DSW 2010 Annual Report Download

Download and view the complete annual report

Please find the complete 2010 DSW annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 84

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84

2010 ANNUAL REPORT

Table of contents

  • Page 1
    2010 ANNUAL REPORT

  • Page 2

  • Page 3
    2010 financials

  • Page 4
    this page intentionally left blank

  • Page 5
    ... DSW Drive, Columbus, Ohio (Address of principal 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...

  • Page 6
    ... with Accountants on Accounting and Financial Disclosure ...Controls and Procedures ...Other Information ...PART III Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters...

  • 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 ...Index...

  • Page 8
    ... clear that the term only means the parent company. DSW is a controlled subsidiary of Retail Ventures. RVI Common Shares are listed for trading under the ticker symbol "RVI" on the NYSE. We own many trademarks and service marks. This Annual Report on Form 10-K may contain trade dress, tradenames and...

  • Page 9
    ... financial statements and the notes thereto in Item 8 of this Annual Report on Form 10-K for financial information about our two reportable segments: the DSW segment, which includes DSW stores and dsw.com, and the leased department segment. Corporate History We were incorporated in the state of Ohio...

  • Page 10
    ... by operation of law warrants issued by Retail Ventures to purchase DSW Class A Common Shares outstanding immediately prior to the effective time of the merger. Upon the closing of the merger, one of Retail Ventures' current board members will be appointed to DSW's board of directors. The parties...

  • Page 11
    ... a sale event. In order to provide additional value to our customers, we maintain a loyalty program, "DSW Rewards", which rewards customers for shopping, both in stores and online at dsw.com. "DSW Rewards" members earn reward certificates that offer discounts on future purchases. Reward certificates...

  • Page 12
    ...-branded footwear retailer by pursuing the following primary strategies for growth in sales and profitability: expanding our business, driving sales through enhanced merchandising and investment in our infrastructure. Expanding Our Business We plan to open approximately 15 to 20 DSW stores in fiscal...

  • Page 13
    ... primary distribution center to our pool points and on to stores. We continue to evaluate expansion of the bypass process for applicability in other parts of the country. We also have a fulfillment center in Columbus, Ohio to process orders for dsw.com, which are shipped directly to customers using...

  • Page 14
    ... season. Available Information DSW electronically files reports with the Securities and Exchange Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to such reports. The public may read and copy...

  • Page 15
    ... lease terms; build-out or refurbish sites on a timely and effective basis; obtain sufficient levels of inventory to meet the needs of new stores; obtain sufficient financing and capital resources or generate sufficient operating cash flows from operations to fund growth; open new stores at costs...

  • Page 16
    ...: challenging U.S. economic conditions and, in particular, the retail sales environment; changes in our merchandising strategy; timing and concentration of new DSW store openings and related new store and other start-up costs; levels of new store expenses associated with new DSW stores; changes in...

  • Page 17
    ... on our business and operations. For DSW stores and leased departments, the majority of our inventory is shipped directly from suppliers to our primary distribution center in Columbus, Ohio, where the inventory is then processed, sorted and shipped to one of our pool locations located throughout the...

  • Page 18
    ...loyalty. "DSW Rewards" is a customer loyalty program that we rely on to drive customer traffic, sales and loyalty. "DSW Rewards" members earn reward certificates that offer discounts on future purchases. In fiscal 2010, shoppers in the loyalty program generated approximately 87% of DSW store and dsw...

  • Page 19
    ... applicable laws and regulations and our internal requirements. However, we do not control our vendors or their labor and business practices. The violation of labor or other laws by one of our vendors could have an adverse effect on our business. We expect to experience cost increases from product...

  • Page 20
    .... DSW is currently subject to litigation relating to the proposed merger. Purported shareholders of Retail Ventures have filed two putative shareholder class action lawsuits in an Ohio state court against Retail Ventures and its directors and in one case, its chief executive officer, referred...

  • Page 21
    ... at the time the merger closes could adversely affect DSW's business, financial condition or results of operations. Risks Relating to our Relationship with and Separation from Retail Ventures Our amended articles of incorporation, amended and restated code of regulations and Ohio state law contain...

  • Page 22
    ... of rights to purchase our Common Shares sell the shares they own, or if Retail Ventures distributes our Common Shares to its shareholders, it could adversely affect the price of our Class A Common Shares. The market price of our Class A Common Shares could decline as a result of market sales by...

  • Page 23
    ... a number of DSW Class A Common Shares per $50 principal amount of PIES equal to 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 market price of our Class A Common Shares...

  • Page 24
    ... and Millennium have the right to acquire from Retail Ventures Class A Common Shares of DSW. Sales or distribution by Retail Ventures, SSC and its affiliates and Millennium of a substantial number of Class A Common Shares in the public market or to their respective shareholders, or the perception...

  • Page 25
    ... 1 11 12 14 8 1 5 2 3 2 10 18 6 15 2 3 16 1 5 30 3 13 6 4 Total ...311 Our primary distribution facility, our principal executive office and our dsw.com fulfillment center are located in Columbus, Ohio. The lease for our distribution center and our executive office space expires in December 2021 21

  • Page 26
    ... and obligations. Litigation relating to the proposed merger of DSW and RVI - Purported shareholders of Retail Ventures have filed two putative shareholder class action lawsuits in an Ohio state court against Retail Ventures and its directors and in one case, its chief executive officer, referred to...

  • Page 27
    ...Class B Common Shares, Retail Ventures. The following table sets forth the high and low sales prices of our Class A Common Shares as reported on the NYSE for each respective quarter: High Low Fiscal 2009: First Quarter...Second Quarter...Third Quarter ...Fourth Quarter ...Fiscal 2010: First Quarter...

  • Page 28
    ... The comparison of the cumulative total returns for each investment assumes $100 was invested on January 28, 2006 and that all dividends were reinvested. Fiscal Years Ended Company/Index 1/28/06 2/3/07 2/2/08 1/31/09 1/30/10 1/29/11 DSW Inc. S&P MidCap 400 Index S&P Retailing Index $100.00 100.00...

  • Page 29
    ...Operating profit ...Net income...Diluted earnings per share ...Balance Sheet Data: Total assets...Working capital(5) ...Current ratio(6) ...Total shareholders' equity ...Long-term obligations ...Other Data: Capital expenditures ...Number of DSW stores:(7) Beginning of period ...New stores ...Closed...

  • Page 30
    ... of sales growth, improved merchandise margins and expense management, operating profit for fiscal 2010 as a percentage of net sales improved 370 basis points over the prior year to 9.5%. We have continued making investments in our business that are critical to long-term growth. During fiscal 2010...

  • Page 31
    information technology infrastructure. As of January 29, 2011, our cash and short-term investments balance was $335.2 million. We had $50.0 million in long-term investments and had no long-term debt. As of January 29, 2011, we operated 311 DSW stores, dsw.com and leased departments in 263 Stein Mart...

  • Page 32
    ... in the fall season margin rate was expected as a result of our inventory being positioned to achieve double digit comparable sales growth. Store occupancy expense for the DSW segment decreased as a percentage of net sales to 11.1% for fiscal 2010 from 12.9% for last year primarily as a result...

  • Page 33
    ... by segment and in total: Fiscal Year Ended January 30, 2010 DSW ...Leased departments ...Total DSW Inc... 4.0% (3.6)% 3.2% The increase in comparable store sales was primarily a result of an increase in traffic and average unit retail. DSW segment comparable sales increased in women's footwear by...

  • Page 34
    ...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...

  • Page 35
    ... 30, 2010. The increase in net working capital was primarily related to the increase in cash and short-term investments as a result of operating cash flow and a planned inventory increase. The increase in current assets was partially offset by an increase in accounts payable primarily related to the...

  • Page 36
    ...the number of stores we open and remodel, infrastructure and information technology programs that we undertake and the timing of these expenditures. In fiscal 2010, we opened nine new DSW stores. We plan to open approximately 15 to 20 stores in fiscal 2011. During fiscal 2010, the average investment...

  • Page 37
    ... Annual Report on Form 10-K. Critical Accounting Policies and Estimates As discussed in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the preparation of our consolidated financial statements in conformity with GAAP requires management to make...

  • Page 38
    ...-related taxes, which are primarily real estate taxes passed to us by our landlords. • Investments. Our investments are valued using a market-based approach using level 1 and 2 inputs. Our equity investment is recorded at cost and reviewed for impairment using an income approach valuation model...

  • Page 39
    ...claims costs and loss development factors would increase or decrease our self-insurance accrual by less than $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...

  • Page 40
    ... Shared Services Agreement, DSW provides RVI and its subsidiaries 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 expired at the end of fiscal...

  • Page 41
    ... internal 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. OTHER INFORMATION. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE...

  • Page 42
    ...equity compensation plans and arrangements, divided between plans approved by our shareholders and plans or arrangements not submitted to our shareholders for approval. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options, warrants...

  • Page 43
    ... 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 as of January 29, 2011 and January 30, 2010...Consolidated Statements of Income for the years ended January...

  • Page 44
    ... by the undersigned, thereunto duly authorized. DSW INC. By: /s/ Douglas J. Probst Douglas J. Probst, Executive Vice President and Chief Financial Officer March 22, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the...

  • Page 45
    Signature Title Date * Allan J. Tanenbaum * Heywood Wilansky *By: /s/ Douglas J. Probst Douglas J. Probst, (Attorney-in-fact) Director March 22, 2011 Director March 22, 2011 41

  • Page 46
    this page intentionally left blank

  • Page 47
    ... January 29, 2011 and January 30, 2010, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended January 29, 2011. We also have audited the Company's internal control over financial reporting as of January 29, 2011 based...

  • Page 48
    ... payable...Accounts payable to related parties...Accrued expenses: Compensation ...Taxes ...Gift cards and merchandise credits ...Other ...Total current liabilities ...Deferred income taxes ...Other non-current liabilities ...Commitments and contingencies Shareholders' equity: Class A Common Shares...

  • Page 49
    DSW INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JANUARY 29, 2011, JANUARY 30, 2010 AND JANUARY 31, 2009 January 29, January 30, January 31, 2011 2010 2009 (In thousands, except per share amounts) Net sales ...Cost of sales ...Operating expenses ...Operating profit ...Interest expense ......

  • Page 50
    ... tax effects ...Purchase of DSW Class B Common Shares from RVI ...Balance, January 30, 2010 ...Net income ...Stock units granted ...Exercise of stock options ...Vesting of restricted stock units, net of settlement of taxes ...Adjustment to non-cash capital contribution from RVI ...Excess tax benefit...

  • Page 51
    ... costs ...Excess tax benefit - related to stock option exercises ...Purchase of DSW Class B Common Shares from RVI ...Net cash provided by (used in) financing activities ...Net (decrease) increase in cash and equivalents ...Cash and equivalents, beginning of period ...Cash and equivalents, end...

  • Page 52
    ... FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Business Operations - DSW Inc. ("DSW") and its wholly-owned subsidiaries are herein referred to collectively as DSW or the "Company". DSW's Class A Common Shares are listed on the New York Stock Exchange under the ticker symbol "DSW...

  • Page 53
    ... of credit risk, consist of cash, equivalents and investments. The Company invests excess cash when available through financial institutions in money market accounts and term investments. At times, such amounts may be in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits and...

  • Page 54
    ... of businesses acquired. As of both January 29, 2011 and January 30, 2010, the balance of goodwill related to the DSW stores was $25.9 million. Goodwill is tested for impairment at least annually. Management evaluates the fair value of the reporting unit using market-based analysis to review market...

  • Page 55
    ..., the members receive reward certificates for these discounts which expire six months after being issued. The Company accrues the anticipated redemptions of the discount earned at the time of the initial purchase. To estimate these costs, DSW makes assumptions related to customer purchase levels and...

  • Page 56
    ... related to buying, information technology, depreciation expense for corporate cost centers, marketing, legal, finance, outside professional services, customer service center expenses, allocable costs to and from Retail Ventures, payroll and benefits for associates and payroll taxes. Corporate level...

  • Page 57
    ... financial statements related to the level 3 fair value disclosures. 2. RELATED PARTY TRANSACTIONS RVI - Under the terms of the Amended and Restated Shared Services Agreement, DSW provides shared finance, information technology and human resources services to RVI. In fiscal 2010 and 2009, DSW...

  • Page 58
    ...-average assumptions used in the Black-Scholes option-pricing model for options granted in each of the periods presented: January 29, 2011 Fiscal Years Ended January 30, January 31, 2010 2009 Assumptions: Risk-free interest rate ...Year end volatility of DSW common stock ...Expected option term...

  • Page 59
    ... chair of a board committee) by the fair market value of a share of the DSW Class A Common Shares on the date of the annual 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 F-13

  • Page 60
    ... center and one distribution center for a total annual minimum rent of $11.5 million and additional contingent rents based on aggregate sales in excess of specified sales for the store locations. Under supply agreements, the Company pays contingent rents based on sales for the leased departments...

  • Page 61
    ... condition of the underlying issuer. The following table discloses the major categories of the Company's investments as of the periods presented: Short-Term Investments Long-Term Investments January 29, January 30, January 29, January 30, 2011 2010 2011 2010 (In thousands) Available-for-sale: Tax...

  • Page 62
    ... using level 3 inputs such as the financial condition and future prospects of the entity. The following table presents the activity related to level 3 fair value measurements for the periods presented: Fiscal Years Ended January 29, 2011 January 30, 2010 Short-Term Long-Term Short-Term Long-Term...

  • Page 63
    ... or asset group over its fair value, based on a discounted cash flow analysis using a discount rate determined by management. Should an impairment loss be realized, it will be included in cost of sales. 7. DSW $100 MILLION CREDIT FACILITY On June 30, 2010, the Company entered into a $100 million...

  • Page 64
    ... Company's future results of operations and financial condition. On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management...

  • Page 65
    ..., production processes, target customers and distribution methods. The Company has identified such segments based on internal management reporting and management responsibilities and measures segment profit as gross profit, which is defined as net sales less cost of sales. All operations are located...

  • Page 66
    ...CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 12. INCOME TAXES Income Tax Provision - The following table presents the composition of the income tax provision for the periods presented: January 29, 2011 Fiscal Years Ended January 30, January 31, 2010 2009 (In thousands) Current: Federal ...State...

  • Page 67
    ... impact on DSW's financial position, results of operations or cash flows. Consistent with its historical financial reporting, the Company has elected to classify interest expense related to income tax liabilities, when applicable, as part of interest expense in its consolidated statement of income...

  • Page 68
    ... current and future tax examinations to be insignificant at this time. 13. QUARTERLY FINANCIAL DATA (UNAUDITED) May 1, 2010 Thirteen Weeks Ended July 31, October 30, January 29, 2010 2010 2011 (In thousands, except per share data) Net sales ...Cost of sales ...Operating expenses ...Operating profit...

  • Page 69
    ... issued by Retail Ventures to purchase DSW Class A Common Shares outstanding immediately prior to the effective time of the merger. DSW and RVI expect to complete the merger in the second quarter of fiscal 2011. Upon the closing of the merger, one of Retail Ventures' current board members will be...

  • Page 70
    ... of Retail Ventures. Litigation relating to the proposed merger of DSW and RVI - Purported shareholders of Retail Ventures have filed two putative shareholder class action lawsuits in an Ohio state court against Retail Ventures and its directors and in one case, its chief executive officer (referred...

  • Page 71
    ... by reference to Exhibit 10.6 to Retail Ventures' Form 10-Q (file no. 1-10767) filed June 18, 2002. Amendment to Corporate Services Agreement, dated July 5, 2005, among Retail Ventures, Schottenstein Stores Corporation and Schottenstein Management Company, together with Side Letter Agreement, dated...

  • Page 72
    ... Avenue, LLC, an affiliate of Schottenstein Stores Corporation, as landlord, and Shonac, as tenant, re: warehouse facility and corporate headquarters. Incorporated by reference to Exhibit 10.60 to Retail Ventures' Form 10-K (file no. 1-10767) filed April 28, 2000. DSW Inc. 2005 Equity Incentive Plan...

  • Page 73
    ...between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Columbus, OH (Polaris) DSW store. Incorporated by reference to Exhibit 10.53.1 to Retail Ventures' Form 10-K/A (file no. 1-10767) filed May 12, 2005. Lease, dated August 30, 2002, by and between JLP-Cary, LLC, an...

  • Page 74
    ... to Form 10-K (file no. 1-32545) filed March 24, 2010. Lease Amendment, dated February 1, 2010, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: South Bend, IN DSW store. Incorporated by reference to Exhibit 10.59.1 to Retail Ventures' Form 10-K/A (file no...

  • Page 75
    ...Stores Corporation and eTailDirect LLC re: new fulfillment center for the business of ETD. Incorporated by reference to Exhibit 10.5 to Form 8-K (file no. 1-32545) filed March 6, 2008. Transfer and Assignment Agreement among Retail Ventures, Inc., Retail Ventures Services, Inc., DSW Inc., and Filene...

  • Page 76
    ... and DSW Inc. #* List of Subsidiaries.* Consent of Independent Registered Public Accounting Firm.* Powers of Attorney.* Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer.* Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.* Section 1350 Certification - Principal...

  • Page 77
    EXHIBIT 31.1 CERTIFICATIONS I, Michael R. MacDonald, certify that: 1. I have reviewed this annual report on Form 10-K of DSW Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, ...

  • Page 78
    EXHIBIT 31.2 CERTIFICATIONS I, Douglas J. Probst, certify that: 1. I have reviewed this annual report on Form 10-K of DSW Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in ...

  • Page 79
    ... with the Annual Report of DSW Inc. (the "Company") on Form 10-K for the fiscal year ended January 29, 2011 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael R. MacDonald, President 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 29, 2011 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
    this page intentionally left blank

  • Page 82
    this page intentionally left blank

  • Page 83

  • Page 84
    DSW INC. 810 DSW DRIVE, COLUMBUS, OHIO 43219 DSW.COM