DSW 2009 Annual Report Download - page 31

We believe the following represent the most significant accounting policies, critical estimates and assump-
tions, among others, used in the preparation of our consolidated financial statements:
• Revenue Recognition. Revenues from merchandise sales are recognized upon customer receipt of mer-
chandise, 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.
• Cost of Sales and Merchandise Inventories. Merchandise inventories are stated at net realizable value,
determined using the first-in, first-out basis, or market, using the retail inventory method. The retail method
is widely used in the retail industry due to its practicality. Under the retail inventory method, the valuation of
inventories at cost and the resulting gross profits are calculated by applying a 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, 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.
We record a reduction to inventories and charge to cost of sales for shrinkage. Shrinkage is calculated as a
percentage of sales from the last physical inventory date. Our estimates are based on both our historical
experience as well as recent physical inventory results. Physical inventory counts are taken on an annual
basis and have supported our shrinkage estimates. If our estimate of shrinkage, on a cost basis, were to
increase or decrease 0.5% as a percentage of DSW Inc. sales, it would result in approximately $3.3 million
decrease or increase to operating profit.
Markdowns represent the excess of the carrying value over the amount we expect to realize from the
ultimate disposition of the inventory. Factors considered in the determination of markdowns include
customer preference and fashion trends. Changes in facts or circumstances do not result in the reversal of
previously recorded markdowns or an increase in that newly established cost basis.
Our cost of sales includes the cost of merchandise, which includes markdowns and shrinkage. We also
include in the cost of sales expenses associated with warehousing (including depreciation), distribution and
store occupancy (excluding depreciation and including impairments). Warehousing costs are comprised of
labor, benefits and other labor-related costs associated with the operations of the distribution and fulfillment
centers. The non-labor costs associated with warehousing include rent, depreciation, insurance, utilities,
maintenance and other operating costs that are passed to us from the landlord. Distribution costs include the
transportation of merchandise to the distribution and fulfillment centers, from the distribution center to our
stores and from the fulfillment center to the customer. Store occupancy costs include rent, utilities, repairs,
maintenance, insurance, janitorial costs and occupancy-related taxes, which are primarily real estate taxes
passed to us by our landlords.
• Investments. Our investments are valued using a market-based approach using level 1 and 2 inputs. Our
equity investment is recorded at cost and reviewed for impairment using an income approach valuation
model that uses level 3 inputs such as the financial condition and future prospects of the entity.
We evaluate our investments for impairment and whether impairment is other-than-temporary. In deter-
mining 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.
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