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of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles,
and that receipts and expenditures of the company are
being made only in accordance with authorizations
of management and directors of the company; and (iii)
provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk
that controls may become inadequate because of changes in conditions,
or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising
from the current period audit of the
consolidated financial statements that was communicated
or required to be communicated to the audit
committee and that (i) relates to accounts or disclosures
that are material to the consolidated financial
statements and (ii) involved our especially challenging, subjective,
or complex judgments. The
communication of critical audit matters does not alter in any
way our opinion on the consolidated
financial
statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a
separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Impairment of Long-Lived Assets - Store Location Asset Groupings
As described in Notes 1 and 6 to the consolidated financial
statements, the Company’s consolidated
property and equipment, net balance was $63.1 million, of which
the store locations were a portion, and
consolidated operating lease right-of-use assets, net balance
was $181.3 million as of January 29, 2022.
The Company invests in leaseholds, right-of-use assets and equipment,
primarily in connection with the
opening and remodeling of stores, and in computer software
and hardware. The Company periodically
reviews its store locations and estimates the recoverability
of its long-lived assets, which primarily relate
to fixtures and equipment, leasehold improvements, right-of-use
assets net of lease liabilities, and
information technology equipment and software. An impairment charge
is recorded for the amount by
which the carrying value exceeds the estimated fair value
when management determines that projected
cash flows associated with those long-lived assets will not
be sufficient to recover the carrying value. This
determination is based on a number of factors, including
the store’s historical operating results and future
projected cash flows, which include contribution margin projections.
The Company assesses the fair value
of each lease by considering market rents and any lease
terms that may adjust market rents under certain
conditions such as the loss of an anchor tenant or a leased
space in a shopping center not meeting certain
criteria. An impairment charge for store assets of $0.9
million was recorded during the year ended
January 29, 2022.
The principal considerations for our determination that
performing procedures relating to the
impairment of long-lived assets – store location asset groupings
is a critical audit matter are (i) the
significant judgment by management when determining the fair
value measurement of the store location
asset groupings, which led to (ii) a high degree of auditor
judgment, subjectivity, and effort in performing
procedures and evaluating management’s projected cash flow
assumptions related to contribution margin
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with
forming our overall opinion on the consolidated financial statements.
These procedures included testing
the effectiveness of controls relating to management’s long
-lived assets – store location recoverability test
and determination of the fair value of the asset group.
These procedures also included, among others (i)
testing the completeness and accuracy of underlying data
used in the projected cash flows and store
location asset groupings, (ii) evaluating the reasonableness
of management’s assumptions related to
contribution margin projections by considering current
and historical performance of the store location
asset groupings and whether the assumptions were consistent
with evidence obtained in other areas of the
audit, (iii) evaluating the appropriateness of the projected
cash flow model, and (iv) evaluating