DSW 2013 Annual Report Download - page 30

Table of Contents
growth initiatives surrounding the reconfiguration of the Columbus distribution center and the expansion of the dsw.com fulfillment center.
Gross profit for the Affiliated Business Group segment increased as a percentage of net sales for fiscal 2012 primarily due to a decrease in occupancy expense.
We incur occupancy expense of approximately 20% of net sales for our Affiliated Business Group.
Operating Expenses. Operating expenses as a percentage of net sales were 21.3% and 22.2% for fiscal 2012 and fiscal 2011, respectively. In the fourth
quarter of fiscal 2012, we increased our estimate of a lease impairment in a lease assumed in the Merger with RVI by $6.0 million based on our expectation of
reduced future sublease income and an expected increase in real estate taxes. This increase was partially offset by our receipt of a court approved award of
damages of $5.3 million from our insurance carrier for a denied claim related to the 2005 data theft, partially offset by related expense of $1.3 million.
Excluding the impact of the award of damages and other RVI operating expenses noted above, operating expenses as a percentage of net sales was 21.2% for
fiscal 2012. Excluding the impact of DSW and RVI merger-related transaction costs and other RVI-related expenses of $17.3 million in fiscal 2011, operating
expenses as a percentage of net sales were 21.3% for fiscal 2011. Of the 10 basis point leverage, we leveraged home office overhead expenses by 70 basis points
primarily due to reduced incentive compensation, which was partially offset by a deleverage of 60 basis points related to new store and store expenses.
Change in Fair Value of Derivatives. During fiscal 2012 and 2011, the Company recorded a non-cash charge of $6.1 million and $12.3 million,
respectively, representing the changes in fair value of warrants, which were settled during fiscal 2012. During fiscal 2011, we recorded a non-cash charge of
$41.7 million representing the change in the fair value of the conversion feature of the PIES, which were settled during fiscal 2011. The Company utilized the
Black-Scholes pricing model to estimate the fair value of the derivatives. The change in the fair value of the derivatives was primarily due to the increases in
share price.
Interest Expense, Net. As a result of the elimination of PIES interest expense due to the settlement of the PIES in the third quarter of fiscal 2011, we have
interest income, net for fiscal 2012 rather than interest expense, net for fiscal 2011. In the third quarter of fiscal 2012, we also received interest of $1.9 million
related to the award of damages from our insurance carrier.
Income Taxes. Our effective tax rate for fiscal 2012 was 39.7%, compared to a benefit of 40.8% for fiscal 2011. The effective tax rate of 39.7% for fiscal
2012 reflects the impact of federal, state and local taxes and the change in fair value of the warrants, which are included for book income but not in tax
income. The effective tax rate of a benefit of 40.8% for fiscal 2011 was favorably impacted by the release of the valuation allowance and other merger-related
tax items.
Income from Discontinued Operations - Value City Department Stores. There was no income from discontinued operations for fiscal 2012 related to Value
City Department Stores. Income from discontinued operations of $0.2 million in fiscal 2011 was primarily due to revaluation of guarantees due to changes in
facts and circumstances related to the guarantees.
Income (Loss) from Discontinued Operations - Filene’s Basement. Income from discontinued operations of $1.3 million in fiscal 2012 was primarily due
to reduction in expected payments under our lease guarantees for Filene's Basement. Loss from discontinued operations, net of tax, of $5.0 million during
fiscal 2011 was primarily due to lease guarantees, net of tax, partially offset by a distribution from the debtors' estates.
Noncontrolling interests. For fiscal 2011, net income was impacted by $20.7 million to reflect that portion of the income attributable to DSW minority
shareholders prior to the Merger. As of the effective time of the Merger, there were no noncontrolling interests.
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DSW utilizes merchandise margin, defined as gross profit excluding occupancy and distribution and fulfillment expenses, a non-GAAP financial measure, to
explain its gross profit performance. Management believes this non-GAAP measure is an indication of the Company’s performance as the measure provides a
consistent means of comparing performance between periods and competitors as retailers differ on their definition of cost of sales. Management uses this non-
GAAP measure to assist in the evaluation of the performance of our segments and to make operating decisions. Within Management’s Discussion and
Analysis, as a percentage of net sales, DSW discloses merchandise margin, store occupancy expenses and distribution and fulfillment expenses, which
reconciles to gross profit. In fiscal 2013, DSW excluded net sales and gross profit related to its luxury test as these items were not indicative of DSW's future
gross profit performance.
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Source: DSW Inc., 10-K, March 27, 2014 Powered by Morningstar® Document Research℠
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