DSW 2009 Annual Report Download - page 36

distribution expenses as a percentage of net sales. The increase in merchandise margin was primarily a result of a
decrease in markdowns due to managing inventory. The increase in distribution expense as a percentage of net sales
was a result of expenses related to our dsw.com fulfillment center, which was not operating in fiscal 2007. Store
occupancy expense for DSW as a percentage of net sales increased to 14.1% in fiscal 2008 from 12.9% in fiscal
2007 as a result of decreased average store sales as compared to fiscal 2007.
The gross profit for leased departments increased as a percentage of net sales compared to fiscal 2007 due to
decreased markdowns partially offset by an increase in distribution expense as a percentage of net sales. The
decrease in markdowns was a result of enhancements to the clearance markdown process and aligning our inventory
position to sales demand.
Operating Expenses. For fiscal 2008, operating expenses increased as a percent of net sales to 23.0% from
20.5% in fiscal 2007. The increase in operating expenses as a percent of sales was driven by an increase in home
office expenses and expenses related to the start-up and operation of dsw.com. Home office expenses as a percent of
sales increased by 130 basis points due to increases in personnel and bonus costs, a one-time severance charge
related to the fourth quarter workforce reduction and unreimbursed expenses related to services provided to Value
City Department Stores. As a percentage of net sales, new store and store expenses were flat to last year.
Operating Profit. Operating profit decreased as a percentage of net sales to 2.9% in fiscal 2008 from 5.8% in
fiscal 2007. The decrease in operating profit as a percentage of net sales was primarily a result of a decrease in gross
profit and an increase in operating expenses.
Interest Income, Net. Interest income, net of interest expense, was 0.2% and 0.4%, respectively, as a
percentage of net sales for fiscal 2008 and 2007. Interest income decreased due to the replacement of our short-term
investments in favor of money market funds and other investments with lower yields.
Non-operating Expense, Net. Non-operating expense, net for fiscal 2008 represents other-than-temporary
impairments on our auction rate securities. There was no non-operating expense in fiscal 2007.
Income Taxes. Our effective tax rate for fiscal 2008 was 39.3%, compared to 38.4% for fiscal 2007.
Net Income. For fiscal 2008, net income decreased 50.0% compared to fiscal 2007 and represented 1.8% and
3.8% of net sales, respectively. This decrease was primarily the result of a decrease in gross profit and an increase in
operating expenses.
Liquidity and Capital Resources
Overview
Our primary ongoing cash flow requirements are for seasonal and new store inventory purchases, capital
expenditures in connection with our store expansion, improving our information systems, the remodeling of
existing 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 the operation of the business, our
growth strategy and to withstand unanticipated business volatility. We believe that cash generated from DSW
operations, together with our current levels of cash and equivalents and short-term investments as well as
availability under our revolving credit facility, will be sufficient to maintain our ongoing operations, support
seasonal working capital requirements and fund capital expenditures related to projected business growth.
$150 Million Secured Revolving Credit Facility. We have a $150 million secured revolving credit facility that
expires July 5, 2010. Under this facility, we and our subsidiaries are named as co-borrowers. Our facility has
borrowing base restrictions and provides for borrowings at variable interest rates based on LIBOR, the prime rate
and the Federal Funds effective rate, plus a margin. Our obligations under this credit facility are secured by a lien on
substantially all of our and one of our subsidiary’s personal property and a pledge of our shares of DSW Shoe
Warehouse. In addition, our secured revolving credit facility contains usual and customary restrictive 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 merge or consolidate with another entity. In addition, if
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