DSW 2010 Annual Report Download - page 38

While we believe that our historical experience and other factors considered provide a meaningful basis for the
accounting policies applied in the preparation of the consolidated financial statements, we cannot guarantee that our
estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of
judgment, actual results inevitably will differ from those estimates, and such differences may be material to our
consolidated financial statements.
We believe the following represent the most significant accounting policies, critical estimates and assump-
tions, among others, used in the preparation of our consolidated financial statements:
• Revenue Recognition. Revenues from merchandise sales are recognized upon customer receipt of mer-
chandise, are net of returns through period end and sales tax and are not recognized until collectability is
reasonably assured. For dsw.com, we estimate a time lag for shipments to record revenue when the customer
receives the goods. We believe a one day change in our estimate would not materially impact our revenue.
Net sales also include revenue from shipping and handling while the related costs are included in cost of
sales.
• Cost of Sales and Merchandise Inventories. Merchandise inventories are stated at net realizable value,
determined using the first-in, first-out basis, or market, using the retail inventory method. The retail method
is widely 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 calculated 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.
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
method, can significantly impact the ending inventory valuation at cost and the resulting gross profit.
We record a reduction to inventories and charge to cost of sales for shrinkage. Shrinkage is calculated as a
percentage of sales from the last physical inventory date. Our estimates are based on both our historical
experience as well as recent physical inventory results. Physical 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. sales, it would result in a decrease or increase of
approximately $3.9 million to operating profit.
Markdowns establish a new cost basis for our 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. Our
markdown reserve requires management to make assumptions regarding customer preferences, fashion
trends and consumer demand.
Our cost of sales includes the cost of merchandise, which includes markdowns and shrinkage. We also
include in the cost of sales expenses associated with warehousing (including depreciation), distribution and
store occupancy (excluding depreciation and including impairments). Warehousing costs are comprised of
labor, benefits and other labor-related costs associated with the operations of the distribution and fulfillment
centers. The non-labor costs associated with warehousing include rent, depreciation, insurance, utilities,
maintenance and other operating costs that are passed to us from the landlord. Distribution costs include the
transportation of merchandise to the distribution and fulfillment centers, from the distribution center to our
stores and from the fulfillment center to the customer. Store occupancy costs include rent, utilities, repairs,
maintenance, insurance, janitorial costs and occupancy-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 that uses level 3 inputs such as the financial condition and future prospects of the entity. We evaluate
our investments for impairment and whether impairment is other-than-temporary. In determining whether
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