DSW 2008 Annual Report Download

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Table of contents

  • Page 1
    2008 ANNUAL REPORT

  • Page 2
    ...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. DSW total square footage represents the total amount of square footage for DSW stores only...

  • Page 3

  • Page 4
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  • Page 5
    ... executive offices) 43219 (Zip Code) Registrant's telephone number, including area code (614) 237-7100 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Name of Each Exchange on Which Registered: Class A Common Shares, without par value New York Stock Exchange...

  • Page 6
    ... about Market Risk ...Financial Statements and Supplementary Data...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation...

  • Page 7
    ... TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets ...Consolidated Statements of Income ...Consolidated Statements of Shareholders' Equity ...Consolidated Statements of Cash Flows ...Notes to Consolidated Financial Statements ...SCHEDULES...

  • Page 8
    ..., but are not limited to, the following: • our success in opening and operating new stores on a timely and profitable basis; • continuation of supply agreements and the financial condition of our leased business partners; • maintaining good relationships with our vendors; • our ability to...

  • Page 9
    ... 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...

  • Page 10
    ...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...

  • Page 11
    ...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...

  • Page 12
    ... 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...

  • Page 13
    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 ...

  • Page 14
    ... 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...

  • Page 15
    ... 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 Filene's Basement could impact the shared service allocations between DSW...

  • Page 16
    ..., DSW provides RVI and Filene's 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...

  • Page 17
    ... economic conditions and, in particular, the retail sales environment. • changes in our merchandising strategy; • timing and concentration of new DSW store openings and related pre-opening and other start-up costs; • levels of pre-opening expenses associated with new DSW stores; • changes...

  • Page 18
    ... 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...

  • Page 19
    ... 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...

  • Page 20
    ... 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...

  • Page 21
    ... 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...

  • Page 22
    ... 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...

  • Page 23
    ... 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...

  • Page 24
    ... 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...

  • Page 25
    ... 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...

  • Page 26
    ...and financial condition. ITEM 4. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Our Class A Common Shares are listed for trading under the ticker symbol "DSW...

  • Page 27
    ... 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 200 DSW, Inc. S&P MidCap 400 Index 150 DOLLARS S&P Retailing Index 100 50 0 6/29/05 1/28/06 2/3/07 2/2/08...

  • Page 28
    ... 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/ Filene's Basement stores which were re-categorized as leased departments at the...

  • Page 29
    ... 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...

  • Page 30
    ... Services Agreement, DSW provides RVI and Filene's 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...

  • Page 31
    ...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...

  • Page 32
    ... 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...

  • Page 33
    ... 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...

  • Page 34
    ... 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...

  • Page 35
    ... in fiscal 2008. By segment and in total, gross profit as a percentage of sales was: For the Fiscal Year Ended February 2, January 31, 2009 2008 DSW ...Leased departments ...Total DSW Inc ... 27.1% 16.6% 25.9% 28.0% 14.7% 26.3% The merchandise margin for the DSW segment for fiscal 2008 increased...

  • Page 36
    ... fiscal years ended: February 2, February 3, 2008 2007 (In millions) DSW ...Leased departments ...Total DSW Inc... $1,230.2 175.4 $1,405.6 $1,148.4 130.7 $1,279.1 The increase includes the impact of a net increase of 36 new DSW stores, 12 non-affiliated leased departments and 6 Filene's Basement...

  • Page 37
    ... 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...

  • Page 38
    ... 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...

  • Page 39
    ... 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...

  • Page 40
    ...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...

  • Page 41
    ... "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 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND...

  • Page 42
    ... 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. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OTHER INFORMATION...

  • Page 43
    ... in Column (a))(c) Plan Category Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) Equity compensation plans approved by security holders(1) ...Equity compensation plans not approved by security holders ...Total ...(1) DSW Inc. 2005 Equity Incentive Plan. 2,433...

  • Page 44
    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...Consolidated Balance Sheets at January 31, 2009 and February 2, 2008 ...

  • Page 45
    ... 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...

  • Page 46
    Signature Title Date * Harvey L. Sonnenberg * Allan J. Tanenbaum * Heywood Wilanksy *By: /s/ Douglas J. Probst Douglas J. Probst, (Attorney-in-fact) Director March 30, 2009 Director March 30, 2009 Director March 30, 2009 42

  • Page 47
    ... 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...

  • Page 48
    ...' EQUITY Accounts payable ...Accounts payable to related parties ...Accrued expenses: Compensation ...Taxes ...Gift cards and merchandise credits ...Customer loyalty program ...Other ...Total current liabilities ...Non-current liabilities ...Shareholders' equity: Class A Common Shares, no par value...

  • Page 49
    DSW INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JANUARY 31, 2009, FEBRUARY 2, 2008 AND FEBRUARY 3, 2007 January 31, February 2, February 3, 2008 2007 2009 (In thousands, except per share amounts) Net sales ...$ 1,462,944 Cost of sales ...(1,083,845) Gross profit ...Operating expenses ......

  • Page 50
    ...EQUITY YEARS ENDED JANUARY 31, 2009, FEBRUARY 2, 2008 AND FEBRUARY 3, 2007 Number of Class A Class B Common Common Shares Shares Class A Common Shares Class B Common Shares Accumulated Other Deferred Comprehensive Compensation Income Expense Retained Earnings (In thousands) Total Balance, January...

  • Page 51
    ... information: Cash paid during the period for: Income taxes ...Non-related parties interest expense ...Noncash investing and operating activities: (Decrease) increase in accounts payable and accrued expenses due property and equipment purchases ...Non cash-capital contribution from Retail Ventures...

  • Page 52
    ...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...

  • Page 53
    ... 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...

  • Page 54
    ... 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...

  • Page 55
    ...) Fiscal Year 2008 ...2009 ...2010 ...2011 ...2012 ...2013 ... ... $854 $854 $854 $854 $854 $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...

  • Page 56
    ... 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...

  • Page 57
    ... "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...

  • Page 58
    ..., the Company has an agreement with Filene's 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/Filene's Basement stores was closed. For the three combination DSW/Filene...

  • Page 59
    ...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...

  • Page 60
    ... the Company's 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...

  • Page 61
    ...) 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...

  • Page 62
    ... 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 Filene's Basement stores and other non-related retailers, the Company pays...

  • Page 63
    ...845 1,266 $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...

  • Page 64
    ...-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...

  • Page 65
    ... is the weighted average diluted shares outstanding. January 31, 2009 Fiscal Years Ended February 2, February 3, 2008 2007 (In thousands) Weighted average shares outstanding ...Assumed exercise of dilutive stock options ...Restricted stock units ...Number of shares for computation of dilutive...

  • Page 66
    ... sales less cost of sales. All operations are located in the United States. The tables below present segment information (in thousands) for the Company's two reportable segments: DSW Leased Departments Total DSW Inc. As of and for the year ended January 31, 2009 Net sales ...Gross profit ...Capital...

  • Page 67
    .... 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 Women's ...Men's ...Athletic ...Accessories and Other...

  • Page 68
    ... 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...

  • Page 69
    ..., results of operations or cash flows. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) May 3, 2008 Thirteen Weeks Ended August 2, November 2, January 31, 2008 2008 2009 (In thousands except per share data) Net sales...$ 366,264 Cost of sales ...(269,217) Gross profit ...Operating expenses ...Operating...

  • Page 70
    ... TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Thirteen Weeks Ended November 3, August 4, February 2, 2007 2007 2008 (In thousands except per share data) May 5, 2007 Net sales...$ 356,997 Cost of sales ...(247,741) Gross profit ...Operating expenses ...Operating profit ...Interest expense...

  • Page 71
    ... 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...

  • Page 72
    ..., between Filene's Basement and DSW. Incorporated by reference to Exhibit 10.6 to Retail Ventures' Form 8-K (file no. 1-10767) filed July 11, 2005. Lease, dated August 30, 2002, by and between Jubilee Limited Partnership, an affiliate of Schottenstein Stores Corporation, and Shonac Corporation, re...

  • Page 73
    ...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. Ground Lease Agreement, dated April 30, 2002, by and between Polaris Mall, LLC, a Delaware limited liability company...

  • Page 74
    ... 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.** Assignment and Assumption Agreement, dated January 17, 2008, between Value City Department Stores LLC...

  • Page 75
    ... 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. Occupancy Licensing Agreement, dated January 17, 2008, between Value City Department Stores LLC, Retail Ventures Services...

  • Page 76
    ...32.2 Section 1350 Certification - Principal Executive Officer.* Section 1350 Certification - Principal Financial Officer.* * Filed herewith. ** Previously filed as the same Exhibit Number to DSW's Form S-1 (Registration Statement No. 333-123289) filed with the Securities and Exchange Commission on...

  • Page 77
    ... report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Jay L. Schottenstein Jay L. Schottenstein, Chairman and Chief Executive Officer...

  • Page 78
    ...record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Douglas J. Probst Douglas J. Probst, Executive Vice...

  • Page 79
    ... with the Annual Report of DSW Inc. (the "Company") on Form 10-K for the fiscal year ended January 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jay L. Schottenstein, Chairman and Chief Executive Officer of the Company, certify, pursuant...

  • Page 80
    ... with the Annual Report of DSW Inc. (the "Company") on Form 10-K for the fiscal year ended January 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Douglas J, Probst, Executive Vice President, and Chief Financial Officer of the Company, certify...

  • Page 81
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  • Page 83
    ... President and Chief Financial Officer DSW Inc. H o m e O f f i c e ~ 810 DSW Drive Columbus, Ohio 43219 Phone: (614) 237-7100 dswinc.com k Listing ~ Jon J. Ricker Executive Vice President and Chief Administrative Officer DSW's Class A common shares trade on the New York Stock Exchange under the...

  • Page 84
    DSW INC. 810 DSW DRIVE, COLUMBUS, OHIO 43219 D S W. C O M