DSW 2012 Annual Report Download - page 13

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generated approximately 89% of DSW store and dsw.com sales versus approximately 88% of DSW store and dsw.com sales in
fiscal 2011. As of February 2, 2013, approximately 20 million members were enrolled in “DSW Rewards” and have made at
least one purchase over the course of the last two fiscal years, compared to approximately 18 million members as of January 28,
2012. In the event that our “DSW Rewards” members do not continue to shop at DSW or the number of members decreases,
this could have a material adverse effect on our business.
We are constantly exploring new business opportunities. We are testing a new luxury business which may not be
successful and could adversely affect our results of operations or distract management from our core business. The failure
to successfully execute our plans may have a material adverse effect on our business, results of operations or financial
condition.
We are testing a new luxury business to sell shoes and related accessories through our website. For a limited time, we are
selling luxury apparel that we purchased as part of the overall luxury purchase in pop-up stores in fiscal 2013. We expect to
recognize a loss in fiscal 2013 from our luxury business. Even considering the expected loss, our actual sales could be lower
than planned. If that occurs, we will likely take further markdowns on inventory which will adversely affect gross profit. Lower
than expected sales could result in the need to execute alternative ways of disposing of the merchandise, which could distract
management and/or adversely affect gross profit.
If we decide to continue luxury product as a permanent offering, the continued development of such a business could
distract management from our core business or be unsuccessful. In addition, as this is a new business, we have purchased
inventory based upon anticipated sales, which may not occur. In the event that we lose focus on our core business or are
unsuccessful in the execution of our concept, it may have a material adverse effect on our business, results of operations or
financial condition.
DSW is exposed to risk through leases of certain portions of its properties.
In fiscal 2013, we purchased our corporate office headquarters, our distribution center and a trailer parking lot. Certain
portions of the properties are leased to both unrelated and related parties, which provides rental income. The largest tenant's
lease, which is not with a related party, is expected to renew in June 2013 for another two-year term, but either party can
terminate after each two-year renewal option and the tenant can terminate at any time with 60 days' notice. In the event that one
or more tenants do not renew their leases, the foregoing circumstances or events could have a material adverse effect on our
financial condition.
Risks Relating to the External Environment
We rely on foreign sources for our merchandise, and our business is therefore subject to risks associated with
international trade.
We purchase merchandise from domestic and foreign vendors. In addition, many of our domestic vendors import a large
portion of their merchandise from abroad, primarily from China, Brazil and Italy. We believe that almost all the merchandise
we purchased during fiscal 2012 was manufactured outside the United States, and the majority was manufactured in China. For
this reason, we face risks inherent in purchasing from foreign suppliers, such as: economic and political instability in countries
where these suppliers are located; international hostilities or acts of war or terrorism affecting the United States or foreign
countries from which our merchandise is sourced; increases in shipping costs; transportation delays and interruptions, including
increased inspections of import shipments by domestic authorities; work stoppages; U.S. laws affecting the importation of
goods, including duties, tariffs and quotas and other non-tariff barriers; expropriation or nationalization; changes in foreign
government administration and governmental policies; changes in import duties or quotas; compliance with trade and foreign
tax laws; and local business practices, including compliance with foreign laws and with domestic and international labor
standards.
We require our vendors to operate in compliance with 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 a material adverse effect on our business.
Restrictions in our secured revolving credit facility could limit our operational flexibility.
We have a $100 million secured revolving credit facility with a term expiring June 2014. Under this facility, we and our
subsidiary, DSW Shoe Warehouse, Inc., are co-borrowers, with all other subsidiaries listed as guarantors. This facility is subject
to a borrowing base restriction and provides for borrowings at variable interest rates as defined in the agreement. The credit
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