DSW 2013 Annual Report Download - page 36

Table of Contents
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Cost of Sales and Merchandise Inventories.
Merchandise inventories are stated at lower of cost or
market, determined using the retail inventory
method. The retail inventory method is 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 determined 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. Markdowns establish a new cost basis for
inventory. Changes in facts or circumstances do not
result in the reversal of previously recorded
markdowns or an increase in the newly established
cost basis.
Markdowns require management to make
assumptions regarding customer preferences,
fashion trends and consumer demand. 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 inventory method, can significantly impact the
ending inventory valuation at cost and the resulting
gross profit. DSW records a reduction to inventories
and a charge to cost of sales for shrinkage.
Shrinkage is calculated as a percentage of sales from
the last physical inventory date. Estimates are based
on both historical experience as well as recent
physical inventory results.
Physical store 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. net sales, it would result
in a decrease or increase of approximately $4.8
million to operating profit.
Investments. Our investments are valued using a
market-based approach using level 1 and 2 inputs.
We evaluate our investments for impairment and
whether impairment is other-than-temporary. Based
on the nature of the impairment(s), we would record
temporary impairments as unrealized losses in other
comprehensive loss 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.
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.
We believe that our fair value estimates are
reasonable.
Asset Impairment and Long-lived Assets. We
periodically evaluate the carrying amount of our
long-lived assets, primarily property and equipment,
and finite lived intangible assets when events and
circumstances warrant such a review to ascertain if
any assets have been impaired. The carrying amount
of a long-lived asset or asset group is considered
impaired when the carrying value of the asset or
asset group exceeds the expected future cash flows
from the asset.
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 or asset group over its fair value, based on
projected discounted cash flows using a discount
rate determined by management. Any impairment
loss realized is generally included in cost of sales.
We believe that the long-lived assets' carrying
amounts and useful lives are appropriate. To the
extent these future projections or our strategies
change, the conclusion regarding impairment
may differ from our current estimates.
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Source: DSW Inc., 10-K, March 27, 2014 Powered by Morningstar® Document Research℠
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