DSW 2008 Annual Report Download - page 37

G
ross Profit. Gross profit increased
$
3.7 million to
$
370.1 million in fiscal 2007 from
$
366.4 million i
n
fiscal 200
6
, and decreased as a percenta
g
e of net sales from 28.
6
% in fiscal 200
6
to 2
6
.3% in fiscal 2007. B
y
s
egment and in total, gross profit as a percentage of sales was:
F
ebruar
y
2
,
2
008
F
ebruar
y
3
,
2
00
7
F
or the Fiscal Year Ended
DSW
....................................................
28
.
0% 29
.
9%
L
ease
dd
e
p
artment
s
.........................................
14.7% 17.
3%
Tota
l
D
SW
Inc
.
.
..........................................
.
26.3% 28.6
%
T
h
e percenta
g
e
d
ecrease
i
n
g
ross pro
fi
t
f
or t
h
e DSW se
g
ment
i
s attr
ib
uta
bl
etoan
i
ncrease
i
n mar
kd
owns an
d
an increase in store occupanc
y
expenses which were partiall
y
offset b
y
an increase in initial mark-up. The increase
i
n markdowns in fiscal 2007 was a result of increased promotional activit
y
as compared to fiscal 2006. Stor
e
occupancy expense increased to 12.9% of net sales in 2007 from 12.2% of net sales in fiscal 200
6
due to increases in
r
ent and other occupanc
y
char
g
es.
The percentage decrease in gross profit for leased departments is a result of an increase in markdowns partiall
y
o
ff
set
b
yan
i
ncrease
i
n
i
n
i
t
i
a
l
mar
k
-up
.
O
perating Expenses.
F
or fiscal 2007, operatin
g
expenses decreased to 20.5% as a percent of net sales from
20.7% in fiscal 2006. The increase in operating expenses was a result of net increases in home office expense
s
(excluding bonus expense and dsw.com expenses) of
$
17.7 million,
$
3.0 million of professional fees and
$
6.0 million of ex
p
enses related to the start-u
p
of dsw.com. The DSW stores and leased de
p
artments that o
p
ene
d
s
ubsequent to Februar
y
3, 2007 added $12.3 million and $0.2 million, respectivel
y
, in expenses in fiscal 2007. Thes
e
e
xpenses exclude pre-opening and occupancy (excluding depreciation and amortization) expenses. The increases i
n
operatin
g
expenses were partiall
y
offset b
y
the decrease of bonus expense of
$
14.4 million and a decrease in
m
arketin
g
expenses as compared to fiscal 2006 due to nonrecurrin
g
expenses related to the chan
g
e in the lo
y
alt
y
pro
g
ram in 2006.
Operating Profit
.
O
peratin
g
profit was
$
81.3 million in fiscal 2007, compared to
$
100.7 million in fisca
l
2006, and decreased as a percenta
g
e of net sales from 7.9% in fiscal 2006 to
5
.8% in fiscal 2007. As a percent o
f
s
ales, the decrease in operating profit was a result of a decrease in gross profit
.
I
nterest Income
,
Net.
I
nterest income, net of interest ex
p
ense, was $6.0 million in fiscal 2007 com
p
ared t
o
i
nterest income, net of interest expense, of $6.9 million in fiscal 2006. Interest income for the fiscal
y
ear was the
result of investment activity from funds generated from operations.
I
ncome
T
axes
.
Our effective tax rate for fiscal 2007 was 38.4%, compared to 39.2% for fiscal 200
6
. Of the
0.8% decrease in the tax rate, 1.7% is related to our investment in tax exempt securities, 0.1% is due to chan
g
es i
n
the state statutory rate, however, these decreases were partially offset by expense of 0.6% related to the valuatio
n
all
owance an
d
0.4% re
l
ate
d
to ot
h
er var
i
ous a
dj
ustments.
N
et Income.
F
or fiscal 2007, net income decreased $11.7 million, or 17.9%, com
p
ared to fiscal 2006 and
represented 3.8% and
5
.1% of net sales of fiscal 2007 and fiscal 2006, respectivel
y
. This decrease as a percenta
g
eof
sa
l
es was pr
i
mar
il
yt
h
e resu
l
to
f
a
d
ecrease
i
n gross pro
fi
t part
i
a
ll
yo
ff
set
b
ya
d
e crease
i
n operat
i
ng expenses
.
L
iquidity and Capital Resources
O
verview
O
ur pr
i
mar
y
on
g
o
i
n
g
cas
hfl
ow requ
i
rements are
f
or seasona
l
an
d
new store
i
nventor
y
purc
h
ases, cap
i
ta
l
expenditures in connection with our store expansion, improvin
g
our information s
y
stems, the development o
f
d
sw.com, the remodelin
g
of existin
g
stores and infrastructure
g
rowth. Our workin
g
capital and inventor
y
levels
typ
i
ca
ll
y
b
u
ild
seasona
ll
y. We
b
e
li
eve t
h
at we
h
ave su
ffi
c
i
ent
fi
nanc
i
a
l
resources an
d
access to
fi
nanc
i
a
l
resources at
this time. We are committed to a cash mana
g
ement strate
gy
that maintains liquidit
y
to adequatel
y
support th
e
o
peration of the business, our
g
rowth strate
gy
and to withstand unanticipated business volatilit
y
. We believe that
cas
h
generate
df
rom DSW operat
i
ons, toget
h
er w
i
t
h
our current
l
eve
l
so
f
cas
h
an
d
equ
i
va
l
ents an
d
s
h
ort-ter
m
33