Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 2010
OR
     
o   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 1-32545
DSW INC.
(Exact name of registrant as specified in its charter)
     
Ohio   31-0746639
     
(State or other jurisdiction of
Incorporation or organization)
  (I.R.S. Employer Identification No.)
     
810 DSW Drive, Columbus, Ohio   43219
     
(Address of principal executive offices)   (Zip Code)
(614) 237-7100
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The number of outstanding Class A Common Shares, without par value, as of May 31, 2010 was 16,589,289 and Class B Common Shares, without par value, as of May 31, 2010 was 27,382,667.
 
 

 

 


 

DSW INC.

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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
DSW INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
                 
    May 1,     January 30,  
    2010     2010  
ASSETS
Cash and equivalents
  $ 141,863     $ 125,020  
Short-term investments, net
    152,358       164,265  
Accounts receivable, net
    6,005       5,406  
Accounts receivable from related parties, net
    190       123  
Inventories
    286,657       262,284  
Prepaid expenses and other current assets
    21,064       20,762  
Deferred income taxes
    30,542       29,130  
 
           
Total current assets
    638,679       606,990  
 
           
 
               
Property and equipment, net
    204,038       206,424  
Goodwill
    25,899       25,899  
Other assets
    18,180       11,443  
 
           
Total assets
  $ 886,796     $ 850,756  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable
  $ 131,203     $ 119,064  
Accounts payable to related parties
    900       1,495  
Accrued expenses:
               
Compensation
    11,673       26,244  
Taxes
    32,819       28,882  
Gift cards and merchandise credits
    16,128       17,774  
Other
    40,770       31,260  
 
           
Total current liabilities
    233,493       224,719  
 
           
 
               
Non-current liabilities
    96,838       101,156  
 
               
Commitments and Contingencies
               
 
               
Shareholders’ equity:
               
Class A Common Shares, no par value; 170,000,000 authorized; 16,549,129 and 16,508,581 issued and outstanding, respectively
    307,523       306,123  
Class B Common Shares, no par value; 100,000,000 authorized; 27,382,667 and 27,382,667 issued and outstanding, respectively
               
Preferred Shares, no par value; 100,000,000 authorized; no shares issued or outstanding Retained earnings
    248,942       218,758  
 
           
Total shareholders’ equity
    556,465       524,881  
 
           
Total liabilities and shareholders’ equity
  $ 886,796     $ 850,756  
 
           
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

 

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DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
                 
    Three months ended  
    May 1, 2010     May 2, 2009  
Net sales
  $ 449,537     $ 385,846  
Cost of sales
    (302,172 )     (280,865 )
Operating expenses
    (98,220 )     (92,878 )
 
           
Operating profit
    49,145       12,103  
 
               
Interest expense
    (252 )     (183 )
Interest income
    1,037       437  
 
           
Interest income, net
    785       254  
Non-operating expense, net
            (395 )
 
           
Earnings before income taxes
    49,930       11,962  
Income tax provision
    (19,746 )     (4,817 )
 
           
Net income
  $ 30,184     $ 7,145  
 
           
 
               
Basic and diluted earnings per share:
               
Basic
  $ 0.69     $ 0.16  
Diluted
  $ 0.67     $ 0.16  
 
               
Shares used in per share calculations:
               
Basic
    43,908       44,018  
Diluted
    44,774       44,289  
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

 

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DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
                                                         
    Number of                             Accumulated        
    Class A     Class B     Class A     Class B             Other        
    Common     Common     Common     Common     Retained     Comprehensive        
    Shares     Shares     Shares     Shares     Earnings     Loss     Total  
Balance, January 31, 2009
    16,316       27,703     $ 294,222     $ 0     $ 172,017     $ (655 )   $ 465,584  
 
                                         
 
                                                       
Net income
                                    7,145               7,145  
Unrealized loss on available-for-sale securities
                                            (249 )     (249 )
 
                                                     
Total comprehensive income
                                                    6,896  
 
                                                     
Stock units granted
    1               17                               17  
Stock based compensation expense, before related tax effects
                    1,281                               1,281  
 
                                         
 
                                                       
Balance, May 2, 2009
    16,317       27,703     $ 295,520     $ 0     $ 179,162     $ (904 )   $ 473,778  
 
                                         
 
                                                       
Balance, January 30, 2010
    16,509       27,383     $ 306,123     $ 0     $ 218,758     $ 0     $ 524,881  
 
                                         
 
                                                       
Net income
                                    30,184               30,184  
Stock units granted
                    15                               15  
Exercise of stock options
    18               265                               265  
Vesting of restricted stock units, net of settlement of taxes
    22               (281 )                             (281 )
Stock based compensation expense, before related tax effects
                    1,401                               1,401  
 
                                         
 
                                                       
Balance, May 1, 2010
    16,549       27,383     $ 307,523     $ 0     $ 248,942     $ 0     $ 556,465  
 
                                         
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

 

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DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                 
    Three months ended  
    May 1, 2010     May 2, 2009  
Cash flows from operating activities:
               
Net income
  $ 30,184     $ 7,145  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    11,756       11,129  
Amortization of debt issuance costs
    29       29  
Stock based compensation expense
    1,401       1,281  
Deferred income taxes
    (2,838 )     (1,769 )
Loss on disposal of long-lived assets
    40       71  
Impairment charges on long-lived assets
            435  
Non-operating expense, net
            395  
Grants of stock units
    15       17  
Other
    (1,121 )     (468 )
Change in working capital, assets and liabilities:
               
Accounts receivable, net
    (1,066 )     (2,102 )
Inventories
    (24,373 )     (34,221 )
Prepaid expenses and other current assets
    (302 )     3,279  
Accounts payable
    9,683       24,466  
Proceeds from construction and tenant allowances
    900       3,072  
Accrued expenses
    (3,355 )     2,025  
 
           
Net cash provided by operating activities
  $ 20,953     $ 14,784  
 
           
 
               
Cash flows from investing activities:
               
Cash paid for property and equipment
    (7,530 )     (8,069 )
Purchases of available-for-sale investments
    (14,242 )     (9,000 )
Purchases of held-to-maturity investments
    (21,864 )        
Maturities and sales of available-for-sale investments
    35,412       29,624  
Maturities and sales of held-to-maturity investments
    3,650          
Return of capital from equity investment — related party
    199          
 
           
Net cash (used in) provided by investing activities
  $ (4,375 )   $ 12,555  
 
           
 
               
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    265          
 
           
Net cash provided by financing activities
  $ 265     $ 0  
 
           
 
               
Net increase in cash and equivalents
    16,843       27,339  
Cash and equivalents, beginning of period
    125,020       54,782  
 
           
Cash and equivalents, end of period
  $ 141,863     $ 82,121  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid during the period for income taxes
  $ 17,630     $ 4,213  
Noncash investing and operating activities —
               
Balance of accounts payable and accrued expenses due to property and equipment purchases
  $ 3,628     $ 3,622  
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements

 

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DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.  
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation- The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 24, 2010 (the “2009 Annual Report”).
In the opinion of management, the unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the consolidated financial position, results of operations and cash flows for the periods presented.
Business Operations- DSW Inc. (“DSW”) and its wholly-owned subsidiaries are herein referred to collectively as DSW or the “Company”. DSW’s Class A Common Shares are listed on the New York Stock Exchange under the ticker symbol “DSW”. As of May 1, 2010, Retail Ventures, Inc. (“RVI” or “Retail Ventures”) owned approximately 62.3% of DSW’s outstanding Common Shares, representing approximately 93.0% of the combined voting power of DSW’s outstanding Common Shares.
DSW has two reportable segments: the DSW segment, which includes DSW stores and dsw.com, and leased departments. DSW stores and dsw.com offer a wide assortment of better-branded dress, casual and athletic footwear for men and women, as well as handbags and accessories. As of May 1, 2010, DSW operated a total of 311 stores located throughout the United States. During the three months ended May 1, 2010, DSW opened five new DSW stores and recategorized one combination DSW/Filene’s Basement store as a DSW store.
DSW also operates leased departments for four retailers in its leased department segment. As of May 1, 2010, DSW supplied merchandise to 265 Stein Mart stores, 67 Gordmans stores, 21 Filene’s Basement stores and one Frugal Fannie’s store. During the three months ended May 1, 2010, DSW added two new leased departments and ceased operations in three leased departments. DSW owns the merchandise and the fixtures (except for Filene’s Basement, where DSW only owns the merchandise), records sales of merchandise, net of returns and sales tax and provides management oversight. The retailers provide the sales associates and retail space. DSW pays a percentage of net sales as rent.
Allowance for Doubtful Accounts- The Company monitors its exposure for credit losses and records related allowances for doubtful accounts. Allowances are estimated based upon specific accounts receivable balances, where a risk of default has been identified. As of May 1, 2010 and January 30, 2010, the Company’s allowances for doubtful accounts were $1.1 million and $1.3 million, respectively.
Inventories- Merchandise inventories are stated at net realizable value, determined using the first-in, first-out basis, or market, using the retail inventory method. The retail method is widely used in the retail industry due to its practicality. Under the retail inventory method, the valuation of inventories at cost and the resulting gross profits are calculated by applying a cost to retail ratio to the retail value of inventories. The cost of the inventory reflected on the balance sheet is decreased by charges to cost of sales at the time the retail value of the inventory is lowered through the use of markdowns, which are reductions in prices due to customers’ perception of value. Hence, earnings are negatively impacted as the merchandise is marked down prior to sale.
Inherent in the calculation of inventories are certain significant management judgments and estimates, including setting the original merchandise retail value, markdowns, and estimates of losses between physical inventory counts, or shrinkage, which combined with the averaging process within the retail method, can significantly impact the ending inventory valuation at cost and the resulting gross profit.
DSW records a reduction to inventories and charge to cost of sales for shrinkage. Shrinkage is calculated as a percentage of sales from the last physical inventory date. Estimates are based on both historical experience as well as recent physical inventory results. Physical inventory counts are taken on an annual basis and have supported the Company’s shrinkage estimates.
Markdowns represent the excess of the carrying value over the amount the Company expects to realize from the ultimate disposition of the inventory. Factors considered in the determination of markdowns include customer preference and fashion trends. Changes in facts or circumstances do not result in the reversal of previously recorded markdowns or an increase in that newly established cost basis.

 

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DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Tradenames and Other Intangible Assets, Net- Tradenames and other intangible assets, net are primarily comprised of values assigned to tradenames and leases at the time of RVI’s acquisition of the Company. As of both May 1, 2010 and January 30, 2010, the gross balance of tradenames was $12.8 million and the gross balance of other intangible assets was $0.1 million. Accumulated amortization for tradenames was $10.2 million and $10.0 million as of May 1, 2010 and January 30, 2010, respectively. Accumulated amortization for other intangible assets was $0.1 million as of both May 1, 2010 and January 30, 2010. The average useful lives of tradenames and other intangible assets, net are 15 years as of both May 1, 2010 and January 30, 2010.
Amortization expense for the three months ended May 1, 2010 was $0.2 million, and $0.7 million will be amortized during the remainder of fiscal 2010. Amortization expense associated with the net carrying amount of intangible assets as of May 1, 2010 is $0.9 million for each fiscal year from fiscal 2010 through fiscal 2012 and $0.2 million in fiscal 2013.
Customer Loyalty Program- The Company maintains a customer loyalty program for the DSW stores and dsw.com in which program members earn reward certificates that result in discounts on future purchases. Upon reaching the target-earned threshold, the members receive reward certificates for these discounts which expire six months after being issued. The Company accrues the anticipated redemptions of the discount earned at the time of the initial purchase. To estimate these costs, DSW is required to make assumptions related to customer purchase levels and redemption rates based on historical experience. The accrued liability as of May 1, 2010 and January 30, 2010 was $10.7 million and $9.0 million, respectively.
Deferred Rent- Many of the Company’s operating leases contain predetermined fixed increases of the minimum rentals during the initial lease terms. For these leases, the Company recognizes the related rental expense on a straight-line basis over the original terms of the lease. The Company records the difference between the amounts charged to expense and the rent paid as deferred rent and begins amortizing such deferred rent upon the delivery of the lease location by the lessor. The deferred rent included in non-current liabilities was $32.2 million and $32.3 million as of May 1, 2010 and January 30, 2010, respectively.
Construction and Tenant Allowances- The Company receives cash allowances from landlords, which are deferred and amortized on a straight-line basis over the original terms of the lease as a reduction of rent expense. Construction and tenant allowances are included in non-current liabilities and were $58.4 million and $59.7 million as of May 1, 2010 and January 30, 2010, respectively.
Sales and Revenue Recognition- Revenues from merchandise sales are recognized upon customer receipt of merchandise, are net of returns through period end and sales tax and are not recognized until collectability is reasonably assured. For dsw.com, the Company estimates a time lag for shipments to record revenue when the customer receives the goods and also includes revenue from shipping and handling in net sales while the related costs are included in cost of sales.
Revenue from gift cards is deferred and recognized upon redemption of the gift card. The Company’s policy is to recognize income from breakage of gift cards when the likelihood of redemption of the gift card is remote. The Company recognized $0.2 million as other operating income from gift card breakage during both of the three months ended May 1, 2010 and May 2, 2009.
Cost of Sales- In addition to the cost of merchandise, which includes markdowns and shrinkage, the Company includes in the cost of sales expenses associated with warehousing (including depreciation), distribution and store occupancy (excluding depreciation and including impairments). Warehousing costs are comprised of labor, benefits and other labor-related costs associated with the operations of the distribution and fulfillment centers. The non-labor costs associated with warehousing include rent, depreciation, insurance, utilities, maintenance and other operating costs that are passed to the Company from the landlord. Distribution costs include the transportation of merchandise to the distribution and fulfillment centers, from the distribution center to the Company’s stores and from the fulfillment center to the customer. Store occupancy costs include rent, utilities, repairs, maintenance, insurance, janitorial costs and occupancy-related taxes, which are primarily real estate taxes passed to the Company by its landlords.
Operating Expenses- Operating expenses include expenses related to store management and store payroll costs, advertising, leased department operations, store depreciation and amortization, new store advertising and other new store costs (which are expensed as incurred) and corporate expenses. Corporate expenses include expenses related to buying, information technology, depreciation expense for corporate cost centers, marketing, legal, finance, outside professional services, customer service center expenses, allocable costs to and from Retail Ventures, payroll and benefits for associates and payroll taxes. Corporate level expenses are primarily attributable to operations at the corporate offices in Columbus, Ohio.

 

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DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Non-operating Expense, Net- Non-operating expense, net includes other-than-temporary impairments related to investments and realized gains on disposition of investments.
Income Taxes- Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Comprehensive Income- For the three months ended May 1, 2010, comprehensive income was equal to net income. For the three months ended May 2, 2009, comprehensive income was $6.9 million.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued updates to existing guidance related to fair value measurements. As a result of these updates, entities will be required to provide enhanced disclosures about transfers into and out of level 1 and level 2 classifications, provide separate disclosures about purchases, sales, issuances and settlements relating to the tabular reconciliation of beginning and ending balances of the level 3 classification and provide greater disaggregation for each class of assets and liabilities that use fair value measurements. Except for the detailed level 3 disclosures, the new standard was effective for the Company for the first quarter of fiscal 2010. The requirement related to level 3 fair value measurements is effective for the Company for interim and annual reporting periods beginning after January 29, 2011. The adoption of the effective portions of this new standard did not have a material impact to the Company’s consolidated financial statements and the Company does not expect a material impact to its consolidated financial statements related to the level 3 fair value disclosures.
2.  
RELATED PARTY TRANSACTIONS
RVI- Accounts payable to RVI of $0.5 million and $1.0 million as of May 1, 2010 and January 30, 2010, respectively, were primarily related to DSW’s usage of RVI’s net operating losses prior to fiscal 2007 under the Tax Separation Agreement, shared services and other intercompany transactions. During the three months ended May 1, 2010, accounts payable were reduced by $0.5 million due to RVI’s reimbursement of certain DSW leasehold improvement expenditures.
Schottenstein Stores Corporation (“SSC”)- The Company leases certain store, office space and distribution center locations owned by entities affiliated with SSC. Accounts receivable from and payable to affiliates principally result from commercial transactions with entities owned or affiliated with SSC or intercompany transactions with SSC and normally settle in the form of cash in 30 to 60 days. These related party balances as of May 1, 2010 and January 30, 2010, were related party receivables of $0.2 million and $0.1 million, respectively, and related party payables of $0.4 million and $0.5 million, respectively.
3.  
STOCK BASED COMPENSATION
The Company has a 2005 Equity Incentive Plan (“the Plan”) that provides for the issuance of equity awards to purchase up to 7.6 million common shares. The Plan covers stock options, restricted stock units and director stock units. Eligible recipients include key employees of the Company and affiliates, as well as directors of the Company. Options generally vest 20% per year on a cumulative basis. Options granted under the Plan generally remain exercisable for a period of ten years from the date of grant. Prior to fiscal 2005, the Company did not have a stock option plan or any equity units outstanding.
Stock Options- The following table summarizes the Company’s stock option activity (in thousands):
         
    Three months ended  
    May 1, 2010  
Outstanding, beginning of period
    2,504  
Granted
    522  
Exercised
    (18 )
Forfeited
    (18 )
 
     
Outstanding, end of period
    2,990  
 
     
Exercisable, end of period
    1,132  

 

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DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
DSW expensed $1.1 million and $1.0 million, respectively, for the three months ended May 1, 2010 and May 2, 2009 related to stock options. The weighted-average grant date fair value of each option granted in the three months ended May 1, 2010 and May 2, 2009 was $13.40 and $5.06, respectively, per share. The following table illustrates the weighted-average assumptions used in the Black-Scholes option-pricing model for options granted in each of the periods presented.
                 
    Three months ended  
    May 1, 2010     May 2, 2009  
Assumptions:
               
Risk-free interest rate
    2.5 %     1.9 %
Expected volatility of DSW common stock
    56.9 %     57.6 %
Expected option term
  4.9 years   4.9 years
Expected dividend yield
    0.0 %     0.0 %
Restricted Stock Units- The following table summarizes the Company’s restricted stock unit activity (in thousands):
         
    Three months ended  
    May 1, 2010  
Outstanding, beginning of period
    267  
Granted
    59  
Vested
    (32 )
Forfeited
       
 
     
Outstanding, end of period
    294  
 
     
DSW expensed $0.3 million for each of the three months ended May 1, 2010 and May 2, 2009 related to restricted stock units. The total aggregate intrinsic value of nonvested restricted stock units as of May 1, 2010 was $8.9 million. As of May 1, 2010, the total compensation cost related to nonvested restricted stock units not yet recognized was approximately $3.0 million with a weighted average expense recognition period remaining of 1.8 years. The weighted average exercise price for all restricted stock units is zero.
Director Stock Units- DSW issues stock units to directors who are not employees of DSW or RVI. During the three months ended May 1, 2010 and May 2, 2009, DSW granted 486 and 1,503 director stock units, respectively, and expensed less than $0.1 million in each respective three month period for these grants. As of May 1, 2010, 130,191 director stock units had been issued and no director stock units had been settled.
4.  
INVESTMENTS
The Company determines the balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. If the Company has the intent and ability to hold the investments to maturity, investments are classified as held-to-maturity. Held-to-maturity securities are stated at amortized cost plus accrued interest. Otherwise, investments are classified as available-for-sale. Excluding certificates of deposit, the majority of the Company’s short-term available-for-sale investments generally have renewal dates of every 7 days, and certificates of deposit mature every 28 to 182 days. In addition to short-term investments, the Company has invested in certain longer term bonds to receive higher returns. These long-term investments have maturities greater than one year but generally shorter than two years, are classified as held-to-maturity and are included within other assets on the condensed consolidated balance sheet. The Company also received a return of capital of $0.2 million related to its related party equity investment.
The following table discloses the major categories of the Company’s investments as of the periods presented:
                                 
    Short-term investments, net     Long-term investments, net  
    May 1, 2010     January 30, 2010     May 1, 2010     January 30, 2010  
    (in thousands)  
Available-for-sale:
                               
Tax exempt, tax advantaged and taxable bonds
  $ 111,878     $ 124,107                  
Tax exempt commercial paper
    3,000       8,100                  
Certificates of deposit
    11,000       15,000                  
 
                       
Total available-for-sale investments
  $ 125,878     $ 147,207                  
 
                               
Held-to-maturity:
                               
Term notes
    26,480       17,058                  
Bonds
                  $ 8,951          
Equity investment — related party
                    952     $ 1,151  
 
                       
Total investments
  $ 152,358     $ 164,265     $ 9,903     $ 1,151  
 
                       

 

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DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5.  
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Therefore, fair value is a market-based measurement based on assumptions of the market participants. As a basis for these assumptions, DSW classifies its fair value measurements under the following fair value hierarchy:
   
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that are publicly accessible. Active markets have frequent transactions with enough volume to provide ongoing pricing information.
   
Level 2 inputs are other than level 1 inputs that are directly or indirectly observable. These can include unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical assets or liabilities in inactive markets or other observable inputs.
   
Level 3 inputs are unobservable inputs.
Financial assets and liabilities measured at fair value on a recurring basis as of the periods presented consisted of the following:
                                                                 
    As of May 1, 2010     As of January 30, 2010  
    Total     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3  
    (in thousands)  
Cash and equivalents
  $ 141,863     $ 141,863                     $ 125,020     $ 125,020                  
Short-term investments, net
    152,358             $ 152,358               164,265             $ 164,265          
Long-term investments, net
    9,903               8,951     $ 952       1,151                     $ 1,151  
 
                                               
 
  $ 304,124     $ 141,863     $ 161,309     $ 952     $ 290,436     $ 125,020     $ 164,265     $ 1,151  
 
                                               
Cash and equivalents primarily represent cash deposits and investments in money market funds held with financial institutions, as well as credit card receivables that generally settle within three days. Equity investments are evaluated for other-than-temporary impairment using level 3 inputs such as the financial condition and future prospects of the entity. The Company’s available-for-sale and held-to maturity investments are valued using a market-based approach using level 2 inputs such as prices of similar assets in active markets.
The following table presents the activity related to level 3 fair value measurements for the periods presented:
                                 
    For the three months ended  
    May 1, 2010     May 2, 2009  
    Short-term     Long-term     Short-term     Long-term  
    investments, net     investments, net     investments, net     investments, net  
    (in thousands)  
Carrying value at the beginning of the period
  $ 0     $ 1,151     $ 1,845     $ 1,266  
Transfer out of level 3
                            (1,266 )
Return of capital from equity investment
            (199 )                
Unrealized losses included in accumulated other comprehensive loss
                    (249 )        
 
                       
Carrying value at the end of the period
  $ 0     $ 952     $ 1,596     $ 0  
 
                       
There were no non-financial assets measured on a nonrecurring basis during the three months ended May 1, 2010. As of May 2, 2009, long-lived assets to be held and used with a carrying amount of $0.8 million were written down to their fair value of $0.4 million resulting in an impairment charge of $0.4 million, which was included in earnings.
The Company periodically evaluates the carrying amount of its long-lived assets, primarily property and equipment, and finite life intangible assets when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the expected future cash flows from the asset or asset group. The Company reviews are conducted at the lowest identifiable level, which include a store. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value, based on a discounted cash flow analysis using a discount rate determined by management. Should an impairment loss be realized, it will generally be included in cost of sales.

 

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DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6.  
EARNINGS PER SHARE
Basic earnings per share are based on net income and a simple weighted average of Class A and Class B Common Shares and director stock units outstanding. Diluted earnings per share are calculated using the treasury stock method and reflect the potential dilution of Class A Common Shares related to outstanding stock options and restricted stock units. The numerator for the diluted earnings per share calculation is net income. The denominator is the weighted average diluted shares outstanding.
                 
    Three months ended  
    May 1, 2010     May 2, 2009  
    (in thousands)  
Weighted average shares outstanding
    43,908       44,018  
Assumed exercise of dilutive stock options
    586          
Assumed exercise of dilutive restricted stock units
    280       271  
 
           
Number of shares for computation of diluted earnings per share
    44,774       44,289  
 
           
Options to purchase 1.0 million and 3.0 million common shares were outstanding as of May 1, 2010 and May 2, 2009, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares for the period, and therefore, the effect would be anti-dilutive.
7.  
DSW $150 MILLION CREDIT FACILITY
The Company has a $150 million secured revolving credit facility with a term of five years that will expire on July 5, 2010. Under this facility, the Company and its subsidiaries are named as co-borrowers. The facility has borrowing base restrictions and provides for borrowings at variable interest rates based on LIBOR, the prime rate and the Federal Funds effective rate, plus a margin. The Company’s obligations under this facility are secured by a lien on substantially all of its and one of its subsidiary’s personal property and a pledge of its shares of DSW Shoe Warehouse, Inc. In addition, the secured revolving credit facility contains usual and customary restrictive covenants relating to the management and the operation of the business. These covenants, among other things, restrict the Company’s ability to grant liens on its assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem its stock, enter into transactions with affiliates and merge or consolidate with another entity. In addition, if at any time the Company utilizes over 90% of its borrowing capacity under the facility, the Company must comply with a fixed charge coverage ratio test set forth in the facility documents. The Company is currently negotiating the terms of a replacement credit facility. As of May 1, 2010 and January 30, 2010, the Company had no outstanding borrowings and had availability under the facility of $138.7 million and $132.6 million, respectively. The Company had outstanding letters of credit of $11.3 million and $17.4 million, respectively, as of May 1, 2010 and January 30, 2010.
8.  
INCOME TAXES
The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The Company’s effective tax rate was 39.5% and 40.3%, respectively, for the three months ended May 1, 2010 and May 2, 2009.
Consistent with its historical financial reporting, the Company has elected to classify interest expense related to income tax liabilities, when applicable, as part of the interest expense in its condensed consolidated statements of income rather than income tax expense. The Company will continue to classify income tax penalties as part of operating expenses in its condensed consolidated statements of income.

 

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DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9.  
SEGMENT REPORTING
DSW has two reportable segments: the DSW segment, which includes DSW stores and dsw.com, and leased departments. DSW stores and dsw.com have been aggregated and are presented as one reportable segment, the DSW segment, based on their similar economic characteristics, products, production processes, target customers and distribution methods. The Company has identified such segments based on internal management reporting and management responsibilities and measures segment profit as gross profit, which is defined as net sales less cost of sales. All operations are located in the United States. The goodwill balance of $25.9 million outstanding as of May 1, 2010 and January 30, 2010 is recorded in the DSW segment related to the DSW stores operating segment. The following tables present segment information for the Company’s two reportable segments:
                         
            Leased        
    DSW     departments     Total  
    (in thousands)  
Three months ended May 1, 2010:
                       
Net sales
  $ 411,626     $ 37,911     $ 449,537  
Gross profit
    138,325       9,040       147,365  
Capital expenditures
    9,132       57       9,189  
 
                       
Three months ended May 2, 2009:
                       
Net sales
  $ 344,128     $ 41,718     $ 385,846  
Gross profit
    96,824       8,157       104,981  
Capital expenditures
    8,403       6       8,409  
 
                       
As of May 1, 2010:
                       
Total assets
  $ 814,743     $ 72,053     $ 886,796  
 
                       
As of January 30, 2010:
                       
Total assets
  $ 784,213     $ 66,543     $ 850,756  
10.  
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that are incidental to the conduct of its business. The Company estimates the range of liability related to pending litigation where the amount of the range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss, the Company records the most likely estimated liability related to the claim. In the opinion of management, the amount of any potential liability with respect to current legal proceedings will not be material to the Company’s results of operations or financial condition. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise the estimates as needed. Revisions in its estimates and the amount of potential liability could materially impact the Company’s future results of operations and financial condition.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
All references to “we,” “us,” “our,” “DSW” or the “Company” in this Quarterly Report on Form 10-Q mean DSW Inc. and its wholly-owned subsidiaries, including DSW Shoe Warehouse, Inc. (“DSWSW”), except where it is made clear that the term only means DSW Inc. DSW Class A Common Shares are listed for trading under the ticker symbol “DSW” on the New York Stock Exchange (“NYSE”).
All references to “Retail Ventures” or “RVI” in this Quarterly Report on Form 10-Q mean Retail Ventures, Inc. and its subsidiaries, except where it is made clear that the term only means the parent company. DSW is a controlled subsidiary of Retail Ventures. RVI Common Shares are listed under the ticker symbol “RVI” on the NYSE.
Company Overview
DSW is a leading U.S. branded footwear specialty retailer operating 311 shoe stores in 39 states as of May 1, 2010. We offer a wide assortment of better-branded dress, casual and athletic footwear for women and men, as well as accessories through our DSW stores and dsw.com. In addition, we operate 354 leased departments for four other retailers as of May 1, 2010. Our typical DSW customers are brand, value, quality and style-conscious shoppers who have a passion for footwear and accessories. Our core focus is to create a distinctive shopping experience that satisfies both the rational and emotional shopping needs of our DSW customers by offering them a vast, exciting assortment of in-season styles combined with the convenience and value they desire. Our DSW stores average approximately 22,000 square feet and carry approximately 26,000 pairs of shoes. We believe this combination of assortment, convenience and value differentiates us from our competitors and appeals to consumers from a broad range of socioeconomic and demographic backgrounds.
Cautionary Statement Regarding Forward-Looking Information for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
Some of the statements in this Quarterly Report on Form 10-Q contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to those factors described under “Part I, Item 1A. Risk Factors,” in our Form 10-K filed on March 24, 2010, some important factors that could cause actual results, performance or achievements for DSW to differ materially from those discussed in forward-looking statements include, but are not limited to, the following:
   
our success in opening and operating new stores on a timely and profitable basis;
   
continuation of supply agreements and the financial condition of our leased business partners;
   
maintaining good relationships with our vendors;
   
our ability to anticipate and respond to fashion trends;
   
fluctuation of our comparable sales and quarterly financial performance;
   
disruption of our distribution operations;
   
failure to retain our key executives or attract qualified new personnel;
   
our competitiveness with respect to style, price, brand availability and customer service;
   
uncertain general economic conditions;
   
risks inherent to international trade with countries that are major manufacturers of footwear;
   
risks related to our cash and investments;
   
the success of dsw.com;
   
RVI’s lease of an office facility;
   
our ability to secure a replacement credit facility upon the expiration of our existing credit facility; and
   
liquidity risks at Retail Ventures and their impact on DSW.

 

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If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance or achievements may vary materially from what we have projected. Furthermore, new factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, DSW undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Critical Accounting Policies
Our critical accounting policies are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended January 30, 2010 contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 24, 2010 (the “2009 Annual Report”). We base these estimates and judgments on our historical experience and other factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. There have been no significant changes to our critical accounting policies since the 2009 Annual Report.
Results of Operations
Overview
During the first quarter of fiscal 2010, we experienced a significant increase in demand for DSW merchandise, which led to record quarterly sales and net income. Total net sales increased 16.5% due to positive comparable sales, which were primarily driven by an increase in traffic, as well as increases in conversion and average unit retail. All merchandise categories reported a strong performance, with no single category driving the overall sales increase.
Increased sales demand and inventory management resulted in a reduction of markdown activity, driving improved merchandise margins. Occupancy expenses decreased due to reductions in non-rent related expenses. Operating expenses, excluding bonus, were relatively flat to last year due to expense management and leveraged significantly as a percentage of sales. As a result of sales growth, inventory management and expense management, first quarter operating profit as a percentage of net sales improved 780 basis points over the prior year to 10.9%.
We have continued making investments in our business that are critical to long-term growth. In the three months ended May 1, 2010, we invested $9.2 million in capital expenditures primarily related to opening new stores, remodeling existing stores and improving our information technology systems. As of May 1, 2010, our cash and short-term investments balance increased to $294.2 million and we have no long-term debt.
As of May 1, 2010, we operated 311 DSW stores, dsw.com and leased departments in 265 Stein Mart stores, 67 Gordmans stores, 21 Filene’s Basement stores and one Frugal Fannie’s store. DSW has two reportable segments: the DSW segment, which includes DSW stores and dsw.com, and leased departments.
The following table sets forth, for the periods indicated, the percentage relationships to net sales of the listed items included in our condensed consolidated statements of income:
                 
    Three months ended  
    May 1, 2010     May 2, 2009  
Net sales
    100.0 %     100.0 %
Cost of sales
    (67.2 )     (72.8 )
 
           
Gross profit
    32.8       27.2  
Operating expenses
    (21.9 )     (24.1 )
 
           
Operating profit
    10.9       3.1  
Interest income, net
    0.2       0.1  
Non-operating expense, net
    0.0       (0.1 )
 
           
Earnings before income taxes
    11.1       3.1  
Income tax provision
    (4.4 )     (1.2 )
 
           
Net income
    6.7 %     1.9 %
 
           

 

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THREE MONTHS ENDED MAY 1, 2010 COMPARED TO THREE MONTHS ENDED MAY 2, 2009
Net Sales. Net sales for the first quarter of fiscal 2010 increased 16.5% from the first quarter of fiscal 2009. The following table summarizes the increase in our net sales:
         
    Three months ended  
    May 1, 2010  
    (in millions)  
Net sales for the three months ended May 2, 2009
  $ 385.8  
Increase in comparable sales
    61.4  
Net increase from 2009 and 2010 new stores and closed store sales
    2.3  
 
     
Net sales for the three months ended May 1, 2010
  $ 449.5  
 
     
The following table summarizes our net sales by reportable segment:
                 
    Three months ended  
    May 1, 2010     May 2, 2009  
    (in millions)  
DSW
  $ 411.6     $ 344.1  
Leased departments
    37.9       41.7  
 
           
Total DSW Inc.
  $ 449.5     $ 385.8  
 
           
The following table summarizes our comparable sales change by reportable segment and in total:
         
    Three months ended  
    May 1, 2010  
DSW
    17.7 %
Leased departments
    2.2 %
Total DSW Inc.
    16.2 %
Beginning in the first quarter of fiscal 2010, dsw.com is included in the change in comparable sales. The inclusion of dsw.com did not significantly impact our comparable sales change percentage for the first quarter of fiscal 2010. The increase in comparable sales was primarily a result of an increase in traffic, as well as increases in conversion and average unit retail in our DSW stores. For the DSW segment, all merchandise categories had positive comparable sales. DSW segment comparable sales increased in women’s footwear by 17.9%, men’s by 16.6%, athletic by 17.1% and accessories by 13.6%.
Gross Profit. Gross profit is defined as net sales less cost of sales. Gross profit increased as a percentage of net sales from 27.2% in the first quarter of fiscal 2009 to 32.8% in the first quarter of fiscal 2010. By reportable segment and in total, gross profit as a percentage of net sales was:
                 
    Three months ended  
    May 1, 2010     May 2, 2009  
DSW
    33.6 %     28.1 %
Leased departments
    23.8 %     19.6 %
Total DSW Inc.
    32.8 %     27.2 %
DSW segment merchandise margin, gross profit excluding occupancy and warehousing expenses, increased as a percentage of net sales to 46.3% for the first quarter of fiscal 2010 from 43.7% for the comparable period last year as the result of inventory management. Store occupancy expense for the DSW segment as a percentage of net sales decreased to 11.2% for the first quarter of fiscal 2010 from 13.9% for the comparable period last year as a result of increased average store sales and a reduction in non-rent related expenses. Warehousing expense decreased as percentage of net sales due to increased average store sales.
Gross profit for the leased departments increased as a percentage of net sales for the first quarter of fiscal 2010 due to a reduction in markdown activity. This reduction was due to aligning inventory position to sales demand and fewer markdowns related to store closures.
Operating Expenses. Operating expenses as a percentage of net sales were 21.9% and 24.1% for the three months ended May 1, 2010 and May 2, 2009, respectively. Operating expenses leveraged as a result of both the sales increase compared to last year and expense management. Overhead, store, and marketing expenses decreased significantly as a percentage of net sales, and were partially offset by an increase in bonus expense due to improved operating results.
Interest Income, Net. Interest income, net of interest expense, was 0.2% and 0.1%, respectively, as a percentage of net sales for the first quarters of fiscal 2010 and 2009. The increase in interest income was primarily a result of the reversal of an interest reserve during the first quarter of fiscal 2010.

 

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Non-operating Expense, Net. There was no non-operating expense for the first quarter of fiscal 2010. Non-operating expense for the first quarter of fiscal 2009 represents an other-than-temporary impairment related to auction rate securities.
Income Taxes. Our effective tax rate for the first quarter of fiscal 2010 was 39.5%, compared to 40.3% for the first quarter of fiscal 2009.
Net Income. For the first quarter of fiscal 2010, net income increased 322%, compared to the first quarter of fiscal 2009 and represented 6.7% and 1.9% of net sales for the first quarters of fiscal 2010 and 2009, respectively. As a percentage of net sales, this increase was primarily the result of an increase in gross profit and a decrease in operating expenses.
Seasonality
Our business is subject to seasonal merchandise trends when our customers’ interest in new seasonal styles increases. Unlike many other retailers, we have not historically experienced a large increase in net sales during our fourth quarter associated with the winter holiday season.
Liquidity and Capital Resources
Our primary ongoing cash flow requirements are for seasonal and new store inventory purchases, capital expenditures in connection with our store expansion, improving our information systems, the remodeling of existing stores and infrastructure growth. Our working capital and inventory levels typically build seasonally. We believe that we have sufficient financial resources and access to financial resources at this time. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, our growth strategy and to withstand unanticipated business volatility. We believe that cash generated from DSW operations, together with our current levels of cash and equivalents and short-term investments as well as availability under our revolving credit facility, will be sufficient to maintain our ongoing operations, support seasonal working capital requirements and fund capital expenditures related to projected business growth.
Although our plan of continued expansion could place increased demands on our financial, managerial, operational and administrative resources and result in increased demands on management, we do not believe that our anticipated growth plan will have an unfavorable impact on our operations or liquidity. Uncertainty in the United States economy could result in reductions in customer traffic and comparable store sales in our existing stores with the resultant increase in inventory levels and markdowns. Reduced sales may result in reduced operating cash flows if we are not able to appropriately manage inventory levels or leverage expenses. These potential negative economic conditions may also affect future profitability and may cause us to reduce the number of future store openings, impair goodwill or impair long-lived assets.
Net Working Capital. Net working capital increased $22.9 million to $405.2 million as of May 1, 2010 from $382.3 million as of January 30, 2010, primarily due to the seasonal inventory increase, which was partially offset by a corresponding increase in accounts payable. As of both May 1, 2010 and January 30, 2010, the current ratio was 2.7.
Operating Cash Flows. For the three months ended May 1, 2010, our net cash provided by operations was $21.0 million, compared to $14.8 million for the three months ended May 2, 2009. The increase in cash provided by operations was primarily a result of an increase in net income partially offset by changes in net working capital.
Investing Cash Flows. For the three months ended May 1, 2010, our net cash used in investing activities was $4.4 million compared to net cash provided by investing activities of $12.6 million for the three months ended May 2, 2009. During the three months ended May 1, 2010, we incurred $9.2 million in capital expenditures. We incurred $4.8 million related to stores, $3.0 million related to information technology and infrastructure and $1.4 million related to supply chain projects and warehouses.
We expect to spend approximately $50 million for capital expenditures in fiscal 2010. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and information technology programs that we undertake and the timing of these expenditures. We plan to open approximately ten stores in fiscal 2010. During fiscal 2009, the average investment required to open a typical new DSW store was approximately $1.4 million, prior to construction and tenant allowances. Of this amount, gross inventory typically accounted for $0.5 million, fixtures and leasehold improvements typically accounted for $0.7 million and new store advertising and other new store expenses typically accounted for $0.2 million.
$150 Million Secured Revolving Credit Facility. We have a $150 million secured revolving credit facility that expires July 5, 2010. Under this facility, we and our subsidiaries are named as co-borrowers. Our facility has borrowing base restrictions and provides for borrowings at variable interest rates based on LIBOR, the prime rate and the Federal Funds effective rate, plus a margin. Our obligations under this credit facility are secured by a lien on substantially all of our and one of our subsidiary’s personal property and a pledge of our shares of DSW Shoe Warehouse. In addition, our secured revolving credit facility contains usual and customary restrictive covenants relating to our management and the operation of our business. These covenants, among other things, restrict our ability to grant liens on our assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem our stock, enter into transactions with affiliates and merge or consolidate with another entity. In addition, if at any time we utilize over 90% of our borrowing capacity under this facility, we must comply with a fixed charge coverage ratio test set forth in the facility documents. As of May 1, 2010 and January 30, 2010, $138.7 million and $132.6 million, respectively, were available under the $150 million secured revolving credit facility and no direct borrowings were outstanding.

 

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We are currently negotiating the terms of a replacement secured revolving credit facility as our current credit facility will expire in July 2010. Based upon the current credit markets, the terms of the replacement credit facility may not be as favorable as our current terms.
Contractual Obligations
We had outstanding letters of credit that totaled approximately $11.3 million as of May 1, 2010 and $17.4 million as of January 30, 2010. If certain conditions are met under these arrangements, we would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience and future expectations, we do not expect to make any significant payment outside of terms set forth in these arrangements.
As of May 1, 2010, we have entered into various construction commitments, including capital items to be purchased for projects that were under construction, or for which a lease has been signed. Our obligations under these commitments aggregated to approximately $1.0 million as of May 1, 2010. As of May 1, 2010, we do not have any signed leases for unopened stores.
We operate all of our stores, warehouses and corporate office space from leased facilities. Lease obligations are accounted for either as operating leases or as capital leases based on lease by lease review at lease inception. The Company had no capital leases outstanding as of May 1, 2010 or January 30, 2010.
Off-Balance Sheet Arrangements
As of May 1, 2010, the Company has not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.
Proposed Accounting Standards
The Financial Accounting Standards Board (“FASB”) periodically issues Accounting Standard Updates, some of which require implementation by a date falling within or after the close of the fiscal year. See Note 1 to the Condensed Consolidated Financial Statements for a discussion of the new accounting standards implemented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our cash and equivalents have maturities of 90 days or fewer. At times, cash and equivalents may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. We also have investments in various short-term and long-term investments. We have $11.0 million invested in certificates of deposit and participate in the Certificate of Deposit Account Registry Service®, which provides FDIC insurance on deposits of up to $50.0 million. Our available-for-sale investments generally renew every 7 to 182 days. These financial instruments may be subject to interest rate risk through lost income should interest rates increase during their limited term to maturity or resetting of interest rates and thus may limit our ability to invest in higher income investments.
As of May 1, 2010, there was no long-term debt outstanding. Future borrowings, if any, would bear interest at negotiated rates and would be subject to interest rate risk. Because we have no outstanding debt, we do not believe that a hypothetical adverse change of 1% in interest rates would have a material effect on our financial position.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, as such term is defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
No change was made in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in various legal proceedings that are incidental to the conduct of our business. We estimate the range of liability related to pending litigation where the amount of the range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. When a liability is probable and there is a range of estimated loss, we record the most likely estimated liability related to the claim. In the opinion of management, the amount of any potential liability with respect to these proceedings will not be material to our results of operations or financial condition. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise the estimates as needed. Revisions in our estimates and the amount of potential liability could materially impact our future results of operations and financial condition.
Item 1A. Risk Factors.
Refer to DSW’s risk factors set forth in Part I, Item 1A of our last Annual Report on Form 10-K for the fiscal year ended January 30, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Recent sales of unregistered securities. Not applicable.
(b) Use of Proceeds. Not applicable.
(c) Purchases of equity securities by the issuer and affiliated purchasers.
DSW made no purchases of its Common Shares during the three months ended May 1, 2010 excluding certain repurchases of shares to satisfy tax withholdings of stock option exercises. These repurchases are summarized in the table below (shares in thousands):
                                 
    Total     Average     Total number of     Approximate dollar  
    number     price     shares purchased as     value of shares that  
    of shares     paid per     part of publicly     may yet be purchased  
Period   purchased     share     announced programs     under the programs  
January 31, 2010 to February 27, 2010
                               
February 28, 2010 to April 3, 2010
    10     $ 26.03                  
April 4, 2010 to May 1, 2010
                               
 
                           
 
    10     $ 26.03                  
 
                           
We do not anticipate paying cash dividends on our Common Shares in the foreseeable future. Presently, we expect that all of our future earnings will be retained for development of our business. The payment of any future dividends will be at the discretion of our board of directors and will depend upon, among other things, future earnings, operations, capital requirements, our general financial condition and general business conditions. Our credit facility restricts the payment of dividends by us or our subsidiaries, other than dividends paid in our stock or paid to another affiliate, and cash dividends can only be paid to Retail Ventures by us up to the aggregate amount of $5.0 million, less the amount of any loan advances made to Retail Ventures by us or our subsidiaries.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Removed and Reserved.
Item 5. Other Information. None.
Item 6. Exhibits. See Index to Exhibits on page 20.

 

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  DSW INC.
(Registrant)
 
 
Date: June 2, 2010  By:   /s/ Douglas J. Probst    
    Douglas J. Probst   
    Executive Vice President and Chief Financial Officer
(principal financial and accounting officer and duly authorized officer) 
 

 

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INDEX TO EXHIBITS
         
Exhibit Number   Description
       
 
  31.1    
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
       
 
  31.2    
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
       
 
  32.1    
Section 1350 Certification of Chief Executive Officer
       
 
  32.2    
Section 1350 Certification of Chief Financial Officer

 

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