## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 

to write down certain assets. No charges were recorded in the month ended February 1, 2003 or the year ended December 31, 2002. These charges are recorded as a component of “selling, general and administrative expenses” in the accompanying consolidated statements of operations. 

## Intangible Assets 

Goodwill and intangible assets with indefinite useful lives are not amortized, but rather tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144. The Company performs its annual assessment of impairment following the finalization of each November’s financial statements. 

## Financial Instruments 

The Company utilizes derivative financial instruments to reduce its exposure to market risks from changes in interest rates. By entering into receive-variable, pay-fixed interest rate swaps, the Company limits its exposure to changes in variable interest rates. The Company is exposed to credit related losses in the event of non-performance by the counterparty to the interest rate swaps; however, the counterparties are major financial institutions, and the risk of loss due to non-performance is considered remote. Interest rate differentials paid or received on the swap are recognized as adjustments to expense in the period earned or incurred. The Company formally documents all hedging relationships, if applicable, and assesses hedge effectiveness both at inception and on an ongoing basis. 

As of January 29, 2005, one of the Company’s interest rate swaps does not qualify for hedge accounting treatment pursuant to the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . As a result, this interest rate swap is recorded at its fair value in the consolidated balance sheets as a component of “other liabilities” (see Note 6). During fiscal 2004, two additional interest rate swaps that did not qualify for hedge accounting expired. Changes in the fair values of these three interest rate swaps are recorded as “change in the fair value of non-hedging interest rate swaps” in the accompanying consolidated statements of cash flows and the consolidated statements of operations. 

The Company is party to one interest rate swap that qualifies for hedge accounting treatment pursuant to the 

provisions of SFAS No. 133. Accordingly, the liability is recorded at fair value in the accompanying consolidated balance sheets and changes in the fair value are recorded as a component of “accumulated other comprehensive loss.” These amounts are subsequently reclassified into earnings as a yield adjustment in the period in which the related interest on the variable-rate obligations affects earnings. If the swap is terminated prior to its expiration date, the amount recorded in accumulated other compre- hensive loss will be recorded as a yield adjustment over the term of the forecasted transaction. 

## Revenue Recognition 

The Company recognizes sales revenue at the time a sale is made to its customer. 

## Cost of Sales 

The Company includes the cost of merchandise, warehousing and distribution costs, and certain occupancy costs in cost of sales. 

## Pre-Opening Costs 

The Company expenses pre-opening costs for new, expanded and relocated stores, as incurred. 

## Advertising Costs 

The Company expenses advertising costs as they are incurred. Advertising costs approximated $11,042 and $5,681 for the years ended January 29, 2005 and January 31, 2004, respectively, and $789 in the month ended February 1, 2003. The Company did not incur significant advertising costs in the year ended December 31, 2002. 

## Income Taxes 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change. 

