DSW 2009 Annual Report Download - page 54

Cost of Sales— In addition to the cost of merchandise, which includes markdowns and shrinkage, the
Company includes in the cost of sales expenses associated with warehousing (including depreciation), distribution
and store occupancy (excluding depreciation and including impairments). Warehousing costs are comprised of
labor, benefits and other labor-related costs associated with the operations of the distribution and fulfillment
centers. The non-labor costs associated with warehousing include rent, depreciation, insurance, utilities, main-
tenance and other operating costs that are passed to the Company from the landlord. Distribution costs include the
transportation of merchandise to the distribution and fulfillment centers, from the distribution center to the
Company’s stores and from the fulfillment center to the customer. Store occupancy costs include rent, utilities,
repairs, maintenance, insurance, janitorial costs and occupancy-related taxes, which are primarily real estate taxes
passed to the Company by its landlords.
Operating Expenses — Operating expenses include expenses related to store management and store payroll
costs, advertising, leased department operations, store depreciation and amortization, new store advertising and
other new store costs (which are expensed as incurred) and corporate expenses. Corporate expenses include
expenses related to buying, information technology, depreciation expense for corporate cost centers, marketing,
legal, finance, outside professional services, customer service center expenses, allocable costs to and from Retail
Ventures, payroll and benefits for associates and payroll taxes. Corporate level expenses are primarily attributable to
operations at the corporate offices in Columbus, Ohio.
Stock-Based Compensation — The fair value of options granted is estimated on the date of grant using the
Black-Scholes option pricing model. See Note 3 for a detailed discussion of stock-based compensation.
New Store Costs — Costs associated with the opening of stores are expensed as incurred. New store costs
expensed were $1.6 million, $6.2 million and $6.3 million for fiscal 2009, 2008 and 2007, respectively.
Marketing Expense — The production cost of advertising is expensed when the advertising first takes place.
Marketing costs were $42.2 million, $30.3 million and $28.9 million in fiscal 2009, 2008 and 2007, respectively.
Other Operating Income — The amount recorded in fiscal 2009, 2008 and 2007 was $5.1 million, $4.2 million
and $4.8 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.
Non-operating Expense, Net — Non-operating expense, net includes other-than-temporary impairments
related to investments and realized gains on disposition of investments.
Legal Proceedings and Claims — The Company is involved in various legal proceedings that are incidental to
the conduct of its business. DSW records a reserve for estimated losses when the loss is probable and the amount can
be reasonably estimated. See Note 10 for a discussion of legal matters outstanding as of January 30, 2010.
Income Taxes — Income taxes are accounted for using the asset and liability method. Under this method,
deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. A valuation allowance is established against deferred tax assets when
it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of January 30,
2010 and January 31, 2009, the Company had valuation allowances of $1.4 million and $0.7 million, respectively.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Codification
(“ASC”) 105 or the Codification. The Codification is the sole source of authoritative U.S. accounting and reporting
standards recognized by the FASB. Rules and interpretive releases of the SEC are also sources of generally accepted
accounting principles (“GAAP”). The Company adopted ASC 105 during the quarter ended October 31, 2009.
Upon adoption of ASC 105, references within financial statement disclosures were modified to reference the
Codification.
F-10
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)