DSW 2014 Annual Report Download - page 33

Table of Contents
Policy Judgments and Estimates Effect if Actual Results Differ from Assumptions
Cost of Sales and Merchandise 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 store inventory counts are taken on an
annual basis and have supported our shrinkage
estimates. If our estimate of shrinkage, on a cost
basis, were to increase or decrease 0.5% as a
percentage of DSW Inc. net sales, it would result
in a decrease or increase of approximately $5.1
million to operating profit.
Investments. Our investments are valued using a
market-based approach using level 1 and 2 inputs.
We evaluate our investments for impairment and
whether impairment is other-than-temporary. Based
on the nature of the impairment(s), we would record
temporary impairments as unrealized losses in other
comprehensive loss or other-than-temporary
impairments in earnings. The investment is written
down to its current market value at the time the
impairment is deemed to have occurred.
In determining whether impairment has occurred,
we review information about the underlying
investment that is publicly available and assess our
ability to hold the securities for the foreseeable
future.
We believe that our fair value estimates are
reasonable.
Asset Impairment and Long-lived Assets. We
periodically evaluate the carrying amount of our
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.
Our reviews are conducted at the lowest identifiable
level, which includes a store. The impairment loss
recognized is the excess of the carrying amount of
the asset or asset group over its fair value, based on
projected discounted cash flows using a discount
rate determined by management. Any impairment
loss realized is generally included in cost of sales.
We believe that the long-lived assets' carrying
amounts and useful lives are appropriate. To the
extent these future projections or our strategies
change, the conclusion regarding impairment
may differ from our current estimates.
Customer Loyalty Program. We maintain a
customer loyalty program for DSW in which
program members earn reward certificates that result
in discounts on future purchases. Upon reaching the
target-earned threshold, the members receive reward
certificates for these discounts which expire three
months after being issued. We accrue the
anticipated redemptions of the discount earned at
the time of the initial purchase.
To estimate these costs, we make assumptions
related to customer purchase levels and redemption
rates based on historical experience.
If our redemption rate were to increase or
decrease by 5%, it would result in an increase or
a decrease of approximately $2.0 million to the
reserve at year end.
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Source: DSW Inc., 10-K, March 26, 2015 Powered by Morningstar® Document Research℠
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