DSW INC. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 29, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number 1-32545
DSW INC.
(Exact name of registrant as specified in its charter)
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Ohio
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31-0746639 |
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(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
Incorporation or organization)
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4150 East 5th Avenue Columbus, Ohio
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43219 |
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(Address of principal executive offices)
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(Zip Code) |
(614) 237-7100
Registrants telephone number, including area code
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. þ
Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). o
Yes þ No
The number of outstanding Class A Common Shares, without par value, as of August 31, 2006 was
16,218,996 and Class B Common Shares, without par value, as of August 31, 2006 was 27,702,667.
DSW INC.
TABLE OF CONTENTS
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
DSW
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share amounts)
(unaudited)
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July 29, |
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January 28, |
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2006 |
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2006 |
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|
ASSETS |
|
|
|
|
|
|
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|
Cash and equivalents |
|
$ |
104,326 |
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|
$ |
124,759 |
|
Short-term investments |
|
|
46,925 |
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|
|
|
|
Accounts receivable, net |
|
|
6,693 |
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|
4,039 |
|
Receivables from related parties |
|
|
64 |
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|
49 |
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Inventories |
|
|
222,029 |
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|
216,698 |
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Prepaid expenses and other assets |
|
|
14,303 |
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|
13,981 |
|
Deferred income taxes |
|
|
19,372 |
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|
|
18,591 |
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Total current assets |
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413,712 |
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|
378,117 |
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Property and equipment, net |
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97,859 |
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95,921 |
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Goodwill |
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25,899 |
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25,899 |
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Tradenames and other intangibles, net |
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5,784 |
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|
6,216 |
|
Deferred income taxes and other assets |
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|
2,017 |
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|
|
1,562 |
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Total assets |
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$ |
545,271 |
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$ |
507,715 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Accounts payable |
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$ |
84,393 |
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$ |
78,889 |
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Accounts payable to related parties |
|
|
2,332 |
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|
6,631 |
|
Accrued expenses: |
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|
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Compensation |
|
|
7,519 |
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|
9,933 |
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Taxes |
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|
11,430 |
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|
|
9,557 |
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Advertising |
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|
11,138 |
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8,586 |
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Other |
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23,449 |
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25,993 |
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Total current liabilities |
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140,261 |
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139,589 |
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Noncurrent liabilities |
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65,146 |
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63,410 |
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Commitments and contingencies |
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Shareholders equity: |
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Class A Common Shares, no par value;
170,000,000 authorized; 16,218,996
and 16,190,088 issued and outstanding,
respectively |
|
|
280,997 |
|
|
|
281,119 |
|
Class B Common Shares, no par value;
100,000,000 authorized; 27,702,667
and 27,702,667 issued and outstanding,
respectively |
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Preferred Shares, no par value; 100,000,000
authorized; no shares issued or outstanding |
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Retained earnings |
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58,867 |
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26,007 |
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Deferred compensation |
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(2,410 |
) |
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Total shareholders equity |
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|
339,864 |
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|
304,716 |
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Total liabilities and shareholders equity |
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$ |
545,271 |
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$ |
507,715 |
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|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
3
DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
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Three months ended |
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Six months ended |
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July 29, |
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July 30, |
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July 29, |
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July 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net sales |
|
$ |
301,302 |
|
|
$ |
276,211 |
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|
$ |
617,789 |
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$ |
558,017 |
|
Cost of sales |
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(216,200 |
) |
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|
(199,848 |
) |
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(439,400 |
) |
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(398,856 |
) |
|
Gross profit |
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|
85,102 |
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|
76,363 |
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|
178,389 |
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159,161 |
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Operating expenses |
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(62,005 |
) |
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|
(55,675 |
) |
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(127,403 |
) |
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(123,420 |
) |
|
Operating profit |
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|
23,097 |
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20,688 |
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50,986 |
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35,741 |
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Non-related parties interest expense |
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(142 |
) |
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(1,159 |
) |
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(282 |
) |
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(2,021 |
) |
Related parties interest expense |
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(3,920 |
) |
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(6,592 |
) |
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Total interest expense |
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|
(142 |
) |
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|
(5,079 |
) |
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|
(282 |
) |
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(8,613 |
) |
Interest income |
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|
2,117 |
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|
67 |
|
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|
3,581 |
|
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|
80 |
|
|
Interest income (expense), net |
|
|
1,975 |
|
|
|
(5,012 |
) |
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|
3,299 |
|
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|
(8,533 |
) |
|
Earnings before income taxes |
|
|
25,072 |
|
|
|
15,676 |
|
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|
54,285 |
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|
27,208 |
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|
|
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|
|
|
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|
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Income tax provision |
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|
(9,731 |
) |
|
|
(6,425 |
) |
|
|
(21,425 |
) |
|
|
(10,977 |
) |
|
Net income |
|
$ |
15,341 |
|
|
$ |
9,251 |
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|
$ |
32,860 |
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|
$ |
16,231 |
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Basis and diluted earnings per share: |
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Basic |
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$ |
0.35 |
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$ |
0.28 |
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$ |
0.75 |
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|
$ |
0.53 |
|
Diluted |
|
$ |
0.35 |
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|
$ |
0.28 |
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|
$ |
0.74 |
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|
$ |
0.53 |
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Shares used in per share calculations: |
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Basic |
|
|
43,909 |
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|
|
33,390 |
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|
43,902 |
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|
30,546 |
|
Diluted |
|
|
44,210 |
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|
33,472 |
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|
|
44,177 |
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|
30,588 |
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
4
DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands)
(unaudited)
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Number of |
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Class A |
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Class B |
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Class A |
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Class B |
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Deferred |
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|
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Common |
|
|
Common |
|
|
Common |
|
|
Common |
|
|
Retained |
|
|
Compensation |
|
|
|
|
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|
Shares |
|
|
Shares |
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|
Shares |
|
|
Shares |
|
|
Earnings |
|
|
Expense |
|
|
Total |
|
|
Balance, January 29, 2005 |
|
|
|
|
|
|
27,703 |
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|
|
|
|
|
$ |
101,442 |
|
|
$ |
77,384 |
|
|
|
|
|
|
$ |
178,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Sale of stock |
|
|
16,172 |
|
|
|
|
|
|
$ |
278,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278,418 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,231 |
|
|
|
|
|
|
|
16,231 |
|
Dividend to parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,442 |
) |
|
|
(88,558 |
) |
|
|
|
|
|
|
(190,000 |
) |
Restricted stock units granted |
|
|
|
|
|
|
|
|
|
|
1,887 |
|
|
|
|
|
|
|
|
|
|
$ |
(1,887 |
) |
|
|
|
|
Amortization of deferred
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
40 |
|
Stock units granted |
|
|
15 |
|
|
|
|
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411 |
|
|
Balance, July 30, 2005 |
|
|
16,187 |
|
|
|
27,703 |
|
|
$ |
280,716 |
|
|
$ |
0 |
|
|
$ |
5,057 |
|
|
$ |
(1,847 |
) |
|
$ |
283,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 28, 2006 |
|
|
16,190 |
|
|
|
27,703 |
|
|
$ |
281,119 |
|
|
$ |
0 |
|
|
$ |
26,007 |
|
|
$ |
(2,410 |
) |
|
$ |
304,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,860 |
|
|
|
|
|
|
|
32,860 |
|
Reclassification of unamortized
deferred compensation |
|
|
|
|
|
|
|
|
|
|
(2,410 |
) |
|
|
|
|
|
|
|
|
|
|
2,410 |
|
|
|
|
|
Stock units granted |
|
|
10 |
|
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278 |
|
Exercise of stock options |
|
|
19 |
|
|
|
|
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367 |
|
Tax benefit related to stock
options exercised |
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86 |
|
Stock based compensation expense,
before related tax effects |
|
|
|
|
|
|
|
|
|
|
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 29, 2006 |
|
|
16,219 |
|
|
|
27,703 |
|
|
$ |
280,997 |
|
|
$ |
0 |
|
|
$ |
58,867 |
|
|
$ |
0 |
|
|
$ |
339,864 |
|
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
5
DSW INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
July 29, |
|
|
July 30, |
|
|
|
2006 |
|
|
2005 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
32,860 |
|
|
$ |
16,231 |
|
Adjustments to reconcile net income
to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,792 |
|
|
|
9,580 |
|
Amortization of debt issuance costs |
|
|
59 |
|
|
|
553 |
|
Amortization of deferred compensation expense |
|
|
|
|
|
|
40 |
|
Stock based compensation expense |
|
|
1,557 |
|
|
|
|
|
Deferred income taxes |
|
|
(1,808 |
) |
|
|
(2,532 |
) |
Loss on disposal of assets |
|
|
1,276 |
|
|
|
36 |
|
Grants of director stock units |
|
|
278 |
|
|
|
411 |
|
Change in working capital, assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,654 |
) |
|
|
(1,893 |
) |
Accounts receivable from related parties |
|
|
(15 |
) |
|
|
|
|
Inventories |
|
|
(5,331 |
) |
|
|
(23,177 |
) |
Prepaid expenses and other assets |
|
|
(173 |
) |
|
|
(8,274 |
) |
Advances to/from affiliates |
|
|
|
|
|
|
(7,123 |
) |
Accounts payable |
|
|
26 |
|
|
|
16,017 |
|
Proceeds from lease incentives |
|
|
3,562 |
|
|
|
4,600 |
|
Other noncurrent liabilities |
|
|
(1,462 |
) |
|
|
1,836 |
|
Accrued expenses |
|
|
(611 |
) |
|
|
9,462 |
|
|
Net cash provided by operating activities |
|
|
37,356 |
|
|
|
15,767 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(11,317 |
) |
|
|
(14,651 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
26 |
|
Purchases of available-for-sale investments |
|
|
(69,025 |
) |
|
|
|
|
Maturities and sales from available-for-sale investments |
|
|
22,100 |
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(58,242 |
) |
|
|
(14,625 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of stock |
|
|
|
|
|
|
278,418 |
|
Proceeds from exercise of stock options |
|
|
367 |
|
|
|
|
|
Excess tax
benefit-related to stock option exercises |
|
|
86 |
|
|
|
|
|
Payment of note to parent |
|
|
|
|
|
|
(190,000 |
) |
Net decrease in revolving credit facility |
|
|
|
|
|
|
(55,000 |
) |
Debt issuance costs |
|
|
|
|
|
|
(570 |
) |
|
Net cash provided by financing activities |
|
|
453 |
|
|
|
32,848 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and equivalents |
|
|
(20,433 |
) |
|
|
33,990 |
|
Cash and equivalents, beginning of period |
|
|
124,759 |
|
|
|
8,339 |
|
|
Cash and equivalents, end of period |
|
$ |
104,326 |
|
|
$ |
42,329 |
|
|
6
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. |
|
BUSINESS OPERATIONS |
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DSW Inc. (DSW) and its wholly-owned subsidiary, DSW Shoe Warehouse, Inc. (DSWSW), are
herein referred to collectively as DSW or the Company. Prior to December 2004, DSW was a
wholly-owned subsidiary of Value City Department Stores, Inc., a wholly-owned subsidiary of
Retail Ventures, Inc. (RVI or Retail Ventures). In December 2004, RVI completed a
corporate reorganization whereby Value City Department Stores, Inc. merged with and into Value
City Department Stores, LLC (Value City), another wholly-owned subsidiary of RVI. In turn,
Value City transferred all of the issued and outstanding shares of DSW to RVI in exchange for
a promissory note. On June 29, 2005, DSW commenced an initial public offering (IPO) that
closed on July 5, 2005. DSWs Class A common stock is listed on the New York Stock Exchange
trading under the symbol DSW. |
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|
DSW operates in two segments and sells better-branded footwear in both. DSW stores also sell
accessories. As of July 29, 2006, DSW operated a total of 205 stores located throughout the
United States as one segment. These DSW stores offer a wide selection of brand name and
designer dress, casual and athletic footwear for men and women. DSW also operates leased shoe
departments for three non-affiliated retailers and one affiliated retailer in its leased
department segment. DSW entered into supply agreements to merchandise the non-affiliated shoe
departments in Stein Mart, Inc. (Stein Mart), Gordmans, Inc. (Gordmans) and Frugal
Fannies Fashion Warehouse (Frugal Fannies) as of July 2002, June 2004 and September 2003,
respectively. DSW has operated leased shoe departments for Filenes Basement, Inc. (Filenes
Basement), a wholly-owned subsidiary of RVI, since its acquisition by RVI in March 2000. DSW
owns the merchandise until the merchandise is sold, records sales of merchandise net of
returns and sales tax, owns the fixtures (except for Filenes Basement) and provides
supervisory assistance in these covered locations. The Company receives a percentage of the
net revenue generated from the sales of the merchandise. Stein Mart, Gordmans, Frugal
Fannies and Filenes Basement provide the sales associates. DSW pays a percentage of net
sales as rent. As of July 29, 2006, DSW supplied 156 leased departments for Stein Mart, 57
for Gordmans, 25 for Filenes Basement and one for Frugal Fannies. During the six months
ended July 29, 2006, DSW opened eight new DSW stores, closed two stores, ceased operations in
five leased departments, and added six new leased departments. |
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|
On May 30, 2006, the Company entered into an Amended and Restated Supply Agreement (the
Agreement) to supply shoes to Stein Mart. Under the terms of the Agreement, the Company
will be the exclusive supplier of shoes (the Merchandise) to all Stein Mart stores that have
shoe departments. As of July 29, 2006, the Company supplied Merchandise to 156 Stein Mart
stores. Under the amended and restated supply agreement, we will be supplying merchandise to
an additional 102 Stein Mart stores in 2007. The Agreement is consistent with the prior
agreement except that it now terminates on December 31, 2009, and will automatically extend
for another three years in the event that neither party gives notice of its intent not to
renew. |
|
2. |
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INITIAL PUBLIC OFFERING |
|
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|
On July 5, 2005, DSW closed on its initial public offering (IPO) of 16,171,875 Class A
Common Shares raising net proceeds of $285.8 million, net of the underwriters commission |
7
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
and
before expenses of approximately $7.8 million. DSW used the net proceeds of the offering to
repay $196.6 million of intercompany indebtedness, including interest, owed to RVI and for
working capital and general corporate purposes, including the paying down of $20 million
outstanding on RVIs old secured revolving credit facility and $10 million intercompany
advance. The 410.09 common shares of DSW held by RVI outstanding at January 29, 2005 were
changed to 27,702,667 Class B Common Shares. It is the 27,702,667 Class B Common Shares which
are being used in the prior periods calculation of earnings per share. Subsequent to the
IPO, the transactions between DSW and RVI and its other subsidiaries are settled in accordance
with a shared services agreement and resulted in the advances from affiliates being classified
as a current receivable or payable, as appropriate. At July 29, 2006, Retail Ventures owned
approximately 63.1% of DSWs outstanding Common Shares, representing approximately 93.2% of
the combined voting power of DSWs outstanding Common Shares. |
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3. |
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BASIS OF PRESENTATION |
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The accompanying unaudited interim financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K as filed with the Securities and Exchange Commission
(SEC) on April 13, 2006 (the 2005 Annual Report). |
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In the opinion of management, the unaudited interim financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are necessary to present fairly
the consolidated financial position and results of operations for the periods presented. |
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4. |
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ADOPTION OF ACCOUNTING STANDARDS |
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The Financial Accounting Standards Board (FASB) periodically issues Statements of Financial
Accounting Standards (SFAS), some of which require implementation by a date falling within
or after the close of the fiscal year. |
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|
In December 2004, the FASB issued SFAS No. 123 (revised 2004) Share-Based Payment (SFAS No.
123R). This statement revised SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS
No. 123) and requires a fair value measurement of all stock-based payments to employees,
including grants of employee stock options and recognition of those expenses in the statements
of operations. SFAS No. 123R establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods and services and focuses on
accounting for transactions in which an entity obtains employee services in share-based
payment transactions. In addition, SFAS No. 123R requires the recognition of compensation
expense over the period during which an employee is required to provide service in exchange
for an award. Effective January 29, 2006, the Company adopted SFAS No. 123R. The impact of
adoption to the Companys results of operations is presented in Note 5. |
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FASB Statement No. 154, Accounting Changes and Error Corrections a replacement of APB
Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154) was issued in May 2005. SFAS No. 154
changes the requirements for the accounting for and reporting of a change in accounting
principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The adoption of this new |
8
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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|
pronouncement in
fiscal 2006 was not material to the Companys financial condition, results of operations or
cash flows. |
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In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance with FASB Statement No.109, Accounting for
Income Taxes. The evaluation of a tax position in accordance with FIN 48 is a two step
process. The first step is recognition: The enterprise determines whether it is more likely
than not that a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the position. The
second step is measurement: A tax position that meets the more likely than not recognition
threshold is measured to determine that amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. FIN 48 provides for a cumulative
effect of a change in accounting principle to be recorded upon the initial adoption. This
interpretation is effective for fiscal years beginning after December 15, 2006. The Company
does not believe the interpretation will have a material impact on its consolidated financial
statements. |
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5. |
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STOCK BASED COMPENSATION |
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The Company has a 2005 Equity Incentive Plan that provides for the issuance of equity awards
to purchase up to 4,600,000 common shares, including stock options and restricted stock units
to management, key employees of the Company and affiliates, consultants (as defined in the
plan), and directors of the Company. Options generally vest 20% per year on a cumulative basis
from the date of grant. Options granted under the 2005 Equity Incentive Plan generally remain
exercisable for a period of ten years from the date of grant. Prior to fiscal 2005, the
Company did not have a stock option plan or any equity units outstanding. |
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On January 29, 2006, DSW adopted the fair value recognition provisions of SFAS No. 123R
relating to its stock-based compensation plans. Prior to January 29, 2006, DSW had accounted
for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations (APB 25). In
accordance with APB 25, compensation expense for employee stock options was generally not
recognized for options granted that had an exercise price equal to the market value of the
underlying common shares on the date of grant. |
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|
Under the modified prospective method of SFAS No. 123R, compensation expense was recognized
during the six months ended July 29, 2006, for all unvested stock options, based on the grant
date fair value estimated in accordance with the original provisions of SFAS No. 123, and for
all stock based payments granted after January 29, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123R. Stock-based compensation
expense was recorded in operating expenses in the condensed consolidated
statements of income for the three and six month periods ending July 29, 2006. The Companys
financial results for the prior periods have not been restated as a
result of this adoption. |
|
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|
During the three and six months ended July 29, 2006, the Company recorded stock based
compensation expense of approximately $0.9 million and $1.6 million, respectively. |
9
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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|
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the condensed
consolidated statements of cash flows. SFAS No. 123R requires the cash flows resulting from
the tax benefits resulting from tax deductions in excess of compensation expense recognized
for those options (excess tax benefits) to be classified as financing cash flows. |
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Consistent with the valuation method used for the disclosure only provisions of SFAS No. 123,
the Company uses the Black-Scholes option-pricing model to value stock-based compensation
expense. This model assumes that the estimated fair value of options is amortized over the
options vesting periods and the compensation costs would be included in operating expenses in
the condensed consolidated statements of income. |
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Stock Options |
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|
Forfeitures of options are estimated at the grant date based on historical rates of the parent
companys stock option activity and reduce the compensation expense recognized. The expected
term of options granted is derived from historical data of the parent companys stock options
due to the limited historical data on the DSW stock activity. The risk-free interest rate is based on the yield for U.S.
Treasury securities with a remaining life equal to the five year expected term of the options
at the grant date. Expected volatility is based on the historical volatility of the DSW common
shares combined with the historical volatility of four similar companies common shares, due
to the relative short historical trading history of the DSW common shares. The expected dividend yield curve is zero, which is based on the
Companys intention of not declaring dividends to shareholders combined with the limitations
on declaring dividends as set forth in the Companys credit facility. |
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The following table illustrates the weighted-average assumptions used in the option-pricing model
for options granted in each of the periods presented. |
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|
|
|
|
|
|
|
|
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|
Six months ended |
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|
July 29, |
|
July 30, |
|
|
2006 |
|
2005 |
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.92 |
% |
|
|
4.11 |
% |
Expected volatility of DSW common stock |
|
|
41.00 |
% |
|
|
42.19 |
% |
Expected option term |
|
4.8 years |
|
5.0 years |
|
|
The weighted-average fair value of each option granted for
the three months ended July 29, 2006
and July 30, 2005 was $15.25 and $8.13 per share, respectively,
and for the six months ended July 29, 2006 and July 30, 2006 was $13.39 per share and $8.13 per share, respectively. |
|
|
|
The following table summarizes the Companys stock option plans and related Weighted Average
Exercise Prices (WAEP) for the three and six months ended July 29, 2006 (shares and
aggregate intrinsic value in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
July 29, 2006 |
|
|
July 29, 2006 |
|
|
|
Shares |
|
|
WAEP |
|
|
Shares |
|
|
WAEP |
|
Outstanding beginning of period |
|
|
978 |
|
|
$ |
21.40 |
|
|
|
914 |
|
|
$ |
19.54 |
|
Granted |
|
|
75 |
|
|
$ |
31.46 |
|
|
|
183 |
|
|
$ |
30.46 |
|
Exercised |
|
|
(11 |
) |
|
$ |
19.00 |
|
|
|
(19 |
) |
|
$ |
19.00 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
$ |
19.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
1,042 |
|
|
$ |
21.48 |
|
|
|
1,042 |
|
|
$ |
21.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
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|
|
As of July 29, 2006 |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Intrinsic |
|
|
Shares |
|
WAEP |
|
Contract Life |
|
Value |
Options outstanding |
|
|
1,042 |
|
|
$ |
21.48 |
|
|
9 Years |
|
$ |
13,246 |
|
Options exercisable |
|
|
146 |
|
|
$ |
19.00 |
|
|
9 Years |
|
$ |
2,210 |
|
Shares available for additional grants |
|
|
3,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the amount by which the fair value of the
underlying common shares exceeds the option exercise price. The total intrinsic value of
options exercised during the three and six months ended July 29,
2006 was $0.2 million and $0.3
million, respectively. |
|
|
|
As of July 29, 2006, the total compensation cost related to nonvested options not yet recognized
was approximately $3.1 million with a weighted average expense recognition period remaining of
4.1 years. The total fair value of options that vested during the three and six months ended
July 29, 2006 was $0.9 million and $1.1 million, respectively. |
|
|
|
The following table summarizes information about options outstanding as of July 29, 2006 (shares
in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices |
|
Shares |
|
|
Life |
|
|
WAEP |
|
|
Shares |
|
|
WAEP |
|
$19.00 - $20.00 |
|
|
775 |
|
|
9 years |
|
$ |
19.00 |
|
|
|
146 |
|
|
$ |
19.00 |
|
$20.01 - $25.00 |
|
|
73 |
|
|
9 years |
|
$ |
24.52 |
|
|
|
|
|
|
|
|
|
$25.01 - $30.00 |
|
|
102 |
|
|
10 years |
|
$ |
28.04 |
|
|
|
|
|
|
|
|
|
$30.01 - $35.00 |
|
|
62 |
|
|
10 years |
|
$ |
31.21 |
|
|
|
|
|
|
|
|
|
$35.01 - $36.00 |
|
|
30 |
|
|
10 years |
|
$ |
35.79 |
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units |
|
|
|
Restricted stock units generally cliff vest at the end of four years from the date of grant
and are settled immediately upon vesting. Restricted stock units granted to employees that are
subject to the risk of forfeiture are not included in the computation of basic earnings per
share. |
|
|
|
Compensation cost is measured at fair value on the grant date and recorded over the vesting
period. Fair value is determined by multiplying the number of units granted by the grant date
market price. The total aggregate intrinsic value of nonvested restricted stock units at July |
11
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
29, 2006 was $4.9 million and the weighted average remaining contractual life was three years.
As of July 29, 2006, the total compensation cost related to nonvested restricted stock units
not yet recognized was approximately $2.5 million with a weighted average expense recognition
period remaining of 2.8 years. |
|
|
|
The following table summarizes the Companys restricted stock units and related Weighted
Average Exercise Prices (WAEP) for the three and six months ended July 29, 2006 (shares in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
Three and six months ended |
|
|
|
July 29, 2006 |
|
|
|
Shares |
|
|
WAEP |
|
Outstanding beginning of period |
|
|
131 |
|
|
$ |
20.46 |
|
Granted |
|
|
20 |
|
|
$ |
30.34 |
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(7 |
) |
|
$ |
19.00 |
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
144 |
|
|
$ |
21.80 |
|
|
|
|
|
|
|
|
|
|
|
Director Stock Units |
|
|
|
The Company issues stock units to directors who are not employees of the Company or Retail
Ventures. During the three and six months ended July 29, 2006,
DSW granted approximately 9,150
and 9,600 director stock units, respectively, and expensed $0.3
million during the three and six months ended July 29, 2006, related to these grants. During the three and six months ended July 30,
2005, DSW granted approximately 15,500 director stock units, and expensed $0.4 million related
to these grants. Stock units are automatically granted to each director who is not an employee
of the Company or Retail Ventures on the date of each annual meeting of shareholders for the
purpose of electing directors. The number of stock units granted to each non-employee director
is calculated by dividing one-half of his or her annual retainer (excluding any amount paid
for service as the chair of a board committee) by the fair market value of a share of the DSW
Class A Common Shares on the date of the meeting. In addition, each director eligible to
receive compensation for board service may elect to have the cash portion of his or her
compensation paid in the form of stock units. Stock units granted to directors
vest immediately and are settled upon the director terminating service from the board. Stock
units granted to directors which are not subject to forfeiture are considered to be
outstanding for the purposes of computing basic earnings per share. As of July 29, 2006
approximately 26,600 director stock units had been issued and no director stock units had been
settled. |
|
6. |
|
EARNINGS PER SHARE |
|
|
|
Basic earnings per share are based on net income and a simple weighted average of Class A and
Class B Common Shares and director stock units outstanding. Diluted earnings per share reflect
the potential dilution of Class A Common Shares related to outstanding stock options and
restricted stock units. The numerator for the diluted earnings per share
calculation is net income. The denominator is the weighted average diluted shares
outstanding. |
12
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended Six months ended |
|
|
July 29, |
|
July 30, |
|
July 29, |
|
July 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
(in thousands) |
Weighted average shares outstanding |
|
|
43,909 |
|
|
|
33,390 |
|
|
|
43,902 |
|
|
|
30,546 |
|
Assumed exercise of dilutive stock options |
|
|
166 |
|
|
|
47 |
|
|
|
142 |
|
|
|
24 |
|
Assumed exercise of dilutive
restricted
stock units |
|
|
135 |
|
|
|
35 |
|
|
|
133 |
|
|
|
18 |
|
|
Number of shares for computation of
dilutive earnings per share |
|
|
44,210 |
|
|
|
33,472 |
|
|
|
44,177 |
|
|
|
30,588 |
|
|
|
|
For the three and six months ended July 29, 2006 and July 30, 2005, all potentially dilutive
stock options were dilutive. |
|
7. |
|
INVESTMENTS |
|
|
|
Short-term investments include investment grade variable-rate debt obligations and auction
rate securities and are classified as available-for-sale securities. These securities are
recorded at cost, which approximates fair value due to their variable interest rates, which
typically reset every 7 to 49 days, and despite the long-term nature of their stated
contractual maturities, the Company has the intent and ability to quickly liquidate these
securities. Because the fair value approximates the cost, there are no accumulated unrealized
holding gains or losses in other comprehensive income from these investments. All income
generated from these investments is recorded as interest income. |
|
|
|
During the quarter ended July 29, 2006, $69.0 million of cash was used to purchase
available-for-sale securities while $22.1 million of cash was generated by the sale of
available-for-sale securities. As of July 29, 2006, the Company held $46.9 million in
short-term investments and at January 28, 2006, the Company had no short-term investments. |
|
|
|
The table below details the short-term investments classified as available-for-sale securities
outstanding at July 29, 2006 (in thousands): |
|
|
|
|
|
|
|
July 29, 2006 |
|
|
|
Maturity of |
|
|
|
Less Than 1 Year |
|
|
|
|
Aggregate fair value |
|
$ |
46,925 |
|
Net gains in accumulated other comprehensive income |
|
|
|
|
Net losses in accumulated other comprehensive income |
|
|
|
|
|
Net carrying amount |
|
$ |
46,925 |
|
|
8. |
|
LONG-TERM OBLIGATIONS |
|
|
|
DSW $150 Million Credit Facility |
|
|
|
In July 2005, upon the consummation of DSWs IPO, RVI and the lenders thereunder amended or
terminated the existing credit facilities and other debt obligations of Value City and its
other affiliates, including certain facilities under which DSW had
rights and obligations as a co-borrower and co-guarantor and released DSW and DSWSW from their obligations as |
13
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
co-borrowers
and co-guarantors. At the same time, DSW entered into a new $150 million secured revolving
credit facility (DSW Revolving Loan) with a term of five years. |
|
|
|
Under this new facility, DSW and DSWSW are named as co-borrowers. The new secured revolving
credit facility has borrowing base restrictions and provides for borrowings at variable
interest rates based on London Interbank Offered Rate (LIBOR), the prime rate and the
Federal Funds effective rate, plus a margin. DSWs obligations under its new secured
revolving credit facility are collateralized by a lien on substantially all of DSWs and its
subsidiarys personal property and a pledge of all of its shares of DSWSW. In addition, this
facility contains usual and customary restrictive covenants relating to DSWs management and
the operation of its business. These covenants will, among other things, restrict DSWs
ability to grant liens on its assets, incur additional indebtedness, open or close stores, pay
cash dividends and redeem its stock, enter into transactions with affiliates and merge or
consolidate with another entity. In addition, if at any time DSW utilizes over 90% of its
borrowing capacity under this facility, it must comply with a fixed charge coverage ratio test
set forth in the facility documents. At July 29, 2006 and January 28, 2006, $128.3 million and
$136.4 million, respectively, were available under the DSW Revolving Loan and no direct
borrowings were outstanding. At July 29, 2006 and January 28, 2006, $21.7 million and $13.6
million, respectively, in letters of credit were issued and outstanding. The maturity of the
DSW Revolving Loan is July 5, 2010. |
|
|
|
Credit Facilities Under Which DSW is No Longer Obligated |
|
|
|
In March 2005, DSW and RVI and certain of their affiliates increased the ceiling under their
then-existing revolving credit facility from $350 million to $425 million. The increase of $75
million to the revolving credit facility was accomplished by amendment under substantially the
same terms as the then-existing revolving credit agreement. |
|
|
|
In March 2005, DSW declared a dividend and issued an intercompany note to RVI in the amount of
$165 million. The indebtedness evidenced by this note was scheduled to mature in March 2020
and bore interest at a rate equal to LIBOR, plus 850 basis points per year. |
|
|
|
In May 2005, DSW declared an additional dividend and issued an intercompany note to RVI in the
amount of $25 million. The indebtedness evidenced by this note was scheduled to mature in May
2020 and bore interest at a rate equal to LIBOR, plus 950 basis points per year. |
|
|
|
In July 2005, subsequent to the IPO, DSW prepaid in full, without penalty, the principal
balance of both the $165 million and $25 million dividend notes, plus accrued interest of
approximately $6.6 million. |
|
9. |
|
SEGMENT REPORTING |
|
|
|
The Company is managed in two operating segments: DSW stores and leased departments. All of
the operations are located in the United States. The Company has identified such segments
based on internal management reporting and management responsibilities and measures segment
profit as gross profit, which is defined as net sales less cost of sales. The tables below
present segment information: |
14
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSW |
|
Leased |
|
|
|
|
Stores |
|
Departments |
|
Total |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Three months ended July 29, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
270,378 |
|
|
$ |
30,924 |
|
|
$ |
301,302 |
|
Gross profit |
|
|
80,172 |
|
|
|
4,930 |
|
|
|
85,102 |
|
Capital expenditures |
|
|
8,201 |
|
|
|
55 |
|
|
|
8,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended July 29, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
554,191 |
|
|
$ |
63,598 |
|
|
$ |
617,789 |
|
Gross profit |
|
|
167,359 |
|
|
|
11,030 |
|
|
|
178,389 |
|
Capital expenditures |
|
|
12,316 |
|
|
|
172 |
|
|
|
12,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 29, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
517,543 |
|
|
$ |
27,728 |
|
|
$ |
545,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSW |
|
Leased |
|
|
|
|
Stores |
|
Departments |
|
Total |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Three months ended July 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
246,875 |
|
|
$ |
29,336 |
|
|
$ |
276,211 |
|
Gross profit |
|
|
72,966 |
|
|
|
3,397 |
|
|
|
76,363 |
|
Capital expenditures |
|
|
9,913 |
|
|
|
16 |
|
|
|
9,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended July 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
498,185 |
|
|
$ |
59,832 |
|
|
$ |
558,017 |
|
Gross profit |
|
|
150,709 |
|
|
|
8,452 |
|
|
|
159,161 |
|
Capital expenditures |
|
|
15,378 |
|
|
|
130 |
|
|
|
15,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 28, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
479,364 |
|
|
$ |
28,351 |
|
|
$ |
507,715 |
|
10. |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
July 29, |
|
|
July 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest to non-related parties |
|
$ |
6 |
|
|
$ |
1,468 |
|
Interest to related parties |
|
|
|
|
|
$ |
6,592 |
|
Income taxes |
|
$ |
24,980 |
|
|
$ |
4,414 |
|
|
|
|
|
|
|
|
|
|
Noncash
investing and operating activities
Changes in accounts payable due to
asset purchases |
|
$ |
(1,179 |
) |
|
$ |
(857 |
) |
15
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
As previously reported, on March 8, 2005, Retail Ventures announced that it had learned of the
theft of credit card and other purchase information from a portion of DSW customers. On April
18, 2005, Retail Ventures issued the findings from its investigation into the theft. The theft
covered transaction information involving approximately 1.4 million credit cards and data from
transactions involving approximately 96,000 checks. |
|
|
|
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in several legal proceedings
arising out of this incident, including four putative class action lawsuits, which seek
unspecified monetary damages, credit monitoring and other relief. Each of the four lawsuits
seeks to certify a different class of consumers. One of the lawsuits seeks to certify a
nationwide class action that would include every consumer who used a credit card, debit card,
or check to make purchases at DSW between November 2004 and March 2005 and whose transaction
data was taken during the data theft incident. The other three lawsuits seek to certify
classes of consumers that are limited geographically. Those cases use different putative class
definitions to identify consumers who made purchases at certain stores in Ohio, Michigan and
Illinois. On July 26, 2006, the Michigan federal district court granted DSWs motion to
dismiss the Michigan lawsuit and so ordered the dismissal of that lawsuit. |
|
|
|
In connection with this matter, DSW entered into a consent order with the Federal Trade
Commission (FTC), which has jurisdiction over consumer protection matters. The FTC
published the final order on March 14, 2006, and copies of the complaint and consent order are
available from the FTCs Web site at http://www.ftc.gov and also from the FTCs Consumer
Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. |
|
|
|
DSW has not admitted any wrongdoing or that the facts alleged in the FTCs proposed unfairness
complaint are true. Under the consent order, DSW will pay no fine or damages. DSW has
agreed, however, to maintain a comprehensive information security program and to undergo a
biannual assessment of such program by an independent third party. |
|
|
|
There can be no assurance that there will not be additional proceedings or claims brought
against DSW in the future. DSW has contested and will continue to vigorously contest the
claims made against us and will continue to explore our defenses and possible claims against
others. |
|
|
|
The Company estimates that the potential exposure for losses related to this theft, including
exposure under currently pending proceedings, ranges from approximately $6.5 million to
approximately $9.5 million. Because of many factors, including the early development of
information regarding the theft and recoverability under insurance policies, there is no
amount in the estimated range that represents a better estimate than any other amount in the
range. Therefore, in accordance with Financial Accounting Standard No. 5, Accounting for
Contingencies, the Company accrued a charge to operations in the first quarter of fiscal 2005
equal to the low end of the range set forth above, or $6.5 million. As the situation develops
and more information becomes available, the amount of the reserve may increase or |
16
DSW INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
decrease
accordingly. The amount of any such change may be material. As of July 29, 2006, the balance
of the associated accrual for potential exposure was $4.0 million. |
|
|
|
Although difficult to quantify, since the announcement of the theft, the Company has not
discerned any material negative effect on sales trends it believes is attributable to the
theft. However, this may not be indicative of the long-term developments regarding this
matter. |
|
|
|
The Company is involved in various other legal proceedings that are incidental to the conduct
of its business. The Company estimates the range of liability related to pending litigation
where the amount and range of loss can be estimated. The Company records its best estimate of
a loss when the loss is considered probable. Where a liability is probable and there is a
range of estimated loss, the Company records the minimum estimated liability
related to the claim. In the opinion of management, the amount of any liability with respect
to these legal proceedings will not be material. As additional information becomes available,
the Company assesses the potential liability related to its pending litigation and revises the
estimates. Revisions in the Companys estimates and potential liability could materially
impact its results of operations and financial condition. |
|
12. |
|
SUBSEQUENT EVENTS |
|
|
|
On August 30, 2006, the Illinois case was dismissed. |
|
|
|
On August 10, 2006 Retail Ventures announced the pricing of its 6.625% Mandatorily
Exchangeable Notes due September 15, 2011, or PIESsm (Premium Income Exchangeable
SecuritiesSM) in the aggregate principal amount of $125,000,000 ($143,750,000 if
the underwriter exercises in full its option to purchase additional PIES pursuant to the
underwriting agreement). The closing of the transaction took place on August 16, 2006. |
|
|
|
Except to the extent Retail Ventures exercises its cash settlement option, the PIES are
mandatorily exchangeable, on the maturity date, into Class A common shares of DSW, no par value per share, which are issuable upon exchange of DSW Class B common
shares, no par value per share, beneficially owned by Retail Ventures. On the maturity date,
each holder of the PIES will receive a number of DSW Class A common shares per $50 principal
amount of PIES equal to the exchange ratio described in the Retail Ventures prospectus, or
if Retail Ventures elects, the cash equivalent thereof or a combination of cash and DSW Class
A common shares. The settlement of the PIES will not change the number of DSW common shares
outstanding. |
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
As used in this Quarterly Report on Form 10-Q (this Report) and except as the context otherwise
may require, Company, we, us, and our refers to DSW Inc. (DSW) and its wholly owned
subsidiary, DSW Shoe Warehouse, Inc. (DSWSW).
Company Overview
DSW is a leading U.S. specialty branded footwear retailer operating 205 DSW stores in 33 states as
of July 29, 2006. We offer in our DSW stores a combination of selection, convenience and value that
we believe differentiates us from our competitors such as mall-based department stores, national
chains and independent shoe retailers and appeals to consumers from a broad range of socioeconomic
and demographic backgrounds. In addition to operating DSW stores, as of July 29, 2006, we operated
a total of 214 leased shoe departments for three non-affiliated retailers, including 156 leased
shoe departments for Stein Mart, Inc. (Stein Mart); 57 for Gordmans, Inc. (Gordmans); and one
for Frugal Fannies Fashion Warehouse (Frugal Fannies). As of July 29, 2006, we also operated 25
leased shoe departments for Filenes Basement, a wholly-owned subsidiary of Retail Ventures. We
plan to further strengthen our position as a leading specialty branded footwear retailer by
pursuing three primary strategies for growth expanding our store base, driving sales through
enhanced merchandising and continuing to improve profitability.
Forward-Looking Statements
Some of the statements in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, including information
incorporated by reference herein, may contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which reflect
our current views with respect to, among other things, future events and financial performance. You
can identify these forward-looking statements by the use of forward-looking words such as
outlook, believes, expects, potential, continues, may, will, should, seeks,
approximately, predicts, intends, plans, estimates, anticipates or the negative version
of those words or other comparable words. Any forward-looking statements contained in this
Quarterly Report on Form 10-Q are based upon our historical performance and on current plans,
estimates and expectations. The inclusion of this forward-looking information should not be
regarded as a representation by us, or any other person that the future plans, estimates or
expectations contemplated by us will be achieved. Such forward-looking statements are subject to
various risks and uncertainties. Accordingly, there are or will be important factors that could
cause our actual results to differ materially from those indicated in these statements. We believe
that these factors include but are not limited to those described under Risk Factors in our
Annual Report for the fiscal year ended January 28, 2006, on
Form 10-K, as filed with the Securities and Exchange Commission on
April 13, 2006, as supplemented by Item 1A, Part II of this Report. These factors
should not be construed as exhaustive and should be read in conjunction with the other cautionary
statements that are included in this Report. We do not undertake any obligation to publicly update
or review any forward-looking statement, whether as a result of new information, future
developments or otherwise.
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary materially from what we may have
projected. Any forward-looking statements you read in this Quarterly Report on Form 10-Q reflect
our current views with respect to future events and are subject to these and other risks,
uncertainties and
18
assumptions relating to our operations, results of operations, financial condition, growth strategy
and liquidity.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with generally accepted
accounting principles, or GAAP, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of commitments and contingencies at
the date of the financial statements and reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we evaluate our estimates and judgments, including, but not
limited to, those related to inventory valuation, depreciation, amortization, recoverability of
long-lived assets (including intangible assets), estimates for self insurance reserves for health
and welfare, workers compensation and casualty insurance, customer loyalty program, income taxes,
contingencies, litigation and revenue recognition. We base these estimates and judgments on our
historical experience and other factors we believe to be relevant, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. The process of determining significant estimates is fact-specific and
takes into account factors such as historical experience, current and expected economic conditions,
product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate
these significant factors and make adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered provide a meaningful
basis for the accounting policies applied in the preparation of the consolidated financial
statements, we cannot guarantee that our estimates and assumptions will be accurate. As the
determination of these estimates requires the exercise of judgment, actual results inevitably will
differ from those estimates, and such differences may be material to our financial statements.
We believe the following represent the most significant accounting policies, critical estimates and
assumptions, among others, used in the preparation of our consolidated financial statements:
|
|
|
Revenue Recognition. Revenues from merchandise sales are recognized at the point of
sale and are net of returns and exclude sales tax. Revenue from stored value cards, which
include gift cards and returned merchandise credits, are deferred and recognized when the
cards are redeemed. The liability associated with outstanding stored value cards was $8.3
million and $9.1 million at July 29, 2006 and January 28, 2006, respectively, and these
amounts are included in the accompanying consolidated balance sheets within Accrued
expenses other. The Company did not recognize income from
unredeemed stored value cards during the three and six months ending
July 29, 2006 and July 30, 2005. |
|
|
|
|
Cost of Sales and Merchandise Inventories. Merchandise inventories are stated at the
lower of cost, determined using the first-in, first-out basis, or market, using the retail
inventory method. The retail inventory 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 profit are calculated by applying a calculated cost to retail ratio
to the retail value of inventories. The cost of the inventory reflected on our
consolidated 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. Hence, earnings are
negatively impacted as merchandise is marked down prior to sale. Reserves to value
inventory at the lower of cost or market were $21.0 million on July 29, 2006 and $19.2
million at January 28, 2006. |
19
|
|
|
Inherent in the calculation of inventories are certain significant management judgments and
estimates, including setting the original merchandise retail value or mark-on, markups of
initial prices established, reductions in prices due to customers perception of value (known
as 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. |
|
|
|
|
We include in the cost of sales expenses associated with warehousing, distribution and store
occupancy. Warehousing costs are comprised of labor, benefits and other labor-related costs
associated with the operations of the warehouse, which are primarily payroll-related taxes
and benefits. The non-labor costs associated with warehousing include rent, depreciation,
insurance, utilities and maintenance and other operating costs that are passed to us from the
landlord. Distribution costs include the transportation of merchandise to the warehouse and
from the warehouse to our stores. Store occupancy costs include rent, utilities, repairs,
maintenance, insurance and janitorial costs and other costs associated with licenses and
occupancy-related taxes, which are primarily real estate taxes passed to us by our landlords. |
|
|
|
|
Short-Term Investments. Short-term investments include investment grade variable-rate
debt obligations and auction rate securities and are classified as available-for-sale
securities. These securities are recorded at cost, which approximates fair value due to
their variable interest rates, which reset every 7 to 49 days. Despite the long-term
nature of their stated contractual maturities, the Company has the ability to quickly
liquidate these securities. As a result of the resetting variable rates, there are no
cumulative gross unrealized or realized holding gains or losses from these investments. All
income generated from these investments is recorded as interest income. As of July 29,
2006, the Company held $46.9 million in short-term investments and at January 28, 2006, the
Company had no short-term investments. |
|
|
|
|
Asset Impairment and Long-lived Assets. We must periodically evaluate the carrying
amount of our long-lived assets, primarily property and equipment, and finite life
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 is considered
impaired when the carrying value of the asset exceeds the expected future cash flows
(undiscounted and without interest) 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 over its fair value, estimated on discounted cash flow.
Should an impairment loss be realized, it will be included in cost of sales. We recorded
$0.8 million in impairment losses during the three and six months ended July 29, 2006. The
amount of impairment losses recorded in fiscal 2005 was $0.2 million, all of which was
recorded in the fourth quarter. |
|
|
|
|
During the quarter ending July 29, 2006, the Company recorded reserves associated with the
closing of two DSW stores. Expenses related to closed stores are recorded as operating
expenses. The operating lease at one of the two stores was terminated through the exercise of
a lease kick-out option. These estimates are monitored on at least a quarterly basis for
changes in circumstances. |
20
|
|
The table below sets forth the significant components and activity related to these closing
reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
January 28, |
|
|
Related |
|
|
|
|
|
|
|
|
|
July 29, |
|
|
|
2006 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
2006 |
|
|
|
(in thousands) |
|
Employee severance
and termination
benefits |
|
|
|
|
|
$ |
19 |
|
|
$ |
(4 |
) |
|
|
|
|
|
$ |
15 |
|
Lease Costs |
|
$ |
282 |
|
|
|
318 |
|
|
|
(194 |
) |
|
$ |
233 |
|
|
|
639 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
282 |
|
|
$ |
337 |
|
|
$ |
(198 |
) |
|
$ |
233 |
|
|
$ |
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
January 29, |
|
|
Related |
|
|
|
|
|
|
|
|
|
July 30, |
|
|
|
2005 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
2005 |
|
|
|
(in thousands) |
|
Employee severance
and termination
benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Costs |
|
$ |
532 |
|
|
$ |
|
|
|
$ |
(8 |
) |
|
$ |
|
|
|
$ |
524 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
532 |
|
|
$ |
|
|
|
$ |
(8 |
) |
|
$ |
|
|
|
$ |
524 |
|
|
|
We believe at this time that the long-lived assets carrying values and useful lives continue
to be appropriate. To the extent these future projections or our strategies change, our
conclusion regarding asset impairment may differ from our current estimates. |
|
|
|
Self-insurance Reserves. We record estimates for certain health and welfare, workers
compensation and casualty insurance costs that are self-insured programs. Self insurance
reserves include actuarial estimates of both claims filed, carried at their expected
ultimate settlement value, and claims incurred but not yet reported. Our liability
represents an estimate of the ultimate cost of claims incurred as of the balance sheet
date. Health and welfare estimates are calculated monthly, based on a historical analysis
for the average of the previous three months claims cost and the number of associates
employed. Workers compensation and casualty insurance estimates are calculated
semi-annually, with the assistance of an actuary, utilizing claims development estimates
based on historical experience and other factors. We have purchased stop loss insurance to
limit our exposure to any significant exposure on a per person basis for health and welfare
and on a per claim basis for workers compensation and casualty insurance. Although we do
not anticipate the amounts ultimately paid will differ significantly from our estimates,
self-insurance reserves could be affected if future claim experience differs significantly
from the historical trends and the actuarial assumptions. For example, for workers
compensation and liability claims estimates, a 1% increase or decrease to the assumptions
for claims costs and loss development factors would increase or decrease our self-insurance
accrual by $0.4 million and $0.1 million, respectively. The self-insurance reserves were
$2.9 million and $0.9 million at July 29, 2006 and January 28, 2006, respectively. |
|
|
|
Customer Loyalty Program. We maintain a customer loyalty program for our DSW stores in
which customers receive a future discount on qualifying purchases. The Reward Your
Style program is designed to promote customer awareness and loyalty and provide us with the
ability to communicate with our customers and enhance our understanding of their |
21
|
|
spending
trends. Upon reaching the target spending level, customers may redeem these discounts on a
future purchase. These future discounts must be redeemed within six months. We accrue the
estimated costs of the anticipated redemptions of the discount earned at the time of the
initial purchase and charge such costs to operating expense based on historical experience.
The estimates of the costs associated with the loyalty program require us to make assumptions
related to customer purchase levels and redemption rates. The accrued liability as of July
29, 2006 and January 28, 2006 was $10.9 million and $8.3 million, respectively. To the extent
assumptions of purchases and redemption rates vary from actual results, earnings would be
impacted. |
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Income Taxes. We are 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 we do business in. In making these estimates, we adjust income 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 our 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. If management had made these determinations on a different
basis, our tax expense, assets and liabilities could be different. |
Results of Operations
As of July 29, 2006, we operated 205 DSW stores in 33 states, and leased shoe departments in 156
Stein Mart stores, 57 Gordmans stores, 25 Filenes Basement stores and one Frugal Fannies store.
We manage our operations in two segments, defined as DSW stores and leased departments. The leased
departments are comprised of leased shoe departments in Stein Mart, Gordmans, Frugal Fannies and
Filenes Basement. The following table represents selected components of our historical
consolidated results of operations, expressed as percentages of net sales:
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Three months ended |
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Six months ended |
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July 29, |
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July 30, |
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July 29, |
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July 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net sales |
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100.0 |
% |
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100.0 |
% |
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|
100.0 |
% |
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100.0 |
% |
Cost of sales |
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(71.8 |
) |
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(72.4 |
) |
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(71.1 |
) |
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(71.5 |
) |
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Gross profit |
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28.2 |
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27.6 |
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28.9 |
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28.5 |
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Operating expenses |
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(20.5 |
) |
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(20.1 |
) |
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(20.6 |
) |
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(22.1 |
) |
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Operating profit |
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7.7 |
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7.5 |
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8.3 |
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6.4 |
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Interest expense |
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0.0 |
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(1.8 |
) |
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0.0 |
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(1.5 |
) |
Interest income |
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0.6 |
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0.0 |
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0.5 |
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0.0 |
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Interest income (expense), net |
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0.6 |
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(1.8 |
) |
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0.5 |
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(1.5 |
) |
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Earnings before income taxes |
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8.3 |
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5.7 |
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8.8 |
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4.9 |
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Income tax provision |
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(3.2 |
) |
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(2.3 |
) |
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(3.5 |
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(2.0 |
) |
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Net income |
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5.1 |
% |
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3.4 |
% |
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5.3 |
% |
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2.9 |
% |
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22
THREE MONTHS ENDED JULY 29, 2006 COMPARED TO THREE MONTHS ENDED
JULY 30, 2005
Net Sales. Net sales for the thirteen week period ended July 29, 2006 increased by 9.1%, or $25.1
million, to $301.3 million from $276.2 million in the thirteen week period ended July 30, 2005.
Our comparable store sales in the second quarter of fiscal 2006 improved 2.2% compared to the
second quarter of fiscal 2005. The increase in DSW sales includes a net increase of 21 DSW stores
and seven non-affiliated leased shoe departments. The DSW store locations opened subsequent to July
30, 2005 added $18.3 million in sales for the quarter ended July 29, 2006, while the leased shoe
departments opened subsequent to July 30, 2005 added $1.1 million in sales for the quarter ended
July 29, 2006. Leased shoe department sales comprised 10.3% of total net sales in the second
quarter of fiscal 2006, compared to 10.6% in the second quarter of fiscal 2005.
For the second quarter of fiscal 2006, DSW comparable store sales increased in womens by 3.3%,
athletic by 0.8% and accessories by 2.7%. The mens category dropped 0.8% for the quarter primarily
due to a decrease in dress class sales. Sales increases in the womens category were driven by
increases in the dress and casual classes, while the fashion classes continue to be the best
performing classes in the athletic category. The increase in the accessories category was driven by
an increase in sales of handbags.
Gross Profit. Gross profit increased $8.7 million to $85.1 million in the second quarter of fiscal
2006 from $76.4 million in the second quarter of fiscal 2005, and increased as a percentage of net
sales from 27.6% in the second quarter of fiscal 2005 to 28.2% in the second quarter of fiscal
2006. The margin for the second quarter of fiscal 2006 was positively affected by an increased
initial markup, a reduction in the markdown rate and a decrease in warehouse expense. The decrease in warehouse expense is the result of improved
operational efficiencies achieved through the use of electronic shipping information and increased
unit volumes. A reduction of the internal shrink accrual rate
resulted in an increase in gross margin of $0.5 million for the three
months ended July 29, 2006 over the comparable prior year period. Those positive factors were partially offset by an increased occupancy expense. The
store occupancy expense increased from 13.4% of net sales in the second quarter of fiscal 2005 to
13.9% of net sales in the second quarter of fiscal 2006. The increase in store occupancy expense is
the result of increases in lease expense for new stores and an impairment charge of $0.8 million.
Operating Expenses. For the second quarter of fiscal 2006, operating expenses increased $6.3
million to $62.0 million from $55.7 million in the second quarter of fiscal 2005, which represented
20.5% and 20.1% of net sales, respectively. The increase in the percent of net sales was the result
of increased personnel related expense in both the stores and home office. This unfavorable expense
was offset in part by a reduction of marketing and pre-opening costs of $2.8 million and $0.5
million, respectively. The decrease in marketing was due in part to the timing of our marketing
strategy as compared to last year. Included in operating expenses are
costs, excluding pre-opening costs, associated with 21 new DSW stores
and seven new leased shoe departments opened subsequent to July 30,
2005 of $3.2 million for the three months ended July 29, 2006. Pre-opening costs are expensed as incurred and therefore do not
necessarily reflect expenses for the stores opened in a given fiscal period. Included in operating
expenses is the related operating cost, excluding occupancy, associated with operating the leased
shoe departments.
Operating Profit. Operating profit was $23.1 million in the second quarter of fiscal 2006 compared
to $20.7 million in the second quarter of fiscal 2005, and increased as a percentage of net sales
from 7.5% in the second quarter of fiscal 2005 to 7.7% in the second quarter of fiscal 2006.
Operating profit as a percentage of net sales was impacted by the increase in gross profit offset
by the increased operating expenses.
23
Interest Income (Expense), Net. Interest income for the second quarter of fiscal 2006 was $2.0
million as compared to $5.0 million of interest expense for the second quarter of fiscal 2005.
Interest income for the quarter was the result of investment activity from funds generated by the
initial public offering (IPO) and from operations. The interest expense incurred in the second
quarter of fiscal 2005 includes $3.9 million of interest due to RVI relating to $190.0 million of
indebtedness incurred to fund dividends and $1.1 million of interest on direct borrowings under the
Value City Revolving Credit Facility.
Income Taxes. Our effective tax rate for the second quarter of fiscal 2006 was 38.8%, compared to
41.0% for the second quarter of fiscal 2005.
Net Income. For the second quarter of fiscal 2006, net income increased $6.1 million, or 65.8%,
over the second quarter of fiscal 2005 and represented 5.1% and 3.4% of net sales, respectively.
This increase was primarily the result of the increase in operating income and earning interest
income during the period as opposed to having interest expense in the comparable period in the
prior fiscal year.
SIX MONTHS ENDED JULY 29, 2006 COMPARED TO SIX MONTHS ENDED
JULY 30, 2005
Net Sales. Net sales for the six-month period ended July 29, 2006 increased by 10.7%, or $59.8
million, to $617.8 million from $558.0 million in the six-month period ended July 30, 2005. Our
comparable store sales in the six-month period of fiscal 2006 improved 3.2%. The increase in DSW
sales includes a net increase of 21 DSW stores and seven non-affiliated leased shoe departments.
The DSW store locations opened subsequent to July 30, 2005 added $33.3 million in sales in fiscal
2006 over the comparable six-month period in fiscal 2005, while the leased shoe departments opened
subsequent to July 30, 2005 added $2.0 million in sales in fiscal 2006 over the comparable
six-month period in fiscal 2005. Leased shoe department sales comprised 10.3% of total net sales
in fiscal 2006, compared to 10.7% in fiscal 2005.
For the six-month period ended July 29, 2006, as compared with the same six-month period in fiscal
2005, DSW comparable store sales increased in womens by 4.5%,
athletic by 2.0%, mens by 0.4%, and
accessories by 2.9%. Sales increases in the womens category were driven by increases in the
seasonal classes, while the increase in the athletic category was the result of an increase in the
womens and mens fashion classes. The increase in mens was driven by the young mens class. The
increase in the accessories category was driven by an increase in
sales of handbags.
Gross Profit. Gross profit increased $19.2 million to $178.4 million in fiscal 2006 from $159.2
million in fiscal 2005, and increased as a percentage of net sales from 28.5% in fiscal 2005 to
28.9% in fiscal 2006. The increase is attributable to an increased initial markup, a reduction in
the markdown rate and a decrease in warehouse
expense. The decrease in warehouse expense is the result of improved operational efficiencies
achieved through the use of electronic shipping information and
increased unit volumes. A reduction of the internal shrink accrual
rate resulted in an increase in gross profit of $1.0 million in the
six month period ended July 29, 2006 over the comparable prior year
period. Those
positive factors were partially offset by an increase in occupancy expense. Store occupancy expense
increased from 13.0% of net sales in fiscal 2005 to 13.4% of net sales in fiscal 2006. The increase
in store occupancy expense is the result of increases in lease expense for new stores and an
impairment charge of $0.8 million.
Operating Expenses. For the six-month period ended July 29, 2006, operating expenses increased
$4.0 million to $127.4 million from $123.4 million in the six-month period ended July 30,
24
2005, which represented 20.6% and 22.1% of net sales, respectively. The favorable operating
percent was in part the result of a reduction in marketing and pre-opening costs of $4.4 million
and $1.1 million, respectively. The decrease in marketing was due in part to the timing of our
marketing strategy as compared to the prior fiscal year. Included in
operating expenses are costs, excluding pre-opening costs, associated
with 21 new DSW stores and seven new leased shoe departments opened subsequent to
July 30, 2005 of $4.8 million for the six months ended
July 29, 2006. Pre-opening costs are expensed as incurred
and therefore do not necessarily reflect expenses for the stores opened in a given fiscal period.
In addition, operating costs for fiscal 2005 included a charge of $6.5 million related to an
estimate for potential losses related to the theft of credit card and other purchase information.
Those positive factors were partially offset by an increase in personnel related expense in both
the stores and home office. Included in operating expenses is the related operating cost, excluding
occupancy, associated with operating the leased shoe departments.
Operating Profit. Operating profit was $51.0 million in fiscal 2006 compared to $35.7 million in
the fiscal 2005, and increased as a percentage of net sales from 6.4% in fiscal 2005 to 8.3% in
fiscal 2006. Operating profit as a percentage of net sales was impacted by the leveraging of
operating expenses and the estimate for potential losses related to the theft of credit card and
other purchase information that was incurred in the prior fiscal year.
Interest Income (Expense), Net. Interest income for the six-month period ended July 29, 2006 was
$3.3 million as compared to $8.5 million of interest expense for the six-month period ended July
30, 2005. Interest income for the quarter was the result of investment activity from funds
generated by the IPO and from operations. The interest expense incurred in the second quarter of
fiscal 2005 includes $6.6 million of interest due to RVI relating to $190.0 million of indebtedness
incurred to fund dividends and $1.9 million of interest on direct borrowings under the Value City
Revolving Credit Facility.
Income Taxes. Our effective tax rate for the six-month period ended July 29, 2006 was 39.5%,
compared to 40.3% for the six-month period ended July 30, 2005. The rate decrease was primarily
attributable to the investment in short-term, tax-free securities in the six months ended July 29,
2006.
Net Income. For the six-month period ended July 29, 2006, net income increased $16.6 million, or
102.5%, over the six-month period ended July 30, 2005 and represented 5.3% and 2.9% of net sales,
respectively. This increase was primarily the result of the decrease in operating expenses due to
the leveraging of operating expenses and the $6.5 million charge in the prior fiscal year for
estimated potential losses related to the theft of credit card and other purchase information and
the interest income during the period as opposed to having interest expense in the prior fiscal
year.
Seasonality
Our business, measured in terms of net sales, is subject to seasonal trends. Our net sales,
measured on a comparable stores basis, have typically been higher in spring and early fall, when
our customers interest in new seasonal styles increases. Unlike many other retailers, we have not
historically experienced a large increase in net sales during our fourth quarter associated with
the winter holiday season.
Liquidity and Capital Resources
Our primary ongoing cash requirements are for seasonal and new store inventory purchases, capital
expenditures in connection with our expansion, the remodeling of existing stores and infrastructure
growth. Since our IPO in July 2005, we have funded our expenditures with cash
25
flows from operations. Prior to the IPO, we funded our expenditures with cash flows from
operations and borrowings under the Value City credit facilities to which we had been a party, as
described below. Our working capital and inventory levels typically build seasonally. We believe
that we will be able to continue to fund our operating requirements and the expansion of our
business pursuant to our growth strategy in the future with existing cash and short-term
investments, cash flows from operations and borrowings under the DSW secured revolving credit
facility, if necessary.
For the twenty six week period ended July 29, 2006, our net cash provided by operations was $37.4
million, compared to $15.8 million provided by operations for the twenty six week period ended July
30, 2005. The $21.6 million increase in cash provided by operations over the comparable period is
primarily due to increased net income.
Net working capital increased $35.0 million to $273.5 million at July 29, 2006 from $238.5 million
at January 28, 2006, primarily due to increased cash and short-term investments and inventory
related to new stores opened in fiscal 2006. Current assets divided by current liabilities at July
29, 2006 and January 28, 2006 were 2.9 and 2.7, respectively.
Our future capital expenditures will depend primarily on the number of new stores we open, the
number of existing stores we remodel and the timing of these expenditures. In fiscal 2005, we
opened 29 new DSW stores. We plan to open approximately 30 stores per year in each of the next
four fiscal years. During fiscal 2005, the average investment required to open a typical new DSW
store was approximately $1.4 million. Of this amount, gross inventory typically accounted for
approximately $680,000, fixtures and leasehold improvements typically accounted for approximately
$460,000 (prior to tenant allowances) and pre-opening advertising and other pre-opening expenses
typically accounted for approximately $280,000. In addition, we expect to invest in inventory and fixtures during the fiscal fourth quarter of 2006
related to the restated supply agreement with Stein Mart to operate 102 additional locations. We
plan to finance investment in new stores with existing cash and cash flows from operating
activities.
$150 Million Secured Revolving Credit Facility. Simultaneously with the amendment and restatement
of the Value City revolving credit facility described below, DSW entered into a new $150 million
secured revolving credit facility with a term of five years. Under this facility, we and our
subsidiary, DSWSW, are named as co-borrowers. The DSW facility has borrowing base restrictions and
provides for borrowings at variable interest rates based on LIBOR, the prime rate and the Federal
Funds effective rate, plus a margin. Our obligations under the secured revolving credit facility
are secured by a lien on substantially all of our and our subsidiarys personal property and a
pledge of our shares of DSWSW. In addition, our secured revolving credit facility contains usual
and customary restrictive covenants relating to our management and the operation of our business.
These covenants will, among other things, restrict our ability to grant liens on our assets, incur
additional indebtedness, open or close stores, pay cash dividends and redeem our stock, enter into
transactions with affiliates and merge or consolidate with another entity. In addition, if at any
time we utilize over 90% of our borrowing capacity under this facility, we must comply with a fixed
charge coverage ratio test set forth in the facility documents. At July 29, 2006 and January 28,
2006, $128.3 million and $136.4 million was available under the $150 million secured revolving
credit facility and no direct borrowings were outstanding. At July 29, 2006 and January 28, 2006,
$21.7 million and $13.6 million in letters of credit were issued and outstanding.
26
Contractual Obligations
DSW had outstanding letters of credit that totaled approximately $21.7 million at July 29, 2006 and
$13.6 million at January 28, 2006. If certain conditions are met under these arrangements, the
Company would be required to satisfy the obligations in cash. Due to the nature of these
arrangements and based on historical experience, DSW does not expect to make any significant
payment outside of terms set forth in these arrangements.
As of July 29, 2006, we have entered into various construction commitments, including capital items
to be purchased for projects that were under construction, or for which a lease has been signed.
Our obligations under these commitments aggregated to approximately $1.6 million as of July 29,
2006. In addition, as of July 29, 2006, we have signed lease agreements for 33 new store locations
with annual rent of approximately $12.3 million. In connection with the new lease agreements, we
will receive approximately $8.9 million of tenant allowances, which will reimburse us for
expenditures at these locations.
Transactions with Retail Ventures
Union Square Store Guaranty by Retail Ventures. In January 2004, we entered into a lease agreement
with 40 East 14 Realty Associates, L.L.C., an unrelated third party, for our Union Square store in
Manhattan, New York. In connection with the lease, Retail Ventures has agreed to guarantee payment
of our rent and other expenses and charges and the performance of our other obligations.
Intercompany Accounts. Prior to the completion of our initial public offering in July 2005, DSW and
Retail Ventures used intercompany transactions in the conduct of their operations. Under this
arrangement, Retail Ventures acted as a central processing location for payments for the
acquisition of merchandise, payroll, outside services, capital additions and expenses by
controlling the payroll and accounts payable activities for all Retail Ventures subsidiaries,
including DSW. DSW transferred cash received from sales of merchandise to cash accounts controlled
by Retail Ventures. The concentration of cash and the offsetting payments for merchandise,
expenses, capital assets and accruals for future payments were accumulated on our balance sheet in
advances to affiliates. The balance of advances to affiliates fluctuated based on DSWs activities
with Retail Ventures.
Following completion of our initial public offering, DSWs intercompany activities have been
limited to those arrangements set forth in the shared services agreement and the other agreements
between DSW and Retail Ventures. DSW no longer concentrates its cash from the sale of merchandise
into Retail Ventures accounts but into its own DSW accounts. DSW pays for its own merchandise,
expenses and capital additions from newly established disbursement accounts. Any intercompany
payments are made pursuant to the terms of the shared services agreement and other agreements
between DSW and Retail Ventures.
The DSW Separation from Retail Ventures
Upon completion of our initial public offering in July 2005, Retail Ventures amended or terminated
the existing credit facilities and other debt obligations of Value City and its other affiliates,
including certain facilities under which DSW had rights and obligations as a co-borrower and/or
co-guarantor. DSW is no longer a party to any of these agreements.
The Value City Revolving Credit Facility. Prior to completion of our initial public offering in
July 2005, we were party to a Loan and Security Agreement, as amended, entered into with
27
National City, as administrative agent, and the other parties named therein, originally entered
into in June 2002. Upon the completion of our initial public offering, this revolving credit
agreement was amended and restated and we were released from our obligations as a party thereto.
The Value City Term Loan Facility. Prior to completion of our initial public offering in July 2005,
we were party to a Financing Agreement, as amended, among Cerberus Partners L.P. (Cerberus), as
agent and lender, and Schottenstein Stores Corporation (SSC) as lender, and the other parties
named as co-borrowers therein, originally entered into in June 2002. Upon the completion of our
initial public offering, this term loan agreement was amended and restated and we were released
from our obligations as a party thereto.
Under the terms of this term loan agreement, SSC and Cerberus each provided us, Value City and the
other Retail Ventures affiliates named as co-borrowers with a separate $50 million term loan
comprised of two tranches with initial three-year terms. In July 2004, the maturity dates of these
loans were extended until June 11, 2006. In connection with the second tranche of these term loans,
Retail Ventures issued to each of Cerberus and SSC warrants to purchase 1,477,396 common shares of
Retail Ventures at a purchase price of $4.50 per share, subject to adjustment. In September 2002,
Back Bay Capital Funding LLC (Back Bay) bought from each of Cerberus and SSC a $1.5 million
interest in each of the tranches of their term loans for an aggregate $6.0 million interest, and
Back Bay received from each of Cerberus and SSC a corresponding portion of the warrants to purchase
Retail Ventures common shares originally issued in connection with the second tranche of their term
loans. Effective November 23, 2005, Millennium Partners, L.P. (Millennium) purchased from Back
Bay term loan warrants to purchase an aggregate of 177,288 of Retail Ventures common shares,
subject to adjustment. The term loans stated rate of interest per annum through June 11, 2004 was
14% if paid in cash and 15% if the co-borrowers elected a paid-in-kind, or PIK, option. During the
first two years of the term loans, the co-borrowers could elect to pay all interest in PIK. During
the final year of the term loans, the stated rate of interest was 15.0% if paid in cash or
15.5% if by PIK, and the PIK option was limited to 50% of the
interest due. All interest was paid under the cash election.
In connection with the amendment of this term loan agreement, Retail Ventures amended the
outstanding warrants to provide SSC, Cerberus and Millennium the right, from time to time, in whole
or in part, to (i) acquire Retail Ventures common shares at the then current conversion price
(subject to the anti-dilution provisions), (ii) acquire from Retail Ventures Class A Common Shares
of DSW at an exercise price of $19.00 per share (subject to anti-dilution provisions) or (iii)
acquire a combination thereof.
As of July 29, 2006, assuming an exercise price per share of $19.00, SSC and Cerberus would each
receive 328,915 Class A Common Shares, and Millennium would receive 41,989 Class A Common Shares,
if they exercised these warrants in full exclusively for DSW Common Shares. The warrants expire in
June 2012. Although Retail Ventures has informed us that it does not currently intend or plan to
undertake a spin-off of DSW Common Shares to Retail Ventures shareholders (it continues to
evaluate financing options in light of market conditions and other factors), in the event that
Retail Ventures effects a spin-off of its DSW Common Shares to its shareholders in the future, the
holders of outstanding unexercised warrants will receive the same number of DSW Common Shares that
they would have received had they exercised their warrants in full for Retail Ventures common
shares immediately prior to the record date of the spin-off, without regard to any limitations on
exercise in the warrants. Following the completion of any such spin-off, the warrants will be
exercisable solely for Retail Ventures common shares.
28
We have entered into an exchange agreement with Retail Ventures whereby, upon the request of Retail
Ventures, we will be required to exchange some or all of the Class B Common Shares of DSW held by
Retail Ventures for Class A Common Shares.
The Value City Senior Subordinated Convertible Loan Facility. Prior to completion of our initial
public offering in July 2005, we were a co-guarantor under the Amended and Restated Senior
Subordinated Convertible Loan Agreement, entered into by Value City, as borrower, Cerberus, as
agent and lender, SSC, as lender, and DSW and the other parties named as guarantors, originally
entered into in June 2002. Upon the completion of our initial public offering, this convertible
loan agreement was amended and restated and we are no longer a party thereto.
In connection with the amendment and restatement of this convertible loan agreement, the $75
million convertible loan was converted into a $50 million non-convertible loan. In addition, Retail
Ventures agreed to issue to SSC and Cerberus convertible warrants which will be exercisable from
time to time until the later of June 11, 2007 and the repayment in full of Value Citys obligations
under the amended and restated loan agreement. Under the convertible warrants, SSC and Cerberus
will have the right, from time to time, in whole or in part, to (i) acquire Retail Ventures common
shares at the conversion price referred to in the convertible loan (subject to antidilution
provisions), (ii) acquire from Retail Ventures Class A Common Shares of DSW at an exercise price of
$19.00 per share (subject to antidilution provisions) or (iii) acquire a combination thereof.
Although Retail Ventures has informed us that it does not currently intend or plan to undertake a
spin-off of Common Shares to Retail Ventures shareholders (it continues to evaluate financing
options in light of market conditions and other factors), in the event that Retail Ventures effects
a spin-off of its DSW Common Shares to its shareholders in the future, the holders of outstanding
unexercised warrants will receive the same number of DSW Common Shares that they would have
received had they exercised their warrants in full for Retail Ventures common shares immediately
prior to the record date of the spin-off, without regard to any limitation on exercise contained in
the warrants. Following the completion of any such spin-off, the warrants will be exercisable
solely for Retail Ventures common shares.
SSC and Cerberus may acquire upon exercise of the warrants Class A Common Shares of DSW from Retail
Ventures. As of July 29, 2006, assuming an exercise price per share of $19.00, SSC and Cerberus
would receive 1,973,684 and 315,790 Class A Common Shares, respectively, without giving effect to
anti-dilution adjustments, if any, if they exercised these warrants exclusively for DSW Common
Shares.
Value City Intercompany Note. The capital stock of DSW held by Retail Ventures secures a $240
million Value City intercompany note made payable by Retail Ventures to Value City, which was
executed and delivered on January 1, 2005 in connection with the transfer of all the capital stock
of DSW and Filenes Basement by Value City to Retail Ventures on that date. The lien granted to
Value City on the DSW capital stock held by Retail Ventures will be released upon written notice
that warrants held by Cerberus, SSC and Millennium are to be exercised in exchange for DSW capital
stock held by Retail Ventures and to be delivered by Retail Ventures upon the exercise of such
warrants. The lien will also be released upon repayment of the note in full.
The $165.0 Million Intercompany Note. In March 2005, we incurred intercompany indebtedness to fund
a $165.0 million dividend to Retail Ventures. We repaid this note in full in July 2005.
The $25.0 Million Intercompany Note. In May 2005, we incurred intercompany indebtedness to fund a
$25.0 million dividend to Retail Ventures. We repaid this note in full in July 2005.
29
Cross-Corporate Guarantees. We previously entered into cross-corporate guarantees with various
financing institutions pursuant to which we, Retail Ventures, Filenes Basement and Value City,
jointly and severally, guaranteed payment obligations owed to these entities under factoring
arrangements they had entered into with vendors who provided merchandise to some or all of Retail
Ventures subsidiaries. In July 2005, we terminated these cross-corporate guarantees and no amounts
remain guaranteed by us.
We operate all our stores, warehouses and corporate office space from leased facilities.
Lease obligations are accounted for either as operating leases or as capital leases based on lease
by lease review at lease inception. The Company had no capital leases outstanding as of July 29,
2006.
On July 5, 2005, subsequent to the IPO, we paid in full the principal balance of both the $165 and
$25 million dividend notes plus accrued interest of approximately $6.6 million to RVI, $20 million
outstanding on the Companys old secured revolving credit facility and a $10 million intercompany
advance from RVI used to pay down on the outstanding old credit facility borrowing.
Off-Balance Sheet Arrangements
The Company does not intend to participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as special purpose entities or variable
interest entities, which would facilitate off-balance sheet arrangements or other limited purposes.
As of July 29, 2006, the Company has not entered into any off-balance sheet arrangements, as that
term is described by the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our cash and cash equivalents are maintained only with maturities of 90 days or less. Our
short-term investments have interest reset periods of 49 days or less. These financial instruments
may be subject to interest rate risk through lost income should interest rates increase during
their limited term to maturity or resetting of interest rates. As of July 29, 2006 and January 28,
2006, there was no long-term debt outstanding. Future borrowings, if any, would bear interest at
negotiated rates and would be subject to interest rate risk. Because we have no outstanding debt,
we do not believe that a hypothetical adverse change of 10% in interest rates would have a material
effect on our financial position.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We, under the supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls
and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end
of the period covered by this report, that such disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
No change
was made in our internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act, during our most recent fiscal
quarter that has materially affected, or is reasonable likely to
materially affect, our internal control over
financial reporting.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, on March 8, 2005, Retail Ventures announced that it had learned of the
theft of credit card and other purchase information from a portion of DSW customers. On April 18,
2005, Retail Ventures issued the findings from its investigation into the theft. The theft covered
transaction information involving approximately 1.4 million credit cards and data from transactions
involving approximately 96,000 checks.
We and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. We are involved in several legal proceedings arising out of
this incident, including four putative class action lawsuits, which seek unspecified monetary
damages, credit monitoring and other relief. Each of the four lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to certify a nationwide class action that
would include every consumer who used a credit card, debit card, or check to make purchases at DSW
between November 2004 and March 2005 and whose transaction data was taken during the data theft
incident. The other three lawsuits seek to certify classes of consumers that are limited
geographically. Those cases use different putative class definitions to identify consumers who made
purchases at certain stores in Ohio, Michigan and Illinois. On July 26, 2006, the Michigan federal
district court granted DSWs motion to dismiss the Michigan lawsuit and so ordered the dismissal of
that lawsuit. On August 30, 2006, the Illinois case was dismissed.
In connection with this matter, we entered into a consent order with the Federal Trade Commission
(FTC), which has jurisdiction over consumer protection matters. The FTC published the final
order on March 14, 2006, and copies of the complaint and consent order are available from the FTCs
Web site at http://www.ftc.gov and also from the FTCs Consumer Response Center, Room 130, 600
Pennsylvania Avenue, N.W., Washington, D.C. 20580.
We have not admitted any wrongdoing or that the facts alleged in the FTCs proposed unfairness
complaint are true. Under the consent order, we will pay no fine or damages. We have agreed,
however, to maintain a comprehensive information security program and to undergo a biannual
assessment of such program by an independent third party.
There can be no assurance that there will not be additional proceedings or claims brought against
DSW in the future. We have contested and will continue to vigorously contest the claims made
against us and will continue to explore our defenses and possible claims against others.
We estimate that the potential exposure for losses related to this theft, including exposure under
currently pending proceedings, ranges from approximately $6.5 million to approximately $9.5
million. Because of many factors, including the early development of information regarding the
theft and recoverability under insurance policies, there is no amount in the estimated range that
represents a better estimate than any other amount in the range. Therefore, in accordance with
Financial Accounting Standard No. 5, Accounting for Contingencies, we accrued a charge to
operations in the first quarter of fiscal 2005 equal to the low end of the range set forth above,
or $6.5 million. As the situation develops and more information becomes available, the amount of
the reserve may increase or decrease accordingly. The amount of any such change may be material.
31
Although difficult to quantify, since the announcement of the theft, we have not discerned any
material negative effect on sales trends we believe is attributable to the theft. However, this may
not be indicative of the long-term developments regarding this matter.
We are involved in various other legal proceedings that are incidental to the conduct of our
business. We estimate the range of liability related to pending litigation where the amount of the
range of loss can be estimated. We recorded our best estimate of a loss when the loss is considered
probable. Where a liability is probable and there is a range of estimated loss, we recorded the
most likely estimated liability related to the claim. In the opinion of management, the amount of
any liability with respect to these proceedings will not be material. As additional information
becomes available, we will assess the potential liability related to our pending litigation and
revise the estimates. Revisions in our estimates and potential liability could materially impact
our results of operations and financial condition.
ITEM 1A. Risk Factors.
We caution that information in this Form 10-Q, particularly information regarding future
economic performance and finances, and plans, expectations and objectives of management, is
forward-looking (as such term is defined in the Private Securities Litigation reform Act of 1995)
and is subject to change based on various important factors. The following factors, in addition to
factors previously disclosed under the caption Risk Factors in our last Annual Report on Form
10-K for the fiscal year-ended January 28, 2006, and other possible factors not listed, could
affect our actual results and cause such results to differ materially from those expressed in
forward-looking statements.
We face security risks related to our electronic processing and transmission of confidential
customer information. On March 8, 2005, we announced the theft of credit card and other purchase
information relating to DSW customers. The security breach could materially adversely affect our
reputation and business and subject us to liability.
As previously reported, on March 8, 2005, Retail Ventures announced that it had learned of the
theft of credit card and other purchase information from a portion of DSW customers. On April 18,
2005, Retail Ventures issued the findings from its investigation into the theft. The theft covered
transaction information involving approximately 1.4 million credit cards and data from transactions
involving approximately 96,000 checks.
We and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. We are involved in several legal proceedings arising out of
this incident, including four putative class action lawsuits, which seek unspecified monetary
damages, credit monitoring and other relief. Each of the four lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to certify a nationwide class action that
would include every consumer who used a credit card, debit card, or check to make purchases at DSW
between November 2004 and March 2005 and whose transaction data was taken during the data theft
incident. The other three lawsuits seek to certify classes of consumers that are limited
geographically. Those cases use different putative definitions to identify consumers who made
purchases at certain stores in Ohio, Michigan, and Illinois. On July 26, 2006, the Michigan
federal district court granted DSWs motion to dismiss the Michigan lawsuit and so ordered the
dismissal of that lawsuit. On August 30, 2006, the Illinois case was
dismissed.
In connection with this matter, we entered into a consent order with the Federal Trade Commission
(FTC), which has jurisdiction over consumer protection matters. The FTC
32
published the final order on March 14, 2006, and copies of the complaint and consent order are
available from the FTCs Web site at http://www.ftc.gov and also from the FTCs Consumer Response
Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
We have not admitted any wrongdoing or that the facts alleged in the FTCs proposed unfairness
complaint are true. Under the consent order, we will pay no fine or damages. We have agreed,
however, to maintain a comprehensive information security program and to undergo a biannual
assessment of such program by an independent third party.
There can be no assurance that there will not be additional proceedings or claims brought against
DSW in the future. We have contested and will continue to vigorously contest the claims made
against us and will continue to explore our defenses and possible claims against others.
We estimate that the potential exposure for losses related to this theft, including exposure under
currently pending proceedings, ranges from approximately $6.5 million to approximately $9.5
million. Because of many factors, including the early development of information regarding the
theft and recoverability under insurance policies, there is no amount in the estimated range that
represents a better estimate than any other amount in the range. Therefore, in accordance with
Financial Accounting Standard No. 5, Accounting for Contingencies, we accrued a charge to
operations in the first quarter of fiscal 2005 equal to the low end of the range set forth above,
or $6.5 million. As the situation develops and more information becomes available, the amount of
the reserve may increase or decrease accordingly. The amount of any such change may be material.
As of July 29, 2006, the balance of the associated accrual for potential exposure was $4.0 million.
Although difficult to quantify, since the announcement of the theft, we have not discerned any
material negative effect on sales trends we believe is attributable to the theft. However, this may
not be indicative of the long-term developments regarding this matter.
The
PIES SM
(Premium Income Exchangeable
Securities SM)
issued by Retail Ventures may adversely affect the market price for DSW Class A Common Shares.
The market price of the DSW Class A Common Shares is likely to be influenced by the PIES issued by
Retail Ventures. For example, the market price of the DSW Class A Common Shares could become more
volatile and could be depressed by (a) investors anticipation of the potential resale in the
market of a substantial number of additional DSW Class A Common Shares received upon exchange of
the PIES, (b) possible sales of DSW Class A Common Shares by investors who view the PIES as a more
attractive means of equity participation in DSW than owning DSW Class A Common Shares and (c)
hedging or arbitrage trading activity that may develop involving the PIES and DSW Class A Common
Shares.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Recent sales of unregistered securities. Not applicable.
(b) Use of Proceeds. Not applicable.
(c) Purchases
of equity securities by the issuer and affiliated purchasers
DSW made no purchases of its Common Shares during the quarter ended July 29, 2006.
33
We do not anticipate paying cash dividends on our Common Shares in the foreseeable future.
Presently, we expect that all of our future earnings will be retained for development of our
business. The payment of any future dividends will be at the discretion of our board of directors
and will depend upon, among other things, future earnings, operations, capital requirements, our
general financial condition and general business conditions. Our credit facility restricts the
payment of dividends by us or our subsidiaries, other than dividends paid in stock, and cash
dividends can only be paid to Retail Ventures by us up to the aggregate amount of $5.0 million,
less the amount of any loan advances made to Retail Ventures by us or our subsidiaries.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our 2006 Annual Meeting of the Shareholders on June 14, 2006. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934. Matters discussed or
voted on at the annual meeting were the election of four incumbent Class I directors. The
following persons continue to serve as Class II directors: Jay L. Schottenstein, Philip B. Miller,
and James D. Robbins. The following persons were elected as Class I members of the Board of
Directors to serve a two year term until the annual meeting in 2008 or until their successors are
duly elected and qualified: Carolee Friedlander, Harvey L. Sonnenberg, Allan J. Tanenbaum, and
Heywood Wilansky. Each person received the number of votes for or the number of votes with
authority withheld indicated below.
|
|
|
|
|
|
|
|
|
|
|
Shares Voted |
|
Shares |
|
|
FOR |
|
WITHHELD |
Carolee Friedlander |
|
|
236,611,491 |
|
|
|
526,258 |
|
Harvey L. Sonnenberg |
|
|
236,231,054 |
|
|
|
906,695 |
|
Allan J. Tanenbaum |
|
|
236,316,993 |
|
|
|
820,756 |
|
Heywood Wilansky |
|
|
236,230,954 |
|
|
|
906,795 |
|
Item 5. Other Information. None.
Item 6. Exhibits. See Index to Exhibits on page 36.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
DSW INC.
(Registrant)
|
|
Date: September 7, 2006 |
By: |
/s/ Douglas J. Probst
|
|
|
|
Douglas J. Probst |
|
|
|
Chief Financial
Officer (duly authorized officer and
chief financial officer) |
|
|
35
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit Number |
|
Description |
|
|
|
|
|
|
10.1 |
|
|
Amended
and Restated Supply Agreement dated May 30, 2006, between
DSW Inc. and Stein Mart, Inc. Incorporated by reference to
Exhibit 10.1 to DSWs Form 8-K (file no. 1-32545)
filed June 5, 2006. |
|
|
|
|
|
|
10.2 |
|
|
Employment
Agreement, dated July 13, 2006, between DSW Inc. and Harris
Mustafa. Incorporated by reference to Exhibit 10.1 to DWSs
Form 8-K (file no. 1-32545) filed July 13, 2006. |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification of
Chief Executive Officer |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification of
Chief Financial Officer |
36