UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 29, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

RETAIL VENTURES, INC.

 

(Exact name of registrant as specified in its charter)

Ohio		20-0090238
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3241 Westerville Road, Columbus, Ohio		43224
(Address of principal executive offices)		(Zip Code)

(614) 471-4722

Registrant’s 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 þ                     Non-accelerated filer o

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 Common Shares, without par value, as of August 31, 2006 was 47,011,476.

 

 

RETAIL VENTURES, INC.
TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at July 29, 2006 and January 28, 2006			3
Condensed Consolidated Statements of Operations for the three and six months ended July 29, 2006 and July 30, 2005			5
Condensed Consolidated Statements of Shareholders’ Equity for the six months ended July 29, 2006 and July 30, 2005			6
Condensed Consolidated Statements of Cash Flows for the six months ended July 29, 2006 and July 30, 2005			7
Notes to the Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			49
Item 4. Controls and Procedures			50
Part II. Other Information
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			59
Item 3. Defaults Upon Senior Securities			59
Item 4. Submission of Matters to a Vote of Security Holders			59
Item 5. Other Information			60
Item 6. Exhibits			60
Signature			61
Index to Exhibits			62
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)

		July 29,				January 28,
		2006				2006
ASSETS
Cash and equivalents		$	149,360			$	138,731
Short-term investments			46,925
Accounts receivable, net			20,414				19,259
Accounts receivable from related parties			376				437
Inventories			553,248				491,867
Prepaid expenses and other assets			27,399				26,814
Deferred income taxes			78,649				66,581
Total current assets			876,371				743,689
Property and equipment, net			261,443				269,126
Goodwill			25,899				25,899
Tradenames and other intangibles, net			37,095				39,217
Deferred income taxes and other assets			8,925				8,643
Total assets		$	1,209,733			$	1,086,574

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share amounts)
(unaudited)

		July 29,				January 28,
		2006				2006
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	250,487			$	221,444
Accounts payable to related parties			5,413				4,901
Accrued expenses
Compensation			30,317				35,085
Taxes			39,856				37,869
Other			98,148				88,403
Warrant liability			2,959				1,723
Warrant liability — related parties			168,778				168,680
Current maturities of long-term obligations			665				623
Total current liabilities			596,623				558,728
Long-term obligations, net of current maturities
Non-related parties			152,649				115,995
Related parties			50,000				50,000
Other noncurrent liabilities			91,673				87,080
Deferred income taxes			44,299				45,829
Minority interest			125,502				112,396
Commitments and contingencies
Shareholders’ equity:
Common shares, without par value; 160,000,000 authorized; issued, including 7,551 treasury shares, 46,973,227 and 39,864,577 outstanding, respectively			271,331				159,617
Accumulated deficit			(115,725	)			(36,082	)
Deferred compensation expense, net							(1	)
Treasury shares, at cost, 7,551 shares			(59	)			(59	)
Accumulated other comprehensive loss			(6,560	)			(6,929	)
Total shareholders’ equity			148,987				116,546
Total liabilities and shareholders’ equity		$	1,209,733			$	1,086,574

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

		Three months ended								Six months ended
		July 29,				July 30,				July 29,				July 30,
		2006				2005				2006				2005
Net sales		$	684,508			$	666,734			$	1,406,021			$	1,346,779
Cost of sales			(409,557	)			(407,362	)			(840,445	)			(819,015	)
Gross profit			274,951				259,372				565,576				527,764
Selling, general and administrative expenses			(264,793	)			(265,547	)			(542,317	)			(544,889	)
Change in fair value of warrants			(311	)			(28	)			(1,237	)			(28	)
Change in fair value of warrants — related parties			(15,032	)			(137,555	)			(78,915	)			(137,555	)
License fees and other income			1,660				3,993				3,222				5,511
Operating loss			(3,525	)			(139,765	)			(53,671	)			(149,197	)
Non-related parties interest expense			(3,418	)			(5,516	)			(6,284	)			(8,640	)
Related parties interest expense			(1,264	)			(5,062	)			(2,528	)			(11,620	)
Total interest expense			(4,682	)			(10,578	)			(8,812	)			(20,260	)
Interest income			2,339				144				3,977				191
Interest expense, net			(2,343	)			(10,434	)			(4,835	)			(20,069	)
Loss before income taxes and minority interest			(5,868	)			(150,199	)			(58,506	)			(169,266	)
Provision for income taxes			(4,473	)			(7,775	)			(10,319	)			(167	)
Loss before minority interest			(10,341	)			(157,974	)			(68,825	)			(169,433	)
Minority interest			(5,660	)			723				(12,124	)			723
Net loss		$	(16,001	)		$	(157,251	)		$	(80,949	)		$	(168,710	)
Basic and diluted loss per share:		$	(0.36	)		$	(4.03	)		$	(1.88	)		$	(4.49	)
Shares used in per share calculations:
Basic and diluted			45,013				39,037				43,037				37,600

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)

		Number of Shares																Retained												Accumulated
						Common												Earnings				Deferred								Other
		Common				Shares				Common								(Accumulated				Compensation				Treasury				Comprehensive
		Shares				in Treasury				Shares				Warrants				Deficit)				Expense				Shares				Loss				Total
Balance, January 29, 2005			34,111				8			$	143,477			$	6,074			$	42,756			$	(3	)		$	(59	)		$	(7,068	)		$	185,177
Net loss																			(168,710	)															(168,710	)
Initial public offering of subsidiary																			110,681																110,681
Capital transactions of Subsidiary																			222																222
Exercise of stock options			5,248								23,760																								23,760
Tax benefit related to stock options exercised											9,472																								9,472
Amortization of deferred compensation expense																							1												1
Warrant reclass to liability															(6,074	)																			(6,074	)
Warrant adjustment to fair value											(20,120	)																							(20,120	)
Balance, July 30, 2005			39,359				8			$	156,589			$	0			$	(15,051	)		$	(2	)		$	(59	)		$	(7,068	)		$	134,409
Balance, January 28, 2006			39,857				8			$	159,617			$	0			$	(36,082	)		$	(1	)		$	(59	)		$	(6,929	)		$	116,546
Net loss																			(80,949	)															(80,949	)
Minimum pension liability, net of income tax benefit of $237																															369				369
Total comprehensive loss																																			(80,580	)
Capital transactions of Subsidiary																			1,306																1,306
Stock based compensation expense, before related tax effects											215																								215
Exercise of stock options			109								854																								854
Exercise of warrants			7,000								110,317																								110,317
Tax benefit related to stock options exercised											329																								329
Reclassification of unamortized deferred compensation											(1	)											1
Balance, July 29, 2006			46,966				8			$	271,331			$	0			$	(115,725	)		$	0			$	(59	)		$	(6,560	)		$	148,987

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

RETAIL VENTURES, 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 loss		$	(80,949	)		$	(168,710	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization of debt issuance costs and discount on debt			602				3,819
Stock based compensation expense			215
Stock based compensation expense of subsidiary			1,557
Depreciation and amortization			27,757				28,928
Change in fair value of warrants ($78,915 and $137,555 — related parties, respectively)			80,152				137,583
Deferred income taxes and other noncurrent liabilities			(12,197	)			8,029
Tax benefit related to stock options exercised							9,472
Loss on disposal of assets			1,370				371
Minority interest in consolidated subsidiary			12,124				(723	)
Other			729				451
Change in working capital, assets and liabilities:
Accounts receivable			(1,094	)			(9,170	)
Inventories			(61,381	)			(86,059	)
Prepaid expenses and other assets			(299	)			(11,284	)
Accounts payable			29,520				61,078
Proceeds from lease incentives			3,562				4,600
Accrued expenses			6,887				(6,429	)
Net cash provided by (used in) operating activities			8,555				(28,044	)
Cash flows from investing activities:
Capital expenditures			(19,214	)			(21,597	)
Proceeds from sale of assets			4				91
Purchases of available-for-sale investments			(69,025	)
Maturities and sales from available-for-sale investments			22,100
Net cash used in investing activities			(66,135	)			(21,506	)
Cash flows from financing activities:
Payments of capital lease obligations			(304	)			(309	)
Payments on convertible loan							(25,000	)
Payments on term loan							(100,000	)
Net increase (decrease) in revolving credit facility			37,000				(91,500	)
Debt issuance costs			(1,170	)			(3,527	)
Proceeds from exercise of warrants			31,500
Proceeds from exercise of stock options			854				23,760
Proceeds from sale of stock of subsidiary							278,418
Excess tax benefit — related to stock option exercises			329
Net cash provided by financing activities			68,209				81,842
Net increase in cash and equivalents			10,629				32,292
Cash and equivalents, beginning of period			138,731				29,258
Cash and equivalents, end of period		$	149,360			$	61,550

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.		BUSINESS OPERATIONS
		Retail Ventures, Inc. (“Retail Ventures” or “RVI”) and its wholly-owned subsidiaries, including but not limited to, Value City Department Stores LLC (“Value City”) and Filene’s Basement, Inc. (“Filene’s Basement”), and DSW Inc. (“DSW”), a controlled subsidiary, and DSW’s wholly-owned subsidiary, DSW Shoe Warehouse, Inc. (“DSWSW”), are herein referred to collectively as the “Company”.
		The Company operates three segments in the United States of America (“United States”). Value City and Filene’s Basement segments operate full-line, off-price department stores. The DSW segment sells better-branded shoes and accessories. As of July 29, 2006, there were a total of 113 Value City stores located principally in the Midwest, mid-Atlantic and southeastern United States, 205 DSW stores located in major metropolitan areas throughout the United States and 26 Filene’s Basement stores located primarily in major metropolitan areas in the northeast and midwest. DSW also supplies shoes, under supply arrangements, to 214 locations for other non-related retailers in the United States.
		On July 5, 2005, DSW completed an initial public offering (“IPO”) of 16,171,875 Class A Common Shares sold at a price of $19.00 per share and raising net proceeds of $285.8 million, net of the underwriters’ commission and before expenses of approximately $7.8 million. As of July 29, 2006, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.1% of DSW’s outstanding common shares and approximately 93.2% of the combined voting power of such shares. RVI accounted for the sale of DSW as a capital transaction. Associated with this transaction, a deferred tax liability of $68.7 million was recorded. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on the New York Stock Exchange under the symbol “DSW”. In conjunction with the separation of their businesses following the IPO, Retail Ventures and DSW entered into several agreements, including, among others, a master separation agreement, a shared services agreement and a tax separation agreement. Retail Ventures’ current intent is to continue to hold its DSW Class B Common Shares, except to the extent necessary to satisfy obligations under warrants it has granted to Schottenstein Stores Corporation (“SSC”), Cerberus Partners, L.P. (“Cerberus”) and Millennium Partners, L.P. (“Millennium”) and under other debt financings (see Note 16, “Subsequent Events”), although it continues to evaluate financing options in light of market conditions and other factors. Retail Ventures is subject to (a) contractual obligations with lenders under its senior loan facility to retain ownership of at least 55% by value of the common shares of DSW for so long as the senior loan facility remains outstanding and (b) contractual obligations with its warrantholders to retain enough DSW common shares to be able to satisfy its obligations to deliver such shares to its warrantholders if the warrantholders elect to exercise their warrants in full for DSW Class A Common Shares.
		Value City. Located in the Midwest, mid-Atlantic and southeastern United States and operating principally under the name Value City for over 80 years this segment’s strategy has been to provide exceptional value by offering a broad selection of brand name merchandise at prices substantially below conventional retail prices.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		DSW. Located in major metropolitan areas throughout the United States, DSW stores offer a wide selection of brand name and designer dress, casual and athletic footwear for men and women. Additionally, pursuant to a license agreement with Filene’s Basement, DSW operates leased shoe departments in most Filene’s Basement stores. In July 2002 and June 2004, respectively, DSW entered into supply agreements with Stein Mart, Inc. (“Stein Mart”) and Gordmans, Inc. (“Gordmans”) to supply merchandise to some of the Stein Mart’s and all of the Gordmans’ shoe departments. On May 30, 2006, DSW entered into an Amended and Restated Supply Agreement (the “Amended Agreement”) to supply shoes to Stein Mart. Under the terms of the Amended Agreement, DSW will be the exclusive supplier of shoes to all Stein Mart stores that have shoe departments and will supply merchandise to an additional 102 Stein Mart stores in 2007. The Amended 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. As of July 29, 2006, DSW operated 156 leased departments for Stein Mart, 57 for Gordmans and one for Frugal Fannie’s Fashion Warehouse. Results of the supply agreements are included with the DSW segment. 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.
		Filene’s Basement. Filene’s Basement stores are located primarily in major metropolitan areas of the United States such as Boston, New York, Atlanta, Chicago and Washington, D.C. Filene’s Basement focuses on providing top tier brand name merchandise at everyday low prices for men’s and women’s apparel, jewelry, shoes, accessories and home goods. During the six months ended July 29, 2006, Filene’s Basement closed one store.
2.		BASIS OF PRESENTATION
		The accompanying unaudited interim financial statements should be read in conjunction with the Company’s Annual Report for the fiscal year ended January 28, 2006, as amended on Form 10-K/A, as filed with the Securities and Exchange Commission (the “SEC”) on August 2, 2006 (the “2005 Annual Report”).
		In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, which are necessary to present fairly the condensed consolidated financial position and results of operations for the periods presented. To facilitate comparisons with the current year, certain previously reported balances have been reclassified to conform to the current period presentation.
3.		ADOPTION OF ACCOUNTING STANDARDS
		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.
		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

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		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 Company’s results of operations is presented in Note 4.
		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 pronouncement in fiscal 2006 was not material to the Company’s financial condition, results of operations or cash flows.
		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 enterprise’s 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 the 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 is currently evaluating the impact this interpretation may have on its consolidated financial statements.
4.		STOCK BASED COMPENSATION
		On January 29, 2006, Retail Ventures adopted the fair value recognition provisions of SFAS No. 123R relating to its stock-based compensation plans. Prior to January 29, 2006, Retail Ventures 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.
		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

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		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 selling, general and administrative expenses in the condensed consolidated statements of operations. Retail Ventures’ financial results for the prior periods have not been restated as a result of this adoption.
		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.
		Consistent with the valuation method used for the disclosure only provisions of SFAS No. 123, the Company is using 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 Selling, general and administrative costs in the condensed consolidated statements of operations.
		Retail Ventures Stock Compensation Plans
		Retail Ventures has a 2000 Stock Incentive Plan that provides for the issuance of options to purchase up to 13,000,000 common shares or the issuance of restricted stock to management, key employees of Retail Ventures and affiliates, consultants (as defined in the plan), and directors of Retail Ventures. Options generally vest 20% per year on a cumulative basis. Options granted under the 2000 Stock Incentive Plan remain exercisable for a period of ten years from the date of grant.
		An option to purchase 2,500 common shares is automatically granted to each non-employee director on the first New York Stock Exchange trading day in each calendar quarter. The exercise price for each option is the fair market value of the common shares on the date of grant. All options become exercisable one year after the grant date and remain exercisable for a period of ten years from the grant date, subject to continuation of the option holders’ service as directors of the Company.
		Retail Ventures has a 1991 Stock Option Plan that provided for the grant of options to purchase up to 4,000,000 common shares. Such options are generally exercisable 20% per year on a cumulative basis from the date of grant and remain exercisable for a period of ten years from the date of grant.
		During the three and six months ended July 29, 2006, the Company recorded stock based compensation expense of approximately $1.0 million and $1.8 million, respectively, which includes approximately $0.9 million and $1.6 million, respectively, of expenses recorded by DSW. Compensation costs of $7.1 million and $6.6 million were expensed during the six months ended July 29, 2006 and July 30, 2005, respectively, relating to stock appreciation

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		rights (“SARS”), and compensation costs of $1.3 million and $4.8 million were expensed during the three months ended July 29, 2006 and July 30, 2005, respectively relating to SARS. Included in the SARS expense for the six months ended July 29, 2006 are expenses relating to the accelerated vesting of some performance based SARS. During the six months ended July 29, 2006, less than $0.1 million was paid to settle exercised SARS.
		The following table illustrates the pro forma effect on net loss and loss per share for the three and six months ended July 30, 2005 if the Company had applied the fair value recognition of SFAS No. 123.

		Three months ended				Six months ended
		July 30, 2005				July 30, 2005
		(in thousands, except per share amounts)
Net loss, as reported		$	(157,251	)		$	(168,710	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax			(335	)			(666	)
Pro forma net loss		$	(157,586	)		$	(169,376	)
Loss per share:
Basic and diluted as reported		$	(4.03	)		$	(4.49	)
Basic and diluted pro forma		$	(4.04	)		$	(4.50	)

Stock Options

		Forfeitures of options are estimated at the grant date based on historical rates and reduce the compensation expense recognized. The risk-free interest rate is based on the yield for the 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 Retail Ventures common shares. The expected term of options granted is derived from historical data on exercises. The expected dividend yield curve is zero, which is based on the Company’s history and current intent of not declaring dividends to shareholders.
		The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented.

		Six months ended
		July 29,				July 30,
		2006				2005
Assumptions
Risk-free interest rate			4.86	%			4.11	%
Expected volatility of Retail Ventures common shares			66.79	%			78.54	%
Expected option term		5.0 years				4.3 years

The weighted-average fair value of each option granted for the three months ended July 29, 2006 and July 30, 2005 was $6.24 per share and $6.34 per share, respectively, and for the six months ended July 29, 2006 and July 30, 2005 was $6.94 per share and $5.01 per share, respectively.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table summarizes the Company’s 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			1,733			$	5.86				1,782			$	5.81
Granted			13			$	16.30				25			$	14.53
Exercised			(74	)		$	8.28				(109	)		$	7.86
Forfeited			(22	)		$	11.87				(48	)		$	7.93
Outstanding end of period			1,650			$	5.75				1,650			$	5.75

		As of July 29, 2006
										Weighted
										Average				Aggregate
										Remaining				Intrinsic
		Shares				WAEP				Contract Life				Value
Options outstanding			1,650			$	5.75			5 years				$	18,614
Options exercisable			1,131			$	6.25			5 years				$	12,214
Shares available for additional grants			5,621

		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 $0.6 million and $0.9 million, respectively.
		As of July 29, 2006, the total compensation cost related to nonvested options not yet recognized was $0.2 million with a weighted average expense recognition period remaining of 1.4 years. The total fair value of options that vested during the three and six months ended July 29, 2006 was $0.2 and $1.0 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
$1.63 — $4.49			446			6 years				$	2.16				263			$	2.19
$4.50 — $10.00			970			5 years				$	5.50				684			$	5.82
$10.01 — $22.00			234			4 years				$	13.60				184			$	13.68

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		Stock Appreciation Rights
		The SARS are subject to an Option Price Protection Provision (“OPPP”) which provides that until the Company receives certain approvals from its lenders, the issue of the options underlying the SARS is contingent. Further, if any of these SARS would have vested before they are actually granted, at or after that time, the grantee may exercise the OPPP on some or all of the SARS that would have vested. Pursuant to an exercise of SARS, the grantee is compensated by the Company in the amount of the gain, if any, represented by the difference between the closing price of the RVI common shares on the New York Stock Exchange on the date of the exercise and the strike price per share. The OPPP does not apply once SARS are actually granted. SARS are recorded as liabilities in the balance sheets due to their ability to be settled in cash or common shares and the historical exercises being settled in cash. SARS are granted to employees and are subject to a vesting schedule or a performance vesting formula, as applicable.
		Compensation costs of $1.3 million and $4.8 million and $7.1 million and $6.6 million were expensed during the three and six months ended July 29, 2006 and July 30, 2005, respectively, relating to SARS. The amount of SARS accrued at July 29, 2006 and January 28, 2006 was $10.8 million and $3.8 million, respectively.
		The following table summarizes the Company’s nonvested SARS and the related WAEP for the three and six months ended July 29, 2006 (shares in thousands):

		Three months ended								Six months ended
		July 29, 2006								July 29, 2006
		Shares				WAEP				Shares				WAEP
Nonvested beginning of period			1,098			$	8.59				1,286			$	6.62
Granted			35			$	17.23				305			$	14.45
Vested			(2	)		$	7.47				(460	)		$	6.30
Forfeited
Nonvested end of period			1,131			$	8.86				1,131			$	8.86

		DSW Stock Compensation Plan
		DSW 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 DSW and affiliates, consultants (as defined in the plan), and directors of DSW. 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, DSW did not have a stock option plan or any equity units outstanding. DSW options, restricted stock units and director stock units are not included in the number of shares used in the basic or dilutive calculation of earnings per share of Retail Ventures.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		Stock Options
		Forfeitures of options are estimated at the grant date based on historical rates of Retail Ventures’ stock option activity and reduce the compensation expense recognized. The expected term of options granted is derived from historical data of Retail Ventures’ stock options due to the limited historical data on the DSW stock activity. The risk-free interest rate is based on the yield for the 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’ stocks, due to the relative short historical trading history of the DSW common shares. The expected dividend yield curve is zero, which is based on DSW’s intention of not declaring dividends to shareholders combined with the limitations on declaring dividends as set forth in DSW’s credit facility.
		The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented.

		Six months ended
		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, 2005 was $13.39 per share and $8.13 per share, respectively.
		The following table summarizes DSW’s stock option plan and related 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

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		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 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 and $1.1 million, respectively.
		The following table summarizes information about DSW’s 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

RETAIL VENTURES, 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 DSW’s restricted stock units and related 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
		DSW issues stock units to directors of DSW who are not employees of DSW 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 DSW 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 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. As of July 29, 2006 approximately 26,600 DSW director stock units had been issued and no DSW director stock units had been settled.
5.		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.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		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

6.		LONG-TERM OBLIGATIONS
		On July 5, 2005, Retail Ventures amended, or amended and restated, its then-existing credit facilities, including certain facilities under which DSW had rights and obligations as a co-borrower and co-guarantor, and replaced them with an aggregate $475.0 million of financing that consists of three separate credit facilities (collectively, the “Credit Facilities”), each of which remained outstanding as of July 29, 2006: (i) a four-year amended and restated $275.0 million revolving credit facility (the “VCDS Revolving Loan”) under which Value City, Retail Ventures and certain subsidiaries of Retail Ventures (other than DSW and DSWSW) are co-borrowers or co-guarantors, (ii) a five-year $150.0 million revolving credit facility (the “DSW Revolving Loan”) under which DSW and DSWSW are co-borrowers and co-guarantors, and (iii) an amended and restated $50.0 million senior non-convertible loan facility, which is held equally by Cerberus and SSC (the “Non-Convertible Loan”), under which Value City is the borrower and Retail Ventures and certain subsidiaries of Retail Ventures (other than DSW and DSWSW) are co-guarantors.
		The Company is not subject to any financial covenants; however, the Credit Facilities contain numerous restrictive covenants relating to the Company’s management and operation. These non-financial covenants include, among other restrictions, limitations on indebtedness, guarantees, mergers, acquisitions, fundamental corporate changes, financial reporting requirements, budget approval, disposition of assets, investments, loans and advances, liens, dividends, stock purchases, transactions with affiliates, issuance of securities and the payment of and modifications to debt instruments under these agreements. The VCDS Revolving Loan and the Non-Convertible Loan also remain subject to an Intercreditor Agreement, as the same was amended and restated in its entirety on July 5, 2005, which provides for an established order of payment of obligations from the proceeds of collateral upon default.
		The Credit Facilities are described more fully below:

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		Revolving Credit Facilities
		$275 Million Secured Revolving Credit Facility — The VCDS Revolving Loan
		On July 5, 2005, Retail Ventures and its affiliates amended and restated the VCDS Revolving Loan, which was originally entered into in June 2002 (the “June 2002 Revolving Credit Facility”). Pursuant to the VCDS Revolving Loan, (i) DSW and DSWSW were released from their obligations under the June 2002 Revolving Credit Facility, (ii) the lenders released their liens on the DSW common shares held by Retail Ventures and the common shares of DSWSW held by DSW, and (iii) leasehold mortgages which had been granted by DSW and DSWSW in 2002 to secure obligations under the June 2002 Revolving Credit Facility were released. Under the VCDS Revolving Loan, Filene’s Basement, Retail Ventures Jewelry, Inc. and certain of Value City’s wholly-owned subsidiaries are named as co-borrowers. The VCDS Revolving Loan is guaranteed by Retail Ventures and certain of its wholly-owned subsidiaries. Neither DSW nor DSWSW are borrowers or guarantors under the VCDS Revolving Loan. The VCDS Revolving Loan 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. In addition to the borrowing base restrictions, 10% of the facility is deemed an “excess reserve” and is not available for borrowing. Obligations under the VCDS Revolving Loan are secured by a lien on substantially all of the personal property of Retail Ventures and its wholly-owned subsidiaries, excluding common shares of DSW owned by Retail Ventures. At July 29, 2006, $63.4 million was available under the VCDS Revolving Loan, direct borrowings aggregated $125.0 million and $25.0 million letters of credit were issued and outstanding. At January 28, 2006, $63.5 million was available under the VCDS Revolving Loan, direct borrowings aggregated $88.0 million and $19.0 million letters of credit were issued and outstanding. The maturity date of the VCDS Revolving Loan is the earlier of July 5, 2009 or the date that is 91 days prior to the maturity date of the Non-Convertible Loan.
		$150 Million Secured Revolving Credit Facility — The DSW Revolving Loan
		Simultaneously with the amendment and restatement of the June 2002 Revolving Credit Facility in July 2005, DSW entered into the DSW Revolving Loan. Under this facility, DSW and its wholly-owned subsidiary, DSWSW, are named as co-borrowers. The DSW Revolving Loan is subject to 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. In addition, if at any time DSW utilizes over 90% of DSW’s borrowing capacity under the facility, DSW must comply with a fixed charge coverage ratio test set forth in the facility document. DSW’s and DSWSW’s obligations under the DSW Revolving Loan are secured by a lien on substantially all of their personal property and a pledge of all of DSW’s shares of DSWSW. 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.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		Term Loans — Related Parties
		From their inception in June 2002 through their amendment, discussed below, in July 2005, the Term Loans were comprised of a $50 million Term Loan B and a $50 million Term Loan C (collectively, the “Term Loans”). All obligations under the Term Loans were senior debt and, subject to the Intercreditor Agreement, had the same rights and privileges as the June 2002 Revolving Credit Facility and the amended and restated $75 million senior subordinated convertible loan (the “Convertible Loan”). The Company and its principal subsidiaries were obligated on the Term Loans. During fiscal 2004, the Company extended the maturity dates of the Term Loans by one year. As a result, the maturity date of the Term Loans was extended to June 11, 2006, under substantially the same terms and conditions as the then-existing Term Loans.
		The Term Loans’ stated rate of interest per annum depended on whether the Company elected to pay interest in cash or a payment-in-kind (“PIK”) option. During the first two years of the Term Loans, the Company had the option 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 PIK and the PIK option was limited to 50% of the interest due. All interest was paid under the cash election.
		The Company issued 2,954,792 Term Loan Warrants to purchase Retail Ventures common shares, at an initial exercise price of $4.50 per share, to Cerberus and SSC in connection with the Term Loan C. Prior to their amendment in July 2005, the Term Loan Warrants were exercisable at any time prior to June 11, 2012. In September 2002, Back Bay Capital Funding LLC (“Back Bay”) bought from each of Cerberus and SSC a $3.0 million interest in each of their Term Loans, and received a corresponding portion of the Term Loan Warrants from each of Cerberus and SSC. The Company has granted the Term Loan C lenders registration rights with respect to the shares issuable upon exercise of the Term Loan Warrants. The related debt discount was amortized into interest expense over the life of the debt.
		Amendment to Term Loans
		On July 5, 2005, the Company and its affiliates amended the Term Loans which had originally been entered into in June 2002. Pursuant to the July 2005 Fourth Amendment to Financing Agreement, (i) DSW was released from its obligations as a co-borrower, (ii) Value City repaid all the Term Loan indebtedness, and (iii) Retail Ventures amended the outstanding Term Loan Warrants to provide SSC, Cerberus and Back Bay the right, from time to time, in whole or in part, to (A) acquire Retail Ventures common shares at the then current conversion price (subject to the existing anti-dilution provisions), (B) acquire from Retail Ventures Class A Common Shares of DSW at an exercise price per share equal to the price of shares sold to the public in DSW’s IPO (subject to anti-dilution provisions similar to those in the existing Term Loan Warrants), or (C) acquire a combination thereof. Effective November 23, 2005, Back Bay transferred and assigned its Term Loan Warrants to Millennium. Although Retail Ventures does not intend or plan to undertake a spin-off of its DSW common shares to Retail Ventures’ shareholders, in the event that Retail Ventures does effect such a spin-off in the future, the holders of outstanding unexercised Term Loan

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		Warrants will receive the same number of DSW Class A Common Shares that they would have received had they exercised their Term Loan Warrants in full for Retail Ventures common shares immediately prior to the record date of such spin-off, without regard to any limitations on exercise contained in the Term Loan Warrants. Following the completion of any such spin-off, the Term Loan Warrants will be exercisable solely for Retail Ventures common shares.
		Senior Subordinated Convertible Loan — Related Parties
		$75 Million Senior Subordinated Convertible Loan
		In June 2002, the Company and its affiliates amended and restated the Convertible Loan dated March 15, 2000. As amended in 2002, borrowings under the Convertible Loan bore interest at 10% per annum. At the Company’s option, interest could be PIK during the first two years, and thereafter, at the Company’s option, up to 50% of the interest due may be PIK until maturity. Prior to its amendment and restatement in July 2005, the Convertible Loan was guaranteed by all Retail Ventures’ principal subsidiaries and was secured by a lien on assets junior to liens granted in favor of the lenders on the June 2002 Revolving Credit Facility and Term Loans. All interest was paid in cash.
		$50 Million Second Amended and Restated Senior Loan Agreement — The Non-Convertible Loan
		On July 5, 2005, the Company and its affiliates amended and restated the Convertible Loan as a non-convertible loan. Pursuant to the Non-Convertible Loan, (i) DSW was released from its obligations as a co-guarantor, (ii) Value City repaid $25 million of the Convertible Loan, (iii) the remaining $50 million Convertible Loan was converted into a Non-Convertible Loan, (iv) the capital stock of DSW held by Retail Ventures continues to secure the Non-Convertible Loan, and (v) Retail Ventures issued to SSC and Cerberus the Conversion Warrants which will be exercisable from time to time until the later of June 11, 2007 and the repayment in full of Value City’s obligations under the Non-Convertible Loan. The maturity date of the Non-Convertible Loan is June 10, 2009 and it is not eligible for prepayment until June 10, 2007. Under the Conversion 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 Non-Convertible Loan (subject to existing anti-dilution provisions), (ii) acquire from Retail Ventures Class A Common Shares of DSW at an exercise price per share equal to the price of the shares sold to the public in DSW’s IPO (subject to anti-dilution provisions similar to those in the existing Term Loan Warrants held by SSC and Cerberus), or (iii) acquire a combination thereof. Although Retail Ventures does not intend or plan to undertake a spin-off of its DSW common shares to Retail Ventures’ shareholders, in the event that Retail Ventures does effect such a spin-off in the future, the holders of outstanding unexercised Conversion Warrants will receive the same number of DSW common shares that they would have received had they exercised their Conversion Warrants in full for Retail Ventures common shares immediately prior to the record date of such spin-off, without regard to any limitations on exercise contained in the Conversion Warrants. Following the completion of any such spin-off, the Conversion Warrants will be exercisable solely for Retail Ventures common shares.
		See Note 16 for subsequent events discussion.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7.		PENSION BENEFIT PLANS
		The Company has three qualified defined benefit pension plans which it assumed at the time of previous acquisitions of three separate companies. The Company’s funding policy is to contribute an amount annually that satisfies the minimum funding requirements of ERISA and that is tax deductible under the Internal Revenue Code. Contributions are provided not only for benefits attributed to service to date but also for those anticipated to be earned in the future. The Company uses a February 1 measurement date for its plans.
		The following table shows the components of net periodic benefit cost of the Company’s pension benefit plans for the three and six months ended July 29, 2006 and July 30, 2005:

		Three months ended								Six months ended
		July 29,				July 30,				July 29,				July 30,
		2006				2005				2006				2005
		(in thousands)
Service cost		$	11			$	12			$	21			$	23
Interest cost			362				366				725				732
Expected return on plan assets			(443	)			(393	)			(886	)			(786	)
Amortization of transition asset			(9	)			(10	)			(19	)			(19	)
Amortization of net loss			150				175				301				350
Net periodic benefit cost		$	71			$	150			$	142			$	300

		The Company anticipates contributing approximately $1.9 million in fiscal 2006 to meet minimum funding requirements. As of July 29, 2006, the Company has not contributed any of the $1.9 million contribution required in fiscal 2006.
8.		OTHER BENEFIT PLANS
		The Company maintains a Profit Sharing and 401(k) Plan (the “401(k) Plan”) for its employees. Employees who attain age twenty-one are eligible to defer compensation as of the first day of the month following 60 days of employment and may contribute up to thirty percent of their compensation to the 401(k) Plan on a pre-tax basis, subject to Internal Revenue Service limitations. As of the first day of the month following an employee’s completion of one year of service as defined under the terms of the 401(k) Plan, the Company matches employee deferrals into the 401(k) Plan, 100% on the first 3% of eligible compensation deferred and 50% on the next 2% of eligible compensation deferred. Additionally, the Company may contribute a discretionary profit sharing amount to the 401(k) Plan each year.
		The Company also provided an Employee Stock Purchase Plan (“ESPP”) for its employees until the end of May 2005, when the ESPP was discontinued. Eligibility requirements were similar to those of the 401(k) Plan. Under the ESPP, eligible employees could purchase common shares of the Company through payroll deductions. The Company matched 15% of employee investments up to a maximum investment level. ESPP costs to the Company for all fiscal periods presented are not material to the consolidated financial statements.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9.		SHAREHOLDERS’ EQUITY AND WARRANT LIABILITY
		The Company issued restricted common shares to certain key employees pursuant to individual employment agreements and certain other grants from time to time, which are approved by the Board of Directors. The agreements condition the vesting of the shares generally upon continued employment with the Company with such restrictions expiring over various periods ranging from three to five years. The market value of the shares at the date of grant is charged to expense on a straight-line basis over the period that the restrictions lapse. As of July 29, 2006 and January 28, 2006, the Company had outstanding approximately 3,000 restricted common shares, which represent less than 1% of the common basic and diluted shares outstanding.
		Warrants
		As a result of the previously discussed credit facilities’ modifications made on July 5, 2005 (see Note 6, “Long-Term Obligations”), the detached Term Loan Warrants and detached Conversion Warrants with dual optionality qualified as derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). As a result of the modifications, the fair values of the Term Loan Warrants and Conversion Warrants (together, the “Warrants”) have been recorded on the balance sheet within current liabilities. Prior to July 5, 2005, the Term Loan Warrants were recorded on the balance sheet within equity. The difference of $20.1 million between the book value of the Warrants and the fair value at the time the Warrants were modified was reclassified to a liability and was recorded to common shares. The Conversion Warrants liability is for the full amount of their fair value as a result of the modifications and a non-cash charge has been recorded within the Condensed Consolidated Statement of Operations. Regarding the change in the fair value of the Warrants, the Company recorded a charge of $144.2 million in fiscal 2005 (subsequent to the first quarter of fiscal 2005), including the initial recording of the Conversion Warrants of $134.2 million. For the three months and six months ended July 29, 2006, the Company recorded a charge of $15.3 million and $80.2 million, respectively, for the change in fair value of Warrants. No tax benefit has been recognized in connection with this charge. These derivative instruments do not qualify for hedge accounting under SFAS No. 133, as changes in the fair values are recognized in earnings in the period of change.
		Retail Ventures estimates the fair values of derivatives based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The fair market value of derivative instruments was $171.7 million and $170.4 million at July 29, 2006 and January 28, 2006, respectively. As the Warrants may be exercised for either common shares of RVI or common shares of DSW owned by RVI, the settlement of the Warrants will not result in a cash outlay by the Company.
		During the three and six months ended July 29, 2006, Retail Ventures issued 2,000,000 and 7,000,000, respectively, of its common shares at an exercise price of $4.50 per share to Cerberus in connection with the exercise of a portion of its outstanding Conversion Warrants. In connection with these exercises, Retail Ventures received $9,000,000 and $31,500,000, respectively, during the three and six months ended July 29, 2006.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

10.		EARNINGS PER SHARE
		Basic earnings (loss) per share are based on the net loss and a simple weighted average of common shares outstanding. Diluted earnings (loss) per share reflects the potential dilution of common shares, related to outstanding stock options, SARS and warrants, calculated using the treasury stock method and convertible debt calculated using the if-converted method. The numerator for the diluted earnings (loss) per share calculation is the net loss adjusted to remove the effect of interest, adjusted for tax, on the convertible debt. The denominator is the weighted average number of shares outstanding.
		For the three months and six months ended July 29, 2006 and July 30, 2005, all potentially dilutive instruments: stock options, SARS, warrants and convertible debt, were anti-dilutive. The total amount of securities outstanding at July 29, 2006 and July 30, 2005 that were not included in dilutive earnings per share because to do so would have been anti-dilutive for the periods presented, but could potentially dilute basic earnings per share in the future are:

		July 29,				July 30,
		2006				2005
		(in thousands)
SARS			1,615				1,511
Stock options			1,650				2,311
Term Loan Warrants			4,413				2,955
Conversion Warrants			9,667				16,667
Total potentially dilutive instruments			17,345				23,444

11.		ACCUMULATED OTHER COMPREHENSIVE LOSS
		The balance sheet caption “Accumulated other comprehensive loss” of $6.6 million and $6.9 million at July 29, 2006 and January 28, 2006, respectively, relates to the Company’s minimum pension liability, net of income tax. For the six months ended July 29, 2006 the comprehensive loss was $80.6 million. For the six months ended July 30, 2005, the comprehensive loss was the same as the net loss.
12.		TAX VALUATION
		The Company establishes valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. The Company has determined that there is a probability that future taxable income may not be sufficient to fully utilize deferred tax assets (state net operating losses and charitable contribution carry forwards) which expire in future years at various dates depending on the jurisdiction. The allowance as of July 29, 2006 and January 28, 2006 was $13.4 million. Based on available data, the Company believes it is more likely than not that the remaining deferred tax assets will be realized.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		The tax rate of 17.6% for the six month period ended July 29, 2006, reflects the negative impact of the change in fair value of warrants included in book loss but not tax loss and the deferred tax liability related to the book tax difference in DSW’s basis.
13.		SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
		A supplemental schedule of non-cash investing and financing activities is presented below:

		Six months ended
		July 29,				July 30,
		2006				2005
		(in thousands)
Cash paid during the period for:
Interest
Non-related parties		$	4,724			$	5,336
Related parties		$	2,514			$	13,826
Income taxes		$	25,420			$	5,847
Noncash activities:
Changes in accounts payable due to asset purchases		$	(35	)		$	(2,390	)
Additional paid in capital transferred from warrant liability for warrant exercises		$	78,817

14.		SEGMENT REPORTING
		The Company is managed in three operating segments: Value City, DSW and Filene’s Basement. All of the operations are located in the United States. The Company has identified such segments based on chief operating decision maker responsibilities and measures segment profit as operating (loss) profit, which is defined as (loss) profit before interest expense, income taxes and minority interest.
		The tables below present segment statement of operations information for the three and six months ended July 29, 2006 and for the three and six months ended July 30, 2005.

										Filene’s
		Value City				DSW				Basement				Total
		(in thousands)
Three months ended July 29, 2006
Net Sales		$	290,362			$	301,302			$	92,844			$	684,508
Operating (loss) profit			(25,455	)			23,097				(1,167	)			(3,525	)
Depreciation and amortization			6,777				4,891				2,248				13,916
Interest expense			3,417				142				1,123				4,682
Interest income			218				2,117				4				2,339
Benefit (provision) for income taxes			4,286				(9,731	)			972				(4,473	)
Capital expenditures		$	2,537			$	8,256			$	2,986			$	13,779

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

										Filene’s				Intersegment
		Value City				DSW				Basement				Eliminations				Total
		(in thousands)
Three months ended July 30, 2005
Net Sales		$	301,170			$	276,211			$	89,353							$	666,734
Operating (loss) profit			(155,197	)			20,688				(5,256	)							(139,765	)
Depreciation and amortization			7,330				4,861				2,324								14,515
Interest expense			8,064				5,079				1,996			$	(4,561	)			10,578
Interest income			3,720				67				918				(4,561	)			144
(Provision) benefit for income taxes			(3,949	)			(6,425	)			2,599								(7,775	)
Capital expenditures		$	2,202			$	9,929			$	1,145							$	13,276

										Filene’s
		Value City				DSW				Basement				Total
		(in thousands)
Six months ended July 29, 2006
Net Sales		$	604,789			$	617,789			$	183,443			$	1,406,021
Operating (loss) profit			(99,847	)			50,986				(4,810	)			(53,671	)
Depreciation and amortization			13,489				9,792				4,476				27,757
Interest expense			6,416				282				2,114				8,812
Interest income			385				3,581				11				3,977
Benefit (provision) for income taxes			8,195				(21,425	)			2,911				(10,319	)
Capital expenditures		$	3,164			$	12,488			$	3,597			$	19,249
As of July 29, 2006
Total assets		$	510,133			$	542,835			$	156,765			$	1,209,733

										Filene’s				Intersegment
		Value City				DSW				Basement				Eliminations				Total
		(in thousands)
Six months ended July 30, 2005
Net Sales		$	612,625			$	558,017			$	176,137							$	1,346,779
Operating (loss) profit			(171,889	)			35,741				(13,049	)							(149,197	)
Depreciation and amortization			14,672				9,580				4,676								28,928
Interest expense			15,956				8,613				3,494			$	(7,803	)			20,260
Interest income			6,360				80				1,554				(7,803	)			191
Benefit (provision) for income taxes			4,710				(10,977	)			6,100								(167	)
Capital expenditures			7,133				15,508				1,346								23,987
As of January 28, 2006
Total assets		$	451,727			$	501,459			$	133,388							$	1,086,574

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

15.		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. DSW 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 DSW’s 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 FTC’s Web site at http://www.ftc.gov and also from the FTC’s 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 FTC’s 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.
		DSW 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, the early stage of lawsuits asserted against DSW 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, DSW has 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. To the Company’s knowledge, no class action lawsuits brought

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		by consumers alleging claims similar to those asserted in the putative class actions against DSW have been litigated against other merchants which have experienced similar data thefts. As the situation develops and more information becomes available to the Company, 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, 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 Company’s estimates and potential liability could materially impact its results of operations and financial condition.
16.		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.
		The PIES bear a coupon at an annual rate of 6.625% of the principal amount, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on December 15, 2006 and ending on September 15, 2011. Except to the extent RVI 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 RVI. 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 RVI prospectus filed with the SEC on August 11, 2006, or if RVI elects, the cash equivalent thereof or a combination of cash and DSW Class A Common Shares. The exchange ratio is equal to the number of DSW Class A Common Shares determined as follows: (i) if the applicable market value of DSW Class A Common Shares equals or exceeds $34.95, the exchange ratio will be 1.4306 shares; (ii) if the applicable market value of DSW Class A Common Shares is less than $34.95 but greater than $27.41, the exchange ratio will be between 1.4306 and 1.8242 shares; and (iii) if the applicable market value of DSW Class A Common Shares is less than or equal to $27.41, the exchange ratio will be 1.8242 shares, subject to adjustment as provided in the PIES. The

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		maximum aggregate number of DSW Class A Common Shares deliverable upon exchange of the PIES is 4,560,500 DSW Class A Common Shares (or 5,244,575 DSW Class A Common Shares if the underwriter exercises in full its option to purchase additional PIES pursuant to the underwriting agreement), subject to adjustment as provided in the PIES.
		RVI used the net proceeds of the offering to repay the approximately $49.7 million remaining balance of an intercompany note due to Value City, and Value City used such proceeds and other funds to repay $49.5 million of the outstanding principal amount of its $50 million Non-Convertible Loan, together with fees and expenses. The balance of the net proceeds was applied for general corporate purposes, which included the repayment of approximately $36.5 million of borrowings under the VCDS Revolving Loan.

Item 2. Management’s 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, “RVI”, “Retail Ventures” “Company”, “we”, “us”, and “our” refers to Retail Ventures, Inc. and its wholly-owned subsidiaries, including but not limited to, Value City Department Stores LLC (“Value City”) and Filene’s Basement, Inc. (“Filene’s Basement”), and DSW Inc. (“DSW”), a controlled subsidiary, and DSW’s wholly-owned subsidiary, DSW Shoe Warehouse, Inc. (“DSWSW”).

OVERVIEW

Retail Ventures is a holding company operating retail stores in three segments: Value City, Filene’s Basement and DSW. Value City is a full-line, value-price retailer carrying men’s, women’s and children’s apparel, accessories, jewelry, shoes, home fashions, electronics and seasonal items. Located in the Midwest, mid-Atlantic and southeastern United States of America (“United States”) and operating for over 80 years, Value City’s strategy has been to provide exceptional value by offering a broad selection of brand name merchandise at prices substantially below conventional retail prices. As of July 29, 2006, there were 113 Value City stores in operation. DSW is a leading United States specialty branded footwear retailer operating 205 shoe stores in 33 states as of July 29, 2006. DSW offers a wide selection of brand name and designer dress, casual and athletic footwear for women and men. DSW’s typical customers are brand-, quality- and style-conscious shoppers who have a passion for footwear and accessories. Filene’s Basement stores are located primarily in major metropolitan areas of the United States such as Boston, New York, Atlanta, Chicago and Washington, D.C. Filene’s Basement’s mission is to provide the best selection of stylish, high-end designer and famous brand name merchandise at surprisingly affordable prices in men’s and women’s apparel, jewelry, shoes, accessories and home goods. As of July 29, 2006, there were 26 Filene’s Basement stores in operation.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole. This discussion should be read in conjunction with our financial statements and accompanying notes as of July 29, 2006.

On July 5, 2005, DSW completed an initial public offering (“IPO”) of 16,171,875 Class A Common Shares sold at a price to the public of $19.00 per share and raising net proceeds of $285.8 million, net of the underwriters’ commission and before expenses of approximately $7.8 million. As of July 29, 2006, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.1% of DSW’s outstanding common shares and approximately 93.2% of the combined voting power of such shares. Retail Ventures accounted for the sale of DSW as a capital transaction. Associated with this transaction, a deferred tax liability of $68.7 million was recorded. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on the New York Stock Exchange under the symbol “DSW”.

The retail industry is highly competitive. We compete with a variety of conventional and discount retail stores, including national, regional and local independent department and specialty stores, as well as with catalog operations, on-line providers, factory outlet stores and other off-price stores. Our operating entities, Value City, DSW and Filene’s Basement, have different target customers and different strategies, but each focuses on this basic principle: the value to the customer is the result of the quality of the merchandise in relationship to the price paid.

Forward-Looking Statements

Some of the statements in this “Management’s 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, as amended on Form 10-K/A, as filed with the Securities and Exchange Commission on August 2, 2006 (the “2005 Annual Report”) 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 assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis discusses the results of operations and financial condition as reflected in our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. As discussed in the Notes to the Consolidated Financial Statements that are included in our 2005 Annual Report, the preparation of financial statements in conformity with generally accepted accounting principles 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, management evaluates its estimates and judgments, including, but not limited to, those related to inventory valuation,

depreciation, amortization, recoverability of long-lived assets including intangible assets, the calculation of retirement benefits, estimates for self insurance reserves for health and welfare, workers’ compensation and casualty insurance, income taxes, contingencies, litigation and revenue recognition. Management bases its estimates and judgments on its historical experience and other relevant factors, 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 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 the financial statements.

We believe the following represent the most critical estimates and assumptions, among others, used in the preparation of our consolidated financial statements. We have discussed the selection, application and disclosure of the critical accounting policies with our Audit Committee.

	•		Revenue recognition. Revenue from merchandise sales is recognized at the point of sale and is net of returns and excludes sales tax. Revenue from stored value cards, which include gift cards and returned merchandise credits, is deferred and is recognized when the cards are redeemed. The liability associated with outstanding stored value cards was $14.2 million and $14.9 million at July 29, 2006 and January 28, 2006, respectively, and these amounts are included in the accompanying consolidated balance sheet within Accrued expenses — other. The Company did not recognize income from unredeemed stored value cards during the six months ended July 29, 2006 and July 30, 2005.
	•		Cost of sales and merchandise inventories. We use the retail method of accounting for substantially all of our 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 margins 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 was $44.9 million and $43.1 million at July 29, 2006 and January 28, 2006, respectively.

Inherent in the calculation of inventories are certain significant management judgments and estimates, including setting the original merchandise retail value or markon, markups of initial prices established, reduction of pricing due to customer’s value perception or perceived value (known as markdowns), and estimates of losses between

physical inventory counts or shrinkage, which, combined with the averaging process within the retail method, can significantly impact the ending inventory valuation at cost and the resulting gross margins.

	•		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 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. As 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. 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 value, based on discounted future cash flows, of the asset over its fair value. Should an impairment loss be realized, it will be included in operating expenses.

During the quarter ending July 29, 2006, the Company recorded charges associated with the closing of two DSW stores. The operating lease at one of the two stores was terminated through the exercise of a lease kick-out option. During the first quarter of 2006, the Company closed one Filene’s Basement store for which closing costs were accrued during the fourth quarter of 2005. These estimates are monitored on at least a quarterly basis for changes in circumstances.

The table below sets forth the significant components and activity related to these closing reserves:

		Balance at 1/28/06				Related Charges				Payments				Adjustments			Balance at 7/29/06
		(in thousands)
Employee severance and termination benefits		$	277			$	55			$	(296	)					$	36
Lease Costs			2,130				392				(440	)		$	233			2,315
Other																		—
Total		$	2,407			$	447			$	(736	)		$	233		$	2,351

		Balance at 1/29/05				Related Charges				Payments			Adjustments				Balance at 7/30/05
		(in thousands)
Employee severance and termination benefits		$	599			$	—			$	(599	)	$	—			$	—
Lease Costs			674				4,686				(342	)						5,018
Other			39				154				(20	)						173
Total		$	1,312			$	4,840			$	(961	)	$	—			$	5,191

We believe at this time that the remaining 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 impairment may differ from our current estimates.