FORM 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For The Fiscal Year Ended
January 31, 2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-32545
DSW INC.
(Exact name of registrant as
specified in its charter)
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Ohio
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31-0746639
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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810 DSW Drive,
Columbus, Ohio
(Address of principal
executive offices)
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43219
(Zip Code)
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Registrants
telephone number, including area code (614)
237-7100
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Class A Common Shares, without par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant computed by reference to the
price at which such voting stock was last sold, as of
August 2, 2008, was $222,266,850.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date: 16,315,746 Class A Common Shares and
27,702,667 Class B Common Shares were outstanding at
February 28, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement relating to
fiscal 2008 for the Annual Meeting of Shareholders to be held on
May 21, 2009 are incorporated by reference into
Part III.
TABLE OF
CONTENTS TO FINANCIAL STATEMENTS
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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SCHEDULES
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E-1
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3
PART I
All references to we, us,
our, DSW or the Company in
this Annual Report on
Form 10-K
mean DSW Inc. and its wholly-owned subsidiaries, 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 Annual Report on
Form 10-K
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 for trading under the ticker symbol RVI
on the NYSE.
We own many trademarks and service marks. This Annual Report on
Form 10-K
may contain trade dress, tradenames and trademarks of other
companies. Use or display of other parties trademarks,
trade dress or tradenames is not intended to and does not imply
a relationship with the trademark or trade dress owner.
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 Annual Report on
Form 10-K
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 Annual Report on
Form 10-K
are based upon our historical performance and on current plans,
estimates and 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 other factors
discussed elsewhere in this report, including those factors
described under Part I, Item 1A. Risk
Factors, 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:
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our success in opening and operating new stores on a timely and
profitable basis;
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continuation of supply agreements and the financial condition of
our leased business partners;
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maintaining good relationships with our vendors;
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our ability to anticipate and respond to fashion trends;
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fluctuation of our comparable store sales and quarterly
financial performance;
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disruption of our distribution operations;
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the realization of our bankruptcy claim related to Value City
Department Stores (Value City);
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failure to retain our key executives or attract qualified new
personnel;
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our competitiveness with respect to style, price, brand
availability and customer service;
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declining general economic conditions;
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risks inherent to international trade with countries that are
major manufacturers of footwear;
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the success of dsw.com;
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liquidity and investment risks related to our investments;
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4
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our ability to secure additional credit upon the termination of
our existing credit facility; and
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liquidity risks at Retail Ventures and Filenes Basement
and their impact on DSW and the allocation of shared services
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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 may 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.
General
DSW is a leading U.S. branded footwear specialty retailer
operating 298 shoe stores in 37 states as of
January 31, 2009. We offer a wide selection of
better-branded dress, casual and athletic footwear for women and
men, as well as accessories. Our typical customers are brand,
quality and style-conscious shoppers who have a passion for
footwear and accessories. Our core focus is to create a
distinctive store experience that satisfies both the rational
and emotional shopping needs of our customers by offering them a
vast, exciting selection of in-season styles combined with the
convenience and value they desire. Our stores average
approximately 23,000 square feet and carry approximately
27,000 pairs of shoes. We believe this combination of selection,
convenience and value differentiates us from our competitors and
appeals to consumers from a broad range of socioeconomic and
demographic backgrounds. In addition, we also operate 377 leased
shoe departments for four other retailers and sell shoes and
accessories through dsw.com.
Please see our financial statements and the notes thereto in
Item 8 of this Annual Report on
Form 10-K
for financial information about our two reportable segments: the
DSW segment, which includes dsw.com and DSW stores, and leased
departments.
Corporate
History
We were incorporated in the state of Ohio on January 20,
1969 and opened our first DSW store in Dublin, Ohio in July
1991. In 1998, a predecessor of Retail Ventures purchased DSW
and affiliated shoe businesses from Schottenstein Stores
Corporation (SSC) and Nacht Management, Inc. In
February 2005, we changed our name from Shonac Corporation to
DSW Inc. In July 2005, we completed an initial public offering
(IPO) of our Class A Common Shares, selling
approximately 16.2 million shares at an offering price of
$19.00 per share. As of January 31, 2009, Retail Ventures
owned approximately 27.7 million of our Class B Common
Shares, or approximately 62.9% of our total outstanding shares
and approximately 93.1% of the combined voting power of our
outstanding Common Shares.
Competitive
Strengths
We believe that our leading market position is driven by our
competitive strengths: the breadth of our branded product
offerings, our convenient store layout, the value proposition
offered to our customers and demonstrated ability to deliver
sales growth on a consistent basis. Over the past few years, we
have honed our retail operating model and continued our
dedication to providing quality in-season products at attractive
prices. We believe we will continue to improve our ability to
leverage these competitive strengths and attract and retain
talented managers and merchandisers.
The
Breadth of Our Product Offerings
Our goal is to excite our customers with a selection of shoes
that fulfill a broad range of style and fashion needs. DSW
stores and dsw.com sell a large selection of better-branded
merchandise. We purchase directly from more than
5
400 domestic and foreign vendors, primarily in-season footwear
found in specialty and department stores and branded
make-ups
(shoes made exclusively for a retailer), with selection at each
store geared toward the particular demographics of the location.
A typical DSW store carries approximately 27,000 pairs of shoes
in over 2,000 styles compared to a significantly smaller product
offering at typical department stores. We also offer a
complementary selection of handbags, hosiery and other
accessories which appeal to our brand- and fashion-conscious
customers.
Our
Distinctive and Convenient Store Layout
We provide our customers with the highest level of convenience
based on our belief that customers should be empowered to
control and personalize their shopping experiences. Our
merchandise is displayed on the selling floor with self-service
fixtures to enable customers to view and touch the merchandise.
Our stores are laid out in a logical manner that groups together
similar styles such as dress, casual, seasonal and athletic
merchandise. We believe this self-service aspect provides our
customers with maximum convenience as they are able to browse
and try on the merchandise without feeling rushed or pressured
into making a decision too quickly.
The
Value Proposition Offered to Our Customers
Through our buying organization, we are able to provide our
customers with high quality, in-season fashions at prices that
we believe are competitive with the typical sale price found at
specialty retailers and department stores. We generally employ a
consistent pricing strategy that typically provides our
customers with the same price on our merchandise from the day it
is received until it goes into our planned clearance rotation.
Our pricing strategy differentiates us from our competitors who
usually price and promote merchandise at discounts available
only for limited time periods. We find that customers appreciate
having the power to shop for value when it is most convenient
for them, rather than waiting for a department store or
specialty retailer to have a sale event.
In order to provide additional value to our regular customers,
we maintain a customer loyalty program for DSW stores and
dsw.com in which program members earn reward certificates that
result in discounts on future purchases. This program offers
additional savings to frequent shoppers and encourages repeat
sales. Upon reaching the target-earned threshold, our members
receive certificates for these discounts which must be redeemed
within six months. We target direct marketing to DSW
Rewards members throughout the year. We classify these
members by frequency and spend and use direct mail and email
communication to stimulate further sales and traffic. As of
January 31, 2009, over 10.4 million members enrolled
in the DSW Rewards loyalty program have made at
least one purchase over the course of the last two fiscal years,
up from approximately 8.6 million members as of
February 2, 2008. In fiscal 2008, approximately 76% of DSW
store and dsw.com net sales were generated by shoppers in the
loyalty program, up from approximately 69% of DSW store net
sales in fiscal 2007.
Demonstrated
Ability to Consistently Deliver Growth
Our operating model is focused on selection, convenience and
value. We believe that the growth we have achieved in the past
is attributable to our operating model and managements
focus on store-level profitability and economic payback. Over
the five fiscal years ended January 31, 2009, our net sales
have grown at a compound annual growth rate of 13.1%. We intend
to continue our focus on net sales, operating profit and
operating cash flows as we pursue our growth strategy.
We believe cash generated from DSW operations, together with our
current levels of cash and investments of $157.5 million,
should be sufficient to maintain our ongoing operations, support
seasonal working capital requirements and fund capital
expenditures related to projected business growth. In addition
to our cash and investments, DSW has no long-term debt, however,
DSW does have significant long-term obligations under its leases.
Growth
Strategy
Our growth strategy is to continue to strengthen our position as
a leading better-branded footwear retailer by pursuing the
following three primary strategies for growth in sales and
profitability: expanding our store base and dsw.com, driving
sales through enhanced merchandising and investment in our
infrastructure.
6
Expanding
Our Store Base and dsw.com
We plan to open approximately 10 stores in fiscal 2009 and
increase dsw.com sales. Our plan is to open stores in both new
and existing markets with the primary focus on power strip
centers as well as repositioning existing stores. We also plan
to continue to pursue opportunities in regional malls, lifestyle
centers and urban street locations in appropriate markets. In
general, our evaluation of potential new stores focuses on
location within a retail area, demographics, co-tenancy, store
size and configuration, and lease terms. Our long-range planning
model includes analysis of every major metropolitan area in the
country with the objective of understanding the demand for our
products in each market over time, and our ability to capture
that demand. The analysis also looks at our current penetration
levels in the markets we serve and our expected deepening of
those penetration levels as we continue to grow our brand and
become the shoe retailer of choice in our markets.
Driving
Sales through Enhanced Merchandising
Our merchandising group constantly monitors current fashion
trends as well as historical sales trends to identify popular
styles and styles that may become popular in the upcoming
season. We track store performance and sales trends on a weekly
basis and have a flexible incremental buying process that
enables us to order styles frequently throughout each season, in
contrast to department stores, which typically make one large
purchase at the beginning of the season. To keep our product mix
fresh and on target, we test new fashions and actively monitor
sell-through rates in our stores. We also aim to increase the
quality and breadth of existing vendor offerings and identify
new vendor opportunities. In addition to our merchandising
initiative, we will continue to invest in planning, allocation
and distribution to continue improving our inventory and
markdown management.
Investment
in Infrastructure
As we grow our business and fill in markets to their full
potential, we believe we will improve our profitability by
leveraging our cost structure in areas of regional management,
supply chain and overhead functions. Additionally, we intend to
continue investing in our infrastructure to improve our
operating and financial performance. Most significantly, we
believe continued investment in information systems will enhance
our efficiency in areas such as merchandise planning and
allocation, inventory management, distribution, labor management
and point of sale functions.
DSW Store
Locations
As of January 31, 2009, we operated 298 DSW stores in
37 states in the United States. The table below shows the
locations of our DSW stores by region.
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Northeast
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West
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Central
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Southwest
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Southeast
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Connecticut
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3
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California
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32
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Illinois
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15
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Arizona
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6
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Alabama
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2
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Delaware
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1
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Oregon
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3
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Indiana
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7
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Colorado
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8
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Florida
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22
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Maine
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1
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Washington
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4
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Iowa
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1
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Nevada
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3
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Georgia
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14
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Maryland
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9
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Kansas
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2
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Texas
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30
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Kentucky
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2
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Massachusetts
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12
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Michigan
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14
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Utah
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3
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Louisiana
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2
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New Hampshire
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1
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Minnesota
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8
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North Carolina
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6
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New Jersey
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10
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Missouri
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4
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Tennessee
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4
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New York
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18
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Nebraska
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2
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Virginia
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13
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Pennsylvania
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15
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Ohio
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14
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Rhode Island
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1
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Oklahoma
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2
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Wisconsin
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4
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Total
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71
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39
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73
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50
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65
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Leased
Departments
We also operate leased departments for three non-affiliated
retailers and one affiliated retailer. We have renewable supply
agreements to merchandise the non-affiliated shoe departments in
Stein Mart, Inc., Gordmans,
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Inc. and Frugal Fannies Fashion Warehouse stores through
December 2012, January 2013, and April 2012, respectively. We
operate leased departments for Filenes Basement, a
wholly-owned subsidiary of Retail Ventures, under a renewable
supply agreement through January 2010.
We own the merchandise, record sales of merchandise net of
returns and sales tax, own the fixtures (except for
Filenes Basement) and provide supervisory assistance in
these covered locations. Stein Mart, Gordmans, Frugal
Fannies and Filenes Basement provide the sales
associates. We pay a percentage of net sales as rent. As of
January 31, 2009, we supplied merchandise to 275 Stein Mart
stores, 65 Gordmans stores, one Frugal Fannies store and
36 Filenes Basement stores. Our leased department segment
has been supported by a store field operations group, a
merchandising group and, for non-affiliated retailers, a
planning and allocation group that are separate from the DSW
segment.
dsw.com
We launched dsw.com in the first half of fiscal 2008 to provide
customers with the opportunity to purchase shoes and related
accessories through our website and to gain market share by
serving customers in regions where we do not currently have
stores. We have entered into a ten-year lease agreement for
space to serve as a fulfillment center for dsw.com sales. We
operate a call center to support both DSW stores and dsw.com to
address our customer service needs.
Merchandise
Suppliers and Mix
We believe we have good relationships with our vendors. We
purchase merchandise directly from more than 400 domestic and
foreign vendors. Our vendors include suppliers who either
manufacture their own merchandise or supply merchandise
manufactured by others, or both. Most of our domestic vendors
import a large portion of their merchandise from abroad. We have
implemented quality control programs under which our DSW buyers
are involved in establishing standards for quality and fit
according to which actual product is manufactured and our store
personnel examine incoming merchandise in regards to color,
material and overall quality of manufacturing. As the number of
DSW locations increases and our sales volumes grow, we believe
there will continue to be adequate sources available to acquire
a sufficient supply of quality goods in a timely manner and on
satisfactory economic terms. During fiscal 2008, merchandise
supplied by our three top vendors accounted for approximately
20% of our net footwear sales.
We separate our DSW merchandise into four primary
categories womens footwear; mens
footwear; athletic footwear; and accessories. While shoes are
the main focus of DSW, we also offer a complementary assortment
of handbags, hosiery and other accessories.
The following table sets forth the approximate percentage of our
sales attributable to each merchandise category for the fiscal
years below:
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Category
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Fiscal 2008
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Fiscal 2007
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Fiscal 2006
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Womens
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66
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%
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65
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%
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65
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%
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Mens
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15
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%
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16
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%
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16
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%
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Athletic
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14
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%
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14
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%
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14
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%
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Accessories and Other
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5
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%
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5
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%
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5
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%
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Distribution
Our primary distribution center is located in an approximately
700,000 square foot facility in Columbus, Ohio. The design
of the distribution center facilitates the prompt delivery of
priority purchases and fast-selling footwear to stores so we can
take full advantage of each selling season. We have engaged a
third party logistics service provider to receive orders
originating from suppliers on the West Coast or imports entering
the United States at a West Coast port of entry through our West
Coast bypass. These initial shipments are then shipped by this
service provider to our pool points and onwards to stores
bypassing our Columbus distribution center facility. We will
continue to evaluate expansion of this process for applicability
in other parts of the country. We also operate a fulfillment
center in
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Columbus, Ohio to process orders for dsw.com, which are shipped
directly to customers using a third party shipping provider.
Management
Information and Control Systems
In order to promote our continued growth, we undertook several
major initiatives in the past to build upon the merchandise
management system and warehouse management systems that support
us. In fiscal 2008, we made a significant investment in
upgrading our Point of Sale (POS) system to a
consistent platform. In our stores, we utilize POS registers
with full scanning capabilities to increase speed and accuracy
at customer checkouts and facilitate inventory restocking. With
our top vendors, we utilize an electronic data interchange for
product UPC barcodes and electronic exchange of purchase orders,
Advance Shipment Notifications and invoices. We use enterprise
data warehouse and customer relationship management software to
manage the DSW Rewards program. This allows us to
support, expand and integrate DSW Rewards with the
POS system to improve the customer experience.
Competition
We view our primary competitors to be department stores. We also
compete with mall-based company stores, national chains,
independent shoe retailers, single-brand specialty retailers,
online shoe retailers, multi-channel specialty retailers and
brand-oriented discounters. We believe shoppers prefer our
remarkable selection of on-trend merchandise compared to product
offerings of our competitors because those retailers generally
offer a more limited selection at higher initial prices, in a
less convenient format than DSW and without the membership
benefits of the DSW Rewards program. In addition, we
also believe that we successfully compete against retailers who
have attempted to duplicate our format because they typically
offer assortments with fewer recognizable brands and more styles
from prior seasons.
Intellectual
Property
We have registered a number of trademarks and service marks in
the United States and internationally, including
DSW®
and DSW Shoe
Warehouse®.
The renewal dates for these U.S. trademarks are
April 25, 2015 and May 23, 2015, respectively. We
believe that our trademarks and service marks, especially those
related to the DSW concept, have significant value and are
important to building our name recognition. To protect our brand
identity, we have also protected the DSW trademark in several
foreign countries.
We also hold patents related to our unique store fixture, which
gives us greater efficiency in stocking and operating those
stores that currently have the fixture. We aggressively protect
our patented fixture designs, as well as our packaging, store
design elements, marketing slogans and graphics.
Associates
As of January 31, 2009, we employed approximately 10,000
associates. None of our associates are covered by any collective
bargaining agreements. We offer competitive wages, comprehensive
medical and dental insurance, vision care, company-paid and
supplemental life insurance programs, associate-paid long-term
and short-term disability insurance and a 401(k) plan to our
full-time associates and some of our part-time associates. We
have not experienced any work stoppages, and we consider our
relations with our associates to be good.
Seasonality
Our business is subject to seasonal trends. The sales in our DSW
stores have typically been higher in the first and third
quarters, 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.
9
Available
Information
DSW electronically files reports with the Securities and
Exchange Commission (SEC), including annual reports
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements and amendments to such reports. The public may
read and copy any materials that DSW files with the SEC at the
SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
The SEC also maintains an internet site that contains reports,
proxy statements, and other information regarding issuers that
file electronically with the SEC at www.sec.gov. Additionally,
information about DSW, including its reports filed with or
furnished to the SEC, is available through DSWs website at
www.dswinc.com. Such reports are accessible at no charge through
DSWs website and are made available as soon as reasonably
practicable after such material is filed with or furnished to
the SEC.
We have included our website addresses throughout this filing as
textual references only. The information contained on our
websites are not incorporated into this
Form 10-K.
In addition to the other information in this Annual Report on
Form 10-K,
shareholders or prospective investors should carefully consider
the following risk factors when evaluating DSW. If any of the
events described below occurs, our business, financial condition
and results of operations and future growth prospects could be
negatively affected.
Risks
Relating to Our Business
We
plan to open approximately 10 stores in fiscal 2009 and are
currently evaluating our strategy for fiscal 2010 and beyond,
which could strain our resources and have a material adverse
effect on our business and financial performance.
Our continued and future growth largely depends on our ability
to successfully open and operate new DSW stores on a profitable
basis. During fiscal 2008, fiscal 2007 and fiscal 2006, we
opened 41, 37, and 29 new DSW stores, respectively. We plan to
open approximately 10 stores in fiscal 2009 and are currently
evaluating our strategy for fiscal 2010 and beyond. As of
January 31, 2009, we have signed leases for an additional
14 stores opening in fiscal 2009 and fiscal 2010. During fiscal
2008, the average investment required to open a typical new DSW
store was approximately $1.6 million. This continued
expansion could place increased demands on our financial,
managerial, operational and administrative resources. For
example, our planned expansion will require us to increase
investments in management information systems and distribution
facilities. These increased demands and operating complexities
could cause us to operate our business less efficiently, have a
material adverse effect on our operations and financial
performance and slow our growth.
We may
be unable to open all the stores contemplated by our growth
strategy on a timely basis, and new stores we open may not be
profitable or may have an adverse impact on the profitability of
existing stores, either of which could have a material adverse
effect on our business, financial condition and results of
operations.
We plan to open approximately 10 stores in fiscal 2009. However,
we may not achieve our planned expansion on a timely and
profitable basis or achieve results in new locations similar to
those achieved in existing locations in prior periods. Our
ability to open and operate new DSW stores on a timely and
profitable basis depends on many factors, including, among
others, our ability to:
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identify suitable markets and sites for new store locations with
financially stable co-tenants and landlords;
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negotiate favorable lease terms;
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build-out or refurbish sites on a timely and effective basis;
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obtain sufficient levels of inventory to meet the needs of new
stores;
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obtain sufficient financing and capital resources or generate
sufficient operating cash flows from operations to fund growth;
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open new stores at costs not significantly greater than those
anticipated;
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successfully open new DSW stores in markets in which we
currently have few or no stores;
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control the costs of other capital investments associated with
store openings;
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hire, train and retain qualified managers and store
personnel; and
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successfully integrate new stores into our existing
infrastructure, operations, management and distribution systems
or adapt such infrastructure, operations and systems to
accommodate our growth.
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As a result, we may be unable to open new stores at the rates
expected or at all. If we fail to successfully implement our
growth strategy, the opening of new DSW stores could be delayed
or prevented, could cost more than anticipated and could divert
resources from other areas of our business, any of which could
have a material adverse effect on our business, financial
condition and results of operations.
To the extent that we open new DSW stores in our existing
markets, we may experience reduced net sales in existing stores
in those markets. As the number of our stores increases, our
stores will become more concentrated in the markets we serve. As
a result, the number of customers and financial performance of
individual stores may decline and the average sales per square
foot at our stores may be reduced. This could have a material
adverse effect on our business, financial condition and results
of operations.
We
have entered into Supply Agreements with Stein Mart, Gordmans
and Filenes Basement. If Stein Mart, Gordmans or
Filenes Basement were to terminate our supply agreements,
close a significant number of stores, declare bankruptcy or
liquidate, it could have a material adverse effect on our
business and financial performance.
Our supply agreements are typically for multiple years with
automatic renewal options as long as either party does not give
notice of intent not to renew. For Stein Mart, Gordmans and
Filenes Basement, our contractual termination dates are
December 2012, January 2013 and January 2010, respectively. In
addition, the agreements contain provisions that may trigger an
earlier termination. For fiscal 2008, the sales from our leased
business segment represent approximately 11.2% of our total
company sales. In the event of the loss of one of these leased
departments, it is unlikely that DSW would be able to
proportionately reduce expenses to the reduction of sales.
The performance of our leased departments is highly dependant on
the performance of Stein Mart, Gordmans and Filenes
Basement. In February 2009, Filenes Basement closed 11
underperforming stores. If Stein Mart, Gordmans or Filenes
Basement were to terminate our supply agreements, close a
significant number of stores, declare bankruptcy or liquidate,
it could have a material adverse effect on our business and
financial performance.
Ongoing
liquidity risks at Retail Ventures and Filenes Basement
could impact the shared service allocations between DSW and RVI
and may have a material adverse effect on our future financial
performance and financial position.
Filenes Basement closed 11 underperforming stores in
February 2009 and also plans to seek to aggressively renegotiate
certain of the remaining 25 operating store leases in addition
to leases for the Filenes Basement Corporate Office and
warehouse. Filenes Basement and RVI are discussing with
representatives of the lenders to Filenes Basement the
effect of the store closings under Filenes Basements
credit agreement. No assurance can be given that RVI and
Filenes Basement will successfully resolve this situation
with the lenders and, RVI, a guarantor under Filenes
Basements credit agreement, is exploring strategic
alternatives to seek to address liquidity risk at both
companies. If obligations under the credit agreement were to be
accelerated and the lenders were to elect to seek repayment from
RVI, RVI currently does not have sufficient liquidity to
immediately satisfy such a repayment obligation under such
guarantee, absent a capital raising transaction. Although such a
capital raising transaction could include the sale or
collateralization of shares of DSW common stock or a sale of
equity by RVI, no assurance may be given that any such
transaction can be successfully pursued or timely consummated.
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Effective March 17, 2008, we entered into an Amended and
Restated Shared Services Agreement with RVI and Filenes
Basement. Pursuant to the terms of the Amended and Restated
Shared Services Agreement, DSW provides RVI and Filenes
Basement with key services relating to risk management, tax,
financial services, benefits administration, payroll, and
information technology based upon a usage based charge. The
current term of the Amended and Restated Shared Services
Agreement will expire at the end of fiscal 2009 and extends
automatically for additional one-year terms unless terminated by
one of the parties. In the event that RVI or Filenes
Basement significantly reduces or ceases operations, DSW would
not be able to allocate as much or any expense to RVI or
Filenes Basement. This increased allocation percentage and
reduction in expense allocation could be material and have a
negative effect on DSWs results of operations and
financial condition.
In fiscal 2008, we allocated $5.7 million to Filenes
Basement and expect to allocate up to $5.7 million in
fiscal 2009. As of January 31, 2009, Filenes Basement
owed DSW $1.8 million. In fiscal 2008, we allocated
$0.7 million to RVI and expect to allocate up to
$0.7 million in fiscal 2009. As of January 31, 2009,
DSW owed RVI $3.4 million.
We
launched dsw.com in the first half of fiscal 2008, which may not
be successful and could adversely affect our results of
operations or distract management from our core
business.
We launched dsw.com to sell shoes and related accessories
through our website in fiscal 2008. In addition, we have entered
into a ten-year lease agreement for space to serve as a
fulfillment center for dsw.com distribution. The continued
development of such a business channel could distract management
from our core business, take business from our existing store
base resulting in lower sales in our stores or be unsuccessful.
In addition, as this is a new business channel, we have
purchased inventory based upon anticipated sales. In the event
that our actual sales are lower than planned, we will likely
take markdowns on inventory which will adversely affect gross
margin. In the event that we lose focus on our core business,
impact sales in our existing store base or are unsuccessful in
the execution of dsw.com, it may have a material adverse effect
on our business, results of operations, financial condition or
result in asset impairment charges related to assets used
specifically by dsw.com.
We
rely on our good relationships with vendors to purchase
better-branded merchandise at favorable prices. If these
relationships were to be impaired, we may not be able to obtain
a sufficient selection of merchandise at attractive prices, and
we may not be able to respond promptly to changing fashion
trends, either of which could have a material adverse effect on
our competitive position, our business and financial
performance.
We do not have long-term supply agreements or exclusive
arrangements with any vendors and, therefore, our success
depends on maintaining good relations with our vendors. Our
growth strategy depends to a significant extent on the
willingness and ability of our vendors to supply us with
sufficient inventory to stock our stores. If we fail to
strengthen our relations with our existing vendors or to enhance
the quality of merchandise they supply us, and if we cannot
maintain or acquire new vendors of in-season better-branded
merchandise, our ability to obtain a sufficient amount and
variety of merchandise at favorable prices may be limited, which
could have a negative impact on our competitive position. In
addition, our inability to stock our DSW stores with in-season
merchandise at attractive prices could result in lower net sales
and decreased customer interest in our stores, which could
adversely affect our financial performance.
During fiscal 2008, merchandise supplied to DSW by three key
vendors accounted for approximately 20% of our net footwear
sales. The loss of or a reduction in the amount of merchandise
made available to us by any one of these vendors could have an
adverse effect on our business.
We may
be unable to anticipate and respond to fashion trends and
consumer preferences in the markets in which we operate, which
could have a material adverse effect on our business, financial
condition and results of operations.
Our merchandising strategy is based on identifying each
regions customer base and having the proper mix of
products in each store to attract our target customers in that
region. This requires us to anticipate and respond to
12
numerous and fluctuating variables in fashion trends and other
conditions in the markets in which our stores are situated. A
variety of factors will affect our ability to maintain the
proper mix of products in each store, including:
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variations in local economic conditions, which could affect our
customers discretionary spending and their price
sensitivity;
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unanticipated fashion trends;
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our success in developing and maintaining vendor relationships
that provide us access to in-season merchandise at attractive
prices;
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our success in distributing merchandise to our stores in an
efficient manner; and
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changes in weather patterns, which in turn affect consumer
preferences.
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If we are unable to anticipate and fulfill the merchandise needs
of each region, we may experience decreases in our net sales and
may be forced to increase markdowns in relation to slow-moving
merchandise, either of which could have a material adverse
effect on our business, financial condition and results of
operations.
Our
operations are affected by seasonal variability.
Our net sales have typically been higher in the first and third
quarters. As a result of seasonality, any factors negatively
affecting us during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic
conditions, could have a material adverse effect on our
financial condition, operating cash flow and results of
operations for the entire year.
Our
sales and quarterly financial performance may fluctuate for a
variety of reasons, which could result in a decline in the price
of our Class A Common Shares.
Our business is sensitive to customers spending patterns,
which in turn are subject to prevailing regional and national
economic conditions and the general level of economic activity.
Our comparable store sales and quarterly results of operations
have fluctuated in the past, and we expect them to continue to
fluctuate in the future. A variety of other factors affect our
sales and quarterly financial performance, including:
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challenging U.S. economic conditions and, in particular,
the retail sales environment.
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changes in our merchandising strategy;
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timing and concentration of new DSW store openings and related
pre-opening and other
start-up
costs;
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levels of pre-opening expenses associated with new DSW stores;
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changes in our merchandise mix;
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changes in and regional variations in demographic and population
characteristics;
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timing of promotional events;
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seasonal fluctuations due to weather conditions; and
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actions by our competitors.
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Accordingly, our results for any one fiscal quarter are not
necessarily indicative of the results to be expected for any
other quarter, and comparable store sales for any particular
future period may decrease. Our future financial performance may
fall below the expectations of securities analysts and
investors. In that event, the price of our Class A Common
Shares would likely decline. For more information on our
quarterly results of operations, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
13
We are
reliant on our information systems and the loss or disruption of
services could affect our ability to implement our growth
strategy and have a material adverse effect on our
business.
Our information systems are an integral part of our growth
strategy in efficiently operating our stores, in managing the
operations of a growing store base and resolving security risks
related to our electronic processing and transmission of
confidential customer information. The capital required to keep
our information systems operating at peak performance may be
higher than anticipated and could strain both our capital
resources, our management of any upgrades and ability to protect
ourselves from any future security breaches. In addition, any
significant disruption of our data centers could have a material
adverse effect on those operations dependent on those systems,
most specifically, store operations, our distribution center and
our merchandising team.
While we maintain business interruption and property insurance,
in the event either of our information centers were to be shut
down, our insurance may not be sufficient to cover the impact to
the business, or insurance proceeds may not be timely paid to us.
We are party to an Amended and Restated Shared Services
Agreement with RVI whereby we provide information technology
services to RVI and its subsidiaries, including Filenes
Basement. Through this agreement, we provide the cash related to
capital expense for certain information technology assets for
RVI and its subsidiaries. We expect to recoup our expenditures
by charging depreciation to RVI based on the expected lives of
the assets. We are exposed to the risk that RVI may not be able
to reimburse us for these expenditures which could adversely
affect our financial performance.
The
loss or disruption of our distribution and fulfillment centers
could have a material adverse effect on our business and
operations.
For DSW stores and leased departments, most of our inventory is
shipped directly from suppliers to our primary distribution
center in Columbus, Ohio, where the inventory is then processed,
sorted and shipped to one of our pool locations located
throughout the country and then on to our stores. Through a
third party, we also operate a west coast bypass. For dsw.com,
our inventory is shipped directly from our fulfillment center to
customers homes. Our operating results depend on the
orderly operation of our receiving and distribution process,
which in turn depends on third-party vendors adherence to
shipping schedules and our effective management of our
distribution facilities. We may not anticipate all the changing
demands that our expanding operations will impose on our
receiving and distribution system, and events beyond our
control, such as disruptions in operations due to fire or other
catastrophic events, labor disagreements or shipping problems,
may result in delays in the delivery of merchandise to our
stores.
While we maintain business interruption and property insurance,
in the event our distribution and fulfillments centers were to
be shut down for any reason or if we were to incur higher costs
and longer lead times in connection with a disruption at our
distribution and fulfillment centers, our insurance may not be
sufficient, and insurance proceeds may not be timely paid to us.
Value
City Department Stores filed for bankruptcy protection and
closed its remaining stores. Value City owes us approximately
$6.7 million as of January 31, 2009 and we may not be able
to collect this amount from Value City.
In January 2008, RVI announced the disposition of an 81%
ownership interest in Value City. As a part of this transaction,
RVI agreed to provide certain transition services to Value City.
On October 26, 2008, Value City filed for bankruptcy
protection and announced that it would close its remaining
stores. We negotiated an agreement with Value City to continue
to provide services post bankruptcy filing, including risk
management, financial services, benefits administration, payroll
and information technology services, in exchange for a weekly
payment.
As of January 31, 2009, Value City owes us approximately
$6.7 million for services rendered by us prior to the
filing of bankruptcy. Of these unpaid amounts, we have not
recognized revenue or a receivable related to those services
other than a fully reserved receivable of approximately
$0.6 million. We have submitted a proof of claim in the
bankruptcy proceeding seeking payment in full for all amounts
owed to us. However, there is no assurance that we can collect
all or any of the amounts owed to us.
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Our
failure to retain our existing senior management team and to
continue to attract qualified new personnel could adversely
affect our business.
Our business requires disciplined execution at all levels of our
organization to ensure that we continually have sufficient
inventories of assorted brand name merchandise at below
traditional retail prices. This execution requires an
experienced and talented management team. If we were to lose the
benefit of the experience, efforts and abilities of any of our
key executive and buying personnel, our business could be
materially adversely affected. We have entered into employment
agreements with several of these officers. Furthermore, our
ability to manage our retail expansion will require us to
continue to train, motivate and manage our employees and to
attract, motivate and retain additional qualified managerial and
merchandising personnel. Competition for these types of
personnel is intense, and we may not be successful in
attracting, assimilating and retaining the personnel required to
grow and operate our business profitably.
We may
be unable to compete favorably in our highly competitive
market.
The retail footwear market is highly competitive with few
barriers to entry. We compete against a diverse group of
retailers, both small and large, including department stores,
mall-based company stores, national chains, independent shoe
retailers, single-brand specialty retailers, online shoe
retailers, multi-channel specialty retailers and brand-oriented
discounters. Some of our competitors are larger and have
substantially greater resources than we do. Our success depends
on our ability to remain competitive with respect to style,
price, brand availability and customer service. The performance
of our competitors, as well as a change in their pricing
policies as a result of the current economic environment,
marketing activities and other business strategies, could have a
material adverse effect on our business, financial condition,
results of operations and our market share.
The
current slowdown in the United States economy has adversely
affected consumer confidence and consumer spending
habits.
The current slowdown in the United States economy has adversely
affected consumer confidence and consumer spending habits, which
may result in further 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 negative economic conditions may also affect future
profitability and may cause us to reduce the number of future
store openings, impair long-lived assets or impair goodwill.
Consumer spending habits, including spending for the footwear
and related accessories that we sell, are affected by, among
other things, prevailing economic conditions, levels of
employment, salaries and wage rates, prevailing interest rates,
income tax rates and policies, consumer confidence and consumer
perception of economic conditions. In addition, consumer
purchasing patterns may be influenced by consumers
disposable income.
Consumer confidence is also affected by the domestic and
international political situation. The outbreak or escalation of
war, or the occurrence of terrorist acts or other hostilities in
or affecting the United States, could lead to a decrease in
spending by consumers. In an economic slowdown, we could
experience lower net sales than expected on a quarterly or
annual basis and be forced to delay or slow our retail expansion
plans.
The current economic slowdown is also impacting credit card
processors and financial institutions which hold our credit card
receivables. We depend on credit card processors to obtain
payments for us. In the event a credit card processor ceases
operations or the financial institution holding our funds fails,
there can be no assurance that we would be able to access funds
due to us on a timely basis, which could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
We
rely on foreign sources for our merchandise, and our business is
therefore subject to risks associated with international
trade.
We purchase merchandise from domestic and foreign vendors. In
addition, many of our domestic vendors import a large portion of
their merchandise from abroad, primarily from China, Brazil and
Italy. We believe that
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almost all the merchandise we purchased during fiscal 2008 was
manufactured outside the United States. For this reason, we face
risks inherent in purchasing from foreign suppliers, such as:
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economic and political instability in countries where these
suppliers are located;
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international hostilities or acts of war or terrorism affecting
the United States or foreign countries from which our
merchandise is sourced;
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increases in shipping costs;
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transportation delays and interruptions, including increased
inspections of import shipments by domestic authorities;
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work stoppages;
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adverse fluctuations in currency exchange rates;
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U.S. laws affecting the importation of goods, including
duties, tariffs and quotas and other non-tariff barriers;
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expropriation or nationalization;
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changes in local government administration and governmental
policies;
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changes in import duties or quotas;
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compliance with trade and foreign tax laws; and
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local business practices, including compliance with local laws
and with domestic and international labor standards.
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We require our vendors to operate in compliance with applicable
laws and regulations and our internal requirements. However, we
do not control our vendors or their labor and business
practices. The violation of labor or other laws by one of our
vendors could have an adverse effect on our business.
Restrictions
in our secured revolving credit facility could limit our
operational flexibility.
We have entered into a $150 million secured revolving
credit facility with a term expiring July 2010. Under this
facility, we and our subsidiaries are named as co-borrowers.
This facility is subject to a borrowing base restriction and
provides for borrowings at variable interest rates based on the
London Interbank Offered Rate, or LIBOR, the prime rate and the
Federal Funds effective rate, plus a margin. Our obligations
under our secured revolving credit facility are secured by a
lien on substantially all our personal property and a pledge of
our shares of DSW Shoe Warehouse, Inc. In addition, the 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. These
covenants could restrict our operational flexibility, and any
failure to comply with these covenants or our payment
obligations would limit our ability to borrow under the secured
revolving credit facility and, in certain circumstances, may
allow the lenders thereunder to require repayment.
We may
be unable to secure additional credit upon the termination of
our existing credit facility in July 2010 or the terms of
additional credit could be materially different than the terms
we have today.
Our current credit facility expires in July 2010. While we do
not currently have borrowings under our credit facility, we had
approximately $17.7 million of letters of credit
outstanding at January 31, 2009. Based upon the current
credit markets, we may be unable to secure additional credit, or
if we are able to secure additional credit, the terms of such
additional credit may be materially different from our current
terms. Such revised terms or the price of credit could have a
material adverse effect on our business, financial condition or
results of operations. Further, in
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the event we are unable to secure additional credit, our future
liquidity may be impacted, which could have a material adverse
effect on our financial condition or results of operations.
The
liquidity of our investments could fluctuate based on adverse
market conditions.
Auction failures have adversely affected the liquidity of
auction rate securities as investors have not been able to sell
their securities on their auction dates. We have been unable to
sell certain auction rate securities at their scheduled auction
dates. As of January 31, 2009, $4.3 million, net of
impairments of $1.8 million, of our $102.7 million in
total investments was invested in auction rate securities. We
have reduced our investment in auction rate securities with a
temporary impairment of $0.7 million and
other-than-temporary impairments of $1.1 million. Due to
auction failures limiting the liquidity of our investments, we
have presented all of our investment in auction rate securities
that have undergone a failed auction and have not been called as
long-term investments as of January 31, 2009.
If we are unable to liquidate the remaining auction rate
securities at their scheduled auction dates, we may not have
access to our funds until the securities undergo a distribution
of the underlying securities or successfully settle at auction.
Further, in the event that it is unlikely that we will be able
to receive the full proceeds from these investments when the
securities undergo a distribution of the underlying securities
or successfully settle at auction, we may be required to impair
the securities. Based on the nature of the impairments, we would
record temporary impairments as unrealized losses in other
comprehensive income or other-than-temporary impairments in
earnings, which could materially impact our results of
operations.
We are
controlled directly by Retail Ventures and indirectly by SSC and
its affiliates, whose interests may differ from our other
shareholders.
As of January 31, 2009, Retail Ventures, a public
corporation, owns 100% of our Class B Common Shares, which
represents approximately 62.9% of our outstanding Common Shares.
These shares collectively represent approximately 93.1% of the
combined voting power of our outstanding Common Shares.
As of January 31, 2009, SSC and its affiliates, in the
aggregate, owned approximately 52.3% of the outstanding Retail
Ventures Common Shares and beneficially owned approximately
60.7% of the outstanding Retail Ventures Common Shares (assumes
the issuance of (i) 8,333,333 RVI Common Shares issuable
upon the exercise of conversion warrants held by SSC,
(ii) 1,731,460 Retail Ventures Common Shares issuable upon
the exercise of term loan warrants held by Schottenstein RVI,
LLC and (iii) 342,709 Retail Ventures Common Shares
issuable upon the exercise of the term loan warrants held by
Schottenstein RVI, LLC). SSC and its affiliates that own Retail
Ventures Common Shares are privately held entities controlled by
Jay L. Schottenstein, Chief Executive Officer and Chairman of
our Board of Directors, and members of his immediate family.
Given their respective ownership interests, Retail Ventures and,
indirectly, SSC and its affiliates, control or substantially
influence the outcome of all matters submitted to our
shareholders for approval, including, the election of directors,
mergers or other business combinations, and acquisitions or
dispositions of assets. The interests of Retail Ventures, SSC
and its affiliates may differ from or be opposed to the
interests of our other shareholders, and its control may have
the effect of delaying or preventing a change in control that
may be favored by other shareholders.
SSC
and Retail Ventures or their affiliates may compete directly
against us.
Corporate opportunities may arise in the area of potential
competitive business activities that may be attractive to Retail
Ventures, SSC, and/or their affiliates and us. Our amended and
restated articles of incorporation provide that Retail Ventures
and SSC are under no obligation to communicate or offer any
corporate opportunity to us. In addition, Retail Ventures and
SSC and/or its affiliates have the right to engage in similar
activities as us, do business with our suppliers and customers
and, except as limited by the master separation agreement,
employ or otherwise engage any of our officers or employees. SSC
and its affiliates engage in a variety of businesses, including,
but not limited to, business and inventory liquidations, apparel
companies and real estate acquisitions. The provisions also
outline how corporate opportunities are to be assigned in the
event that our, Retail Ventures or SSCs directors
and officers learn of corporate opportunities.
17
Some
of our directors and officers also serve as directors and
officers of Retail Ventures, and may have conflicts of interest
because they may own Retail Ventures stock or options to
purchase Retail Ventures stock, or they may receive cash- or
equity-based awards based on the performance of Retail
Ventures.
Some of our directors and officers also serve as directors or
officers of Retail Ventures and may own Retail Ventures stock or
options to purchase Retail Ventures stock, or they may be
entitled to participate in the Retail Ventures incentive plans.
Jay L. Schottenstein is our Chief Executive Officer and Chairman
of the Board of Directors and Chairman of the Board of Directors
of Retail Ventures; Harvey L. Sonnenberg is a director of DSW
and of Retail Ventures; and James A. McGrady is a Vice President
of DSW and the Chief Executive Officer, Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of
Retail Ventures. The Retail Ventures incentive plans provide
cash- and equity-based compensation to employees based on Retail
Ventures performance. These employment arrangements and
ownership interests or cash- or equity-based awards could
create, or appear to create, potential conflicts of interest
when directors or officers who own Retail Ventures stock or
stock options or who participate in these incentive plans are
faced with decisions that could have different implications for
Retail Ventures than they do for us. These potential conflicts
of interest may not be resolved in our favor.
We do
not expect to pay dividends in the foreseeable
future.
We anticipate that future earnings will be used principally to
finance our retail expansion. Thus, we do not intend to pay cash
dividends on our Common Shares in the foreseeable future.
Provisions in our secured revolving credit facility may also
restrict us from declaring dividends. Our board of directors
will have sole discretion to determine the dividend amount, if
any, to be paid. Our board of directors will consider a number
of factors, including applicable provisions of Ohio corporate
law, our financial condition, capital requirements, funds
generated from operations, future business prospects, applicable
contractual restrictions and any other factors our board may
deem relevant.
If our
existing shareholders or holders of rights to purchase our
Common Shares sell the shares they own, or if Retail Ventures
distributes our Common Shares to its shareholders, it could
adversely affect the price of our Class A Common
Shares.
The market price of our Class A Common Shares could decline
as a result of market sales by our existing shareholders,
including Retail Ventures, or a distribution of our Common
Shares to Retail Ventures shareholders or the perception
that such sales or distributions will occur. These sales or
distributions also might make it difficult for us to sell equity
securities in the future at a time and at a price that we deem
appropriate. We cannot predict the size of future sales of our
Common Shares.
As of January 31, 2009, there were 16,232,545 Class A
Common Shares of DSW outstanding. Additionally, there were
308,851 restricted stock units and director stock units
outstanding at January 31, 2009 that were issued pursuant
to the terms of DSWs equity incentive plan. The remaining
27,702,667 Class B Common Shares outstanding are restricted
securities within the meaning of Rule 144 under the
Securities Act but will be eligible for resale subject to
applicable volume, manner of sale, holding period and other
limitations of Rule 144.
SSC, Schottenstein RVI, LLC, Cerberus Partners L.P., or
Cerberus, and Millennium Partners, L.P., or Millennium, have the
right to acquire Class A Common Shares of DSW from Retail
Ventures pursuant to warrant agreements they have with Retail
Ventures. All these Common Shares are eligible for future sale,
subject to the applicable volume, manner of sale, holding period
and other limitations of Rule 144. Retail Ventures has
registration rights with respect to its DSW Common Shares in
specified circumstances pursuant to the master separation
agreement. In addition, SSC, Schottenstein RVI, LLC and Cerberus
(and any party to whom either of them transfers at least 15% of
their interest in registrable DSW Common Shares) have the right
to require that we register for resale in specified
circumstances the Class A Common Shares issued to them upon
exercise of their warrants, and each of these entities and
Millennium will be entitled to participate in registrations
initiated by the other entities.
18
Our
amended articles of incorporation, amended and restated code of
regulations and Ohio state law contain provisions that may have
the effect of delaying or preventing a change in control of DSW.
This could adversely affect the value of our Common
Shares.
Our amended articles of incorporation authorize our board of
directors to issue up to 100,000,000 preferred shares and to
determine the powers, preferences, privileges, rights, including
voting rights, qualifications, limitations and restrictions on
those shares, without any further vote or action by the
shareholders. The rights of the holders of our Class A
Common Shares will be subject to, and may be adversely affected
by, the rights of the holders of any preferred shares that may
be issued in the future. The issuance of preferred shares could
have the effect of delaying, deterring or preventing a change in
control and could adversely affect the voting power of our
Common Shares.
In addition, provisions of our amended articles of
incorporation, amended and restated code of regulations and Ohio
law, together or separately, could discourage potential
acquisition proposals, delay or prevent a change in control and
limit the price that certain investors might be willing to pay
in the future for our Common Shares. Among other things, these
provisions establish a staggered board, require a supermajority
vote to remove directors, and establish certain advance notice
procedures for nomination of candidates for election as
directors and for shareholder proposals to be considered at
shareholders meetings.
Risks
Relating to our Relationship with and Separation from Retail
Ventures
The
agreements we entered into with Retail Ventures in connection
with our initial public offering could restrict our operations
and adversely affect our financial condition.
We and Retail Ventures have entered into a number of agreements
governing our separation from and our future relationship with
Retail Ventures, including a master separation agreement and an
Amended and Restated Shared Services Agreement, in the context
of our relationship to Retail Ventures. Accordingly, the terms
and provisions of these agreements may be less favorable to us
than terms and provisions we could have obtained in arms
length negotiations with unaffiliated third parties.
We and Retail Ventures have entered into a tax separation
agreement. The tax separation agreement governs the respective
rights, responsibilities, and obligations of Retail Ventures and
us with respect to tax liabilities and benefits, tax attributes,
tax contests and other matters regarding taxes and related tax
returns. Although Retail Ventures has informed us that it does
not currently intend or plan to undertake a spin-off of our
stock to Retail Ventures shareholders, we and Retail
Ventures have agreed to set forth our respective rights,
responsibilities and obligations with respect to any possible
spin-off in the tax separation agreement. If Retail Ventures
were to decide to pursue a possible spin-off, we have agreed to
cooperate with Retail Ventures and to take any and all actions
reasonably requested by Retail Ventures in connection with such
a transaction. We have also agreed not to knowingly take or fail
to take any actions that could reasonably be expected to
preclude Retail Ventures ability to undertake a tax-free
spin-off. In addition, we generally would be responsible for any
taxes resulting from the failure of a spin-off to qualify as a
tax-free transaction to the extent such taxes are attributable
to, or result from, any action or failure to act by us or
certain transactions in our stock (including transactions over
which we would have no control, such as acquisitions of our
stock and the exercise of warrants, options, exchange rights,
conversion rights or similar arrangements with respect to our
stock) following or preceding a spin-off. We would also be
responsible for a percentage (based on the relative market
capitalizations of DSW and Retail Ventures at the time of such
spin-off) of such taxes to the extent such taxes are not
otherwise attributable to DSW or Retail Ventures. Our agreements
in connection with such tax matters last indefinitely.
The
PIES (Premium Income Exchangeable Securities) issued by Retail
Ventures may adversely affect the market price for DSW
Class A Common Shares.
In fiscal 2006, Retail Ventures issued 2,875,000 units of
its 6.625% Mandatorily Exchangeable Notes due September 15,
2011, or PIES (Premium Income Exchangeable Securities) in the
aggregate principal amount of $143,750,000. In the third quarter
of fiscal 2008, Retail Ventures repurchased 200,000 units of
PIES, which are still considered outstanding and can be resold
by Retail Ventures.
19
Except to the extent Retail Ventures exercises its cash
settlement option, the PIES are mandatorily exchangeable, on the
maturity date, into Class A Common Shares of DSW, no par
value per share, which are issuable upon exchange of DSW
Class B Common Shares, no par value per share, beneficially
owned by Retail Ventures. On the maturity date, each holder of
the PIES will receive a number of DSW Class A Common Shares
per $50 principal amount of PIES equal to the exchange
ratio described in the offering prospectus, or if Retail
Ventures elects, the cash equivalent thereof or a combination of
cash and DSW Class A Common Shares. The settlement of the
PIES will not change the number of DSW Common Shares outstanding.
The market price of our Class A Common Shares is likely to
be influenced by the PIES issued by Retail Ventures. For
example, the market price of our Class A Common Shares
could become more volatile and could be depressed by
(a) investors anticipation of the potential resale in
the market of a substantial number of additional DSW
Class A Common Shares received upon exchange of the PIES,
(b) possible sales of our Class A Common Shares by
investors who view the PIES as a more attractive means of equity
participation in us than owning our Class A Common Shares
and (c) hedging or arbitrage trading activity that may
develop involving the PIES and our Class A Common Shares.
We may
be prevented from issuing stock to raise capital, to effectuate
acquisitions or to provide equity incentives to members of our
management and board of directors.
Beneficial ownership of at least 80% of the total voting power
and 80% of each class of nonvoting capital stock is required in
order for Retail Ventures to effect a tax-free spin-off of DSW
or certain other tax-free transactions. Although Retail Ventures
has informed us that it does not currently intend or plan to
undertake a spin-off of our stock to Retail Ventures
shareholders, under the terms of our tax separation agreement,
we have agreed that for so long as Retail Ventures continues to
own greater than 50% of the voting control of our outstanding
stock, we will not knowingly take or fail to take any action
that could reasonably be expected to preclude Retail
Ventures ability to undertake a tax-free spin-off. In
addition, Retail Ventures is subject to contractual obligations
with its warrantholders to retain enough DSW Common Shares to be
able to satisfy its obligations to deliver such shares to its
warrantholders if the warrantholders elect to exercise their
warrants in full for DSW Class A Common Shares. Retail
Ventures is also subject to contractual obligations with the
holders of the PIES to retain enough DSW common shares to be
able to satisfy its obligations to deliver shares to the holders
of the PIES. These restrictions may prevent us from issuing
additional equity securities to raise capital, to effectuate
acquisitions or to provide management or director equity
incentives.
Our
prior and continuing relationship with Retail Ventures exposes
us to risks attributable to Retail Ventures
businesses.
Retail Ventures is obligated to indemnify us for losses that a
party may seek to impose upon us or our affiliates for
liabilities relating to the Retail Ventures business that are
incurred through a breach of the master separation agreement or
any ancillary agreement by Retail Ventures or its non-DSW
affiliates, if such losses are attributable to Retail Ventures
in connection with our initial public offering or are not
expressly assumed by us under the master separation agreement.
Any claims made against us that are properly attributable to
Retail Ventures or Filenes Basement in accordance with
these arrangements requires us to exercise our rights under the
master separation agreement to obtain payment from Retail
Ventures. We are exposed to the risk that, in these
circumstances, Retail Ventures cannot, or will not, make the
required payment. If this were to occur, our business and
financial performance could be adversely affected.
Possible
future sales of Class A Common Shares by Retail Ventures,
SSC, Schottenstein RVI, LLC, Cerberus and Millennium could
adversely affect prevailing market prices for the Class A
Common Shares.
Retail Ventures may sell any and all of the Common Shares held
by it subject to applicable lender consents, applicable
securities laws and the restrictions set forth below. In
addition, SSC, Schottenstein RVI, LLC, Cerberus and Millennium
have the right to acquire from Retail Ventures Class A
Common Shares of DSW. Sales or distribution by Retail Ventures,
SSC, Schottenstein RVI, LLC, Cerberus and Millennium of a
substantial number of Class A Common Shares in the public
market or to their respective shareholders, or the perception
that such SSC,
20
Schottenstein RVI, LLC, Cerberus and Millennium sales or
distributions could occur, could adversely affect prevailing
market prices for the Class A Common Shares.
Retail Ventures has not advised us that it currently intends to
dispose of the Common Shares owned by it, except to the extent
necessary to satisfy its obligations, including obligations
under the PIES and obligations under warrants it has granted to
SSC, Schottenstein RVI, LLC, Cerberus, and Millennium. In
addition, Retail Ventures is subject to contractual obligations
with its warrantholders to retain enough DSW Common Shares to be
able to satisfy its obligations to deliver such shares to its
warrantholders if the warrantholders elect to exercise their
warrants in full for DSW Class A Common Shares. Retail
Ventures is also subject to contractual obligations with the
holders of the PIES to retain enough DSW common shares to be
able to satisfy its obligations to deliver shares to the holders
of the PIES. In addition, in the event that the PIES were to be
accelerated, a payment which is required to be paid to the PIES
holders by RVI can be satisfied by, in lieu of paying cash,
using additional Class A Common Shares upon compliance with
the terms of the instruments governing the PIES. The settlement
of the PIES will not change the number of DSW Common Shares
outstanding, although shares delivered upon the settlement of
the PIES will generally be freely tradable by the former PIES
holders as a result of having been registered in connection with
the initial issuance of the PIES.
If Retail Ventures were to require funds to service or refinance
its indebtedness or to fund its operations in the future and
could not obtain capital from alternative sources, it could seek
to sell some or all of the Common Shares of DSW that it holds in
order to obtain such funds.
Similarly, SSC, Schottenstein RVI, LLC, Cerberus and Millennium
are not subject to any contractual obligation to retain
Class A Common Shares they may acquire from Retail
Ventures. As a result, there can be no assurance concerning the
period of time during which Retail Ventures, SSC, Schottenstein
RVI, LLC, Cerberus and Millennium will maintain their respective
beneficial ownership of Common Shares in the future. Retail
Ventures, SSC, Schottenstein RVI, LLC, and Cerberus (and any
party to whom either of them transfers at least 15% of their
interest in registrable DSW Common Shares) will have
registration rights with respect to their respective Common
Shares, which would facilitate any future distribution, and SSC,
Schottenstein RVI, LLC, Cerberus and Millennium will be entitled
to participate in the registrations initiated by the other
entities.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None.
All DSW stores, our offices, our distribution centers, our
dsw.com fulfillment center, a trailer parking lot and our office
facilities are leased or subleased. As of January 31, 2009,
we leased or subleased 19 DSW stores, our corporate office, our
primary distribution center, a trailer parking lot and our
dsw.com fulfillment center, from entities affiliated with SSC.
The remaining DSW stores are leased from unrelated entities.
Most of the DSW store leases provide for a minimum annual rent
plus a percentage of gross sales over specified breakpoints.
Most of our leases are for a fixed term with options for three
to five extension periods, each of which is for a period of four
or five years, exercisable at our option.
As of January 31, 2009, we operated 298 DSW stores. See the
table on page 7 for a listing of the states where our DSW
stores are located. Our primary distribution facility, our
principal executive office and our dsw.com fulfillment center
are located in Columbus, Ohio. The lease for our distribution
center and our executive office space expires in December 2021
and has three renewal options with terms of five years each. The
lease for our dsw.com fulfillment center has an initial term of
ten years with two renewal options with terms of five years each.
|
|
ITEM 3.
|
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. Where 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
21
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 potential liability could materially impact
our results of operations and financial condition.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
None.
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Our Class A Common Shares are listed for trading under the
ticker symbol DSW on the NYSE. As of
February 28, 2009, there were 17 holders of record of our
Class A Common Shares and one holder of record of our
Class B Common Shares, Retail Ventures. The following table
sets forth the high and low sales prices of our Class A
Common Shares as reported on the NYSE for each respective
quarter and as of February 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2007:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
44.71
|
|
|
$
|
37.68
|
|
Second Quarter
|
|
|
41.21
|
|
|
|
31.48
|
|
Third Quarter
|
|
|
36.49
|
|
|
|
21.13
|
|
Fourth Quarter
|
|
|
24.88
|
|
|
|
14.72
|
|
Fiscal 2008:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
20.69
|
|
|
|
11.46
|
|
Second Quarter
|
|
|
15.50
|
|
|
|
10.10
|
|
Third Quarter
|
|
|
16.32
|
|
|
|
9.17
|
|
Fourth Quarter
|
|
|
13.21
|
|
|
|
7.30
|
|
Fiscal 2009:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
11.21
|
|
|
|
8.56
|
|
(Through February 28, 2009)
|
|
|
|
|
|
|
|
|
We do not anticipate paying cash dividends on our Common Shares
during fiscal 2009. 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, other than
dividends paid in stock of the issuer 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 borrower advances made to Retail Ventures
by us or our subsidiaries.
We did not make any purchases of our Common Shares during the
fourth quarter of fiscal 2008.
22
Performance
Graph
The following graph compares our cumulative total stockholder
return of our Class A common stock with the cumulative
total return of the S & P MidCap 400 Index and the
S & P Retailing Index, both of which are published
indexes. This comparison includes the period beginning
June 29, 2005, our first day of trading after our initial
public offering, and ending on January 31, 2009.
Comparison
of Cumulative Total Return
The comparison of the cumulative total returns for each
investment assumes $100 was invested on June 29, 2005, and
that all dividends were reinvested.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed Returns Years Ended
|
|
|
Base Period
|
|
|
|
|
|
|
|
|
Company/Index
|
|
6/29/05
|
|
1/28/06
|
|
2/3/07
|
|
2/2/08
|
|
1/31/09
|
DSW Inc.
|
|
$
|
100
|
|
|
$
|
111.37
|
|
|
$
|
167.04
|
|
|
$
|
76.92
|
|
|
$
|
41.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P MidCap 400 Index
|
|
|
100
|
|
|
|
114.30
|
|
|
|
123.40
|
|
|
|
120.65
|
|
|
|
76.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P Retailing Index
|
|
|
100
|
|
|
|
104.76
|
|
|
|
119.41
|
|
|
|
98.25
|
|
|
|
61.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
The following table sets forth, for the periods indicated,
various selected financial information. Such selected
consolidated financial data should be read in conjunction with
our Consolidated Financial Statements, including the notes
thereto, set forth in Item 8 of this Annual Report on
Form 10-K
and Managements Discussion and Analysis of Financial
Condition and Results of Operations set forth in
Item 7 of this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
|
|
1/31/09
|
|
|
2/02/08
|
|
|
2/03/07
|
|
|
1/28/06
|
|
|
1/29/05
|
|
|
|
(Dollars in thousands, except per share and net sales per
average gross square foot)
|
|
|
Statement of Income Data:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(2)
|
|
$
|
1,462,944
|
|
|
$
|
1,405,615
|
|
|
$
|
1,279,060
|
|
|
$
|
1,144,061
|
|
|
$
|
961,089
|
|
Gross profit
|
|
$
|
379,099
|
|
|
$
|
370,135
|
|
|
$
|
366,351
|
|
|
$
|
315,719
|
|
|
$
|
270,211
|
|
Operating profit(3)
|
|
$
|
42,813
|
|
|
$
|
81,321
|
|
|
$
|
100,714
|
|
|
$
|
70,112
|
|
|
$
|
56,109
|
|
Net income(3)
|
|
$
|
26,902
|
|
|
$
|
53,775
|
|
|
$
|
65,464
|
|
|
$
|
37,181
|
|
|
$
|
34,955
|
|
Diluted earnings per share
|
|
$
|
0.61
|
|
|
$
|
1.21
|
|
|
$
|
1.48
|
|
|
$
|
1.00
|
|
|
$
|
1.26
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
721,197
|
|
|
$
|
693,882
|
|
|
$
|
608,303
|
|
|
$
|
507,715
|
|
|
$
|
395,437
|
|
Working capital(4)
|
|
$
|
295,721
|
|
|
$
|
282,717
|
|
|
$
|
298,704
|
|
|
$
|
238,528
|
|
|
$
|
138,919
|
|
Current ratio(5)
|
|
|
2.87
|
|
|
|
2.67
|
|
|
|
2.88
|
|
|
|
2.71
|
|
|
|
2.28
|
|
Long term obligations(6)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,000
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of DSW stores:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
259
|
|
|
|
223
|
|
|
|
199
|
|
|
|
172
|
|
|
|
142
|
|
New stores
|
|
|
41
|
|
|
|
37
|
|
|
|
29
|
|
|
|
29
|
|
|
|
31
|
|
Closed/re-categorized stores(7)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
298
|
|
|
|
259
|
|
|
|
223
|
|
|
|
199
|
|
|
|
172
|
|
Comparable DSW stores (units)(8)
|
|
|
217
|
|
|
|
192
|
|
|
|
163
|
|
|
|
139
|
|
|
|
124
|
|
DSW total square footage(9)
|
|
|
6,749,690
|
|
|
|
6,142,685
|
|
|
|
5,534,243
|
|
|
|
5,061,642
|
|
|
|
4,372,671
|
|
Average gross square footage(10)
|
|
|
6,454,396
|
|
|
|
5,814,398
|
|
|
|
5,271,748
|
|
|
|
4,721,129
|
|
|
|
4,010,245
|
|
Net sales per average gross square foot(11)
|
|
$
|
196
|
|
|
$
|
212
|
|
|
$
|
218
|
|
|
$
|
217
|
|
|
$
|
217
|
|
Number of leased departments at end of period
|
|
|
377
|
|
|
|
378
|
|
|
|
360
|
|
|
|
238
|
|
|
|
224
|
|
Total comparable store sales change(8)
|
|
|
(5.9
|
)%
|
|
|
(0.8
|
)%
|
|
|
2.5
|
%
|
|
|
5.4
|
%
|
|
|
5.0
|
%
|
|
|
|
(1) |
|
Fiscal 2006 was based on a 53 week year. All other fiscal
years are based on a 52 week year. |
|
(2) |
|
Includes net sales of leased departments. |
|
(3) |
|
Results for the fiscal year ended January 28, 2006 include
a $6.5 million pre-tax charge in operating profit, a
$3.9 million after-tax charge to net income, related to the
reserve for estimated losses associated with the theft of credit
card and other purchase information. |
|
(4) |
|
Working capital represents current assets less current
liabilities. |
|
(5) |
|
Current ratio represents current assets divided by current
liabilities. |
|
(6) |
|
Comprised of borrowings under the Value City revolving credit
facility during fiscal 2004, which we are no longer obligated
under. |
|
(7) |
|
Number of DSW stores for each fiscal period presented prior to
fiscal 2005 includes two combination DSW/Filenes Basement
stores which were re-categorized as leased departments at the
beginning of fiscal 2005. |
24
|
|
|
(8) |
|
Comparable DSW stores and comparable leased departments are
those units that have been in operation for at least
14 months at the beginning of the fiscal year. Stores or
leased departments, as the case may be, are added to the
comparable base at the beginning of the year and are dropped for
comparative purposes in the quarter that they are closed. |
|
(9) |
|
DSW total square footage represents the total amount of square
footage for DSW stores only; it does not reflect square footage
of leased departments. |
|
(10) |
|
Average gross square footage represents the monthly average of
square feet for DSW stores only for each period presented and
consequently reflects the effect of opening stores in different
months throughout the period. |
|
(11) |
|
Net sales per average gross square foot is the result of
dividing net sales for DSW stores only for the period presented,
by average gross square footage calculated as described in
note 10 above. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
This managements discussion and analysis of financial
condition and results of operations contains forward-looking
statements that involve risks and uncertainties. Please see
Cautionary Statement on page 4 for a discussion
of the uncertainties, risks and assumptions associated with
these statements. You should read the following discussion in
conjunction with our historical consolidated financial
statements and the notes thereto appearing elsewhere in this
Annual Report on
Form 10-K.
The results of operations for the periods reflected herein are
not necessarily indicative of results that may be expected for
future periods, and our actual results may differ materially
from those discussed in the forward-looking statements as a
result of various factors, including but not limited to those
listed under Risk Factors and included elsewhere in
this Annual Report on
Form 10-K.
Overview
Key
Financial Measures
In evaluating our results of operations, we refer to a number of
key financial and non-financial measures relating to the
performance of our business. Among our key financial measures
are net sales, operating profit and net income. Other measures
that we use in evaluating our performance include number of DSW
stores and leased departments, net sales per average gross
square foot for DSW stores, and change in comparable stores
sales.
The following describes certain line items set forth in our
consolidated statement of income:
Net Sales. We record net sales exclusive of
sales tax and net of returns. For comparison purposes, we define
stores or leased departments as comparable or non-comparable. A
stores or leased departments sales are included in
comparable sales if the store or leased department has been in
operation at least 14 months at the beginning of the fiscal
year. Stores and leased departments are excluded from the
comparison in the quarter that they close. Stores that are
remodeled or relocated are excluded from the comparison if there
is a material change in the size of the store or the store is
relocated more than one mile out of its area.
Cost of Sales. Our cost of sales includes the
cost of merchandise, distribution and warehousing (including
depreciation), store occupancy (excluding depreciation),
permanent and point of sale reductions, markdowns and shrinkage.
Operating Expenses. Operating expenses include
expenses related to store management and store payroll costs,
advertising, leased department operations, store depreciation
and amortization, pre-opening advertising and other pre-opening
costs (which are expensed as incurred), corporate expenses for
buying services, information services, depreciation expense for
corporate cost centers, marketing, legal, finance, outside
professional services, customer service center expenses,
allocable costs to and from Retail Ventures and other corporate
related departments and benefits for associates and related
payroll taxes. Corporate level expenses are primarily
attributable to operations at our corporate offices in Columbus,
Ohio.
25
Fiscal
Year
We follow a 52/53-week fiscal year that ends on the Saturday
nearest to January 31 in each year. Fiscal years 2008 and 2007
each consisted of 52 weeks. Fiscal year 2006 consisted of
53 weeks.
Separation
Agreements
In connection with the completion of our initial public offering
in July 2005, we entered into several agreements with Retail
Ventures in connection with the separation of our business from
the Retail Ventures group. After the transfer of shared services
in fiscal 2008, we amended the shared services agreement and the
tax separation agreement.
Master Separation Agreement. The master
separation agreement contains key provisions relating to the
separation of our business from Retail Ventures. The master
separation agreement requires us to exchange information with
Retail Ventures, follow certain accounting practices and resolve
disputes with Retail Ventures in a particular manner. We also
have agreed to maintain the confidentiality of certain
information and preserve available legal privileges. The
separation agreement also contains provisions relating to the
allocation of the costs of our initial public offering,
indemnification, non-solicitation of employees and employee
benefit matters.
Under the master separation agreement, we agreed to effect up to
one demand registration per calendar year of our Common Shares,
whether Class A or Class B, held by Retail Ventures,
if requested by Retail Ventures. We have also granted Retail
Ventures the right to include its Common Shares of DSW in an
unlimited number of other registrations of such shares initiated
by us or on behalf of our other shareholders.
Amended and Restated Shared Services
Agreement. Effective March 17, 2008, we
entered into an Amended and Restated Shared Services Agreement
with RVI and Filenes Basement. Pursuant to the terms of
the Amended and Restated Shared Services Agreement, DSW provides
RVI and Filenes Basement with key services relating to
risk management, tax, financial services, benefits
administration, payroll, and information technology. The current
term of the Amended and Restated Shared Services Agreement will
expire at the end of fiscal 2009 and will be extended
automatically for additional one-year terms unless terminated by
one of the parties. With respect to each shared service, we
cannot reasonably anticipate whether the services will be shared
for a period shorter or longer than the initial term.
The costs associated with many of these shared services are
allocated among the parties based upon usage. In January 2008,
RVI announced the disposition of an 81% ownership interest in
Value City. As a part of this transaction, RVI agreed to provide
certain transition services to Value City. On October 26,
2008, Value City filed for bankruptcy protection and announced
that it would close its remaining stores. We negotiated an
agreement with Value City to continue to provide services post
bankruptcy filing until the liquidation is complete, including
risk management, financial services, benefits administration,
payroll and information technology services, in exchange for a
weekly payment.
Tax Separation Agreement. Until the completion
of our initial public offering in July 2005, we were
historically included in Retail Ventures consolidated
group, or the Consolidated Group, for U.S. federal income
tax purposes as well as in certain consolidated, combined or
unitary groups which include Retail Ventures
and/or
certain of its subsidiaries, or a Combined Group, for state and
local income tax purposes. We entered into a tax separation
agreement with Retail Ventures that became effective upon
consummation of our initial public offering and amended this
agreement effective March 17, 2008. Pursuant to the tax
separation agreement, we and Retail Ventures generally make
payments to each other such that, with respect to tax returns
for any taxable period in which we or any of our subsidiaries
are included in the Consolidated Group or any Combined Group,
the amount of taxes to be paid by us will be determined, subject
to certain adjustments, as if we and each of our subsidiaries
included in the Consolidated Group or Combined Group filed our
own consolidated, combined or unitary tax return. DSW will
prepare pro forma tax returns for RVI with respect to any tax
return filed with respect to the Consolidated Group or any
Combined Group in order to determine the amount of tax
separation payments under the tax separation agreement. RVI has
the right to review and comment on such pro forma tax returns.
We are responsible for any taxes with respect to tax returns
that include only us and our subsidiaries.
26
Effective March 17, 2008, DSW is exclusively responsible
for preparing any tax return with respect to the Consolidated
Group or any Combined Group. Retail Ventures continues to be
responsible for filing any tax return with respect to the
Consolidated Group. We continue to be responsible for preparing
and filing any tax returns that include only us and our
subsidiaries. For the tax services provided to RVI by us, RVI
pays a monthly fee equal to its respective share of all costs
associated with the maintenance and operation of DSWs tax
department (including all overhead expenses). In addition, RVI
reimburses DSW for 100% of any third party fees and expenses
incurred by DSWs tax department in connection with the
performance of the tax services that are solely incurred for RVI.
DSW is primarily responsible for controlling and contesting any
audit or other tax proceeding with respect to the Consolidated
Group or any Combined Group. In cases involving taxes relating
to a spin-off, we have the right to control decisions to
resolve, settle or otherwise agree to any deficiency, claim or
adjustment with respect to any item for which we are solely
liable under the tax separation agreement. Pursuant to the tax
separation agreement, we have the right to control and contest
any audit or tax proceeding that relates to any tax returns that
include only us and our subsidiaries. We and Retail Ventures
have joint control over decisions to resolve, settle or
otherwise agree to any deficiency, claim or adjustment for which
we and Retail Ventures could be jointly liable, except in cases
involving taxes relating to a spin-off. Disputes arising between
the parties relating to matters covered by the tax separation
agreement are subject to resolution through specific dispute
resolution provisions.
We have been included in the Consolidated Group for periods in
which Retail Ventures owned at least 80% of the total voting
power and value of our outstanding stock. Following completion
of our initial public offering in July 2005, we are no longer
included in the Consolidated Group. Each member of a
consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the U.S. federal income
tax liability of each other member of the consolidated group.
Similarly, in some jurisdictions, each member of a consolidated,
combined or unitary group for state, local or foreign income tax
purposes is jointly and severally liable for the state, local or
foreign income tax liability of each other member of the
consolidated, combined or unitary group. Accordingly, although
the tax separation agreement allocates tax liabilities between
us and Retail Ventures, for any period in which we were included
in the Consolidated Group or a Combined Group, we could be
liable in the event that any income tax liability was incurred,
but not discharged, by any other member of the Consolidated
Group or a Combined Group.
Retail Ventures has informed us that it does not currently
intend or plan to undertake a spin-off of our stock to Retail
Ventures shareholders. Nevertheless, we and Retail Ventures
agreed to set forth our respective rights, responsibilities and
obligations with respect to any possible spin-off in the tax
separation agreement. If Retail Ventures were to decide to
pursue a possible spin-off, we have agreed to cooperate with
Retail Ventures and to take any and all actions reasonably
requested by Retail Ventures in connection with such a
transaction. We have also agreed not to knowingly take or fail
to take any actions that could reasonably be expected to
preclude Retail Ventures ability to undertake a tax-free
spin-off. In addition, we generally would be responsible for any
taxes resulting from the failure of a spin-off to qualify as a
tax-free transaction to the extent such taxes are attributable
to, or result from, any action or failure to act by us or
certain transactions in our stock (including transactions over
which we would have no control, such as acquisitions of our
stock and the exercise of warrants, options, exchange rights,
conversion rights or similar arrangements with respect to our
stock) following or preceding a spin-off. We would also be
responsible for a percentage (based on the relative market
capitalizations of us and Retail Ventures at the time of such
spin-off) of such taxes to the extent such taxes are not
otherwise attributable to us or Retail Ventures. Our agreements
in connection with such spin-off matters last indefinitely. In
addition, present and future majority-owned affiliates of DSW or
Retail Ventures will be bound by our agreements, unless Retail
Ventures or we, as applicable, consent to grant a release of an
affiliate (such consent cannot be unreasonably withheld,
conditioned or delayed), which may limit our ability to sell or
otherwise dispose of such affiliates. Additionally, a minority
interest participant(s) in a future joint venture, if any, would
need to evaluate the effect of the tax separation agreement on
such joint venture, and such evaluation may negatively affect
their decision whether to participate in such a joint venture.
Furthermore, the tax separation agreement may negatively affect
our ability to acquire a majority interest in a joint venture.
Critical
Accounting Policies and Estimates
As discussed in Note 1 to our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K,
the preparation of our consolidated financial statements in
conformity with generally accepted
27
accounting principles, or GAAP, requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of commitments and
contingencies at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. On an ongoing basis, we evaluate our estimates and
judgments, including, but not limited to, those related to
inventory valuation, investments, depreciation, amortization,
recoverability of long-lived assets (including intangible
assets), estimates for self insurance reserves for health and
welfare, workers compensation and casualty insurance,
investments, income taxes and revenue recognition. 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.
While we believe that our historical experience and other
factors considered provide a meaningful basis for the accounting
policies applied in the preparation of the consolidated
financial statements, we cannot guarantee that our estimates and
assumptions will be accurate. As the determination of these
estimates requires the exercise of judgment, actual results
inevitably will differ from those estimates, and such
differences may be material to our financial statements.
We believe the following represent the most significant
accounting policies, critical estimates and assumptions, among
others, used in the preparation of our consolidated financial
statements:
|
|
|
|
|
Revenue Recognition. Revenues from merchandise
sales are recognized upon customer receipt of merchandise, are
net of returns and sales tax and are not recognized until
collectability is reasonably assured. For dsw.com, we estimate a
time lag for shipments to record revenue when the customer
receives the goods. We believe a one day change in our estimate
would not materially impact our revenue. Net sales also include
revenue from shipping and handling while the related costs are
included in cost of sales.
|
Revenue from gift cards is deferred and recognized upon
redemption of the gift cards. Our policy is to recognize income
from breakage of gift cards when the likelihood of redemption of
the gift card is remote. In the fourth quarter of fiscal 2007,
we determined that we had accumulated enough historical data to
recognize income from gift card breakage. Miscellaneous income
is included in operating expense. Prior to the fourth quarter of
fiscal 2007, we had not recognized any income from gift card
breakage.
|
|
|
|
|
Cost of Sales and Merchandise
Inventories. Merchandise inventories are stated
at realizable value, determined using the
first-in,
first-out basis, or market, using the retail inventory method.
The retail inventory 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 profit are calculated by applying a calculated cost to
retail ratio to the retail value of inventories. The cost of the
inventory reflected on our consolidated 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 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 or mark-on,
markups of initial prices established, markdowns, and estimates
of losses between physical inventory counts, or shrinkage,
which, combined with the averaging process within the retail
inventory method, can significantly impact the ending inventory
valuation at cost and the resulting gross profit. If our
estimate of shrinkage were to increase or decrease 0.5% as a
percentage of net sales, it would result in approximately
$1.9 million decrease or increase to operating profit.
We include in the cost of sales expenses associated with
warehousing products for our retail stores and dsw.com,
distribution and store occupancy. Warehousing costs are
comprised of labor, benefits and other labor-related costs
associated with the operations of the distribution centers,
which are primarily payroll-related taxes and benefits. The
non-labor costs associated with warehousing include rent,
depreciation, insurance, utilities and maintenance and other
operating costs that are passed to us from the landlord.
28
Distribution costs include the transportation of merchandise to
the distribution centers and from the distribution center to our
stores. Store occupancy costs include rent, utilities, repairs,
maintenance, insurance, janitorial costs, costs associated with
licenses for leased departments and occupancy-related taxes,
which are primarily real estate taxes passed to us by our
landlords.
|
|
|
|
|
Investments. Our investments in auction rate
securities are recorded at fair value under
SFAS No. 157, Fair Value Measurements using an
income approach valuation model that uses level 3 inputs
such as the financial condition of the issuers of the underlying
securities, expectations regarding the next successful auction,
risks in the auction rate securities market and other various
assumptions. Our other types of investments are valued using a
market based approach using level 2 inputs such as prices
of similar assets in active markets. We believe that changes in
our valuation model would not result in a material change to
earnings.
|
We evaluate our investments for impairment and whether
impairment is other-than-temporary. In determining whether
impairment has occurred, we review information about the
underlying investment that is publicly available and assess our
ability to hold the securities for the foreseeable future. Based
on the nature of the impairment(s), we would record temporary
impairments as unrealized losses in other comprehensive income
or other-than-temporary impairments in earnings. The investment
is written down to its current market value at the time the
impairment is deemed to have occurred.
|
|
|
|
|
Asset Impairment and Long-lived Assets. We
must periodically evaluate the carrying amount of our 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 is considered impaired
when the carrying value of the asset exceeds the expected future
cash flows from the asset. Our reviews are conducted at the
lowest identifiable level, which includes a store. The
impairment loss recognized is the excess of the carrying amount
of the asset over its fair value, based on projected discounted
cash flows using a discount rate determined by management. Any
impairment loss realized is included in cost of sales. We
believe as of January 31, 2009 that the long-lived
assets carrying amounts and useful lives are appropriate.
We do not believe that there will be material changes in the
estimates or assumptions we use to calculate asset impairments.
To the extent these future projections or our strategies change,
the conclusion regarding impairment may differ from our current
estimates.
|
|
|
|
Self-insurance Reserves. We record estimates
for certain health and welfare, workers compensation and
casualty insurance costs that are self-insured programs.
Self-insurance reserves include actuarial estimates of both
claims filed, carried at their expected ultimate settlement
value, and claims incurred but not yet reported. Our liability
represents an estimate of the ultimate cost of claims incurred
as of the balance sheet date. Health and welfare estimates are
calculated utilizing claims development estimates based on
historical experience and other factors. Workers
compensation and general liability insurance estimates are
calculated utilizing claims development estimates based on
historical experience and other factors. We have purchased stop
loss insurance to limit our exposure to any significant exposure
on a per person basis for health and welfare and on a per claim
basis for workers compensation and casualty insurance.
Although we do not anticipate the amounts ultimately paid will
differ significantly from our estimates, self-insurance reserves
could be affected if future claim experience differs
significantly from the historical trends and the actuarial
assumptions. For example, for workers compensation and
liability future claims estimates, a 1% increase or decrease to
the assumptions for claims costs and loss development factors
would increase or decrease our self-insurance accrual by
approximately $0.1 million.
|
|
|
|
Customer Loyalty Program. We maintain 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 must be redeemed within six months. We accrue
the anticipated redemptions of the discount earned at the time
of the initial purchase. To estimate these costs, we are
required to make assumptions related to customer purchase levels
and redemption rates based on historical experience.
|
|
|
|
Income Taxes. We are required to determine the
aggregate amount of income tax expense to accrue and the amount
which will be currently payable based upon tax statutes of each
jurisdiction we do business in. In making these estimates, we
adjust income based on a determination of generally accepted
accounting
|
29
|
|
|
|
|
principles for items that are treated differently by the
applicable taxing authorities. Deferred tax assets and
liabilities, as a result of these differences, are reflected on
our balance sheet for temporary differences that will reverse in
subsequent years. A valuation allowance is established against
deferred tax assets when it is more likely than not that some or
all of the deferred tax assets will not be realized. If our
management had made these determinations on a different basis,
our tax expense, assets and liabilities could be different.
|
Results
of Operations
Overview
In fiscal 2008, a difficult economic environment created many
challenges for our business. Traffic continued to deteriorate
throughout the year resulting in negative comparable sales of
5.9%. Despite these challenges, we increased net sales 4.1%
through new stores and the launch of dsw.com and increased our
share of the adult footwear market. Dsw.com contributed to our
increase in net sales allowing us to increase market share and
expand our DSW Rewards program. In order to align our business
with the difficult economic environment, we focused on managing
inventory to minimize markdowns and preserve our merchandise
margins. However, store occupancy and distribution expense
offset these efforts due to decreased average store sales
resulting in a 40 basis point decrease in gross profit for
fiscal 2008.
Operating expenses increased in fiscal 2008. Depreciation
expense related to investments in our infrastructure, dsw.com
and new stores contributed to the increase in operating
expenses. Also, we expected to provide services to Value City,
but their financial difficulties ended in bankruptcy resulting
in expenses we were unable to allocate. To offset a portion of
these expenses, we completed a workforce reduction in the fourth
quarter of 2008.
Even in these difficult economic times, we continued to make
significant investments in our business that are critical to our
long-term growth, such as information technology upgrades,
investments in dsw.com and opening new stores. In fiscal 2008,
we opened 41 new DSW stores and launched dsw.com. Our cash and
investment balance increased $13.1 million to
$157.5 million in fiscal 2008. As we enter into fiscal
2009, we plan to focus on sales growth through dsw.com,
preserving our liquidity and strengthening our balance sheet.
As of January 31, 2009, we operated 298 DSW stores, dsw.com
and leased departments in 275 Stein Mart stores, 65 Gordmans
stores, 36 Filenes Basement stores and one Frugal
Fannies store. We manage our operations in three operating
segments, defined as DSW stores, dsw.com, and leased
departments. DSW stores and dsw.com are aggregated and presented
as one reportable segment, the DSW segment.
The following table represents selected components of our
historical consolidated results of operations, expressed as
percentages of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
(53 Weeks)
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
(74.1
|
)
|
|
|
(73.7
|
)
|
|
|
(71.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25.9
|
|
|
|
26.3
|
|
|
|
28.6
|
|
Operating expenses
|
|
|
(23.0
|
)
|
|
|
(20.5
|
)
|
|
|
(20.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
2.9
|
|
|
|
5.8
|
|
|
|
7.9
|
|
Interest income, net
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Other-than-temporary impairment charge on investments
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
3.0
|
|
|
|
6.2
|
|
|
|
8.4
|
|
Income tax provision
|
|
|
(1.2
|
)
|
|
|
(2.4
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.8
|
%
|
|
|
3.8
|
%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Fiscal
Year Ended January 31, 2009 (Fiscal 2008) Compared to
Fiscal Year Ended February 2, 2008 (Fiscal 2007)
Net Sales. Sales for the year ended
January 31, 2009 increased by 4.1%, or $57.3 million,
from the year ended February 2, 2008. The following table
summarizes the increase in our net sales:
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
January 31, 2009
|
|
|
|
(In millions)
|
|
|
Net sales for the year ended February 2, 2008
|
|
$
|
1,405.6
|
|
Decrease in comparable store sales
|
|
|
(74.6
|
)
|
Net increase in 2007 and 2008 new stores, dsw.com and closed
store sales
|
|
|
131.9
|
|
|
|
|
|
|
Net sales for the year ended January 31, 2009
|
|
$
|
1,462.9
|
|
|
|
|
|
|
The following table summarizes our sales breakdown by segment
for the fiscal years ended:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In millions)
|
|
|
DSW
|
|
$
|
1,298.9
|
|
|
$
|
1,230.2
|
|
Leased departments
|
|
|
164.0
|
|
|
|
175.4
|
|
|
|
|
|
|
|
|
|
|
Total DSW Inc.
|
|
$
|
1,462.9
|
|
|
$
|
1,405.6
|
|
|
|
|
|
|
|
|
|
|
The decrease in comparable sales of 5.9% was primarily a result
of the challenging economic environment evidenced by a decrease
in customer traffic and units per transaction. For fiscal 2008,
DSW segment comparable sales decreased in womens by 6.0%,
mens by 5.1%, accessories by 7.6% and the athletic
category by 5.4%. Leased department sales comprised 11.2% of
total net sales in fiscal 2008, compared to 12.5% in fiscal 2007.
Gross Profit. For fiscal 2008, gross profit
increased $9.0 million, or 2.4%, from fiscal 2007. Gross
profit decreased as a percentage of net sales from 26.3% in
fiscal 2007 to 25.9% in fiscal 2008. By segment and in total,
gross profit as a percentage of sales was:
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
DSW
|
|
|
27.1
|
%
|
|
|
28.0
|
%
|
Leased departments
|
|
|
16.6
|
%
|
|
|
14.7
|
%
|
Total DSW Inc
|
|
|
25.9
|
%
|
|
|
26.3
|
%
|
The merchandise margin for the DSW segment for fiscal 2008
increased as a percentage of DSW segment net sales to 42.8%
compared to merchandise margin of 42.1% in fiscal 2007 but was
offset by increased store occupancy and distribution expenses as
a percentage of sales. The increase in merchandise margin was
primarily a result of a decrease in markdowns due to managing
inventory. The increase in distribution expense as a percentage
of sales was a result of expenses related to our dsw.com
fulfillment center, which was not operating in fiscal 2007.
Store occupancy expense for DSW as a percentage of sales
increased to 14.1% in fiscal 2008 from 12.9% in fiscal 2007 as a
result of decreased average store sales as compared to fiscal
2007.
The gross profit for leased departments increased as a
percentage of net sales compared to fiscal 2007 due to decreased
markdowns partially offset by an increase in distribution
expense as a percentage of sales. The decrease in markdowns was
a result of enhancements to the clearance markdown process and a
result of managing inventory.
Operating Expenses. For fiscal 2008, operating
expenses increased as a percent of net sales to 23.0% from 20.5%
in fiscal 2007. The increase in operating expenses as a percent
of sales was driven by an increase in home office expenses and
expenses related to the
start-up and
operation of dsw.com. Home office expenses as a percent of sales
increased by 130 basis points due to increases in personnel
and bonus costs, a one-time severance charge related to the
fourth quarter workforce reduction, and unreimbursed expenses
related to services provided to Value City. As a percentage of
sales, pre-opening and store expenses were flat to last year.
31
Operating Profit. Operating profit was
$42.8 million in fiscal 2008 compared to $81.3 million
in fiscal 2007 and decreased as a percentage of net sales to
2.9% in fiscal 2008 from 5.8% in fiscal 2007. The decrease in
operating profit as a percentage of net sales was primarily
impacted by a decrease in gross profit and an increase in
operating expenses.
Interest Income, Net. Interest income, net of
interest expense, for fiscal 2008 was $2.6 million as
compared to $6.0 million of net interest income for fiscal
2007. Interest income decreased due to the replacement of our
short-term investments in favor of money market funds and other
investments with lower yields.
Other-than-temporary-impairment charge on
investments. Other-than-temporary charges on
investments for fiscal 2008 were $1.1 million, which
represents other-than-temporary impairments on two of our
auction rate securities. There were no other-than-temporary
impairment charges in fiscal 2007 or fiscal 2006.
Income Taxes. Our effective tax rate for
fiscal 2008 was 39.3%, compared to 38.4% for fiscal 2007.
Net Income. For fiscal 2008, net income
decreased $26.9 million, or 50.0%, compared to fiscal 2007
and represented 1.8% and 3.8% of net sales, respectively. This
decrease was primarily the result of a decrease in gross profit
and an increase in operating expenses.
Fiscal
Year Ended February 2, 2008 (Fiscal 2007) Compared to
Fiscal Year Ended February 3, 2007 (Fiscal 2006)
Net Sales. Net sales for the fifty-two weeks
ended February 2, 2008 increased by 9.9%, or
$126.6 million, to $1.41 billion from
$1.28 billion in the fifty-three week period ended
February 3, 2007. The following table summarizes the
increase in our net sales:
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
February 2, 2008
|
|
|
|
(In millions)
|
|
|
Net sales for the year ended February 3, 2007
|
|
$
|
1,279.1
|
|
Decrease in comparable store sales
|
|
|
(8.9
|
)
|
Net increase in 2007 and 2008 new stores, closed store sales and
the fifty-third week
|
|
|
135.4
|
|
|
|
|
|
|
Net sales for the year ended February 2, 2008
|
|
$
|
1,405.6
|
|
|
|
|
|
|
The following table summarizes our sales breakdown by segment
for the fiscal years ended:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
DSW
|
|
$
|
1,230.2
|
|
|
$
|
1,148.4
|
|
Leased departments
|
|
|
175.4
|
|
|
|
130.7
|
|
|
|
|
|
|
|
|
|
|
Total DSW Inc.
|
|
$
|
1,405.6
|
|
|
$
|
1,279.1
|
|
|
|
|
|
|
|
|
|
|
The increase includes the impact of a net increase of 36 new DSW
stores, 12 non-affiliated leased departments and 6 Filenes
Basement leased departments during fiscal 2007. Leased
department sales comprised 12.5% of total net sales in fiscal
2007, compared to 10.2% in fiscal 2006. Our comparable store
sales in fiscal 2007 decreased 0.8% compared to the previous
fiscal year. Compared with fiscal 2006, DSW segment comparable
sales for fiscal 2007 decreased in womens and mens
by 1.0% and 2.1%, respectively, while increasing in athletic and
accessories by 1.0% and 4.3%, respectively.
32
Gross Profit. Gross profit increased
$3.7 million to $370.1 million in fiscal 2007 from
$366.4 million in fiscal 2006, and decreased as a
percentage of net sales from 28.6% in fiscal 2006 to 26.3% in
fiscal 2007. By segment and in total, gross profit as a
percentage of sales was:
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
DSW
|
|
|
28.0
|
%
|
|
|
29.9
|
%
|
Leased departments
|
|
|
14.7
|
%
|
|
|
17.3
|
%
|
Total DSW Inc.
|
|
|
26.3
|
%
|
|
|
28.6
|
%
|
The percentage decrease in gross profit for the DSW segment is
attributable to an increase in markdowns and an increase in
store occupancy expenses which were partially offset by an
increase in initial
mark-up. The
increase in markdowns in fiscal 2007 was a result of increased
promotional activity as compared to fiscal 2006. Store occupancy
expense increased to 12.9% of net sales in 2007 from 12.2% of
net sales in fiscal 2006 due to increases in rent and other
occupancy charges.
The percentage decrease in gross profit for leased departments
is a result of an increase in markdowns partially offset by an
increase in initial
mark-up.
Operating Expenses. For fiscal 2007, operating
expenses decreased to 20.5% as a percent of net sales from 20.7%
in fiscal 2006. The increase in operating expenses was a result
of net increases in home office expenses (excluding bonus
expense and dsw.com expenses) of $17.7 million,
$3.0 million of professional fees and $6.0 million of
expenses related to the
start-up of
dsw.com. The DSW stores and leased departments that opened
subsequent to February 3, 2007 added $12.3 million and
$0.2 million, respectively, in expenses in fiscal 2007.
These expenses exclude pre-opening and occupancy (excluding
depreciation and amortization) expenses. The increases in
operating expenses were partially offset by the decrease of
bonus expense of $14.4 million and a decrease in marketing
expenses as compared to fiscal 2006 due to nonrecurring expenses
related to the change in the loyalty program in 2006.
Operating Profit. Operating profit was
$81.3 million in fiscal 2007, compared to
$100.7 million in fiscal 2006, and decreased as a
percentage of net sales from 7.9% in fiscal 2006 to 5.8% in
fiscal 2007. As a percent of sales, the decrease in operating
profit was a result of a decrease in gross profit.
Interest Income, Net. Interest income, net of
interest expense, was $6.0 million in fiscal 2007 compared
to interest income, net of interest expense, of
$6.9 million in fiscal 2006. Interest income for the fiscal
year was the result of investment activity from funds generated
from operations.
Income Taxes. Our effective tax rate for
fiscal 2007 was 38.4%, compared to 39.2% for fiscal 2006. Of the
0.8% decrease in the tax rate, 1.7% is related to our investment
in tax exempt securities, 0.1% is due to changes in the state
statutory rate, however, these decreases were partially offset
by expense of 0.6% related to the valuation allowance and 0.4%
related to other various adjustments.
Net Income. For fiscal 2007, net income
decreased $11.7 million, or 17.9%, compared to fiscal 2006
and represented 3.8% and 5.1% of net sales of fiscal 2007 and
fiscal 2006, respectively. This decrease as a percentage of
sales was primarily the result of a decrease in gross profit
partially offset by a de crease in operating expenses.
Liquidity
and Capital Resources
Overview
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 development of dsw.com, 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
33
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.
$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 subsidiary, DSWSW, 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 our subsidiarys
personal property and a pledge of our shares of DSWSW. 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. At
January 31, 2009 and February 2, 2008,
$132.3 million and $134.3 million, respectively, were
available under the $150 million secured revolving credit
facility and no direct borrowings were outstanding. At
January 31, 2009 and February 2, 2008,
$17.7 million and $15.7 million in letters of credit,
respectively, were issued and outstanding.
We are currently seeking a new secured revolving credit facility
as our current credit facility will expire in July 2010. Based
upon the current credit markets, the terms of the new credit
facility may not be as favorable as our current terms.
Auction Rate Securities. As of
January 31, 2009, $4.3 million, net of a
$0.7 million unrealized loss and $1.1 million of
other-than-temporary impairments, of our $102.7 million in
total investments was invested in auction rate securities. Due
to auction failures limiting the liquidity of our investments,
we have presented $1.3 million, net of $1.1 million
other-than-temporary impairments, of our investment in auction
rate securities as long-term investments as of January 31,
2009. We believe that the current lack of liquidity and the
other-than-temporary impairment charges relating to our auction
rate securities will have no impact on our ability to fund our
ongoing operations and growth initiatives.
Net Working Capital. Net working capital
increased $13.0 million to $295.7 million as of
January 31, 2009 from $282.7 million at
February 2, 2008. There are several factors related to net
working capital increase. Our cash and short term investment
balance had a net increase of $24.4 million due to
operating cash flow and sales of long term investments. The
decrease in inventory was offset by a corresponding decrease in
accounts payable. These items were partially offset by the
decrease in accounts receivable related to fewer tenant and
construction allowances due to the decrease in planned and
committed future store openings and an increase in the bonus
accrual due to an expected bonus payout. At January 31,
2009 and February 2, 2008, the current ratio was 2.9 and
2.7, respectively.
Net working capital decreased $16.0 million to
$282.7 million at February 2, 2008 from
$298.7 million at February 3, 2007. The decrease in
net working capital was a result of the decrease in cash and
short term investments due to capital expenditures in fiscal
2007 partially offset by decrease in bonus accrual as there was
no bonus payment in fiscal 2007. Current ratios at those dates
were 2.7 and 2.9, respectively.
Operating
Activities
Net cash provided by operations in fiscal 2008 was
$97.1 million, compared to $70.9 million for fiscal
2007. The increase in net cash provided by operations during
fiscal 2008 is primarily due to changes in net working capital
partially offset by a decrease in net income.
Net cash provided by operations in fiscal 2007 was
$70.9 million, compared to $88.2 million for fiscal
2006. The decrease of $17.3 million net cash provided by
operations during fiscal 2007 as compared to the prior year is
primarily due to a decrease in net income. Other changes include
an increase in inventory due to new stores, an increase in
receivables related to tenant and construction allowances and a
decrease in accrued expenses due to a
34
decrease in accrued bonuses, partially offset by increases in
accounts payable and cash received from tenant and construction
allowances related to new stores.
We operate all our stores, our primary distribution center, our
fulfillment center and our corporate office space from leased
facilities. All lease obligations are accounted for as operating
leases. We disclose the minimum payments due under operating
leases in the notes to the financial statements included
elsewhere in this Annual Report on
Form 10-K.
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.
The current slowdown in the United States economy has adversely
affected consumer confidence and consumer spending habits, which
may result in further 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 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.
Investing
Activities
For fiscal 2008, cash used in investing activities amounted to
$104.1 million compared to $82.8 million for fiscal
2007. During the year ended January 31, 2009,
$207.6 million of cash was used to purchase
available-for-sale and held-to-maturity securities while
$185.6 million of cash was generated by the sale of
available-for-sale and held-to-maturity securities. During
fiscal 2008, we had capital expenditures of $81.0 million,
of which $82.2 million was paid during fiscal 2008. Of this
amount, we incurred $53.8 million for new stores and
remodels of existing stores, $12.1 million related to the
warehouses, $5.0 million related to dsw.com and
$10.1 million related to information technology equipment
upgrades and new systems, excluding dsw.com.
For fiscal 2007, cash used in investing activities amounted to
$82.8 million compared to $140.5 million for fiscal
2006. During the year ended February 2, 2008,
$209.9 million of cash was used to purchase
available-for-sale securities while $226.0 million of cash
was generated by the sale of available-for-sale securities.
During fiscal 2007, we had capital expenditures of
$102.5 million, of which $99.0 million was paid during
fiscal 2007. Of this amount, we incurred $45.7 million for
new stores and remodels of existing stores, $15.1 million
related to the corporate office expansion and warehouses,
$26.3 million related to the start up of dsw.com and
$15.4 million related to information technology equipment
upgrades and new systems, excluding dsw.com. Cash used for
capital expenditures was $41.9 million for fiscal 2006. In
fiscal 2006, costs were primarily related to new stores, our
additional home office space, store remodels and fixtures for
the additional Stein Mart locations.
We expect to spend approximately $35 million for capital
expenditures in fiscal 2009. Our future investments will depend
heavily on the number of stores we open and remodel,
infrastructure and information technology programs that we
undertake and the timing of these expenditures. In fiscal 2008,
we opened 41 new DSW stores. We plan to open approximately 10
stores in fiscal 2009. During fiscal 2008, the average
investment required to open a typical new DSW store was
approximately $1.6 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 $1.0 million and
pre-opening advertising and other pre-opening expenses typically
accounted for $0.1 million.
Financing
Activities
For fiscal 2008, net cash provided by financing activities was
less than $0.1 million compared to $0.6 million for
fiscal 2007, and $0.8 million in fiscal 2006.
Contractual
Obligations
We have the following minimum commitments under contractual
obligations, as defined by the SEC. A purchase
obligation is defined as an agreement to purchase goods or
services that is enforceable and legally
35
binding on us and that specifies all significant terms,
including: fixed or minimum quantities to be purchased, fixed,
minimum or variable price provisions; and the approximate timing
of the transaction. Other long-term liabilities are defined as
long-term liabilities that are reflected on our balance sheet in
accordance with GAAP. Based on this definition, the table below
includes only those contracts which include fixed or minimum
obligations. It does not include normal purchases, which are
made in the ordinary course of business.
The following table provides aggregated information about
contractual obligations and other long-term liabilities as of
January 31, 2009 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
|
|
|
|
|
|
|
Less Than
|
|
|
1 - 3
|
|
|
3 - 5
|
|
|
More Than
|
|
|
Expiration
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Date
|
|
|
Operating lease obligations(1)
|
|
$
|
989,521
|
|
|
$
|
133,772
|
|
|
$
|
254,133
|
|
|
$
|
219,465
|
|
|
$
|
382,151
|
|
|
$
|
|
|
Construction commitments(2)
|
|
|
893
|
|
|
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(3)
|
|
|
2,897
|
|
|
|
1,503
|
|
|
|
1,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 obligations(4)
|
|
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
995,665
|
|
|
$
|
136,168
|
|
|
$
|
255,527
|
|
|
$
|
219,465
|
|
|
$
|
384,505
|
|
|
$
|
|
|
|
|
|
(1) |
|
Many of our operating leases require us to pay for common area
maintenance costs and real estate taxes. These costs and taxes
vary year by year and are based almost entirely on actual costs
incurred and taxes paid by the landlord. As such, they are not
included in the lease obligations presented above. |
|
(2) |
|
Construction commitments include capital items to be purchased
for projects that were under construction, or for which a lease
had been signed, as of January 31, 2009. |
|
(3) |
|
Many of our purchase obligations are cancelable by us without
payment or penalty, and we have excluded such obligations, along
with all associate employment and intercompany obligations. |
|
(4) |
|
The amount of FIN 48 obligations as of January 31,
2009 is $2.4 million, including approximately
$1.1 million of accrued interest and penalties. Uncertain
tax benefits are positions taken or expected to be taken on an
income tax return that may result in additional payments to tax
authorities. The balance of the uncertain tax benefits are
included in the More than 5 Years column as we
are not able to reasonably estimate the timing of the potential
future payments. |
We have outstanding letters of credit that totaled approximately
$17.7 million at January 31, 2009. 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 January 31, 2009, 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 $0.9 million as of
January 31, 2009. In addition, as of January 31, 2009,
we have signed 14 lease agreements for new store locations
opening in fiscal 2009 and fiscal 2010 with annual rent of
approximately $4.2 million. In connection with the new
lease agreements, we expect to receive approximately
$5.8 million of construction and tenant allowances, which
reimburses us for expenditures at these locations.
Recent
Accounting Pronouncements
Recent Accounting Pronouncements and their impact on DSW are
disclosed in Note 1 to the Consolidated Financial
Statements included in this Annual Report on
Form 10-K.
In November 2008, the SEC released a proposed roadmap regarding
the potential mandatory adoption of International Financial
Reporting Standards (IFRS). Under the proposed
roadmap, the Company, as an accelerated filer, may be required
to prepare financial statements in accordance with IFRS as early
as 2015. In 2011, the SEC will decide on the mandatory adoption
of IFRS. The Company is currently assessing the implications
should it be required to adopt IFRS in the future.
36
Off-Balance
Sheet Arrangements
As of January 31, 2009, we have not entered into any
off-balance sheet arrangements, as that term is
described by the SEC.
Inflation
and Deflation
Our results of our operations and financial condition are
generally presented based upon historical cost. While it is
difficult to accurately measure the impact of inflation or
deflation because of the nature of the estimates required,
management believes that the effect of inflation or deflation,
if any, on our results of operations and financial condition has
been minor; however, there can be no assurance that the business
will not be affected by inflation or deflation in the future.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Our cash and equivalents have maturities of 90 days or
less. Our investments in auction rate securities typically
auction every 91 to 182 days. We also have investments in
tax exempt bonds, tax advantaged bonds, variable rate demand
notes, tax exempt commercial paper and certificates of deposit.
Tax exempt commercial paper and certificates of deposit mature
every 26 to 91 days. Our other types of short-term
investments generally have interest reset dates of every
7 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 interest investments.
We have $14.0 million invested in certificates of deposit
and participate in the Certificate of Deposit Account Registry
Service®
(CDARS). CDARS provides FDIC insurance on deposits
of up to $50.0 million.
As of January 31, 2009, our long-term investments,
$1.3 million, net of $1.1 million other-than-temporary
impairments, were in auction rate securities. Due to auction
failures limiting the liquidity of these investments, we have
presented investments in auction rate securities that have
undergone a failed auction as long-term investments as of
January 31, 2009. In fiscal 2008, we believe that certain
auction rate securities have undergone other-than-temporary
impairments of $1.1 million, and we have also recorded a
temporary impairment of $0.7 million related to another
auction rate security. Although we have impaired certain auction
rate securities, we expect to continue to earn interest at the
prevailing rates on our auction rate securities.
As of January 31, 2009, 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 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
Our financial statements and financial statement schedules and
the Report of Independent Registered Public Accounting Firm
thereon are filed pursuant to this Item 8 and are included
in this report beginning on
page F-1.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
We, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, performed an evaluation of the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded, as of
the end of the period covered by this Annual Report, that such
disclosure controls and procedures were effective.
37
Managements
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the
Company (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act). Our internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements in accordance with accounting principles
generally accepted in the United States of America.
Management assessed the effectiveness of our internal control
system as of January 31, 2009. In making its assessment, we
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control Integrated Framework. Based on this
assessment, management concluded that it maintained effective
internal control over financial reporting, as of
January 31, 2009.
Deloitte & Touche LLP, our independent registered
public accounting firm, has issued an attestation report
covering our internal control over financial reporting, as
stated in its report which begins on
page F-1
of this Annual Report.
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.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
In accordance with General Instruction G(3), the
information contained under the captions EXECUTIVE
OFFICERS, ELECTION OF DIRECTORS and
OTHER DIRECTOR INFORMATION, COMMITTEES OF DIRECTORS AND
CORPORATE GOVERNANCE INFORMATION in our definitive
Proxy Statement for the Annual Meeting of Shareholders to be
held on May 21, 2009, to be filed with the SEC pursuant to
Regulation 14A promulgated under the Exchange Act (the
Proxy Statement), is incorporated herein by
reference to satisfy the remaining information required by this
Item.
Other
Mr. Schottenstein, our Chairman and Chief Executive
Officer, and Mr. Probst, our Executive Vice President and
Chief Financial Officer have issued certifications required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and
applicable Securities and Exchange Commission regulations with
respect to this Annual Report on
Form 10-K.
The full text of the certifications are set forth in
Exhibit 31 and 32 to this Annual Report on
Form 10-K.
Mr. Schottenstein submitted his annual certification to the
NYSE on June 23, 2008, stating that he was not aware of any
violation by the Company of the NYSEs corporate governance
standards, as required by Section 303A.12(a) of the NYSE
Listed Company Manual.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
In accordance with General Instruction G(3), the
information contained under the captions COMPENSATION
OF MANAGEMENT and OTHER DIRECTOR INFORMATION,
COMMITTEES OF DIRECTORS AND CORPORATE GOVERNANCE
INFORMATION in the Proxy Statement is incorporated
herein by reference. The REPORT OF THE COMPENSATION
COMMITTEE shall not be deemed to be incorporated
herein by reference.
38
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
|
In accordance with General Instruction G(3), the
information contained under the captions SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
and OTHER DIRECTOR INFORMATION, COMMITTEES OF
DIRECTORS AND CORPORATE GOVERNANCE INFORMATION, in the
Proxy Statement is incorporated herein by reference.
Equity
Compensation Plan Table
The following table sets forth additional information as of
January 31, 2009, about our Class A Common Shares that
may be issued upon the exercise of options and other rights
under our existing equity compensation plans and arrangements,
divided between plans approved by our shareholders and plans or
arrangements not submitted to our shareholders for approval. The
information includes the number of shares covered by, and the
weighted average exercise price of, outstanding options,
warrants and other rights and the number of shares remaining
available for future grants, excluding the shares to be issued
upon exercise of outstanding options, warrants, and other rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
for Issuance Under
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(a))(c)
|
|
|
Equity compensation plans approved by security
holders(1)
|
|
|
2,433,586
|
(2)
|
|
$
|
22.04
|
|
|
|
2,101,743
|
|
Equity compensation plans not approved by security holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,433,586
|
|
|
$
|
22.04
|
|
|
|
2,101,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
DSW Inc. 2005 Equity Incentive Plan. |
|
(2) |
|
Includes 2,124,735 shares issuable pursuant to the exercise
of outstanding stock options, 225,650 shares issuable
pursuant to restricted stock units, and 83,201 shares
issuable pursuant to director stock units. Since the restricted
stock units and director stock units have no exercise price they
are not included in the weighted average exercise price
calculation in column (b). |
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
In accordance with General Instruction G(3), the
information contained under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS in the Proxy
Statement is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
In accordance with General Instruction G(3), the
information contained under the caption AUDIT AND OTHER
SERVICE FEES in the Proxy Statement is incorporated
herein by reference.
39
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
15(a)(1)
Financial Statements
The documents listed below are filed as part of this
Form 10-K:
|
|
|
|
|
|
|
Page in
|
|
|
Form 10-K
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-1
|
|
Consolidated Balance Sheets at January 31, 2009 and
February 2, 2008
|
|
|
F-2
|
|
Consolidated Statements of Income for the years ended
January 31, 2009, February 2, 2008 and
February 3, 2007
|
|
|
F-3
|
|
Consolidated Statements of Shareholders Equity for the
years ended January 31, 2009, February 2, 2008 and
February 3, 2007
|
|
|
F-4
|
|
Consolidated Statements of Cash Flows for the years ended
January 31, 2009, February 2, 2008 and
February 3, 2007
|
|
|
F-5
|
|
Notes to Consolidated Financial Statements
|
|
|
F-6
|
|
15(a)(2)
Consolidated Financial Statement Schedules:
Schedules not filed are omitted because of the absence of the
conditions under which they are required or because the required
information is included in the financial statements or the notes
thereto.
While the Company did not file Schedule II, there are
immaterial reserves related to a lower of cost or market
inventory valuation and allowance for doubtful accounts.
15(a)(3)
and (b) Exhibits:
See Index to Exhibits which begins on
page E-1.
15(c)
Additional Financial Statement Schedules:
None.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
By:
|
/s/ Douglas
J. Probst
|
Douglas J. Probst,
Executive Vice President and Chief Financial Officer
March 30, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in
the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jay
L. Schottenstein
Jay
L. Schottenstein
|
|
Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
March 30, 2009
|
|
|
|
|
|
/s/ Douglas
J. Probst
Douglas
J. Probst
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
March 30, 2009
|
|
|
|
|
|
*
Elaine
J. Eisenman
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
*
Carolee
Friedlander
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
*
Joanna
T. Lau
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
*
Roger
S. Markfield
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
*
Philip
B. Miller
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
*
James
D. Robbins
|
|
Director
|
|
March 30, 2009
|
41
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Harvey
L. Sonnenberg
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
*
Allan
J. Tanenbaum
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
*
Heywood
Wilanksy
|
|
Director
|
|
March 30, 2009
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Douglas
J. Probst
Douglas
J. Probst,
(Attorney-in-fact)
|
|
|
|
|
42
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
DSW Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of
DSW Inc. and subsidiaries (the Company) as of
January 31, 2009 and February 2, 2008, and the related
consolidated statements of income, shareholders equity and
cash flows for each of the three years in the period ended
January 31, 2009. We also have audited the Companys
internal control over financial reporting as of January 31,
2009, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on these financial statements and an
opinion on the Companys internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of DSW Inc. and subsidiaries as of January 31,
2009 and February 2, 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended January 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of January 31, 2009, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
March 30, 2009
F-1
DSW
INC.
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands,
|
|
|
|
except share amounts)
|
|
|
ASSETS
|
Cash and equivalents
|
|
$
|
54,782
|
|
|
$
|
61,801
|
|
Short term investments, net
|
|
|
101,404
|
|
|
|
70,005
|
|
Accounts receivable, net
|
|
|
6,851
|
|
|
|
11,805
|
|
Accounts receivable from related parties
|
|
|
336
|
|
|
|
2,538
|
|
Inventories
|
|
|
244,008
|
|
|
|
262,037
|
|
Prepaid expenses and other assets
|
|
|
24,790
|
|
|
|
23,134
|
|
Deferred income taxes
|
|
|
21,876
|
|
|
|
20,302
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
454,047
|
|
|
|
451,622
|
|
|
|
|
|
|
|
|
|
|
Property and equipment at cost:
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment
|
|
|
223,285
|
|
|
|
183,743
|
|
Leasehold improvements
|
|
|
154,140
|
|
|
|
125,459
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
377,425
|
|
|
|
309,202
|
|
Less accumulated depreciation
|
|
|
(144,059
|
)
|
|
|
(116,430
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
233,366
|
|
|
|
192,772
|
|
Long term investments, net
|
|
|
1,266
|
|
|
|
12,500
|
|
Goodwill
|
|
|
25,899
|
|
|
|
25,899
|
|
Deferred income taxes and other assets
|
|
|
6,619
|
|
|
|
11,089
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
721,197
|
|
|
$
|
693,882
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Accounts payable
|
|
$
|
92,912
|
|
|
$
|
113,605
|
|
Accounts payable to related parties
|
|
|
2,299
|
|
|
|
990
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
9,971
|
|
|
|
3,536
|
|
Taxes
|
|
|
10,228
|
|
|
|
9,881
|
|
Gift cards and merchandise credits
|
|
|
15,491
|
|
|
|
14,231
|
|
Customer loyalty program
|
|
|
7,267
|
|
|
|
6,410
|
|
Other
|
|
|
20,158
|
|
|
|
20,252
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
158,326
|
|
|
|
168,905
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
97,287
|
|
|
|
91,497
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Class A Common Shares, no par value; 170,000,000
authorized; 16,315,746 and 16,263,569 issued and outstanding,
respectively
|
|
|
294,222
|
|
|
|
288,365
|
|
Class B Common Shares, no par value; 100,000,000
authorized; 27,702,667 and 27,702,667 issued and outstanding,
respectively
|
|
|
|
|
|
|
|
|
Preferred Shares, no par value; 100,000,000 authorized; no
shares issued or outstanding Retained earnings
|
|
|
172,017
|
|
|
|
145,115
|
|
Accumulated other comprehensive loss
|
|
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
465,584
|
|
|
|
433,480
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
721,197
|
|
|
$
|
693,882
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
F-2
DSW
INC.
YEARS
ENDED JANUARY 31, 2009, FEBRUARY 2, 2008 AND FEBRUARY 3,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,462,944
|
|
|
$
|
1,405,615
|
|
|
$
|
1,279,060
|
|
Cost of sales
|
|
|
(1,083,845
|
)
|
|
|
(1,035,480
|
)
|
|
|
(912,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
379,099
|
|
|
|
370,135
|
|
|
|
366,351
|
|
Operating expenses
|
|
|
(336,286
|
)
|
|
|
(288,814
|
)
|
|
|
(265,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
42,813
|
|
|
|
81,321
|
|
|
|
100,714
|
|
Interest expense
|
|
|
(794
|
)
|
|
|
(1,178
|
)
|
|
|
(614
|
)
|
Interest income
|
|
|
3,400
|
|
|
|
7,148
|
|
|
|
7,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
2,606
|
|
|
|
5,970
|
|
|
|
6,913
|
|
Other-than-temporary impairment charge on investments
|
|
|
(1,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
44,285
|
|
|
|
87,291
|
|
|
|
107,627
|
|
Income tax provision
|
|
|
(17,383
|
)
|
|
|
(33,516
|
)
|
|
|
(42,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,902
|
|
|
$
|
53,775
|
|
|
$
|
65,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.61
|
|
|
$
|
1.22
|
|
|
$
|
1.49
|
|
Diluted
|
|
$
|
0.61
|
|
|
$
|
1.21
|
|
|
$
|
1.48
|
|
Shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,998
|
|
|
|
43,953
|
|
|
|
43,914
|
|
Diluted
|
|
|
44,218
|
|
|
|
44,273
|
|
|
|
44,222
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
F-3
DSW
INC.
YEARS
ENDED JANUARY 31, 2009, FEBRUARY 2, 2008 AND FEBRUARY 3,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
|
|
|
Other
|
|
|
Deferred
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Compensation
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Shares
|
|
|
Earnings
|
|
|
Income
|
|
|
Expense
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, January 28, 2006
|
|
|
16,190
|
|
|
|
27,703
|
|
|
$
|
281,119
|
|
|
$
|
0
|
|
|
$
|
26,007
|
|
|
$
|
0
|
|
|
$
|
(2,410
|
)
|
|
$
|
304,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,464
|
|
|
|
|
|
|
|
|
|
|
|
65,464
|
|
Reclassification of unamortized deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(2,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,410
|
|
|
|
|
|
Stock units granted
|
|
|
11
|
|
|
|
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314
|
|
Exercise of stock options
|
|
|
31
|
|
|
|
|
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601
|
|
Exercise of restricted stock units, net of settlement of taxes
|
|
|
7
|
|
|
|
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126
|
)
|
Excess tax benefit related to stock options exercised
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
Stock based compensation expense, before related tax effects
|
|
|
|
|
|
|
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 3, 2007
|
|
|
16,239
|
|
|
|
27,703
|
|
|
$
|
283,108
|
|
|
$
|
0
|
|
|
$
|
91,471
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
374,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,775
|
|
|
|
|
|
|
|
|
|
|
|
53,775
|
|
Cumulative effect of FIN 48 adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
Stock units granted
|
|
|
10
|
|
|
|
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
Exercise of stock options
|
|
|
8
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Exercise of restricted stock units, net of settlement of taxes
|
|
|
7
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
Excess tax benefit related to stock options exercised
|
|
|
|
|
|
|
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488
|
|
Stock based compensation expense, before related tax effects
|
|
|
|
|
|
|
|
|
|
|
4,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,212
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 2, 2008
|
|
|
16,264
|
|
|
|
27,703
|
|
|
$
|
288,365
|
|
|
$
|
0
|
|
|
$
|
145,115
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
433,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,902
|
|
|
|
|
|
|
|
|
|
|
|
26,902
|
|
Unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(655
|
)
|
|
|
|
|
|
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,247
|
|
Stock units granted
|
|
|
45
|
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
Exercise of stock options
|
|
|
1
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Exercise of restricted stock units, net of settlement of taxes
|
|
|
6
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
Non-cash capital contribution from Retail Ventures
|
|
|
|
|
|
|
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787
|
|
Tax shortfall related to restricted stock unit exercises
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Stock based compensation expense, before related tax effects
|
|
|
|
|
|
|
|
|
|
|
4,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 31, 2009
|
|
|
16,316
|
|
|
|
27,703
|
|
|
$
|
294,222
|
|
|
$
|
0
|
|
|
$
|
172,017
|
|
|
$
|
(655
|
)
|
|
$
|
0
|
|
|
$
|
465,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
F-4
DSW
INC.
YEARS
ENDED JANUARY 31, 2009, FEBRUARY 2, 2008 AND FEBRUARY 3,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,902
|
|
|
$
|
53,775
|
|
|
$
|
65,464
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
36,336
|
|
|
|
25,055
|
|
|
|
20,686
|
|
Amortization of debt issuance costs
|
|
|
118
|
|
|
|
118
|
|
|
|
118
|
|
Stock based compensation expense
|
|
|
4,522
|
|
|
|
4,212
|
|
|
|
3,416
|
|
Deferred income taxes
|
|
|
(889
|
)
|
|
|
(5,605
|
)
|
|
|
2,372
|
|
Loss on disposal of assets
|
|
|
1,676
|
|
|
|
230
|
|
|
|
790
|
|
Impairment charges on long-lived assets
|
|
|
3,339
|
|
|
|
2,081
|
|
|
|
832
|
|
Grants of director stock units
|
|
|
606
|
|
|
|
347
|
|
|
|
314
|
|
Other-than-temporary impairment charges on investments
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(4,066
|
)
|
|
|
3,117
|
|
|
|
3,841
|
|
Change in working capital, assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,693
|
|
|
|
(6,059
|
)
|
|
|
(4,196
|
)
|
Inventories
|
|
|
18,029
|
|
|
|
(24,300
|
)
|
|
|
(21,039
|
)
|
Prepaid expenses and other assets
|
|
|
(1,656
|
)
|
|
|
(2,426
|
)
|
|
|
(10,725
|
)
|
Accounts payable
|
|
|
(15,112
|
)
|
|
|
16,132
|
|
|
|
8,888
|
|
Accrued expenses
|
|
|
6,371
|
|
|
|
(9,819
|
)
|
|
|
9,916
|
|
Proceeds from construction and tenant allowances
|
|
|
16,106
|
|
|
|
14,002
|
|
|
|
7,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
97,109
|
|
|
|
70,860
|
|
|
|
88,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for property and equipment
|
|
|
(82,191
|
)
|
|
|
(98,940
|
)
|
|
|
(41,867
|
)
|
Purchases of available-for-sale investments
|
|
|
(205,558
|
)
|
|
|
(209,855
|
)
|
|
|
(188,250
|
)
|
Purchases of held-to-maturity investments
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
Maturities and sales of available-for-sale investments
|
|
|
183,604
|
|
|
|
226,000
|
|
|
|
89,600
|
|
Maturities and sales of held-to-maturity investments
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
Acquisition of tradename
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(104,145
|
)
|
|
|
(82,816
|
)
|
|
|
(140,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
17
|
|
|
|
64
|
|
|
|
601
|
|
Excess tax benefit related to stock option exercises
|
|
|
|
|
|
|
488
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
17
|
|
|
|
552
|
|
|
|
795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and equivalents
|
|
|
(7,019
|
)
|
|
|
(11,404
|
)
|
|
|
(51,554
|
)
|
Cash and equivalents, beginning of period
|
|
|
61,801
|
|
|
|
73,205
|
|
|
|
124,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents, end of period
|
|
$
|
54,782
|
|
|
$
|
61,801
|
|
|
$
|
73,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
13,399
|
|
|
$
|
34,958
|
|
|
$
|
40,133
|
|
Non-related parties interest expense
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Noncash investing and operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in accounts payable and accrued expenses due
to property and equipment purchases
|
|
$
|
(1,240
|
)
|
|
$
|
3,496
|
|
|
$
|
433
|
|
Non cash-capital contribution from Retail Ventures
|
|
$
|
787
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
F-5
DSW
INC.
|
|
1.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Business Operations DSW Inc.
(DSW) and its wholly-owned subsidiaries are herein
referred to collectively as DSW or the Company.
DSWs Class A Common Shares are listed on the New York
Stock Exchange under the ticker symbol DSW. At
January 31, 2009, Retail Ventures, Inc. (RVI or
Retail Ventures) owned approximately 62.9% of
DSWs outstanding Common Shares, representing approximately
93.1% of the combined voting power of DSWs outstanding
Common Shares.
DSW is managed in three operating segments: DSW stores, dsw.com
and leased departments. DSW stores and dsw.com are aggregated
and presented as one reportable segment, the DSW segment. DSW
sells better-branded footwear in all segments. DSW stores and
dsw.com also sell handbags and accessories. As of
January 31, 2009, DSW operated a total of 298 stores
located throughout the United States. DSW stores and dsw.com
offer a wide selection of better-branded dress, casual and
athletic footwear for men and women. During the fiscal years
ended January 31, 2009, February 2, 2008, and
February 3, 2007, DSW opened 41, 37, and 29 new DSW stores,
respectively, and closed two, one and five DSW stores,
respectively. In fiscal 2008, DSW launched dsw.com.
DSW also operates leased departments for three non-affiliated
retailers and one affiliated retailer in its leased department
segment. As of January 31, 2009, DSW supplied merchandise
to 275 Stein Mart stores, 65 Gordmans stores, one Frugal
Fannies store, and 36 Filenes Basement stores. In
January 2009, Filenes Basement announced that 11 stores
would close in fiscal 2009. The Companys renewable supply
agreements to merchandise non-affiliated leased departments in
Stein Mart, Gordmans and Frugal Fannies stores are
effective through December 2012, January 2013, and April 2012,
respectively. DSW has operated leased departments for
Filenes Basement, a wholly-owned subsidiary of Retail
Ventures, under a renewable supply agreement through January
2010. DSW owns the merchandise, records sales of merchandise net
of returns and sales tax, owns the fixtures (except for
Filenes Basement) and provides supervisory assistance in
these covered locations. Stein Mart, Gordmans, Frugal
Fannies and Filenes Basement provide the sales
associates. DSW pays a percentage of net sales as rent.
Fiscal Year The Companys fiscal year
ends on the Saturday nearest January 31. Fiscal years 2008
and 2007 consisted of 52 weeks. Fiscal year 2006 consisted
of 53 weeks. Unless otherwise stated, references to years
in this report relate to fiscal years rather than calendar years.
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Significant estimates are required as a part of
inventory valuation, depreciation, amortization, recoverability
of long-lived assets and establishing reserves for
self-insurance. Although these estimates are based on
managements knowledge of current events and actions it may
undertake in the future, actual results could differ from these
estimates.
Financial Instruments The following
assumptions were used to estimate the fair value of each class
of financial instruments:
Cash and Equivalents Cash and equivalents
represent cash, highly liquid investments with original
maturities of three months or less at the date of purchase and
credit card receivables, which generally settle within three
days. The carrying amounts approximate fair value.
Investments Investments, which include tax
exempt bonds, tax advantaged bonds, variable rate demand notes,
auction rate securities, tax exempt commercial paper and
certificates of deposit, are classified as available-for-sale
securities. All income generated from these investments is
recorded as interest income.
The Company evaluates its investments for impairment and whether
impairment is other-than-temporary. In fiscal 2008, the Company
recognized other-than-temporary impairments of $1.1 million
as non-operating expense and recorded a temporary impairment of
$0.7 million in other comprehensive income. The Company
F-6
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
did not recognize any impairment on investments during fiscal
2007 or 2006. Please see Note 7 for additional discussion
of the Companys investments.
Accounts Receivable Accounts receivable are
classified as current assets because the average collection
period is generally less than one year. The carrying amount
approximates fair value because of the relatively short average
maturity of the instruments and no significant change in
interest rates.
Concentration of Credit Risk Financial
instruments, which principally subject the Company to
concentration of credit risk, consist of cash, equivalents and
short term investments. The Company invests excess cash when
available through financial institutions in overnight
investments. At times, such amounts may be in excess of FDIC
insurance limits.
Concentration of Vendor Risk During fiscal
years 2008, 2007 and 2006, merchandise supplied to the Company
by three key vendors accounted for approximately 20%, 21%, and
22% of net footwear sales.
Allowance for Doubtful Accounts. We monitor
our exposure for credit losses and record related allowances for
doubtful accounts. Allowances are estimated based upon specific
accounts receivable balances, where a risk of default has been
identified. As of January 31, 2009 and February 2,
2008, our allowances for doubtful accounts were
$0.8 million and $0.4 million, respectively. The
increase in our allowance is primarily related to the
collectability of a receivable from Value City Department Stores
(Value City).
Inventories Merchandise inventories are
stated at 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 calculated 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 or mark-on,
markups of initial prices established, 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.
Property and Equipment Property and equipment
are stated at cost less accumulated depreciation determined by
the straight-line method over the expected useful lives of the
assets. The straight-line method is used to amortize such
capitalized costs over the lesser of the expected useful life of
the asset or the life of the lease. The estimated useful lives
of furniture, fixtures and equipment are 3 to 10 years.
Asset Impairment and Long-Lived Assets 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 is considered impaired
when the carrying value of the asset exceeds the expected future
cash flows from the asset. The Company reviews are conducted
down at the lowest identifiable level, which include a store.
The impairment loss recognized is the excess of the carrying
value of the asset over its fair value, based on 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. The Company expensed
$3.3 million, $2.1 million and $0.8 million in
fiscal 2008, 2007 and 2006, respectively, of identified store
assets where the recorded value could not be supported by
projected future cash flows. The impairment charges were
recorded within the DSW reportable segment.
Self-insurance Reserves The Company records
estimates for certain health and welfare, workers compensation
and casualty insurance costs that are self insured programs.
Self-insurance reserves include actuarial estimates of both
claims filed, carried at their expected ultimate settlement
value, and claims incurred but not yet reported. The
F-7
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liability represents an estimate of the ultimate cost of claims
incurred as of the balance sheet date. Health and welfare
estimates are calculated utilizing claims development estimates
based on historical experience and other factors. Workers
compensation and general liability estimates are calculated
utilizing claims development estimates based on historical
experience and other factors. The Company has purchased stop
loss insurance to limit its exposure to any significant exposure
on a per person basis for health and welfare and on a per claim
basis for workers compensation and general liability. Although
the Company does not anticipate the amounts ultimately paid will
differ significantly from the estimates, self-insurance reserves
could be affected if future claim experience differs
significantly from the historical trends and the actuarial
assumptions. For example, for workers compensation and
liability future claims estimates, a 1% increase or decrease to
the assumptions for claims costs and loss development factors
would increase or decrease our self-insurance accrual at
January 31, 2009, by approximately $0.1 million. The
self-insurance reserves were $1.8 million and
$1.4 million at the end of fiscal 2008 and 2007,
respectively.
Goodwill Goodwill represents the excess cost
over the estimated fair values of net assets including
identifiable intangible assets of businesses acquired. At
January 31, 2009 and February, 2, 2008, the balance of
goodwill related to the DSW stores was $25.9 million.
Goodwill is tested for impairment at least annually in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets.
Management evaluates the fair value of the reporting unit using
market based analysis to review market capitalization as well as
reviewing a discounted cash flow analysis using
managements assumptions. Several factors could result in
an impairment charge. Failure to achieve sufficient levels of
cash flow at the reporting unit level or a significant and
sustained decline in our stock price could result in goodwill
impairment charges. Significant judgment is required to
determine the underlying cause of the decline and whether stock
price declines are related to the market or specifically to the
Company. The Company did not record any goodwill impairments in
fiscal 2008, 2007 or 2006.
Tradenames and Other Intangible Assets
Tradenames and other intangible assets are comprised of values
assigned to names the Company acquired and leases acquired. The
accumulated amortization for these assets is $9.2 million
and $8.4 million at January 31, 2009 and
February 2, 2008, respectively.
The asset value and accumulated amortization of intangible
assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Not subject to amortization
|
|
|
|
|
|
|
|
|
Domain names
|
|
$
|
21
|
|
|
$
|
21
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
Tradenames:
|
|
|
|
|
|
|
|
|
Gross asset
|
|
$
|
12,750
|
|
|
$
|
12,750
|
|
Accumulated amortization
|
|
|
(9,138
|
)
|
|
|
(8,287
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
3,612
|
|
|
$
|
4,463
|
|
Useful life
|
|
|
15 years
|
|
|
|
15 years
|
|
Favorable leases:
|
|
|
|
|
|
|
|
|
Gross asset
|
|
$
|
140
|
|
|
$
|
140
|
|
Accumulated amortization
|
|
|
(105
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
35
|
|
|
$
|
38
|
|
Useful life
|
|
|
14 years
|
|
|
|
14 years
|
|
Tradenames and other intangible assets, net
|
|
$
|
3,668
|
|
|
$
|
4,522
|
|
|
|
|
|
|
|
|
|
|
F-8
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Aggregate amortization expense for the current and each of the
five succeeding years is as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
Fiscal Year
|
|
|
|
|
2008
|
|
$
|
854
|
|
2009
|
|
$
|
854
|
|
2010
|
|
$
|
854
|
|
2011
|
|
$
|
854
|
|
2012
|
|
$
|
854
|
|
2013
|
|
$
|
216
|
|
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 must be redeemed within six months.
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 January 31, 2009
and February 2, 2008 was $7.3 million and
$6.4 million, respectively.
Deferred Rent Many of the Companys
operating leases contain predetermined fixed increases of the
minimum rental rate during the initial lease term. For these
leases, the Company recognizes the related rental expense on a
straight-line basis over the original terms of the lease and
records the difference between the amount 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 amount of deferred rent included in other noncurrent
liabilities was $31.9 million and $29.3 million, at
January 31, 2009 and February 2, 2008, 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.
These allowances are included in other non-current liabilities
and were $63.7 million and $58.8 million, at
January 31, 2009 and February 2, 2008, respectively.
Accumulated Other Comprehensive Loss The
accumulated other comprehensive loss of $0.7 million at
January 31, 2009 relates to the Companys unrealized
loss on available-for-sale securities. The Company believes it
is more likely than not that it would not be able to utilize any
resulting deferred tax asset and recorded a full valuation
allowance against the resulting deferred tax asset. For the year
ended January 31, 2009, total comprehensive income was
$26.2 million. For the year ended February 2, 2008,
there was no unrealized loss on available-for-sale securities
and comprehensive income was equal to net income.
Sales and Revenue Recognition Revenues from
merchandise sales are recognized upon customer receipt of
merchandise, are net of returns 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. The Company
believes a one day change in this estimate would not materially
impact revenue. Net sales also include revenue from shipping and
handling 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 Companys policy is to
recognize income from breakage of gift cards when the likelihood
of redemption of the gift card is remote. In the fourth quarter
of fiscal 2007, the Company determined that it accumulated
enough historical data to recognize income from gift card
breakage. The Company recognized $0.8 million and
$0.3 million as miscellaneous income from gift card
breakage during fiscal 2008 and 2007, respectively. Prior to the
fourth quarter of fiscal 2007, the Company had not recognized
any income from gift card breakage.
As of January 31, 2009, the Company supplies footwear,
under supply arrangements, to 36 Filenes Basement stores
and 341 locations for three non-related retailers. Sales for
these leased supply locations are net of returns and
F-9
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sales tax, as reported by the lessor, and are included in net
sales. Leased department sales represented 11.2%, 12.5%, and
10.2% of total net sales for fiscal 2008, 2007 and 2006,
respectively.
Cost of Sales In addition to the cost of
merchandise, the Company includes in the cost of sales expenses
associated with warehousing (including depreciation),
distribution and store occupancy (excluding depreciation).
Warehousing costs are comprised of labor, benefits and other
labor-related costs associated with the operations of the
distribution and fulfillment centers, which are primarily
payroll-related taxes and benefits. The non-labor costs
associated with warehousing include rent, depreciation,
insurance, utilities and 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 center and from the distribution
center to the Companys stores. Store occupancy costs
include rent, utilities, repairs, maintenance, insurance and
janitorial costs and other costs associated with licenses for
leased departments 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, pre-opening advertising and other pre-opening
costs (which are expensed as incurred), corporate expenses for
buying services, information services, depreciation expense for
corporate cost centers, marketing, insurance, legal, finance,
outside professional services, allocable costs from our parent
and other corporate related departments, and benefits for
associates and related payroll taxes. Corporate level expenses
are primarily attributable to operations at the corporate
offices in Columbus, Ohio.
Stock-Based Compensation For purposes of
applying the provisions of SFAS No. 123(R), Share Based
Payment (FAS 123R), the fair value
of options granted is estimated on the date of grant using the
Black-Scholes option pricing model. See Note 4 for a
detailed discussion of stock-based compensation.
Pre-Opening Costs Pre-opening costs
associated with opening of stores are expensed as incurred.
Pre-opening costs expensed were $6.2 million,
$6.3 million and $7.2 million for fiscal 2008, 2007
and 2006, respectively.
Marketing Expense The cost of advertising is
expensed as incurred or when the advertising first takes place.
Marketing costs were $30.3 million, $28.9 million and
$29.0 million in fiscal 2008, 2007 and 2006, respectively.
Other Operating Income The amount recorded in
fiscal years 2008, 2007, and 2006 was $4.2 million,
$4.8 million, and $3.0 million, respectively. Other
operating income is included in Operating Expenses in the income
statement. Other operating income consists primarily of income
from consignment sales, income from gift card breakage, and
insurance proceeds.
Legal Proceedings and Claims The Company is
involved in various legal proceedings that are incidental to the
conduct of its business. In accordance with
SFAS No. 5, Accounting for Contingencies, DSW
records a reserve for estimated losses when the loss is probable
and the amount can be reasonably estimated. See Note 11 for
a discussion of legal matters outstanding as of January 31,
2009.
Income Taxes Income taxes are accounted for
using the asset and liability method as required by
SFAS No. 109, Accounting for Income Taxes
(FAS 109). 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. As of January 31, 2009 and February 2, 2008,
the Company recorded valuation allowances of $0.7 million
and $0.6 million, respectively.
Recent
Accounting Pronouncements
In February 2008, the FASB issued FASB Staff Position
157-2,
Effective Date of FASB Statement No. 157,
(FSP 157-2),
which delays the effective date of SFAS No. 157, Fair
Value Measurements (FAS 157) for non-
F-10
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
financial assets and liabilities that are recognized or
disclosed in the financial statements on a nonrecurring basis to
fiscal years beginning after November 15, 2008.
FAS 157, which defines fair value, establishes a framework
for measuring fair value under GAAP and expands disclosures
about fair value measurements. We have not applied the
provisions of FAS 157 to our non-financial assets and
non-financial liabilities measured on a nonrecurring basis in
accordance with FSP
No. 157-2.
FSP
No. 157-2
is effective for the Company beginning February 1, 2009.
The Company does not expect the adoption of FAS 157 for
non-financial assets and liabilities measured on a nonrecurring
basis to have a material impact on its financial position and
results of operations.
In October 2008, the FASB issued FSP
FAS 157-3,
Determining the Fair Value of a Financial Asset in a Market
That is Not Active (FSP
FAS 157-3).
FSP FAS
157-3
clarifies the application of FAS 157 when the market for a
financial asset is not active, specifically regarding
consideration of managements internal assumptions in
measuring fair value when observable data are not present, how
observable market information from an inactive market should be
taken into account, and the use of broker quotes or pricing
services in assessing the relevance of observable and
unobservable data. This FSP was effective immediately. The
Company considered the guidance provided by FSP FAS
157-3 in its
determination of estimated fair values of its investment
portfolio as of January 31, 2009. Refer to Note 6 for
additional information regarding the fair value measurement of
its investment portfolio.
In November 2008, the Securities and Exchange Commission
(SEC) released a proposed roadmap regarding the
potential mandatory adoption of International Financial
Reporting Standards (IFRS). Under the proposed
roadmap, the Company, as an accelerated filer, may be required
to prepare financial statements in accordance with IFRS as early
as 2015. In 2011, the SEC will decide on the mandatory adoption
of IFRS. The Company is currently assessing the implications
should it be required to adopt IFRS in the future.
At January 31, 2009, Retail Ventures owned approximately
62.9% of DSWs outstanding Common Shares, representing
approximately 93.1% of the combined voting power of DSWs
outstanding Common Shares.
Premium
Income Exchangeable Securities (PIES)
In fiscal 2006, RVI issued 2,875,000 units of its 6.625%
Mandatorily Exchangeable Notes due September 15, 2011, or
PIES (Premium Income Exchangeable Securities) in the aggregate
principal amount of $143,750,000. Except to the extent RVI
exercises its cash settlement option, the PIES are mandatorily
exchangeable, on the maturity date, into Class A Common
Shares of DSW, no par value per share, which are issuable upon
exchange of DSW Class B Common Shares, no par value per
share, beneficially owned by RVI. On the maturity date, each
holder of the PIES will receive a number of DSW Class A
Common Shares per $50 principal amount of PIES equal to the
exchange ratio described in the offering prospectus,
or if RVI elects, the cash equivalent thereof or a combination
of cash and DSW Class A Common Shares. The settlement of
the PIES will not change the number of DSW Common Shares
outstanding. In the third quarter of fiscal 2008, Retail
Ventures repurchased 200,000 units of PIES, which are still
considered outstanding and can be resold by Retail Ventures.
|
|
3.
|
RELATED
PARTY TRANSACTIONS
|
Schottenstein Stores Corporation (SSC)
The Company leases certain store, office space
and distribution center locations owned by entities affiliated
with SSC, as described in Note 5.
Accounts receivable from and payable to affiliates principally
result from commercial transactions with entities owned or
affiliated with SSC or intercompany transactions with SSC.
Settlement of related party receivables and payables are in the
form of cash. These transactions settle normally in 30 to
60 days. Accounts receivable and payable to SSC or its
affiliates at January 31, 2009 and February 2, 2008,
respectively, were primarily related to a related party
receivable from an SSC affiliate of $0.3 million and
$0.9 million, respectively, for tenant allowances and
related party payables of $0.7 million and
$0.9 million, respectively, related to rent and real estate
taxes.
F-11
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company shares certain personnel, administrative and service
costs with SSC and its affiliates. The costs of providing these
services are allocated among the Company, SSC and its affiliates
without a premium. The allocated amounts are not significant.
SSC does not charge the Company for general corporate management
services.
The Company participated in SSCs self-insurance program
for general liability, casualty loss and certain state
workers compensation programs, which participation ended
in fiscal 2003. While the Company no longer participates in the
program, it continues to remain responsible for liabilities it
incurred under the program. There was no expense related to this
program in fiscal 2008 and the Company expensed an immaterial
amount in fiscal years 2007 and 2006 for such program..
Estimates for self-insured programs are based on actuarial
assumptions, which incorporate historical incurred claims and
incurred but not reported (IBNR) claims.
RVI and Filenes Basement Under the
terms of the Amended and Restated Shared Services Agreement
effective March 17, 2008, DSW provides shared finance and
human resources services to RVI and Filenes Basement.
Previously, RVI provided these shared services to DSW. RVI
charged DSW $4.7 million for management fees and shared
services provided prior to March 17, 2008. DSW charged RVI
$6.4 million for the fiscal year ended January 31,
2009 for all of the shared services it provided to RVI and
Filenes Basement, including information technology
services which it was previously providing.
In January 2009, Filenes Basement announced that it would
close 11 underperforming stores in February 2009 and that it
plans to seek to renegotiate certain of the remaining leases.
Filenes Basement and RVI are discussing with
representatives of Filenes Basements lenders the
effect of the store closings and other liquidity concerns under
Filenes Basements credit agreement. No assurance can
be given that RVI and Filenes Basement will successfully
resolve this situation with the lenders and RVI is exploring
strategic alternatives to seek to address liquidity risk at both
companies. As of January 31, 2009, DSW supplied shoes to
Filenes Basement for 36 stores under a supply agreement
and provided shared services.
Prior to the Amended and Restated Shared Services Agreement, the
Company received various services provided by RVI or its
subsidiaries, including import administration, risk management,
human resources, information technology, tax, financial services
and payroll, as well as other corporate services. RVI also
provided the Company with the services of a number of its
executives and employees. These cost allocations were determined
on a basis that the Company and RVI consider to be reasonable
reflections of the use of services provided or the benefit
received to the Company. These allocations totaled
$9.2 million and $13.1 million in fiscal 2007 and
2006, respectively. In fiscal 2007 and 2006, DSW allocated
$18.5 million and $10.5 million, respectively, to RVI
for services that were provided by DSW to RVI. Beginning in the
fourth quarter of fiscal 2006, information technology services
were provided by a subsidiary of DSW, which resulted in a
significant increase in DSWs allocation to RVI. In
addition, the Company has an agreement with Filenes
Basement, a subsidiary of RVI, to supply all of their shoe
inventories. These sales are included as leased department net
sales. In fiscal 2008, one of the three combination
DSW/Filenes Basement stores was closed. For the three
combination DSW/Filenes Basement stores, DSW paid a net
amount of $2.5 million, $2.9 million and
$2.9 million in fiscal 2008, 2007 and 2006, respectively.
The net balance of these transactions with RVI and Filenes
Basement is reflected within the Companys balance sheet as
a net payable of $1.6 million to related parties as of
January 31, 2009 and a net receivable of $1.2 million
from related parties as of February 2, 2008. RVI
contributed deferred tax assets to DSW in fiscal 2008 resulting
in a non-cash contribution of $0.8 million.
In January 2004, the Company entered into a lease agreement with
40 East 14 Realty Associates, L.L.C., an unrelated third party,
for the Union Square store in Manhattan, New York. In connection
with the lease, Retail Ventures has agreed to guarantee payment
of rent and other expenses and charges and the performance of
other obligations.
Value City On January 23, 2008, Retail
Ventures disposed of an 81% ownership interest in its Value City
operations to VCHI Acquisition Co., a newly formed entity owned
by VCDS Acquisition Holdings, LLC, Emerald
F-12
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Capital Management LLC and Crystal Value, LLC. As a part of this
transaction, RVI agreed to provide certain transition services
to Value City. On October 26, 2008, Value City filed for
bankruptcy protection and announced that it would close its
remaining stores. DSW negotiated an agreement with Value City to
continue to provide services post bankruptcy filing, including
risk management, financial services, benefits administration,
payroll and information technology services, in exchange for a
weekly payment. DSW received $3.3 million in fiscal 2008
related to services provided post bankruptcy filing.
As of January 31, 2009, Value City owes DSW approximately
$6.7 million for services rendered by us prior to the
filing of bankruptcy. Of these unpaid amounts, DSW reserved
approximately $0.6 million and did not recognize a
receivable related to the remaining services provided. DSW
submitted a proof of claim in the bankruptcy proceeding seeking
payment in full for all amounts owed, however, there is no
assurance that DSW can collect all or any of the amounts owed.
Other Purchases from affiliates were
$0.1 million in fiscal 2008. There were no purchases from
affiliates in fiscal 2007 or 2006.
|
|
4.
|
STOCK
BASED COMPENSATION
|
The Company has a 2005 Equity Incentive Plan that provides for
the issuance of equity awards to purchase up to 4.6 million
common shares, including stock options, restricted stock units
to management and director stock units, key employees of the
Company and affiliates, consultants as defined, and directors of
the Company. Options generally vest 20% per year on a cumulative
basis. Options granted under the 2005 Equity Incentive 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.
On January 29, 2006, DSW adopted the fair value recognition
provisions of FAS 123R relating to its stock-based compensation
plans. Prior to January 29, 2006, DSW had accounted for
stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations (APB
25). In accordance with APB 25, compensation expense for
employee stock options was generally not recognized for options
granted that had an exercise price equal to the market value of
the underlying common shares on the date of grant.
Under the modified prospective method of FAS 123R,
compensation expense was recognized during the years ended
January 31, 2009, February 2, 2008 and
February 3, 2007, for all unvested stock options granted
before January 29, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
FAS 123, and for all stock based payments granted after
January 29, 2006, based on the grant date fair value
estimated in accordance with the provisions of FAS 123R.
DSWs financial results, results of operations, or cash
flows for the prior periods have not been restated as a result
of this adoption. The cash flows resulting from the tax benefits
resulting from tax deductions in excess of compensation expense
recognized for those options (excess tax benefits) are
classified as financing cash flows.
Consistent with the valuation method used for the disclosure
only provisions of FAS No. 123, Accounting for
Share-Based Payment (FAS 123), DSW uses the
Black-Scholes option-pricing model to value stock-based
compensation expense. This model assumes that the estimated fair
value of options is amortized over the options vesting
periods and the compensation costs are included in operating
expenses in the consolidated statements of income. DSW
recognizes compensation expense for stock option awards granted
subsequent to the adoption of FAS 123R and time-based
restricted stock awards on a straight-line basis over the
requisite service period of the award. Prior to the adoption of
FAS 123R, compensation expense for stock option awards
granted was recorded using an accelerated method.
F-13
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the unfavorable impact of
FAS 123R stock based compensation expense on DSWs
income before income taxes, net income and basic and diluted
earnings per share for the following years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Income before income taxes
|
|
$
|
(4,522
|
)
|
|
$
|
(4,212
|
)
|
|
$
|
(3,416
|
)
|
Net income
|
|
$
|
(2,745
|
)
|
|
$
|
(2,595
|
)
|
|
$
|
(2,078
|
)
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
Stock
Options
Forfeitures of options are estimated at the grant date based on
historical rates of RVIs stock option activity and reduce
the compensation expense recognized. The expected term of
options granted is derived from historical data of RVIs
stock options due to the limited historical data on DSW stock
activity. The risk-free interest rate is based on the yield for
U.S. Treasury securities with a remaining life equal to the
five year expected term of the options at the grant date.
Expected volatility is based on the historical volatility of the
DSW Common Shares. The expected dividend yield is zero, which is
based on DSWs intention of not declaring dividends to
shareholders combined with the limitations on declaring
dividends as set forth in DSWs credit facility.
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.
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 31,
|
|
February 2,
|
|
February 3,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Assumptions:
|
|
|
|
|
|
|
Risk-free interest rate
|
|
2.7%
|
|
4.5%
|
|
4.6%
|
Year end volatility of DSW common stock
|
|
48.5%
|
|
39.4%
|
|
39.9%
|
Expected option term
|
|
4.9 years
|
|
5.0 years
|
|
4.8 years
|
Dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
The weighted average grant date fair value of each option
granted in fiscal 2008, 2007 and 2006 was $5.77, $17.27 and
$13.01 respectively. As of January 31, 2009, the total
compensation cost related to nonvested options not yet
recognized was approximately $10.1 million, with a weighted
average expense recognition period remaining of 3.5 years.
The following tables summarize the Companys stock option
plan and related per share Weighted Average Exercise Prices
(WAEP) and weighted average grant date fair value
using the Black-Scholes option pricing model (shares and
intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 31, 2009
|
|
|
|
Shares
|
|
|
WAEP
|
|
|
Outstanding beginning of year
|
|
|
1,520
|
|
|
$
|
28.65
|
|
Granted
|
|
|
1,112
|
|
|
$
|
12.87
|
|
Exercised
|
|
|
(1
|
)
|
|
$
|
12.92
|
|
Forfeited
|
|
|
(506
|
)
|
|
$
|
21.85
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
2,125
|
|
|
$
|
22.04
|
|
|
|
|
|
|
|
|
|
|
Options exercisable end of year
|
|
|
533
|
|
|
$
|
24.77
|
|
F-14
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
Remaining
|
|
|
Intrinsic
|
|
As of January 31, 2009:
|
|
Shares
|
|
|
WAEP
|
|
|
Fair Value
|
|
|
Contract Life
|
|
|
Value
|
|
|
Options outstanding
|
|
|
2,125
|
|
|
$
|
22.04
|
|
|
$
|
9.47
|
|
|
|
8 years
|
|
|
$
|
124
|
|
Options vested or expected to vest
|
|
|
2,007
|
|
|
$
|
22.10
|
|
|
$
|
9.49
|
|
|
|
8 years
|
|
|
$
|
115
|
|
Options exercisable
|
|
|
533
|
|
|
$
|
24.77
|
|
|
$
|
10.56
|
|
|
|
7 years
|
|
|
$
|
0
|
|
Shares available for additional grants
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the amount by
which the fair value of the underlying common shares exceeds the
option exercise price. The total intrinsic value of options
exercised during the years ended February 2, 2008 and
February 3, 2007 was $0.2 million and
$0.5 million, respectively. This amount was immaterial in
fiscal 2008. The total fair value of options that vested during
the years ended January 31, 2009, February 2, 2008 and
February 3, 2007 was $3.6 million, $2.0 million
and $1.6 million, respectively.
Restricted
Stock Units
Restricted stock units generally cliff vest at the end of four
years from the date of grant and are settled immediately upon
vesting. Restricted stock units granted to employees that are
subject to the risk of forfeiture are not included in the
computation of basic earnings per share.
Compensation cost is measured at fair value on the grant date
and recorded over the vesting period. Fair value is determined
by multiplying the number of units granted by the grant date
market price. The total aggregate intrinsic value of nonvested
restricted stock units was $2.3 million, $3.0 million
and $5.5 million for fiscal 2008, 2007 and 2006,
respectively. As of January 31, 2009, the total
compensation cost related to nonvested restricted stock units
not yet recognized was approximately $2.0 million with a
weighted average expense recognition period remaining of
2.0 years. The weighted average exercise price for all
restricted stock units is zero.
The following table summarizes DSWs restricted stock units
and weighted average grant date fair value (GDFV)
for the periods presented (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 31, 2009
|
|
|
February 2, 2008
|
|
|
February 3, 2007
|
|
|
|
Units
|
|
|
GDFV
|
|
|
Units
|
|
|
GDFV
|
|
|
Units
|
|
|
GDFV
|
|
|
Outstanding beginning of year
|
|
|
151
|
|
|
$
|
23.92
|
|
|
|
135
|
|
|
$
|
22.03
|
|
|
|
131
|
|
|
$
|
20.46
|
|
Granted
|
|
|
158
|
|
|
$
|
12.61
|
|
|
|
29
|
|
|
$
|
28.69
|
|
|
|
23
|
|
|
$
|
30.91
|
|
Exercised/Vested
|
|
|
(8
|
)
|
|
$
|
26.61
|
|
|
|
(10
|
)
|
|
$
|
24.85
|
|
|
|
(10
|
)
|
|
$
|
24.85
|
|
Forfeited
|
|
|
(75
|
)
|
|
$
|
19.08
|
|
|
|
(3
|
)
|
|
$
|
27.96
|
|
|
|
(9
|
)
|
|
$
|
19.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
226
|
|
|
$
|
17.51
|
|
|
|
151
|
|
|
$
|
23.92
|
|
|
|
135
|
|
|
$
|
22.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
Stock Units
DSW issues stock units to directors who are not employees of DSW
or RVI. During the years ended January 31, 2009,
February 2, 2008 and February 3, 2007, DSW granted
45,265, 10,398 and 10,525 director stock units,
respectively, and expensed $0.6 million, $0.3 million
and $0.3 million, respectively, related to these grants.
Stock units are automatically granted to each director who is
not an employee of DSW or RVI on the date of each annual meeting
of shareholders for the purpose of electing directors. The
number of stock units granted to each non-employee director is
calculated by dividing one-half of the directors annual
retainer (including committee retainer fees but excluding any
amount paid for service as the chair of a board committee) by
the fair market value of a share of the DSW Class A Common
Shares on the date of the meeting. In addition, each director
eligible to receive compensation for board service may elect to
have the cash portion of such directors compensation paid
in the form of stock units. Stock units granted to directors
vest immediately and are settled upon the director terminating
service
F-15
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the board. Stock units granted to directors which are not
subject to forfeiture are considered to be outstanding for the
purposes of computing basic earnings per share. The exercise
price of the director stock units is zero. As of
January 31, 2009, 83,201 director stock units had been
issued and no director stock units had been settled.
The Company leases stores, office space, a fulfillment center
and a distribution center under various arrangements with
related and unrelated parties. Such leases expire through 2024
and in most cases provide for renewal options. Generally, the
Company is required to pay base rent, real estate taxes,
maintenance, insurance and contingent rentals based on sales in
excess of specified levels.
As of January 31, 2009, the Company leased or had other
agreements with entities affiliated with SSC for 19 store
locations, two office facilities, a trailer parking lot, one
fulfillment center and one distribution center for a total
annual minimum rent of $12.2 million and additional
contingent rents based on aggregate sales in excess of specified
sales for the store locations. Under supply agreements to
Filenes Basement stores and other non-related retailers,
the Company pays contingent rents based on sales.
Future minimum lease payments required under the aforementioned
leases, exclusive of real estate taxes, insurance and
maintenance costs, at January 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
|
|
|
Unrelated
|
|
|
Related
|
|
Fiscal Year
|
|
Total
|
|
|
Party
|
|
|
Party
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
133,772
|
|
|
$
|
121,479
|
|
|
$
|
12,293
|
|
2010
|
|
|
130,811
|
|
|
|
118,086
|
|
|
|
12,725
|
|
2011
|
|
|
123,322
|
|
|
|
110,467
|
|
|
|
12,855
|
|
2012
|
|
|
113,971
|
|
|
|
100,865
|
|
|
|
13,106
|
|
2013
|
|
|
105,494
|
|
|
|
92,954
|
|
|
|
12,540
|
|
Future years
|
|
|
382,151
|
|
|
|
307,805
|
|
|
|
74,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
989,521
|
|
|
$
|
851,656
|
|
|
$
|
137,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of rental expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Minimum rentals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties
|
|
$
|
104,516
|
|
|
$
|
93,839
|
|
|
$
|
82,677
|
|
Related parties
|
|
|
10,824
|
|
|
|
10,561
|
|
|
|
8,796
|
|
Contingent rentals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrelated parties
|
|
|
28,261
|
|
|
|
25,391
|
|
|
|
17,721
|
|
Related parties
|
|
|
11,967
|
|
|
|
12,467
|
|
|
|
11,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,568
|
|
|
$
|
142,258
|
|
|
$
|
120,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 31, 2009 and February 2, 2008, the Company
had no capital leases.
|
|
6.
|
FAIR
VALUE MEASUREMENTS OF FINANCIAL ASSETS AND LIABILITIES
|
Although the adoption of FAS 157 standard for financial
assets and liabilities as of February 3, 2008 had no impact
on DSWs financial position or results of operations, it
did result in additional disclosures regarding fair value
measurements. FAS 157 defines fair value as the price that
would be received to sell an asset or paid to transfer
F-16
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, FAS 157
establishes the following three level 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 January 31, 2009 consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents
|
|
$
|
54,782
|
|
|
$
|
54,782
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
101,404
|
|
|
|
|
|
|
$
|
99,559
|
|
|
$
|
1,845
|
|
Long-term investments
|
|
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157,452
|
|
|
$
|
54,782
|
|
|
$
|
99,559
|
|
|
$
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents primarily represent cash deposits and
investments in money market funds held with financial
institutions, as well as credit card receivables that settle in
less than three days. Our investments in auction rate securities
is recorded at fair value under FAS 157 using an income
approach valuation model that uses level 3 inputs such as
the financial condition of the issuers of the underlying
securities, expectations regarding the next successful auction,
risks in the auction rate securities market and other various
assumptions. Our other types of investments are valued using a
market based approach using level 2 inputs such as prices
of similar assets in active markets.
The activity related to level 3 investments for the year
ended January 31, 2009 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Short-Term
|
|
|
Long-Term
|
|
|
|
Investments, net
|
|
|
Investments, net
|
|
|
|
(In thousands)
|
|
|
Carrying value as of February 2, 2008
|
|
$
|
70,005
|
|
|
$
|
12,500
|
|
Maturities and sales
|
|
|
(68,855
|
)
|
|
|
(7,600
|
)
|
Transfers into short-term investments, net
|
|
|
2,500
|
|
|
|
|
|
Transfers into long-term investments, net
|
|
|
|
|
|
|
(2,500
|
)
|
Transfers out of level 3
|
|
|
(1,150
|
)
|
|
|
|
|
Other-than-temporary
impairment included in earnings
|
|
|
|
|
|
|
(1,134
|
)
|
Unrealized losses included in accumulated other comprehensive
loss
|
|
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value as of January 31, 2009
|
|
$
|
1,845
|
|
|
$
|
1,266
|
|
|
|
|
|
|
|
|
|
|
F-17
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company determines the appropriate 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
and stated at current market value.
Short-term investments, net at January 31, 2009 and
February 2, 2008 include tax exempt bonds, tax advantaged
bonds, variable rate demand notes, tax exempt commercial paper,
certificates of deposit and auction rate securities. Tax exempt
commercial paper and certificates of deposit mature every 28 to
91 days. Excluding the auction rate securities, the other
types of short-term investments generally have interest reset
dates of every 7 days. Despite the long-term nature of the
stated contractual maturities of the bonds, tax exempt
commercial paper and variable rate demand notes, the Company has
the ability to quickly liquidate these securities. As a result,
the Company has classified these securities as available for
sale.
Investments in auction rate securities typically auction every
91 to 182 days. There are two auction rate securities
classified as short term investments, net. One auction rate
security will not undergo auction until November 2009 and was
reclassified from long term investments, net to short term
investments, net in fiscal 2008. The Company recorded a
temporary impairment of $0.7 million related to this
security. The Company believes the impairment is temporary as
the security is a perpetual preferred security that possesses
certain debt-like characteristics and the Company believes it
has the ability to hold the security until it can recover in
value. The second auction rate security included in short-term
investments, net experienced a call at par subsequent to year
end and there was no unrealized loss recorded related to this
security.
The long-term investments, net balance at both January 31,
2009 and February 2, 2008 includes auction rate securities
that failed at auction subsequent to February 2, 2008 and
are presented as long-term as it is unknown if the Company will
be able to liquidate these securities within one year. As a
result, for fiscal 2008, the Company recorded
other-than-temporary
impairments of approximately $1.1 million related to these
auction rate securities. The Company believes the impairments
are
other-than-temporary
due to current economic conditions, the financial condition and
future business prospects of the underlying issuer and the
duration of the impairments.
The following table discloses the major categories of the
Companys investments as of January 31, 2009 and
February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments, net
|
|
|
Long-Term Investments, net
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt bonds
|
|
$
|
64,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax advantaged bonds
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate demand notes
|
|
|
16,580
|
|
|
$
|
44,505
|
|
|
|
|
|
|
|
|
|
Tax exempt commercial paper
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
|
3,650
|
|
|
|
25,500
|
|
|
$
|
2,400
|
|
|
$
|
12,500
|
|
Other-than-temporary
impairment included in earnings
|
|
|
|
|
|
|
|
|
|
|
(1,134
|
)
|
|
|
|
|
Unrealized losses included in accumulated other comprehensive
loss
|
|
|
(655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
101,404
|
|
|
$
|
70,005
|
|
|
$
|
1,266
|
|
|
$
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-term obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Letters of credit outstanding
|
|
$
|
17,709
|
|
|
$
|
15,711
|
|
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 Companys obligations under this facility are
secured by a lien on substantially all of its and its
subsidiarys personal property and a pledge of its shares
of DSW Shoe Warehouse, Inc. (DSWSW). 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 Companys 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. At January 31, 2009 and
February 2, 2008, the Company had no outstanding borrowings
and had availability under the facility of $132.3 million
and $134.3 million, respectively.
Total interest expense was $0.8 million, $1.2 million
and $0.6 million for fiscal years 2008, 2007 and 2006,
respectively, and included fees, such as commitment and line of
credit fees, of $0.5 million, $0.4 million and
$0.5 million, respectively.
Basic earnings per share are based on net income and a simple
weighted average of Class A and Class B common shares
and directors 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Weighted average shares outstanding
|
|
|
43,998
|
|
|
|
43,953
|
|
|
|
43,914
|
|
Assumed exercise of dilutive stock options
|
|
|
|
|
|
|
170
|
|
|
|
170
|
|
Restricted stock units
|
|
|
220
|
|
|
|
150
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares for computation of dilutive earnings per share
|
|
|
44,218
|
|
|
|
44,273
|
|
|
|
44,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 2.1 million and 0.8 million common
shares were outstanding at January 31, 2009 and
February 2, 2008, 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. For the fiscal year ended
February 3, 2007, all potentially issuable shares from the
exercise of stock options and restricted stock units were
dilutive.
F-19
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company participates in a 401(k) Plan (the
Plan). Eligible employees may contribute up to
thirty percent of their compensation to the Plan, on a pre-tax
basis, subject to Internal Revenue Service limitations. As of
the first day of the month following an employees
completion of one year of service as defined under the terms of
the Plan, the Company matches employee deferrals into the Plan,
100% on the first 3% of eligible compensation deferred and 50%
on the next 2% of eligible compensation deferred. Additionally,
the Company may contribute a discretionary profit sharing amount
to the Plan each year but has not for the past three fiscal
years. The Company incurred costs associated with the Plan of
$1.9 million, $1.8 million and $1.4 million for
fiscal years 2008, 2007 and 2006, respectively.
|
|
11.
|
COMMITMENTS
AND CONTINGENCIES
|
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. Where 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 these
proceedings will not be material to the Companys 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 potential
liability could materially impact the Companys results of
operations and financial condition.
The Company is managed in three operating segments: DSW stores,
dsw.com and leased departments. DSW stores and dsw.com have been
aggregated and are presented as one reportable segment, as
permitted by SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information, 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 tables below present segment information (in
thousands) for the Companys two reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
Total
|
|
|
|
DSW
|
|
|
Departments
|
|
|
DSW Inc.
|
|
|
As of and for the year ended January 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,298,886
|
|
|
$
|
164,058
|
|
|
$
|
1,462,944
|
|
Gross profit
|
|
|
351,899
|
|
|
|
27,200
|
|
|
|
379,099
|
|
Capital expenditures
|
|
|
80,670
|
|
|
|
304
|
|
|
|
80,974
|
|
Total assets
|
|
|
659,876
|
|
|
|
61,321
|
|
|
|
721,197
|
|
As of and for the year ended February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,230,217
|
|
|
$
|
175,398
|
|
|
$
|
1,405,615
|
|
Gross profit
|
|
|
344,276
|
|
|
|
25,859
|
|
|
|
370,135
|
|
Capital expenditures
|
|
|
101,269
|
|
|
|
1,182
|
|
|
|
102,451
|
|
Total assets
|
|
|
641,874
|
|
|
|
52,008
|
|
|
|
693,882
|
|
For the year ended February 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,148,395
|
|
|
$
|
130,665
|
|
|
$
|
1,279,060
|
|
Gross profit
|
|
|
343,734
|
|
|
|
22,617
|
|
|
|
366,351
|
|
Capital expenditures
|
|
|
38,675
|
|
|
|
3,732
|
|
|
|
42,407
|
|
F-20
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the approximate percentage of our
sales attributable to each merchandise category for the fiscal
years below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Womens
|
|
|
66
|
%
|
|
|
65
|
%
|
|
|
65
|
%
|
Mens
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
Athletic
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
14
|
%
|
Accessories and Other
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
16,178
|
|
|
$
|
30,259
|
|
|
$
|
32,750
|
|
State and local
|
|
|
2,094
|
|
|
|
6,528
|
|
|
|
7,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,272
|
|
|
|
36,787
|
|
|
|
39,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
174
|
|
|
|
(3,896
|
)
|
|
|
2,217
|
|
State and local
|
|
|
(1,063
|
)
|
|
|
625
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(889
|
)
|
|
|
(3,271
|
)
|
|
|
2,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
17,383
|
|
|
$
|
33,516
|
|
|
$
|
42,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the expected income taxes based upon the
statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Income tax expense at federal statutory rate
|
|
$
|
15,500
|
|
|
$
|
30,552
|
|
|
$
|
37,670
|
|
State and local
taxes-net
|
|
|
1,032
|
|
|
|
3,788
|
|
|
|
4,988
|
|
Tax exempt interest and other
|
|
|
851
|
|
|
|
(824
|
)
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,383
|
|
|
$
|
33,516
|
|
|
$
|
42,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax asset is recorded in the Companys
balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current deferred tax asset
|
|
$
|
21,876
|
|
|
$
|
20,302
|
|
Non-current deferred asset
|
|
|
806
|
|
|
|
3,139
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset
|
|
$
|
22,682
|
|
|
$
|
23,441
|
|
|
|
|
|
|
|
|
|
|
F-21
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the net deferred tax asset are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Basis differences in inventory
|
|
$
|
4,074
|
|
|
$
|
3,321
|
|
Construction and tenant allowances
|
|
|
2,335
|
|
|
|
1,645
|
|
State and local tax NOLs
|
|
|
656
|
|
|
|
1,125
|
|
Valuation allowance
|
|
|
(708
|
)
|
|
|
(553
|
)
|
Accrued rent
|
|
|
12,541
|
|
|
|
11,846
|
|
Workers compensation
|
|
|
943
|
|
|
|
874
|
|
Stock compensation Restricted stock and director
stock units
|
|
|
1,876
|
|
|
|
1,142
|
|
Accrued expenses
|
|
|
3,635
|
|
|
|
3,356
|
|
Stock compensation non-qualified stock options
|
|
|
3,693
|
|
|
|
2,211
|
|
Benefit from unrecognized tax position
|
|
|
756
|
|
|
|
2,147
|
|
Unredeemed gift cards
|
|
|
1,202
|
|
|
|
|
|
Auction rate securities impairment
|
|
|
708
|
|
|
|
|
|
Other
|
|
|
959
|
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,670
|
|
|
|
29,045
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(4,773
|
)
|
|
|
(4,399
|
)
|
Basis differences in property and equipment
|
|
|
(4,958
|
)
|
|
|
(956
|
)
|
Other
|
|
|
(257
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,988
|
)
|
|
|
(5,604
|
)
|
|
|
|
|
|
|
|
|
|
Total-net
|
|
$
|
22,682
|
|
|
$
|
23,441
|
|
|
|
|
|
|
|
|
|
|
The net operating loss deferred tax assets consist of a state
and local component. These net operating losses are available to
reduce state and local taxable income for the fiscal years 2009
to 2023. A valuation allowance of $0.6 million related to a
state deferred tax asset was established in fiscal 2007 as the
Company believed that it was more likely than not that the
benefit will not be realized. This state deferred tax asset
expired in fiscal 2008, and the asset and related valuation
allowance are no longer necessary. A valuation allowance of
$0.7 million related to the unrealized loss and
other-than-temporary
impairments on
available-for-sale
securities was established in fiscal 2008 as the Company
believes that it is more likely than not that the benefit will
not be realized.
The Company is no longer subject to U.S federal income tax
examination for years prior to 2004. With a few exceptions, the
Company is no longer subject to state tax examination for fiscal
years prior to 2002. The Company is currently under examination
by the Internal Revenue Service for fiscal 2006. The Company
estimates the range of possible changes that may result from any
current and future tax examinations to be insignificant at this
time.
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 consolidated statement of income rather than income tax
expense. The Company will continue to classify income tax
penalties as part of operating expenses in its consolidated
statements of income. As of January 31, 2009,
February 2, 2008 and February 4, 2007,
$1.1 million, $0.9 million and $0.3 million,
respectively, were accrued for the payment of interest and
penalties.
Effective February 4, 2007, the Company adopted the
provisions of FIN 48. The adoption of FIN 48 resulted
in a charge of $0.1 million to beginning retained earnings.
As of January 31, 2009, February 2, 2008 and
February 4,
F-22
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, unrecognized tax benefits of $0.9 million,
$3.0 million and $2.0 million respectively, would
affect the Companys effective tax rate if recognized. As
of January 31, 2009 and February 2, 2008, the
reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning Balance
|
|
$
|
3,028
|
|
|
$
|
2,004
|
|
(Decreases) Tax Positions taken in a prior period
|
|
|
(1,760
|
)
|
|
|
(1,123
|
)
|
Increases Tax Positions taken in the current period
|
|
|
9
|
|
|
|
2,147
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
1,277
|
|
|
$
|
3,028
|
|
|
|
|
|
|
|
|
|
|
While it is expected that the amount of unrecognized tax
benefits will change in the next 12 months, any change is
not expected to have a material impact on our financial
position, results of operations or cash flows.
|
|
14.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 3,
|
|
|
August 2,
|
|
|
November 2,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands except per share data)
|
|
|
Net sales
|
|
$
|
366,264
|
|
|
$
|
357,175
|
|
|
$
|
391,355
|
|
|
$
|
348,150
|
|
Cost of sales
|
|
|
(269,217
|
)
|
|
|
(256,081
|
)
|
|
|
(282,280
|
)
|
|
|
(276,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
97,047
|
|
|
|
101,094
|
|
|
|
109,075
|
|
|
|
71,883
|
|
Operating expenses
|
|
|
(81,041
|
)
|
|
|
(83,415
|
)
|
|
|
(88,158
|
)
|
|
|
(83,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
16,006
|
|
|
|
17,679
|
|
|
|
20,917
|
|
|
|
(11,789
|
)
|
Interest expense
|
|
|
(274
|
)
|
|
|
(304
|
)
|
|
|
(270
|
)
|
|
|
54
|
|
Interest income
|
|
|
997
|
|
|
|
724
|
|
|
|
956
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
723
|
|
|
|
420
|
|
|
|
686
|
|
|
|
777
|
|
Other-than-temporary
impairment charge on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
16,729
|
|
|
|
18,099
|
|
|
|
21,603
|
|
|
|
(12,146
|
)
|
Income tax (provision) benefit
|
|
|
(6,441
|
)
|
|
|
(7,142
|
)
|
|
|
(8,425
|
)
|
|
|
4,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,288
|
|
|
$
|
10,957
|
|
|
$
|
13,178
|
|
|
$
|
(7,521
|
)
|
Earnings (loss) per share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.30
|
|
|
$
|
(0.17
|
)
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.30
|
|
|
$
|
(0.17
|
)
|
F-23
DSW
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 5,
|
|
|
August 4,
|
|
|
November 3,
|
|
|
February 2,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands except per share data)
|
|
|
Net sales
|
|
$
|
356,997
|
|
|
$
|
348,718
|
|
|
$
|
367,380
|
|
|
$
|
332,520
|
|
Cost of sales
|
|
|
(247,741
|
)
|
|
|
(267,368
|
)
|
|
|
(260,720
|
)
|
|
|
(259,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
109,256
|
|
|
|
81,350
|
|
|
|
106,660
|
|
|
|
72,869
|
|
Operating expenses
|
|
|
(72,038
|
)
|
|
|
(73,024
|
)
|
|
|
(71,855
|
)
|
|
|
(71,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
37,218
|
|
|
|
8,326
|
|
|
|
34,805
|
|
|
|
972
|
|
Interest expense
|
|
|
(138
|
)
|
|
|
(143
|
)
|
|
|
(140
|
)
|
|
|
(757
|
)
|
Interest income
|
|
|
1,857
|
|
|
|
2,091
|
|
|
|
1,673
|
|
|
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
1,719
|
|
|
|
1,948
|
|
|
|
1,533
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
38,937
|
|
|
|
10,274
|
|
|
|
36,338
|
|
|
|
1,742
|
|
Income tax provision
|
|
$
|
(15,193
|
)
|
|
$
|
(3,753
|
)
|
|
$
|
(13,906
|
)
|
|
$
|
(664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,744
|
|
|
$
|
6,521
|
|
|
$
|
22,432
|
|
|
$
|
1,078
|
|
Earnings per share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.54
|
|
|
$
|
0.15
|
|
|
$
|
0.51
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.54
|
|
|
$
|
0.15
|
|
|
$
|
0.51
|
|
|
$
|
0.02
|
|
|
|
|
(1) |
|
The earnings per share calculations for each quarter are based
upon the applicable weighted average shares outstanding for each
period and may not necessarily be equal to the full year share
amount. |
F-24
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Amended Articles of Incorporation of the registrant.***
|
|
3
|
.2
|
|
Amended and Restated Code of Regulations of the registrant.***
|
|
4
|
.1
|
|
Specimen Class A Common Shares certificate. Incorporated by
reference to Exhibit 4.1 to DSWs
Form S-1
(Registration
No. 333-134227)
filed on May 17, 2006 and amended on June 23, 2006,
July 17, 2006, August 2, 2006 and August 7, 2006.
|
|
4
|
.2
|
|
Second Amended and Restated Registration Rights Agreement, dated
as of July 5, 2005, by and among Retail Ventures, Inc.,
Cerberus Partners, L.P., Schottenstein Stores Corporation and
Back Bay Funding LLC. Incorporated by reference to
Exhibit 4.2 to Retail Ventures
Form 8-K
(file
no. 1-10767)
filed July 11, 2005.
|
|
4
|
.3
|
|
Exchange Agreement, dated July 5, 2005, by and between
Retail Ventures, Inc. and DSW Inc. Incorporated by reference to
Exhibit 10.4 to Retail Ventures
Form 8-K
(file
no. 1-10767)
filed July 11, 2005.
|
|
4
|
.4
|
|
Amended Common Stock Purchase Warrant issued by Retail Ventures,
Inc. to Cerberus Partners, L.P. Incorporated by reference to
Exhibit 4.1 to Retail Ventures
Form 8-K
(file
no. 1-10767)
filed October 19, 2005.
|
|
4
|
.5
|
|
Amended Common Stock Purchase Warrant issued by Retail Ventures,
Inc. to Schottenstein Stores Corporation. Incorporated by
reference to Exhibit 4.2 to Retail Ventures
Form 8-K
(file
no. 1-10767)
filed October 19, 2005.
|
|
4
|
.6
|
|
Form of Term Loan Warrant issued by Retail Ventures, Inc. to
Millennium Partners, L.P. Incorporated by reference to
Exhibit 4.1 to Retail Ventures
Form 10-Q
(file
no. 1-10767)
filed December 8, 2005.
|
|
10
|
.1
|
|
Corporate Services Agreement, dated June 12, 2002, between
Retail Ventures and Schottenstein Stores Corporation.
Incorporated by reference to Exhibit 10.6 to Retail
Ventures
Form 10-Q
(file
no. 1-10767)
filed June 18, 2002.
|
|
10
|
.1.1
|
|
Amendment to Corporate Services Agreement, dated July 5,
2005, among Retail Ventures, Schottenstein Stores Corporation
and Schottenstein Management Company, together with Side Letter
Agreement, dated July 5, 2005, among Schottenstein Stores
Corporation, Retail Ventures, Inc., Schottenstein Management
Company and DSW Inc. related thereto. Incorporated by reference
to Exhibit 5 to Retail Ventures
Form 8-K
(file
no. 1-10767)
filed July 11, 2005.
|
|
10
|
.2
|
|
Employment Agreement, dated March 4, 2005, between Deborah
L. Ferrée and DSW Inc.**#
|
|
10
|
.2.1
|
|
First Amendment to Employment Agreement, dated December 31,
2007, between Deborah L. Ferrée and DSW Inc. Incorporated
by reference to Exhibit 10.2.1 to
Form 10-K
(file
no. 1-32545)
filed April 17, 2008. #
|
|
10
|
.4
|
|
Employment Agreement, dated June 1, 2005, between Douglas
J. Probst and DSW Inc.**#
|
|
10
|
.4.1
|
|
First Amendment to Employment Agreement, dated December 31,
2007, between Douglas J. Probst and DSW Inc. Incorporated by
reference to Exhibit 10.4.1 to
Form 10-K
(file
no. 1-32545)
filed April 17, 2008.#
|
|
10
|
.5
|
|
Employment Agreement, dated December 1, 2005, between Kevin
Lonergan and DSW Inc. Incorporated by reference to
Exhibit 10.1 to the Companys
Form 8-K
filed January 24, 2006.#
|
|
10
|
.5.1
|
|
First Amendment to Employment Agreement, dated December 31,
2007, between Kevin Lonergan and DSW Inc. Incorporated by
reference to Exhibit 10.5.1 to
Form 10-K
(file
no. 1-32545)
filed April 17, 2008.#
|
|
10
|
.6
|
|
Employment Agreement, dated June 26, 2005, between Derek
Ungless and DSW Inc.***#
|
|
10
|
.6.1
|
|
First Amendment to Employment Agreement, dated December 31,
2007, between Derek Ungless and DSW Inc. Incorporated by
reference to Exhibit 10.6.1 to
Form 10-K
(file
no. 1-32545)
filed April 17, 2008.#
|
|
10
|
.7
|
|
Summary of Director Compensation. Incorporated by reference to
Exhibit 10.2 to DSWs
Form 10-Q
(file
no. 1-32545)
filed December 13, 2007.#
|
E-1
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.11
|
|
Loan and Security Agreement, between DSW Inc. and DSW Shoe
Warehouse, Inc., as the Borrowers, and National City Business
Credit, Inc., as Administrative Agent and Collateral Agent for
the Revolving Credit Lenders.***
|
|
10
|
.15
|
|
Lease, dated March 22, 2000, by and between East Fifth
Avenue, LLC, an affiliate of Schottenstein Stores Corporation,
as landlord, and Shonac, as tenant, re: warehouse facility and
corporate headquarters. Incorporated by reference to
Exhibit 10.60 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 28, 2000.
|
|
10
|
.16
|
|
Form of Common Stock Purchase Warrants (with respect to the
stock of Retail Ventures) issued to Cerberus Partners, L.P. and
Schottenstein Stores Corporation. Incorporated by reference to
Exhibit 10.5 to Retail Ventures
Form 10-Q
(file
no. 1-10767)
filed June 18, 2002.
|
|
10
|
.17
|
|
Form of Conversion Warrant to be issued by Retail Ventures to
Schottenstein Stores Corporation.**
|
|
10
|
.23
|
|
DSW Inc. 2005 Equity Incentive Plan.***#
|
|
10
|
.23.1
|
|
Form of Restricted Stock Units Award Agreement for Employees.**#
|
|
10
|
.23.2
|
|
Form of Stock Units for automatic grants to non-employee
directors.**#
|
|
10
|
.23.3
|
|
Form of Stock Units for conversion of non-employee
directors cash retainer.**#
|
|
10
|
.23.4
|
|
Form of Non-Employee Directors Cash Retainer Deferral
Election Form.**#
|
|
10
|
.23.5
|
|
Form of Nonqualified Stock Option Award Agreement for
Consultants.**#
|
|
10
|
.23.6
|
|
Form of Nonqualified Stock Option Award Agreement for
Employees.**#
|
|
10
|
.24
|
|
DSW Inc. 2005 Cash Incentive Compensation Plan.***#
|
|
10
|
.25
|
|
Master Separation Agreement, dated July 5, 2005, between
Retail Ventures, Inc. and DSW. Incorporated by reference to
Exhibit 10.1 to Retail Ventures
Form 8-K
(file
no. 1-10767)
filed July 11, 2005.
|
|
10
|
.26
|
|
Amended and Restated Shared Services Agreement, dated as of
October 29, 2006, between Retail Ventures, Inc. and DSW.
Incorporated by reference to Exhibit 10.7 to DSWs
Form 10-Q
(file
no. 1-32545)
filed December 6, 2006.
|
|
10
|
.26.1
|
|
Amendment No. 1 to Amended and Restated Shared Services
Agreement between DSW Inc. and Retail Ventures, Inc., dated as
of March 17, 2008. Incorporated by reference to
Exhibit 10.2 to
Form 8-K
(file
no. 1-32545)
filed August 28, 2008.
|
|
10
|
.27
|
|
Tax Separation Agreement, dated July 5, 2005, among Retail
Ventures, Inc. and its affiliates and DSW Inc. and its
affiliates. Incorporated by reference to Exhibit 10.3 to
Retail Ventures
Form 8-K
(file
no. 1-10767)
filed July 11, 2005.
|
|
10
|
.27.1
|
|
Amendment No. 1 to Tax Separation Agreement between DSW
Inc. and Retail Ventures, Inc., dated as of March 17, 2008.
Incorporated by reference to Exhibit 10.3 to
Form 8-K
(file
no. 1-32545)
filed August 28, 2008.
|
|
10
|
.28
|
|
Supply Agreement, effective as of January 30, 2005, between
Filenes Basement and DSW. Incorporated by reference to
Exhibit 10.6 to Retail Ventures
Form 8-K
(file
no. 1-10767)
filed July 11, 2005.
|
|
10
|
.29
|
|
Lease, dated August 30, 2002, by and between Jubilee
Limited Partnership, an affiliate of Schottenstein Stores
Corporation, and Shonac Corporation, re: Troy, MI DSW store.
Incorporated by reference to Exhibit 10.44 to Retail
Ventures
Form 10-K
(file
no. 1-10767)
filed April 29, 2004.
|
|
10
|
.29.1
|
|
Assignment and Assumption Agreement, dated October 23,
2002, between Shonac Corporation, as assignor, and DSW Shoe
Warehouse, Inc., as assignee re: Troy, MI DSW store.
Incorporated by reference to Exhibit 10.29.1 to Retail
Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.30
|
|
Lease, dated October 8, 2003, by and between Jubilee
Limited Partnership, an affiliate of Schottenstein Stores
Corporation, and Shonac Corporation, re: Denton, TX DSW store.
Incorporated by reference to Exhibit 10.46 to Retail
Ventures
Form 10-K
(file
no. 1-10767)
filed April 29, 2004.
|
|
10
|
.30.1
|
|
Assignment and Assumption Agreement, dated December 18,
2003 between Shonac Corporation, as assignor, and DSW Shoe
Warehouse, Inc., as assignee re: Denton, TX DSW store.
Incorporated by reference to Exhibit 10.30.1 to Retail
Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
E-2
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.31
|
|
Lease, dated October 28, 2003, by and between JLP-RICHMOND
LLC, an affiliate of Schottenstein Stores Corporation, and
Shonac Corporation, re: Richmond, VA DSW store. Incorporated by
reference to Exhibit 10.47 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 29, 2004.
|
|
10
|
.31.1
|
|
Assignment and Assumption Agreement, dated December 18,
2003 between Shonac Corporation, as assignor, and DSW Shoe
Warehouse, Inc., as assignee re: Richmond, VA DSW store.
Incorporated by reference to Exhibit 10.31.1 to Retail
Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.32
|
|
Lease, dated May 2000, by and between Jubilee-Richmond LLC, an
affiliate of Schottenstein Stores Corporation, and DSW Shoe
Warehouse, Inc. (as assignee of Shonac Corporation), re: Glen
Allen, VA DSW store. Incorporated by reference to
Exhibit 10.49 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.33
|
|
Lease, dated February 28, 2001, by and between
Jubilee-Springdale, LLC, an affiliate of Schottenstein Stores
Corporation, and Shonac Corporation d/b/a DSW Shoe Warehouse,
re: Springdale, OH DSW store. Incorporated by reference to
Exhibit 10.50 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.33.1
|
|
Assignment and Assumption Agreement, dated May 11, 2001,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee re: Springdale, OH DSW store. Incorporated by
reference to Exhibit 10.50.1, to Retail Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.34
|
|
Agreement of Lease, dated 1997, between Shoppes of Beavercreek
Ltd., an affiliate of Schottenstein Stores Corporation, and
Shonac corporation (assignee of Schottenstein Stores Corporation
d/b/a Value City Furniture through Assignment of Tenants
Leasehold Interest and Amendment No. 1 to Agreement of
Lease, dated February 28, 2001), re: Beavercreek, OH DSW
store. Incorporated by reference to Exhibit 10.51 to Retail
Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.34.1
|
|
Assignment and Assumption Agreement, dated May 11, 2001,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee re: Beavercreek, OH DSW store. Incorporated by
reference to Exhibit 10.51.1 to Retail Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.35
|
|
Lease, dated February 28, 2001, by and between
JLP-Chesapeake, LLC, an affiliate of Schottenstein Stores
Corporation, and Shonac Corporation, re: Chesapeake, VA DSW
store. Incorporated by reference to Exhibit 10.52 to Retail
Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.35.1
|
|
Assignment and Assumption Agreement, dated May 11, 2001,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee re: Chesapeake, VA DSW store. Incorporated by
reference to Exhibit 10.52.1 to Retail Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.36
|
|
Ground Lease Agreement, dated April 30, 2002, by and
between Polaris Mall, LLC, a Delaware limited liability company,
and Schottenstein Stores Corporation-Polaris LLC, an affiliate
of Schottenstein Stores Corporation, as modified by Sublease
Agreement, dated April 30, 2002, by and between
Schottenstein Stores Corporation-Polaris LLC, as sublessor, and
DSW Shoe Warehouse, Inc., as sublessee (assignee of Shonac
Corporation), re: Columbus, OH (Polaris) DSW store. Incorporated
by reference to Exhibit 10.53 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.36.1
|
|
Assignment and Assumption Agreement, dated August 6, 2002,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee, re: Columbus, OH (Polaris) DSW store.
Incorporated by reference to Exhibit 10.53.1 to Retail
Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.37
|
|
Lease, dated August 30, 2002, by and between JLP-Cary, LLC,
an affiliate of Schottenstein Stores Corporation, and Shonac
Corporation, re: Cary, NC DSW store. Incorporated by reference
to Exhibit 10.54 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.37.1
|
|
Assignment and Assumption Agreement, dated October 23,
2002, between Shonac Corporation, as assignor, and DSW Shoe
Warehouse, Inc., as assignee, re: Cary, NC DSW store.
Incorporated by reference to Exhibit 10.54.1 to Retail
Ventures
Form 10-K/A
(file
No. 1-10767)
filed May 12, 2005.
|
|
10
|
.38
|
|
Lease, dated August 30, 2002, by and between JLP-Madison,
LLC, an affiliate of Schottenstein Stores Corporation, and
Shonac Corporation, re: Madison, TN DSW store. Incorporated by
reference to Exhibit 10.55 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
E-3
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.38.1
|
|
Assignment and Assumption Agreement, dated October 23,
2002, between Shonac Corporation, as assignor, and DSW Shoe
Warehouse, Inc., as assignee, re: Madison, TN DSW store.
Incorporated by reference to Exhibit 10.55.1 to Retail
Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.39
|
|
Sublease, dated May 2000, by and between Schottenstein Stores
Corporation, as sublessor, and Shonac Corporation d/b/a DSW Shoe
Warehouse, Inc., as sublessee, re: Pittsburgh, PA DSW store.
Incorporated by reference to Exhibit 10.48 to Retail
Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.39.1
|
|
Assignment and Assumption Agreement, dated January 8, 2001,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc. as assignee, re: Pittsburgh, PA DSW store. Incorporated by
reference to Exhibit 10.48.1 to Retail Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.40
|
|
Lease, dated September 24, 2004, by and between K&S
Maple Hill Mall, L.P., an affiliate of Schottenstein Stores
Corporation, and Shonac Corporation, re: Kalamazoo, MI DSW
store. Incorporated by reference to Exhibit 10.58 to Retail
Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.40.1
|
|
Assignment and Assumption Agreement, dated February 28,
2005, between Shonac Corporation, as assignor, and DSW Shoe
Warehouse, Inc., as assignee, re: Kalamazoo, MI DSW store.
Incorporated by reference to Exhibit 10.58.1 to Retail
Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.41
|
|
Lease, dated November 2004, by and between KSK Scottsdale Mall,
L.P., an affiliate of Schottenstein Stores Corporation, and
Shonac Corporation, re: South Bend, IN DSW store. Incorporated
by reference to Exhibit 10.59 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.
|
|
10
|
.41.1
|
|
Assignment and Assumption Agreement, dated March 18, 2005,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee, re: South Bend, IN DSW store. Incorporated by
reference to Exhibit 10.59.1 to Retail Ventures
Form 10-K/A
(file
no. 1-10767)
filed May 12, 2005.
|
|
10
|
.42
|
|
Sublease Agreement, dated June 12, 2000, by and between
Jubilee Limited Partnership, an affiliate of Schottenstein
Stores Corporation, and Shonac Corporation, re: Fairfax, VA DSW
store.**
|
|
10
|
.42.1
|
|
Assignment and Assumption Agreement, dated January 8, 2001,
between Shonac Corporation, as assignor, and DSW Shoe Warehouse,
Inc., as assignee, re: Fairfax, VA DSW store.**
|
|
10
|
.43
|
|
Lease, dated March 1, 1994, between Jubilee Limited
Partnership, an affiliate of Schottenstein Stores Corporation,
and Value City Department Stores, Inc., as modified by First
Lease Modification, dated November 1, 1994, re:
Merrillville, IN DSW store. Incorporated by reference to
Exhibit 10.44 to Retail Ventures
Form 10-K
(file
no. 1-10767)
filed April 14, 2005.**
|
|
10
|
.43.1
|
|
Assignment and Assumption Agreement, dated January 17,
2008, between Value City Department Stores LLC, as assignor, and
DSW Shoe Warehouse, Inc., as assignee, re: Merrillville, IN DSW
Store. Incorporated by reference to Exhibit 10.43.1 to
Form 10-K
(file
no. 1-32545)
filed April 17, 2008.
|
|
10
|
.44
|
|
Form of Indemnification Agreement between DSW Inc. and its
officers and directors.**
|
|
10
|
.45
|
|
Agreement of Lease, dated April 7, 2006, by and between
JLP-Harvard Park, LLC, an affiliate of Schottenstein Stores
Corporation, and DSW Inc., re: Chagrin Highlands, Warrendale,
Ohio DSW store.***
|
|
10
|
.46
|
|
Agreement of Lease, dated June 30, 2006, between
JLPK Levittown NY LLC, an affiliate of Schottenstein
Stores Corporation and DSW Inc., re: Levittown, NY DSW store.
Incorporated by reference to Exhibit 10.1 to
Form 10-Q
(file
no. 1-32545)
filed December 6, 2006.
|
|
10
|
.47
|
|
Agreement of Lease, dated November 27, 2006, between
JLP Lynnhaven VA LLC, an affiliate of Schottenstein
Stores Corporation and DSW Inc., re: Lynnhaven, Virginia DSW
store. Incorporated by reference to Exhibit 10.2 to
Form 10-Q
(file
no. 1-32545)
filed December 6, 2006.
|
|
10
|
.48
|
|
Agreement of Lease, dated November 30, 2006, between 4300
Venture 34910 LLC, an affiliate of Schottenstein Stores
Corporation, and DSW Inc., re: Home office. Incorporated by
reference to Exhibit 10.3 to
Form 10-Q
(file
no. 1-32545)
filed December 6, 2006.
|
|
10
|
.48.1
|
|
Lease Amendment, dated October 1, 2007, between 4300
Ventures 34910 LLC, an affiliate of Schottenstein Stores
Corporation, and DSW Inc., re: Home office. Incorporated by
reference to Exhibit 10.2 to
Form 8-K
(file
no. 1-32545)
filed March 6, 2008.
|
E-4
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
10
|
.49
|
|
Agreement of Lease, dated November 30, 2006, between 4300
East Fifth Avenue LLC, an affiliate of Schottenstein Stores
Corporation, and DSW Inc., re: Trailer Parking spaces for home
office. Incorporated by reference to Exhibit 10.4 to
Form 10-Q
(file
no. 1-32545)
filed December 6, 2006.
|
|
10
|
.49.1
|
|
Lease Amendment, dated October 1, 2007, between 4300 East
Fifth Avenue LLC, an affiliate of Schottenstein Stores
Corporation, and DSW Inc., re: Trailer Parking spaces for home
office. Incorporated by reference to Exhibit 10.3 to
Form 8-K
(file
no. 1-32545)
filed March 6, 2008.
|
|
10
|
.50
|
|
Lease Amendment, dated November 30, 2006 between 4300
Venture 6729 LLC, an affiliate of Schottenstein Stores
Corporation, and DSW Inc., re: warehouse and corporate
headquarters. Incorporated by reference to Exhibit 10.5 to
Form 10-Q
(file
no. 1-32545)
filed December 6, 2006.
|
|
10
|
.50.1
|
|
Second Lease Amendment, dated October 1, 2007 between 4300
Venture 6729 LLC, an affiliate of Schottenstein Stores
Corporation, and DSW Inc., re: warehouse and corporate
headquarters. Incorporated by reference to Exhibit 10.4 to
Form 8-K
(file
no. 1-32545)
filed March 6, 2008.
|
|
10
|
.51
|
|
IT Transfer and Assignment Agreement dated October 29,
2006. Incorporated by reference to Exhibit 10.6 to
Form 10-Q
(file
no. 1-32545)
filed December 6, 2006.
|
|
10
|
.52
|
|
Amended and Restated Supply Agreement dated May 30, 2006,
between DSW Inc. and Stein Mart, Inc. Incorporated by reference
to Exhibit 10.1 to DSWs
Form 8-K
(file
no. 1-32545)
filed June 5, 2006.
|
|
10
|
.53
|
|
Employment Agreement, dated July 13, 2006, between DSW Inc.
and Harris Mustafa. Incorporated by reference to
Exhibit 10.1 to DSWs
Form 8-K
(file
no. 1-32545)
filed July 13, 2006.
|
|
10
|
.53.1
|
|
First Amendment to Employment Agreement, dated December 31,
2007, between Harris Mustafa and DSW Inc. Incorporated by
reference to Exhibit 10.53.1 to
Form 10-K
(file
no. 1-32545)
filed April 17, 2008. #
|
|
10
|
.54
|
|
Agreement of Lease, dated December 15, 2006, between
American Signature, Inc., an affiliate of Schottenstein Stores
Corporation, and DSW Shoe Warehouse, Inc., re: Langhorne,
Pennsylvania DSW store. Incorporated by reference to
Exhibit 10.54 to
Form 10-K
(file
no. 1-32545)
filed April 5, 2007.
|
|
10
|
.55
|
|
Nonqualified Deferred Compensation Plan. Incorporated by
reference to Exhibit 10.1 to DSWs
Form 10-Q
(file
no. 1-32545)
filed December 13, 2007.#
|
|
10
|
.56
|
|
Agreement of Lease, dated October 1, 2007, between 4300
Venture 34910 LLC, an affiliate of Schottenstein Stores
Corporation and eTailDirect LLC re: new fulfillment center for
the business of ETD. Incorporated by reference to
Exhibit 10.1 to
Form 8-K
(file
no. 1-32545)
filed March 6, 2008.
|
|
10
|
.57
|
|
Occupancy Licensing Agreement, dated January 17, 2008,
between Value City Department Stores LLC, Retail Ventures
Services, Inc, and DSW Inc. re: 3241 Westerville Rd.
Incorporated by reference to Exhibit 10.57 to
Form 10-K
(file
no. 1-32545)
filed April 17, 2008.
|
|
10
|
.58
|
|
Guaranty by DSW Inc. to 4300 Venture 34910 LLC, an affiliate of
Schottenstein Stores Corporation re: Lease, dated
October 1, 2007 between 4300 Venture 34910 LLC, an
affiliate of Schottenstein Stores Corporation and eTailDirect
LLC re: new fulfillment center for the business of ETD.
Incorporated by reference to Exhibit 10.5 to
Form 8-K
(file
no. 1-32545)
filed March 6, 2008.
|
|
10
|
.59
|
|
Transfer and Assignment Agreement among Retail Ventures, Inc.,
Retail Ventures Services, Inc., DSW Inc., and Filenes
Basement, Inc., dated as of March 17, 2008. Incorporated by
reference to Exhibit 10.1 to
Form 8-K
(file
no. 1-32545)
filed August 28, 2008.
|
|
10
|
.60
|
|
Employment Agreement, dated March 27, 2009, between Jon Ricker
and DSW Inc.*#
|
|
10
|
.61
|
|
Employment Agreement, dated March 27, 2009, between William L.
Jordan and DSW Inc.*#
|
|
10
|
.62
|
|
Employment Agreement, dated March 25, 2009, between Michael
R. MacDonald and DSW Inc. Incorporated by reference to
Exhibit 10.1 to
Form 8-K
(file
no. 1-32545)
filed March 25, 2009.#
|
|
21
|
.1
|
|
List of Subsidiaries.*
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.*
|
|
24
|
.1
|
|
Powers of Attorney.*
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification Principal Executive Officer.*
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification Principal Financial Officer.*
|
E-5
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
32
|
.1
|
|
Section 1350 Certification Principal Executive
Officer.*
|
|
32
|
.2
|
|
Section 1350 Certification Principal Financial
Officer.*
|
|
|
|
* |
|
Filed herewith. |
|
** |
|
Previously filed as the same Exhibit Number to DSWs
Form S-1
(Registration Statement No. 333-123289) filed with the
Securities and Exchange Commission on March 14, 2005 and
amended on May 9, 2005, June 7, 2005, June 15,
2005 and June 29, 2005, and incorporated herein by
reference. |
|
*** |
|
Previously filed as the same Exhibit Number to DSWs
Form 10-K
filed with the Securities and Exchange Commission on
April 13, 2006 and incorporated by reference. |
|
# |
|
Management contract or compensatory plan or arrangement. |
E-6