DSW 2010 Annual Report Download - page 56

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, main-
tenance and other operating costs that are passed to the Company from the landlord. Distribution costs include the
transportation of merchandise to the distribution and fulfillment centers, from the distribution center to the
Company’s 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 the Company by its landlords.
Operating Expenses — Operating expenses include expenses related to store management and store payroll
costs, advertising, leased department operations, store depreciation and amortization, new store advertising and
other new store costs (which are expensed as incurred) and corporate expenses. Corporate expenses include
expenses 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 expenses are primarily attributable to
operations at the corporate offices in Columbus, Ohio.
Stock-Based Compensation — The fair value of options granted is estimated on the date of grant using the
Black-Scholes option pricing model. See Note 3 for a detailed discussion of stock-based compensation.
New Store Costs — Costs associated with the opening of stores are expensed as incurred. New store costs
expensed were $2.8 million, $1.6 million and $6.2 million for fiscal 2010, 2009 and 2008, respectively.
Marketing Expense — The production cost of television advertising is expensed when the advertising first
takes place. All other marketing costs are expensed as incurred. Marketing costs were $46.5 million, $42.2 million
and $30.3 million in fiscal 2010, 2009 and 2008, respectively.
Other Operating Income — Other operating income consists primarily of income from consignment sales,
income from gift card breakage and insurance proceeds and is included in operating expenses in the income
statement. The amount recorded in fiscal 2010, 2009 and 2008 was $7.3 million, $5.1 million and $4.2 million,
respectively.
Non-operating Income (Expense), Net — Non-operating income (expense), net includes other-than-temporary
impairments related to investments and realized gains on disposition of investments.
Legal Proceedings and Claims — The Company is involved in various legal proceedings that are incidental to
the conduct of its business. DSW records a reserve for estimated losses when the loss is probable and the amount can
be reasonably estimated. See Note 10 for a discussion of legal proceedings.
Income Taxes — Income taxes are accounted for using the asset and liability method. Under this method,
deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their
reported amounts in the consolidated financial statements. A valuation allowance is established against deferred tax
assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of
January 29, 2011 and January 30, 2010, the Company had valuation allowances of $0.8 million and $1.4 million,
respectively.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued updates to existing guidance
related to fair value measurements. As a result of these updates, entities will be required to provide enhanced
disclosures about transfers into and out of level 1 and level 2 classifications, provide separate disclosures about
purchases, sales, issuances and settlements relating to the tabular reconciliation of beginning and ending balances of
the level 3 classification and provide greater disaggregation for each class of assets and liabilities that use fair value
measurements. Except for the detailed level 3 disclosures, the new standard was effective for the Company for the
first quarter of fiscal 2010. The requirement related to level 3 fair value measurements is effective for the Company
F-10
DSW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)