DSW 2011 Annual Report Download - page 59

Table of Contents DSW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively.
Cost of Sale s -
In addition to the cost of merchandise, which includes markdowns and shrinkage, DSW includes in cost of sales expenses
associated with warehousing (including depreciation), distribution and store occupancy (excluding depreciation and including store 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 DSW from the landlord. Distribution costs include the transportation of merchandise to the distribution and fulfillment centers,
from the distribution center to DSW’
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 DSW by its landlords. DSW
conformed its accounting policies and recast its pre-
merger or prior period financial statements and notes for warehousing and store occupancy
costs historically reported by RVI within operating expenses to be consistent with DSW’
s historical classification of these costs within cost of
sales.
Operating Expenses-
Operating expenses include expenses related to store management and store payroll costs, advertising, leased business
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, payroll and benefits for associates and payroll taxes.
DSW conformed RVI's accounting policies and recast its pre-
merger or prior period financial statements and notes for warehousing and store
occupancy costs historically reported by RVI within operating expenses to be consistent with DSW’
s historical classification of these costs within
cost of sales.
Stock-Based Compensation- The fair value of options granted is estimated on the date of grant using the Black-Scholes pricing model
. See
Note 4 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, primarily pre-
opening rent and marketing
expenses, expensed were $6.7 million , $2.8 million and $1.6 million for fiscal 2011 , 2010 and 2009 , 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 $50.9 million, $46.5 million and $42.2 million in fiscal 2011 , 2010 and 2009 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 statement of operations. The amount recorded in fiscal 2011 , 2010 and 2009
was
$7.8 million , $11.0 million and $5.1 million, respectively.
Exit and Disposal Obligations- DSW records a reserve when a store or office facility is abandoned due to closure or relocation. Using its credit-
adjusted risk-
free rate to present value the liability, DSW estimates future lease obligations based on remaining lease payments, estimated or
actual sublease payments, and any other relevant factors. On a quarterly basis, DSW reassesses the reserve based on current market conditions.
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.
Noncontrolling Interests- The noncontrolling interests represented the portion of legacy DSW’s total shareholders’
equity owned by unaffiliated
investors in DSW prior to the Merger and net income attributable to the unaffiliated investors. The noncontrolling interest percentage was
computed by the ratio of shares held by unaffiliated interests. After the Merger, noncontrolling interests were eliminated.
Income Taxes-
Income taxes are accounted for using the asset and liability method. The Company is required to determine the aggregate amount
of income tax expense to accrue and the amount which will be currently payable based upon tax statutes of each jurisdiction in which the
Company does business. In making these estimates, income is adjusted based on a determination of generally accepted accounting principles for
items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities, as a result of these differences, are
reflected on DSW’
s balance sheet for temporary differences that will reverse in subsequent years. A valuation allowance is established against
deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. DSW succeeded to RVI’s tax
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