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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 1, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-38291


STITCH FIX, INC.
(Exact name of registrant as specified in its charter)


Delaware
27-5026540
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1 Montgomery Street
Suite 1500
San Francisco
California
94104
(Address of Principal Executive Offices)
(Zip Code)
(415) 882-7765
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Class A common stock, par value $0.00002 per shareSFIXNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 ☒
Accelerated filer

Non-accelerated filer  
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
As of March 4, 2020, the number of outstanding shares of the registrant’s Class A common stock, par value $0.00002 per share, was 56,522,096, and the number of outstanding shares of the registrant’s Class B common stock, par value $0.00002 per share, was 45,954,513.

1


STITCH FIX, INC.
TABLE OF CONTENTS
 
  
Page No.
   
  
  
  
 
  
  
  
  
  
   
  
  
  
  
  
  
  
  
  
 
In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Stitch Fix,” and “the Company” refer to Stitch Fix, Inc. The Stitch Fix logo and other trade names, trademarks or service marks of Stitch Fix are the property of Stitch Fix, Inc. This Quarterly Report on Form 10-Q contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

2


PART I. FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

Stitch Fix, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)

February 1, 2020August 3, 2019
Assets
Current assets:
Cash and cash equivalents$165,989  $170,932  
Short-term investments134,592  143,276  
Inventory, net147,236  118,216  
Prepaid expenses and other current assets38,513  49,980  
Total current assets486,330  482,404  
Long-term investments96,657  53,372  
Property and equipment, net63,158  54,888  
Operating lease right-of-use assets123,490    
Deferred tax assets27,047  22,175  
Other long-term assets3,046  3,227  
Total assets$799,728  $616,066  
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$86,092  $90,883  
Operating lease liabilities23,475    
Accrued liabilities84,904  69,734  
Gift card liability10,393  7,233  
Deferred revenue11,273  11,997  
Other current liabilities3,934  2,784  
Total current liabilities220,071  182,631  
Operating lease liabilities, net of current portion125,925    
Deferred rent, net of current portion  24,439  
Other long-term liabilities14,822  12,996  
Total liabilities360,818  220,066  
Commitments and contingencies (Note 6)
Stockholders’ equity:
Class A common stock, $0.00002 par value – 2,000,000,000 shares authorized as of February 1, 2020, and August 3, 2019; 56,362,550 and 54,551,240 shares issued and outstanding as of February 1, 2020, and August 3, 2019, respectively
1  1  
Class B common stock, $0.00002 par value – 100,000,000 shares authorized as of February 1, 2020, and August 3, 2019; 46,081,625 and 46,846,240 shares issued and outstanding as of February 1, 2020, and August 3, 2019, respectively
1  1  
Additional paid-in capital308,687  279,511  
Accumulated other comprehensive income (loss)2,294  (187) 
Retained earnings127,927  116,674  
Total stockholders’ equity438,910  396,000  
Total liabilities and stockholders’ equity$799,728  $616,066  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3


Stitch Fix, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(In thousands, except share and per share amounts)
 
 For the Three Months EndedFor the Six Months Ended
 February 1, 2020January 26, 2019February 1, 2020January 26, 2019
Revenue, net$451,784  $370,280  $896,599  $736,516  
Cost of goods sold249,597  207,131  493,110  408,199  
Gross profit202,187  163,149  403,489  328,317  
Selling, general, and administrative expenses193,689  147,738  394,831  302,009  
Operating income 8,498  15,411  8,658  26,308  
Interest (income) expense(1,477) (1,170) (3,130) (2,569) 
Other (income) expense, net28  (453) 862  (573) 
Income before income taxes9,947  17,034  10,926  29,450  
Provision (benefit) for income taxes(1,484) 5,058  (327) 6,796  
Net income (loss)$11,431  $11,976  $11,253  $22,654  
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-for-sale securities, net of tax247  104  75  22  
Foreign currency translation651  93  2,406  119  
Total other comprehensive income (loss), net of tax898  197  2,481  141  
Comprehensive income$12,329  $12,173  $13,734  $22,795  
Net income (loss) attributable to common stockholders:
Basic$11,431  $11,968  $11,253  $22,632  
Diluted$11,431  $11,968  $11,253  $22,633  
Earnings (loss) per share attributable to common stockholders:    
Basic$0.11  $0.12  $0.11  $0.23  
Diluted$0.11  $0.12  $0.11  $0.22  
Weighted-average shares used to compute earnings (loss) per share attributable to common stockholders:    
Basic102,045,087  99,590,187  101,801,666  99,278,599  
Diluted104,637,548  102,817,838  104,018,782  103,597,316  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


Stitch Fix, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)
 
For the Three Months Ended January 26, 2019
 Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive Income (Loss)Retained
Earnings
Total
Stockholders’
Equity
 SharesAmount
Balance as of October 27, 201899,434,225  $2  $243,086  $(56) $90,471  $333,503  
Issuance of common stock upon exercise of stock options390,308  —  (69) —  —  (69) 
Issuance of restricted stock units, net of tax withholdings84,268  —  (918)     (918) 
Vesting of early exercised options—  —  88  —  —  88  
Stock-based compensation—  —  8,512  —  —  8,512  
Net income (loss)—  —  —  —  11,976  11,976  
Other comprehensive income (loss), net of tax—  —  —  197  —  197  
Balance as of January 26, 2019
99,908,801  $2  $250,699  $141  $102,447  $353,289  
For the Three Months Ended February 1, 2020
 Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive Income (Loss)Retained
Earnings
Total
Stockholders’
Equity
 SharesAmount
Balance as of November 2, 2019101,708,646  $2  $290,720  $1,396  $116,496  $408,614  
Issuance of common stock upon exercise of stock options503,891  —  5,140  —  —  5,140  
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings231,638  —  (3,044)     (3,044) 
Stock-based compensation—  —  15,871  —  —  15,871  
Net income (loss)—  —  —  —  11,431  11,431  
Other comprehensive income (loss), net of tax—  —  —  898  —  898  
Balance as of February 1, 2020
102,444,175  $2  $308,687  $2,294  $127,927  $438,910  
5


For the Six Months Ended January 26, 2019
 Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive Income (Loss)Retained
Earnings
Total
Stockholders’
Equity
 SharesAmount
Balance as of July 28, 2018
98,799,861  $2  $235,312  $  $79,758  $315,072  
Cumulative effect of adopting accounting standards(1)
—  —  —  —  35  35  
Issuance of common stock upon exercise of stock options968,415  —  1,931  —  —  1,931  
Issuance of restricted stock units, net of tax withholdings140,525  —  (2,281) —  —  (2,281) 
Vesting of early exercised options—  —  178  —  —  178  
Stock-based compensation—  —  15,559  —  —  15,559  
Net income (loss)—  —  —  —  22,654  22,654  
Other comprehensive income (loss), net of tax—  —  —  141  —  141  
Balance as of January 26, 2019
99,908,801  $2  $250,699  $141  $102,447  $353,289  
For the Six Months Ended February 1, 2020
Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive Income (Loss)Retained
Earnings
Total
Stockholders’
Equity
SharesAmount
Balance as of August 3, 2019
101,397,480  2  279,511  (187) 116,674  $396,000  
Issuance of common stock upon exercise of stock options626,559  —  5,658  —  —  5,658  
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings420,136  —  (5,256)     (5,256) 
Stock-based compensation—  —  28,774  —  —  28,774  
Net income (loss)—  —  —  —  11,253  11,253  
Other comprehensive income (loss), net of tax—  —  —  2,481  —  2,481  
Balance as of February 1, 2020
102,444,175  $2  $308,687  $2,294  $127,927  $438,910  

(1) See Note 2, Summary of Significant Accounting Policies, of the Notes to the Condensed Consolidated Financial Statements for more details on the cumulative effect of adopting accounting standards.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


Stitch Fix, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands)
 For the Six Months Ended
 February 1, 2020January 26, 2019
Cash Flows from Operating Activities  
Net income (loss)$11,253  $22,654  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Deferred income taxes(4,865) (2,288) 
Inventory reserves2,831  4,853  
Stock-based compensation expense27,881  14,747  
Depreciation, amortization, and accretion10,347  6,456  
Other71    
Change in operating assets and liabilities: 
Inventory(31,586) (22,928) 
Prepaid expenses and other assets5,167  1,546  
Operating lease right-of-use assets and liabilities141    
Accounts payable(4,870) 7,012  
Accrued liabilities15,254  17,689  
Deferred revenue(729) 3,822  
Gift card liability3,160  3,512  
Other liabilities4,187  592  
Net cash provided by operating activities38,242  57,667  
Cash Flows from Investing Activities  
Purchases of property and equipment(11,446) (11,903) 
Purchases of securities available-for-sale(129,925) (185,994) 
Sales of securities available-for-sale14,095  1,163  
Maturities of securities available-for-sale81,675  9,500  
Net cash used in investing activities(45,601) (187,234) 
Cash Flows from Financing Activities  
Proceeds from the exercise of stock options, net5,658  1,931  
Payments for tax withholding related to vesting of restricted stock units(5,256) (2,281) 
Net cash provided by (used in) financing activities402  (350) 
Net increase (decrease) in cash, cash equivalents, and restricted cash(6,957) (129,917) 
Effect of exchange rate changes on cash2,014  (103) 
Cash, cash equivalents, and restricted cash at beginning of period170,932  310,366  
Cash, cash equivalents, and restricted cash at end of period$165,989  $180,346  
Components of Cash, Cash Equivalents, and Restricted Cash    
Cash and cash equivalents$165,989  $167,496  
Restricted cash – current portion  250  
Restricted cash – long-term portion  12,600  
Total cash, cash equivalents, and restricted cash$165,989  $180,346  
Supplemental Disclosure  
Cash paid for income taxes$90  $191  
Supplemental Disclosure of Non-Cash Investing and Financing Activities:  
Purchases of property and equipment included in accounts payable and accrued liabilities$4,474  $4,741  
Capitalized stock-based compensation$893  $812  
Vesting of early exercised options$  $178  
Leasehold improvements paid by landlord$7,406  $  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


Stitch Fix, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1. Description of Business
Stitch Fix, Inc. (“we,” “our,” “us” or “the Company”) delivers one-to-one personalization to our clients through the combination of data science and human judgment. Our stylists hand select items from a broad range of merchandise. Stylists pair their own judgment with our analysis of client and merchandise data to provide a personalized shipment of apparel, shoes, and accessories suited to each client’s needs. We call each of these unique shipments a Fix. After receiving a Fix, our clients purchase the items they want to keep and return the other items. We also offer a direct-buy functionality that allows clients the flexibility of purchasing items outside of a Fix. Through direct buy, clients are offered previously purchased items in different colors, sizes, or prints, as well as a personalized set of algorithmically generated items based on items they have already bought from us. No styling fee is charged for direct purchases. We are incorporated in Delaware and have operations in the United States and the United Kingdom.
Initial Public Offering
On November 16, 2017, we completed an initial public offering (“IPO”). In connection with the IPO, we authorized two new classes of common stock: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting, conversion, and transfer rights. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. The Class B common stock automatically converts to Class A common stock upon transfers or any sale. In our IPO, we issued and sold 8,000,000 shares of our Class A common stock at a public offering price of $15.00 per share. We received $110.4 million in net proceeds after deducting $6.2 million of underwriting discounts and $3.4 million in offering costs. Upon the closing of the IPO, all of the then outstanding shares of common stock were reclassified into Class B common stock, all of the outstanding shares of convertible preferred stock automatically converted into 59,511,055 shares of Class B common stock, and all of the outstanding preferred stock warrants were automatically exercised into 1,066,225 shares of Class B common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or preferred stock warrants outstanding.
In December 2017, we issued an additional 1,175,557 shares of Class A common stock at a price of $15.00 per share following the underwriters’ exercise of their option to purchase additional shares and received $16.7 million in net proceeds after deducting underwriting discounts and expenses.
2. Summary of Significant Accounting Policies
Basis of Presentation
Our fiscal year is a 52-week or 53-week period ending on the Saturday closest to July 31. The fiscal years ending August 1, 2020 (“2020”), and August 3, 2019 (“2019”), consist of 52 weeks and 53 weeks, respectively.
The unaudited condensed consolidated financial statements include the accounts of Stitch Fix, Inc. and our wholly owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending August 1, 2020, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended August 3, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC on October 2, 2019 (“2019 Annual Report”).
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in our condensed consolidated financial statements and accompanying footnotes.
8


Significant estimates and assumptions are used for inventory, stock-based compensation expense, income taxes, leases, and revenue recognition. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.
Restricted Cash
Restricted cash represented cash balances held in segregated accounts collateralizing letters of credit for our leased properties at January 26, 2019.
Short-Term and Long-Term Investments
The Company’s short-term and long-term investments have been classified and accounted for as available-for-sale securities. We determine the appropriate classification of our investments at the time of purchase and reevaluate the classification at each balance sheet date. Available-for-sale securities with maturities of 12 months or less are classified as short-term and available-for-sale securities with maturities greater than 12 months are classified as long-term. The Company’s available-for-sale securities are carried at fair value, with unrealized gains and losses, net of taxes, reported within accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity, with the exception of unrealized losses believed to be other-than-temporary, which are reported in earnings in the current period, if applicable. The cost of securities sold is based upon the specific identification method.
Foreign Currency
The functional currency of our international subsidiary is the local currency. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in AOCI as a component of stockholders’ equity. Net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency are recorded in other income, net in the condensed consolidated statements of operations and comprehensive income.   
Revenue Recognition
We generate revenue primarily from the sale of merchandise in a Fix and, to a lesser extent, from direct purchases. Clients create an online account on our website or mobile app, complete a style profile, and order a Fix to be delivered on a specified date.
Each Fix represents an offer made by us to the client to purchase merchandise. The client is charged a nonrefundable upfront styling fee before the Fix is shipped. As an alternative to the styling fee, we offer select clients the option to purchase a Style Pass. Style Pass clients pay a nonrefundable annual fee for unlimited Fixes that is credited towards merchandise purchases. If the offer to purchase merchandise is accepted, we charge the client the order amount for the accepted merchandise, net of the upfront styling fee or Style Pass annual fee. For each Fix, acceptance occurs when the client checks out the merchandise on our website or mobile app. We offer a discount to clients who purchase all of the items in the Fix.
We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.
Both our styling fee and Style Pass arrangements consist of one performance obligation, which is the option to purchase merchandise. The upfront styling fee is not a performance obligation as the styling activity is not distinct within the context of the contract. Similarly, the right to receive multiple options under Style Pass does not provide the customer with material stand-alone value and therefore does not give rise to a separate performance obligation. Both the upfront styling fee and Style Pass annual fee are included in deferred revenue until the performance obligation is satisfied when the client exercises his or her option to purchase merchandise (i.e., upon checkout of a Fix) or when the option(s) to purchase merchandise expire(s).
Revenue is recognized when control of the promised goods is transferred to the client. For a Fix, control is transferred when the client accepts or rejects the offer to purchase merchandise. Upon acceptance by purchasing one or more items within the Fix at checkout, the total amount of the order, including the upfront styling fee, is recognized as revenue. If none of the items within the Fix are accepted at checkout, the upfront styling fee is recognized as revenue at that time. The Style Pass annual fee is recognized at the earlier of (i) the time at which a client accepts and applies the Style Pass fee to an offer to purchase merchandise or (ii) upon expiry of the annual period. Under Style Pass arrangements, if a client does not accept any items within the Fix, the annual fee will continue to be deferred until it is applied to a future purchase or upon expiry of the annual period. If a client would like to exchange an item, we recognize revenue at the time the exchanged item is shipped, which coincides with the transfer of control to the customer. For a direct purchase, control is transferred when the item is shipped to the client.
9


We deduct discounts, sales tax, and estimated refunds to arrive at net revenue. Sales tax collected from clients is not considered revenue and is included in accrued liabilities until remitted to the taxing authorities. All shipping and handling costs are accounted for as fulfillment costs in cost of goods sold and as selling, general, and administrative expense (“SG&A”), respectively, and are therefore not evaluated as a separate performance obligation. Discounts are recorded as a reduction to revenue when the order is accepted. We record a refund reserve based on our historical refund patterns. Our refund reserve, which is included in accrued liabilities in the condensed consolidated balance sheets, was $2.4 million and $3.1 million as of February 1, 2020, and August 3, 2019, respectively.
The Company has four types of contractual liabilities: (i) cash collections of upfront styling fees, which are included in deferred revenue and are recognized as revenue upon the earlier of application to a merchandise purchase or expiry of the offer, (ii) cash collections of Style Pass annual fees, which are included in deferred revenue and are recognized upon the earlier of application to a merchandise purchase or expiry of the Style Pass annual period, (iii) unredeemed gift cards, which are included in gift card liability and recognized as revenue upon usage or inclusion in gift card breakage estimates, and (iv) referral credits, which are included in other current liabilities and are recognized as revenue when used.
We sell gift cards to clients and establish a liability based upon the face value of such gift cards. We reduce the liability and recognize revenue upon usage of the gift card. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period, subject to requirements to remit balances to governmental agencies. All commissions paid to third parties upon issuance of gift cards are recognized in SG&A as incurred, as on average, gift cards are used within a one-year period. Similarly, referral credits that are considered incremental costs of obtaining a contract with a customer are recognized in SG&A when issued, as on average, referral credits are used within a one-year period.
Contractual liabilities included in deferred revenue, gift card liability, and other current liabilities were $11.3 million, $10.4 million, and $2.6 million, respectively, at February 1, 2020, and $12.0 million, $7.2 million, and $1.6 million, respectively, at August 3, 2019. During the three months ended February 1, 2020, the Company recognized $0.2 million, $0.7 million, and $0.1 million of revenue included in deferred revenue, gift card liability, and other current liabilities, respectively, at August 3, 2019. During the six months ended February 1, 2020, the Company recognized $11.1 million, $2.1 million, and $0.6 million of revenue included in deferred revenue, gift card liability, and other current liabilities, respectively, at August 3, 2019.
Deferred revenue related to upfront styling fees totaled $7.9 million as of February 1, 2020, and $9.6 million as of August 3, 2019. Deferred revenue related to Style Pass annual fees totaled $3.3 million as of February 1, 2020, and $2.3 million as of August 3, 2019.
The Company expects deferred revenue for upfront styling fees and Style Pass annual fees to be recognized within one year. On average, gift card liability and other current liabilities are also recognized within one year.
Concentration of Credit Risks
We are subject to concentrations of credit risk principally from cash and cash equivalents and investment securities. The majority of our cash is held by three financial institutions within the United States. Our cash balances held by these institutions may exceed federally insured limits. The associated risk of concentration for cash is mitigated by banking with credit-worthy institutions. The associated risk of concentration for cash equivalents and investments is mitigated by maintaining a diversified portfolio of highly rated instruments. 
No client accounted for greater than 10% of total revenue, net for the three and six months ended February 1, 2020, and January 26, 2019, respectively.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard requires entities to use a financial instrument impairment model based on expected losses, known as the current expected credit loss model, rather than incurred losses. Under the new guidance, an entity recognizes an allowance for estimated credit losses upon recognition of the financial instrument. We expect to adopt this standard in our first fiscal quarter of 2021. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard is effective beginning in our first fiscal quarter of 2021 on a prospective or retrospective basis, with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
10


In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. This update amends and simplifies the accounting for income taxes by eliminating certain exceptions in existing guidance related to performing intraperiod tax allocation, calculating interim period taxes, and recognizing deferred taxes for investments. The update also provides new guidance to reduce complexity in certain areas. This standard is effective beginning in our first fiscal quarter of 2022 with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to Accounting Standards Codification (“ASC”) 840. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Presentation of leases within the consolidated statements of operations and comprehensive income and consolidated statements of cash flow is generally consistent with prior periods presented under ASC 840. However, this standard resulted in a substantial increase in our long-term assets and liabilities on our consolidated balance sheet.
We adopted this standard on August 4, 2019, on a modified retrospective basis through a cumulative-effect adjustment of zero to opening retained earnings. We also elected the package of practical expedients to leases that commenced before the effective date whereby we elected to not reassess the following:
(i) whether any expired or existing contracts contain leases;
(ii) the lease classification for any expired or existing leases; and
(iii) initial direct costs for any existing leases.
Upon adoption of ASU 2016-02, we did not record right-of-use assets or lease liabilities for leases with an initial term of 12 months or less. Payments on those leases will be recognized on a straight-line basis through the consolidated statements of operations and comprehensive income over the lease term. We also elected to combine lease and non-lease components on new or modified leases after adoption. Upon adoption on August 4, 2019, we recorded $133.0 million in right-of-use assets, net of $25.7 million previously recorded as deferred rent on our consolidated balance sheets. We also recorded $22.0 million in current operating lease liabilities and $136.7 million in operating lease liabilities, net of current portion.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). Under ASU 2018-07, the accounting for awards issued to nonemployees will be similar to the accounting for employee awards. This includes allowing for the measurement of awards at the grant date and recognition of awards with performance conditions when those conditions are probable, both of which are earlier than under current guidance for nonemployee awards. We adopted this standard in the first quarter of fiscal year 2020. The standard did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amended the existing FASB Accounting Standards Codification. ASU 2014-09 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services and also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. The new guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”).
We adopted the standard in the first quarter of 2019 under the modified retrospective approach. Under the new standard, we recognize estimated gift card breakage revenue proportionately to customer gift card usage over the expected gift card usage period rather than waiting until the likelihood of redemption becomes remote. Further, we recognize revenue related to exchanges upon shipment by us, rather than upon receipt by the customer.  In the first quarter of 2019, the Company recorded a cumulative catch-up adjustment resulting in an increase to opening retained earnings, net of tax, of $0.4 million, comprised of the impact of $0.3 million from the change in revenue recognition related to gift cards and $0.1 million from the recognition of exchanges upon shipment.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which amends existing guidance on the recognition of current and deferred income tax impacts for intra-entity asset transfers other than inventory. We adopted the standard in the first quarter of 2019 under the modified retrospective approach. As a result, a cumulative adjustment of $0.4 million, net of tax, was recorded to reduce opening retained earnings in connection with adoption of this standard.
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3. Fair Value Measurements
We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities 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 related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, and accrued liabilities. At February 1, 2020, and August 3, 2019, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities.
The following table sets forth the amortized cost, gross unrealized gains, gross unrealized losses and fair values of our short-term and long-term investments accounted for as available-for-sale securities as of February 1, 2020, and August 3, 2019:
February 1, 2020August 3, 2019
(in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueAmortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Financial Assets:
Investments:
U.S. Treasury securities$68,970  $150  $  $69,120  $49,807  $100  $  $49,907  
Commercial paper34,828      34,828  29,761      29,761  
Asset-backed securities44,566  176    44,742  42,587  145    42,732  
Corporate bonds82,287  272    82,559  73,969  279    74,248  
Total$230,651  $598  $  $231,249  $196,124  $524  $  $196,648  
The following table sets forth the fair value of available-for-sale securities by contractual maturity as of February 1, 2020, and August 3, 2019:
February 1, 2020August 3, 2019
(in thousands)One Year or LessOver One Year Through Five YearsOver Five YearsTotalOne Year or LessOver One Year Through Five YearsOver Five YearsTotal
Financial Assets:
Investments:
U.S. Treasury securities$47,774  $21,346  $  $69,120  $44,772  $5,135  $  $49,907  
Commercial paper34,828      34,828  29,761      29,761  
Asset-backed securities3,806  40,936    44,742  5,412  37,320    42,732  
Corporate bonds48,184  34,375    82,559  63,331  10,917    74,248  
Total$134,592  $96,657  $  $231,249  $143,276  $53,372  $  $