DSW 2011 Annual Report Download - page 57

Table of Contents DSW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories-
Merchandise inventories are stated at net realizable value, determined 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. Markdowns establish a new cost basis for 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. The markdown reserve requires management to make assumptions regarding
customer preferences, fashion trends and consumer demand.
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. DSW records 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.
Estimates are based on both historical experience as well as recent physical inventory results. Physical inventory counts are taken on an annual
basis and have supported DSW’s shrinkage estimates.
Property and Equipment- Property and equipment are stated at cost less accumulated depreciation determined by the straight-
line method over the
expected useful lives of the assets. The straight-
line method is used to amortize such capitalized costs over the lesser of the expected useful life of
the asset or the life of the lease. The estimated useful lives by class of asset are:
Asset Impairment and Long-Lived Assets- DSW periodically evaluates the carrying amount of its long-
lived assets, primarily property and
equipment, and finite lived intangible assets when events and circumstances warrant such a review to ascertain if any assets have been impaired.
The carrying amount of a long-
lived asset or asset group is considered impaired when the carrying value of the asset or asset group exceeds the
expected future cash flows from the asset or asset group. The reviews are conducted at the lowest identifiable level, which includes a store. The
impairment loss recognized is the excess of the carrying value of the asset 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 generally be included in cost of sales.
The Company expensed $1.6 million and $0.9 million in fiscal 2011 and 2009
, respectively, of identified assets where the recorded value could
not be supported by projected future cash flows. The impairment charges in fiscal 2011
were recorded in other, and the impairment charges in
fiscal 2009 were recorded within the DSW segment. There were no impairment charges in fiscal 2010.
Goodwill-
Goodwill represents the excess cost over the estimated fair values of net assets including identifiable intangible assets of businesses
acquired. As of both January 28, 2012 and January 29, 2011
, 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
capitalization as well as reviewing a discounted cash flow analysis using management’
s assumptions. Several factors could result in an
impairment charge such as failure to achieve sufficient levels of cash flow at the reporting unit level or a significant and sustained decline in
DSW’
s stock price. Significant judgment is necessary to determine the underlying cause of the decline and whether stock price declines are related
to the market or specifically to the Company. The Company has never recorded a goodwill impairment.
Tradenames and Other Intangible Assets, Net-
Tradenames and other intangible assets, net are primarily comprised of values assigned to
tradenames at the time of RVI’s acquisition of DSW. As of both January 28, 2012
and January 29, 2011, the gross balance of tradenames was
$13.0 million , and the average useful lives of tradenames are 14 years. Accumulated amortization for tradenames was $11.8 million
and $10.9
million as of January 28, 2012 and January 29, 2011, respectively. Amortization expense for fiscal 2011 was $0.9 million
. Future amortization
expense associated with the net carrying amount of intangible assets as of January 28, 2012 will be $0.9 million in fiscal 2012, $0.3 million
in
fiscal 2013 and less than $0.1 million in each of fiscal 2014 and fiscal 2015.
Equity Investments-
The Company accounts for equity investments using the equity method of accounting when it exercises significant influence
over the investment. If the Company does not exercise significant influence, the Company accounts for
F-13
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements Shorter of the lease term or 10 years