DSW 2012 Annual Report Download - page 53

F- 13
consist of cash and equivalents and investments. The Company invests excess cash when available through financial
institutions in money market accounts and short-term and long-term investments. At times, such amounts invested through
banks may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits, and the Company mitigates the
risk by utilizing multiple banks.
Concentration of Vendor Risk- During fiscal 2012, 2011 and 2010, merchandise supplied to the Company by three key
vendors accounted for approximately 18%, 19% and 20% of net sales, respectively.
Fair Value- Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Therefore, fair value is a market-based measurement based on
assumptions of the market participants. As a basis for these assumptions, DSW classifies its fair value measurements under the
following fair value hierarchy:
• Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that are publicly
accessible. Active markets have frequent transactions with enough volume to provide ongoing pricing
information.
• Level 2 inputs are other than level 1 inputs that are directly or indirectly observable. These can include
unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical
assets or liabilities in inactive markets or other observable inputs.
• Level 3 inputs are unobservable inputs.
Allowance for Doubtful Accounts- The Company monitors its exposure for credit losses and records related allowances for
doubtful accounts. Allowances are estimated based upon specific accounts receivable balances, where a risk of default has been
identified. The reduction in fiscal 2010 is related to the release of the Company’s claim related to the Value City bankruptcy
estate in December 2010. The following table summarizes the activity related to the Company’s allowance for doubtful
accounts:
Fiscal years ended Balance at
Beginning of
the Period Charged to Expense Deductions
Balance at
End of the
Period
(in thousands)
February 2, 2013 $ 555 — (256) $ 299
January 28, 2012 714 532 (691) 555
January 29, 2011 5,343 183 (4,812) 714
Inventories- Merchandise inventories are stated at lower of cost or market, determined using the retail inventory method. The
retail inventory method is 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 determined 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. Markdowns require 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 inventory method, can significantly impact the ending inventory
valuation at cost and the resulting gross profit. DSW records a reduction to inventories and a 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 life of 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:
Table of Contents DSW INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS