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ANN INC (ANN)

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ANN : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/30/2014 | 03:03pm US/Eastern
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General

ANN INC., through its wholly-owned subsidiaries, is a leading national specialty
retailer of women's apparel, shoes and accessories, sold primarily under the
"Ann Taylor" and "LOFT" brands. We were incorporated in the State of Delaware in
1988 and changed our name to ANN INC. in March 2011. For more than half a
century, we have evolved with the needs of real women who live full, active
lives.
Our rich heritage dates back to 1954, when we opened our first Ann Taylor store
in New Haven, Connecticut. Back then, "Ann Taylor" represented a best-selling
dress style that embodied the well-dressed woman. Today, we operate 1,032 retail
stores in 47 states, the District of Columbia, Puerto Rico and Canada. In
addition to our stores, our clients can shop online in more than 100 countries
worldwide at www.anntaylor.com and www.LOFT.com (together, our "Websites") or by
phone at 1-800-DIAL-ANN and 1-888-LOFT-444.
We are committed to and driven by a simple but important mission - "to inspire
and connect with our clients to put their best selves forward every day." This
is evident in our strong brands as well as in our commitment to operate our
business responsibly and thoughtfully. This commitment means that our clients
can look and feel great about the clothes that they wear, and that as a
business, we are holding ourselves to high standards. It means forging strong
partnerships with our suppliers so that our products are made ethically. It
means investing in new programs and innovation to minimize our impact on the
environment. And it means making meaningful contributions to our communities.
Unless the context indicates otherwise, all references to "we," "our," "us," and
"the Company" refer to ANN INC. and its wholly-owned subsidiaries.
Management Overview
Our results during the first quarter of Fiscal 2014 reflect the impact of
headwinds from the severe winter weather, continued traffic challenges across
the industry and a highly promotional retail environment, which impacted the
top-line at both Ann Taylor and LOFT and our overall gross margin rate
performance. However, due, in part, to continued disciplined expense management,
selling, general and administrative expenses were essentially flat, representing
a 100 basis point improvement in SG&A rate performance over the first quarter of
Fiscal 2013. We also recorded a pre-tax restructuring charge of $17.3 million
during the first quarter in connection with our previously announced strategic
organizational realignment, which was designed to integrate processes across the
organization in support of our omni-channel retail strategy to better serve our
clients. This all contributed to net income of $5.2 million and diluted earnings
per share of $0.11 for the first quarter. Excluding the after-tax effect of
restructuring costs of $10.2 million, or $0.22 per diluted share, first quarter
net income was $15.4 million or $0.33 per diluted share.
At the Ann Taylor brand, total net sales in the first quarter of Fiscal 2014
were essentially flat to last year and overall comparable sales declined 2.3%.
At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, comparable
sales were flat with the first quarter of Fiscal 2013, reflecting the strength
of our merchandise assortment and pricing strategies despite soft traffic and a
highly promotional environment throughout much of the quarter. As a result, we
experienced higher full-price sell-through and improved gross margin rate
performance as compared to last year. At Ann Taylor Factory, comparable sales
declined 7.1%, reflecting continued traffic challenges in factory outlet centers
and softness in basic knit tops and key item sweaters early in the quarter.
At the LOFT brand, total net sales in the first quarter of Fiscal 2014 increased
4.3% compared to last year, while overall comparable sales declined 1.6%. At
LOFT, which includes LOFT stores and LOFT.com, comparable sales decreased 1.8%,
reflecting the impact of lower mall traffic, particularly in the first two
months of the quarter. In addition, LOFT experienced softness in the knit tops
category during the quarter, although clients responded favorably to LOFT's
overall fashion offering. At LOFT Outlet, total net sales increased 13.4% over
the first quarter of Fiscal 2013, while comparable sales declined 0.2%. This
performance was primarily driven by store growth and a strong merchandise
assortment, partially offset by the impact of continued weak traffic in factory
outlet centers.
During the first quarter of Fiscal 2014, our real estate strategy remained
focused on expanding LOFT's domestic small- and mid-market store presence and on
factory outlet store growth at both brands, as well as the execution of
selective store closures across the fleet. Toward that end, we opened a total of
13 new stores during the quarter, comprised of three Ann Taylor Factory stores,
seven LOFT stores and three LOFT Outlet stores. We also right-sized two existing
stores and closed a total of six underperforming stores. Our total store count
at the end of the first quarter of Fiscal 2014 was 1,032 stores.
We also made progress on our Fiscal 2014 strategic priorities. First among these
is the further evolution of our business for continued growth in an increasingly
omni-channel retail environment. During the first quarter, we successfully
executed

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our previously announced strategic organizational realignment and are moving
forward with a leaner, more efficient and integrated structure to best position
us to optimize brand growth and serve our client, whenever and wherever she
chooses to shop. In addition, during 2014, we will further enhance our online
shopping experience through improved site speed and functionality and the
roll-out of an enhanced mobile experience across both brands. These efforts were
designed to improve the online client experience and drive higher conversion. We
will also begin to lay the groundwork for the second phase of our omni-channel
initiative, designed to further enhance the seamless client shopping experience
by enabling fulfillment of in-store client orders online. We will also further
develop our CRM tool for more effective marketing and client outreach.
During the first quarter, we continued to focus on the further development of
our new concept, Lou & Grey, opening the first shop-in-shop in our Westport, CT
LOFT store. We are highly encouraged by the initial results in this location.
Later this year, we expect to open four stand-alone stores to support our
assessment of the growth opportunities of Lou & Grey. In terms of international
growth, we plan to expand the presence of both Ann Taylor and LOFT with a small
number of store openings in Canada during the second quarter and also expect to
open a LOFT store in Mexico later this year.
Overall, we are moving forward on our commitment to strengthen our position as
the go-to wardrobing destination for women of style. Together, Ann Taylor, LOFT
and Lou & Grey represent a full-spectrum offering that put ANN INC. in a unique
position to meet the needs of women at every important phase of their lives. We
believe our strategic initiatives present significant opportunities to build on
the strength of these brands in order to deliver long-term, profitable growth in
2014 and beyond. In addition, with $128 million in cash and cash equivalents, no
bank debt, strong free cash flow and availability under our $250 million share
repurchase program, we will continue to evaluate share repurchase activity as
another means of further enhancing shareholder value.
Key Performance Indicators
In evaluating our performance, senior management reviews certain key performance
indicators, including:
•      Comparable sales - Comparable sales ("comps") provide a measure of
       existing store sales performance. A store is included in comparable sales
       in its thirteenth month of operation. A store with a square footage change
       of greater than 15% is treated as a new store for the first year following
       its reopening. Sales from our Websites are also included in comparable
       sales. In a fiscal year with 53 weeks, sales in the last week of that
       fiscal year are excluded from comparable sales.


•      Gross margin and merchandise gross margin - Gross margin measures our
       ability to control the direct costs of merchandise sold during the period.
       Merchandise gross margin represents the difference between net merchandise
       sales and merchandise cost. Merchandise cost includes the cost paid to our
       third-party suppliers for merchandise sold during the period and the cost
       to transport that merchandise from our suppliers to our distribution
       center, including customs costs. Gross margin includes merchandise gross
       margin, as well as the effect of revenue and/or expenses related to:  our
       sourcing operations; fulfillment and shipment of online and omni-channel
       sales; depreciation related to merchandise management systems; sample
       development costs; and direct costs of our credit card loyalty program.
       Buying and occupancy costs are excluded from cost of sales and gross
       margin.


•      Operating income - Because retailers do not uniformly record supply chain,
       buying and/or occupancy costs as components of cost of sales or selling,
       general and administrative expenses, operating income allows us to
       benchmark our performance relative to other retailers. Operating income
       represents earnings before interest, other income/expense and income taxes
       and measures our earnings power from ongoing operations.


•      Store productivity - Store productivity, including sales per square foot,
       average unit retail price ("AUR"), units per transaction ("UPT"), dollars
       per transaction ("DPT"), traffic and conversion, is evaluated by
       management in assessing our operating performance.


•      Inventory turnover - Inventory turnover measures our ability to sell our
       merchandise and how many times it is replaced over time. This ratio is
       important in determining the need for markdowns, planning future inventory
       levels and assessing client response to our merchandise.


•      Quality of merchandise offerings - To monitor and maintain client
       acceptance of our merchandise offerings, we monitor sell-through levels,
       inventory turnover, gross margin, returns and markdown rates at a class
       and style level. This analysis helps identify merchandise issues at an
       early date and helps us plan future product development and buying.




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Results of Operations The following table sets forth data from our Condensed Consolidated Statements of Operations expressed as a percentage of net sales:

                                                     Quarter Ended
                                               May 3, 2014    May 4, 2013
Net sales                                        100.0  %          100.0 %
Cost of sales                                     46.6  %           44.2 %
Gross margin                                      53.4  %           55.8 %
Selling, general and administrative expenses      48.9  %           49.9 %
Restructuring charge                               2.9  %              - %
Operating income                                   1.6  %            5.9 %
Interest and investment income/(expense), net     (0.1 )%              - %
Other non-operating income, net                      -  %              - %
Income before income taxes                         1.5  %            5.9 %
Income tax provision                               0.6  %            2.3 %
Net income                                         0.9  %            3.6 %


The following table sets forth selected data from our Condensed Consolidated
Statements of Operations expressed as a percentage change from the comparable
prior period:

                         Quarter Ended
                  May 3, 2014     May 4, 2013
                      increase/(decrease)
Net sales             2.8  %          2.5  %
Gross margin         (1.7 )%          1.0  %
Operating income    (72.8 )%        (25.2 )%
Net income          (75.2 )%        (27.2 )%



Sales and Sales-Related Metrics
The following tables set forth certain sales and sales-related metrics:

                                        Quarter Ended
                               May 3, 2014          May 4, 2013
                             Sales     Comp %     Sales     Comp %
Sales and Comparable Sales             ($ in thousands)
Ann Taylor brand
Ann Taylor (1)             $ 150,656      -  %  $ 150,783    6.2  %
Ann Taylor Factory            69,293   (7.1 )%     68,484   (5.8 )%
Total Ann Taylor brand     $ 219,949   (2.3 )%  $ 219,267    1.9  %
LOFT brand
LOFT (2)                   $ 306,289   (1.8 )%  $ 298,497   (0.9 )%
LOFT Outlet                   64,354   (0.2 )%     56,742   (7.9 )%
Total LOFT brand           $ 370,643   (1.6 )%  $ 355,239   (1.9 )%
Total Company              $ 590,592   (1.8 )%  $ 574,506   (0.5 )%


(1) Includes sales at Ann Taylor stores and anntaylor.com.

(2) Includes sales at LOFT stores and LOFT.com.







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Sales and Sales-Related Metrics (Continued)

                                                 Quarter Ended
                                         May 3, 2014      May 4, 2013
Sales-Related Metrics
Average Dollars Per Transaction ("DPT")
Ann Taylor brand                        $       83.29$       79.90
LOFT brand                                      64.25            64.61
Average Units Per Transaction ("UPT")
Ann Taylor brand                                 2.49             2.49
LOFT brand                                       2.74             2.67
Average Unit Retail ("AUR")
Ann Taylor brand                        $       33.45$       32.09
LOFT brand                                      23.45            24.20



Store Data

The following tables set forth certain store data:

                                                    Quarter Ended
                                        May 3, 2014              May 4, 2013
                                   Stores    Square Feet    Stores    Square Feet
                                             (square feet in thousands)
Stores and Square Footage
Ann Taylor brand
Ann Taylor                           264          1,306       273          1,375
Ann Taylor Factory                   111            748       102            698
Total Ann Taylor brand               375          2,054       375          2,073
LOFT brand
LOFT                                 544          3,106       516          2,965
LOFT Outlet                          113            744        98            661
Total LOFT brand                     657          3,850       614          3,626
Total Company                      1,032          5,904       989          5,699

Number of: Stores open at beginning of period 1,025 5,873 984 5,685 New stores (1)

                        13             71        13             66
Downsized/expanded stores, net (2)     -            (10 )       -             (6 )
Closed stores                         (6 )          (30 )      (8 )          (46 )
Stores open at end of period       1,032          5,904       989          5,699



(1)    During the quarter ended May 3, 2014, we opened three new Ann Taylor
       Factory stores, seven new LOFT stores and three new LOFT Outlet stores. In
       addition, we opened our first Lou & Grey store within an existing LOFT
       store. During the quarter ended May 4, 2013, we opened one new Ann Taylor
       store, one new Ann Taylor Factory store, nine new LOFT stores and two new
       LOFT Outlet stores.


(2)    During the quarter ended May 3, 2014, we downsized one Ann Taylor store
       and one LOFT Outlet store. During the quarter ended May 4, 2013, we
       downsized two Ann Taylor stores, one Ann Taylor Factory store and two LOFT
       stores.


Total net sales for the quarter ended May 3, 2014 increased approximately $16.1 million, or 2.8%, as compared with the prior-year period. This increase was primarily due to the impact of net store growth and higher revenue related to our private label and co-branded credit card program, partially offset by a 1.8% decline in total comparable sales. The decrease in total comparable sales was due to comparable sales declines in our brick-and-mortar channels, particularly at Ann Taylor Factory and LOFT, approximately two-thirds of which was offset by higher sales at our Websites. Overall, our sales results continued to be impacted by softer traffic trends, unseasonably cold weather and a highly promotional retail environment.


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At the Ann Taylor brand, total net sales increased $0.7 million, or 0.3%, over the first quarter of Fiscal 2013, with comparable sales down 2.3%. At Ann Taylor, which includes Ann Taylor stores and anntaylor.com, both net sales and comparable sales were essentially flat to last year. While we experienced a year-over-year net decrease in stores and softer traffic, clients responded favorably to our product offering and merchandising strategy, which helped drive full-price sell-through and improvement in both AUR and DPT. At Ann Taylor Factory, net sales increased 1.2% to $69.3 million, primarily due to net store growth partially offset by a 7.1% decrease in comparable sales. This performance reflected the impact of product challenges early in the quarter, continued traffic challenges and a highly promotional environment in factory outlet centers, all of which contributed to decreases in AUR and DPT. At the LOFT brand, total net sales increased approximately $15.4 million, or 4.3%, as compared with the first quarter of Fiscal 2013, with comparable sales down 1.6%. At LOFT, which includes LOFT stores and LOFT.com, net sales increased 2.6% to $306.3 million, primarily due to a year-over-year net increase in stores partially offset by a 1.8% decline in comparable sales. LOFT experienced some product challenges early in the quarter, which combined with the highly promotional environment, weighed on both AUR and DPT. At LOFT Outlet, net sales increased 13.4% to $64.4 million, primarily due to net store growth, while comparable sales were down slightly at 0.2%. Although traffic continued to be challenging in factory outlet centers, strong product and effective promotions helped drive increases in conversion, UPT and DPT. Cost of Sales and Gross Margin The following table presents cost of sales and gross margin in dollars and gross margin as a percentage of net sales:

                               Quarter Ended
                            May 3,         May 4,
                             2014           2013
                           (dollars in thousands)
Cost of sales           $    275,400$ 253,941
Gross margin            $    315,192$ 320,565

Percentage of net sales 53.4 % 55.8 %




Gross margin as a percentage of net sales for the quarter ended May 3, 2014 was
53.4%, a decrease from 55.8% in the comparable 2013 period. Our overall gross
margin rate performance was negatively impacted by the continued competitive
retail environment, which caused us to be more promotional than planned at both
brands in order to clear through inventory. As a result, we experienced an
overall decrease in merchandise gross margin rate performance, despite higher
merchandise gross margin rate performance at Ann Taylor, which was primarily due
to higher full-price sell-through.
Selling, General and Administrative Expenses
The following table presents selling, general and administrative expenses in
dollars and as a percentage of net sales:

                                                    Quarter Ended
                                                 May 3,         May 4,
                                                  2014           2013
                                                (dollars in thousands)

Selling, general and administrative expenses $ 288,672$ 286,653 Percentage of net sales

                              48.9 %        49.9 %



For the quarter ended May 3, 2014, selling, general and administrative expenses increased approximately $2.0 million compared with the first quarter of Fiscal 2013. This increase was primarily due to increases in payroll, occupancy and other variable expenses related to store growth, as well as other expenses to support the expansion of our business. These increases were partially offset by an overall decrease in performance-based compensation expense, primarily resulting from the impact of changes in the forfeiture rate estimates applied to our long-term performance compensation plan, due, in part, to our restructuring. As a percentage of net sales, selling, general and administrative expenses decreased 100 basis points as compared to the first quarter of Fiscal 2013, reflecting a decrease in performance-based compensation expense, as well as the benefit of ongoing disciplined expense management. This decrease was partially offset by an increase in payroll, occupancy and other variable expenses related to store growth.



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Restructuring Charge

During the first quarter of Fiscal 2014, we executed an organizational restructuring in support of our omni-channel retail strategy and our strategic growth initiatives. As part of the restructuring, we realigned certain functions within our corporate workforce, including our marketing, merchandise planning, procurement and allocation functions, to eliminate redundancy and integrate processes to better support our brands and serve our clients. These actions resulted in the separation of approximately 100 full-time associates. In connection with this effort, we recorded a pre-tax restructuring charge of approximately $17.3 million, or 2.9% of net sales, for severance and other costs, and do not expect further material costs related to the restructuring. The restructuring is expected to result in pre-tax operating savings of approximately $20 million in Fiscal 2014 and approximately $25 million annually thereafter. There were no material savings related to the restructuring during the first quarter of Fiscal 2014. For additional information, see Note 2, "Restructuring Charge," in the Notes to Condensed Consolidated Financial Statements.


Income Taxes
The following table presents our income tax provision and effective income tax
rate:
                                 Quarter Ended
                             May 3,          May 4,
                              2014            2013
                             (dollars in thousands)

Income tax provision $ 3,562$ 13,141 Effective income tax rate 40.7 % 38.6 %

Our effective income tax rate was 40.7% for the quarter ended May 3, 2014 as compared to 38.6% for the comparable 2013 period, primarily due to the effect of certain discrete items recorded during the prior-year period.


Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operations, available cash
and cash equivalents and availability under our revolving credit facility. Our
primary cash requirements relate to working capital needs, retail store
expansion, store renovation and refurbishment, investments in technology and
additional share repurchases.
The following table sets forth certain measures of our liquidity:

                  May 3,      February 1,       May 4,
                   2014           2014           2013
                         (dollars in thousands)
Working capital $ 241,963$     231,472$ 182,454
Current ratio      1.80:1           1.70:1       1.60:1



Operating Activities
Cash used for operating activities was $51.8 million for the three months ended
May 3, 2014, compared with $49.7 million for the three months ended May 4, 2013.
The year-over-year increase in cash used for operating activities is primarily
the result of lower net income, partially offset by lower payments under our
incentive compensation plans.
Merchandise inventories increased approximately $17.1 million, or 6.4%, at
May 3, 2014 compared to May 4, 2013. On a per-square-foot basis, merchandise
inventories at May 3, 2014 increased 3% as compared to May 4, 2013, reflecting
increases of 15% at Ann Taylor and 8% in our factory outlet channels, partially
offset by a 6% decrease at LOFT. The increase in inventory per square foot at
Ann Taylor was due to a change in the merchandise mix, which resulted in higher
average unit cost and a slight decrease in unit inventory per square foot as
compared to last year. Merchandise mix also contributed to the increase in
inventory per square foot in our factory outlet channels, although unit
inventory was also up slightly compared to last year. At LOFT, the decrease in
inventory per square foot was primarily due to the successful clearance of early
Spring product, as well as an overall decrease in unit inventory per square
foot.


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Investing Activities Cash used for investing activities was $26.7 million for the three months ended May 3, 2014, compared with $30.1 million for the three months ended May 4, 2013. Cash used for investing activities was primarily driven by capital expenditures related to our store expansion and refurbishment projects during both periods.

Financing Activities Cash provided by financing activities was $4.5 million for the three months ended May 3, 2014, compared with $6.7 million in cash used for financing activities during the three months ended May 4, 2013. The year-over-year change is primarily due to an increase in stock option exercise activity during the quarter ended May 3, 2014.


Revolving Credit Facility
On December 19, 2012, our wholly-owned subsidiary, AnnTaylor, Inc., and certain
of its subsidiaries, entered into a Fourth Amended and Restated $250 million
senior secured revolving credit facility with Bank of America, N.A. and a
syndicate of lenders (the "Credit Facility"), which amended the then existing
senior secured revolving credit facility due to expire in April 2013.
The Credit Facility, which expires on December 19, 2017, includes a $75 million
sub-facility solely for loans and letters of credit to be provided to ANN Canada
Inc., a wholly owned subsidiary of AnnTaylor, Inc., and an option to expand the
total facility and the aggregate commitments thereunder up to $400 million,
subject to the lenders' agreement to increase their commitment for the requested
amount. The Credit Facility may be used for working capital, letters of credit
and other corporate purposes, and contains an acceleration clause which, upon
the occurrence of an Event of Default, including but not limited to, a Material
Adverse Effect, as defined in the Credit Facility, may cause any outstanding
borrowings to become immediately due and payable.
The maximum availability for loans and letters of credit under the Credit
Facility is governed by a quarterly borrowing base, determined by the
application of specified percentages to certain eligible assets, primarily
accounts receivable and inventory. Commercial and standby letters of credit
outstanding under the Credit Facility totaled approximately $10.3 million, $11.0
million and $13.7 million as of May 3, 2014, February 1, 2014 and May 4, 2013,
respectively, leaving a remaining available balance for loans and letters of
credit of $239.7 million, $171.4 million and $236.3 million, respectively. There
were no borrowings outstanding under the Credit Facility at May 3, 2014,
February 1, 2014, May 4, 2013 or as of May 30, 2014, the date of this filing.

Credit Card Program
We have a credit card program that offers eligible clients in the United States
the choice of a private label or co-branded credit card. All cardholders are
automatically enrolled in our exclusive rewards program, which is designed to
recognize and promote client loyalty. We provide the sponsoring bank with
marketing support of the program, and use our sales force to process credit card
applications for both the private label and co-branded credit cards. On December
2, 2013, we entered into an eight-year agreement with the sponsoring bank, which
amended and restated the original agreement that began in October 2008. As with
the original agreement, we received an upfront signing bonus from the sponsoring
bank and also receive ongoing payments for new accounts activated as well as a
share of finance charges collected by the sponsoring bank. These revenue streams
are accounted for as a single unit of accounting and accordingly, are recognized
as revenue ratably based on the total projected revenues over the term of the
agreement. Certain judgments and estimates underlie our projected revenues and
related expenses under the program, including projected future store counts, the
number of applications processed, our projected sales growth and points
breakage, among other things.
During the quarters ended May 3, 2014 and May 4, 2013, we recognized
approximately $10.3 million and $2.3 million of revenue related to the credit
card program, respectively. At May 3, 2014, February 1, 2014 and May 4, 2013,
approximately $5.7 million, $3.0 million and $2.7 million, respectively, of
deferred credit card income is included in "Accrued expenses and other current
liabilities" on our Condensed Consolidated Balance Sheets. Additionally, in
connection with the December 2013 agreement, $19.5 million and $20.7 million of
long-term deferred credit card income is included in "Other liabilities" on our
Consolidated Balance Sheets at May 3, 2014 and February 1, 2014, respectively.
Partially offsetting the income from the credit card program are costs, net of
points breakage, related to the customer loyalty program. These costs are
included in either Cost of sales or in Net sales as a Sales discount, as
appropriate. The Cost of sales impact, net of points breakage, was approximately
$2.9 million and $1.1 million and the Sales discount impact was approximately
$3.3 million and $1.5 million for the quarters ended May 3, 2014 and May 4,
2013, respectively.


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Other

Foreign cash balances at May 3, 2014 were $5.8 million, the majority of which was held in Canadian dollars. As of February 1, 2014 and May 4, 2013, we had foreign cash balances of $2.1 million and $1.3 million, respectively. On October 1, 2007, we froze our noncontributory defined benefit pension plan (the "Pension Plan"). Our Pension Plan is invested in readily liquid investments, primarily equity and debt securities. Although we were not required to make a contribution to the Pension Plan in Fiscal 2013 or Fiscal 2012, any deterioration in the financial markets or changes in discount rates may require us to make a contribution to our Pension Plan in Fiscal 2014. We are self-insured for expenses related to our employee point of service medical plan, our workers' compensation plan, general liability plan and for short-term and long-term disability, up to certain thresholds.

Critical Accounting Policies and Estimates Our discussion and analysis of our results of operations and capital resources are based on the Condensed Consolidated Financial Statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and use assumptions that affect the reported amounts in the financial statements and accompanying notes, including revenue, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities. Management has determined that our most critical accounting estimates are those related to revenue recognition, merchandise inventory valuation, asset impairment, income taxes and stock and incentive-based compensation. Actual results in these areas could differ from management's estimates. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes in the information concerning our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2014.

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