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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Fiscal Year Ended February 3, 2007
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-10767
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) |
Registrant’s telephone number, including area code (614) 471-4722
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered: | |
| Common Shares, without par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. o Yes þ No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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
Act). o Yes þ No
The aggregate market value of voting common equity held by non-affiliates of the registrant
computed by reference to the price at which such voting common equity was last sold, as of July 29,
2006, was $471,752,172.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as
of the latest practicable date: 47,280,347 Common Shares were outstanding at March 31, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Retail Ventures, Inc.’s fiscal 2006 Proxy Statement, which will be filed no later than
120 days after February 3, 2007, are incorporated by reference into Part III of this Annual Report
on Form 10-K.
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TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
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SCHEDULES |
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PART I
As used in this Annual Report on Form 10-K (“Annual Report on Form 10-K” or “Form 10-K”) and except
as the context otherwise may require, 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.”
We own many trademarks and service marks. This Annual Report on Form 10-K contains trade dress,
tradenames and trademarks of other companies. Use or display of other parties’ trademarks, trade
dress or tradenames is not intended to, and does not, imply a relationship with the trademark or
trade dress owner.
Cautionary Statement Regarding Forward-Looking Information for Purposes of the “Safe Harbor”
Provisions of the Private Securities Litigation Reform Act of 1995
Some of the statements in this Annual Report on Form 10-K contain forward-looking statements 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,” “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 Annual
Report on Form 10-K are based upon our historical performance and on current plans, estimates and
expectations and assumptions relating to our operations, results of operations, financial
condition, growth strategy and liquidity. 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 numerous risks, uncertainties and other factors that may cause actual
results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. In addition to
other factors discussed elsewhere in this report, including those described under “Part I, Item 1A.
Risk Factors,” some important factors that could cause actual results, performance or achievements
for the Company to differ materially from those discussed in forward-looking statements include, but are
not limited to, the following:
| • | our success in opening new stores and operating stores on a timely and profitable basis; | ||
| • | maintaining good relationships with our vendors; | ||
| • | our ability to anticipate and respond to fashion trends; | ||
| • | fluctuation of our comparable store sales and quarterly financial performance; | ||
| • | disruption of our distribution operations; | ||
| • | our dependence on DSW Inc. for key services; | ||
| • | failure to retain our key executives or attract qualified new personnel; | ||
| • | our competitiveness with respect to style, price, brand availability and customer service; | ||
| • | declining general economic conditions; | ||
| • | risks inherent to international trade with countries that are major manufacturers of apparel and footwear; and | ||
| • | security risks related to the electronic processing and transmission of confidential customer information. |
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results, performance or achievements may vary materially
from what we may have projected. Furthermore, new factors emerge from time to time and it is not
possible for management to predict all such factors, nor can it assess the impact of any such
factor on the business or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking statement. Any
forward-looking statement speaks only as of the date on which such statement is made, and, except
as required by law, RVI undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to reflect the occurrence
of unanticipated events.
ITEM 1. BUSINESS.
History of Our Business
We opened our first Value City department store in Columbus, Ohio in 1917. Until our initial public
offering on June 18, 1991, Value City department stores operated as a division of Schottenstein
Stores Corporation (“SSC”). As of February 3, 2007 SSC owned approximately 40.7% of the outstanding
RVI Common Shares and beneficially owned approximately 51.5% (assumes issuance of (i) 8,333,333 RVI
Common Shares issuable upon the exercise of conversion warrants, (ii) 1,388,752 shares of RVI
Common Shares issuable upon the exercise of term loan warrants and (iii) 685,417 RVI Common Shares
issuable upon exercise of the term loan warrants) of the outstanding shares of Retail Ventures. We
also have a number of ongoing related party agreements and arrangements with SSC. These are more
fully described in Item 13 of this Annual Report beginning on page 53.
On October 8, 2003, the Company reorganized its corporate structure into a holding company form
whereby Retail Ventures, an Ohio corporation, became the successor issuer to Value City Department
Stores, Inc. As a result of the reorganization, Value City Department Stores, Inc. became a
wholly-owned subsidiary of Retail Ventures. In connection with the reorganization, holders of
common shares of Value City Department Stores, Inc. became holders of an identical number of common
shares of Retail Ventures. The reorganization was effected by a merger which was previously
approved by Value City Department Stores Inc.’s shareholders. Since October 2003, Retail Ventures’
Common Shares have been listed for trading under the ticker symbol “RVI” on the New York Stock
Exchange.
In December 2004, the Company completed another corporate reorganization whereby Value City
Department Stores, Inc. merged with and into Value City Department Stores LLC (“VCDS” or “Value
City”), a newly created, wholly-owned subsidiary of Retail Ventures. In connection with this
reorganization, Value City transferred all the issued and outstanding shares of DSW and Filene’s
Basement to Retail Ventures in exchange for a promissory note.
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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. RVI
accounted for the sale of DSW as a capital transaction. Associated with this transaction, a
deferred tax liability of $65.5 million was recorded. As of February 3, 2007, Retail Ventures owned
Class B Common Shares of DSW representing approximately 63.0% of DSW’s outstanding common shares
and approximately 93.2% of the combined voting power of such shares. 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 SSC, Cerberus Partners, L.P. (“Cerberus”) and Millennium Partners L.P.
(“Millennium”) and under its 6.625% Mandatorily Exchangeable Notes due September 15, 2011, or
Premium Income Exchangeable SecuritiesSM (“PIES”). Retail Ventures is subject to
contractual obligations (a) 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 and (b) with the holders of its
PIES to retain ownership of a number of DSW Class B common shares (which are exchangeable by Retail
Ventures for DSW Class A common shares) equal to the maximum number of Class A common shares
deliverable by Retail Ventures upon exchange of the PIES.
General
We operate our business in the four segments described below:
Value City. 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 and operating for over 80 years principally
under the name Value City, this segment’s strategy has been to provide exceptional value by
offering a broad selection of brand name merchandise at prices below conventional retail prices.
Over the past two years, Value City has modified its merchandising strategy to increase the
percentage of fashionable brand name in-season and private label merchandise and to increase the
percentage of all-season, regularly in stock merchandise, while refining the offerings of special
merchandise purchases to provide appropriate quantities and quality. Value City expects that this
will provide its customers, also known as “guests”, a significantly improved combination of today’s
fashions, basic products and deeply discounted special promotions, all at low prices, while still
allowing customers the experience of “treasure hunting” for special, deal-based offerings. Value
City believes that this enhanced combination of fashion and value will provide a distinctive
shopping opportunity for its guests. In 2006 Value City continued to make changes in its
merchandise displays, store operations and marketing strategy. As of February 3, 2007, there were
113 Value City stores in operation. In December 2006 we announced that we are exploring strategic
alternatives for the Value City operations, including a possible sale of the division. RVI has
retained financial advisors to assist in this effort to enhance shareholder value. We also stated
that there can be no assurance that this process will result in any specific transaction.
DSW. DSW is a leading U.S. specialty branded footwear retailer operating 223 shoe stores in 35
states as of February 3, 2007. It 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. DSW’s core focus is to
create a distinctive store experience that satisfies both the rational and emotional shopping needs
of its customers by offering them a vast, exciting selection of in-season styles combined with the
convenience and value they desire. The stores average approximately 25,000 square feet and hold
approximately 30,000 pairs of shoes. DSW believes this combination of selection, convenience and
value differentiates it from its competitors and appeals to consumers from a broad range of
socioeconomic and demographic backgrounds. In addition, DSW operates leased shoe departments for
three non-related retailers in a combined 330 stores and 30 stores in RVI’s wholly-owned subsidiary
Filene’s Basement.
Filene’s Basement. Filene’s Basement stores are located primarily in major metropolitan areas of
the Northeast and Midwest United States. 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.
Filene’s Basement focuses on serving the customer with discriminating fashion taste who appreciates
an excellent value. These stores have a large selection of upscale designer and better-branded
merchandise, including couture items imported directly from the fashion capitals of Europe. Famous
for its unique bridal dress promotions, now hailed as the “Running of the Brides™,” Filene’s
Basement believes that it is also distinctive in its offering of great fashion, high quality and
affordable prices. As of February 3, 2007, there were 31 Filene’s Basement stores in operation.
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Corporate. The Corporate segment represents the corporate assets, liabilities and expenses not
allocated to other segments through corporate allocation or shared service arrangements. The
remaining results of operation are comprised of debt related expenses, income on investments and
interest on intercompany notes, the latter of which is eliminated in consolidation.
See Note
12 of Notes to Consolidated Financial Statements beginning on page
F-34 of this Annual
Report for detailed financial information regarding our four operating segments.
VALUE CITY
Value City’s goal is to continue its transition to a leading value department store consistently
featuring in-season brand name fashions, a mix of private label merchandise, a consistent
presentation of in-stock basic products and special promotions.
Value City’s merchandise strategy provides women’s, men’s, children’s apparel, shoes,
jewelry/fragrances, bath and body products, home goods, electronics, toys and seasonal items
representing recognizable, mid-tier name brands in current styles and colors at exceptional values.
Value City is also developing a direct sourced line of high quality merchandise which allows higher
margins within recognizable brand names such as “Leslie Fay.”
Value City also buys in-line and opportunistic merchandise which is available to it at
significantly less than the cost to the original retailer. These goods provide excitement in the
store due to their 20-70% lower prices than a customer can find in a traditional department store
shopping experience. These branded special buys provide a reason for Value City’s guests to shop
often to see the latest exceptional values.
Merchandising
Beginning in 2005, Value City initiated a new merchandising strategy, designed to supplement the
prior deal-based approach with a greater emphasis on being in-stock on a regular basis on current
fashion from recognized brands. In the past, opportunistic buys accounted for a substantial amount
of the mix. Currently, we believe opportunistic buys are about one half of the mix, with a goal of
eventually dropping that percentage to 35%, with the remainder of the mix being pre-planned. This
strategy gives Value City greater control over the selection, sizing, quality, consistency and
fashion timeliness of its inventory, which makes it easier to satisfy the needs of the customers.
The women’s and men’s departments were transformed starting in 2005. The transformation of the
children’s and home fashion areas was initiated in the latter half of 2006 but was not complete as
of February 3, 2007.
To help build complete assortments and still provide great value, Value City expanded its exclusive
brand program using its and Retail Ventures’ own private label brands, such as Leslie Fay, F.R.
Trippler and Outdoor Outfitters. Value City has the ability to design and coordinate the fashion
assortments controlling all aspects of the process. This business has grown substantially, from
virtually nothing in 2004. Although this area is expected to continue its rapid growth, the primary
emphasis of the store mix will remain on providing brand name merchandise at bargain prices, so the
long term goal is to have private label brands become no more than 20% to 25% of the mix.
Supplier Relationships and Purchasing
Value City employs several different purchasing strategies. Up-front planned purchases occur in
advance of the targeted season and represent a growing portion of overall merchandising needs.
Value City purchases in-season merchandise opportunistically during the selling season when
merchandise presents itself and the cost of the acquisition allows for sufficient retail markup. It
has also started more aggressively to seek advantageous buying opportunities and sourcing overseas
across all categories. Value City purchases overstocked or overproduced items from manufacturers
and other retailers, including end-of-season, out-of-season and end-of-run merchandise and
manufacturers’ slight irregulars. From time to time, but less frequently than its historical
practice, Value City purchases (i) all or substantially all of the inventories of financially
distressed retailers and makes other special purchases and (ii) packaway merchandise. Packaway
purchases are used as a method of sourcing branded and short supply closeout merchandise found in
the market and warehousing these goods until the following season. Packaway merchandise lags the
normal retail distribution by approximately one selling season and generally has a higher level of
risk associated with it compared to other purchases.
An important factor in operations has been the relationships Value City has developed with select
suppliers and its many years of experience in purchasing merchandise directly from manufacturers,
vendors and other sources at prices substantially below those generally paid by conventional
retailers. Value City believes our buyers have good relationships with suppliers that allow us to
acquire the mix and quantities of merchandise we want and need. Value City purchases merchandise
from more than 3,000 suppliers, none of which accounted for a material percentage of purchases
during the past fiscal year. Except for greeting cards, bottled drinks and our
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program supplying merchandise next to the point of sale (“POS”) register, there are no long-term or
exclusive commitments to purchase merchandise from any one supplier. Most brand name merchandise
manufacturers are open to selling merchandise to Value City for resale at our discounted prices as
we provide a stable and known outlet. By selling their merchandise through our retail stores, Value
City is able to assure these suppliers that the merchandise will be sold without disturbing their
regular channels of distribution.
Value City cannot quantify the reduction in prices it pays for special purchases compared to the
prices paid by competitors for similar purchases. However, we believe that such special purchases
are made at prices sufficiently favorable to enable Value City to offer merchandise to our guests
at very competitive prices while achieving initial markup goals.
Advertising and Promotion
Value City has committed substantial resources to advertising. In recent years, Value City has
increased its advertising to 5% to 6% of net sales to retain and attract new customers. This
temporary increase was done to build greater awareness of the brand and convince people to visit
the store to see all of the merchandising improvements, using slogans such as “The Brands are Back”
and “You gotta see the V.” Once the awareness of the change has taken place and word of mouth
begins to spread, it is expected that advertising will return to its historic levels.
Value City’s promotional strategy is carefully planned and budgeted to include not only
institutional and seasonal promotions, but also weekly storewide sales events highlighting recent
buy-outs and other specially purchased brand name merchandise designed to maximize customer
interest.
Value City uses a variety of advertising media, including print (primarily circulars), television,
radio and direct mail and email marketing. Much of the emphasis in advertising has been placed on
broadcast, since we believe it is a more effective medium for reaching people who are not currently
loyal customers. To effectively use direct mail and its website, Value City has pursued increasing
the size of Value City’s customer database of mail and email addresses. This has primarily taken
two forms, the Vplus loyalty card and Value City credit card programs. Vplus is a loyalty program
that was initiated in 2005 in which customers sign up to become members. Members receive special
communications and promotions not available to the general public, and this customer database is
growing rapidly. There has also been an increased emphasis to encourage customers to sign up for
the Value City private label credit card. At year end, there were
approximately 1.8 million
customers in the Vplus loyalty program and 0.4 million active customers in the private label credit
card program.
In some cases, the arrangements Value City has with its suppliers prohibit Value City from
mentioning the actual brand name of the product in its non-store advertising. The items can still
be displayed in the ad, but without the brand name.
Stores
Store Location, Design and Operations. We believe Value City’s customers are attracted to its
stores principally by the wide assortment of quality items at substantial savings.
Our Value City stores are generally open from 9:30 a.m. until 9:30 p.m. Monday through Saturday and
11:00 a.m. until 6:00 p.m. on Sunday. All of the stores are located in leased facilities. Of the
113 Value City stores open as of February 3, 2007, 32 are freestanding, 56 are located in shopping
centers and 25 are located in enclosed malls. Value City stores average approximately 88,000 square
feet, with approximately 75% of the total area of each store representing selling space. The stores
are generally laid out on a single level with central traffic aisles providing access to major
departments. Each department strives to display and stock large quantities and assortments of
merchandise, giving the store a full appearance. Value City believes its stores offer customers a
convenient shopping experience.
All of our Value City stores are designed for self-service shopping, although sales personnel are
available to help guests locate merchandise and to assist in the selection and fitting of apparel,
jewelry and footwear. Value City’s associate training programs are designed to assure that
associates, known at Value City as “Team Members,” maintain the highest level of professionalism
and place guest service at the forefront. In all stores, a guest service desk is conveniently
located, generally adjacent to the central checkout area. To promote the ease of checkout, we
utilize point of sale scanning systems that expedite the checkout process by providing automated
check and credit approval and price lookup. We accept all major credit cards and also provide a
private label credit card program. We also maintain a reasonable return policy.
Our Value City stores are organized into separate geographic regions and districts, each with a
territory or district manager. Territory and district managers are headquartered in their region
and spend the majority of their time in their stores to ensure adherence to merchandising,
operational and personnel standards. The typical staff for a Value City store consists of a store
manager, an operations
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manager, one or more assistant managers and full and part-time hourly associates. Each store
manager reports directly to one of the territory or district managers, and each of the territory or
district managers reports to a Regional Vice President who in turn reports to the Senior Vice
President of Store Operations.
Our Value City store managers are responsible on a day-to-day basis for the overall condition of
their stores, guest relations, personnel hiring and scheduling, and all other operational matters
arising in their stores. Each store manager is compensated, in part, based on the performance of
the manager’s store. Our store managers are an important source of information concerning local
market conditions, trends and customer preferences.
Value City began updating its store layout in fiscal 2005, replacing rail racks with four-way
fixtures and updated merchandise display tables to improve the visibility and appearance of our
merchandise. Value City continued to update its visual merchandising in fiscal 2006 at all of its
stores with new department locations and in-store signage.
Expansion. No new Value City stores were added in fiscal 2006 or 2005 and none are currently
planned for fiscal 2007.
Distribution
Our distribution facilities are designed to enable us to prioritize the processing of merchandise
on short notice and to deliver merchandise to stores. This allows our buyers to purchase
merchandise very late in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we are capable of devoting
warehouse space to out-of-season goods for our Value City stores. Our ability to purchase and
distribute our warehouse merchandise in substantial quantities has enabled us to offer high-quality
merchandise to customers at prices significantly below usual retail prices. We believe that this
ability distinguishes Value City from the typical discount or department store and provides it with
a competitive advantage in making purchases as favorable opportunities arise.
We use five distribution centers located in Columbus, Ohio. Our distribution facilities utilize
material handling equipment, including mechanized conveyor systems to separate and collate
shipments to the stores. The aggregate area of the distribution facilities is approximately
2,040,000 square feet; however, use of multi-tier processing levels in some of the distribution
centers increases the operating capacity by approximately 380,000 square feet. In 2005, we further
consolidated operations, allowing Value City to eliminate excess capacity with the elimination of
260,000 square feet in an existing facility.
Merchandise is processed, ticketed and consolidated prior to shipment to the stores to ensure
full-truck loads and minimize shipping costs. We lease our fleet of road tractors and approximately
70% of our semi-rig trailers with the remainder being owned. Our fleet makes the majority of all
deliveries to the stores.
License Agreements
In connection with the reorganization completed in December 2004, Value City and DSW agreed to
terminate the supply agreement pursuant to which Value City utilized DSW to operate the shoe
departments in all the Value City stores. In fiscal 2006 and 2005, shoe departments in Value City
were operated by Value City and its own Team Members. Retail Ventures Jewelry, Inc., a wholly-owned
subsidiary of Retail Ventures, operates the jewelry departments in all Value City stores. The
inter-company activity is eliminated in our consolidated financial statements. In a few stores,
Value City licenses space to third party licensees. Licensees supply their own merchandise and
generally supply their own store fixtures.
Value City operates a leased shoe department for Filene’s Basement in the Downtown Crossing Boston
location. The inter-company activity is eliminated in our consolidated financial statements.
Segment Seasonality
Value City customer traffic typically increases in the early spring, back-to-school and Christmas
holiday seasons. These seasonal periods are critical to achieving Value City’s annual operating
targets.
Service Marks, Trademarks and Tradenames
The service mark “Value City” has been registered by SSC with the United States Patent and
Trademark Office (“USPTO”). As of February 3, 2007, we had three department stores in Columbus,
Ohio operating under the tradename “Schottenstein’s,” which has been registered by SSC in the State
of Ohio. We are entitled to use such names for the sole purpose of operating department stores on
an exclusive basis pursuant to a perpetual license from SSC. SSC also operates a chain of furniture
stores under the name “Value City
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Furniture.” We have also registered with the U.S. Patent and Trademark Office various trademarks
used in our private label and marketing programs.
DSW
DSW’s goal is to further strengthen its position as a leading specialty branded retailer of adult
footwear in the United States. Since 1998, DSW has accelerated its expansion by investing in new
stores, merchandise development, technology and its people to support further growth and to enhance
its performance. In fiscal 2006, DSW generated $1.3 billion in net sales and $100.7 million in
operating profit. Over the four-fiscal-year period ended February 3, 2007, DSW has grown its DSW
store base, net sales and operating profit at compound annual rates
of approximately 15.3%, 18.7%
and 54.3%, respectively.
DSW operates leased shoe departments for three non-affiliated retailers and one affiliated
retailer. DSW entered into supply agreements to merchandise the non-affiliated shoe departments in
Stein Mart, Inc., or Stein Mart, Gordmans, Inc., or Gordmans, and Frugal Fannie’s Fashion
Warehouse, or Frugal Fannie’s, stores as of July 2002, June 2004 and September 2003, respectively.
On May 30, 2006, DSW entered into an Amended and Restated Supply Agreement (the “Agreement”) to
supply shoes to Stein Mart so that DSW is now the exclusive supplier of shoes to all Stein Mart
stores that have shoe departments. DSW has operated leased shoe departments for Filene’s Basement
since its acquisition by Retail Ventures in March 2000. DSW owns the merchandise, records sales of
merchandise net of returns and sales tax, owns the fixtures (except for Filene’s Basement) and
provides supervisory assistance in the covered locations. Stein Mart, Gordmans, Frugal Fannie’s and
Filene’s Basement provide the sales associates. DSW pays a percentage of net sales as rent. As of
February 3, 2007, DSW supplied merchandise to 267 Stein Mart stores, 62 Gordmans stores, one Frugal
Fannie’s store and 30 Filene’s Basement stores. Beginning in fiscal 2006, DSW’s leased shoe
department segment has been supported by a store field operations group, a merchandising group and
a planning and allocation group that are separate from the DSW stores segment.
Merchandising
Selection. DSW’s goal is to excite its customers with a “sea of shoes” that fulfill a broad range
of style and fashion needs. DSW believes that the typical store offers the largest selection of
brand name and designer merchandise of any footwear retailer or typical department store in the
nation. DSW purchases directly from more than 400 domestic and foreign vendors, primarily in-season
footwear found in specialty and department stores and branded make-ups (shoes made exclusively for
a retailer), with selection at each store geared toward the particular demographics of the
location. A typical DSW store carries approximately 30,000 pairs of shoes in over 2,000 styles
compared to a significantly smaller product offering at typical department stores. DSW also offers
a complementary selection of handbags, hosiery and other accessories that appeal to its brand- and
fashion-conscious customers.
DSW’s merchandising group constantly monitors current fashion trends as well as historical sales
trends to identify popular styles and styles that may become popular in the upcoming season. DSW
tracks store performance and sales trends on a weekly basis and has a flexible incremental buying
process that enables it to order styles frequently throughout each season, in contrast to
department stores, which typically make one large purchase at the beginning of the season. To keep
DSW products mix fresh and on target, DSW tests new fashions and actively monitors sell-through
rates in its stores. DSW also aims to increase the quality and breadth of existing vendor
offerings and identify new vendor opportunities. In addition to DSW merchandising initiatives, DSW
will continue to invest in planning, allocation and distribution to continue to improve its
inventory and markdown management.
Value. Through the DSW buying organization, DSW is able to provide its customers with high-quality,
in-season fashions at prices that it believes are competitive with the typical sale price found at
specialty retailers and department stores. DSW employs a consistent pricing strategy that typically
provides its customers with the same price on its merchandise from the day it is received until it
goes into DSW’s planned clearance rotation. The DSW pricing strategy differentiates DSW from
competitors who usually price and promote merchandise at discounts available only for limited time
periods. DSW finds customers appreciate having the power to shop for value when it is most
convenient for them, rather than waiting for a department store or specialty retailer to have a
sale event. For easy comparison by DSW’s customers DSW prominently displays their price and the
corresponding vendor’s suggested retail price for each pair of shoes
In order to provide additional value to shoe enthusiasts and other regular customers, DSW maintains
a customer loyalty program for the DSW stores in which program members receive a future discount on
qualifying purchases. This program offers additional savings to frequent shoppers and encourages
repeat sales. Upon reaching the target-earned threshold, members receive certificates for these
discounts which must be redeemed in six months.
Convenience. DSW believes it provides customers with the highest level of convenience based on
DSW’s belief that customers should be empowered to control and personalize their shopping
experiences. DSW merchandise is displayed on the selling floor with
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self-service fixtures to enable customers to view and touch the merchandise. DSW stores are laid
out in a logical manner that groups together similar styles such as dress, casual, seasonal and
athletic merchandise. DSW believes this self-service aspect provides DSW customers with maximum
convenience as they are able to browse and try on the merchandise without feeling rushed or
pressured into making a decision too quickly.
Supplier Relationships and Purchasing
DSW believes it has good relationships with its vendors. DSW purchased merchandise directly from
more than 400 domestic and foreign vendors as of February 3, 2007. DSW vendors include suppliers
who either manufacture their own merchandise or supply merchandise manufactured by others, or both.
Most of DSW’s domestic vendors import a large portion of their merchandise from abroad. DSW has
implemented quality control programs under which DSW buyers are involved in establishing standards
for quality and fit according to which actual product is manufactured and the DSW store personnel
examine incoming merchandise in regards to color, material and overall quality of manufacturing. As
the number of DSW locations increases and its sales volumes grow, DSW believes there will continue
to be adequate sources available to acquire a sufficient supply of quality goods in a timely manner
and on satisfactory economic terms. During fiscal 2006, merchandise supplied by its three top vendors accounted for approximately 22%
of its sales.
Advertising and Promotion
The marketing strategy for DSW focuses on communicating the selection, convenience and value
offered by DSW through the use of television, radio and print media advertising as well as in-store
promotions. DSW also maintains a gift card program with the intent to generate additional sales by
reaching new customers.
During the third quarter of 2006 DSW re-launched its loyalty program, which included changing the
name from “Reward Your Style” to “DSW Rewards,” the points threshold to receive a certificate and
the certificate amounts. The changes were designed to improve customer awareness, customer loyalty
and DSW’s ability to communicate with its customers. DSW target markets to “DSW Rewards” members
throughout the year. DSW classifies these members by frequency and uses direct mail and on-line
communications to stimulate further sales and traffic. As of February 3, 2007, over 7.3 million
members enrolled in the “DSW Rewards” loyalty program had purchased merchandise in the previous two
fiscal years, up from approximately 6.8 million members as of January 28, 2006. In fiscal 2006,
approximately 66% of DSW store net sales were generated by shoppers in the loyalty program, up from
approximately 60% of DSW store net sales in fiscal 2005.
Stores
Store Location, Design and Operations. Typical DSW stores are approximately 25,000 square feet,
with over 85% of total square footage used as selling space. Most DSW stores are organized on a
single level, which allows customers to view the entire store and product offering as they enter
and move quickly to the area where their desired styles are located. Interiors are well-lit, with
informative signage, and spacious aisles allow ease of movement throughout the store. Shoes in the
stores are displayed in a logical manner that groups together similar styles such as dress, casual,
seasonal and athletic merchandise. Clearance shoes are grouped by size and displayed on racks in
the rear of the store. Of the 223 DSW stores open as of February 3, 2007, 191 are either
freestanding or located in shopping centers, which provide customers with direct access to parking,
and the remainder are in shopping malls or downtown locations. For added convenience, DSW stores
have a centralized check-out, which aids customers in quickly locating the cashier for efficient
processing. The stores are generally open from 10:00 a.m. until 9:00 p.m. on Monday through
Saturday and 11:00 a.m. until 6:00 p.m. on Sunday. DSW maintains a reasonable return policy. All
stores are located in leased facilities.
Store associates receive training to maximize the customer shopping experience in DSW’s
self-service environment. Training components consist of customer service, maintaining neat, clean
and orderly store conditions for ease of shopping, efficient checkout process and friendly service.
DSW also maintains a store management training program to develop the skills of management
personnel and to provide an ongoing talent pool for future store expansion. DSW prefers to fill
store management and field supervisor positions through internal promotions.
As of February 3, 2007, DSW stores are organized into the West, Central, Northeast and Southeast
United States geographic regions. Each region is supported by a Regional Vice President or
Director, who supervises senior district, district and area managers headquartered in the
respective region, district or area. The Regional Vice Presidents and Directors spend the majority
of their time in their stores to ensure adherence to merchandising, operational and personnel
standards. The typical staff for a DSW store consists of a store manager and two assistant managers
who supervise 15 to 25 full and part-time hourly associates. Each store manager reports directly to
one of 35 district or area managers, each of whom in turn reports to one of four Regional Vice
Presidents or Regional Directors who in turn report to the Senior Vice President of Store
Operations. DSW store managers are responsible on a day-to-day
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basis for customer relations, personnel hiring and scheduling, and all other operational matters
arising in the stores. Store managers are an important source of information concerning local
market conditions, trends and customer preferences. DSW provides compensation bonuses to store
managers which are largely based on store profitability and inventory control.
Expansion. DSW opened 29 new stores in fiscal 2006, and plans to open at least 30 additional stores
in fiscal 2007. As of February 3, 2007, DSW has signed leases for 30 new stores that are scheduled
to open in fiscal 2007 and fiscal 2008. DSW plans to open stores in both new and existing markets
while expanding its store portfolio to include lifestyle and regional mall locations.
Based on an internal planning model created in fiscal 2005, DSW believes that it has the long-term
potential to operate over 400 stores in the United States, including the 223 stores existing as of
February 3, 2007. In general, the evaluation of new stores focuses on store size, configuration,
location demographics, co-tenancy and lease terms. DSW’s long-range planning model is based on an
examination of each metropolitan area it currently serves or desires to serve. The objective of the
analysis is to understand the demand for DSW’s products in each market over time, and its ability
to capture that demand. The analysis also looks at DSW’s current penetration levels in the markets
it serves, and its expected deepening of those penetration levels as DSW continues to grow the
brand and become the shoe retailer of choice in the market.
After DSW approves a site, it negotiates lease terms and begins planning the store layout and
design. DSW typically devotes approximately six weeks, from the time it takes possession, to
prepare a store for its opening. During fiscal 2006, the average investment required to open a new
DSW store was approximately $1.7 million per store. Of this amount, in fiscal 2006, gross inventory
typically accounted for approximately $0.8 million, fixtures and leasehold improvements typically
accounted for approximately $0.7 million (prior to tenant allowances) and pre-opening advertising
and other pre-opening expenses typically accounted for approximately $0.2 million.
Distribution
DSW’s primary distribution center is located in an approximately 700,000 square foot facility in
Columbus, Ohio. The design of the distribution center facilitates the prompt delivery of priority
purchases and fast-selling footwear to stores so they can take full advantage of each selling
season. In January 2007, DSW implemented a distribution center bypass process which will result in
improving speed-to-market for initial deliveries to stores on the West Coast. As part of this
process, DSW has engaged a third party logistics service provider to receive orders originating
from suppliers on the West Coast or imports entering the United States at a West Coast port of
entry. These initial shipments are then shipped by this service provider to DSW pool points and
onwards to the stores bypassing the Columbus distribution center facility. DSW will continue to
evaluate expansion of this process for applicability in other parts of the country.
Leased Departments and Supply Agreements
DSW has operated leased shoe departments for Filene’s Basement since March 2000. The inter-company
activity is eliminated in our consolidated financial statements. Effective January 30, 2005, DSW
updated and reaffirmed its contractual relationship with Filene’s Basement. Under the new
agreement, DSW owns the merchandise and provides supervisory assistance in all covered locations
and receives a percentage of net sales as payment. Filene’s Basement provides the fixtures and
sales associates. As of February 3, 2007, DSW operated leased shoe departments in 30 Filene’s
Basement locations.
DSW had operated shoe departments in all the Value City stores prior to fiscal 2005. The
inter-company activity was eliminated in our consolidated financial statements. In connection with
the reorganization completed in December 2004, Value City and DSW agreed to terminate the supply
agreement whereby Value City utilized DSW to operate the shoe departments in all the Value City
stores. In fiscal 2005 and 2006, the shoe departments in Value City stores were operated by Value
City.
As of February 3, 2007, DSW supplied merchandise to 267 Stein Mart stores, 62 Gordmans stores and
one Frugal Fannie’s store.
Segment Seasonality
DSW’s business is subject to seasonal trends. DSW store net sales have typically been higher in
spring and early fall, when its customers’ interest in new seasonal styles increases. Unlike many
other retailers, DSW has not historically experienced a large increase in net sales during its
fourth quarter associated with the winter holiday season.
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Service Marks, Trademarks and Tradenames
DSW has registered a number of trademarks and service marks in the United States and
internationally, including DSW® and DSW Shoe Warehouse®. The renewal dates for these U.S.
trademarks are April 25, 2015 and May 23, 2015, respectively. DSW believes that its trademarks and
service marks, especially those related to the DSW concept, have significant value and are
important to building name recognition. To protect the brand identity, DSW has also protected the
DSW trademark in several foreign countries.
DSW also holds patents related to its unique store fixture, which gives DSW greater efficiency in
stocking and operating those stores that have the fixture. DSW aggressively protects its patented
fixture designs, as well as its packaging, store design elements, marketing slogans and graphics.
FILENE’S BASEMENT
Filene’s Basement’s mission is to be the premiere destination for discriminating, high-end,
value-driven shoppers for their fashion needs. Filene’s Basement strives 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.
Filene’s Basement stores have a large selection of upscale designer and better-branded merchandise,
including couture items imported directly from the fashion capitals of Europe. Famous for its
unique bridal dress promotions, now hailed as the “Running of
the Brides”™, Filene’s Basement
believes that it is also unique in its offering of great fashion, high quality and extraordinary
prices.
Merchandising
Designer and Famous Brand Merchandise. Filene’s Basement stores offer designer and famous name
brand apparel, home goods and accessories. The merchandise represents a focused assortment of
fashionable, nationally recognized men’s and women’s apparel, shoes, handbags and other
accessories, fine jewelry, fragrances, giftware and home goods bearing prominent designers’ and
manufacturers’ names. Branded merchandise constitutes most of the product line. Filene’s Basement
believes that up-front purchasing will promote a reliable flow of branded merchandise to its stores
for opening season assortments in February and August. Filene’s Basement now places a significant
portion of its purchases up front. It also has become more aggressive in placing purchases of
make-up goods in Europe, such as sweaters, knits and cold weather goods. The remaining branded
goods are obtained through opportunistic purchases from a diverse group of quality manufacturers
and vendors, including direct imports from some of the most prominent European designers.
Value Pricing. With the exception of special event merchandising and some promotions, Filene’s
Basement offers everyday low pricing in key fashion categories. The Filene’s Basement customer base
has a high fashion I.Q. and recognizes the value in what is being offered and the need to purchase
or risk losing unique items because of the changing nature of the assortment. This allows Filene’s
Basement to eliminate some of the expenses associated with a larger sales floor labor force and
heavy promotional activity to keep prices low. The exception is the historic flagship Downtown
Crossing Boston store that is scheduled to temporarily close while undergoing building renovations.
This store uses an automatic markdown policy, where the longer a product remains in the store, the
lower its price becomes.
There are several factors which allow Filene’s Basement to achieve its value pricing. First, it has
excellent, longstanding relationships with its suppliers. This makes Filene’s Basement a preferred
choice for vendors with designer and famous brand overruns, department store cancellations and
unmet volume objectives. These vendors understand that goods will be sold in an environment that
supports the stature of their brands. Second, Filene’s Basement imports directly from Europe,
cutting out middleman costs. Third, Filene’s Basement understands the market for these high-end
brands well and finds numerous up-front and opportunistic buying opportunities.
Supplier Relationships and Purchasing
Because of the longstanding relationships Filene’s Basement has with vendors, it receives quality
buying opportunities at competitive prices. Filene’s Basement purchases merchandise from more than
2,500 suppliers, none of which accounted for a material percentage of purchases during the past
fiscal year.
Advertising and Promotion
Filene’s Basement employs a multi-media approach to advertising, using print, broadcast direct
mail/email and billboards. The primary method of communicating with the market throughout the year
is via advertising in daily newspapers, typically quarter and
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half page ads. Direct mail and email communications have also been found to be effective and are
becoming a growing part of the advertising mix. Filene’s Basement offers gift cards and a private
label credit card.
Filene’s Basement is not typically an item advertiser. Instead, Filene’s Basement focuses on
promoting the Filene’s Basement store as a brand. The intent is to build the reputation as being
the primary value-based solution for fashion needs and desires, regardless of the item or the time
of year. As a result, the customers gain confidence that whenever they visit Filene’s Basement,
they will find tremendous values on fashionable brands. A large part of this approach relies on
promoting major events, the most famous of which is the Bridal Event. Brides-to-be line up in front
of the store hours before the store opens — when the doors open, there is a stampede by the
customers, now regularly hailed as the “Running of the Brides,”™ to get their hands on a designer
wedding gown at a significantly reduced price before the selection runs out. The event is so unique
and interesting that the event gets significant free media coverage in every market where the
promotion is held. Other major events include a prom gown promotion, a men’s suit promotion and
end-of-season clearance events. These events are not only effective during the time of the
promotion, but also helps establish the reputation for Filene’s Basement as a leader in these
categories year-round.
Since the events are not item specific, Filene’s Basement creates a distinctive look to the print
advertising by using fashion illustrations rather than photography. This enhances the impression
that Filene’s Basement deals in designer merchandise, since the illustrations look similar to
designer drawings.
By not emphasizing item-based advertising, Filene’s Basement can avoid the high expense of running
large weekly circulars. As of 2005, it began issuing item-based catalogs. Here, the intent is more
to emphasize the breadth of the branded offering rather than to sell individual items. As a result,
Filene’s Basement’s advertising as a percent of net sales is relatively low, typically around 2.5%,
excluding grand openings.
Stores
Store Location, Design and Operations.
Most of our Filene’s Basement stores are located in leased facilities within suburban areas, near
large residential neighborhoods, and average approximately 31,000 square feet of selling space per
store (approximately 45,000 square feet of total space per store). The Downtown Crossing Boston
location and stores in New York, Chicago, Atlanta and Washington D.C. are located in urban areas.
As of February 3, 2007, Filene’s Basement operated 30 branch stores, in addition to our Downtown
Crossing Boston location, in eight states and the District of Columbia. The branch stores are
designed to be convenient and attractive in their merchandise presentation, dressing rooms,
checkouts and customer service areas. Their merchandise mix is similar to that of the Boston
flagship store. The branch stores do not operate under the Automatic Markdown Plan, although
markdowns are taken as required.
Our Filene’s Basement Downtown Crossing Boston store is a
landmark institution recognized by generations of New England families and visitors as a source of
quality off-price men’s and women’s merchandise. The Downtown Crossing location will temporarily
cease operations in the fall of 2007, due to the extensive renovation planned for the host building
by the building’s new owner, and when the renovation is completed will resume operations in the
spring of 2009. Our Filene’s Basement Downtown Crossing Boston store currently subleases 178,000
square feet (approximately 65,300 square feet of selling space) on four floors; when the new space
is available, the store premises will be 128,000 square feet on five floors. The sublease has been
amended to extend its term, and now terminates in 2024 with rights on behalf of Filene’s Basement
to extend until 2044. The Downtown Crossing Boston store generated
approximately 12.9% and 15.1% of Filene’s
Basement’s segment sales during fiscal 2006 and 2005,
respectively. During the time the store is closed, the Company does
not believe it will have a material impact to the segment’s result of operations.
All of Filene’s Basement stores are designed for self-service shopping, although fine jewelry
counters maintain a dedicated staff and sales personnel are available to help customers locate
merchandise and to assist in the selection and fitting of apparel and footwear. In all stores, a
customer service desk is conveniently located generally adjacent to the central checkout area. To
promote the ease of checkout we utilize point of sale scanning systems that expedite the checkout
process by providing automated check and credit approval and price lookup. Sales associates are
trained to create a “customer-friendly” environment. Filene’s Basement accepts all major credit
cards, and also provides a private label credit card program. Filene’s Basement maintains a
reasonable return policy in the branch stores of 30 days and in the Downtown Crossing Boston
location of 14 days.
Our Filene’s Basement stores’ typical staff consists of a general manager, an assistant store
manager, merchandising group managers and full and part-time associates. Typically, general
managers report to a Regional Vice President who in turn reports to the Executive Vice President,
Stores & Operations.
Filene’s Basement store managers are responsible on a day-to-day basis for customer relations,
personnel hiring and scheduling, and all other operational matters arising in the stores. Each
store manager is compensated, in part, based on the performance of the
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manager’s store. The store managers are an important source of information concerning local market
conditions, trends and customer preferences. Filene’s Basement prefers to fill management positions
through promotion of existing associates.
Expansion. We plan to open approximately six new Filene’s Basement stores and reopen a fully
remodeled store during fiscal 2007. Typical new stores are expected to have a gross square footage
of approximately 32,000 to 38,000 square feet. Sites will tend to be in urban and key suburban
locations. Based upon our experience, we estimate the average cost of opening a new Filene’s
Basement store is approximately $4.8 million including leasehold improvements, fixtures, inventory,
pre-opening expenses and other costs. Preparations for opening a Filene’s Basement store generally
take nine weeks. We charge pre-opening expenses to operations as incurred.
We continually update our stores by changing the merchandise displays and in-store signage. The
annual cost of refurbishing on a per store basis is generally not substantial and is treated as
on-going cost of operations.
Distribution
Filene’s Basement’s merchandise is processed and distributed from a 457,000 square foot leased
distribution facility situated on 32.8 acres with adjacent rail service in Auburn, Massachusetts,
outside of metropolitan Boston, Massachusetts. In 2005, the Auburn distribution center was upgraded
to accommodate the current volume of business and the anticipated growth in new stores.
Filene’s Basement plans to invest capital dollars in the 2007 fiscal year to further improve the
existing facility.
We have a dedicated contract carrier that manages the fleet of road tractors and our semi-trailers.
Our contract carrier makes the majority of all deliveries to the stores.
License Agreements and Leased Departments
Filene’s Basement licenses cosmetics and certain other incidental departments to independent third
parties. The aggregate annual license fees for the 2006 fiscal year were approximately $1.4
million. Filene’s Basement also uses DSW to supply the in-store shoe departments on a leased
department basis in 30 of its stores; the Value City shoe operation supplies the in-store shoe
department to the Downtown Crossing Boston Filene’s Basement store. Retail Ventures Jewelry, Inc.,
a wholly owned subsidiary of Retail Ventures, operates the jewelry departments in all Filene’s
Basement stores. The inter-company activity is eliminated in our consolidated financial statements.
Third party licensees supply their own merchandise and generally supply their own store fixtures.
In most instances, licensees utilize Filene’s Basement associates to operate their departments and
reimburse Filene’s Basement for all associated costs. Leased departments are operated under the
general supervision of Filene’s Basement and licensees are required to abide by its policies with
regard to pricing, quality of merchandise, refunds, store hours and associate conduct. Leased
departments complement the operations of the stores and facilitate the uniformity of the in-store
merchandising strategy.
DSW has operated leased shoe departments for Filene’s Basement since March 2000. Effective as of
January 30, 2005, DSW updated and reaffirmed its contractual arrangement with Filene’s Basement.
Under the new agreement, DSW owns the merchandise, records sales of merchandise net of returns and
sales tax, and provides supervisory assistance in all covered locations and pays a percentage of
net sales as rent. Filene’s Basement provides the fixtures and sales associates. In three of these
locations, Filene’s Basement licenses and uses the name DSW in connection with the leased shoe
department. This intercompany activity is eliminated in our consolidated financial statements.
Segment Seasonality
Filene’s Basement customer traffic typically increases in the spring, fall and Christmas holiday
season.
Service Marks, Trademarks and Tradenames
Filene’s Basement has an exclusive, perpetual, worldwide, royalty free license to use the name
Filene’s Basement and Filene’s Basement of Boston trademark and service mark registrations, as well
as certain other tradenames. Filene’s Basement’s exclusive licensee status with respect to these
registered marks has been recorded with the USPTO and relevant state offices. Other trademarks and
tradenames used by Filene’s Basement have been protected as well.
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RVI Management Information and Control Systems
We believe a high level of automation is essential to maintaining and improving our competitive
position. We rely upon computerized systems to provide information at all levels for all of our
segments, including warehouse operations, store billing, inventory control, merchandising and
automated accounting. We utilize registers with full scanning capabilities to increase speed and
accuracy at customer checkouts and facilitate inventory restocking. We utilize automated
distribution center systems to track and control the receipt, processing, storage and shipping of
product to the stores.
Value City. The JDA merchandise management system and accounts payable system were implemented
during fiscal 2006 for the hardlines and softlines businesses replacing legacy systems. Secondly,
the Lawson suite was implemented during the first quarter of 2006 for general ledger, accounts
payable, fixed assets, HR, payroll, benefits and procurement systems. Lastly, new Kronos time
clocks and new time and attendance software was implemented in the distribution centers and stores
during fiscal 2006. Value City systems run on two AS/400’s and open systems computers. In mid-2005,
Value City implemented high quality printers in all of its stores to enhance in store signage. This
allows the stores to produce higher quality color signing on a timelier basis. In addition, during
fiscal 2005, Value City customers were able to open a new Value City credit card at all of its POS
registers. The Vplus customer loyalty program was launched in the fall of 2005 to improve the
customer relationship and experience. An automatic replenishment capability began in 2005 to
improve the in-stock position in the stores for “basics” programs. Additionally, in 2005 Value City
implemented a fraud detection program to reduce losses. Fiscal 2005 was a year where significant
systems development and testing took place in preparation of several major implementations.
In the fourth quarter of fiscal 2005, Value City launched the Vplus customer loyalty program which
provides enrollment capabilities at the POS registers in every store.
DSW. In order to promote its continued growth, DSW has undertaken several major initiatives to
build upon the merchandise management system and warehouse management systems that support DSW. An
electronic data interchange (“EDI”) project is underway to utilize product UPC barcodes and
electronic exchange of purchase orders, Advance Shipment Notifications (“ASNs”) and invoices with
DSW’s top vendors. As of February 3, 2007, approximately 80% of the DSW footwear product was
processed using UPC barcodes which has reduced processing costs and improved flow of goods through
the distribution center to the stores. EDI purchase orders and ASNs were piloted with key vendors
in early 2004 and during fiscal 2006 accounted for over 55% of the shipments received from the
vendors.
DSW utilizes POS registers with full scanning capabilities to increase speed and accuracy at
customer checkouts and facilitate inventory restocking.
DSW uses enterprise data warehouse and customer relationship management software to manage the DSW
customer loyalty program. This allows DSW to support, expand and integrate the DSW customer loyalty
program with the POS system to improve the customer experience. In 2005, DSW implemented a fraud
detection program to reduce losses. During fiscal year 2006, the customer loyalty program was
re-launched with new customer offers and personalization capabilities in a continual effort to
improve customer relationships and experiences.
Filene’s Basement. Filene’s Basement utilizes the JDA merchandise management system to track and
manage merchandise inventory at its stores. A warehouse management system is used at the
distribution center to process and distribute merchandise to the stores. Filene’s Basement utilizes
POS registers with full scanning capabilities to increase speed and accuracy at customer checkout
and facilitate inventory restocking. An automatic replenishment capability began in 2005 to improve
the in-stock position in the stores for “basics” programs. Filene’s Basement systems run on an
AS/400 and open systems computers.
Associates
The mission of the Company’s human resource department includes ensuring the Company’s business
plans, organization structure, talent development and bench strength meet the Company’s needs for
employee effectiveness to improve quality of work product, superior customer service, shareholder
value and our profit.
As of February 3, 2007, we had 17,342 associates across all segments of which 7,422 were full-time
and the remaining balance were part-time. Approximately 950 of these associates in 21 stores are
covered by collective bargaining agreements. We believe that, in general, we have satisfactory
relations with our associates.
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Competition
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 Value City, DSW and Filene’s Basement operating entities have different target
customers and different strategies, but each focus on this basic principle: the value to the
customer is the result of the quality of the merchandise in relationship to the price paid.
As a mid-tier value priced department store, Value City strives to provides its guests with
exceptional value within a clean, convenient shopping environment. We differentiate ourselves
through our Value City store format and the breadth of our product offering. Our large stores
differ from most other off-price retailers that tend to operate substantially smaller stores
focusing predominantly on either hard or soft goods. Our large Value City stores enable us to offer
a broad range of brands and products.
In addition, because Value City purchases some of its inventory opportunistically, it competes for
merchandise with other national and regional off-price apparel and discount outlets. Many of Value
City’s competitors handle identical or similar lines of merchandise and have comparable locations,
and some have greater financial resources than Value City does.
Competitive factors important to Value City customers include fashion, value, merchandise
selection, brand-name recognition and store location. Value City competes primarily on the basis of
value, merchandise quality and selection. We believe Value City’s competitive advantages include:
our reputation in the marketplace; our now enhanced full-line merchandise and style offerings; our
reputation for great value; and our broad range of brand names.
Value City and Filene’s Basement provide perceived high value by offering easily recognized
brand-name merchandise at discounted prices. We believe Filene’s Basement’s niche, however, is the
top-tier of the off-price retailing category and its sales events help shape its image as having a
special “cachet.” We believe that Filene’s Basement is more upscale than its off-price competitors
and, in addition to its exclusive selection of prestige couture merchandise, carries a broader and
more complete selection of better designer brands than the competition. Filene’s Basement also offers a
shopping environment that is typically more fashionable than its off-price competition.
DSW customers prefer the wide selection of on-trend merchandise compared to product offerings of
typical traditional department stores, mall-based company stores, national chains, single-brand
specialty retailers and independent shoe retailers because those retailers generally offer a more
limited selection at higher average prices and in a less convenient format than DSW does. In
addition, DSW believes that it successfully competes against competitors who have attempted to
duplicate DSW’s format.
Available Information
RVI electronically files reports with the Securities and Exchange Commission (“SEC”), including
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxies
and amendments to such reports. The public may read and copy any materials that RVI files with the
SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Additionally, information about RVI, including its reports filed with the SEC, is available through
RVI’s web site at http://www.retailventuresinc.com. Such reports are accessible at no charge
through RVI’s web site and are made available as soon as reasonably practicable after such material
is filed with or furnished to the SEC. The reference to the Company website address does not constitute incorporation by
reference of the information contained on the website and that website information should not be
considered part of this document.
ITEM 1A. RISK FACTORS.
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
In
addition to the other information in this Annual Report on Form 10-K, shareholders or prospective
investors should carefully consider the following risk factors when evaluating RVI. If any of the
events described below occurs, our business, financial condition and results of operations and
future growth prospects could suffer.
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We are exploring strategic alternatives for our Value City operations, including the possible sale
of the division, which sale could disrupt our business and may unfavorably impact our future
financial performance.
In December 2006 we announced that we are exploring strategic alternatives for the Value City
operations, including a possible sale of the division. RVI has retained financial advisors to
assist in this effort to enhance shareholder value. We also stated that there can be no assurance
that this process will result in any specific transaction.
With any strategic alternative, including the possible sale of Value City, there are risks that
future operating results could be unfavorably impacted if targeted objectives, such as cost
savings, are not achieved or if other business disruptions occur as a result of implementing the
strategic alternative or activities related to the strategic alternative. There is no assurance
that any strategic alternative or possible sale of Value City that might be consummated will be at
a price or on terms that are favorable to the Company. The strategic analysis process may also
make it more difficult to attract or retain talented associates at Value City.
If we are unable to retain current and attract new customers to our Value City business segment,
our results of operations, cash flow, financial condition and business could be materially
adversely affected.
Our ability to execute our new management’s strategy for the Value City segment is necessary to
reverse the Value City downward sales trend we have experienced. This strategy includes acquiring
the right mix of merchandise in our key fashion areas of women’s and men’s, acquiring in-season
merchandise sooner in the season in complete runs (size and color) in recognizable brands and
identifying the prevailing fashion trend. Our advertising and marketing efforts to retain and draw
new customers will need to be focused on this strategy. The failure to influence the customers we
have and draw in new customers may further reduce profitability, which could, in turn, have a
material adverse impact on our business, financial condition, cash flow and results of operations.
We may be unable to open all the DSW and Filene’s Basement stores contemplated by our growth
strategy on a timely basis, and new stores we open may not be profitable or may have an adverse
impact on the profitability of existing stores, either of which could have a material adverse effect
on our business, financial condition, cash flow and results of operations.
We intend to open at least 30 DSW stores per year in each fiscal year from 2007 through 2010, and
six Filene’s Basement stores in fiscal 2007. However, we may not achieve our planned expansion on a
timely and profitable basis or achieve results in new locations similar to those achieved in
existing locations in prior periods. Our ability to open and operate new DSW and Filene’s Basement
stores successfully on a timely and profitable basis depends on many factors, including, among
others, our ability to:
| • | identify suitable markets and sites for new store locations; | ||
| • | negotiate favorable lease terms; | ||
| • | build-out or refurbish sites on a timely and effective basis; | ||
| • | obtain sufficient levels of inventory to meet the needs of new stores; | ||
| • | obtain sufficient financing and capital resources or generate sufficient cash flows from operations to fund growth; | ||
| • | successfully open new DSW and Filene’s Basement stores in regions of the United States in which we currently have few or no stores; | ||
| • | open new stores at costs not significantly greater than those anticipated; | ||
| • | control the costs of other capital investments associated with store openings, including, for example, those related to the expansion of distribution facilities; | ||
| • | hire, train and retain qualified managers and store personnel; and | ||
| • | successfully integrate new stores into our existing infrastructure, operations and management and distribution systems or adapt such infrastructure, operations and systems to accommodate our growth. |
As a result, we may be unable to open new stores at the rates expected or at all. If we fail to
successfully implement our growth strategy, the opening of new stores could be delayed or
prevented, could cost more than anticipated and could divert resources from
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other areas of our business, any of which could have a material adverse effect on our business,
financial condition, cash flow and results of operations.
To the extent that we open new stores in our existing markets, we may experience reduced net sales
in existing stores in those markets. As the number of our stores increases, our stores will become
more concentrated in the markets we serve. As a result, the number of customers and financial
performance of individual stores may decline and the average sales per square foot at our stores
may be reduced. This could have a material adverse effect on our business, financial condition,
cash flow and results of operations.
We intend to open new DSW and Filene’s Basement stores at an increased rate compared to historical
years, which could strain our resources and have a material adverse effect on our business and
financial performance.
Our continued and future growth in our DSW and Filene’s Basement segments largely depends on our
ability to successfully open and operate new stores on a profitable basis. We intend to continue to
open at least 30 new DSW stores per year in each fiscal year from fiscal 2007 through 2010, and
expect to open six new Filene’s Basement Stores in fiscal 2007. As of February 3,
2007, we have signed leases for an additional 30 new DSW stores and four new Filene’s Basement
stores to be opened in fiscal 2007 and fiscal 2008. During fiscal 2006, the average investment
required to open a typical new DSW store and Filene’s Basement store was approximately $1.7 million
and $4.8 million, respectively. This continued expansion could place increased demands on our
financial, managerial, operational and administrative resources. For example, our planned expansion
will require us to increase the number of people we employ, as well as to monitor and upgrade our
management information and other systems and our distribution facilities. These increased demands
and operating complexities could cause us to operate our business
less efficiently, have a material adverse effect on our operations and financial performance and slow our growth.
The temporary cessation of operations at the Downtown Crossing Boston Filene’s Basement store could
lead to reduced sales when that location resumes operations.
The Downtown Crossing Boston Filene’s Basement is the original, landmark Filene’s Basement store.
The Downtown Crossing store generated approximately 12.9% and 15.1% of Filene’s Basement segment
sales during fiscal 2006 and 2005, respectively. Filene’s Basement announced that it will
temporarily cease operations at the Downtown Crossing location in the late summer or early Fall of
2007 due to the complex redevelopment of the building housing the original store. Filene’s Basement
will resume operations in the basement of the new development in the spring of 2009. The
approximately 18-month temporary cessation of business in this Downtown Crossing store could
result, upon its reopening, in reduced customer traffic and sales at this location.
DSW
plans to invest in the development of an e-commerce business which
may not be successful or could distract management from its core
business.
DSW plans to invest in the development of an e-commerce business to sell shoes and related
accessories through the world wide web. The development of such a business channel could cost more than expected, distract
management from its core business, take business from its existing store base resulting in lower
sales in DSW stores, or be unsuccessful. In the event that DSW spends more than anticipated,
loses focus on its core business, cannibalizes its existing store base, or is unsuccessful in the
development or execution of an e-commerce business, it may have a material adverse effect to its
business, results of operations or financial results.
We rely on our good relationships with vendors and their factors which provide vendor financing to
purchase brand name and designer merchandise at favorable prices. If these relationships were to
be impaired, we may not be able to obtain a sufficient selection of merchandise at attractive
prices, and we may not be able to respond promptly to changing fashion trends, either of which
could have a material adverse effect on our competitive position, our business and financial
performance.
We do not have long-term supply agreements or exclusive arrangements with any vendors (except for
greeting cards, bottled drinks and a program for supplying merchandise at the register for our
Value City stores), and, therefore, our success depends on maintaining good relations with our
vendors in all business segments. Since our business is fundamentally dependent on selling brand
name and designer merchandise at attractive prices, we must continue to obtain from our vendors a
wide selection of this merchandise at favorable wholesale prices. Our growth strategy depends to a
significant extent on the willingness and ability of our vendors to supply us with sufficient
inventory to stock our stores, and of their factors to provide them with vendor financing. If we
fail to continue to deepen and strengthen our relations with our existing vendors and their
factors, or to enhance the quality of merchandise they supply us, and if we cannot maintain or
acquire new vendors of in-season brand name and designer merchandise, this may limit our ability to
obtain a sufficient amount and variety of merchandise at favorable prices, which could have a
negative impact on our competitive position.
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During fiscal 2006, merchandise supplied to our DSW
segment by three key vendors accounted for in the aggregate approximately 22% of DSW’s net sales.
The loss or reduction in the amount of merchandise made available by any one of these key vendors
could have a material adverse effect on our business.
We may be unable to anticipate and respond to fashion trends and consumer preferences in the
markets in which we operate, which could materially adversely affect our business, financial
condition, cash flow and results of operations.
Our merchandising strategy is based on identifying each region’s customer base and having the
proper mix of products in each store across our segments to attract its target customers. This
requires us to anticipate and respond to numerous and fluctuating variables in fashion trends and
other conditions in the markets in which our stores are situated. A variety of factors will affect
our ability to maintain the proper mix of products in each store, including:
| • | variations in local economic conditions, which could affect our customers’ discretionary spending; | ||
| • | unanticipated fashion trends; | ||
| • | our success in developing and maintaining vendor relationships that provide us access to in-season merchandise at attractive prices; | ||
| • | our success in distributing merchandise to our stores in an efficient manner; and | ||
| • | changes in weather patterns, which in turn affect consumer preferences. |
If we are unable to anticipate and fulfill the merchandise needs of each region, we may experience
decreases in our net sales and may be forced to increase markdowns in relation to slow-moving
merchandise, either of which could have a material adverse effect on our business, financial
condition, cash flow and results of operations.
Our operations are affected by seasonal variability.
Our operations have been historically seasonal, with a disproportionate amount of sales and a
majority of net income occurring in the fall and Christmas selling seasons for Value City and
Filene’s Basement. DSW net sales have typically been higher in spring and early fall. As a result
of seasonality, any factors negatively affecting us during these periods, including adverse
weather, the timing and level of markdowns or unfavorable economic conditions, could have a
material adverse effect on our financial condition, cash flow and results of operations for the
entire year.
Our comparable store sales and quarterly financial performance may fluctuate for a variety of
reasons in addition to seasonal factors, which could result in a decline in the price of our common
shares.
Our business is sensitive to customers’ spending patterns, which in turn are subject to prevailing
regional and national economic conditions and the general level of economic activity. Our
comparable store sales and quarterly results of operations have fluctuated in the past, and we
expect them to continue to fluctuate in the future. In addition to seasonal fluctuations, including
weather patterns, a variety of other factors affect our comparable store sales and quarterly
financial performance, including:
| • | changes in our merchandising strategy; | ||
| • | timing and concentration of new store openings and related pre-opening and other start-up costs; | ||
| • | levels of pre-opening expenses associated with new stores; | ||
| • | changes in our merchandise mix; | ||
| • | changes in and regional variations in demographic and population characteristics; | ||
| • | timing of promotional events; | ||
| • | actions by our competitors; and | ||
| • | general United States economic conditions and, in particular, the retail sales environment. |
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Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results
to be expected for any other quarter, and comparable store sales for any particular future period
may decrease. In the future, our financial performance may fall below the expectations of
securities analysts and investors. In that event, the price of our common shares would likely
decline.
Retail Ventures is a holding company and relies on its subsidiaries to make payments on its
indebtedness and meet its obligations.
Retail Ventures is a holding company and all our operations are conducted through our subsidiaries.
Therefore, we rely on the cash flow of our subsidiaries to meet our obligations, including our
obligations under the PIES. The ability of these subsidiaries to distribute to Retail Ventures by
way of dividends, distributions, interest or other payments (including intercompany loans) is
subject to various restrictions, including restrictions imposed by the facilities governing our and
our subsidiaries’ indebtedness, and future indebtedness may also limit or prohibit such payments.
In addition, the ability of our subsidiaries to make such payments may be limited by relevant
provisions of the laws of their respective jurisdictions of organization.
We have debt which could have consequences if we were unable to repay the balances or interest due.
We have debt on our balance sheet which could have consequences if we were unable to repay the
balances or interest due. For example, it could:
| • | limit our flexibility in planning for, or reacting to, changes in our industry in which we operate; | ||
| • | place us at a competitive disadvantage compared to our competitors that have less debt; | ||
| • | limit our ability to seek and borrow additional funds; and | ||
| • | expose us to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates. |
Our ability to make payments on and to refinance our indebtedness and to fund planned capital
expenditures will depend on our ability to generate cash in the future. This, to some extent, is
subject to general economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
Our business may not generate sufficient cash flow from operating activities or that future
borrowings will be available to us under our credit facilities in amounts sufficient to enable us
to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a
portion of our indebtedness, on or before maturity. We may not be able to refinance any of our
indebtedness on commercially reasonable terms or at all.
Upon the occurrence of an event of default under our existing credit facilities, the lenders could
elect to declare the applicable outstanding indebtedness due immediately and payable and terminate
all commitments to extend further credit. We cannot be sure that our lenders would waive a default
or that we could pay the indebtedness in full if it were accelerated.
VCDS’s and DSW’s secured revolving credit facilities could limit operational flexibility.
$275 Million Secured Revolving Credit Facility — The VCDS Revolving Loan
VCDS has entered into a $275 million secured revolving credit facility with a term expiring July
2009. Under this facility, RVI and certain of its wholly-owned subsidiaries are named as
co-borrowers and/or co-guarantors. This facility is subject to a borrowing base restriction and
provides for borrowings at variable interest rates based on the London Interbank Offered Rate, or
LIBOR, the prime rate and the Federal Funds effective rate, plus a margin. VCDS’s obligations under
our secured revolving credit facility are secured by a lien on substantially all our personal
property. In addition, the secured revolving credit facility contains usual and customary
restrictive covenants relating to our management and the operation of our business. These
covenants, among other things, restrict VCDS’s ability to grant liens on its assets, incur
additional indebtedness, open or close stores, pay cash dividends, enter into transactions with
affiliates and merge or consolidate with another entity. These covenants could restrict VCDS’s
operational flexibility, and any failure to comply with these covenants or VCDS’s payment
obligations would limit VCDS’s ability to borrow under the secured revolving credit facility and,
in certain circumstances, may allow the lenders thereunder to require repayment.
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$150 Million Secured Revolving Credit Facility — The DSW Revolving Loan
DSW has entered into a $150 million secured revolving credit facility with a term expiring July
2010. Under this facility, DSW and its subsidiary DSWSW, are named as co-borrowers. This facility
is subject to a borrowing base restriction and provides for borrowings at variable interest rates
based on the London Interbank Offered Rate, or LIBOR, the prime rate and the Federal Funds
effective rate, plus a margin. DSW’s obligations under its secured revolving credit facility are
secured by a lien on substantially all their personal property and a pledge of DSW’s shares of
DSWSW. In addition, the secured revolving credit facility contains usual and customary restrictive
covenants relating to the management and its operation of our business. These covenants, among
other things, restrict DSW’s ability to grant liens on DSW’s assets, incur additional indebtedness,
open or close stores, pay cash dividends and redeem DSW’s stock, enter into transactions with
affiliates and merge or consolidate with another entity. 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 documents. These covenants could restrict DSW’s
operational flexibility, and any failure to comply with these covenants or DSW’s payment
obligations would limit DSW’s ability to borrow under the secured revolving credit facility and, in
certain circumstances, may allow the lenders thereunder to require repayment.
Our stock price may fluctuate significantly, which could negatively affect the trading of our
common shares.
The market price of our common shares has fluctuated significantly in the past and may likely
continue to fluctuate in the future, which could negatively affect the trading of our common
shares. Various factors and events have caused this fluctuation and are likely to cause the
fluctuations to continue. These factors include, among others:
| • | developments related to DSW and fluctuations in the market price of DSW shares; | ||
| • | quarterly variations in actual or anticipated operating results; | ||
| • | changes by securities analysts in estimates regarding Retail Ventures; | ||
| • | conditions in the retail industry; | ||
| • | the condition of the stock market; and | ||
| • | general economic conditions. |
Our failure to retain our existing senior management team and to continue to attract qualified new
personnel could materially adversely affect our business.
Our business requires disciplined execution at all levels of our organization to ensure that we
continually have sufficient inventories of assorted brand name merchandise at below traditional
retail prices. This execution requires an experienced and talented management team. If we were to
lose the benefit of the experience, efforts and abilities of any of our key executive and buying
personnel, our business could be materially adversely affected. We have entered into employment
agreements with certain of these officers. Furthermore, our ability to manage our retail expansion
will require us to continue to train, motivate and manage our employees and to attract, motivate
and retain additional qualified managerial and merchandising personnel. Competition for these
personnel is intense, and we may not be successful in attracting, assimilating and retaining the
personnel required to grow and operate profitably.
We may be unable to compete favorably in our highly competitive markets.
The off-price retail, department store and retail footwear markets are highly competitive with few
barriers to entry. We compete against a diverse group of retailers, both small and large, including
locally owned, regional and national department stores, specialty retailers, discount chains and
off-price retailers. Some of our competitors are larger and have substantially greater resources
than we do. Our success depends on our ability to remain competitive with respect to style, price,
brand availability and customer service. The performance of our competitors, as well as a change in
their pricing policies, marketing activities and other business strategies, could have a material
adverse effect on our business, financial condition, cash flow, results of operations and our
market share.
SSC and/or its affiliates may compete directly against us.
Corporate opportunities may arise in the area of potential competitive business activities that may
be attractive to SSC and us in the area of employee recruiting and retention. Any competition could
intensify if SSC acquired a business that carried an assortment of
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shoes or merchandise in these stores similar to those found in our stores, targeted customers
similar to ours or adopted a similar business model or strategy for its shoe businesses. Given that
RVI and DSW are not wholly-owned by SSC, SSC may be inclined to direct relevant corporate
opportunities to its other affiliates rather than us.
SSC is under no obligation to communicate or offer any corporate opportunity to us. In addition,
SSC has the right to engage in similar activities as us, do business with our suppliers and
customers and employ or otherwise engage any of our officers or employees. SSC and its affiliates
engage in a variety of businesses, including, but not limited to, business and inventory
liquidations, real estate management and real estate acquisitions.
A decline in general economic conditions, or the outbreak or escalation of war or terrorist acts,
could lead to reduced consumer demand for our merchandise.
Consumer spending habits, including spending for the merchandise that we sell, are affected by,
among other things, prevailing economic conditions, levels of employment, salaries and wage rates,
prevailing interest rates, income tax rates and policies, consumer confidence and consumer
perception of economic conditions. In addition, consumer purchasing patterns may be influenced by
consumers’ disposable income. A general slowdown in the U.S. economy or an uncertain economic
outlook could adversely affect consumer spending habits.
Consumer confidence is also affected by the domestic and international political situation. The
outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or
affecting the United States, could lead to a decrease in spending by consumers. In the event of an
economic slowdown, we could experience lower net sales than expected on a quarterly or annual basis
and be forced to delay or slow our retail expansion plans.
We rely on foreign sources for our merchandise, and our business is therefore subject to risks
associated with international trade.
We purchase merchandise from domestic and foreign vendors. In addition, many of our domestic
vendors import a large portion of their merchandise from abroad. For this reason, we face risks
inherent in purchasing from foreign suppliers, such as:
| • | economic and political instability in countries where these suppliers are located; | ||
| • | international hostilities or acts of war or terrorism affecting the United States or foreign countries from which our merchandise is sourced; | ||
| • | increases in shipping costs; | ||
| • | transportation delays and interruptions, including as a result of increased inspections of import shipments by domestic authorities; | ||
| • | work stoppages; | ||
| • | adverse fluctuations in currency exchange rates; | ||
| • | laws of the United States affecting the importation of goods, including duties, tariffs and quotas and other non-tariff barriers; | ||
| • | expropriation or nationalization; | ||
| • | changes in local government administration and governmental policies; | ||
| • | changes in import duties or quotas; | ||
| • | compliance with trade and foreign tax laws; and | ||
| • | local business practices, including compliance with local laws and with domestic and international labor standards. |
We require our vendors to operate in compliance with applicable laws and regulations and our
internal requirements. However, we do not control our vendors or their labor and business
practices. The violation of labor or other laws by one of our vendors could have a material adverse
effect on our business.
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DSW and Filene’s Basement each rely on a primary distribution center. The loss or disruption of
either of these centralized distribution centers could have a material adverse effect on our
business and operations.
Most of DSW’s inventory is shipped directly from suppliers to a primary centralized distribution
center in Columbus, Ohio, where the inventory is then processed, sorted and shipped to one of DSW’s
pool locations located throughout the country and then on to DSW stores. In the fourth quarter of
fiscal 2006, DSW began operations of its West Coast bypass. Due to the short time of operation of
the west coast bypass, DSW is unable to determine the long term success in mitigating the risk of
loss or disruption of its centralized distribution center.
Inventory for Filene’s Basement stores is processed and shipped from a primary distribution
facility in Auburn, Massachusetts.
Our operating results depend on the orderly operation of our receiving and distribution process,
which in turn depends on third-party vendors’ adherence to shipping schedules and our effective
management of our distribution facilities. We may not anticipate all the changing demands that our
expanding operations in these two segments will impose on our receiving and distribution systems,
and events beyond our control, such as disruptions in operations due to fire or other catastrophic
events, labor disagreements or shipping problems, may result in delays in the delivery of
merchandise to our stores.
While we maintain business interruption and property insurance, in the event a distribution center
were to be shut down for any reason or if we were to incur higher costs and longer lead times in
connection with a disruption at a distribution center, our insurance may not be sufficient, and
insurance proceeds may not be timely paid to us.
We will require strong cash flows from our operations to support capital expansion, operations and
debt repayment.
In order to fully implement our new strategy for our Value City segment, as well as implementing
our expansion strategy for both the Filene’s Basement and DSW segments, we will require strong cash
flows from operations to support our capital expansion requirements, our general operating
activities and to fund debt repayment and the availability of financing sources. Our inability to
generate sufficient cash flows to support these activities or the lack of availability of financing
in adequate amounts and on appropriate terms could adversely affect our financial performance or
our earnings per share growth.
If we fail to execute our opportunistic buying and inventory management well, our business could be
materially adversely affected.
We purchase some of the inventory for our Value City and Filene’s Basement stores opportunistically
with our buyers purchasing close to need. To drive traffic to the stores and to increase same store
sales, the treasure hunt nature of the off-price buying experience requires continued replenishment
of fresh high quality, attractively priced merchandise. While the practice of opportunistic buying
enables our buyers to buy at the right time and price, in the quantities we need and into market
trends, it places considerable discretion in our buyers. This discretion subjects us to risks that
our buyers will miscalculate on the timing, quantity and nature of inventory flowing to the stores.
We rely on our distribution infrastructure to support delivering goods to our stores on time. We
must effectively and timely distribute inventory to stores, maintain an appropriate mix and level
of inventory and effectively manage pricing and markdowns. Failure to acquire and manage our
inventory well and to operate our distribution infrastructure effectively, can materially adversely
affect our performance and our relationship with our customers.
If we do not attract and retain quality sales, distribution center and other associates in
sufficient numbers as well as experienced buying and management personnel, our performance could be
materially adversely affected.
Our performance is dependent on attracting and retaining a large and growing number of quality
associates. Many of these associates are in entry level or part-time positions with historically
high rates of turnover. Our ability to meet our labor needs while controlling our costs is subject
to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation
and changing demographics. In the event of increasing wage rates, if we do not increase our wages
competitively, our customer service could suffer because of a declining quality of our workforce,
or our earnings would decrease if we increase our wage rates. Further, our off-price model limits
the market for experienced buying and management personnel and requires us to do significant
internal training and development. Changes that adversely impact our ability to attract and retain
quality associates could materially adversely affect our performance.
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If our
information systems do not operate and our new technologies are not
implemented effectively, our
business could be materially disrupted or our sales or profitability could be reduced.
The
efficient operation of our business is dependent on information
systems, including the
ability to have them operated effectively and to successfully implement new technologies, systems,
controls and adequate disaster recovery systems. The failure of our information systems to perform
as designed or the failure to implement and operate them effectively could materially disrupt our
business or subject us to liability and thereby harm our profitability.
We are reliant on our information systems and the loss or disruption of services could affect our
ability to implement our growth strategy and have a material adverse effect on our business.
Our information systems are integral to efficiently operating our stores and in managing the
operations of a growing store base at Filene’s Basement. The capital and other expenditures
required to keep our information systems operating at peak performance may be higher than
anticipated and could strain our resources. In addition, any significant disruption of the data
centers upon which we rely could have a material adverse affect on those operations dependent on
those systems, most specifically, store operations, our distribution centers and our merchandising
teams.
While we maintain business interruption and property insurance, in the event the data centers on
which we rely are shut down, our insurance may not be sufficient to cover the impact to the
business, or insurance proceeds may not be timely paid to us.
On December 5, 2006, we entered into an Amended and Restated Shared Services Agreement with DSW,
effective as of October 29, 2006 (the “Amended Shared Services Agreement”). Under the terms of the
Amended Shared Services Agreement, through BTS, we receive information technology services from
BTS. RVI information technology associates are now employed by BTS. Through this agreement, DSW
now provides the cash related to capital expense for information technology assets for RVI and its
subsidiaries. DSW expects to recoup its expenditures by charging depreciation to RVI based on the
expected lives of the assets.
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 related to DSW customers. This security breach could materially adversely affect our
reputation and business and subject us to liability.
We rely on commercially available encryption software and on other technologies to provide security
for processing and transmission of confidential customer information, such as credit card numbers.
Advances in computer capabilities, new discoveries in the field of cryptography, or other events or
developments, including improper acts by third parties, could result in a compromise or breach of
security measures we use to protect customer transaction data. Compromises of these security
systems could have a material adverse effect on our reputation and business, and may subject us to
significant liabilities and reporting obligations. A party who is able to circumvent our security
measures could misappropriate our information, cause interruptions in our operations, damage our
reputation and customers’ willingness to shop in our stores and subject us to possible liability.
We may be required to expend significant capital and other resources to protect against these
security breaches or to alleviate problems caused by these breaches.
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 two putative class action lawsuits, which seek unspecified
monetary damages, credit monitoring and other relief. Each of the two 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 lawsuit seeks to certify classes of consumers that are limited geographically
to consumers who made purchases at certain stores in Ohio.
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 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, 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 our knowledge, no class action lawsuits brought 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 us, the amount of the reserve may increase or decrease
accordingly. The amount of any such change may be material. As of February 3, 2007, the balance of
the associated accrual for potential exposure was $3.2 million.
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We continue to be dependent on DSW to provide us with key services for our business.
From 1998 until the completion of its IPO, DSW was operated as a wholly-owned subsidiary of Value
City or Retail Ventures, and provided key services required for the operation of Retail Ventures’
business. In connection with the DSW IPO, we entered into agreements with DSW related to the
separation of our business operations from DSW including, among others, a master separation
agreement and a shared services agreement. Under the terms of the amended and restated shared
services agreement, which when signed became effective as of October 29, 2006, DSW provides several
of our subsidiaries with key services relating to information technology services, planning and
allocation support, distribution services and outbound transportation management, store design and
construction management. The initial term of the shared services agreement will expire at the end
of fiscal 2007 and will be extended automatically for additional one-year terms unless terminated
by one of the parties. We expect some of these services to be provided for longer or shorter
periods than the initial term. We believe it is necessary for DSW to provide these services for us
under the shared services agreement to facilitate the efficient operation of our business.
Once the transition periods specified in the shared services agreement have expired and are not
renewed, or if DSW does not or is unable to perform its obligations under the shared services
agreement, we will be required to provide these services ourselves or to obtain substitute
arrangements with third parties. We may be unable to provide these services because of financial or
other constraints or be unable to timely implement substitute arrangements on terms that are
favorable to us, or at all, which would have a material adverse effect on our business, financial
condition, cash flow and results of operations.
We are controlled indirectly by Schottenstein Stores Corporation, whose interests may differ from
our other shareholders.
As of February 3, 2007, SSC owned approximately 40.7% of the outstanding RVI Common Shares and
beneficially owned approximately 51.5% (assumes issuance of (i) 8,333,333 RVI Common Shares
issuable upon the exercise of conversion warrants, (ii) 1,388,752 RVI Common Shares issuable upon
the exercise of term loan warrants, and, (iii) 685,417 RVI Common Shares issuable upon exercise of
the term loan warrants) of the outstanding shares of Retail Ventures. SSC, a privately held
corporation, is controlled by Jay L. Schottenstein, the Chairman of our Board of Directors, and
members of his immediate family. Given its ownership interests, SSC will be able to control or
substantially influence the outcome of all matters submitted to our shareholders for approval,
including, the election of directors, mergers or other business combinations, and acquisitions or
dispositions of assets. The interests of SSC may differ from or be opposed to the interests of our
other shareholders, and its control may have the effect of delaying or preventing a change in
control that may be favored by other shareholders.
Some of our directors and officers also serve as directors or officers of DSW, and may have
conflicts of interest because they may own DSW Common Shares or options to purchase DSW Common
Shares, or they may receive cash-based or equity-based awards based on the performance of DSW.
Some of our directors and officers also serve as directors or officers of DSW and may own DSW
Common Shares or options to purchase DSW Common Shares, or they may be entitled to participate in
the DSW incentive plans. Jay L. Schottenstein is our Chairman of the Board of Directors and
Chairman of the Board of Directors of DSW; Heywood Wilansky is our President and Chief Executive
Officer and a director of DSW; Harvey L. Sonnenberg is a director of Retail Ventures and of DSW;
Julia A. Davis is our Executive Vice President, General Counsel and Assistant Secretary, and
previously served as Executive Vice President, General Counsel and Secretary of DSW until April 10,
2006; Steven E. Miller is Senior Vice President and Controller of both Retail Ventures and DSW; and
James A. McGrady is our Executive Vice President, Chief Financial Officer, Treasurer and Secretary
and is a Vice President of DSW. DSW’s incentive plans provide cash-based and equity-based
compensation to employees based on DSW’s performance. These employment arrangements and ownership
interests or cash-based or equity-based awards could create, or appear to create, potential
conflicts of interest when directors or officers who own DSW Common Shares or stock options or who
participate in the DSW incentive plans are faced with decisions that could have different
implications for DSW than they do for us. These potential conflicts of interest may not be resolved
in our favor.
Risk Factors Relating to Our PIES
PIES holders will bear the full risk of a decline in the market price of the DSW Class A Common
Shares between the pricing date for the PIES and the exchange date.
The number of DSW Class A Common Shares (or, if we elect, the cash value thereof) that the PIES
holders will receive upon exchange is not fixed, but instead will depend on the applicable market
value, which is the average of the volume weighted average prices of DSW Class A Common Shares
during the 20 consecutive trading day period ending on the third trading day immediately preceding
the exchange date (or, if exchange is accelerated as a result of a cash merger or an event of
default, during the 10 consecutive trading day period ending on the trading day immediately
preceding the effective date of the cash merger or the date of
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acceleration, respectively). The aggregate market value of the DSW Class A Common Shares (or, the
cash value thereof) deliverable upon exchange may be less than the principal amount of the PIES.
Specifically, if the applicable market value of the DSW Class A Common Shares is less than $27.41,
the aggregate market value of the DSW Class A Common Shares deliverable upon exchange will be less
than $50.00, and the holders’ investment in the PIES will result in a loss. Accordingly, the PIES
holders will bear the full risk of a decline in the market price of the DSW Class A Common Shares.
Any such decline could be substantial.
The opportunity for equity appreciation provided by an investment in the PIES is less than that
provided by a direct investment in DSW Class A Common Shares.
The aggregate market value of the DSW Class A Common Shares the PIES holders receive on the
exchange date (or, if we elect, the cash value thereof) will only exceed the principal amount of
the PIES if the applicable market value of the DSW Class A Common Shares exceeds the threshold
appreciation price of $34.95, which represents an appreciation of 27.50% over the initial price of
$27.41. In this event, the PIES holders would receive on the exchange date 78.43% (which percentage
is equal to the initial price of the DSW Class A Common Shares divided by the threshold
appreciation price) of the value of the DSW Class A Common Shares that they would have received if
they had made a direct investment in DSW Class A Common Shares. In addition, if the market value of
DSW Class A Common Shares appreciates and the applicable market value is greater than the initial
price but less than the threshold appreciation price, the aggregate market value of the DSW Class A
Common Shares deliverable upon exchange would be only equal to the principal amount of the PIES and
the PIES holders will realize no equity appreciation of the DSW Class A Common Shares.
The market price of the DSW Class A Common Shares, which may fluctuate significantly, may adversely
affect the market price of the PIES.
We expect that generally the market price of DSW Class A Common Shares will affect the market
price of the PIES more than any other single factor. The market price of the DSW Class A Common
Shares will, in turn, be influenced by the operating results and prospects of DSW, by economic,
financial and other factors and by general market conditions, including, among others:
| • | developments related to DSW; | ||
| • | quarterly variations in DSW’s actual or anticipated operating results; | ||
| • | changes by securities analysts in estimates regarding DSW; | ||
| • | conditions in the retail industry; | ||
| • | the condition of the stock market; | ||
| • | general economic conditions; and | ||
| • | sales of DSW’s Common Shares by its existing shareholders, including Retail Ventures, or holders of rights to purchase DSW Common Shares. |
It is impossible to predict whether the market price of DSW Class A Common Shares will rise or fall
over the life of the PIES. In addition, we expect that the market price of the PIES will be
influenced by interest and yield rates in the capital markets, the dividend rate, if any, on DSW
Class A Common Shares, the time remaining to the maturity of the PIES, our creditworthiness and the
occurrence of certain events affecting DSW that do not require an adjustment to the exchange ratio.
Fluctuations in interest rates in particular may give rise to arbitrage opportunities based upon
changes in the relative value of the PIES and the DSW Class A Common Shares. Any such arbitrage
could, in turn, affect the market prices of the PIES and the DSW Class A Common Shares.
The PIES 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. 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.
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The adjustments to the exchange ratio do not cover all the events that could adversely affect the
market price of the DSW Class A Common Shares.
The number of DSW Class A Common Shares that the PIES holders are entitled to receive on the
exchange date (or, if we elect, the cash value thereof) is subject to adjustment for certain stock
splits, stock combinations, stock dividends and certain other actions by DSW that modify its
capital structure. However, other events, such as offerings by DSW of DSW Class A Common Shares for
cash or in connection with acquisitions, which may adversely affect the market price of DSW Class A
Common Shares, may not result in an adjustment. If any of these other events adversely affects the
market price of DSW Class A Common Shares, it may also adversely affect the market price of the
PIES.
PIES holders will have no rights with respect to DSW Class A Common Shares, but may be negatively
affected by some changes made with respect to DSW Class A Common Shares.
Until the PIES holders acquire DSW Class A Common Shares upon exchange of the PIES, they will have
no rights with respect to the DSW Class A Common Shares (including, without limitation, voting
rights, rights to respond to tender offers or rights to receive any dividends or other
distributions on the DSW Class A Common Shares, if any (other than through an exchange adjustment))
prior to the exchange date, but their investment may be negatively affected by these events. PIES
holders will be entitled to rights with respect to the DSW Class A Common Shares only after we
deliver the DSW Class A Common Shares on the exchange date and only if the applicable record date,
if any, for the exercise of a particular right occurs after the date the holders receive the
shares. For example, in the event that an amendment is proposed to the amended articles of
incorporation or the amended and restated regulations of DSW requiring shareholder approval and the
record date for determining the shareholders of record entitled to vote on the amendment occurs
prior to delivery of the DSW Class A Common Shares, PIES holders will not be entitled to vote on
the amendment, although they will nevertheless be subject to any changes in the powers, preferences
or special rights of the DSW Class A Common Shares. If we elect to deliver only cash upon the
exchange of the PIES, the holders will never be able to exercise any rights with respect to the DSW
Class A Common Shares.
Our obligations under the PIES will be effectively junior to our other existing and future secured
debt to the extent of the value of the assets securing that debt and effectively subordinate to the
debt and other liabilities of our subsidiaries.
The PIES are effectively junior to our other existing and future secured debt to the extent of the
value of the assets securing that debt, and effectively subordinate to the debt and other
liabilities, including trade payables and preferred stock, if any, of our subsidiaries. A
substantial part of our operations is conducted through our subsidiaries. Certain of our
subsidiaries, including Value City and Filene’s Basement, but not DSW or its subsidiaries, are
borrowers and/or guarantors under our loan agreements, including the VCDS Revolving Loan (as
defined herein). The obligations under the VCDS Revolving Loan are secured by a lien on
substantially all the personal property of Retail Ventures and its wholly-owned subsidiaries,
except that the assets of DSW and its subsidiaries do not secure this credit facility, and the
common shares of DSW owned by Retail Ventures currently do not secure the VCDS Revolving Loan. The
obligations under the VCDS Revolving Loan are also secured by leasehold interests on certain of the
leasehold properties of Value City and Filene’s Basement. The DSW Revolving Loan (as defined
herein), is secured by substantially all the assets of DSW and DSWSW, including a pledge by DSW of
the stock of DSWSW. Our intercompany note was secured by the capital stock of DSW and Filene’s
Basement held by Retail Ventures. Upon completion of the PIES offering, the lien on the capital
stock of DSW and Filene’s Basement that secured the intercompany note, as well as the lien on the
capital stock of DSW that secured the Non-Convertible Loan (as defined herein), were released and
the approximately $49.7 million remaining balance of the intercompany note was repaid. In
addition, we made a payment of approximately $36.5 million on the VCDS Revolving Loan. We pledged
sufficient DSW Common Shares to the collateral agent for the PIES to enable us to satisfy our
obligations to deliver DSW Class A Common Shares upon exchange of the PIES, and sufficient DSW
Common Shares will continue to be subject to liens and/or contractual obligations to enable us to
satisfy our obligations to the warrantholders to deliver DSW Class A Common Shares upon exercise of
the warrants. In addition, claims of unsecured creditors of such subsidiaries, including trade
creditors, and claims of preferred shareholders, if any, of such subsidiaries will have priority
with respect to the assets and earnings of such subsidiaries over the claims of creditors of Retail
Ventures, including holders of the PIES. The PIES, therefore, are effectively subordinated to
creditors, including trade creditors, and preferred shareholders, if any, of our subsidiaries.
The VCDS Revolving Loan requires that we obtain the prior consent of our senior lenders before
making any payments of cash or other property with respect to the PIES, other than coupon payments,
if these payments come from any source other than the collateral pledged with the collateral agent
for the PIES. Accordingly, we would need to obtain the consent of our senior lenders to exercise
our cash settlement option under the PIES or, in the event of a cash merger, to pay the present
value of all future coupon payments, or, in the event of an acceleration, to pay the yield
maintenance premium. We cannot provide any assurances that our senior lenders will provide any such
consent.
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The tax consequences of an investment in the PIES are uncertain.
Investors should consider the tax consequences of investing in the PIES. No statutory, judicial or
administrative authority directly addresses the characterization of the PIES or instruments similar
to the PIES for United States federal income tax purposes. As a result, significant aspects of the
United States federal income tax consequences of an investment in the PIES are not certain. We are
not requesting any ruling from the Internal Revenue Service with respect to the PIES and cannot
assure PIES holders that the Internal Revenue Service will agree with the treatment described in
this document. We intend to treat, and by purchasing a PIES, for all purposes PIES holders agree to
treat, a PIES as a variable prepaid forward contract rather than as a debt instrument. We intend to
report the coupon payments as ordinary income to PIES holders, but holders should consult their own
tax advisor concerning the alternative characterizations.
Holders of the PIES are urged to consult their own tax advisor regarding all aspects of the U.S.
federal income tax consequences of investing in the PIES, as well as any tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction.
In the event of our bankruptcy, the principal amount of the PIES would not represent a debt claim
against us.
Certain events of bankruptcy, insolvency or reorganization relating to us or our significant
subsidiaries (including, as to the date hereof, DSW) constitute automatic acceleration events that
lead to the PIES becoming immediately due for exchange into DSW Class A Common Shares. In such
event, although the accrued and unpaid coupons and yield maintenance premium would be due and
payable in cash, the principal amount of the PIES would not represent a debt claim against us. In
addition, while the delivery of DSW Class A Common Shares and cash in payment of the accrued and
unpaid coupons and yield maintenance premium will occur, to the extent permitted by law, as soon as
practicable, there may be a delay.
The secondary market for the PIES, if any, may be illiquid.
A secondary market for the PIES may not develop, or, if it does, it may be illiquid at the time the
PIES holders may want to resell their PIES. The PIES will not be listed on any exchange. Because
the PIES will not be listed, the market for the PIES may be less liquid than the market for similar
listed securities. The secondary market may not provide enough liquidity to allow holders to trade
or sell their PIES easily. Although the underwriter in connection with the PIES offering advised
the Company that it then intended to make a market for the PIES, it is not obligated to do so, and
it may discontinue any market-making at any time.
DSW has no obligations with respect to the PIES and does not have to consider PIES holders’
interests for any reason.
DSW has no obligations with respect to the PIES. Accordingly, DSW is not under any obligation to
take the PIES holders’ interests or Retail Ventures’ interests into consideration for any reason.
DSW did not receive any of the proceeds of the PIES offering and did not participate in the
determination of the quantities or prices of the PIES or the determination or calculation of the
number of shares (or, if Retail Ventures elects, the cash value thereof) that the PIES holders will
receive at maturity. DSW is not involved with the administration or trading of the PIES.
PIES holders should carefully consider the risk factors relating to DSW.
Holders of the PIES should carefully consider the information contained under the heading “Risk
Factors” in the DSW prospectus relating to the PIES offering as well as factors previously
disclosed under the caption “Risk Factors” in DSW’s 2006 Annual Report on Form 10-K and other
periodic reports. The DSW prospectus and periodic reports do not constitute a part of this Annual
Report, nor are they incorporated into any of RVI’s periodic reports by reference.
ITEM 1B. UNRESOLVED STAFF COMMENTS. None.
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ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores we operated as of February 3, 2007:
| Value | Filene’s | |||||||||||||||
| City | DSW | Basement | Total | |||||||||||||
Alabama |
1 | 1 | ||||||||||||||
Arizona |
5 | 5 | ||||||||||||||
California |
21 | 21 | ||||||||||||||
Colorado |
6 | 6 | ||||||||||||||
Connecticut |
3 | 3 | ||||||||||||||
Delaware |
3 | 1 | 4 | |||||||||||||
Florida |
16 | 16 | ||||||||||||||
Georgia |
4 | 8 | 1 | 13 | ||||||||||||
Illinois |
16 | 10 | 3 | 29 | ||||||||||||
Indiana |
7 | 6 | 13 | |||||||||||||
Iowa |
1 | 1 | ||||||||||||||
Kansas |
2 | 2 | ||||||||||||||
Kentucky |
4 | 4 | ||||||||||||||
Maine |
1 | 1 | ||||||||||||||
Maryland |
8 | 7 | 3 | 18 | ||||||||||||
Massachusetts |
9 | 9 | 18 | |||||||||||||
Michigan |
9 | 12 | 21 | |||||||||||||
Minnesota |
7 | 7 | ||||||||||||||
Missouri |
6 | 4 | 10 | |||||||||||||
Nebraska |
1 | 1 | ||||||||||||||
Nevada |
3 | 3 | ||||||||||||||
New Hampshire |
1 | 1 | ||||||||||||||
New Jersey |
6 | 8 | 1 | 15 | ||||||||||||
New York |
18 | 7 | 25 | |||||||||||||
North Carolina |
1 | 4 | 5 | |||||||||||||
Ohio |
22 | 12 | 2 | 36 | ||||||||||||
Oklahoma |
1 | 1 | ||||||||||||||
Oregon |
1 | 1 | ||||||||||||||
Pennsylvania |
18 | 11 | 2 | 31 | ||||||||||||
Rhode Island |
1 | 1 | ||||||||||||||
Tennessee |
1 | 3 | 4 | |||||||||||||
Texas |
23 | 23 | ||||||||||||||
Utah |
1 | 1 | ||||||||||||||
Virginia |
4 | 10 | 14 | |||||||||||||
Washington |
1 | 1 | ||||||||||||||
Washington D.C. |
3 | 3 | ||||||||||||||
West Virginia |
4 | 4 | ||||||||||||||
Wisconsin |
4 | 4 | ||||||||||||||
| 113 | 223 | 31 | 367 | |||||||||||||
We maintain buying offices in Columbus, Ohio, a suburb of Boston, Massachusetts, and New York, New
York. Our principal RVI executive offices occupy approximately 45,000 square feet in a building in
Columbus, Ohio which includes a Value City store and also serves as one of our apparel distribution
centers. DSW’s principal executive offices are also located on the site of its main warehouse and
distribution facility in Columbus, Ohio.
We operate six warehouse/distribution complexes located in Columbus, Ohio and one distribution
facility in Auburn, Massachusetts. In January 2007, DSW implemented a distribution center bypass
process which will result in improving speed-to-market for initial deliveries to stores on the West
Coast. As part of this process, DSW has engaged a third party logistics service provider to receive
orders originating from suppliers on the West Coast or imports entering the United States at a West
Coast port of entry. These initial shipments are then shipped by this service provider to DSW’s
pool points and onwards to the stores bypassing DSW’s primary Columbus distribution center
facility. In addition, to expedite the flow of merchandise to certain clusters of stores, we use
third party
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processors and utilize vendor direct shipments where such use is advantageous. Our warehouse and
distribution facilities for our Value City, DSW and Filene’s Basement businesses are adequate for
our current needs and we believe that such facilities, with certain modifications and additional
equipment, will be adequate for our foreseeable future demands. Filene’s Basement plans to invest
capital dollars in the 2007 fiscal year to further improve its existing facilities.
The stores and all of the warehouse and distribution, buying and executive office facilities are
leased or subleased. The Company has several leasing agreements with SSC and affiliates of SSC.
Under a Master Lease Agreement, as amended, the Company leases four store locations owned by SSC,
and also leases or subleases from SSC or affiliates of SSC 42 store locations, four warehouse
facilities, one office space and a parcel of land The remaining stores and warehouses are leased
from unrelated entities. Most of the store leases provide for an annual rent based upon a
percentage of gross sales, with a specified minimum rent.
ITEM 3. 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.
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 two putative class action lawsuits, which seek unspecified
monetary damages, credit monitoring and other relief. Each of the two lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to certify a nationwide class 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 lawsuit seeks to certify classes of consumers that are limited geographically
to consumers who made purchases at certain stores in Ohio.
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 DSW 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 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, DSW 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 February 3,
2007, the balance of the associated accrual for potential exposure was $3.2 million.
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.
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Table of Contents
PART II
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common shares are listed for trading under the ticker symbol “RVI” on the New York Stock
Exchange. The following table sets forth the high and low sales prices of our common shares as
reported on the NYSE Composite Tape during the periods indicated. As
of March 31, 2007, there were 984 holders of record of our common shares.
| High | Low | |||||||
Fiscal 2005: |
||||||||
First Quarter |
$ | 10.25 | $ | 6.60 | ||||
Second Quarter |
14.34 | 9.80 | ||||||
Third Quarter |
14.12 | 8.95 | ||||||
Fourth Quarter |
14.03 | 10.02 | ||||||
Fiscal 2006: |
||||||||
First Quarter |
$ | 16.60 | $ | 12.35 | ||||
Second Quarter |
18.00 | 14.31 | ||||||
Third Quarter |
17.50 | 13.61 | ||||||
Fourth Quarter |
20.47 | 15.29 | ||||||
Fiscal 2007: |
||||||||
First Quarter |
$ | 21.69 | $ | 19.12 | ||||
(through March 31, 2007) |
||||||||
Retail Ventures made no purchases of its common shares during the fourth quarter of the 2006 fiscal
year.
We have paid no cash dividends in the two most recent fiscal years and we do not anticipate paying
cash dividends on our common shares during fiscal 2007. Presently we expect that all of our future
earnings will be retained for development of our businesses. 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. Each of the Companies’ credit facilities restricts the payment of dividends by
the Company or any affiliate of the borrower or guarantor, other than dividends paid in stock of
the issuer or paid to another affiliate, and cash dividends can only be paid to the Company by its
subsidiaries up to the aggregate amount of $5.0 million less the amount of any borrower advances
made to the Company by any subsidiaries. The Company and its subsidiaries are also restricted from
issuing “dividend notes” or similar instruments unless the Company’s several lenders have agreed on
how such “dividend notes” or similar instruments would be treated for collateral purposes. The
Company’s credit facilities are more fully explained in
Item 7 on page 49 of this Annual Report.
PERFORMANCE GRAPH
The following graph compares the performance of the Company with that of the Standard & Poor’s
General Merchandise Stores Index and the Russell 2000 Index, both of which are published indexes.
This comparison includes the period beginning February 2, 2002 through February 3, 2007.
The Standard & Poor’s General Merchandise Stores Index is published weekly in the Standard & Poor’s
Statistical Service and the index value preceding each fiscal year end has been selected for
purposes of this comparison. The Russell 2000 Index is a capitalization-weighted index of domestic
equity securities traded on the New York and American Stock Exchanges and the NASDAQ that
measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
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The comparison of the cumulative total returns for each investment assumes that $100 was invested
on February 2, 2002, and that all dividends earned theron were reinvested.
| Company / Index | 02-Feb-02 | 01-Feb-03 | 31-Jan-04 | 29-Jan-05 | 28-Jan-06 | 03-Feb-07 | ||||||||||||||||||
RETAIL VENTURES, INC. |
$ | 100.00 | $ | 45.03 | $ | 138.34 | $ | 152.66 | $ | 294.00 | $ | 466.28 | ||||||||||||
RUSSELL 2000 |
$ | 100.00 | $ | 78.62 | $ | 124.25 | $ | 132.64 | $ | 160.30 | $ | 179.31 | ||||||||||||
S&P GENERAL MERCHANDISE STORES |
$ | 100.00 | $ | 78.29 | $ | 108.17 | $ | 128.95 | $ | 134.59 | $ | 158.32 | ||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated various selected financial information.
Such selected consolidated financial data should be read in conjunction with the consolidated
financial statements of Retail Ventures, Inc. including the notes thereto, set forth in Item 8 of
this Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” set forth in Item 7 of this Annual Report on Form 10-K.
| For the Fiscal Year Ended (1) | ||||||||||||||||||||
| February 3, | January 28, | January 29, | January 31, | February 1, | ||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (dollars in thousands, except per share amounts and net sales per selling square foot) | ||||||||||||||||||||
Net sales |
$ | 3,067,658 | $ | 2,913,371 | $ | 2,739,631 | $ | 2,594,206 | $ | 2,450,719 | ||||||||||
Operating profit before change in fair
value of derivative instruments
(2) |
$ | 81,513 | $ | 7,218 | $ | 6,685 | $ | 31,658 | $ | 36,706 | ||||||||||
Change in fair value of derivative
instruments |
$ | (175,955 | ) | $ | (144,209 | ) | ||||||||||||||
Operating (loss) profit |
$ | (94,442 | ) | $ | (136,991 | ) | $ | 6,685 | $ | 31,658 | $ | 36,706 | ||||||||
Loss before cumulative effect of accounting
change |
$ | (150,913 | ) | $ | (183,418 | ) | $ | (19,448 | ) | $ | (5,219 | ) | $ | (2,357 | ) | |||||
Cumulative effect of accounting change |
$ | (2,080 | ) | |||||||||||||||||
Net loss |
$ | (150,913 | ) | $ | (183,418 | ) | $ | (19,448 | ) | $ | (5,219 | ) | $ | (4,437 | ) | |||||
Basic loss per share before cumulative
effect of accounting change |
$ | (3.35 | ) | $ | (4.75 | ) | $ | (0.57 | ) | $ | (0.15 | ) | $ | (0.07 | ) | |||||
Cumulative effect of accounting change |
$ | (0.06 | ) | |||||||||||||||||
Basic and diluted loss per share |
$ | (3.35 | ) | $ | (4.75 | ) | $ | (0.57 | ) | $ | (0.15 | ) | $ | (0.13 | ) | |||||
Total assets |
$ | 1,267,217 | $ | 1,086,574 | $ | 976,426 | $ | 860,592 | $ | 828,126 | ||||||||||
Working capital |
$ | 274,439 | $ | 184,961 | $ | 233,568 | $ | 227,665 | $ | 174,971 | ||||||||||
Current ratio |
1.45 | 1.33 | 1.65 | 1.84 | 1.57 | |||||||||||||||
Long-term obligations |
$ | 265,783 | $ | 165,995 | $ | 343,375 | $ | 326,940 | $ | 264,664 | ||||||||||
Number of:(3) |
||||||||||||||||||||
Value City Stores |
113 | 113 | 116 | 116 | 116 | |||||||||||||||
DSW Stores |
223 | 199 | 172 | 142 | 126 | |||||||||||||||
Filene’s Basement Stores |
31 | 27 | 26 | 21 | 20 | |||||||||||||||
Net sales per selling sq. ft. (4) |
$ | 232.38 | $ | 219.08 | $ | 221.00 | $ | 225.00 | $ | 224.00 | ||||||||||
Comparable store sales change (5) |
0.8 | % | 0.5 | % | -1.0 | % | 1.2 | % | -3.5 | % | ||||||||||
| (1) | Fiscal 2006 consists of 53 weeks. All other years reported consist of 52 weeks. | |
| (2) | The Company believes that the non-cash accounting charge associated with the change in fair value of derivative instruments is not directly related to its retail operations and is therefore providing supplemental adjusted results that exclude this item. This financial measure should facilitate analysis by investors and others who follow the Company’s financial performance. | |
| (3) | Includes all stores operating at the end of the fiscal year. | |
| (4) | Presented in whole dollars and excludes leased departments and stores not operated during the entire fiscal period. | |
| (5) | A store or leased department is considered to be comparable if it has been opened 14 months at the beginning of the fiscal year. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
This management’s discussion and analysis of financial condition and results of operations contains
forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking
Information” for a discussion of the uncertainties, risks and assumptions associated with these
statements. You should read the following discussion in conjunction with our historical
consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report
on Form 10-K. The results of operations for the periods reflected herein are not necessarily
indicative of results that may be expected for future periods, and our actual results may differ
materially from those discussed in the forward-looking statements as a result of various factors,
including but not limited to those listed under “Risk Factors” and included elsewhere in this
Annual Report on Form 10-K.
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OVERVIEW
Retail Ventures is a holding company operating retail stores in four segments: Value City, Filene’s
Basement, DSW and Corporate. 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 February 3, 2007, there were 113 Value City stores in
operation. DSW is a United States specialty branded footwear retailer operating 223 shoe stores in
35 states as of February 3, 2007. 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 eastern and Midwestern United States.
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 February 3, 2007, there were 31 Filene’s Basement
stores in operation. The Corporate segment consists of all corporate assets, liabilities and
expenses related to the Corporate Entities that are not allocated to the other segments.
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 included in this annual report on Form 10-K.
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 February 3, 2007, Retail Ventures owned Class B Common Shares of DSW representing approximately
63.0% of DSW’s outstanding Common Shares and approximately 93.2% of the combined voting power of
such shares. 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.” Retail Ventures accounted for the
sale of DSW as a capital transaction. Associated with this transaction, a deferred tax liability of
$65.5 million was recorded.
In December 2006 we announced that we are exploring strategic alternatives for the Value City
operations, including a possible sale of the division. RVI has retained financial advisors to
assist in this effort to enhance shareholder value. We also stated that there can be no assurance
that this process will result in any specific transaction.
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 focus on this basic principle: the value to the
customer is the result of the quality of the merchandise in relationship to the price paid.
Key Financial Measures
In evaluating the results of operations, our management refers to a number of key financial and
non-financial measures relating to the performance of our business segments. Among our key
financial measures are net sales, operating profit, and net income. Non-financial measures that we
use in evaluating our performance include number of stores, leased operations, net sales per
average gross square foot for our stores and change in comparable store sales. Comparable store
sales is a measure which indicates the performance of our existing stores by measuring the growth
in sales for such stores for a particular period over the corresponding period in the prior year.
For fiscal 2006 and prior years, we considered comparable store sales to be sales at stores that
were open 14 months as of the prior fiscal year end. Comparable store sales are also referred to as
“comp-store” sales by others within the retail industry. The method of calculating comparable store
sales varies across the retail industry. As a result, our calculation of comparable store sales is
not necessarily comparable to similarly titled measures reported by other companies.
The Company’s revenues are generated through sales from existing stores and through sales from new
stores. In fiscal 2006, no new Value City stores were opened and no existing Value City stores were
closed, DSW opened 29 new stores and closed five stores, and Filene’s Basement opened five new
stores and closed one store. For fiscal 2007, Filene’s Basement plans to open six new stores and
DSW plans to open at least 30 additional stores. During fiscal 2007, Filene’s Basement will cease
operations in two stores
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temporarily due to remodeling, one of which is planned to reopen in fiscal 2007 while the other is
not expected to reopen until fiscal 2009. No new Value City stores are presently planned to be
opened in fiscal 2007.
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, or GAAP. As discussed in Note 1 to our consolidated
financial statements, 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 and litigation. 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 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 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. Revenues from merchandise sales are recognized at the point of sale, net of returns and exclude sales tax. Layaway sales are recognized when the merchandise has been paid for in full. Layaway was discontinued at the end of fiscal 2004. |
Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift
card. The Company did not recognize income during these periods from unredeemed stored value
cards. The Company will continue to review its historical activity and will recognize income
from unredeemed stored value cards when deemed appropriate.
| • | 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. Accordingly, earnings are negatively impacted as merchandise is marked down prior to sale. Reserves to value inventory at the lower of cost or market were $44.4 million and $43.1 million at the end of fiscal 2006 and 2005, 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 customers’ 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 reset every 33 to 182 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 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 |
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| from these investments is recorded as interest income. As of February 3, 2007, the Company held $98.7 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 amount of the asset exceeds the expected future cash flows from the asset. Our reviews are conducted at the lowest identifiable level which includes a store. The impairment loss recognized is the excess of the carrying value of the asset over its fair value, based on discounted future cash flows. Should an impairment loss be realized, it will be included in operating expenses. Assets acquired for stores that have been previously impaired are not capitalized when acquired if the store’s expected future cash flow remains negative. During fiscal 2006, fiscal 2005 and fiscal 2004, we recorded $0.8 million, $0.5 million, and $2.9 million (including the impairment of a capital lease of $1.2 million related to a store closing) in charges, respectively, related to long-lived assets at store operating units. |
During fiscal 2004, we recorded a non-cash charge of $11.7 million, $6.9 million net of taxes,
for the impairment of goodwill related to Filene’s Basement. The balance of goodwill subject
to goodwill annual testing at the end of the current fiscal year was $25.9 million on the DSW
segment.
We believe at this time that the carrying values and useful lives of long-lived assets
continue to be appropriate. To the extent these future projections or our strategies change,
the conclusion regarding impairment may differ from our current estimates.
| • | Store Closing Reserve. During the 2006 fiscal year, the Company recorded charges associated with the closing of five DSW stores. The operating lease at one of the five 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 fiscal 2005. These reserves are monitored on at least a quarterly basis for changes in circumstances. The store closing reserves were $1.9 million and $2.4 million at the end of fiscal 2006 and 2005, respectively. | ||
| • | 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 two months claims cost and the number of associates employed. Workers’ compensation and general liability 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 general liability. Although we do not anticipate the amounts ultimately paid will differ significantly from our estimates, self-insurance reserves could be affected if future claims 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 $17.5 million and $17.6 million at the end of fiscal 2006 and 2005, respectively. The decrease in self-insurance reserves was principally associated with the decrease in general liability. | ||
| • | Pension. The obligations and related assets of defined benefit retirement plans are presented in Note 7 of the Notes to Consolidated Financial Statements in this Annual Report. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined by independent actuaries and through the use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate, the rate of salary increases and the estimated future return on plan assets. In determining the discount rate, we utilize the yield on fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are based upon historical experience and anticipated future management actions. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans. At January 28, 2006, the weighted-average actuarial assumptions applied to our plans were a discount rate of 5.75%, assumed salary increases of 3.5% and long-term rate of return on plan assets of 8.0%. At February 3, 2007, the weighted-average actuarial assumptions applied to our plans were a discount rate of 6.0%, assumed salary increases of 3.0% and long-term rate of return on plan assets of 8.0%. To the extent actual results vary from assumptions, earnings would be impacted. | ||
| • | Customer loyalty program. DSW maintains a customer loyalty program for the DSW stores in which program members receive a discount on future purchases. Upon reaching the target-earned threshold, members receive certificates for these |
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| discounts which must be redeemed within six months. During the third quarter of fiscal 2006 DSW re-launched its loyalty program, which included changing the name from “Reward Your Style” to “DSW Rewards”, the points threshold to receive a certificate and the certificate amounts. The changes were designed to improve customer awareness, customer loyalty and their ability to communicate with their customers. DSW accrues the anticipated redemptions of the discount earned at the time of the initial purchase. To estimate these costs, DSW is required to make assumptions related to customer purchase levels and redemption rates based on historical experience. The accrued liability as of February 3, 2007 and January 28, 2006 was $5.0 million and $8.3 million, respectively. Substantially all certificates under the “Reward Your Style” program expired on or before January 31, 2007. |
| • | Change in fair value of derivative instruments. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, the Company recognizes all derivatives on the balance sheet at fair value. For derivatives that are not designated as hedges under SFAS No. 133, changes in the fair values are recognized in earnings in the period of change. The Company uses the Black-Sholes Pricing Model to calculate the fair value of derivative instruments. |
For the fiscal year ended February 3, 2007, the Company recorded a charge related to the
change in fair value of warrants of $124.8 million. For the fiscal year ended January 28,
2006, the Company recorded a charge related to the change in the fair value of the
Warrants of $144.2 million, including $134.2 million relating to the initial recording of
the Conversion Warrants.
For the fiscal year ended February 3, 2007, the Company recorded a charge related to the
change in the fair value of the conversion feature of the PIES of $51.1 million. The PIES
were not outstanding during fiscal 2005.
| • | 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 in which we do business. 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 our management had made these determinations on a different basis, our tax expense, assets and liabilities could be different. During fiscal 2006, we established an additional valuation reserve of $2.2 million for deferred tax assets. During fiscal 2005, we established an additional valuation reserve of $14.4 million for state net operating loss carry forwards and wrote off $4.0 million of deferred tax assets no longer deductible as a result of changes in state income tax laws in Ohio. During fiscal 2004, we established an additional valuation reserve for deferred income tax assets of $3.2 million for carry forwards related to state net operating losses. |
Following the completion of the DSW IPO in June 2005, DSW is no longer included in Retail
Ventures’ consolidated federal tax return.
RESULTS OF OPERATIONS
We operate four business operating segments. Value City and Filene’s Basement segments operate
full-line, off-price department stores. Our DSW segment is a specialty branded footwear retailer.
As of February 3, 2007, a total of 113 Value City, 31 Filene’s Basement and 223 DSW stores were
open. The Corporate segment consists of all corporate assets, liabilities and expenses not
allocated to the other segments through corporate allocation or shared service arrangements.
Seasonality
Our business is affected by the pattern of seasonality common to most retail businesses.
Historically, the majority of our sales and operating profit have been generated during the early
spring, back-to-school and Christmas selling seasons for our Value City segment and, more recently,
our Filene’s Basement segment. DSW net sales have typically been higher in spring and early fall,
when DSW’s customers’ interest in new seasonal styles increases.
Fiscal Year
We follow a 52/53-week fiscal year that ends on the Saturday nearest to January 31. Fiscal 2006
contained 53 weeks, while 2005 and 2004 each contained 52 weeks. Fiscal 2007 will consist of 52
weeks.
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The following table sets forth, for the periods indicated, the percentage relationships to net
sales of the listed items included in our Consolidated Statements of Operations.
| Fifty-three | Fifty-two | |||||||||||
| weeks | weeks | |||||||||||
| ended | ended | |||||||||||
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales |
(60.4 | ) | (61.9 | ) | (60.7 | ) | ||||||
Gross profit |
39.6 | 38.1 | 39.3 | |||||||||
Selling, general and administrative expenses |
(37.3 | ) | (38.1 | ) | (39.3 | ) | ||||||
Change in fair value of derivative instruments |
(5.7 | ) | (5.0 | ) | 0.0 | |||||||
License fees and other income |
0.3 | 0.3 | 0.2 | |||||||||
Operating (loss) profit |
(3.1 | ) | (4.7 | ) | 0.2 | |||||||
Non-related interest expense |
(0.7 | ) | (0.5 | ) | (0.5 | ) | ||||||
Related party interest expense |
(0.2 | ) | (0.5 | ) | (0.9 | ) | ||||||
Total interest expense |
(0.9 | ) | (1.0 | ) | (1.4 | ) | ||||||
Interest income |
0.3 | 0.1 | 0.0 | |||||||||
Interest expense, net |
(0.6 | ) | (0.9 | ) | (1.4 | ) | ||||||
Loss before income taxes and minority interest |
(3.7 | ) | (5.6 | ) | (1.2 | ) | ||||||
Income taxes (expense) benefit |
(0.4 | ) | (0.5 | ) | 0.5 | |||||||
Loss before minority interest |
(4.1 | ) | (6.1 | ) | (0.7 | ) | ||||||
Minority interest |
(0.8 | ) | (0.2 | ) | 0.0 | |||||||
Net loss |
(4.9 | )% | (6.3 | )% | (0.7 | )% | ||||||
Fiscal Year Ended February 3, 2007 (“fiscal 2006”) Compared To Fiscal Year Ended January 28, 2006 (“fiscal 2005”)
Sales. Sales for fiscal 2006 increased by 5.3% to $3.07 billion from $2.91 billion for fiscal 2005.
By operating segment, comparable store sales were:
| 2006 | 2005 | |||||||
Value City |
(1.3 | )% | (3.2 | )% | ||||
DSW |
2.5 | % | 5.4 | % | ||||
Filene’s Basement |
3.1 | % | 3.5 | % | ||||
Total |
0.8 | % | 0.5 | % | ||||
Value City net sales for the fifty-three weeks ended February 3, 2007 decreased 1.4%, or $18.9
million, to $1.36 billion from $1.38 billion in the fifty-two weeks ended January 28, 2006. For
fiscal 2006, the number of transactions in the comparable stores in the Value City segment
decreased by 6.4% and the average unit retail increased 10.6% while the number of units in the
basket decreased 4.7%. During fiscal 2006, Value City continued its transition to a new merchandise
strategy which includes more name brand merchandise, better assortments and more upfront
purchasing. The transition occurred throughout fiscal 2005 and was substantially in place for the
women’s and shoe categories by the third quarter of fiscal 2005. The hardlines and jewelry areas
were addressed in fiscal 2006 and were substantially completed in the fall of fiscal 2006, and the
children’s area continues to be addressed. The Value City sales for comparable stores decreased
1.3% due to declines in transactions, an incomplete conversion of other departments in the store to
the new merchandising strategy and the short-term effect of eliminating certain merchandise
categories. All stores in the Value City segment are in the
comparative stores base. The decrease in comparable store sales was
partially offset by the impact of a 53rd week in fiscal 2006.
In addition, during fiscal 2006, Value City operated three fewer stores than in the previous year.
These stores had net sales of $18.1 million in fiscal 2005. The decrease in comparable sales is
comprised of decreases in children’s and hardlines of 11.3% and 8.2%, respectively. Jewelry, men’s
and women’s comparable sales increased over the comparable period by 2.2%, 3.3% and 5.3%,
respectively. Additionally, Value City began the elimination of the health and beauty aids and
non-gourmet food categories in July 2005. These categories represented less than 1.0% and 2.2% of
total segment sales in the fiscal years 2006 and 2005, respectively.
DSW net sales for the fifty-three weeks ended February 3, 2007 increased by 11.8%, or $135.0
million, to $1.28 billion from $1.14 billion in the fifty-two weeks ended January 28, 2006.
Comparable store sales in fiscal 2006 improved 2.5% compared to the previous
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fiscal
year. The increase in DSW sales includes the impact of a 53rd week in
fiscal 2006 and a net increase of 24 DSW stores, 117 non-affiliated
leased shoe departments and five Filene’s Basement leased shoe departments, during fiscal 2006. The
new DSW locations added $53.3 million in sales compared to fiscal 2005, while the new leased shoe
departments added $6.6 million in sales. Leased shoe department sales comprised 10.2% of total net
sales in fiscal 2006, compared to 10.5% in fiscal 2005.
Compared with fiscal 2005, DSW comparable store sales for fiscal 2006 increased in women’s,
athletic, and accessories by 3.0%, 5.8%, and 1.8%, respectively, while decreasing in men’s by 0.1%.
In the women’s category, the casual class was the best performing group while athletic increases
are still driven by the fashion class. In accessories, positive results from DSW’s ongoing product
offerings were partially offset by the transition to a consignment program for DSW’s shoe care
products. In men’s, positive seasonal results were offset by negatives in the dress and casual
classifications.
Filene’s Basement net sales for the fifty-three weeks ended February 3, 2007 increased 9.8%, or
$38.2 million, to $427.5 million from $389.3 million in the fifty-two weeks ended January 28, 2006.
The increase in net sales is primarily due to the comparable store
sales increase of 3.1%, the impact of a 53rd week in fiscal 2006 and
a net increase of four stores over the prior year’s period. Net sales for the new stores opened in fiscal 2006 added $24.3
million to sales. The merchandise categories of men’s, women’s and accessories had comparable sale
increases of 4.1%, 1.1%, and 6.5%, respectively. The merchandise categories of home and jewelry had
comparable sale decreases of 2.7% and 3.6 %, respectively. The home
and jewelry categories each represented
5.8% of total comparative stores sales in fiscal 2006.
Gross Profit. Total gross profit increased $106.2 million or 9.6% from $1.11 billion to $1.22
billion. Gross profit, as a percentage of sales, increased to 39.6% compared to 38.1% for the prior
year’s period. The increase in the overall margin rate is attributable to the increase in gross
profit from the Value City, DSW and Filene’s Basement segments.
Gross profit, as a percent of sales by segment, was:
| 2006 | 2005 | |||||||
Value City |
37.2 | % | 35.6 | % | ||||
DSW |
43.1 | % | 42.4 | % | ||||
Filene’s Basement |
37.0 | % | 34.3 | % | ||||
Total |
39.6 | % | 38.1 | % | ||||
Value City’s gross profit increased $15.8 million to $506.6 million in fiscal 2006 from $490.8
million in fiscal 2005, and increased as a percentage of net sales from 35.6% in fiscal 2005 to
37.2% in fiscal 2006. The increase is primarily attributable to higher initial markups and reduced
markdown rates partially offset by an increase in shrinkage expense.
The DSW gross profit increased $65.9 million to $550.7 million in fiscal 2006 from $484.8 million
in 2005, and increased as a percentage of net sales from 42.4% in fiscal 2005 to 43.1% in fiscal
2006. The increase of approximately $58.2 million in gross profit is primarily attributable to the
overall increase in sales of which $8.0 million was attributable to the 53rd week. The
increase is also attributable to an increased initial markup.
Filene’s Basement gross profit increased $24.6 million to $158.2 million in fiscal 2006 from $133.6
million in fiscal 2005, and increased as a percentage of net sales from 34.3% in fiscal 2005 to
37.0% in fiscal 2006. The increase of approximately $13.4 million in gross profit is attributable
to the overall increase in sales of which $2.4 million is attributable to the 53rd week.
The increase is also attributable to an increased initial markup and lower markdowns as a percent
of sales.
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses
increased $32.5 million from $1.11 billion in fiscal 2005 to $1.14 billion in fiscal 2006. Total
SG&A expense associated with new DSW and Filene’s Basement stores and new leased shoe departments
not opened in the prior year, excluding pre-opening costs, were $25.0 million. Pre-opening costs
increased approximately $1.3 million for fiscal 2006 compared to fiscal 2005. During fiscal 2005,
the Company recorded a one-time decrease in workers’ compensation expense of $3.7 million as a
result of the completion of a bureau of workers’ compensation audit and DSW accrued $6.5 million
related to the estimated liability for credit card data theft.
SG&A expense, as a percent of sales by segment, was:
| 2006 | 2005 | |||||||
Value City |
38.9 | % | 39.8 | % | ||||
DSW |
35.4 | % | 36.3 | % | ||||
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| 2006 | 2005 | |||||||
Filene’s Basement |
39.5 | % | 39.5 | % | ||||
Total |
37.3 | % | 38.1 | % | ||||
The Value
City’s segment SG&A expense decreased 3.6% or $19.6 million to $529.5 million in fiscal
2006 from $549.1 million in fiscal 2005. The Value City segment’s SG&A expense decrease is
primarily due to reductions of approximately $8.8 million, $7.3 million and $3.8 million in
personnel expense, administrative overhead expense and occupancy expense, respectively. These
decreases in expense were slightly offset by an increase in operations expense of $0.2 million
which was primarily driven by an increase in advertising expense. During fiscal 2005, Value City
closed a related party leased warehouse facility and recorded $2.9 million in expenses associated
with the closing. During fiscal 2005, Value City recorded a gain on a terminated lease of
approximately $9.5 million, related to a store that closed on January 28, 2006.
For fiscal 2006, the DSW segment SG&A expense increased $37.4 million to $453.0 million from
$415.6 million in fiscal 2005 which represented 35.4% and 36.3% of net sales, respectively. The
percentage decrease results from reductions in marketing and preopening costs of $9.0 million and
$0.5 million, respectively. The marketing favorability was the
result of a positive variance related to the “Reward Your Style” loyalty program compared with the prior fiscal
year, resulting in a $7.1 million year over year impact. DSW was also able to reduce its marketing
spend by realizing efficiencies in its media buying and moving some marketing services in house.
Additional favorability in the reduced operating percent is that operating costs for fiscal 2005
included a charge of $6.5 million related to an accrual of potential losses related to the theft of
credit card and other purchase information. Those positive factors were offset by an increase in
store expense of $16.3 million and personnel related expenses in
DSW’s home office of $18.3
million. The store expense increase is due to new stores and remained at 12% of sales compared to
the prior year. The personnel expenses include additional headcount and related costs, additional
incentive compensation, and the costs related to adoption of SFAS 123R. In total the home office
increase over the prior year was approximately 1.2% of sales.
The
Filene’s Basement segment SG&A expense increased 9.9% or $15.1 million to $168.9 million in
fiscal 2006 from $153.8 million in fiscal 2005. Personnel expense, occupancy expense and other
operating expenses all increased $2.1 million, $1.4 million and $1.8 million, respectively. The
total SG&A expense associated with new Filene’s Basement stores not opened in fiscal 2005,
excluding pre-opening costs, was $8.0 million.
Change in Fair Value of Derivatives. During fiscal 2006 and fiscal 2005, the Company recorded a
non-cash charge of $124.8 million and $144.2 million, respectively, representing the changes in
fair value of the Conversion Warrants and Term Loan Warrants. The decrease in the charge is
primarily due to the exercise by Cerberus Partners, L.P. (“Cerberus”) of 7,000,000 warrants during
fiscal 2006. During fiscal 2006, $51.1 million was recorded related to the change in the fair value
of the conversion feature of the PIES from the date of issuance to February 3, 2007. There were no
PIES outstanding during fiscal 2005. The Company utilizes the Black Sholes Pricing Model to
estimate the fair value of the derivatives.
License fees and other income. License fees and other income were $9.6 million in fiscal 2006
compared to $8.9 million in the prior year. License fees and other income are comprised of fees
from licensees and vending income. These sources of income can vary based on customer traffic and
contractual arrangements.
Operating (Loss) Profit. The operating loss for 2006 was $94.4 million compared to an operating
loss of $137.0 million in 2005, an improvement of $42.6 million. The operating loss as a percentage
of sales was 3.1% in 2006 compared to 4.7% in 2005.
Operating (loss) profit as a percent of sales by segment was:
| 2006 | 2005 | |||||||
Value City |
(1.3 | )% | (14.2 | )% | ||||
DSW |
7.9 | % | 6.1 | % | ||||
Filene’s Basement |
(0.3 | )% | (2.8 | )% | ||||
Total |
(3.1 | )% | (4.7 | )% | ||||
The operating loss for the Corporate segment of $176.0 million is primarily due to the non-cash
charge of $124.8 million versus $144.2 million for fiscal 2006 and 2005, respectively, which
represents the changes in fair value of the Conversion Warrants and Term Loan Warrants. During
fiscal 2006, $51.1 million was recorded related to the change in the fair value of the conversion
feature of the PIES from the date of issuance to February 3, 2007. There were no PIES outstanding
during fiscal 2005.
Interest
Expense. Interest expense was $27.2 million in fiscal 2006 a $0.6 million reduction from
fiscal 2005. Interest expense included the amortization of debt discount of $0.9 million and $0.8
million fiscal 2006 and 2005, respectively. The decrease is primarily due to the decrease of $12.8
million in average borrowings during fiscal 2006.
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Interest
Income. During fiscal 2006, interest income rose $7.9 million to $9.5 million due to
short-term securities held by the DSW segment and an overall increase in cash and cash equivalents.
Income
Taxes. Fiscal 2006 reflects a negative 13.0% effective tax rate as compared to a negative
8.1% fiscal 2005 effective rate. The 2006 tax rate of negative 13.0% reflects the impact of $43.7
million for the change in fair value on the mark to market accounting for the warrants, which are
not tax deductible, and an increase in the valuation allowance provided for federal and state
deferred tax assets of $2.2 million.
Minority Interest. Fiscal 2006 net income decreased by $24.2 million compared to $7.0 million in
fiscal 2005, to reflect that portion of the income attributable to DSW minority shareholders.
Net Loss. The fiscal 2006 net loss decreased $32.5 million compared to fiscal 2005 and represents
4.9% versus 6.3% of net sales, respectively. Major contributing elements in the change in net loss
from fiscal 2005 are the $31.7 million increase in derivatives
and the $7.9 million increase in interest
income, offset by the $17.2 million increase in minority interest expense.
Fiscal Year Ended January 28, 2006 (“fiscal 2005”) Compared To Fiscal Year Ended January 29, 2005
(“fiscal 2004”)
Sales. Sales for fiscal 2005 increased by 6.3% to $2.9 billion from $2.7 billion for fiscal 2004.
By operating segment, comparable store sales were:
| 2005 | 2004 | |||||||
Value City |
(3.2 | )% | (4.9 | )% | ||||
DSW |
5.4 | % | 5.0 | % | ||||
Filene’s Basement |
3.5 | % | 4.7 | % | ||||
Total |
0.5 | % | (1.0 | )% | ||||
Value City net sales decreased by $54.6 million to $1.38 billion, a 3.8% decrease over the
comparable period for fiscal 2004. During fiscal 2005, Value City transitioned to a new merchandise
strategy which includes more name brand merchandise, better assortments and more upfront
purchasing. The transition occurred throughout fiscal 2005 and was substantially in place for the
women’s and shoe categories by the third quarter. The sales for comparable stores decreased 3.2%
due to declines in transactions, an incomplete conversion of other departments in the store to the
new merchandising strategy and the short-term effect of eliminating certain merchandise categories.
All stores in the Value City segment are in the comparative stores base.
In addition, during fiscal 2005, Value City operated two fewer stores than in the previous year
(another Value City store closed on January 28, 2006, not affecting fiscal 2005). These two stores
had net sales of $11.6 million in fiscal 2004. The decrease in comparable sales is comprised of
decreases in men’s, children’s, shoes and hardlines of 3.1%, 7.7%, 2.4% and 7.8%, respectively.
Jewelry and women’s sales increased over the comparable period by 7.6% and 1.8%, respectively. For
fiscal 2005, the number of transactions in the Value City segment increased by 5.5% and the average
unit retail increased 6.2% while the number of units in the basket decreased 0.8%. Additionally,
Value City began the elimination of the health and beauty aids and non-gourmet food categories in
July 2005. These categories represent 2.2% and 3.5% of total segment sales in the fiscal years 2005
and 2004, respectively.
DSW net
sales were $1.14 billion, a $183.0 million, or 19.0%, increase over fiscal 2004. Comparable
store sales improved 5.4%. The increase in DSW sales includes a net increase of 29 DSW stores, 11
non-affiliated leased shoe departments and one Filene’s Basement leased shoe department, and does
not include the re-categorization in fiscal 2005 of two DSW/Filene’s Basement combination stores as
leased shoe departments which are included in the DSW segment. The DSW store locations and the
leased shoe departments that opened subsequent to January 29, 2005 added sales of $59.8 million and
$3.7 million, respectively. Leased shoe department sales comprised 10.5% of total net sales in
fiscal 2005, compared to 9.4% in fiscal 2004. DSW comparable sales in the merchandise categories of
women’s, athletics and men’s had increases of 6.8%, 6.4% and 3.8%, respectively, and decreased in
the accessories category by 6.4%. Sales increases in women’s were across all categories; dress,
casual and seasonal. The seasonal performance of boots drove the women’s increase with a 19.7%
increase for the year. The increase in athletic was driven by women’s, and specifically women’s
fashion athletic. The increase in men’s was driven by expanded assortment offering in casual and
fashion. The decrease in accessories was due to a narrowing of the offering in gift products.
Filene’s Basement net sales increased $45.4 million, or 13.2%, in the year to $389.3 million.
Filene’s Basement had a net increase of one store over the prior year’s period and a comparable
store sales increase of 3.5%. Net sales for the new stores opened in fiscal 2005 added $9.0 million
to sales. The merchandise categories of men’s, women’s and children’s had comparable sale increases
of 4.3%, 5.0% and 20.0%, respectively. The jewelry category had an increase of 11.6% driven by
watches and costume jewelry classes. Home goods comparable sales increased 0.9%. The children’s and
jewelry categories represent 2.0% and 6.2%, respectively, of total comparative stores sales.
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Gross Profit. Total gross profit increased $32.8 million or 3.1% from $1.08 billion to $1.11
billion. Gross profit, as a percentage of sales, decreased to 38.1% compared to 39.3% for the prior
year’s period. The decrease in the overall margin rate is attributable to the decrease in gross
profit from the Value City and DSW segments, offset in part by increases at the Filene’s Basement
segment.
Gross profit, as a percent of sales by segment, was:
| 2005 | 2004 | |||||||
Value City |
35.6 | % | 38.0 | % | ||||
DSW |
42.4 | % | 43.2 | % | ||||
Filene’s Basement |
34.3 | % | 33.7 | % | ||||
Total |
38.1 | % | 39.3 | % | ||||
Value City’s gross profit decreased $54.2 million from fiscal 2004. The decrease is attributable to
several factors, including lower initial markups as a result of the shift toward a new
merchandising strategy focused on more name brand merchandise and better assortments at compelling
prices. These new merchandise items have higher initial costs, thus lower initial markups (“IMU”)
which we believe along with the shift in strategy will improve our sell through. Value City also
incurred additional markdowns related to increased point of sales discounts on clearance
merchandise, on merchandise that would not be carried into the new strategy, and categories that
did not execute to the new merchandising strategy in children’s and hardlines areas.
The DSW gross profit increased $69.4 million to $484.8 million in fiscal 2005 from $415.4 million
in 2004, and decreased as a percentage of net sales from 43.2% in fiscal 2004 to 42.4% in fiscal
2005. The decrease, as a percentage of sales, is primarily attributable to increased markdowns in
all categories. The decrease was partially offset by an increase in initial markup. The initial
markup increase is the result of increased average unit retail prices and the ability to buy at
lower costs, due to the fact that DSW placed larger orders. The IMU increases are not expected to
continue at the same pace as in prior years.
Filene’s Basement gross profit increased by $17.6 million in fiscal 2005 attributable to the
addition of one new store, the full year results of five stores opened in fiscal 2004 and the
reduction of markdowns necessary to address aged inventory from the prior fiscal year.
Selling, General and Administrative Expenses. SG&A expenses increased $34.5 million from $1.08
billion in fiscal 2004 to $1.11 billion in fiscal 2005. Total SG&A expense associated with new DSW
and Filene’s Basement stores and new leased shoe departments not opened in the prior year,
excluding pre-opening costs, were $22.3 million. Pre-opening costs decreased approximately $6.0
million for fiscal 2005 compared to fiscal 2004. During the year the Company recorded a one-time
decrease in workers’ compensation expense of $3.7 million as a result of the completion of a bureau
of workers’ compensation audit. SG&A expense, as a percent of sales by segment, was:
| 2005 | 2004 | |||||||
Value City |
39.8 | % | 40.0 | % | ||||
DSW |
36.3 | % | 37.2 | % | ||||
Filene’s Basement |
39.5 | % | 43.1 | % | ||||
Total |
38.1 | % | 39.3 | % | ||||
The Value City segment’s SG&A expense decrease as a percentage of sales is primarily the result of
fixed costs, in occupancy, and salaries being leveraged against the current period sales. Value
City closed a related party leased warehouse facility and recorded $2.9 million in expenses
associated with the closing. During the fourth quarter of fiscal 2005, Value City recorded a gain
on a terminated lease of approximately $9.5 million, related to a store that closed on January 28,
2006.
The DSW segment SG&A expense percentage decreased as a percentage of sales. Included in the DSW
SG&A expenses, excluding pre-opening costs, are costs associated with new DSW stores and new leased
shoe departments not opened in the prior year of $20.0 million. Pre-opening costs, which are
expensed as incurred, decreased approximately $3.0 million. Fiscal 2005 operating expenses also
included a $6.5 million charge related to the theft of credit card and other purchase information.
Pre-opening costs decreased in Filene’s Basement by approximately $3.0 million in 2005 due to
opening fewer stores. The total SG&A expense associated with new Filene’s Basement stores not
opened in fiscal 2004, excluding pre-opening costs, was $2.3 million.
Change in Fair Value of Warrants. In connection with the initial public offering of DSW, the
Company and its affiliates amended the Term Loans and amended and restated the Convertible Loan.
See “- Liquidity and Capital Resources” for further discussion. In connection with the amendment of
the Term Loans, the Company amended outstanding warrants issued in connection with the Term Loan to
Schottenstein Stores Corporation (“SSC”), Cerberus and Back Bay Capital Funding LLC (“Back Bay”) to
provide SSC,
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Cerberus and Back Bay the right, from time to time, in whole or in part, to (i) acquire Retail
Ventures Common Shares at the conversion price of $4.50 (subject to existing anti-dilution
provisions), (ii) acquire from Retail Ventures Class A Common Shares of DSW at an exercise price
equal to $19.00 (subject to anti-dilution provisions similar to those in the existing Term Loan
warrants) or (iii) acquire a combination thereof (the “Term Loan Warrants”). The Term Loan Warrants
expire in June 2012. In November 2005, Back Bay transferred its Term Loan Warrants to Millennium.
In connection with the amendment and restatement of the Convertible Loan, the convertible loan was
converted into a non-convertible loan and the Company issued to SSC and Cerberus warrants which
provide them the right, from time to time, in whole or in part, to
(i) acquire Retail Ventures
Common Shares at $4.50 conversion price (subject to existing anti-dilution provision), (ii) acquire
from Retail Ventures Class A Common Shares of DSW at an exercise price equal to $19.00 (subject to
anti-dilution provisions similar to those in the existing Term Loan Warrants) or (iii) acquire a
combination thereof (the “Conversion Warrants,” together with the Term Loan Warrants, the
“Warrants”). The Conversion Warrants are exercisable from time to time until June 11, 2007.
During 2005 the Company recorded a non-cash charge of $144.2 million representing the initial
recording and subsequent changes in fair value of the Conversion Warrants and Term Loan Warrants.
There were no derivative instruments outstanding for 2004.
License fees and other income. License fees and other income were $8.9 million in fiscal 2005
compared to $6.7 million in the prior year. License fees and other income are comprised of fees
from licensees and vending income. These sources of income can vary based on customer traffic and
contractual arrangements.
Operating (Loss) Profit. The operating loss for 2005 was $137.0 million compared to an operating
profit of $6.7 million in 2004, a decrease of $143.7 million. The operating loss as a percentage of
sales was 4.7% in 2005 compared to a 0.2% operating profit as a percentage of sales in 2004. A
major element in the 2005 operating loss is the $144.2 million charge for the change in fair value
of warrants in the Value City segment as discussed earlier.
Operating (loss) profit as a percent of sales by segment was:
| 2005 | 2004 | |||||||
Value City |
(14.2 | )% | (1.7 | )% | ||||
DSW |
6.1 | % | 6.1 | % | ||||
Filene’s Basement |
(2.8 | )% | (7.8 | )% | ||||
Total |
(4.7 | )% | 0.2 | % | ||||
Interest Expense. Interest expense was $27.9 million in fiscal 2005 an $11.3 million reduction from
fiscal 2004. Interest expense included the amortization of debt discount of $0.8 million and $2.0
million in fiscal 2005 and 2004, respectively. The decrease is due primarily to the decrease of
$124.4 million in average borrowings during the year to year periods as a result of the repayment
of borrowings from the proceeds from DSW’s initial public offering.
Interest Income. During fiscal 2005, interest income rose $1.0 million to $1.7 million due to an
increased investment in cash and cash equivalents.
Income Taxes. Fiscal 2005 reflects a negative 8.1% effective tax rate as compared to a 39.0% fiscal
2004 effective rate. The 2005 tax rate of negative 8.1% reflects the impact of $50.5 million for
the change in fair value on the mark to market accounting for the warrants, which are not tax
deductible, the tax law change of $4.0 million of deferred tax assets as a result of changes in
Ohio law and an increase in the valuation allowance provided for state net operating loss carry
forwards of $14.4 million.
Minority Interest. Fiscal 2005 net income decreased by $7.0 million to reflect that portion of the
income attributable to DSW minority shareholders.
Net Loss. The fiscal 2005 net loss increased $164.0 million compared to fiscal 2004 and represents
6.3% versus 0.7% of net sales, respectively. A major contributing element in the 2005 net loss is
the $144.2 million charge for the initial recording and subsequent change in fair value of warrants
in the Value City Department Stores segment as discussed earlier. The remaining increase in the net
loss is primarily due to the $7.0 million minority interest recorded in fiscal 2005 and the write
off of $4.0 million of deferred tax assets and additional $14.4 million of valuation allowance
recorded for state net operating loss carry forwards discussed above. The loss was partially offset
by a one-time decrease in workers’ compensation expense of $3.7 million, net of tax as a result of
the completion of a bureau of workers’ compensation audit.
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Inflation
The results of operations and financial condition are presented based upon historical cost. While
it is difficult to accurately measure the impact of inflation because of the nature of the
estimates required, management believes that the effect of inflation, if any, on the results of
operations and financial condition has been minor; however, there can be no assurance that the
business will not be affected by inflation in the future.
Liquidity and Capital Resources
Our primary ongoing cash requirements are for debt service plus seasonal and new store inventory
purchases, capital expenditures in connection with expansion and remodeling and infrastructure
growth, primarily information technology development. The primary sources of funds for these
liquidity needs are cash flow from operations and credit facilities. Our working capital and
inventory levels typically build throughout the fall, peaking during the winter holiday selling
season for our Value City and Filene’s Basement segments.
Net working capital was $274.4 million and $185.0 million at February 3, 2007 and January 28, 2006,
respectively. Current ratios at those dates were 1.45 and 1.33, respectively. Net cash provided by
operating activities totaled $47.3 million and $32.7 million in fiscal 2006 and 2005, respectively.
The fiscal 2006 increase of $14.6 million in net cash provided by operating activities is primarily
due to the (i) $48.5 million decrease in working capital provided from the change in working
capital assets and liabilities, (ii) $32.5 million decrease in the fiscal 2006 net loss and (iii)
$31.7 million increase in the non cash change in the fair value of derivatives.
Net working capital was $185.0 million and $233.6 million at January 28, 2006 and January 29, 2005,
respectively. Current ratios at those dates were 1.33 and 1.65, respectively. Net cash provided by
operating activities totaled $32.7 million and $90.1 million in fiscal 2005 and 2004, respectively.
The fiscal 2005 decrease of $57.3 million in net cash provided by operating activities is primarily
due to the (i) $45.7 million decrease in working capital provided from the change in working
capital assets and liabilities, (ii) $164.0 million increase in the fiscal 2005 net loss and (iii)
$144.2 million non cash change in fair value of warrants.
Cash used for capital expenditures was $65.6 million and $46.5 million in fiscal 2006 and 2005,
respectively, and excludes the impact of capital expenditures in accounts payable. During fiscal
2006, capital expenditures included $34.1 million for new stores, $16.2 million for improvements in
existing stores, $7.8 million for office and warehousing and $7.5 million for MIS equipment
upgrades and new systems.
In fiscal 2006, DSW began its expansion into additional office space, which DSW expects to be
completed in the first half of fiscal 2007. Effective October 29, 2006, the creation of DSW’s
wholly-owned subsidiary, Brand Technology Services will place increased capital demands on DSW
related to both the investment in infrastructure, and those investments needed to run Retail
Ventures. DSW believes that it will be able to continue to fund the operating requirements and the
expansion of the business pursuant to its growth strategy in the future with existing cash and
short term investments, cash flows from operations and borrowings under its secured revolving
credit facility, if necessary. DSW expects to spend up to $80 million
for capital expenditures in fiscal 2007. These expenditures include
investments to make improvements to its information systems,
remodeling stores, accelerating its store growth, and the development
of an e-commerce channel.
Filene’s Basement plans to open approximately six new stores and fully remodel a store and improve
its existing distribution facility in fiscal 2007. Filene’s Basement expects to spend $17.7
million for capital expenditures over the next fiscal year.
On June 11, 2002, Value City Department Stores, Inc., together with certain other principal
subsidiaries of Retail Ventures, entered into a refinancing that consisted of three separate credit
facilities (collectively, the “Prior Credit Facilities”): (i) a three-year $350 million revolving
credit facility (subsequently increased to $425 million), (the “June 2002 Revolving Credit
Facility”), (ii) two $50 million term loan facilities (collectively, the “Term Loans”) initially
provided equally by Cerberus and SSC and (iii) an amended and restated $75 million senior
subordinated convertible loan (the “Convertible Loan”), initially entered into on March 15, 2000,
which was held equally by Cerberus and SSC. Prior to their amendment in July 2005 discussed below,
these Prior Credit Facilities were guaranteed by Retail Ventures and substantially all of its
subsidiaries, including DSW. These Prior Credit Facilities were also subject to an Intercreditor
Agreement, which provided for an established order of payment of obligations from the proceeds of
collateral upon default (the “Intercreditor Agreement”).
On July 5, 2005, Retail Ventures amended, or amended and restated, the Prior 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, each of which remained outstanding as of February 3, 2007: (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 wholly-owned 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
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and SSC (the “Non-Convertible Loan”), under which Value City is the borrower and Retail Ventures
and certain wholly-owned subsidiaries of Retail Ventures (other than DSW and DSWSW) are
co-guarantors.
On August 16, 2006, Retail Ventures issued $125 million of 6.625% Mandatorily Exchangeable Notes
due September 15, 2011, or PIES (Premium Income Exchangeable SecuritiesSM). On
September 15, 2006, Retail Ventures closed on the exercise by the sole underwriter of its entire
option to purchase an additional aggregate principal amount of $18,750,000 of PIES. RVI used a
portion of the net proceeds of the offering to repay 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 the Non-Convertible Loan. The VCDS Revolving Loan, DSW Revolving Loan, Non-Convertible Loan and
PIES are sometimes referred to collectively as the “Credit Facilities.”
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 Credit Facilities are described more fully below:
Revolving Credit Facilities
$275 Million Secured Revolving Credit Facility — The VCDS Revolving Loan
Under the VCDS Revolving Loan, Filene’s Basement, Retail Ventures Jewelry, Inc. and certain of
Retail Ventures’ other 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 shares of DSW
owned by Retail Ventures. At February 3, 2007, $66.8 million was available under the VCDS Revolving
Loan. Direct borrowings aggregated $105.0 million and $19.4 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 at January 28, 2006 and $19.0 million in letters of
credit were issued and outstanding. The maturity date of the VCDS Revolving Loan is July 5, 2009.
$150 Million Secured Revolving Credit Facility — The DSW Revolving Loan
Under the DSW Revolving Loan, DSW and its wholly-owned subsidiary, DSWSW, are named as
co-borrowers. The DSW Revolving Loan is subject to a borrowing base restriction 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 February 3, 2007, $136.6 million was available under the DSW Revolving Loan and no direct
borrowings were outstanding. At February 3, 2007 and January 28, 2006, $13.4 million and $13.6
million, respectively, in letters of credit were issued and outstanding. At January 28, 2006 $136.4
million was available under the DSW Revolving Loan and no direct borrowings were outstanding. The
maturity of the DSW Revolving Loan is July 5, 2010.
Term Loans — Related Parties
The principal balances of the Term Loans were repaid in full on July 5, 2005.
The Company issued 2,954,792 Term Loan Warrants to purchase RVI Common Shares, at an initial
exercise price of $4.50 per share, to Cerberus and SSC in connection with one of the Term Loans.
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 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 lenders registration
rights with respect to the shares issuable upon exercise of the Term Loan Warrants. The $6.1
million value ascribed to the Term Loan Warrants was estimated as of the date of issuance using the
Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of 5.6%;
expected life of 10 years; expected volatility of 47%; illiquidity discount of 10%; and an expected
dividend yield of 0%. The related debt discount was amortized into interest expense over the life
of the debt.
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Amendment to Term Loans
Pursuant to the July 2005 Fourth Amendment to Financing Agreement, (i) DSW was released from its
obligations as a co-borrower under the Term Loans, (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 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
As amended in 2002, borrowings under the Convertible Loan bore interest at 10% per annum. At our
option, interest could be PIK during the first two years, and thereafter, at our option, up to 50%
of the interest due may be PIK until maturity. Prior to its amendment and restatement in July 2006,
the Convertible Loan was guaranteed by all our principal subsidiaries and was secured by a lien on
assets junior to liens granted in favor of the lenders on the 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
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.
On August 16, 2006, the Non-Convertible Loan was amended and restated for a third time whereby the
Company (i) paid $49.5 million of the then aggregate $50.0 million outstanding balance, (ii)
secured the remaining $0.5 million balance with cash collateral accounts, (iii) pledged DSW Common
Shares sufficient for the exercise of the Conversion Warrants, and (iv) obtained a release of the
capital stock of DSW held by Retail Ventures used to secure the Non-Convertible Loan. The final
maturity date is the earlier of (i) June 10, 2009 or (ii) the date that the Conversion Warrants
held by the lenders, are exercised.
$143,750,000 Premium Income Exchangeable SecuritiesSM (PIES)
On August 10, 2006, Retail Ventures announced the pricing of its 6.625% Mandatorily Exchangeable
Notes due September 15, 2011, or PIES (Premium Income Exchangeable SecuritiesSM) in the
aggregate principal amount of $125,000,000. The closing of the transaction took place on August 16,
2006. On September 15, 2006, Retail Ventures closed on the exercise by the sole underwriter of its
entire option to purchase an additional aggregate principal amount of $18,750,000 of PIES.
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The $143,750,000 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 $50.00 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 maximum aggregate number of DSW Class A Common Shares deliverable upon exchange of the PIES is
5,244,575 DSW Class A Common Shares, subject to adjustment as provided in the PIES.
RVI used a portion of 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 $50.0 million
Non-Convertible Loan, together with fees and expenses. Restricted cash of $0.5 million is held for
the remaining balance of the Non-Convertible Loan. 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.
The embedded exchange feature of the PIES is accounted for as a derivative, which is recorded at
fair value with changes in fair value in the statement of operations. Accordingly, the accounting
for the embedded derivative addresses the variations in the fair value of the obligation to settle
the PIES when the market value exceeds or is less than the threshold appreciation price. The fair
value of the conversion feature at the date of issuance of $11.7 million was equal to the amount of
the discount of the PIES and will be amortized into interest expense over the term of the PIES.
During fiscal 2006, the Company recorded a charge related to the change in fair value of the
conversion feature of the PIES from the date of issuance to February 3, 2007 of $51.1 million. As
of February 3, 2007, the fair value liability recorded for the conversion feature was $62.8
million.
Contractual Obligations
We have the following minimum commitments under contractual obligations. A “purchase obligation” is
defined as an agreement to purchase goods or services that is enforceable and legally binding on us
and that specifies all significant terms, including fixed or minimum quantities to be purchased,
fixed, minimum or variable price provisions; and the approximate timing of the transaction. Based
on this definition, the tables below include only those contracts, which include fixed or minimum
obligations. It does not include normal purchases, which are made in the ordinary course of
business.
The following table provides aggregated information about contractual obligations and other
long-term liabilities as of February 3, 2007 (dollars in thousands).
| Payments due by Period | ||||||||||||||||||||||||
| No | ||||||||||||||||||||||||
| Less Than | 1 - 3 | 3 - 5 | More Than | Expiration | ||||||||||||||||||||
| Contractual Obligations(5) | Total | 1 Year | Years | Years | 5 Years | Date | ||||||||||||||||||
Long—term debt |
$ | 249,250 | $ | 105,500 | $ | 143,750 | $ | |||||||||||||||||
Interest payments on long—term debt (1) |
47,678 | $ | 11,896 | 19,116 | 16,666 | |||||||||||||||||||
Capital lease obligations(2) |
54,669 | 3,448 | 7,022 | 7,289 | $ | 36,910 | ||||||||||||||||||
Operating lease obligations (2) |
1,535,456 | 189,496 | 361,240 | 310,198 | 674,522 | |||||||||||||||||||
Construction commitments(3) |
10,026 | 10,026 | ||||||||||||||||||||||
Purchase obligations(4) |
25,087 | 13,288 | 11,394 | 405 | ||||||||||||||||||||
Total |
$ | 1,922,166 | $ | 228,154 | $ | 504,272 | $ | 478,308 | $ | 711,432 | $ | ` | ||||||||||||
| (1) | Projected interest payments are for the Non-Convertible Loan and the VCDS Revolving Loan and are based on the outstanding principal amount at February 3, 2007 and interest rate per the agreement. |
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| (2) | Many capital and operating leases require us, as part of the lease, to pay for common area maintenance, real estate taxes and contingent rents. In fiscal 2006, the common area maintenance and real estate taxes represented approximately 36.7% of the rent expense. These costs vary year by year and are based almost entirely on actual costs incurred by the landlord and as such are not included in the lease obligations presented above. | |
| (3) | Construction commitments include capital items to be purchased for projects that were under construction, or for which a lease had been signed, as of February 3, 2007. | |
| (4) | Many of our purchase commitments are cancelable by us without payment or penalty, and we have excluded such commitments, along with all associate employment and intercompany commitments. | |
| (5) | Deferred taxes, minority interest and payments related to pension plans are not included in this table. |
In 2006, RVI used the proceeds from the issuance of PIES to repay the approximately $49.7 million
remaining balance of an intercompany note due Value City and lend Value City and Filene’s Basement
$62 million through intercompany loans. Value City used these and other funds to pay down $49.5
million of the outstanding principal amount of the $50 million Senior Non-Convertible Loan and
approximately $36.5 million of borrowings under the VCDS Revolving Loan. During 2005, the Company
repaid the amount owed on the $100 million Term Loans plus accrued interest, $25 million of the $75
million Convertible Loan and a portion of the Revolving Credit Facility with the proceeds of DSW’s
IPO used to repay intercompany promissory notes relating to dividends issued by DSW to Retail
Ventures.
At February 3, 2007, the Company had outstanding a $0.5 million Non-Convertible Loan, $143.8
million PIES and $105.0 million of direct borrowings under the VCDS Revolving Loan. As of
January 28, 2006 the Company had outstanding a $50.0 million Non-Convertible Loan and $88.0 million
of direct borrowings under the VCDS Revolving Loan.
The Company had outstanding letters of credit that totaled approximately $19.4 million and $13.4
million, respectively, at February 3, 2007, on the Retail Ventures and new DSW secured revolving
credit facilities and $19.0 million and $13.6 million at January 28, 2006 on the Retail Ventures
and DSW secured revolving credit facilities. 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, the Company does not expect to make any
significant payment outside of the terms set forth in these arrangements.
During the current year, we have continued to enter 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 approximately $10.0
million at February 3, 2007. In addition, we signed lease agreements for 34 new store locations
with annual aggregate rent of $14.2 million and average terms of approximately 10 years. Associated
with the new lease agreements, we will receive approximately $8.9 million of tenant improvement
allowances which will offset future capital expenditures.
We operate substantially all our stores, warehouses and corporate office space from leased
facilities. Lease obligations are accounted for either as operating leases or as capital leases. We
disclosed in the Notes to consolidated financial statements included in our 2006 Annual Report the
minimum payments due under operating or capital leases.
Additional information regarding our financial commitment as of February 3, 2007 is provided in the
Notes to Consolidated Financial Statements. See “Notes to Consolidated Statements, Note 6 -
Long-Term Obligations beginning on page F-22 and Note 10 — Commitments and Contingencies” beginning
on page F-34.
Recent Accounting Pronouncements
Recent
Accounting Pronouncements and their impact on Retail Ventures are
disclosed in Footnote 1 to
our consolidated financial statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
It is not our intention 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.
Retail Ventures had no “off-balance sheet” arrangements as of February 3, 2007, as that term is
described by the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates, which may adversely affect our
financial position, results of operations and cash flows. In seeking to minimize the risks from
interest rate fluctuations, we manage exposures through our regular operating
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and financing activities and, when deemed appropriate, through the use of derivative financial
instruments. We do not use financial instruments for trading or other speculative purposes and are
not party to any leveraged financial instruments.
Secured Revolving Credit Facilities
We are exposed to interest rate risk primarily through our borrowings under the $275 million VCDS
Revolving Loan and the $150 million DSW Revolving Loan. At February 3, 2007, direct borrowings
aggregated $105.0 million and an additional $32.8 million of letters of credit were outstanding
against these revolving credit facilities. A hypothetical 100 basis point increase in interest rates on our variable rate debt outstanding for
the year ended February 3, 2007, net of income taxes, would have had an approximate $0.7 million
impact on our financial position, liquidity and results of operations.
Warrants
For derivatives that are not designated as hedges under SFAS No. 133, changes in the fair values
are recognized in earnings in the period of change. Retail Ventures estimates the fair value of
derivatives based on pricing models using current market rates and records all derivatives on the
balance sheet at fair value. 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 fiscal 2006 the Company recorded a charge related to the change in the fair value of the
warrants of $124.8 million. As of February 3, 2007, the aggregate fair value liability recorded
relating to both the Term Loan Warrants and Conversion Warrants is
$216.4 million. The $156.5
million value ascribed to the Conversion Warrants was estimated as of February 3, 2007 using the
Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of 4.9%;
expected life of 2.4 years; expected volatility of 44.1%; and an expected dividend yield of 0.0%.
The $59.9 million value ascribed to the Term Loan Warrants was estimated as of February 3, 2007
using the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of
4.8%; expected life of 5.4 years; expected volatility of 44.1% and an expected dividend yield of
0.0%. 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.
Conversion Feature of PIES
During fiscal 2006, the Company recorded a charge related to the change in fair value of the
conversion feature of the PIES from the date of issuance to February 3, 2007 of $51.1 million. As
of February 3, 2007, the fair value liability recorded for the conversion feature was $62.8
million. The fair value was estimated using the Black-Scholes Pricing Model with the following
assumptions: risk-free interest rate of 5.2 %; expected life of 4.6 years; expected volatility of
39.7%; and an expected dividend yield of 0.0%. The fair value of the conversion feature at the date
of issuance of $11.6 million is equal to the amount of the discount of the PIES and will be
amortized into interest expense over the term of the PIES.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and financial statement schedule and the Report of Independent Registered
Public Accounting Firm thereon are filed pursuant to this Item 8 and are included in this Annual
Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including its
Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness
of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)). Based on that
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the
end of the period covered by this Annual Report, that such disclosure controls and procedures were
effective.
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Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The
Company’s internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America.
Management assessed the effectiveness of the Company’s internal control system as of February 3,
2007. In making its assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.
Based on this assessment, management concluded that the Company maintained effective internal
control over financial reporting, as of February 3, 2007.
Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has issued an
audit report covering management’s assessment of the Company’s internal control over financial
reporting, as stated in its report which begins on page F-1 of this Annual Report.
Changes in Internal Control over Financial Reporting
No change was made in the Company’s internal control over financial reporting during the Company’s
most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION. None.
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PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Executive Officers
The following persons are executive officers of the Company. Our officers of the Company are
elected annually by our Board and serve at the pleasure of the Board.
Heywood Wilansky, age 59, became our President and Chief Executive Officer in November 2004. Mr.
Wilansky is a director of the Company since June 2005 and is also a director of DSW since March
2005. Before joining Retail Ventures, Mr. Wilansky served as President and Chief Executive Officer
of Filene’s Basement, a subsidiary of Retail Ventures, from February 2003 to November 2004. Mr.
Wilansky was a professor of marketing at the University of Maryland business school from August
2002 to February 2003. From August 2000 to January 2003, he was President and Chief Executive
Officer of Strategic Management Resources, LLC. From August 1995 to July 2000, he was President and
Chief Executive Officer of Bon Ton Stores. Prior to that, he was with The May Department Stores
Company for more than 19 years, last serving as President and Chief Executive Officer of the
Foley’s division from 1992 to 1995 and President and Chief Executive Officer of the Filene’s
division from 1991 to 1992.
James A. McGrady, age 56, became our Executive Vice President, Chief Financial Officer, Treasurer
and Secretary in December 2002. He served as our Chief Financial Officer, Treasurer and Secretary
from July 2000 until December 2002. Mr. McGrady is also a Vice President of DSW. From 1986 until
July 2000, Mr. McGrady served as Vice President and Treasurer of Big Lots, Inc. From 1979 through
1986, Mr. McGrady was in the practice of public accounting with KPMG Main Hurdman.
Julia A. Davis, age 46, became our Executive Vice President and General Counsel in January 2003.
Since the DSW IPO she also served as Executive Vice President, General Counsel and Secretary of DSW
until April 10, 2006. Prior to joining the Company Ms. Davis was a partner in the Columbus office
of Vorys, Sater, Seymour and Pease LLP. Ms. Davis has 19 years of private legal practice primarily
representing and advising national and regional retailers in a wide variety of employment matters.
Jed L. Norden, age 56, became our Executive Vice President and Chief Administrative Officer as of
February 1, 2006. Prior to accepting this position with the Company, Mr. Norden served as Executive
Vice President of Human Resources for Retail Ventures Services, Inc., a subsidiary of Retail
Ventures, Inc. Beginning in 2002, Mr. Norden served as Vice President of Human Resources for
Ultimate Electronics. Prior to serving in that position, Mr. Norden served as Corporate Senior Vice
President of Human Resources for Payless ShoeSource, Inc. from 1985 to 2002. Mr. Norden has also
held various management positions at May Department Stores Company and Ingersoll-Rand Corporation.
Steven E. Miller, age 48, became our Senior Vice President Controller in May 2003 after joining the
Company in September 2000 as its Vice President Controller. Since the DSW IPO he also serves as
Senior Vice President and Controller of DSW. Prior to joining the Company Mr. Miller served as
Chief Financial Officer of Spitzer Management, Inc. beginning in 1998. From 1993 through 1998, Mr.
Miller held various positions with Big Lots, Inc. including Director, Assistant Treasurer and
Assistant Controller.
Audit Committee
The Company’s Board of Directors has determined that Harvey L. Sonnenberg is an audit committee
financial expert as such term is defined by the SEC under Item 407(d) of Regulation S-K. The
members of the Audit Committee are Messrs. Harvey L. Sonnenberg (Chair), James L. Weisman and
Lawrence J. Ring and Ms. Elizabeth M. Eveillard. The Board of Directors has affirmatively
determined that each of Messrs. Sonnenberg, Weisman, Ring and Ms. Eveillard is an independent
member of the Audit Committee in accordance with the listing standards of the New York Stock
Exchange.
Code of Ethics and Corporate Governance Information
The Company has adopted a code of ethics that applies to all of its directors, officers and
employees, including its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions, and an additional code
of ethics that applies to senior financial officers. These codes of ethics, designated as the “Code
of Conduct” and the “Code of Ethics for Senior Financial Officers,” respectively by the Company,
can be found on the Company’s investor website at www.retailventuresinc.com. The Company intends to
disclose any amendment to, or waiver from, any applicable provision of the Code of Conduct or Code
of Ethics for Senior Financial Officers (if such amendment or waiver relates to elements listed
under Item 406(b) of Regulation S-K and applies to the Company’s directors, principal executive
officer, principal financial officer, principal
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accounting officer or controller, or persons performing similar functions) by posting such
information on the Company’s website at www.retailventuresinc.com.
The Board of Directors has adopted and approved Corporate Governance Principles and written
charters for its Nominating and Corporate Governance, Audit and Compensation Committees. In
addition, the Audit Committee has adopted a written Audit Committee Pre-Approval Policy with
respect to audit and non-audit services to be performed by the Company’s independent public
accountants. All of the forgoing documents are available on the Company’s investor website at
www.retailventuresinc.com and a copy of the foregoing will be made available (without charge) to
any shareholder upon request.
Other
In accordance with General Instruction G(3), the information contained under the captions “ELECTION
OF DIRECTORS”, “OTHER DIRECTOR INFORMATION, COMMITTEES OF DIRECTORS AND CORPORATE GOVERNANCE
INFORMATION”, in the Company’s definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on June 13, 2007, to be filed with the SEC pursuant to Regulation 14A promulgated under the
Exchange Act (the “Proxy Statement”), is incorporated herein by reference to satisfy the remaining
information required by this Item.
NYSE Certification
Mr. Wilansky, Chief Executive Officer and President of the Company, and Mr. McGrady, Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of the Company, have issued
certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and applicable
Securities and Exchange Commission regulations with respect to the Company’s 2006 Annual Report on
Form 10-K. The full text of the certifications are set forth in Exhibits 31 and 32 to this Annual
Report on Form 10-K.
Mr. Wilansky submitted his annual certification to the New York Stock Exchange (NYSE) on June 5,
2006, stating that he was not aware of any violation by the Company of the NYSE’s corporate
governance listing standards, as required by Section 303A.12(a) of the NYSE Listed Company Manual.
| Item 11. | EXECUTIVE COMPENSATION. |
In accordance with General Instruction G(3), the information contained under the captions
“COMPENSATION OF MANAGEMENT” and “OTHER DIRECTOR INFORMATION COMMITTEES OF DIRECTORS AND CORPORATE
GOVERNANCE INFORMATION — GENERAL” in the Proxy Statement is incorporated herein by reference. The
report of the Compensation Committee of the Company’s Board of Directors on executive compensation
included in the Proxy Statement shall not be deemed to be incorporated herein by reference.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS. |
In accordance with General Instruction G(3), the information contained under the captions “SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS” and
“PROPOSAL NO. 2, APPROVAL OF RETAIL VENTURES, INC. 2007 CASH INCENTIVE COMPENSATION PLAN — EQUITY
COMPENSATION PLAN INFORMATION” in the Proxy Statement is incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
In accordance with General Instruction G(3), the information contained under the caption “CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS” and “OTHER
DIRECTOR INFORMATION, COMITTEES OF DIRECTORS AND CORPORATE GOVERNANCE
INFORMATION – CORPORATE GOVERNANCE PRINCIPLES” in the Proxy Statement is incorporated herein by reference.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
In accordance with General Instruction G(3), the information contained under the caption “AUDIT AND
OTHER SERVICE FEES” in the definitive Proxy Statement is incorporated herein by reference.
53
Table of Contents
PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
15(a)(1) Financial Statements
The documents listed below are filed as part of this Form 10-K:
| Page in | ||||
| Form 10-K | ||||
| F-1 | ||||
| F-2 | ||||
| F-4 | ||||
| F-5 | ||||
| F-7 | ||||
| F-8 | ||||
15(a)(2) Consolidated Financial Statement Schedules: |
||||
The schedule listed below is filed as part of this Form 10-K: |
||||
| S-1 | ||||
| S-2 | ||||
Schedules not listed above are omitted because of the absence of the conditions under which they
are required or because the required information is included in the financial statements or the
notes thereto.
15(a)(3) and (b) Exhibits:
See Index to Exhibits which begins on page E-1.
15(c) Additional Financial Statement Schedules:
None.
54
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| RETAIL VENTURES, INC. |
||||
| April 5, 2007 | By: | /s/ James A. McGrady | ||
| James A. McGrady, Executive Vice President, Chief Financial Officer, Treasurer and Secretary | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
*
|
Chairman of the Board of Directors | April 5, 2007 | ||
/s/ Heywood Wilansky
|
President, Chief Executive Officer and Director (Principal Executive Officer) | April 5, 2007 | ||
/s/ James A. McGrady
|
Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) | April 5, 2007 | ||
*
|
Director | April 5, 2007 | ||
*
|
Director | April 5, 2007 | ||
*
|
Director | April 5, 2007 | ||
*
|
Director | April 5, 2007 | ||
*
|
Director | April 5, 2007 | ||
*
|
Director | April 5, 2007 | ||
*
|
Director | April 5, 2007 |
| *By: | /s/ James A. McGrady | |||
| James A. McGrady (Attorney-in-fact) | ||||
55
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Retail Ventures, Inc.
Columbus, Ohio
Retail Ventures, Inc.
Columbus, Ohio
We have
audited the accompanying consolidated balance sheets of Retail Ventures, Inc. and
subsidiaries (the “Company”) as of February 3, 2007 and January 28, 2006, and the related
consolidated statements of operations, shareholders’ equity, and cash flows for each of the three
years in the period ended February 3, 2007. Our audits also included the financial statement
schedules listed in the Index at Item 15. We also have audited management’s assessment, included
in the accompanying Management’s Report on Internal Control over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of February 3, 2007,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
these financial statements and financial statement schedules, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on these financial
statements and financial statement schedules, an opinion on management’s assessment, and an opinion
on the effectiveness of the Company’s internal control over financial reporting based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting, included obtaining
an understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Retail Ventures, Inc.
and its subsidiaries as of February 3, 2007
and January 28, 2006, and the results of their operations and their cash flows for each of the
three years in the period ended February 3, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein. Also, in our
opinion, management’s assessment that the Company maintained effective internal control over
financial reporting as of February 3, 2007, is fairly stated, in all material respects, based on
the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of
February 3, 2007, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
April 4, 2007
Columbus, Ohio
April 4, 2007
F-1
Table of Contents
RETAIL VENTURES, INC.
CONSOLIDATED BALANCE SHEETS
February 3, 2007 and January 28, 2006
(in thousands, except share amounts)
CONSOLIDATED BALANCE SHEETS
February 3, 2007 and January 28, 2006
(in thousands, except share amounts)
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
ASSETS |
||||||||
Cash and equivalents |
$ | 160,221 | $ | 138,731 | ||||
Restricted cash |
511 | |||||||
Short-term investments |
98,650 | |||||||
Accounts receivable, net |
16,781 | 19,259 | ||||||
Accounts receivables from related parties |
3,777 | 437 | ||||||
Inventories |
545,584 | 491,867 | ||||||
Prepaid expenses and other assets |
36,686 | 26,814 | ||||||
Deferred income taxes |
25,737 | 66,581 | ||||||
Total current assets |
887,947 | 743,689 | ||||||
Property and equipment, at cost: |
||||||||
Furniture, fixtures and equipment |
367,823 | 348,296 | ||||||
Leasehold improvements |
299,743 | 272,835 | ||||||
Land and building |
789 | 789 | ||||||
Capital leases |
32,300 | 32,300 | ||||||
| 700,655 | 654,220 | |||||||
Accumulated depreciation and amortization |
(420,746 | ) | (385,094 | ) | ||||
Property and equipment, net |
279,909 | 269,126 | ||||||
Goodwill |
25,899 | 25,899 | ||||||
Tradenames and other intangibles, net |
34,976 | 39,217 | ||||||
Deferred income taxes |
26,114 | |||||||
Other assets |
12,372 | 8,643 | ||||||
Total assets |
$ | 1,267,217 | $ | 1,086,574 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-2
Table of Contents
RETAIL VENTURES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
February 3, 2007 and January 28, 2006
(in thousands, except share amounts)
CONSOLIDATED BALANCE SHEETS (Continued)
February 3, 2007 and January 28, 2006
(in thousands, except share amounts)
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Accounts payable |
$ | 212,434 | $ | 221,444 | ||||
Accounts payable to related parties |
4,902 | 4,901 | ||||||
Accrued expenses: |
||||||||
Compensation |
40,886 | 35,085 | ||||||
Taxes |
45,227 | 37,869 | ||||||
Other |
92,894 | 88,403 | ||||||
Warrant liability |
3,594 | 1,723 | ||||||
Warrant liability-related parties |
212,806 | 168,680 | ||||||
Current maturities of long-term obligations |
765 | 623 | ||||||
Total current liabilities |
613,508 | 558,728 | ||||||
Long-term obligations, net of current maturities: |
||||||||
Non-related parties |
265,283 | 115,995 | ||||||
Related parties |
500 | 50,000 | ||||||
Conversion feature of long-term debt |
62,770 | |||||||
Other noncurrent liabilities |
95,108 | 87,080 | ||||||
Deferred income taxes |
45,829 | |||||||
Minority interest |
138,428 | 112,396 | ||||||
Commitments and contingencies |
||||||||
Shareholders’ equity: |
||||||||
Common shares, without par value; 160,000,000
authorized; issued, including 7,551 treasury
shares, 47,270,777 and 39,864,577 outstanding,
respectively |
276,690 | 159,617 | ||||||
Accumulated deficit |
(184,461 | ) | (36,082 | ) | ||||
Deferred compensation expense, net |
(1 | ) | ||||||
Treasury shares, at cost, 7,551 shares |
(59 | ) | (59 | ) | ||||
Accumulated other comprehensive loss |
(550 | ) | (6,929 | ) | ||||
Total shareholders’ equity |
91,620 | 116,546 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,267,217 | $ | 1,086,574 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Table of Contents
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands, except per share amounts)
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Net sales |
$ | 3,067,658 | $ | 2,913,371 | $ | 2,739,631 | ||||||
Cost of sales |
(1,852,242 | ) | (1,804,139 | ) | (1,663,215 | ) | ||||||
Gross profit |
1,215,416 | 1,109,232 | 1,076,416 | |||||||||
Selling, general and administrative expenses |
(1,143,468 | ) | (1,110,950 | ) | (1,076,445 | ) | ||||||
Change in fair value of derivative instruments |
(53,012 | ) | (151 | ) | ||||||||
Change in fair value of derivative instruments- related parties |
(122,943 | ) | (144,058 | ) | ||||||||
License fees and other income |
9,565 | 8,936 | 6,714 | |||||||||
Operating (loss) profit |
(94,442 | ) | (136,991 | ) | 6,685 | |||||||
Non-related parties interest expense |
(20,499 | ) | (13,526 | ) | (13,465 | ) | ||||||
Related parties interest expense |
(6,718 | ) | (14,335 | ) | (25,741 | ) | ||||||
Total interest expense |
(27,217 | ) | (27,861 | ) | (39,206 | ) | ||||||
Interest income |
9,542 | 1,660 | 645 | |||||||||
Interest expense, net |
(17,675 | ) | (26,201 | ) | (38,561 | ) | ||||||
Loss before income taxes and minority interest |
(112,117 | ) | (163,192 | ) | (31,876 | ) | ||||||
Income taxes (expense) benefit |
(14,630 | ) | (13,224 | ) | 12,428 | |||||||
Loss before minority interest |
(126,747 | ) | (176,416 | ) | (19,448 | ) | ||||||
Minority interest |
(24,166 | ) | (7,002 | ) | ||||||||
Net loss |
$ | (150,913 | ) | $ | (183,418 | ) | $ | (19,448 | ) | |||
Basic and diluted loss per share |
$ | (3.35 | ) | $ | (4.75 | ) | $ | (0.57 | ) | |||
Shares used in basic and diluted per share calculations |
45,088 | 38,586 | 33,956 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-4
Table of Contents
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands)
| Number of Shares | Retained | Accumulated | ||||||||||||||||||||||||||||||||||
| Common | Earnings | Deferred | Other | |||||||||||||||||||||||||||||||||
| Common | Shares in | Common | (Accumulated | Compensation | Treasury | Comprehen- | ||||||||||||||||||||||||||||||
| Shares | Treasury | Shares | Warrants | Deficit) | Expense | Shares | sive Loss | Total | ||||||||||||||||||||||||||||
Balance, January
31, 2004 |
33,991 | 8 | $ | 143,077 | $ | 6,074 | $ | 62,204 | $ | (635 | ) | $ | (59 | ) | $ | (6,011 | ) | $ | 204,650 | |||||||||||||||||
Net loss |
(19,448 | ) | (19,448 | ) | ||||||||||||||||||||||||||||||||
Change in minimum
pension liability,
net of income tax
benefit of $753 |
(1,057 | ) | (1,057 | ) | ||||||||||||||||||||||||||||||||
Total
comprehensive
loss |
(20,505 | ) | ||||||||||||||||||||||||||||||||||
Exercise of stock
options |
136 | 504 | 504 | |||||||||||||||||||||||||||||||||
Net
issuance/forfeitures
of restricted
shares |
(16 | ) | (104 | ) | 104 | |||||||||||||||||||||||||||||||
Amortization of
deferred
compensation
expense |
528 | 528 | ||||||||||||||||||||||||||||||||||
Balance, January
29, 2005 |
34,111 | 8 | $ | 143,477 | $ | 6,074 | $ | 42,756 | $ | (3 | ) | $ | (59 | ) | $ | (7,068 | ) | $ | 185,177 | |||||||||||||||||
Net loss |
(183,418 | ) | (183,418 | ) | ||||||||||||||||||||||||||||||||
Change in minimum
pension liability,
net of income tax
benefit of $924 |
139 | 139 | ||||||||||||||||||||||||||||||||||
Total
comprehensive
loss |
(183,279 | ) | ||||||||||||||||||||||||||||||||||
Initial public
offering of
subsidiary |
104,187 | 104,187 | ||||||||||||||||||||||||||||||||||
Capital
transactions of
subsidiary |
393 | 393 | ||||||||||||||||||||||||||||||||||
Exercise of stock
options |
5,754 | 26,286 | 26,286 | |||||||||||||||||||||||||||||||||
Excess tax benefit
related to
stock option
exercises |
9,974 | 9,974 | ||||||||||||||||||||||||||||||||||
Amortization of
deferred
compensation
expense |
2 | 2 | ||||||||||||||||||||||||||||||||||
Warrant
reclassification to
liability |
(6,074 | ) | (6,074 | ) | ||||||||||||||||||||||||||||||||
Warrant adjustment
to fair value |
(20,120 | ) | (20,120 | ) | ||||||||||||||||||||||||||||||||
Balance, January
28, 2006 |
39,865 | 8 | $ | 159,617 | $ | $ | (36,082 | ) | $ | (1 | ) | $ | (59 | ) | $ | (6,929 | ) | $ | 116,546 | |||||||||||||||||
F-5
Table of Contents
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Continued)
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands)
| Number of Shares | Retained | Accumulated | ||||||||||||||||||||||||||||||||||
| Common | Earnings | Deferred | Other | |||||||||||||||||||||||||||||||||
| Common | Shares in | Common | (Accumulated | Compensation | Treasury | Comprehen- | ||||||||||||||||||||||||||||||
| Shares | Treasury | Shares | Warrants | Deficit) | Expense | Shares | sive Loss | Total | ||||||||||||||||||||||||||||
Balance, January
28, 2006 |
39,865 | 8 | $ | 159,617 | $ | $ | (36,082 | ) | $ | (1 | ) | $ | (59 | ) | $ | (6,929 | ) | $ | 116,546 | |||||||||||||||||
Net loss |
(150,913 | ) | (150,913 | ) | ||||||||||||||||||||||||||||||||
Change in minimum
pension liability,
net of income tax
expense of $153 |
1,192 | 1,192 | ||||||||||||||||||||||||||||||||||
Total
comprehensive
loss |
(149,721 | ) | ||||||||||||||||||||||||||||||||||
Capital
transactions of
subsidiary |
2,534 | 2,534 | ||||||||||||||||||||||||||||||||||
Stock based
compensation
expense, before
related tax effects |
634 | 634 | ||||||||||||||||||||||||||||||||||
Exercise of stock
options |
406 | 2,934 | 2,934 | |||||||||||||||||||||||||||||||||
Exercise of warrants |
7,000 | 110,317 | 110,317 | |||||||||||||||||||||||||||||||||
Deferred income tax
adjustment |
3,189 | 3,189 | ||||||||||||||||||||||||||||||||||
Reclassification of
unamortized
deferred
compensation |
(1 | ) | 1 | |||||||||||||||||||||||||||||||||
Adjustment to
initially apply
FASB Statement No.
158, net of income
tax expense of $3,330 |
5,187 | 5,187 | ||||||||||||||||||||||||||||||||||
Balance, February
3, 2007 |
47,271 | 8 | $ | 276,690 | $ | $ | (184,461 | ) | $ | $ | (59 | ) | $ | (550 | ) | $ | 91,620 | |||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Table of Contents
RETAIL VENTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005
(in thousands)
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (150,913 | ) | $ | (183,418 | ) | $ | (19,448 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||||||
Amortization of debt issuance costs and discount on debt |
4,567 | 4,422 | 5,380 | |||||||||
Amortization of deferred compensation |
2 | 528 | ||||||||||
Stock based compensation expense |
634 | |||||||||||
Stock based compensation expense of subsidiary |
2,534 | |||||||||||
Depreciation and amortization |
58,329 | 58,889 | 56,111 | |||||||||
Change in fair value of derivative instruments ($122,943, $144,058 and $0 — related
party) |
175,955 | 144,209 | ||||||||||
Deferred income taxes and other noncurrent liabilities |
(23,671 | ) | 2,872 | (8,264 | ) | |||||||
Excess tax benefit related to stock option exercises |
9,974 | |||||||||||
Loss on disposal of assets |
1,469 | 1,735 | 120 | |||||||||
Gain on lease termination |
(9,536 | ) | ||||||||||
Minority interest in consolidated subsidiary |
24,166 | 7,353 | ||||||||||
Impairment charges |
832 | 507 | 14,596 | |||||||||
Other |
1,866 | 393 | ||||||||||
Change in working capital, assets and liabilities: |
||||||||||||
Accounts receivable |
(862 | ) | (11,740 | ) | 1,150 | |||||||
Inventories |
(53,717 | ) | (18,816 | ) | (52,713 | ) | ||||||
Prepaid expenses and other assets |
(11,079 | ) | (10,825 | ) | (12,013 | ) | ||||||
Accounts payable |
(10,595 | ) | 16,419 | 58,488 | ||||||||
Proceeds from lease incentives |
10,168 | 10,781 | 13,099 | |||||||||
Accrued expenses |
17,618 | 9,524 | 33,042 | |||||||||
Net cash provided by operating activities |
47,301 | 32,745 | 90,076 | |||||||||
Cash flows from investing activities: |
||||||||||||
Restricted cash |
(511 | ) | ||||||||||
Cash paid for property and equipment |
(65,584 | ) | (46,499 | ) | (85,443 | ) | ||||||
Proceeds from sale of assets |
30 | 165 | 119 | |||||||||
Purchases of available-for-sale investments |
(188,250 | ) | ||||||||||
Maturities and sales from available-for-sale investments |
89,600 | |||||||||||
Tradename acquisitions |
(4,066 | ) | ||||||||||
Net cash used in investing activities |
(164,715 | ) | (46,334 | ) | (89,390 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Payment on Senior Loan Agreement— Non Convertible Loan |
(49,500 | ) | ||||||||||
Payments on convertible loan |
(25,000 | ) | ||||||||||
Payments on term loan |
(100,000 | ) | ||||||||||
Payments of capital lease obligations |
(624 | ) | (611 | ) | (720 | ) | ||||||
Net increase (decrease) in revolving credit facility |
17,000 | (52,000 | ) | 15,000 | ||||||||
Proceeds from issuance of PIES |
143,750 | |||||||||||
Proceeds from the exercise of warrants |
31,500 | |||||||||||
Proceeds from exercise of stock options |
2,934 | 26,286 | 504 | |||||||||
Debt issuance costs |
(6,156 | ) | (3,576 | ) | (438 | ) | ||||||
Proceeds from sale of stock of subsidiary |
277,963 | |||||||||||
Net cash provided by financing activities |
138,904 | 123,062 | 14,346 | |||||||||
Net increase in cash and equivalents |
21,490 | 109,473 | 15,032 | |||||||||
Cash and equivalents, beginning of year |
138,731 | 29,258 | 14,226 | |||||||||
Cash and equivalents, end of year |
$ | 160,221 | $ | 138,731 | $ | 29,258 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-7
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations
Retail Ventures, Inc. (“Retail Ventures” or “RVI”) and its wholly-owned subsidiaries and
majority-owned subsidiary are herein referred to collectively as the “Company”. The Company
operates four segments in the United States of America (“United States”). Value City Department
Stores LLC (“Value City”) and Filene’s Basement, Inc. (“Filene’s Basement”) segments are off-price
retailers. DSW Inc. (“DSW”) segment is a specialty branded footwear retailer. The Corporate segment
consists of all revenue and expenses related to the corporate entities that are not allocated to
the other segments. As of February 3, 2007, there were a total of 113 Value City stores located
principally in the Midwest, mid-Atlantic and southeastern United States, 223 DSW stores located in
major metropolitan areas throughout the United States and 31 Filene’s Basement stores located in
major metropolitan areas in the northeast and midwest. DSW also supplies shoes, under supply
arrangements, for 330 locations for other non-related retailers in the United States.
In October 2003, the Company reorganized its corporate structure into a holding company form
whereby Retail Ventures, Inc., an Ohio corporation, became the successor issuer to Value City
Department Stores, Inc. As a result of the reorganization, Value City Department Stores, Inc.
became a wholly-owned subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of Value City became holders of an
identical number of common shares of Retail Ventures, Inc. The reorganization was affected by a
merger which was previously approved by the Company’s shareholders. Since October 2003, the
Company’s common shares have been listed for trading under the ticker symbol “RVI” on the New York
Stock Exchange.
In December 2004, the Company completed another corporate reorganization whereby Value City
Department Stores, Inc. merged with and into Value City Department Stores LLC, another wholly-owned
subsidiary of Retail Ventures. In turn, Value City Department Stores LLC transferred all the issued
and outstanding shares of DSW and Filene’s Basement to Retail Ventures in exchange for a promissory
note.
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 February 3,
2007, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.0% 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 $65.5 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 December 2006 the Company announced that it is exploring strategic alternatives for the Value
City operations, including a possible sale of the division. RVI has retained financial advisors to
assist in this effort to enhance shareholder value. The Company also stated that there can be no
assurance that this process will result in any specific transaction.
Principles of Consolidation
The consolidated financial statements include the accounts of Retail Ventures, Inc., its
wholly-owned subsidiaries and its majority-owned subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest to January 31. Fiscal year 2006 contains 53
weeks while fiscal years 2005 and 2004 each contain 52 weeks. Unless otherwise stated, references
to years in this report relate to fiscal years rather than calendar years.
Use of Estimates
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 contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting period. Significant
estimates are required as a part of inventory valuation, depreciation, amortization, recoverability
of long-lived assets, establishing reserves for
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RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance, calculating retirement benefits and derivative valuations. Although these estimates are
based on management’s knowledge of current events and actions it may undertake in the future,
actual results could differ from these estimates.
Cash and Equivalents
Cash and equivalents represent cash, highly liquid investments with original maturities of three
months or less at the date of purchase and credit card receivables which generally settle within
three days to be cash equivalents.
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 33 to 182 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. As of February 3, 2007, the Company held $98.7 million in short-term
investments and at January 28, 2006, the Company had no short-term investments.
Accounts Receivable, Net
Accounts receivable is classified as current assets because the average collection period is
generally less than one year. The carrying amount approximates fair value because of the relatively
short average maturity of the instruments and no significant change in interest rates. The
allowance for doubtful accounts was $0.7 million and $0.4 million at February 3, 2007 and January
28, 2006, respectively.
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 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 the 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 the
merchandise is marked down prior to sale. Reserves to value inventory at the lower of cost or
market were $44.4 million and $43.1 million at the end of fiscal year 2006 and 2005, respectively.
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.
Pre-Opening Expenses
Pre-opening costs associated with the opening of new stores are expensed as incurred for stores
opened during the fiscal year and those under construction and to be opened in future fiscal years.
Pre-opening costs expensed were $9.7 million, $8.4 million
and $14.4 million for fiscal 2006, 2005
and 2004, respectively. During these respective periods we opened 29 DSW and five Filene’s Basement
stores in 2006, 29 DSW and one Filene’s Basement store in 2005 and 31 DSW and five Filene’s
Basement stores in 2004.
Property and Equipment
Depreciation and amortization are recognized principally on the straight line method in amounts
adequate to amortize costs over the estimated useful lives of the respective assets. Leasehold
improvements are amortized over the shorter of their useful lives (10 years) or initial lease term.
The estimated useful lives by class of asset are:
Buildings |
31 years | |||
Furniture, fixtures and equipment |
3 to 10 years | |||
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RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Impairment and Long-Lived Assets
The Company must periodically evaluate the carrying amount of its 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 from the asset. The Company’s review is conducted at the lowest identifiable level, which
includes a store. The impairment loss recognized is the excess of the carrying value of the asset
over its fair value, based on discounted future cash flows. The impairment loss is included in
selling, general and administrative expense. Assets acquired for stores that have been previously
impaired are not capitalized when acquired if the store’s expected future cash flow remains
negative.
Impairment charges by segment, excluding goodwill, are as follows (in thousands):
| Fiscal Year | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Value City |
$ | 2,043 | ||||||||||
DSW |
$ | 832 | $ | 234 | 833 | |||||||
Filene’s Basement |
273 | |||||||||||
| $ | 832 | $ | 507 | $ | 2,876 | |||||||
Store Closings
During fiscal 2006, the Company recorded additional reserves for the closing of five DSW
stores. The operating lease at one of the five 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
balance at February 3, 2007 includes the liability for a closed store lease which is in effect
through September of 2017.
The table below sets forth the significant components and activity related to these closing
reserves (in thousands):
| Balance at | ||||||||||||||||||||
| 1/28/06 | Related Charges | Payments | Adjustments | Balance at 2/3/07 | ||||||||||||||||
Employee severance and termination benefits |
$ | 277 | $ | 56 | $ | (333 | ) | $ | ||||||||||||
Lease Costs |
2,130 | 1,104 | (1,601 | ) | $ | 233 | 1,866 | |||||||||||||
Other |
— | 64 | (64 | ) | ||||||||||||||||
Total |
$ | 2,407 | $ | 1,224 | $ | (1,998 | ) | $ | 233 | $ | 1,866 | |||||||||
| Balance at | ||||||||||||||||||||
| 1/29/05 | Related Charges | Payments | Adjustments | Balance at 1/28/06 | ||||||||||||||||
Employee severance and termination benefits |
$ | 599 | $ | 277 | $ | (599 | ) | $ | $ | 277 | ||||||||||
Lease Costs |
674 | 4,892 | (3,436 | ) | 2,130 | |||||||||||||||
Other |
39 | 307 | (346 | ) | — | |||||||||||||||
Total |
$ | 1,312 | $ | 5,476 | $ | (4,381 | ) | $ | $ | 2,407 | ||||||||||
Goodwill
Goodwill represents the excess cost over the estimated fair values of net assets including
identifiable intangible assets of businesses acquired. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, the Company does not record goodwill amortization but it is
subject to annual testing.
During fiscal 2004, based on the results of the annual impairment tests in accordance with SFAS No.
142, the Company recorded a non-cash impairment charge relating to the goodwill on Filene’s
Basement of $11.7 million ($6.9 million, net of taxes). At February 3, 2007 and January 28, 2006,
the Company had $25.9 million of goodwill. The carrying amount of Goodwill is evaluated based on
the market value of the DSW stock.
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RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tradenames and Other Intangible Assets
Tradenames and other intangibles assets are comprised of values assigned to names the Company
acquired and leases acquired. The accumulated amortization for these assets is $30.5 million and
$26.3 million at February 3, 2007 and January 28, 2006, respectively. During fiscal 2004, the
Company acquired the “Leslie Fay” tradename for approximately $4.1 million. The anticipated life of
the amortizing asset has been initially assigned 15 years. The asset value and accumulated
amortization of intangible assets is as follows (in thousands):
| Filene’s | ||||||||||||||||
| Value City | DSW | Basement | Total | |||||||||||||
As of February 3, 2007 |
||||||||||||||||
Tradenames: |
||||||||||||||||
Gross amount |
$ | 5,211 | $ | 12,750 | $ | 9,900 | $ | 27,861 | ||||||||
Accumulated amortization |
(1,484 | ) | (7,438 | ) | (4,565 | ) | (13,487 | ) | ||||||||
Useful life (in years) |
15 | 15 | 15 | |||||||||||||
Favorable lease values: |
||||||||||||||||
Gross amount |
$ | 14,417 | $ | 140 | $ | 23,057 | $ | 37,614 | ||||||||
Accumulated amortization |
(6,316 | ) | (98 | ) | (10,598 | ) | (17,012 | ) | ||||||||
Useful life (in years) |
25 | 14 | 21 | |||||||||||||
As of January 28, 2006 |
||||||||||||||||
Tradenames: |
||||||||||||||||
Gross amount |
$ | 5,211 | $ | 12,750 | $ | 9,900 | $ | 27,861 | ||||||||
Accumulated amortization |
(1,134 | ) | (6,587 | ) | (3,905 | ) | (11,626 | ) | ||||||||
Useful life (in years) |
15 | 15 | 15 | |||||||||||||
Favorable lease values: |
||||||||||||||||
Gross amount |
$ | 14,417 | $ | 140 | $ | 23,057 | $ | 37,614 | ||||||||
Accumulated amortization |
(5,715 | ) | (87 | ) | (8,830 | ) | (14,632 | ) | ||||||||
Useful life (in years) |
25 | 14 | 21 | |||||||||||||
Aggregate amortization expense for the current and each of the five succeeding years is as follows
(in thousands):
| Filene’s | ||||||||||||||||
| Fiscal Year | Value City | DSW | Basement | Total | ||||||||||||
2006 |
$ | 952 | $ | 861 | $ | 2,428 | $ | 4,241 | ||||||||
2007 |
952 | 854 | 2,428 | 4,234 | ||||||||||||
2008 |
948 | 854 | 2,428 | 4,230 | ||||||||||||
2009 |
938 | 854 | 1,624 | 3,416 | ||||||||||||
2010 |
930 | 854 | 1,624 | 3,408 | ||||||||||||
2011 |
915 | 854 | 1,625 | 3,394 | ||||||||||||
Self-insurance Reserves
The Company records 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. The 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 two months claims cost and the number of
associates employed. Workers’ compensation and general liability estimates are calculated
semi-annually, with the assistance of an actuary, utilizing claims development estimates based on
historical experience and other factors. The Company has purchased stop loss insurance to limit its
exposure to any significant exposure on a per person basis for health and welfare and on a per
claim basis for workers compensation and general liability. Although the Company does not
anticipate the amounts ultimately paid will differ significantly from the 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 at February 3, 2007, by
$0.4 million and $0.1 million, respectively. The self-insurance reserves were $17.5 million and
$17.6 million at the end of fiscal 2006 and 2005, respectively.
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RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Revenues from merchandise sales are recognized at the point of sale, net of returns and exclude
sales tax. Layaway sales are recognized when the merchandise has been paid for in full. Layaway was
discontinued at the end of fiscal 2004.
Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift card.
The Company did not recognize income during these periods from unredeemed stored value cards. The
Company will continue to review its historical activity and will recognize income from unredeemed
stored value cards when deemed appropriate.
Customer Loyalty Program
DSW maintains a customer loyalty program for the DSW stores in which program members receive a
discount on future purchases. Upon reaching the target-earned threshold, members
receive certificates for these discounts which must be redeemed within six months. During the third
quarter of fiscal 2006 DSW re-launched its loyalty program, which included changing: the name from
“Reward Your Style” to “DSW Rewards”, the points threshold to receive a certificate and the
certificate amounts. The changes were designed to improve customer awareness, customer loyalty and
DSW’s ability to communicate with its customers. DSW accrues the anticipated redemptions of the
discount earned at the time of the initial purchase. To estimate these costs, DSW is required to
make assumptions related to customer purchase levels and redemption rates based on historical
experience. The accrued
liability as of February 3, 2007 and January 28, 2006 was $5.0 million and $8.3 million,
respectively. Substantially all certificates under the “Reward Your Style” program expired on or
before January 31, 2007.
Advertising Expense
The cost of advertising is expensed as incurred. During fiscal years 2006, 2005 and 2004,
advertising expense was $116.1 million, $123.0 million and $112.5 million, respectively.
Derivative Financial Instruments
In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as
amended, the Company recognizes all derivatives on the balance sheet at fair value. For derivatives
that are not designated as hedges under SFAS No. 133, changes in the fair values are recognized in
earnings in the period of change. There were no derivatives designated as hedges outstanding as of
February 3, 2007 or January 28, 2006. The Company does not hold or issue derivative financial
instruments for trading purposes.
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.
During fiscal 2006 and 2005, the Company recorded a charge related to the change in the fair value
of its Warrants of $124.8 and $144.2 million, respectively. As of February 3, 2007 and January 28,
2006, the aggregate fair value liability recorded relating to both the term loan warrants and
conversion warrants was $216.4 million and $170.4 million, respectively.
During fiscal 2006, the Company recorded a charge related to the change in the fair value of the
conversion feature of the PIES of $51.1 million. The $62.8 million value ascribed to the
conversion feature of the PIES was estimated as of February 3, 2007 using the Black-Scholes Pricing
Model. The PIES were not outstanding during fiscal year ended January 28, 2006.
During the fiscal year 2004, the Company did not have derivative financial instruments that were
held or issued and accounted for as hedges of anticipated transactions and there were no
outstanding swap agreements.
Minority Interest
The minority interest liability represents the portion of DSW’s total shareholders’ equity owned by
unaffiliated investors in DSW. The minority interest percentage is computed by the ratio of shares
held by unaffiliated interests to total shares outstanding. Minority interest in the statement of
operations is calculated using the same ratio. In the statement of cash flows, the non-cash
minority interest represents the minority shareholders portion of DSW’s income as well as their
allocable portion of DSW equity transactions other than retained earnings.
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RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Basic earnings per share is based on the numerator of net loss and the denominator of weighted
average of common shares outstanding. Diluted earnings per share reflects the potential dilution of
common shares, related to outstanding stock options, stock appreciation rights and warrants,
calculated using the treasury stock method and convertible debt calculated using the if-converted
method. For the years ended February 3, 2007, January 28, 2006 and January 29, 2005, all
potentially dilutive instruments were anti-dilutive.
There were securities outstanding at February 3, 2007, January 28, 2006 and January 29, 2005 that
were anti-dilutive and, therefore, were not included in the computation of diluted earnings per
share. The total number of securities outstanding that were not included in the computation of
dilutive earnings per share for the periods presented are as follows (in thousands):
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Stock Options |
1,335 | 1,782 | 7,714 | |||||||||
SARS |
978 | 1,308 | 1,998 | |||||||||
Term loan warrants |
4,413 | 4,413 | 2,955 | |||||||||
Conversion warrants |
9,667 | 16,667 | ||||||||||
Convertible debt |
16,667 | |||||||||||
Total of all potentially dilutive instruments |
16,393 | 24,170 | 29,334 | |||||||||
Stock-Based Compensation
For purposes of applying the provisions of SFAS No. 123(R), the fair value of options granted is
estimated on the date of grant using the Black-Scholes option pricing model. See Note 3 for a
detailed discussion of stock-based compensation.
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and distributions to
owners. The Company presents other comprehensive loss in its consolidated statements of
shareholders’ equity.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“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 Company’s
results of operations is presented in Note 3.
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 did not impact 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
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RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
statement may have on its consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements which defines
fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about
fair value measurements. The intent of this standard is to ensure consistency and comparability in
fair value measurements and enhanced disclosures regarding the measurements. This statement is
effective for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company is currently evaluating the impact this statement may have on its
consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans- an amendment of FASB Statements No. 87, 88, 106,
and 132(R), (“SFAS No. 158”) which requires an employer to recognize the overfunded or underfunded
status of a defined benefit post-retirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in which the changes
occur through comprehensive income of a business entity. This statement also requires the employer
to measure the funded status of the plan as of the date of its year-end statement of financial
position. The employer still must disclose any additional information about certain effects of net
periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or
losses, prior service costs or credits, and transition asset or obligation in the notes to
financial statements. The adoption of SFAS 158 at February 3,
2007 decreased the Company’s assets
by $3.2 million, decreased its liabilities by $8.4 million and increased shareholders’
equity by $5.2 million. These changes to the Company’s financial statements were non-cash and have
no impact on the Company’s existing debt covenants, credit ratings or financial flexibility.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB
108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration
when quantifying misstatements in current year financial statements for purposes of determining
whether the current year’s financial statements are materially misstated. SAB 108 is effective for
fiscal years ending after November 15, 2006. The adoption of SAB 108 did not impact the Company’s
financial condition, results of operations or cash flows.
In June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue
No. 06-3, How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That Is, Gross Versus Net Presentation) (“EITF No. 06-3”).
EITF No. 06-3 indicates that a company may adopt a policy of presenting taxes within the scope of
EITF No. 06-3 either gross within revenue or net. If taxes subject to EITF No. 06-3 are
significant, a company is required to disclose its accounting policy for presenting taxes and the
amounts of the taxes that are recognized on a gross basis. EITF No. 06-3 is effective for years
beginning after December 15, 2006, and the Company has already adopted EITF No. 06-3 in fiscal 2006
with no material impact. The Company presents sales taxes collected from customers on a net basis
and disclosed in “Critical Accounting Policies.”
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“FAS 159”). This statement allows entities to choose to measure financial
instruments and certain other financial assets and financial liabilities at fair value. FAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating
the impact this statement may have on its consolidated financial statements.
2. RELATED PARTY TRANSACTIONS
The Company purchases merchandise from affiliates of Shottenstein Stores Corporation (‘SSC’), the
direct owner of approximately 40.7% of the common shares of Retail Ventures. The amount of
purchases from related parties in fiscal 2006, fiscal 2005 and fiscal
2004 were $4.8 million, $4.4
million and $4.7 million, respectively.
The Company also leases certain store and warehouse locations owned by SSC as described in Note 5.
Accounts receivable from and payable to affiliates principally result from commercial transactions
with entities owned or controlled by SSC or intercompany transactions with SSC. Settlement of
affiliate receivables and payables are in the form of cash. These transactions settle normally in
30 to 60 days. The Company shares certain personnel, administrative and service costs with SSC and
its affiliates. The costs of providing these services are allocated among the Company, SSC and its
affiliates without a premium. The allocated amounts are not significant. SSC does not charge the
Company for general corporate management services. In the opinion of
the Company and SSC management, the aforementioned charges are reasonable. SSC provides certain
real estate services to the Company for which the Company expensed $0.6 million in fiscal 2006.
F-14
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s participation in SSC’s self-insurance program for general liability, casualty loss
and certain state workers’ compensation programs ended in fiscal 2004. Estimates for self-insured
programs are determined by independent actuaries based on actuarial assumptions, which incorporate
historical incurred claims and incurred but not reported (IBNR) claims.
Cerberus, as a beneficial owner of approximately 5.9% of the outstanding common shares of Retail
Ventures, is also a related party.
See Notes 5, 6 and 8 to the consolidated financial statements for additional related party
disclosures.
3. 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 year ended February 3, 2007 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 selling,
general and administrative expenses in the 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 Consolidated Statements
of Cash Flows. During the year ended January 28, 2006, there were no tax benefits. Beginning in
fiscal 2006 with the adoption of SFAS No. 123R, the cash flows resulting from the tax benefits
resulting from tax deductions in excess of compensation expense recognized for those options
(excess tax benefits) are 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 Consolidated Statements of Operations. RVI recognizes compensation expense for stock option
awards granted subsequent to the adoption of SFAS No. 123R and time-based restricted stock awards
on a straight-line basis over the requisite service period of the award. Compensation expense for
stock option awards granted prior to the adoption of SFAS No. 123R is recorded using an accelerated
method.
Retail Ventures Stock Compensation Plans
The Company 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 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.
The Company 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
and remain exercisable for a period of ten years from the date of grant.
During fiscal 2006, the Company recorded stock based compensation expense of approximately $4.1
million, which includes approximately $3.4 million of expenses recorded by DSW. The following
table presents the unfavorable impact of adoption of SFAS
No. 123R on the Company’s loss before income taxes and minority interest, minority interest, net
loss and basic and diluted earnings per share for the year ended February 3, 2007:
F-15
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Share-based | ||||
| (in thousands, except per share amounts) | compensation expense | |||
Loss before income taxes and minority interest |
$ | (4,050 | ) | |
Minority interest |
(768 | ) | ||
Net loss |
$ | (1,557 | ) | |
Loss per share |
||||
Basic |
$ | (0.03 | ) | |
Diluted |
$ | (0.03 | ) | |
The following table illustrates the pro forma effect on net loss and loss per share for the fiscal
year 2005 and 2004 if the Company had applied the fair value recognition of SFAS No. 123 (in
thousands):
| January 28, | January 29, | |||||||
| 2006 | 2005 | |||||||
Net loss, as reported |
$ | (183,418 | ) | $ | (19,448 | ) | ||
Add: Stock-based employee compensation
expense included in reported net loss,
net of tax |
4,698 | 391 | ||||||
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards |
(5,748 | ) | (2,773 | ) | ||||
Pro forma net loss |
$ | (184,468 | ) | $ | (21,830 | ) | ||
Loss per share: |
||||||||
Basic and diluted as reported |
$ | (4.75 | ) | $ | (0.57 | ) | ||
Basic and diluted pro forma |
$ | (4.78 | ) | $ | (0.64 | ) | ||
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 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.
| Fiscal year ended | |||||||||||||||
| February 3, | January 28, | January 29, | |||||||||||||
| 2007 | 2006 | 2005 | |||||||||||||
Assumptions |
|||||||||||||||
Risk-free interest rate |
4.6 | % | 4.3 | % | 4.1 | % | |||||||||
Expected volatility of Retail
Ventures Common Shares |
62.5 | % | 71.8 | % | 72.5 | % | |||||||||
Expected option term |
4.8 | years | 4.5 | years | 5.4 | years | |||||||||
Expected dividend yield |
0.0 | % | 0.0 | % | 0.0 | % | |||||||||
The weighted-average grant date fair value of each option granted in fiscal 2006, 2005 and 2004 was
$9.18 per share, $6.34 per share and $5.07 per share, respectively.
F-16
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company’s stock option plans, related Weighted Average Exercise
Prices (“WAEP”) and Weighted Average Remaining Contract Life (“WARCL”) (shares and aggregate
intrinsic value in thousands):
| February 3, 2007 | ||||||||
| Shares | WAEP | |||||||
Outstanding beginning of year |
1,782 | $ | 5.81 | |||||
Granted |
50 | 15.78 | ||||||
Exercised |
(406 | ) | 7.22 | |||||
Canceled |
(91 | ) | 8.23 | |||||
Outstanding end of year |
1,335 | $ | 5.59 | |||||
Options exercisable end of year |
1,089 | $ | 5.76 | |||||
Shares available for additional grants |
5,626 | |||||||
| As of February 3, 2007 | ||||||||||||||||
| Aggregate | ||||||||||||||||
| Intrinsic | ||||||||||||||||
| Shares | WAEP | WARCL | Value | |||||||||||||
Options outstanding |
1,335 | $ | 5.59 | 5 years | $ | 19,495 | ||||||||||
Options vested or expected to vest |
1,316 | $ | 5.60 | 5 years | $ | 19,216 | ||||||||||
Options exercisable |
1,089 | $ | 5.76 | 5 years | $ | 15,729 | ||||||||||
Shares available for additional grants |
5,626 | |||||||||||||||
The aggregate intrinsic value is calculated as the amount by which the fair value of the underlying
common shares exceeds the option exercise price. Total intrinsic value of options exercised during
fiscal 2006 and 2005 was $3.5 million and $28.6 million, respectively.
The following table summarizes the status of the Company’s nonvested awards for the year ended
February 3, 2007 (shares in thousands):
| Fiscal year ended February 3, 2007 | ||||||||
| Weighted-Average | ||||||||
| Grant Date Fair | ||||||||
| Shares | Value | |||||||
Nonvested beginning of period |
934 | $ | 2.47 | |||||
Granted |
50 | $ | 9.18 | |||||
Vested |
(697 | ) | $ | 2.78 | ||||
Forfeited/Cancelled |
(41 | ) | $ | 3.10 | ||||
Nonvested end of period |
246 | $ | 2.87 | |||||
As of fiscal 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 1.5 years. The total
fair value of options that vested during fiscal 2006 was $1.9 million.
The following table summarizes information about options outstanding and exercisable as of February
3, 2007 (shares in thousands):
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Prices | Shares | WARCL | WAEP | Shares | WAEP | |||||||||||||||
$1.63 — $4.49 |
391 | 6 years | $ | 2.14 | 229 | $ | 2.16 | |||||||||||||
$4.50 — $10.00 |
771 | 5 years | $ | 5.44 | 725 | $ | 5.48 | |||||||||||||
$10.01 — $22.00 |
173 | 6 years | $ | 14.07 | 135 | $ | 13.31 | |||||||||||||
F-17
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
SARS generally vest ratably over five years although some of the more recent grants vest over a
three year period with 50% vesting at the end of the third year. The exercise price is equal to
the fair market value on the date of the grant. Compensation costs of $9.5 million, $7.5 million
and $0.6 million were expensed during fiscal 2006, fiscal 2005, and fiscal 2004, respectively,
relating to SARS. The amount of SARS accrued at February 3, 2007 and January 28, 2006 was $7.0
million and $3.8 million, respectively. Included in the SARS expense for fiscal 2006 and fiscal
2005 are expenses relating to the accelerated vesting of some performance based SARS. During
fiscal 2006 approximately $5.8 million was paid to settle exercised SARS.
The following table summarizes information about the Company’s SARS for the year ended February 3,
2007 (shares in thousands):
| Fiscal year ended February 3, 2007 | ||||||||
| Shares | WAEP | |||||||
Outstanding beginning of period |
1,318 | $ | 6.61 | |||||
Granted |
345 | $ | 14.78 | |||||
Exercised |
(644 | ) | $ | 6.15 | ||||
Forfeited |
(41 | ) | $ | 13.88 | ||||
Outstanding end of period |
978 | $ | 9.49 | |||||
Exercisable end of period |
135 | $ | 7.53 | |||||
| Fiscal year ended February 3, 2007 | ||||
| Shares | ||||
Nonvested beginning of period |
1,286 | |||
Granted |
345 | |||
Vested |
(747 | ) | ||
Forfeited/Cancelled |
(41 | ) | ||
Nonvested end of period |
843 | |||
Restricted Stock Units
The Company issues restricted stock units to certain executives of the Company. The restricted
stock units issued by Retail Ventures, generally vest over three years, one-third per year and are
settled immediately upon vesting. The restricted stock units are settled only in cash in an amount
equal to the fair market value of an equivalent number of the Company’s common stock on the date of
vesting. The restricted stock units provide that no shares of the Company’s common stock will be
issued, authorized, reserved, purchased or sold at any time in connection with the restricted stock
units. The restricted stock units are under no circumstances considered shares of common stock, nor do they entitle the holder of the restricted stock units to the exercise of
any other rights arising from the ownership of shares of common stock, including dividend and
voting rights.
Total compensation expense costs recognized related to the restricted stock units in fiscal 2006,
fiscal 2005 and fiscal 2004 was $2.8 million, $3.3 million and $0.5 million, respectively. The
amount of restricted stock units accrued at February 3, 2007 and January 28, 2006 was $2.3 million
and $2.0 million, respectively. The Company paid $2.5 million and $1.8 million to settle vested
restricted stock units in fiscal 2006 and fiscal 2005 respectively. No restricted stock units
vested during fiscal 2004.
F-18
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company’s outstanding restricted stock units for fiscal 2006
(units in thousands):
| Fiscal year ended | ||||
| February 3, 2007 | ||||
| Units | ||||
Outstanding beginning of period |
300 | |||
Granted |
35 | |||
Vested |
(160 | ) | ||
Forfeited |
(5 | ) | ||
Outstanding end of period |
170 | |||
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.
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 three similar companies’ stocks, due
to the relative short historical trading history of the DSW Common Shares. The expected dividend
yield 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.
| Fiscal year ended | ||||||||
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Assumptions
Risk-free interest rate |
4.6 | % | 4.1 | % | ||||
Expected volatility of DSW common stock |
39.9 | % | 42.3 | % | ||||
Expected option term |
4.8 years | 5.0 years | ||||||
Expected dividend yield |
0.0 | % | 0.0 | % | ||||
The weighted-average grant date fair value of each option granted during fiscal 2006 and 2005 was
$13.01 per share and $8.40 per share, respectively. There were no DSW options in fiscal 2004.
The following table summarizes DSW’s stock option plan and related WAEP and WARCL (shares and
aggregate intrinsic value in thousands):
| February 3, 2007 | ||||||||
| Shares | WAEP | |||||||
Outstanding beginning of year |
914 | $ | 19.54 | |||||
Granted |
270 | $ | 30.05 | |||||
Exercised |
(31 | ) | $ | 19.12 | ||||
Canceled |
(69 | ) | $ | 20.07 | ||||
Outstanding end of year |
1,084 | $ | 22.14 | |||||
Options exercisable end of year |
186 | $ | 19.51 | |||||
Shares available for additional grants |
3,314 | |||||||
F-19
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| As of February 3, 2007 | ||||||||||||||||
| Aggregate | ||||||||||||||||
| Intrinsic | ||||||||||||||||
| Shares | WAEP | WARCL | Value | |||||||||||||
Options outstanding |
1,084 | $ | 22.14 | 9 years | $ | 20,466 | ||||||||||
Options vested or expected to vest |
1,017 | $ | 22.10 | 9 years | $ | 19,245 | ||||||||||
Options exercisable |
186 | $ | 19.51 | 8 years | $ | 3,998 | ||||||||||
Shares available for additional grants |
3,314 | |||||||||||||||
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 fiscal 2006 was $0.5 million.
The following table summarizes the status of DSW’s nonvested awards for the year ended February 3,
2007 (shares in thousands):
| Fiscal year ended February 3, 2007 | ||||||||
| Weighted-Average | ||||||||
| Grant Date Fair | ||||||||
| Shares | Value | |||||||
Nonvested beginning of period |
884 | $ | 8.41 | |||||
Granted |
270 | $ | 13.01 | |||||
Vested |
(187 | ) | $ | 8.40 | ||||
Forfeited/Cancelled |
(69 | ) | $ | 8.64 | ||||
Nonvested end of period |
898 | $ | 9.78 | |||||
As of February 3, 2007, the total compensation cost related to nonvested options not yet recognized
was approximately $4.7 million with a weighted average expense recognition period remaining of 3.7
years. The total fair value of options that vested during fiscal 2006 was $1.6 million.
The following table summarizes information about DSW stock options outstanding and exercisable as
of February 3, 2007 (shares in thousands):
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Range of Exercise Prices | Shares | WARCL | WAEP | Shares | WAEP | |||||||||||||||
$19.00 — $20.00 |
738 | 8 years | $ | 19.00 | 170 | $ | 19.00 | |||||||||||||
$20.01 — $25.00 |
70 | 9 years | 24.54 | 14 | $ | 24.55 | ||||||||||||||
$25.01 — $30.00 |
167 | 9 years | 27.93 | 2 | $ | 26.84 | ||||||||||||||
$30.01 — $35.00 |
79 | 9 years | 31.84 | |||||||||||||||||
$35.01 — $36.00 |
30 | 9 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 February 3, 2007
was $5.5 million and the weighted average remaining contractual life was three years. As of
February 3, 2007, the total compensation cost related to nonvested restricted stock units not yet
recognized was approximately $2.1 million with a weighted average expense recognition period
remaining of 2.3 years.
F-20
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes DSW’s restricted stock units for the year ended February 3, 2007
(units in thousands):
| Fiscal Year ended February 3, 2007 | ||||||||
| Weighted-Average | ||||||||
| Grant Date Fair | ||||||||
| Units | Value | |||||||
Outstanding beginning of period |
131 | $ | 20.46 | |||||
Granted |
23 | $ | 30.91 | |||||
Vested |
(10 | ) | $ | 24.85 | ||||
Forfeited |
(9 | ) | $ | 19.00 | ||||
Outstanding end of period |
135 | $ | 22.03 | |||||
Director Stock Units
DSW issues stock units to directors of DSW who are not employees of DSW or Retail Ventures. During
fiscal 2006 and 2005, DSW granted 10,525 and 17,013 director stock units, respectively, and
expensed $0.3 million and $0.4 million, respectively, 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 the director’s
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
their 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 director stock
units vest immediately, they are considered outstanding and included in our calculation of basic
earnings per share. As of February 3, 2007 27,538 DSW director stock units had been issued and no
DSW director stock units had been settled.
4. INVESTMENTS
During the year ended February 3, 2007, $188.2 million of cash, respectively, was used to purchase
available-for-sale securities while $89.6 million of cash, respectively, was generated by the sale
of available-for-sale securities. As of February 3, 2007, the Company held $98.7 million in
short-term investments and at January 28, 2006, the Company had no short-term investments. Because
the fair value approximates the cost, there are no accumulated unrealized holding gains or losses
in other comprehensive income from these investments.
5. LEASES
The Company leases stores and warehouses under various arrangements with related and unrelated
parties. Such leases expire through 2024 and in most cases provide for renewal options. Generally,
the Company is required to pay real estate taxes, maintenance, insurance and contingent rentals
based on sales in excess of specified levels. The Company subleases space in a number of its
facilities to related and unrelated parties. The total amount of income recorded for these
subleases were $5.8 million, $3.4 million and $1.9 million in fiscal 2006, 2005 and 2004,
respectively.
The Company has several leasing agreements with SSC and affiliates of SSC. Under a Master Lease
Agreement, as amended, the Company leases four store locations owned by SSC, and also leases or
subleases from SSC or affiliates of SSC 42 store locations, four warehouse facilities, one office
space and a parcel of land for an annual minimum rent of $25.5 million and additional contingent
rents based on aggregate sales in excess of specified sales trends for the store locations. Leases
and subleases with related parties are for initial periods generally ranging from five to twenty
years, provide for renewal options and require the Company to pay real estate taxes, maintenance
and insurance.
SSC operates a chain of furniture stores, five of which operate in separate space subleased from
the Company at five of its Value City store locations. Three of these furniture store subleases
(the “Furniture Subleases”) are for a term concurrent with the respective lease between the Company
and a third party landlord. These Furniture Subleases provide for the payment by SSC of base rent
and other charges in amounts at least equal to its pro rata share based on square footage and its
pro rata share of any percentage rent based on its gross sales. Two additional furniture store
subleases are for periods shorter than the Company’s lease.
F-21
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SSC paid to the Company pursuant to these subleases the following (in thousands):
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Minimum rentals |
$ | 694 | $ | 694 | $ | 694 | ||||||
Contingent rentals |
420 | 473 | 641 | |||||||||
Total |
$ | 1,114 | $ | 1,167 | $ | 1,335 | ||||||
The total cost of assets held under capital leases was $32.3 million both at February 3, 2007 and
January 28, 2006. Assets held under capital leases are amortized over the terms of the related
leases. The accumulated depreciation for these assets was $10.8 million and $9.4 million at
February 3, 2007 and January 28, 2006, respectively. During fiscal 2005 Value City recorded a
pre-tax gain on a terminated capital lease of approximately $9.5 million, related to a store that
closed on January 28, 2006. Included in the amount of the gain are amounts received from the lessor
to terminate the lease, the write-off of fixed assets, including the capital lease, store closing
costs and the remaining capital lease obligation.
Future minimum lease payments required under the aforementioned leases, exclusive of real estate
taxes, insurance and maintenance costs, at February 3, 2007 are as follows (in thousands):
| Operating Leases | ||||||||||||||||
| Unrelated | Related | Capital | ||||||||||||||
| Fiscal Year | Total | Party | Party | Leases | ||||||||||||
2007 |
$ | 189,496 | $ | 164,013 | $ | 25,483 | $ | 3,448 | ||||||||
2008 |
185,735 | 161,297 | 24,438 | 3,504 | ||||||||||||
2009 |
175,505 | 151,795 | 23,710 | 3,518 | ||||||||||||
2010 |
162,853 | 140,452 | 22,401 | 3,657 | ||||||||||||
2011 |
147,345 | 125,944 | 21,401 | 3,632 | ||||||||||||
Future Years |
674,522 | 536,027 | 138,495 | 36,910 | ||||||||||||
Total minimum lease payments |
$ | 1,535,456 | $ | 1,279,528 | $ | 255,928 | 54,669 | |||||||||
Less amount representing interest |
(26,674 | ) | ||||||||||||||
Present value of minimum lease payments |
27,995 | |||||||||||||||
Less current portion |
(765 | ) | ||||||||||||||
Total long-term portion |
$ | 27,230 | ||||||||||||||
The composition of rental expense was as follows (in thousands):
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Minimum rentals: |
||||||||||||
Unrelated parties |
$ | 140,015 | $ | 132,692 | $ | 117,770 | ||||||
Related parties |
20,809 | 21,156 | 24,549 | |||||||||
Contingent rentals: |
||||||||||||
Unrelated parties |
20,289 | 20,776 | 17,746 | |||||||||
Related parties |
10 | 69 | 111 | |||||||||
Total |
$ | 181,123 | $ | 174,693 | $ | 160,176 | ||||||
Many of the Company’s leases contain fixed escalations of the minimum annual lease payments during
the original term of the lease. For these leases, the Company recognizes rental expense on a
straight-line basis and records the difference between the average rental amount charged to expense
and the amount payable under the lease as deferred rent. At the end of fiscal 2006 and 2005, the
balance of deferred rent was $36.5 million and $31.5 million, respectively, and is included in
other noncurrent liabilities. Certain store and warehouse leases provided landlord incentives
totaling $57.4 million and $44.3 million in fiscal 2006 and 2005, respectively. These incentives
are recorded as other noncurrent liabilities in the accompanying consolidated balance sheet and are
amortized as a reduction of rent expense over the remaining minimum lease term.
F-22
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG TERM OBLIGATIONS
Long term obligations consist of the following (in thousands):
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Credit facilities: |
||||||||
Revolving credit facilities |
$ | 105,000 | $ | 88,000 | ||||
Senior Loan Agreement — related parties |
500 | 50,000 | ||||||
PIES |
143,750 | |||||||
Discount on PIES |
(10,697 | ) | ||||||
| 238,553 | 138,000 | |||||||
Capital lease obligations |
27,995 | 28,618 | ||||||
| 266,548 | 166,618 | |||||||
Less current maturities |
(765 | ) | (623 | ) | ||||
| $ | 265,783 | $ | 165,995 | |||||
Letters of credit outstanding: |
||||||||
RVI revolving credit facilities |
$ | 19,355 | $ | 19,019 | ||||
DSW revolving credit facilities |
$ | 13,448 | $ | 13,577 | ||||
Availability under revolving credit facilities: |
||||||||
RVI revolving credit facilities |
$ | 66,838 | $ | 63,521 | ||||
DSW revolving credit facilities |
$ | 136,552 | $ | 136,423 | ||||
Accrued interest to related parties |
$ | 1,236 | ||||||
On June 11, 2002, Value City Department Stores, Inc., together with certain other principal
subsidiaries of Retail Ventures, entered into a refinancing that consisted of three separate credit
facilities (collectively, the “Prior Credit Facilities”): (i) a three-year $350 million revolving
credit facility (subsequently increased to $425 million), (the “June 2002 Revolving Credit
Facility”), (ii) two $50 million term loan facilities (collectively, the “Term Loans”) initially
provided equally by Cerberus Partners, L.P. (“Cerberus”) and SSC, and (iii) an amended and restated
$75 million senior subordinated convertible loan (the “Convertible Loan”), initially entered into
on March 15, 2000, which was held equally by Cerberus and SSC. Prior to their amendment in July
2005 discussed below, these Prior Credit Facilities were guaranteed by Retail Ventures and
substantially all of its subsidiaries, including DSW. These Prior Credit Facilities were also
subject to an Intercreditor Agreement, which provided for an established order of payment of
obligations from the proceeds of collateral upon default (the “Intercreditor Agreement”).
On July 5, 2005, Retail Ventures amended, or amended and restated, the Prior 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 each of which remained outstanding as of February 3, 2007: (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 wholly-owned 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 wholly-owned subsidiaries of Retail Ventures
(other than DSW and DSWSW) are co-guarantors.
On August 16, 2006, Retail Ventures issued $125 million of 6.625% Mandatorily Exchangeable Notes
due September 15, 2011, or PIES (Premium Income Exchangeable SecuritiesSM). On
September 15, 2006, Retail Ventures closed on the exercise by the sole underwriter of its entire
option to purchase an additional aggregate principal amount of $18,750,000 of PIES. RVI used a
portion the net proceeds of the offering to repay 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 the Non-Convertible Loan. The VCDS Revolving Loan, DSW Revolving Loan, Non-Convertible Loan and
PIES are sometimes referred to collectively as the “Credit Facilities.”
The Company is not subject to any financial covenants; however, the Prior 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.
F-23
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Credit Facilities are described more fully below:
Revolving Credit Facilities
$275 Million Secured Revolving Credit Facility — The VCDS Revolving Loan
Under the VCDS Revolving Loan, Filene’s Basement, Retail Ventures Jewelry, Inc. and certain of
Retail Ventures’ other 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 shares of DSW
owned by Retail Ventures. At February 3, 2007, $66.8 million was available under the VCDS Revolving
Loan. Direct borrowings aggregated $105.0 million and $19.4 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 at January 28, 2006 and $19.0 million in letters of
credit were issued and outstanding. The maturity date of the VCDS Revolving Loan is July 5, 2009.
$150 Million Secured Revolving Credit Facility — The DSW Revolving Loan
Under the DSW Revolving Loan, DSW and its wholly-owned subsidiary, DSWSW, are named as
co-borrowers. The DSW Revolving Loan is subject to a borrowing base restriction 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 February 3, 2007, $136.6 million was available under the DSW Revolving Loan and no direct
borrowings were outstanding. At February 3, 2007 and January 28, 2006, $13.4 million and $13.6
million, respectively in letters of credit were issued and outstanding. At January 28, 2006 $136.4
million was available under the DSW Revolving Loan and no direct borrowings were outstanding. The
maturity of the DSW Revolving Loan is July 5, 2010.
Term Loans — Related Parties
The principal balances of the Term Loans were repaid in full on July 5, 2005.
The Company issued 2,954,792 Term Loan Warrants to purchase RVI Common Shares, at an initial
exercise price of $4.50 per share, to Cerberus and SSC in connection with the one of the Term
Loans. 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 lenders registration rights with respect to the shares issuable upon exercise
of the Term Loan Warrants. The $6.1 million value ascribed to the Term Loan Warrants was estimated
as of the date of issuance using the Black-Scholes Pricing Model with the following assumptions:
risk-free interest rate of 5.6%; expected life of 10 years; expected volatility of 47%; illiquidity
discount of 10%; and an expected dividend yield of 0%. The related debt discount was amortized into
interest expense over the life of the debt.
Amendment to Term Loans
Pursuant to the July 2005 Fourth Amendment to Financing Agreement, (i) DSW was released from its
obligations as a co-borrower under the Term Loans, (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 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
F-24
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Covertible Loan — Related Parties
$75 Million Senior Subordinated Convertible Loan
As amended in 2002, borrowings under the Convertible Loan bore interest at 10% per annum. At our
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 2006, the Convertible Loan was guaranteed by all the Company’s principal subsidiaries and was
secured by a lien on assets junior to liens granted in favor of the lenders on the 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
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.
On August 16, 2006, the Non-Convertible Loan was amended and restated for a third time whereby the
Company (i) paid $49.5 million of the then aggregate $50.0 million outstanding balance, (ii)
secured the remaining $0.5 million balance with cash collateral accounts, (iii) pledged DSW Common
Shares sufficient for the exercise of the Conversion Warrants, and (iv) obtained a release of the
capital stock of DSW held by Retail Ventures used to secure the Non-Convertible Loan. The final
maturity date is the earlier of (i) June 10, 2009 or (ii) the date that the Conversion Warrants
held by the lenders, are exercised.
$143,750,000 Premium Income Exchangeable Securities
SM
(PIES)
On August 10, 2006, Retail Ventures announced the pricing of its 6.625% Mandatorily Exchangeable
Notes due September 15, 2011, or PIES (Premium Income Exchangeable SecuritiesSM) in the
aggregate principal amount of $125,000,000. The closing of the transaction took place on August 16,
2006. On September 15, 2006, Retail Ventures closed on the exercise by the sole underwriter of its
entire option to purchase an additional aggregate principal amount of $18,750,000 of PIES.
The $143,750,000 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 $50.00 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 maximum aggregate number of DSW Class A Common
F-25
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares deliverable upon exchange of the PIES is
5,244,575 DSW Class A Common Shares, subject to adjustment as provided in the PIES.
RVI used a portion of 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 $50.0 million
Non-Convertible Loan, together with fees and expenses. Restricted cash of $0.5 million is held for
the remaining balance of the Non-Convertible Loan. 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.
The embedded exchange feature of the PIES is accounted for as a derivative, which is recorded at
fair value with changes in fair value in the statement of operations. Accordingly, the accounting
for the embedded derivative addresses the variations in the fair value of the obligation to settle
the PIES when the market value exceeds or is less than the threshold appreciation price. The fair
value of the conversion feature at the date of issuance of $11.7 million was equal to the amount of
the discount of the PIES and will be amortized into interest expense over the term of the PIES.
During fiscal 2006, the Company recorded a charge related to the change in fair value of the
conversion feature of the PIES from the date of issuance to February 3, 2007 of $51.1 million. As
of February 3, 2007, the fair value liability recorded for the conversion feature was $62.8 million
as estimated using the Black-Scholes pricing model with the following assumptions: risk-free rate
of 5.2%, expected life of 4.6 years, expected volatility of 39.7% and an expected dividend yield of
0.0%.
Other Debt Items
The weighted average interest rate on borrowings under the Company’s credit facilities during
fiscal year 2006, 2005 and 2004 was 7.3%, 8.8% and 8.5%, respectively.
The book value of notes payable and long-term debt approximates fair value at February 3, 2007. The
carrying amount of the revolving line of credit approximates fair value as a result of the variable
rate-based borrowings. The carrying amount of the term loan and subordinated debt also approximates
fair value, as this was the available financing in the marketplace during the fiscal year.
At February 3, 2007, future annual long-term debt payments are as follows (in thousands):
| Fiscal Year | Amount | |||
2007 |
||||
2008 |
||||
2009 |
$ | 105,500 | ||
2010 |
||||
2011 |
143,750 | |||
Future Years |
||||
Total |
$ | 249,250 | ||
7. PENSION BENEFIT PLANS
The Company has three qualified defined benefit pension plans (“plans”) assumed at the time of
acquisition of three separate companies. The Company’s funding policy is to contribute annually the
amount required to meet ERISA funding standards and to provide not only for benefits attributed to
service to date but also for those anticipated to be earned in the future. The Company uses a
January 31 measurement date for its plans.
F-26
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides a reconciliation of projected benefit obligations, plan assets and funded
status of all plans for the years as noted below (in thousands):
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Change in projected benefit obligation: |
||||||||
Projected benefit obligation at beginning of year |
$ | 26,316 | $ | 26,588 | ||||
Service cost |
42 | 45 | ||||||
Interest cost |
1,449 | 1,464 | ||||||
Settlement (gain) or loss |
62 | |||||||
Benefits paid |
(1,260 | ) | (1,581 | ) | ||||
Settlement payments |
(296 | ) | ||||||
Actuarial loss |
(396 | ) | (200 | ) | ||||
Projected benefit obligation at end of year |
$ | 25,917 | $ | 26,316 | ||||
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Change in plan assets: |
||||||||
Fair market value at beginning of year |
$ | 22,680 | $ | 19,902 | ||||
Actual return on plan assets |
2,094 | 2,036 | ||||||
Employer contributions |
2,000 | 2,500 | ||||||
Benefits paid |
(1,260 | ) | (1,581 | ) | ||||
Settlement payments |
(296 | ) | ||||||
Other |
(205 | ) | (177 | ) | ||||
Fair market value at end of year |
$ | 25,013 | $ | 22,680 | ||||
Amounts recognized in the consolidated balance sheet consisted of (in thousands):
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Accrued benefit cost |
$ | (904 | ) | $ | (3,527 | ) | ||
Accumulated other comprehensive loss |
10,630 | |||||||
Net amount recognized |
$ | (904 | ) | $ | 7,103 | |||
The plan’s accumulated benefit obligation was $25.9 million at February 3, 2007, and $26.2 million
at January 28, 2006 (in thousands):
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Projected benefit obligation |
$ | 25,917 | $ | 26,316 | ||||
Accumulated benefit obligation |
25,854 | 26,208 | ||||||
Fair value of plan assets |
25,014 | 22,681 | ||||||
The components of net periodic benefit cost are comprised of the following for the years indicated
(in thousands):
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Service cost |
$ | 42 | $ | 45 | $ | 43 | ||||||
Interest cost |
1,449 | 1,464 | 1,401 | |||||||||
Expected return on plan assets |
(1,772 | ) | (1,571 | ) | (1,436 | ) | ||||||
Amortization of transition (asset) obligation |
(38 | ) | (38 | ) | (37 | ) | ||||||
Amortization of net loss |
585 | 700 | 580 | |||||||||
Net periodic benefit cost |
$ | 266 | $ | 600 | $ | 551 | ||||||
F-27
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amount included within accumulated other comprehensive loss arising from a change in the
additional minimum pension liability was $1.1 million at January 28, 2006 and $1.8 million at
January 29, 2005.
Of the amounts in accumulated other comprehensive income as of February 3, 2007, we expect the
following to be recognized as net pension costs in fiscal 2007 (in thousands):
Remaining unrecognized benefit obligation existing at transition |
$ | (38 | ) | |
Unrecognized net loss |
523 | |||
Total |
$ | 485 | ||
Assumptions used in each year of the actuarial computations were:
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Discount rate |
6.00 | % | 5.75 | % | ||||
Rate of increase in compensation levels |
3.0 | % | 3.5 | % | ||||
Expected long-term rate of return |
8.0 | % | 8.0 | % | ||||
The expected long-term rate of return was based on historical average annual returns for S&P 500,
Russell 2000 and LB Intermediate Term Government for 10 years and since inception of the assets.
The weighted average allocation of plan assets by category is as follows:
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Equity securities |
50.4 | % | 50.7 | % | ||||
Fixed securities |
31.3 | % | 44.9 | % | ||||
Government securities |
17.9 | % | ||||||
Commercial mortgage |
3.3 | % | ||||||
Other |
0.4 | % | 1.1 | % | ||||
| 100.0 | % | 100.0 | % | |||||
The Company’s investment strategy is to meet the liabilities of the plans as they are due and to
maximize the return on invested assets within appropriate risk tolerances.
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 of 1986, as
amended. The Company anticipates contributing approximately $1.4 million in fiscal 2006 to meet
minimum funding requirements.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid (in thousands):
| Fiscal Year | Amount | |||
2007 |
$ | 1,116 | ||
2008 |
1,116 | |||
2009 |
1,125 | |||
2010 |
1,119 | |||
2011 |
1,162 | |||
2012 — 2017 |
7,450 | |||
As of February 3, 2007, the Company adopted FASB Statement No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans— an amendment of FASB Statements No. 87, 88,
106, and 132(R), (“SFAS No. 158”) which requires an employer to recognize the overfunded or
underfunded status of a defined benefit post-retirement plan as an asset or liability in its
statement of financial position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income of a business entity. This statement also requires
the employer to measure the funded status of the plan as of the date of its year-end statement of
financial position.
F-28
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incremental Effect of Applying FASB Statement No. 158
on Individual Line Items in the Consolidated Balance Sheet
February 3, 2007
(in thousands)
on Individual Line Items in the Consolidated Balance Sheet
February 3, 2007
(in thousands)
| Before | After | |||||||||||
| Application of | Application of | |||||||||||
| Statement 158 | Adjustments | Statement 158 | ||||||||||
Pension assets |
$ | 118 | $ | 118 | ||||||||
Deferred income taxes |
$ | 29,444 | (3,330 | ) | 26,114 | |||||||
Total assets |
1,270,429 | (3,212 | ) | 1,267,217 | ||||||||
Liability for pension
benefits |
(9,420 | ) | 8,398 | (1,022 | ) | |||||||
Total liabilities |
(1,183,995 | ) | 8,398 | (1,175,597 | ) | |||||||
Accumulated other
comprehensive loss |
5,737 | (5,187 | ) | 550 | ||||||||
Total stockholders’ equity |
$ | (86,433 | ) | $ | (5,187 | ) | $ | (91,620 | ) | |||
8. OTHER BENEFIT PLANS
The Company maintains a 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 Plan on a
pre tax basis, subject to IRS 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 Plan, the Company matches
employee deferrals into the 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 Plan each year. The Company incurred costs associated
with the 401(k) Plan of $5.2 million, $4.9 million and $4.7 million for fiscal years 2006, 2005 and
2004, respectively. In fiscal 2004 the Company contributed $1.3 million to the 401(k) Plan for
discretionary profit sharing. The Company made no discretionary profit sharing contributions during
fiscal 2005 and fiscal 2006.
Prior to fiscal 2006, the Company identified the following issue involving its 401(k) Plan:
If participants’ 401(k) plan contributions can be invested in employer securities, all of the
securities offered pursuant to the plan must be registered under the Securities Act of 1933 (the
“Securities Act”). This is true regardless whether the plan acquires the shares from the employer
or on the open market and whether the shares are purchased with employee contributions or the
company’s match. Based on this interpretation of the Securities Act, Retail Ventures registered
600,000 common shares for inclusion in the Retail Ventures, Inc. Common Stock Fund under the 401(k)
Plan.
Although all purchases by the custodian of the 401(k) Plan were made in the open market and in a
manner consistent with the 401(k) Plan and the investment elections of the 401(k) Plan
participants, Retail Ventures determined that (i) more common shares had been purchased by the
custodian of the 401(k) Plan and allocated to the Retail Ventures, Inc. Common Stock Fund than were
registered in accordance with the Securities Act and (ii) certain participants in the 401(k) Plan
may not have received the prospectus required to be delivered under the Securities Act.
Effective November 29, 2005, Retail Ventures commenced an offer for a 30-day right of rescission
with regard to all of its common shares purchased by the custodian of the 401(k) Plan and included
in units purchased by 401(k) Plan participants between July 12, 2003 and December 22, 2004. Under
the rescission offer, which applied to approximately 700,000 Retail Ventures Common Shares, if
401(k) Plan participants sold units at a loss, Retail Ventures would credit to their 401(k) Plan
account an amount equal to the price per unit they paid less the proceeds from the sale of the
units plus applicable interest. Additionally, if 401(k) Plan participants continued to hold the
units and the market price of the Retail Ventures Common Shares as of the expiration date of the
rescission offer was less than the price they paid for the units plus applicable interest, Retail
Ventures would repurchase units that are subject to the rescission offer and would credit their
401(k) Plan account with an amount equal to the price per unit they paid plus interest from the
date of
purchase of the units through the date the credit is made. The rescission offer expired after
December 29, 2005. The liability associated with the settlement of the rescission offer was paid in
full during fiscal 2006.
SSC, as the primary sponsor of the 401(k) Plan, and Retail Ventures, as an additional sponsor of
the 401(k) Plan, elected to close the Retail Ventures, Inc. Common Stock Fund to additional
investments effective July 1, 2005. Subsequent to December 22, 2004, all 401(k) Plan participants
received registered securities and the prospectus required to be delivered under the Securities
Act.
F-29
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company 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. 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 were not material to the consolidated
financial statements.
Certain employees of the Company are covered by union sponsored, collectively bargained, multi
employer pension plans, the costs of which are not material to the consolidated financial
statements.
9. SHAREHOLDERS’ EQUITY AND WARRANT LIABILITY
The Company issued 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 February 3, 2007 and January
28, 2006, the Company had outstanding approximately 500 and 3,000 restricted shares, respectively,
which are less than 1% of the common shares outstanding and the diluted shares.
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”). Due to 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 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 fiscal 2006, the Company recorded a charge of $124.8 million, 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, therefore, changes
in the fair values are recognized in earnings in the period of change. The Term Loan Warrants
expire on June 11, 2012 while the Conversion Warrants expire on June 10, 2009.
Retail Ventures estimates the fair values of derivatives based on the Black-Scholes Pricing Model
using current market rates and records all derivatives on the balance sheet at fair value. The fair
market value of derivative instruments was $216.4 million and $170.4 million at February 3, 2007
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.
The $156.5 million value ascribed to the Conversion Warrants was estimated as of February 3, 2007
using the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of
4.9%; expected life of 2.4 years; expected volatility of 44.1% and an expected dividend yield of
0.0%.
The $59.9 million value ascribed to the Term Warrants was estimated as of February 3, 2007 using
the Black-Scholes Pricing Model with the following assumptions: risk-free interest rate of 4.8%;
expected life of 5.4 years; expected volatility of 44.1% and an expected dividend yield of 0.0%. As
the Warrants may be exercised for either common shares of Retail Ventures or common shares of DSW
owned by Retail Ventures, the settlement of the Warrants will not result in a cash outlay by the
Company.
During fiscal 2006, Retail Ventures issued 7,000,000 of their 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 $31.5 million and
reclassified $78.8 million from the warrant liability to paid in capital during fiscal 2006. Retail
Ventures did not issue any of its common shares in connection with the exercise of the outstanding
Conversion Warrants during fiscal 2005.
F-30
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 two putative class action lawsuits, which seek unspecified
monetary damages, credit monitoring and other relief. Each of the two lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to certify a nationwide class 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 lawsuit seeks to certify classes of consumers that are limited geographically
to consumers who made purchases at certain stores in Ohio.
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 DSW 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 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, DSW 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 February 3,
2007, the balance of the associated accrual for potential exposure was $3.2 million.
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.
F-31
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
The expense (benefit) for income taxes consists of the following (in thousands):
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 31,988 | $ | 1,644 | $ | 9,967 | ||||||
State and local |
8,028 | 4,451 | 3,923 | |||||||||
Total current tax expense |
40,016 | 6,095 | 13,890 | |||||||||
Deferred: |
||||||||||||
Federal |
(24,598 | ) | (10,071 | ) | (29,245 | ) | ||||||
State and local |
(788 | ) | 17,200 | 2,927 | ||||||||
Total deferred tax (benefit) expense |
(25,386 | ) | 7,129 | (26,318 | ) | |||||||
Income tax expense (benefit) |
$ | 14,630 | $ | 13,224 | $ | (12,428 | ) | |||||
A reconciliation of the expected income taxes based upon the statutory rate is as follows (in
thousands):
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Income tax (benefit) expense at federal statutory rate of 35% |
$ | (39,241 | ) | $ | (57,117 | ) | $ | (12,760 | ) | |||
Warrant liability marked to market |
43,685 | 50,473 | ||||||||||
Jobs credit |
(751 | ) | (949 | ) | (800 | ) | ||||||
State and local taxes, net |
1,148 | (1,713 | ) | (1,251 | ) | |||||||
Tax exempt interest |
(498 | ) | ||||||||||
Non-deductible interest |
222 | 592 | ||||||||||
Valuation allowance |
2,241 | 14,367 | 3,214 | |||||||||
Write off of net operating loss |
4,018 | 3,072 | ||||||||||
Provision to return adjustments |
177 | 1,979 | ||||||||||
Change in subsidiary basis |
6,025 | 910 | ||||||||||
Other |
1,844 | 1,034 | (4,495 | ) | ||||||||
Income tax expense (benefit) |
$ | 14,630 | $ | 13,224 | $ | (12,428 | ) | |||||
F-32
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset as of February 3, 2007 and January 28, 2006, are (in
thousands):
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Deferred tax assets: |
||||||||
Basis differences in inventory |
$ | 10,587 | $ | 9,537 | ||||
Basis differences in property and equipment |
12,311 | 10,316 | ||||||
Deferred compensation |
5,667 | 1,473 | ||||||
Intangible assets |
2,441 | 6,196 | ||||||
Store closing reserve |
913 | |||||||
State net operating loss & credits |
15,263 | 14,631 | ||||||
Federal net operating loss |
22,496 | 22,526 | ||||||
Federal tax credit |
13,621 | 4,583 | ||||||
Contribution carry forward |
391 | |||||||
Tenant allowance |
1,415 | 173 | ||||||
Capital leases |
3,462 | 3,387 | ||||||
Other comprehensive loss |
3,837 | |||||||
Workers compensation |
7,160 | 7,278 | ||||||
Deferred revenue |
4,663 | |||||||
Accrued expenses |
5,294 | 10,791 | ||||||
Accrued rent |
14,788 | 12,059 | ||||||
PIES |
24,354 | |||||||
Other |
4,365 | 1,896 | ||||||
Total deferred tax assets |
147,887 | 109,987 | ||||||
Less: Valuation allowance |
(15,648 | ) | (13,406 | ) | ||||
| 132,239 | 96,581 | |||||||
Deferred tax liabilities: |
||||||||
Basis in subsidiary |
(72,480 | ) | (69,644 | ) | ||||
Prepaid expenses |
(6,816 | ) | (5,367 | ) | ||||
Deferred Revenue — CAT Credit |
(1,092 | ) | (818 | ) | ||||
Total deferred tax liabilities |
(80,388 | ) | (75,829 | ) | ||||
Total net |
$ | 51,851 | $ | 20,752 | ||||
The net deferred tax asset is recorded in the Company’s consolidated balance sheet as follows (in
thousands):
| February 3, | January 28, | |||||||
| 2007 | 2006 | |||||||
Current deferred tax asset |
$ | 25,737 | $ | 66,581 | ||||
Non current deferred tax (liability) asset |
26,114 | (45,829 | ) | |||||
Net deferred tax asset |
$ | 51,851 | $ | 20,752 | ||||
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 it is more likely than not that future taxable income will 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 state jurisdiction. As a
result, the Company has recorded an addition to the valuation allowance in the current period, of
$2.2 million.. The ending balances of the valuation allowance at February 3, 2007 and at January
28, 2006, were $15.6 million and $13.4 million, respectively. The Company believes it is more
likely than not that the remaining deferred tax assets will be realized.
The net operating loss deferred tax asset consists of a federal and state component. The federal
component is $22.5 million and the state component $15.3 million. These net operating losses are
available to reduce federal and state taxable income for the fiscal years 2006 to 2026.
F-33
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT REPORTING
During fiscal 2006, the Company’s business segments were realigned to reflect how the Company
manages the business. The realignment resulted in the addition of a Corporate segment. The
Corporate segment includes activities that are not allocated to individual segments. Prior year
segment tables have been updated to conform to this realignment.
The Company is managed in four operating segments: Value City, DSW, Filene’s Basement and
Corporate. 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
(loss) as operating profit (loss), which is defined as profit (loss) before interest expense,
income taxes and minority interest. Capital expenditures in brackets represent assets transferred
to other segments.
The tables below present segment statement of operations information (in thousands):
| Intersegment | ||||||||||||||||||||||||
| Value City | DSW | Filene’s Basement | Corporate | Eliminations | Total | |||||||||||||||||||
As of and for the year ended
February 3, 2007 |
||||||||||||||||||||||||
Net sales |
$ | 1,361,125 | $ | 1,279,060 | $ | 427,473 | $ | 3,067,658 | ||||||||||||||||
Operating (loss) profit |
(17,975 | ) | 100,714 | (1,226 | ) | $ | (175,955 | ) | (94,442 | ) | ||||||||||||||
Depreciation and amortization |
25,508 | 20,686 | 9,282 | 2,853 | 58,329 | |||||||||||||||||||
Interest expense |
17,774 | 614 | 6,791 | 7,873 | $ | (5,835 | ) | 27,217 | ||||||||||||||||
Interest income |
2,235 | 7,527 | 40 | 5,575 | (5,835 | ) | 9,542 | |||||||||||||||||
Benefit (expense) for income
taxes |
10,560 | (42,164 | ) | 2,215 | 14,759 | (14,630 | ) | |||||||||||||||||
Capital expenditures |
8,962 | 42,407 | 16,118 | (317 | ) | 67,170 | ||||||||||||||||||
Total assets |
438,899 | 603,785 | 175,287 | 328,208 | (278,962 | ) | 1,267,217 | |||||||||||||||||
| Intersegment | ||||||||||||||||||||||||
| Value City | DSW | Filene’s Basement | Corporate | Eliminations | Total | |||||||||||||||||||
As of and for the year ended
January 28, 2006 |
||||||||||||||||||||||||
Net sales |
$ | 1,379,975 | $ | 1,144,061 | $ | 389,335 | $ | 2,913,371 | ||||||||||||||||
Operating (loss) profit |
(52,167 | ) | 70,112 | (10,727 | ) | $ | (144,209 | ) | (136,991 | ) | ||||||||||||||
Depreciation and amortization |
28,141 | 19,443 | 8,662 | 2,643 | 58,889 | |||||||||||||||||||
Interest expense |
21,812 | 8,892 | 3,743 | 6,928 | $ | (13,514 | ) | 27,861 | ||||||||||||||||
Interest income |
7,143 | 1,388 | 57 | 6,586 | (13,514 | ) | 1,660 | |||||||||||||||||
Benefit (expense) for income
taxes |
8,953 | (25,426 | ) | 3,526 | (277 | ) | (13,224 | ) | ||||||||||||||||
Capital expenditures |
17,336 | 25,537 | 4,112 | 1,434 | 48,419 | |||||||||||||||||||
Total assets |
466,642 | 501,459 | 119,932 | 265,103 | (266,562 | ) | 1,086,574 | |||||||||||||||||
| Intersegment | ||||||||||||||||||||||||
| Value City | DSW | Filene’s Basement | Corporate | Eliminations | Total | |||||||||||||||||||
For the year ended January 29,
2005 |
||||||||||||||||||||||||
Net sales |
$ | 1,434,618 | $ | 961,089 | $ | 343,924 | $ | 2,739,631 | ||||||||||||||||
Operating (loss) profit |
(25,883 | ) | 58,275 | (26,731 | ) | $ | 1,024 | 6,685 | ||||||||||||||||
Depreciation and amortization |
27,276 | 18,515 | 7,094 | 3,226 | 56,111 | |||||||||||||||||||
Interest expense |
32,553 | 2,734 | 3,919 | 1,024 | $ | (1,024 | ) | 39,206 | ||||||||||||||||
Interest income |
1,614 | 55 | (1,024 | ) | 645 | |||||||||||||||||||
Benefit (expense) for income
taxes |
18,008 | (18,420 | ) | 12,840 | 12,428 | |||||||||||||||||||
Capital expenditures |
19,420 | 33,975 | 26,528 | 3,932 | 83,855 | |||||||||||||||||||
F-34
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following sets forth sales by each major merchandise category (in thousands):
| February 3, | January 28, | January 29, | ||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Apparel and ready to wear |
$ | 1,309,218 | $ | 1,077,088 | $ | 1,083,195 | ||||||
Hard goods and home furnishings |
303,027 | 509,592 | 512,169 | |||||||||
Shoes and other footwear |
1,455,413 | 1,326,691 | 1,144,267 | |||||||||
Total |
$ | 3,067,658 | $ | 2,913,371 | $ | 2,739,631 | ||||||
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
Year Ended February 3, 2007
| Thirteen weeks Ended | Fourteen weeks ended | |||||||||||||||
| (in thousands except per share data) | April 29, 2006 | July 29, 2006 | October 28, 2006 | February 3, 2007 | ||||||||||||
Net sales |
$ | 721,513 | $ | 684,508 | $ | 787,619 | $ | 874,018 | ||||||||
Cost of sales |
(430,888 | ) | (409,557 | ) | (472,090 | ) | (539,707 | ) | ||||||||
Gross profit |
290,625 | 274,951 | 315,529 | 334,311 | ||||||||||||
Selling, general and administrative expenses |
(277,524 | ) | (264,793 | ) | (301,939 | ) | (299,212 | ) | ||||||||
Change in fair value of derivative instruments |
(926 | ) | (311 | ) | (28,009 | ) | (23,766 | ) | ||||||||
Change in fair value of derivative instruments — related party |
(63,883 | ) | (15,032 | ) | (2,565 | ) | (41,463 | ) | ||||||||
License fees and other income |
1,562 | 1,660 | 2,192 | 4,151 | ||||||||||||
Operating loss |
(50,146 | ) | (3,525 | ) | (14,792 | ) | (25,979 | ) | ||||||||
Non-related parties interest expense |
(2,866 | ) | (3,418 | ) | (7,980 | ) | (6,235 | ) | ||||||||
Related parties interest expense |
(1,264 | ) | (1,264 | ) | (4,176 | ) | (14 | ) | ||||||||
Total interest expense |
(4,130 | ) | (4,682 | ) | (12,156 | ) | (6,249 | ) | ||||||||
Interest income |
1,638 | 2,339 | 2,194 | 3,371 | ||||||||||||
Interest expense, net |
(2,492 | ) | (2,343 | ) | (9,962 | ) | (2,878 | ) | ||||||||
Loss before income taxes and minority interest |
(52,638 | ) | (5,868 | ) | (24,754 | ) | (28,857 | ) | ||||||||
Expense for income taxes |
(5,846 | ) | (4,473 | ) | (3,411 | ) | (900 | ) | ||||||||
Loss before minority interest |
(58,484 | ) | (10,341 | ) | (28,165 | ) | (29,757 | ) | ||||||||
Minority interest |
(6,464 | ) | (5,660 | ) | (5,909 | ) | (6,133 | ) | ||||||||
Net Loss |
$ | (64,948 | ) | $ | (16,001 | ) | $ | (34,074 | ) | $ | (35,890 | ) | ||||
Loss per share(1): |
||||||||||||||||
Basic |
$ | (1.58 | ) | $ | (0.36 | ) | $ | (0.72 | ) | $ | (0.76 | ) | ||||
Diluted |
$ | (1.58 | ) | $ | (0.36 | ) | $ | (0.72 | ) | $ | (0.76 | ) | ||||
F-35
Table of Contents
RETAIL VENTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended January 28, 2006
| Thirteen weeks ended | ||||||||||||||||
| April 30, | July 30, | October 30, | January 28, | |||||||||||||
| (in thousands except per share data) | 2005 | 2005 | 2005 | 2006 | ||||||||||||
Net sales |
$ | 680,045 | $ | 666,734 | $ | 746,101 | $ | 820,491 | ||||||||
Cost of sales |
(411,653 | ) | (407,362 | ) | (462,397 | ) | (522,727 | ) | ||||||||
Gross profit |
268,392 | 259,372 | 283,704 | 297,764 | ||||||||||||
Selling, general and administrative expenses |
(279,342 | ) | (265,547 | ) | (290,439 | ) | (275,622 | ) | ||||||||
Change in fair value of derivative instruments |
(28 | ) | 590 | (713 | ) | |||||||||||
Change in fair value of derivative instruments — related party |
(137,555 | ) | 66,407 | (72,910 | ) | |||||||||||
License fees and other income |
1,518 | 3,993 | 1,593 | 1,832 | ||||||||||||
Operating (loss) profit |
(9,432 | ) | (139,765 | ) | 61,855 | (49,649 | ) | |||||||||
Non-related parties interest expense |
(3,124 | ) | (5,516 | ) | (2,307 | ) | (2,579 | ) | ||||||||
Related parties interest expense |
(6,558 | ) | (5,062 | ) | (1,264 | ) | (1,451 | ) | ||||||||
Total interest expense |
(9,682 | ) | (10,578 | ) | (3,571 | ) | (4,030 | ) | ||||||||
Interest income |
47 | 144 | 326 | 1,143 | ||||||||||||
Interest expense, net |
(9,635 | ) | (10,434 | ) | (3,245 | ) | (2,887 | ) | ||||||||
(Loss) income before income taxes and minority interest |
(19,067 | ) | (150,199 | ) | 58,610 | (52,536 | ) | |||||||||
Benefit (expense) for income taxes |
7,608 | (7,775 | ) | 1,812 | (14,869 | ) | ||||||||||
(Loss) income before minority interest |
(11,459 | ) | (157,974 | ) | 60,422 | (67,405 | ) | |||||||||
Minority Interest |
723 | (4,022 | ) | (3,703 | ) | |||||||||||
Net (loss) income |
$ | (11,459 | ) | $ | (157,251 | ) | $ | 56,400 | $ | (71,108 | ) | |||||
(Loss) earnings per share(1): |
||||||||||||||||
Basic |
$ | (0.32 | ) | $ | (4.03 | ) | $ | 1.43 | $ | (1.79 | ) | |||||
Diluted |
$ | (0.32 | ) | $ | (4.03 | ) | $ | 0.92 | $ | (1.79 | ) | |||||
| (1) | (Loss) earnings per share calculations for each quarter are based on the applicable weighted average shares outstanding for each period and may not necessarily be equal to the full year per share amount. |
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
| February 3, | January 28, | January 29, | ||||||||||
| (in thousands) | 2007 | 2006 | 2005 | |||||||||
Cash paid during the period for: |
||||||||||||
Interest: |
||||||||||||
Non-related parties |
$ | 14,712 | $ | 9,041 | $ | 8,647 | ||||||
Related parties |
7,954 | 16,382 | 20,217 | |||||||||
Income taxes |
41,841 | 16,278 | 12,540 | |||||||||
Noncash investing and operating activities: |
||||||||||||
Changes in accounts payable due to asset purchases |
(1,586 | ) | 1,920 | (1,588 | ) | |||||||
Additional paid in capital transferred from
warrant liability for warrant exercises |
78,817 | |||||||||||
F-36
Table of Contents
RETAIL VENTURES, INC.
SCHEDULE I — Condensed Financial Information of Registrant
(dollars in thousands)
SCHEDULE I — Condensed Financial Information of Registrant
(dollars in thousands)
| Description | Amount | |||
Dividend paid to registrant from DSW Inc.: |
||||
January 29, 2005 |
None | |||
January 28, 2006 |
$ | 190,000 | ||
February 3, 2007 |
None | |||
S-1
Table of Contents
RETAIL VENTURES, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
| Balance at | Charges to | Charges to | Balance at | |||||||||||||||||
| Beginning of | Costs and | Other | End of | |||||||||||||||||
| Description | Period | Expenses | Accounts | Deductions(1) | Period | |||||||||||||||
Allowance deducted from asset to which it applies: |
||||||||||||||||||||
Allowance for doubtful accounts |
||||||||||||||||||||
January 29, 2005 |
$ | 826 | $ | $ | 60 | $ | 766 | |||||||||||||
January 28, 2006 |
766 | $ | 99 | 419 | 446 | |||||||||||||||
February 3, 2007 |
446 | 364 | 80 | 730 | ||||||||||||||||
Inventory Reserve |
||||||||||||||||||||
January 29, 2005 |
34,185 | 14,142 | 5,545 | 42,782 | ||||||||||||||||
January 28, 2006 |
42,782 | 7,820 | 7,542 | 43,060 | ||||||||||||||||
February 3, 2007 |
43,060 | 4,927 | 3,554 | 44,433 | ||||||||||||||||
Allowance for Sales Returns |
||||||||||||||||||||
January 29, 2005 |
3,210 | 1,861 | 1,495 | 3,576 | ||||||||||||||||
January 28, 2006 |
3,576 | 2,868 | 2,436 | 4,008 | ||||||||||||||||
February 3, 2007 |
4,008 | 2,157 | 2,648 | 3,517 | ||||||||||||||||
Store Closing Reserve |
||||||||||||||||||||
January 29, 2005 |
1,122 | 1,926 | 1,736 | 1,312 | ||||||||||||||||
January 28, 2006 |
1,312 | 5,476 | 4,381 | 2,407 | ||||||||||||||||
February 3, 2007 |
2,407 | 1,224 | 1,765 | 1,866 | ||||||||||||||||
| (1) | The deductions are amounts written off against the reserve. |
S-2
Table of Contents
INDEX TO EXHIBITS
Exhibits marked with an asterisk (*) are filed herewith.
Exhibits marked with an asterisk (*) are filed herewith.
| Exhibit | ||
| No. | Description | |
2.1
|
Agreement and Plan of Merger among Value City Department Stores, Inc., Retail Ventures, Inc. (the “Company”) and Value City Merger Sub, Inc., effective as of October 8, 2003. Incorporated by reference to Exhibit 2 to Form 8-K (file no. 1-10767) filed on October 8, 2003. | |
3.1
|
Amended Articles of Incorporation of the Company. Incorporated by reference to Exhibit 3(a) to Form 8-K (file No. 1-10767) filed on October 8, 2003. | |
3.2
|
Amended Code of Regulations of the Company. Incorporated by reference to Exhibit 3(b) to Form 8-K (file No. 1-10767) filed on October 8, 2003. | |
4.1
|
Amended Common Stock Purchase Warrant issued by Retail Ventures, Inc. to Cerberus Partners, L.P. Incorporated by reference to Exhibit 4.1 to Form 8-K (file no. 1-10767) filed October 19, 2005. | |
4.2
|
Amended Common Stock Purchase Warrant issued by Retail Ventures, Inc. to Schottenstein Stores Corporation. Incorporated by reference to Exhibit 4.2 to Form 8-K (file no. 1-10767) filed October 19, 2005. | |
4.3
|
Form of Term Loan Warrant issued by Retail Ventures, Inc. to Millennium Partners, L.P. Incorporated by reference to Exhibit 4.1 to Form 10-Q (file no. 1-10767) filed December 8, 2005. | |
4.4
|
Form of Conversion Warrant issued by Retail Ventures, Inc. issued to Cerberus Partners, L.P. and Schottenstein Stores Corporation. Incorporated by reference to Exhibit 4.1 to Form 8-K (file no. 1-10767) filed July 11, 2005. | |
4.5
|
Exchange Agreement, dated July 5, 2005, between Retail Ventures, Inc. and DSW Inc. Incorporated by reference to Exhibit 10.4 to Form 8-K (file no. 1-10767) filed July 11, 2005. | |
4.6
|
Second Amended and Restated Registration Rights Agreement, dated July 5, 2005, among Retail Ventures, Inc., Cerberus Partners, L.P., Schottenstein Stores Corporation and Back Bay Capital Funding LLC. Incorporated by reference to Exhibit 4.2 to Form 8-K (file no. 1-10767) filed July 11, 2005. | |
4.7
|
Specimen of Common Share Certificate. Incorporated by reference to Exhibit 4.7 to Form 10-K (file no. 1-10767) filed April 13, 2006. | |
4.8
|
Indenture, dated as of August 16, 2006, by and between Retail Ventures, Inc. and HSBC Bank USA, National Association, as indenture trustee (Form of 6.625% Mandatorily Exchangeable Notes Due September 15, 2011 filed as Exhibit A thereto). Incorporated by reference to Exhibit 4.1 to Form 8-K (file no. 001-10767) filed on August 22, 2006. | |
4.9
|
Collateral Agreement, dated as of August 16, 2006, by and between Retail Ventures, Inc., as pledgor, and HSBC Bank USA, National Association, as collateral agent, indenture trustee and securities intermediary. Incorporated by reference to Exhibit 4.2 to Form 8-K (file no. 001-10767) filed on August 22, 2006. | |
4.10
|
Form of Exchange Request by Retail Ventures, Inc. to DSW Inc. Incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-3/A (file no. 333-134225) filed on July 17, 2006. | |
4.11
|
Pledge Agreement, dated as of August 16, 2006, made by Retail Ventures, Inc. with and in favor of Cerberus Partners, L.P. Incorporated by reference to Exhibit 10.4 to Form 8-K (file no. 001-10767) filed on August 22, 2006. | |
4.12
|
Pledge Agreement, dated as of August 16, 2006, made by Retail Ventures, Inc. with and in favor of Schottenstein Stores Corporation. Incorporated by reference to Exhibit 10.5 to Form 8-K (file no. 001-10767) filed on August 22, 2006. | |
10.1
|
Corporate Services Agreement, dated June 12, 2002, between the Company and SSC. Incorporated by reference to Exhibit 10.6 to Form 10-Q (file no. 1-10767) filed June 18, 2002. | |
10.1.1
|
Amendment to Corporate Services Agreement, dated July 5, 2005, among Schottenstein Stores Corporation, Retail Ventures, Inc. and Schottenstein Management Company, together with Side Letter Agreement, dated July 5, 2005, among DSW Inc., Schottenstein Stores Corporation, Retail Ventures, Inc. and Schottenstein Management Company. Incorporated by reference to Exhibit 10.5 to Form 8-K (file no. 1-10767) filed July 11, 2005. | |
10.2
|
License Agreement, dated June 5, 1991, between the Company and SSC re: Service Marks. Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to Form S-1 Registration Statement (file no. 33-40214) filed June 6, 1991. | |
10.3
|
Master Separation Agreement, dated July 5, 2005, between Retail Ventures, Inc. and DSW Inc. Incorporated by reference |
E-1
Table of Contents
| Exhibit | ||
| No. | Description | |
| to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed July 11, 2005. | ||
10.4
|
Amended and Restated Shared Services Agreement, dated as of October 29, 2006, between Retail Ventures, Inc. and DSW Inc. Incorporated by reference to Exhibit 10.8 to form 10-Q (file no. 1-10767) filed December 6. 2006. | |
10.5
|
Tax Separation Agreement, dated July 5, 2005, among Retail Ventures, Inc. and its affiliates and DSW Inc. and its affiliates. Incorporated by reference to Exhibit 10.3 to Form 8-K (file no. 1-10767) filed July 11, 2005. | |
10.6
|
Supply Agreement, effective as of January 30, 2005, between DSW Inc. and Filene’s Basement, Inc. Incorporated by reference to Exhibit 10.6 to Form 8-K (file no. 1-10767) filed July 11, 2005. | |
10.7#
|
Form of Indemnification Agreement entered into on December 22, 2005 between Retail Ventures, Inc. and each of its directors and executive officers. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed December 23, 2005 | |
10.8#
|
Amended and Restated Retail Ventures, Inc. 1991 Stock Option Plan. Incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Form S-8 Registration Statement (file no. 333-45852) filed October 16, 2003. | |
10.9#
|
Retail Ventures, Inc. Employee Stock Purchase Plan. Incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Form S-8 Registration Statement (file no. 33-46221) filed October 16, 2003. | |
10.10#
|
Retail Ventures, Inc. Amended and Restated 2000 Stock Incentive Plan (the “2000 Stock Incentive Plan”). Incorporated by reference to Exhibit 4(a) to Amendment No. 1 to Form S-8 Registration Statement (file no. 333-100398) filed on October 16, 2003. | |
10.11#
|
Amended and Restated Retail Ventures, Inc. Non-Employee Director Stock Option Plan. Incorporated by reference to Exhibit 4(a) to Form S-8 Registration Statement (file no. 333-45856) filed October 16, 2003. | |
10.12
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Baltimore, MD (Eastpoint) furniture store location. Incorporated by reference to Exhibit 10.15.1 to Registration Statement on Form S-1 (file no. 33-40214) filed April 29, 1991. | |
10.13
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Baltimore, MD (Westview) furniture store location. Incorporated by reference to Exhibit 10.15.2 to Registration Statement on Form S-1 (file no. 33-40214) filed April 29, 1991. | |
10.14
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Lansing, MI furniture store location. Incorporated by reference to Exhibit 10.15.3 to Registration Statement on Form S-1 (file no. 33-40214) filed April 29, 1991. | |
10.15
|
Sublease, dated April 25, 1991, between the Company, as sublessor, and SSC, as sublessee, re: Louisville, KY (Preston Highway) furniture store location. Incorporated by reference to Exhibit 10.15.4 to Registration Statement on Form S-1 (file no. 33-40214) filed April 29, 1991. | |
10.16
|
Form of Assignment and Assumption Agreement between the Company, as assignee, and SSC, as assignor, re: separate assignments of leases for 31 stores. Incorporated by reference to Exhibit 10.16 to Registration Statement on Form S-1 (file no. 33-40214) filed April 29, 1991. | |
10.17
|
Lease Agreement, dated July 1, 1988, between the Company, by assignment from SSC, dated April 25, 1991, as sublessee, and SSC, as sublessor, re: Benwood, WV store location. Incorporated by reference to Exhibit 10.19 to Form 10-K (file no.1-10767) filed October 24, 1991. | |
10.18#
|
Form of Restricted Stock Agreement between the Company and certain employees. Incorporated by reference to Exhibit 10.27 to Amendment No. 1 to Form S-1 Registration Statement (file no. 33-47252) filed April 27, 1992. | |
10.19
|
Lease, dated September 1, 1992, between the Company, as lessee, and SSC, as lessor, re: South Bend/Mishawaka, IN store. Incorporated by reference to Exhibit 10.29 to Form 10-K (file no.1-10767) filed October 22, 1992. | |
10.20
|
Lease, dated January 27, 1992, between the Company, as lessee, and J.A.L. Realty Company, an affiliate of SSC, as lessor, re: 3080 Alum Creek Drive, Columbus, OH warehouse. Incorporated by reference to Exhibit 10.30 to Form 10-K (file no.1-10767) filed October 22, 1992. | |
10.20.1
|
Exercise of the first five-year renewal option commencing February 1, 1997 under lease, dated January 27, 1992, as amended, between the Company, as lessee, and J.A.L. Realty Company, an affiliate of SSC, as lessor, re: 3080 Alum Creek Drive, Columbus, OH warehouse. Incorporated by reference to Exhibit 10.30.1 to Form 10-Q (file no. 1-10767) filed March 19, 1996. |
E-2
Table of Contents
| Exhibit | ||
| No. | Description | |
10.21
|
Lease, dated July 29, 1992, between the Company, as lessee, and J.A.L. Realty Company, an affiliate of SSC, as lessor, re: 3232 Alum Creek Drive, Columbus, OH warehouse. Incorporated by reference to Exhibit 10.31 to Form 10-K (file no.1-10767) filed October 22, 1992. | |
10.22
|
Ground lease, dated April 15, 1994, between the Company, as lessee, and J.A.L. Realty Company, an affiliate of SSC, as lessor, re: 19 acres (Westerville Rd., Columbus, OH). Incorporated by reference to Exhibit 10.35 to Form 10-K (file no. 1-10767) filed October 26, 1994. | |
10.23
|
Agreement of Lease, dated March 1, 1994, between the Company, as tenant, and Jubilee Limited Partnership, an affiliate of SSC, as landlord, re: Hobart, IN store. Incorporated by reference to Exhibit 10.37 to Form 10-Q (file no. 1-10767) filed December 12, 1994. | |
10.24
|
Agreement of Lease, dated January 13, 1995, between the Company, as tenant, and Westland Partners, an affiliate of SSC, as landlord, re: Westland, MI store. Incorporated by reference to Exhibit 10.39 to Form 10-Q, (file no. 1-10767) filed March 14, 1995. | |
10.25
|
Agreement of Lease, dated January 13, 1995, between the Company, as tenant, and Taylor Partners, an affiliate of SSC, as landlord, re: Taylor, MI store. Incorporated by reference to Exhibit 10.40 to Form 10-Q, (file no. 1-10767) filed March 14, 1995. | |
10.26
|
Lease, dated September 2, 1997, between the Company, as lessee, and SSC-Fort Wayne L.L.C., an affiliate of SSC, as lessor. Incorporated by reference to Exhibit 10.33.1 to Form 10-K (file no. 1-10767) filed April 29, 2002. | |
10.27
|
Agreement of Lease, dated April 10, 1995, between the Company, as tenant, and Independence Limited Liability Company, an affiliate of SSC, as landlord, re: Charlotte, NC store. Incorporated by reference to Exhibit 10.45 to Form 10-Q (file no. 1-10767) filed December 12, 1995. | |
10.28
|
Sublease and Occupancy Agreement, dated December 15, 1995, between the Company, SSC and SSC, dba Value City Furniture, re: Louisville, KY (Preston Highway) store. Incorporated by reference to Exhibit 10.46 to Form 10-Q (file no. 1-10767) filed March 19, 1996. | |
10.29
|
Agreement of Lease, dated October 4, 1996, between the Company, as tenant, and Hickory Ridge Pavilion, Ltd., an affiliate of SSC, as landlord, re: Memphis, TN store. Incorporated by reference to Exhibit 10.50 to Form 10-K (file no. 1-10767) filed November 1, 1996. | |
10.30
|
Agreement of Lease, dated October 30, 1998, between the Company, as lessee, and Jubilee Limited Partnership, an affiliate of SSC, as lessor, re: Calumet City, IL store. Incorporated by reference to Exhibit 10.56 to Form 10-K (file no. 1-10767) filed April 30, 1999. | |
10.31
|
Agreement of Lease, dated September 29, 1998, between the Company, as tenant, and Valley Fair Irvington, LLC, an affiliate of SSC, as landlord, re: Irvington, NJ. Incorporated by reference to Exhibit 10.57 to Form 10-K (file no. 1-10767) filed April 30, 1999. | |
10.32
|
Industrial Space Lease-Net, dated March 22, 2000, between 4300 East Fifth Avenue, LLC, an affiliate of SSC, as landlord, and Shonac Corporation, as tenant, re: Building 6, Columbus International Aircenter, Columbus, OH. Incorporated by reference to Exhibit 10.60 to Form 10-K (file no. 1-10767) filed April 28, 2000. | |
10.33
|
Lease, dated August 30, 2002, by and between Jubilee Limited Partnership, an affiliate of SSC, and Shonac Corporation, re: | |
| Troy, MI DSW store. Incorporated by reference to Exhibit 10.44 to Form 10-K (file no. 1-10767) filed April 29, 2004. | ||
10.33.1
|
Assignment and Assumption Agreement, dated October 23, 2002, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Troy, MI DSW store. Incorporated by reference to Exhibit 10.29.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.34
|
Lease, dated October 8, 2003, by and between Jubilee Limited Partnership, an affiliate of SSC, and Shonac Corporation, re: | |
| Denton, TX DSW store. Incorporated by reference to Exhibit 10.46 to Form 10-K (file no. 1-10767) filed April 29, 2004. | ||
10.34.1
|
Assignment and Assumption Agreement, dated December 18, 2003 between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Denton, TX DSW store. Incorporated by reference to Exhibit 10.30.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.35
|
Lease, dated October 28, 2003, by and between JLP-RICHMOND LLC, an affiliate of SSC, and Shonac Corporation, re: Richmond, VA DSW store. Incorporated by reference to Exhibit 10.47 to Form 10-K (file no. 1-10767) filed April 29, 2004. |
E-3
Table of Contents
| Exhibit | ||
| No. | Description | |
10.35.1
|
Assignment and Assumption Agreement, dated December 18, 2003, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Richmond, VA DSW store. Incorporated by reference to Exhibit 10.31.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.36#
|
Employment Agreement, dated June 21, 2000, between James A. McGrady and the Company. Incorporated by reference to Exhibit 10.46 (also listed as Exhibit 10.61) to Form 10-K (file no. 1-10767) filed May 4, 2001. | |
10.37#
|
Employment Agreement, dated as of April 29, 2004, between Julia A. Davis and the Company. Incorporated by reference to Exhibit 10.51 to Form 10-K (file no. 1-10767) filed April 29, 2004. | |
10.38
|
Amended and Restated Loan and Security Agreement, dated July 5, 2005, by and among National City Business Credit, Inc., as Administrative Agent for the ratable benefit of the Revolving Credit Lenders, National City Business Credit, Inc., as Collateral Agents for the ratable benefit of the Revolving Credit Lenders, the Revolving Credit Lenders and Value City Department Stores LLC (in such capacity, the “Lead Borrower”), as agent for the Borrower and collectively the Borrowers. Incorporated by reference to Exhibit 10.7 to Form 8-K (file no. 1-10767) filed July 11, 2005. | |
10.38.1
|
First Amendment to Amended and Restated Loan and Security Agreement, dated as of August 16, 2006, by and among Value City Department Stores LLC, as lead borrower, the other borrowers named therein, the revolving credit lenders party thereto and National City Business Credit, Inc., as administrative agent and collateral agent. Incorporated by reference to Exhibit 10.6 to Form 8-K (file no. 001-10767) filed on August 22, 2006. | |
10.39
|
Third Amended and Restated Senior Loan Agreement, dated as of August 16, 2006, among Value City Department Stores LLC, as borrower, and Cerberus Partners, L.P., as lender. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 001-10767) filed on August 22, 2006. | |
10.40
|
Third Amended and Restated Senior Loan Agreement, dated as of August 16, 2006, among Value City Department Stores LLC, as borrower, and Schottenstein Stores Corporation, as lender. Incorporated by reference to Exhibit 10.2 to Form 8-K (file no. 001-10767) filed on August 22, 2006. | |
10.41#
|
Value City Department Stores, Inc. 2003 Incentive Compensation Plan. Incorporated by reference to Exhibit 10.41 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.42#
|
Employment Agreement, effective November 1, 2004, between Retail Ventures, Inc. and Heywood Wilansky. Incorporated by reference to Exhibit 10.1 to Form 8-K/A (file no. 1-10767) filed November 24, 2004. | |
10.43#
|
Employment Agreement, effective October 10, 2003, between Value City Department Stores, Inc. and Steven E. Miller. Incorporated by reference to Exhibit 10.43 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.44
|
Agreement of Lease, dated March 1, 1994, between Jubilee Limited Partnership, an affiliate of SSC, and Value City Department Stores, Inc., as modified by First Lease Modification, dated November 1, 1994, re: Merrilville, IN Value City store. Incorporated by reference to Exhibit 10.44 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.45
|
Lease Agreement, dated July 7, 1987, by and between Schottenstein Trustees, an affiliate of SSC, and Schottenstein Stores Corp. dba Schottenstein’s Department Store, as modified by Lease Extension and Modification Agreement, dated March 12, 1998, by and between Schottenstein Trustees and Value City Department Stores, Inc. dba Schottenstein’s East Department Store, re: 6055 E. Main Street, Columbus, OH Value City store. Incorporated by reference to Exhibit 10.45 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.46
|
Industrial Space Lease — Net, dated May 18, 2000, by and between 4300 East Fifth Avenue LLC, an affiliate of SSC, and Value City Department Stores, Inc., re: 4320-30 East Fifth Avenue, Columbus, OH warehouse. Incorporated by reference to Exhibit 10.47 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.47
|
Sublease, dated May 2000, by and between SSC, as sublessor, and Shonac Corporation dba DSW Shoe Warehouse, as sublessee, re: Pittsburgh, PA DSW store. Incorporated by reference to Exhibit 10.48 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.47.1
|
Assignment and Assumption Agreement, dated January 8, 2001, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: 451 Clariton Boulevard, Pittsburgh, PA DSW store. Incorporated by reference to Exhibit 10.48.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.48
|
Lease, dated May 2000, by and between Jubilee-Richmond LLC, an affiliate of SSC, and DSW Shoe Warehouse, Inc. (as assignee of Shonac Corporation), re: Glen Allen, VA DSW store. Incorporated by reference to Exhibit 10.49 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
E-4
Table of Contents
| Exhibit | ||
| No. | Description | |
10.49
|
Lease, dated February 28, 2001, by and between Jubilee-Springdale, LLC, an affiliate of SSC, and Shonac Corporation dba DSW Shoe Warehouse, re: Springdale, OH DSW store. Incorporated by reference to Exhibit 10.50 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.49.1
|
Assignment and Assumption Agreement, dated May 11, 2001, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Springdale, OH DSW store. Incorporated by reference to Exhibit 10.50.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.50
|
Agreement of Lease, dated 1997, between Shoppes of Beavercreek Ltd., an affiliate of SSC, and Shonac Corporation (assignee of SSC d/b/a Value City Furniture through Assignment of Tenany’t Leasehold Interst and Amendment No. 1 to Agreement of Lease, dated February 28, 2001), re: Beavercreek, OH DSW store. Incorporated by reference to Exhibit 10.51 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.50.1
|
Assignment and Assumption Agreement, dated May 11, 2001, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Beavercreek, OH DSW store. Incorporated by reference to Exhibit 10.51.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.51
|
Lease, dated February 28, 2001, by and between JLP-Chesapeake, LLC, an affiliate of SSC, and Shonac Corporation, re: Chesapeake, VA DSW store. Incorporated by reference to Exhibit 10.52 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.51.1
|
Assignment and Assumption Agreement, dated May 11, 2001, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Chesapeake, VA DSW store. Incorporated by reference to Exhibit 10.52.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.52
|
Ground Lease Agreement, dated April 30, 2002, by and between Polaris Mall, LLC, a Delaware limited liability company, and SSC-Polaris LLC, an affiliate of SSC, as modified by Sublease agreement, dated April 30, 2002, by and between SSC-Polaris LLC, as sublessor, and DSW Shoe Warehouse, Inc. as sublease (assignee of Shonac Corporation), re: Columbus, OH (Polaris) DSW store. Incorporated by reference to Exhibit 10.53 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.52.1
|
Assignment and Assumption Agreement, dated August 6, 2002, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Columbus, OH (Polaris) DSW store. Incorporated by reference to Exhibit 10.53.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.53
|
Lease, dated August 30, 2002, by and between JLP-Cary LLC, an affiliate of SSC, and Shonac Corporation, re: Cary, NC DSW store. Incorporated by reference to Exhibit 10.54 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.53.1
|
Assignment and Assumption Agreement, dated October 23, 2002, between Shonac Corporation, as assignor and DSW Shoe Warehouse, Inc., as assignee, re: Cary, NC DSW store. Incorporated by reference to Exhibit 10.54.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.54
|
Lease, dated August 30, 2002, by and between JLP-Madison LLC, an affiliate of SSC, and Shonac Corporation, re: Madison, TN DSW store. Incorporated by reference to Exhibit 10.55 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.54.1
|
Assignment and Assumption Agreement, dated October 23, 2002, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Madison, TN DSW store. Incorporated by reference to Exhibit 10.55.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.55
|
Lease, dated July 19, 2000, by and between Jubilee Limited Partnership, an affiliate of SSC, and Value City Department Stores, Inc., as modified by Lease Modification Agreement, dated November 2, 2000, re: 3704 W. Dublin-Granville Rd., Columbus, OH DSW/Filene’s combo store. Incorporated by reference to Exhibit 10.56 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.56
|
Master Store Lease, dated April 25, 1991, by and between SSC and Value City Department Stores, Inc., as modified by First Amendment to Master Store Lease, dated February 3, 1992, and Second Amendment to Master Store Lease, dated March 18, 2005, by and between SSC and Value City Department Stores LLC and Value City of Michigan, Inc., re: 4 store locations (Clarksville, IN, Springdale, OH, Louisville, KY (Dixie Highway), and Beckley, WV). Incorporated by reference to Exhibit 10.57 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.57
|
Lease, dated September 24, 2004, by and between K&S Maple Hill Mall, L.P., an affiliate of SSC, and Shonac Corporation, re: | |
| Kalamazoo, MI DSW store. Incorporated by reference to Exhibit 10.58 to Form 10-K (file no. 1-10767) filed April 14, 2005. |
E-5
Table of Contents
| Exhibit | ||
| No. | Description | |
10.57.1
|
Assignment and Assumption Agreement, dated February 28, 2005, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: Kalamazoo, MI DSW store. Incorporated by reference to Exhibit 10.58.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.58
|
Lease, dated November 2004, by and between KSK Scottsdale Mall, L.P., an affiliate of SSC, and Shonac Corporation, re: South Bend, IN DSW store. Incorporated by reference to Exhibit 10.59 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.58.1
|
Assignment and Assumption Agreement, dated March 18, 2005, between Shonac Corporation, as assignor, and DSW Shoe Warehouse, Inc., as assignee, re: South Bend, IN DSW store. Incorporated by reference to Exhibit 10.59.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.59
|
Lease Agreement, dated March 18, 2005, by and between SSC and Value City of Michigan, Inc., re: Flint, MI DSW store. Incorporated by reference to Exhibit 10.60 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.60
|
Lease Agreement, dated September 2, 1997, by and between SSC-Barboursville, L.L.C., an affiliate of SSC, and Value City Department Stores, Inc. Incorporated by reference to Exhibit 10.61 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.61#
|
Sample Nonqualified Stock Option Award Agreement issued by the Company pursuant to the 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 10.62 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.62#
|
Sample Price Protected Stock Option Award Agreement issued by the Company pursuant to the 2000 Stock Incentive Plan. Incorporated by reference to Exhibit 10.63 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.63#
|
Sample Equity Compensation Approval Notice and Agreement issued by the Company to certain employees. Incorporated by reference to Exhibit 10.64 to Form 10-K (file no. 1-10767) filed April 14, 2005. | |
10.64
|
Master Sublease, dated April 25, 1991, between the Company, as sublessee, and SSC, as sublessor, re: two stores (Covington, KY and Greenwood, IN). Incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-1 (file no. 33-402144) filed April 29, 1991. | |
10.65#
|
Form of Indemnification Agreement between the Company and its directors and officers. Incorporated by reference to Exhibit 10(b) to Registration Statement on Form S-8 (file no. 333-117341) filed July 13, 2004. | |
10.66
|
Lease Agreement, dated November 5, 1992, by and between Value City Department Stores, Inc. (successor to SSC d/b/a Elyria Value City Shopping Center), as sublessor, and SSC d/b/a Value City Furniture #17, as sublessee, as modified by Sublease Extension and Modification Agreement, dated October 11, 2001, re: Elyria, OH store. Incorporated by reference to Exhibit 10.67.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.67
|
Agreement of Lease, dated March 6, 1996, between Value City of Michigan, Inc. (assignee of MRSLV Saginaw, L.L.C.), as sublessor, and SSC d/b/a Value City Furniture, as sublessee, re: Saginaw Michigan store. Incorporated by reference to Exhibit 10.68.1 to Form 10-K/A Amendment No. 2 (file no. 1-10767) filed May 12, 2005. | |
10.68
|
Agreement of Sublease, dated June 12, 2000, between Jubilee Limited Partnership, an affiliate of SSC, and DSW Shoe Warehouse, Inc. (assignee of DSW Inc.), re: Baileys Crossroads, VA DSW Store. Incorporated by reference to Exhibit 10.1 to Form 10-Q (file no. 1-10767) filed June 9, 2005. | |
10.70
|
License Agreement, dated August 30, 2002, by and between Value City Department Stores, Inc. and Shonac Corporation, re: Merrillville, IN DSW store. Incorporated by reference to Exhibit 10.1 to Form 10-Q (file no. 1-10767) filed September 13, 2005. | |
10.71#
|
Employment Agreement, effective as of January 29, 2006, by and between Jed L. Norden and the Company. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 1-10767) filed February 2, 2006. | |
10.72
|
Agreement of Lease, dated April 7, 2006, by and between JLP — Harvard Park, LLC, an affiliate of SSC, as landlord, and DSW Inc., as tenant, re: Chagrin Highlands, Warrensville, Ohio DSW store. Incorporated by reference to Exhibit 10.72 to Form 10-K (file no. 1-10767) filed April 13, 2006. | |
10.74#
|
Summary of Director Compensation. Incorporated by reference to Exhibit 10.74 to Form 10-K (file no. 1-10767) filed April 13, 2006. | |
10.75
|
Loan and Security Agreement, between DSW Inc. and DSW Shoe Warehouse, Inc., as the Borrowers, and National City Business Credit, Inc., as Administrative Agent and Collateral Agent for the Revolving Credit Lenders. Incorporated by reference to Exhibit 10.11 to DSW Inc.’s Form 10-K (file no. 001-32545) filed on April 13, 2006. |
E-6
Table of Contents
| Exhibit | ||
| No. | Description | |
10.76
|
Agreement of Lease, dated April 13, 2006, between JLP — Harvard Park, LLC, an affiliate of SSC, as landlord, and Filene’s Basement, Inc. as tenant, re: Chagrin, OH Filene’s Basement store. Incorporated by reference to Exhibit 10.1 to Form 10-Q (file no. 1-10767) filed June 8, 2006. | |
10.77
|
Agreement of Lease, dated June 30, 2006, between JLPK — Levittown NY LLC, an affiliate of Schottenstein Stores Corporation and DSW Inc., re: Levittown, NY DSW store. Incorporated by reference to Exhibit 10.1 to Form 10-Q (file no. 1-10767) filed December 6, 2006. | |
10.78
|
Agreement of Lease, dated November 27, 2006, between JLP — Lynnhaven VA LLC, an affiliate of Schottenstein Stores Corporation and DSW Inc., re: Lynnhaven, Virginia DSW store. Incorporated by reference to Exhibit 10.2 to Form 10-Q (file no. 1-10767) filed December 6, 2006. | |
10.79
|
Agreement of Lease, dated November 30, 2006, between 4300 Venture 34910 LLC, an affiliate of Schottenstein Stores Corporation, and DSW Inc., re: Home office. Incorporated by reference to Exhibit 10.3 to Form 10-Q (file no. 1-10767) filed December 6, 2006. | |
10.80
|
Agreement of Lease, dated November 30, 2006, between 4300 East Fifth Avenue LLC, an affiliate of Schottenstein Stores Corporation, and DSW Inc., re: Trailer Parking spaces for home office. Incorporated by reference to Exhibit 10.4 to Form 10-Q (file no. 1-10767) filed December 6, 2006. | |
10.81
|
Lease Amendment, dated November 30, 2006 between 4300 Venture 6729 LLC, an affiliate of Schottenstein Stores Corporation, and DSW Inc., re: warehouse and corporate headquarters. Incorporated by reference to Exhibit 10.5 to Form 10-Q (file no. 1-10767) filed December 6, 2006. | |
10.82
|
Agreement of Lease, dated June 30, 2006, between JLPK — Levittown NY LLC, an affiliate of Schottenstein Stores Corporation and Filene’s Basement, re: Levittown, NY Filene’s Basement store. Incorporated by reference to Exhibit 10.6 to Form 10-Q (file no. 1-10767) filed December 6, 2006. | |
10.83
|
IT Transfer and Assignment Agreement dated October 29, 2006. Incorporated by reference to Exhibit 10.7 to Form 10-Q (file no. 1-10767) filed December 6, 2006. | |
10.84*
|
Agreement of Lease, dated December 15, 2006, between American Signature, Inc., an affiliate of SSC, and DSW Shoe Warehouse, Inc., re: Langhorne, Pennsylvania DSW store. | |
10.85*
|
Sample Restricted Stock Unit Award Agreement issued by the Company to certain employees. | |
10.86*
|
Sample Stock Appreciation Right Award Agreement issued by the Company to certain employees. | |
12*
|
Ratio of Earnings to Fixed Charges | |
21*
|
List of Subsidiaries. | |
23*
|
Consent of Independent Registered Public Accounting Firm. | |
24*
|
Power of Attorney. | |
31.1*
|
Rule 13a-14(a)/15d-14(a) Certification — Principal Executive Officer. | |
31.2*
|
Rule 13a-14(a)/15d-14(a) Certification — Principal Financial Officer. | |
32.1*
|
Section 1350 Certification — Principal Executive Officer. | |
32.2*
|
Section 1350 Certification — Principal Financial Officer. |
| * | Filed herewith. | |
| # | Management contract or compensatory plan or arrangement. |
E-7