $3.3 million and $3.2 million. The inventory reserve includes inventory whose estimated market value is below cost and an estimate for inventory shrinkage. We estimate an inventory shrinkage reserve for anticipated losses for the period. Shrinkage refers to a reduction in inventory due to shoplifting, employee theft and other matters. The inventory related to these reserves is not marked up in subsequent periods. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Fixed Assets&#8212;</b>Fixed assets primarily consist of leasehold improvements, fixtures, land, buildings, computer equipment, software and store equipment. Fixed assets are stated at cost less accumulated depreciation utilizing the straight-line method over the assets&#8217; estimated useful lives. 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Our AROs are primarily associated with leasehold improvements that, at the end of a lease, we are contractually obligated to remove in order to comply with certain lease agreements. The ARO balance at February&#160;2, 2013 and January&#160;28, 2012 is $1.9 million and $1.7 million and is recorded in other liabilities and long-term debt and other liabilities on the consolidated balance sheets and will be subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life. </font></p> <p style="font-size:1px;margin-top:12px;margin-bottom:0px">&#160;</p> <p style="margin-top:0px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Valuation of Long-Lived Assets&#8212;</b>We review the carrying value of long-lived assets for impairment when factors and circumstances indicate that the carrying values may not be recoverable. Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment recognized is measured by comparing projected discounted cash flow of the asset to the asset carrying values. The estimation of future cash flows from operating activities requires significant judgments of factors that include future sales, gross profit and operating expenses. Impairment charges are included in selling, general and administrative expenses on the consolidated statements of income. Impairment charges were immaterial for the fiscal years ended February&#160;2, 2013,&#160;January&#160;28, 2012 and January&#160;29, 2011. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Goodwill&#8212;</b>Goodwill represents the excess of purchase price over the fair value of acquired tangible and identifiable intangible net assets. We test goodwill for impairment on an annual basis or more frequently if indicators of impairment are present. We perform our annual impairment measurement test in the fourth quarter. Events that result in an impairment review include significant changes in the current business climate, future expectations of economic conditions, declines in our operating results of our reporting units, or an expectation that the carrying amount may not be recoverable. We have an option to test goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount.&#160;The qualitative assessment may include, but is not limited to, weighing the relative impact of factors specific to the reporting units as well as industry and macroeconomic factors. Reporting unit specific factors considered, include the results of the most recent impairment test, as well as financial performance and changes to the reporting units&#8217; carrying amounts since the most recent impairment test. After assessing those various factors, if it is determined that it is more likely than not that the fair value of the reporting unit is greater than the carrying amount, further testing of goodwill impairment is not required to be performed.&#160;If it is more likely than not that the fair value of the reporting unit is less than the carrying amount or if we chose not to perform the qualitative assessment, we perform a quantitative two-step impairment test.&#160;The first step compares the fair value of the reporting unit with its carrying amount of net assets, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step includes fair valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit&#8217;s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit&#8217;s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount. The fair value of each of our reporting units is the price a willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow model and market multiples of current earnings. Key assumptions used in this calculation include revenue growth, operating expenses and a discount rate that we believe a buyer would assume when determining a purchase price for the reporting unit. Estimates of revenue growth and operating expenses are based on internal projections considering a reporting unit&#8217;s past performance and forecasted growth, local market economics and the local business environment impacting the reporting unit&#8217;s performance. The discount rate is calculated using a weighted average cost of capital. These estimates are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Intangible Assets&#8212;</b>Our intangible assets consist of trade names and trademarks with indefinite lives and certain definite-lived intangible assets. We test our indefinite-lived intangible assets for impairment on an annual basis, or more frequently if indicators of impairment are present. In July 2012, the FASB issued guidance that would allow us to test our indefinite-lived intangible asset for impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the asset is less than the carrying amount. We did not early adopt this guidance and it will be effective for us for the fiscal year ending February&#160;1, 2014. We test our indefinite-lived assets by estimating the fair value of the asset and comparing that to the carrying value, an impairment loss is recorded for the amount that carrying value exceeds the estimated fair value. The fair value of the trade names and trademarks is determined using the relief from royalty method, which requires management to make assumptions and to apply judgment, including forecasting future sales, expenses, discount rates, and royalty rates. Definite-lived intangible assets, which consist of developed technology and customer relationships, are amortized using the straight-line method over their estimated useful lives. Additionally, we test the definite-lived intangible assets when facts and circumstances indicate that the carrying values may not be recoverable. An impairment loss in our definite-lived intangible assets would be recognized when the estimated fair value of the definite-lived asset is less than its carrying value. We determine the estimated fair value of our definite-lived asset where we take the estimated future operating cash flows derived from the operation to which the asset relates over its remaining useful life, using a discounted cash flow analysis. 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text-indent:4%"><font style="font-family:times new roman" size="2"><b>Common Stock Share Repurchases&#8212;</b>We may repurchase shares of the Company&#8217;s common stock under authorizations made from time to time by our Board of Directors. 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Common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options, employee stock purchase plan funds held to acquire stock and non-vested restricted stock. Potentially anti-dilutive securities not included in the calculation of diluted earnings per share are options to purchase common stock where the option exercise price is greater than the average market price of the Company&#8217;s common stock during the period reported. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Foreign Currency Translation&#8212;</b>Assets and liabilities denominated in foreign currencies were translated into U.S. dollars, the reporting currency, at the exchange rate prevailing at the balance sheet date. Revenue and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. 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Recent Accounting Pronouncements </b></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Recently Adopted Accounting Standards</b><b>&#8212;</b>In June 2011, the Financial Accounting Standards Board (&#8220;FASB&#8221;) issued guidance that requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders&#8217; equity. This guidance is effective for interim and annual reporting periods beginning after December&#160;15, 2011, with early adoption permitted. We adopted this guidance in the three months ended April&#160;28, 2012. As this guidance only amends the presentation of the components of comprehensive income, the adoption did not have an impact on our financial position, results of operations or cash flows. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2">In May 2011, the FASB issued guidance that amends certain accounting and disclosure requirements related to fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December&#160;15, 2011. We adopted this guidance in the three months ended April&#160;28, 2012. The adoption did not have a material impact on our financial position, results of operations or cash flows. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"> <b>Recently Issued Accounting Standards</b><b>&#8212;</b>In February 2013, the FASB issued guidance that requires an entity to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements or footnotes. This guidance is effective for fiscal years and interim periods within those years beginning after December&#160;15, 2012. We will adopt this guidance for the fiscal quarter ended May&#160;4, 2013 and we do not expect the adoption will have a material impact on our consolidated financial statements. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2">In July 2012, the FASB issued guidance that will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. If entities determine, based on qualitative factors, the fair value of the asset is more likely than not less than the carrying value, the two-step impairment test would be required. This guidance is effective for fiscal years beginning after September&#160;15, 2012, with early adoption permitted. We will adopt this guidance for the fiscal year ending February&#160;1, 2014 and we do not expect the adoption will have a material impact on our financial position, results of operations or cash flows. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Note 4 - us-gaap:BusinessCombinationDisclosureTextBlock--> <p style="margin-top:18px;margin-bottom:0px"><font style="font-family:times new roman" size="2"><b>4. Business Combinations </b></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Blue Tomato</b>&#8212;On July&#160;4, 2012, we acquired 100% of the outstanding stock of Blue Tomato for cash consideration of 59.5&#160;million Euros ($74.8 million). 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Subsequent Event </b></font></p> <p style="margin-top:6px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2">On February&#160;15, 2013, a putative class action lawsuit, Robert Steele v. 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(the &#8220;Company,&#8221; &#8220;we,&#8221; &#8220;us,&#8221; &#8220;its&#8221; and &#8220;our&#8221;) is a leading multi-channel specialty retailer of action sports related apparel, footwear, accessories and hardgoods, focusing on skateboarding, snowboarding, surfing, motocross and bicycle motocross (&#8220;BMX&#8221;) for young men and women. At February&#160;2, 2013, we operated 500 stores; 472 in the United States (&#8220;U.S.&#8221;), 20 in Canada and eight in Europe. We operate under the names Zumiez and Blue Tomato. Additionally, we operate ecommerce websites at www.zumiez.com and www.blue-tomato.com. We completed the acquisition of Snowboard Dachstein Tauern GmbH and Blue Tomato Graz Handel GmbH (collectively, &#8220;Blue Tomato&#8221;) during the fiscal year ended February&#160;2, 2013. Blue Tomato is a multi-channel retailer for board sports and related apparel and footwear that operates primarily in the European marketplace. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table2 - us-gaap:FiscalPeriod--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Fiscal Year&#8212;</b>We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January&#160;31. Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. Fiscal 2012 was a 53-week period ending February&#160;2, 2013. Fiscal 2011 was a 52-week period ending January&#160;28, 2012. Fiscal 2010 was a 52-week period ended January&#160;29, 2011. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note1_accounting_policy_table3 - us-gaap:BasisOfAccounting--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Basis of Presentation&#8212;</b>The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (&#8220;U.S. GAAP&#8221;). The consolidated financial statements include the accounts of Zumiez Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table1 - us-gaap:UseOfEstimates--> <p style="margin-top:6px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Use of Estimates&#8212;</b>The preparation of consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period. These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition. Actual results could differ from these estimates and assumptions. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table2 - us-gaap:FairValueOfFinancialInstrumentsPolicy--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Fair Value of Financial Instruments&#8212;</b>We disclose the estimated fair value of our financial instruments. Financial instruments are generally defined as cash, evidence of ownership interest in an entity or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. Our financial instruments, other than those presented in Note 12, &#8220;Fair Value Measurements,&#8221; include cash and cash equivalents, receivables, payables and other liabilities. The carrying amounts of cash and cash equivalents, receivables, payables and other liabilities approximate fair value because of the short-term nature of these instruments. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table3 - us-gaap:CashAndCashEquivalentsPolicyTextBlock--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Cash and Cash Equivalents&#8212;</b>We consider all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table4 - us-gaap:ConcentrationRiskCreditRisk--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Concentration of Risk&#8212;</b>We maintain our cash and cash equivalents in accounts with major financial institutions in the form of demand deposits, money market accounts and state and local municipal securities. Deposits in these financial institutions may exceed the amount of federal deposit insurance provided on such deposits. We have not experienced any losses on our deposits of cash and cash equivalents. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table5 - us-gaap:MarketableSecuritiesPolicy--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Marketable Securities&#8212;</b>Our marketable securities primarily consist of state and local municipal securities, corporate debt securities and variable-rate demand notes. Variable-rate demand notes are considered highly liquid. Although the variable-rate demand notes have long-term nominal maturity dates, the interest rates generally reset weekly. 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The investment would be written down to its current market value at the time the impairment is deemed to have occurred. Future adverse changes in market conditions, continued poor operating results of underlying investments or other factors could result in further losses that may not be reflected in an investment&#8217;s current carrying value, possibly requiring an additional impairment charge in the future. </font></p> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"> We use the specific identification method to determine any realized gains or losses from the sale of our marketable securities classified as available-for-sale. 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Our decisions to write-down our merchandise inventories are based on their current rate of sale, the age of the inventory, the profitability of the inventory and other factors. Actual final sales prices to customers may&#160;be higher or lower than our estimated sales prices and could result in a fluctuation in gross profit. Historically, any additional write-downs have not been significant. We have reserved for inventory at February&#160;2, 2013 and January&#160;28, 2012 in the amounts of $3.3 million and $3.2 million. The inventory reserve includes inventory whose estimated market value is below cost and an estimate for inventory shrinkage. We estimate an inventory shrinkage reserve for anticipated losses for the period. Shrinkage refers to a reduction in inventory due to shoplifting, employee theft and other matters. The inventory related to these reserves is not marked up in subsequent periods. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table7 - us-gaap:PropertyPlantAndEquipmentPolicyTextBlock--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Fixed Assets&#8212;</b>Fixed assets primarily consist of leasehold improvements, fixtures, land, buildings, computer equipment, software and store equipment. Fixed assets are stated at cost less accumulated depreciation utilizing the straight-line method over the assets&#8217; estimated useful lives. 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Our AROs are primarily associated with leasehold improvements that, at the end of a lease, we are contractually obligated to remove in order to comply with certain lease agreements. The ARO balance at February&#160;2, 2013 and January&#160;28, 2012 is $1.9 million and $1.7 million and is recorded in other liabilities and long-term debt and other liabilities on the consolidated balance sheets and will be subsequently adjusted for changes in fair value. The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over its useful life. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table9 - us-gaap:ImpairmentOrDisposalOfLongLivedAssetsPolicyTextBlock--> <p style="margin-top:0px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Valuation of Long-Lived Assets&#8212;</b>We review the carrying value of long-lived assets for impairment when factors and circumstances indicate that the carrying values may not be recoverable. Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment recognized is measured by comparing projected discounted cash flow of the asset to the asset carrying values. The estimation of future cash flows from operating activities requires significant judgments of factors that include future sales, gross profit and operating expenses. Impairment charges are included in selling, general and administrative expenses on the consolidated statements of income. Impairment charges were immaterial for the fiscal years ended February&#160;2, 2013,&#160;January&#160;28, 2012 and January&#160;29, 2011. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table10 - us-gaap:GoodwillAndIntangibleAssetsGoodwillPolicy--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Goodwill&#8212;</b>Goodwill represents the excess of purchase price over the fair value of acquired tangible and identifiable intangible net assets. We test goodwill for impairment on an annual basis or more frequently if indicators of impairment are present. We perform our annual impairment measurement test in the fourth quarter. Events that result in an impairment review include significant changes in the current business climate, future expectations of economic conditions, declines in our operating results of our reporting units, or an expectation that the carrying amount may not be recoverable. We have an option to test goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount.&#160;The qualitative assessment may include, but is not limited to, weighing the relative impact of factors specific to the reporting units as well as industry and macroeconomic factors. Reporting unit specific factors considered, include the results of the most recent impairment test, as well as financial performance and changes to the reporting units&#8217; carrying amounts since the most recent impairment test. After assessing those various factors, if it is determined that it is more likely than not that the fair value of the reporting unit is greater than the carrying amount, further testing of goodwill impairment is not required to be performed.&#160;If it is more likely than not that the fair value of the reporting unit is less than the carrying amount or if we chose not to perform the qualitative assessment, we perform a quantitative two-step impairment test.&#160;The first step compares the fair value of the reporting unit with its carrying amount of net assets, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step includes fair valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit&#8217;s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit&#8217;s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount. The fair value of each of our reporting units is the price a willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow model and market multiples of current earnings. Key assumptions used in this calculation include revenue growth, operating expenses and a discount rate that we believe a buyer would assume when determining a purchase price for the reporting unit. Estimates of revenue growth and operating expenses are based on internal projections considering a reporting unit&#8217;s past performance and forecasted growth, local market economics and the local business environment impacting the reporting unit&#8217;s performance. The discount rate is calculated using a weighted average cost of capital. These estimates are highly subjective judgments and can be significantly impacted by changes in the business or economic conditions. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table11 - us-gaap:GoodwillAndIntangibleAssetsIntangibleAssetsPolicy--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Intangible Assets&#8212;</b>Our intangible assets consist of trade names and trademarks with indefinite lives and certain definite-lived intangible assets. We test our indefinite-lived intangible assets for impairment on an annual basis, or more frequently if indicators of impairment are present. In July 2012, the FASB issued guidance that would allow us to test our indefinite-lived intangible asset for impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the asset is less than the carrying amount. We did not early adopt this guidance and it will be effective for us for the fiscal year ending February&#160;1, 2014. We test our indefinite-lived assets by estimating the fair value of the asset and comparing that to the carrying value, an impairment loss is recorded for the amount that carrying value exceeds the estimated fair value. The fair value of the trade names and trademarks is determined using the relief from royalty method, which requires management to make assumptions and to apply judgment, including forecasting future sales, expenses, discount rates, and royalty rates. Definite-lived intangible assets, which consist of developed technology and customer relationships, are amortized using the straight-line method over their estimated useful lives. Additionally, we test the definite-lived intangible assets when facts and circumstances indicate that the carrying values may not be recoverable. An impairment loss in our definite-lived intangible assets would be recognized when the estimated fair value of the definite-lived asset is less than its carrying value. We determine the estimated fair value of our definite-lived asset where we take the estimated future operating cash flows derived from the operation to which the asset relates over its remaining useful life, using a discounted cash flow analysis. Changes in any of these estimates, projections and assumptions could have a material effect of the fair value of these assets in future measurement periods and result in an impairment which could materially affect our results of operations. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table12 - us-gaap:LeasePolicyTextBlock--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Deferred Rent, Rent Expense and Tenant Allowances&#8212;</b>We lease our stores and certain corporate and other operating facilities under operating leases. A majority of our leases provide for ongoing co-tenancy requirements or early cancellation clauses that would further lower rental rates, or permit lease terminations, or both, in the event that co-tenants cease to operate for specific periods or if certain sales levels are not met in specific periods. Most of the store leases require payment of a specified minimum rent and a contingent rent based on a percentage of the store&#8217;s net sales in excess of a specified threshold. Most of the lease agreements have defined escalating rent provisions, which are straight-lined over the term of the related lease, including any lease renewals deemed to be probable. We recognize rent expense over the term of the lease, plus the construction period prior to occupancy of the retail location. For certain locations, we receive tenant allowances and report these amounts as a liability, which is amortized as a reduction to rent expense over the term of the lease. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table13 - us-gaap:CommitmentsAndContingenciesPolicyTextBlock--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Claims and Contingencies&#8212;</b>We are subject to various claims and contingencies related to lawsuits, insurance, regulatory and other matters arising out of the normal course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not determinable, we provide disclosure of a material claim or contingency in the Notes to the Consolidated Financial Statements. </font></p> <!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" --> <!-- Begin Block Tagged Accounting Policy: note2_accounting_policy_table14 - us-gaap:RevenueRecognitionPolicyTextBlock--> <p style="margin-top:12px;margin-bottom:0px; text-indent:4%"><font style="font-family:times new roman" size="2"><b>Revenue Recognition&#8212;</b>Sales are recognized upon purchase at our retail store locations. For our ecommerce sales, revenue is recognized upon estimated delivery to the customer. Taxes collected from our customers are recorded on a net basis. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, an estimate of the portion of gift cards that is not expected to be redeemed (&#8220;gift card breakage&#8221;) is recognized in net sales after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data. For the fiscal years ended February&#160;2, 2013,&#160;January&#160;28, 2012 and&#160;January 29, 2011, we recorded net sales related to gift card breakage income of $0.7 million, $0.6 million and $0.6 million. Revenue is recorded net of estimated and actual sales returns and deductions for promotions. We accrue for estimated sales returns by customers based on historical sales return results. 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This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. 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Common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options, employee stock purchase plan funds held to acquire stock and non-vested restricted stock. 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Revenue and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. 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