UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended November 1, 2008

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

For the transition period from                      to                     

RETAIL VENTURES, INC.

(Exact name of registrant as specified in its charter)

Ohio		20-0090238
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4150 E. Fifth Avenue, Columbus, Ohio		43219
(Address of principal executive offices)		(Zip Code)

(614) 238-4148

Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

The number of outstanding Common Shares, without par value, as of November 30, 2008 was 48,680,729.

 

 

RETAIL VENTURES, INC.
TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at November 1, 2008 and February 2, 2008			2
Condensed Consolidated Statements of Operations for the three and nine months ended November 1, 2008 and November 3, 2007			4
Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended November 1, 2008 and November 3, 2007			5
Condensed Consolidated Statements of Cash Flows for the nine months ended November 1, 2008 and November 3, 2007			6
Notes to the Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37
Part II. Other Information
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information			39
Item 6. Exhibits			39
Signature			40
Index to Exhibits			41
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. Financial Information

Item 1. Financial Statements

RETAIL VENTURES, INC.

		November 1,				February 2,
		2008				2008
ASSETS
Cash and equivalents		$	96,526			$	112,951
Restricted cash			260				257
Short-term investments			84,915				70,005
Accounts receivable, net			10,465				14,373
Accounts receivable from related parties, net			247				2,245
Inventories			418,664				339,320
Prepaid expenses and other current assets			32,495				31,232
Deferred income taxes			26,449				28,225
Total current assets			670,021				598,608
Property and equipment, net			278,753				254,659
Goodwill			25,899				25,899
Long-term investments, net			4,493				12,500
Tradenames and other intangibles, net			17,537				19,927
Conversion feature of long-term debt			52,329				30,848
Deferred income taxes			3,972
Other assets			7,351				9,524
Total assets		$	1,060,355			$	951,965

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

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

		November 1,				February 2,
		2008				2008
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	187,534			$	149,900
Accounts payable to related parties			1,569				2,431
Accrued expenses:
Compensation			14,611				8,407
Taxes			35,300				22,857
Gift cards and merchandise credits			15,166				16,790
Guarantees from discontinued operations			3,932				17,477
Other			47,304				42,671
Warrant liability			1,417				936
Warrant liability-related parties			2,920				41,277
Total current liabilities			309,753				302,746
Long-term obligations			170,309				157,793
Other noncurrent liabilities			144,409				128,497
Deferred income taxes			28,861				29,657
Minority interest			174,469				160,349
Commitments and contingencies
Shareholders’ equity:
Common shares, without par value; 160,000,000 authorized; issued and outstanding, including 7,551 treasury shares, 48,688,280 and 48,623,430, respectively			306,500				305,254
Accumulated deficit			(71,251	)			(130,577	)
Treasury shares, at cost, 7,551 shares			(59	)			(59	)
Warrants			124				124
Accumulated other comprehensive loss			(2,760	)			(1,819	)
Total shareholders’ equity			232,554				172,923
Total liabilities and shareholders’ equity		$	1,060,355			$	951,965

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

RETAIL VENTURES, INC.

		Three months ended								Nine months ended
		November 1,				November 3,				November 1,				November 3,
		2008				2007				2008				2007
Net sales		$	503,505			$	489,394			$	1,429,575			$	1,419,871
Cost of sales			(287,820	)			(284,445	)			(821,354	)			(838,899	)
Gross profit			215,685				204,949				608,221				580,972
Selling, general and administrative expenses			(201,509	)			(177,193	)			(583,301	)			(521,554	)
Change in fair value of derivative instruments			(669	)			43,497				30,738				85,046
Change in fair value of derivative instruments – related parties			8,527				47,850				31,021				143,634
License fees and other income			2,255				1,872				5,572				4,941
Operating profit			24,289				120,975				92,251				293,039
Interest expense			(3,798	)			(3,179	)			(11,974	)			(9,379	)
Interest income			1,179				2,633				3,325				8,218
Interest expense, net			(2,619	)			(546	)			(8,649	)			(1,161	)
Other non-operating income			1,486								1,486
Income from continuing operations before income taxes and minority interest			23,156				120,429				85,088				291,878
Income tax expense			(10,214	)			(29,701	)			(24,374	)			(61,301	)
Income from continuing operations before minority interest			12,942				90,728				60,714				230,577
Minority interest			(4,988	)			(8,295	)			(12,748	)			(19,481	)
Income from continuing operations			7,954				82,433				47,966				211,096
Income (loss) from discontinued operations, net of tax			2,035				(14,211	)			8,908				(33,916	)
Net income		$	9,989			$	68,222			$	56,874			$	177,180
Basic and diluted earnings (loss) per share:
Basic earnings per share from continuing operations		$	0.16			$	1.70			$	0.99			$	4.40
Diluted earnings per share from continuing operations		$	0.16			$	1.45			$	0.96			$	3.62
Basic earnings (loss) per share from discontinued operations		$	0.04			$	(0.29	)		$	0.18			$	(0.71	)
Diluted earnings (loss) per share from discontinued operations		$	0.04			$	(0.25	)		$	0.18			$	(0.58	)
Basic earnings per share		$	0.21			$	1.40			$	1.17			$	3.69
Diluted earnings per share		$	0.20			$	1.20			$	1.14			$	3.04
Shares used in per share calculations:
Basic			48,681				48,616				48,665				48,014
Diluted			48,817				56,655				49,803				58,267

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

RETAIL VENTURES, INC.

(in thousands)

		Number of Shares																								Accumulated
						Common																				Other
		Common				Shares in				Common				Accumulated				Treasury								Comprehensive
		Shares				Treasury				Shares				Deficit				Shares				Warrants				Loss				Total
Balance, February 3, 2007			47,271				8			$	276,690			$	(184,461	)		$	(59	)		$				$	(550	)		$	91,620
Net income from continuing operations															211,096																211,096
Net loss from discontinued operations															(33,916	)															(33,916	)
Cumulative effect of FIN 48 adoption															(641	)															(641	)
Capital transactions of Subsidiary															2,051																2,051
Reclassification of Stock Appreciation Rights											1,934																				1,934
Stock based compensation expense, before related tax effects											658																				658
Exercise of stock options			19								71																				71
Exercise of warrants			1,333								25,612																				25,612
Balance, November 3, 2007			48,623				8			$	304,965			$	(5,871	)		$	(59	)		$				$	(550	)		$	298,485
Balance, February 2, 2008			48,623				8			$	305,254			$	(130,577	)		$	(59	)		$	124			$	(1,819	)		$	172,923
Net income from continuing operations															47,966																47,966
Net income from discontinued operations															8,908																8,908
Unrealized loss on available-for- sale securities, net of tax benefit of $616																											(941	)			(941	)
Total comprehensive income																														$	55,933
Capital transactions of Subsidiary															2,452																2,452
Stock based compensation expense, before related tax effects											1,046																				1,046
Exercise of stock options			65								200																				200
Balance, November 1, 2008			48,688				8			$	306,500			$	(71,251	)		$	(59	)		$	124			$	(2,760	)		$	232,554

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

RETAIL VENTURES, INC.

		Nine months ended
		November 1,				November 3,
		2008				2007
Cash flows from operating activities:
Net income		$	56,874			$	177,180
(Income) loss from discontinued operations, net of tax			(8,908	)			33,916
Income before discontinued operations			47,966				211,096
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of debt issuance costs and discount on debt			2,603				2,539
Stock based compensation expense			1,046				658
Stock based compensation expense of subsidiary			2,452				2,051
Depreciation and amortization			34,461				29,351
Change in fair value of derivative instruments ($(31,021) and $(143,634) — related party)			(61,759	)			(228,680	)
Gain on repurchase of Premium Income Exchangeable Securities			(1,486	)
Deferred income taxes and other noncurrent liabilities			(10,694	)			(2,946	)
Impairment of assets			11,649				3,106
Loss on disposal of assets			1,069				184
Minority interest in consolidated subsidiary			12,748				19,481
Other			1,018				1,359
Change in working capital, assets and liabilities:
Accounts receivable			5,906				(1,397	)
Inventories			(79,344	)			(49,806	)
Prepaid expenses and other assets			(490	)			(6,728	)
Accounts payable			39,850				53,116
Proceeds from construction and tenant allowances			21,187				19,242
Accrued expenses			18,396				(24,455	)
Net cash provided by operating activities from continuing operations			46,578				28,171
Net cash used in operating activities from discontinued operations							(19,759	)
Cash flows from investing activities:
Cash paid for property and equipment			(69,644	)			(80,439	)
Purchases of available-for-sale investments			(182,672	)			(87,100	)
Purchases of held-to-maturity investments			(2,000	)
Maturities and sales from available-for-sale investments			174,213				88,550
Maturities and sales from held-to-maturity investments			2,000
Acquisition of tradename							(21	)
Net cash used in investing activities from continuing operations			(78,103	)			(79,010	)
Net cash used in investing activities from discontinued operations							(169	)
Cash flows from financing activities:
Net increase in revolving credit facility			20,500				31,000
Repurchase of Premium Income Exchangeable Securities			(5,600	)
Proceeds from exercise of warrants							6,000
Proceeds from exercise of stock options			200				71
Net cash provided by financing activities from continuing operations			15,100				37,071
Net cash provided by financing activities from discontinued operations							19,197
Net decrease in cash and equivalents from continuing operations			(16,425	)			(13,768	)
Cash and equivalents from continuing operations, beginning of period			112,951				143,020
Cash and equivalents from continuing operations, end of period		$	96,526			$	129,252
Net decrease in cash and equivalents from discontinued operations							(731	)
Cash and equivalents from discontinued operations, beginning of period							17,201
Cash and equivalents from discontinued operations, end of period		$				$	16,470

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

RETAIL VENTURES, INC.

1.		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”. Retail Ventures’ common shares are listed on the New York Stock Exchange trading under the ticker symbol “RVI”. The Company operates three segments in the United States of America (“United States”). DSW Inc. (“DSW”) is a specialty branded footwear retailer and Filene’s Basement, Inc. (“Filene’s Basement”) is an off-price retailer. The Corporate segment consists of all revenue and expenses that are not allocated to the other segments. As of November 1, 2008, there were 295 DSW stores located throughout the United States and 36 Filene’s Basement stores located in major metropolitan areas in the northeastern and midwestern United States. DSW also operates dsw.com and supplies shoes, under supply arrangements, for 345 locations for other non-related retailers in the United States.
		As of November 1, 2008, Retail Ventures owned Class B Common Shares of DSW representing approximately 62.9% of DSW’s outstanding common shares and approximately 93.1% of the combined voting power of such shares. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are listed on the New York Stock Exchange trading under the ticker symbol “DSW”.
		On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores LLC (“Value City”) business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an after-tax loss on the transaction of $81.1 million, including a reduction of the loss of $8.9 million recognized in the first three quarters of fiscal 2008. As part of the transaction, Retail Ventures issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the change in ownership and operation of Value City, Retail Ventures agreed to provide or arrange for the provision of certain transition services principally related to information technology, finance and human resources to Value City for a period of one year unless otherwise extended by both parties. On October 26, 2008, Value City filed for bankruptcy protection and announced that it would close its remaining stores. The Company has negotiated an agreement with Value City to continue to provide services post bankruptcy filing, including risk management, financial services, benefits administration, payroll and information technology services, in exchange for a weekly payment.
		DSW. DSW stores and dsw.com offer a wide selection of better-branded dress, casual and athletic footwear for men and women, as well as accessories. During the nine months ended November 1, 2008, DSW opened 37 new DSW stores, closed one DSW store and launched dsw.com. DSW also operates leased departments for three non-affiliated retailers and one affiliated retailer in its leased department segment. As of November 1, 2008, DSW supplied merchandise to 279 Stein Mart stores, 65 Gordmans stores, 36 Filene’s Basement stores, and one Frugal Fannie’s store. During the nine months ended November 1, 2008, DSW added nine non-affiliated leased departments and one affiliated leased department and ceased operations in seven non-affiliated leased departments and one affiliated leased department. DSW owns the merchandise, records sales of merchandise net of returns and sales tax, owns the fixtures (except for Filene’s Basement, the affiliated retailer) and provides supervisory assistance in these locations. Stein Mart, Gordmans, Filene’s Basement and Frugal Fannie’s provide the sales associates. DSW pays a percentage of net sales as rent.
		Filene’s Basement. Filene’s Basement stores are located primarily in major metropolitan areas of the northeastern 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. During the nine months ended November 1, 2008, Filene’s Basement opened one new store and closed one store.
		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.

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

2.		BASIS OF PRESENTATION
		The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2008, as filed with the Securities and Exchange Commission (the “SEC”) on April 25, 2008 (the “2007 Annual Report”).
		In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, which are necessary to present fairly the condensed consolidated financial position, results of operations and cash flows for the periods presented.
3.		ADOPTION OF ACCOUNTING STANDARDS
		In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, Fair Value Measurements (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in Generally Accepted Accounting Principles (“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 financial assets and liabilities for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. For non-financial assets and liabilities measured at fair value on a non-recurring basis, SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2008. RVI is currently evaluating the impact of the adoption of SFAS 157 for non-financial assets and liabilities on its financial position and results of operations.
		Although the adoption of this standard for financial assets and liabilities in the quarter ended May 3, 2008 had no impact on RVI’s financial position or results of operations, it does result in additional disclosures regarding fair value measurements. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Therefore, fair value is a market-based measurement based on assumptions of the market participants. As a basis for these assumptions, SFAS 157 establishes the following three level fair value hierarchy:

	•		Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that are publicly accessible. Active markets have frequent transactions with enough volume to provide ongoing pricing information.
	•		Level 2 inputs are other than level 1 inputs that are directly or indirectly observable. These can include unadjusted quoted prices for similar assets or liabilities in active markets, unadjusted quoted prices for identical assets or liabilities in inactive markets, or other observable inputs.
	•		Level 3 inputs are unobservable inputs.

Financial assets and liabilities measured at fair value on a recurring basis as of November 1, 2008 consisted of the following:

		Balance at
		November 1, 2008				Level 1				Level 2				Level 3
		(in thousands)
Assets:
Cash and equivalents		$	96,526			$	96,526
Restricted cash			260				260
Short-term investments			84,915							$	84,915
Long-term investments			4,493											$	4,493
Conversion feature of long-term debt			52,329								52,329
		$	238,523			$	96,786			$	137,244			$	4,493
Liabilities:
Warrant liability		$	1,417							$	1,417
Warrant liability-related parties			2,920								2,920
		$	4,337							$	4,337

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

Cash and equivalents and restricted cash primarily represent cash deposits and investments in money market funds held with financial institutions. See Note 7 for fair value disclosure regarding financial instruments and debt. The activity related to level 3 investments for the nine months ended November 1, 2008 is summarized below:

		Short-term				Long-term
		(in thousands)
Carrying value as of February 2, 2008		$	70,005			$	12,500
Maturities and sales			(68,855	)			(7,600	)
Transfers between short-term and long-term investments			(1,150	)			1,150
Unrealized losses included in accumulated other comprehensive loss							(1,557	)
Carrying value as of November 1, 2008		$	0			$	4,493

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). This statement allows entities to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this standard in the quarter ended May 3, 2008 had no impact on RVI’s financial position or results of operations. RVI has not currently elected the fair value provisions for any assets or liabilities, but RVI may elect to measure certain assets and liabilities using the fair value option in the future.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. This statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as minority interest) and for the deconsolidation of a subsidiary. This statement shall be applied prospectively as of the beginning of the fiscal year in which this statement is initially adopted, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact this statement may have on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). This statement establishes enhanced disclosures about the entity’s derivative and hedging activities. This statement is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Adoption of SFAS 161 will result in enhanced disclosure regarding the Company’s derivative instruments.

In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of Statement of Financial Accounting Standard No. 133, Accounting for Derivatives and Hedging Activities (“SFAS 133”), specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No. 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company is currently evaluating the impact of the adoption of EITF No. 07-5 on the Company’s consolidated financial statements.

4. DISCONTINUED OPERATIONS

On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City operations to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. As part of the transaction, Retail Ventures issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008. Retail Ventures received no net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized

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

an after-tax loss on the transaction of $81.1 million as of November 1, 2008, including a reduction in the loss of $8.9 million recognized in the nine months ended November 1, 2008 consisting primarily of the adjustments of guarantees recorded by Retail Ventures partially offset by additional expenses relating to the transaction. The after-tax loss on the transaction as of February 2, 2008 of $90.0 million was comprised of $26.6 million for the recording of guarantees, $35.1 million for the write off of a note receivable from Value City to RVI and related accrued interest, $13.8 million for the write off of receivables from Value City to RVI, $10.6 million for the write off of RVI’s remaining investment in the discontinued operations, $3.8 million related to the transfer of assets and $0.1 million for the issuance of warrants to VCHI. See Note 14 for additional discussion regarding the guarantees as of November 1, 2008.

The significant components of Value City operating results for the three months ended November 3, 2007 included in discontinued operations were: net sales of $298.4 million, loss before income taxes of $22.3 million, income tax benefit of $8.1 million, and loss from discontinued operations, net of tax of $14.2 million. The significant components of Value City operating results for the nine months ended November 3, 2007 included in discontinued operations were: net sales of $854.8 million, loss before income taxes of $53.3 million, income tax benefit of $19.4 million, and loss from discontinued operations, net of tax of $33.9 million.

5. STOCK BASED COMPENSATION

Retail Ventures Stock Compensation Plans

The Company has an Amended and Restated 2000 Stock Incentive Plan (the “2000 Plan”) that provides for the issuance of equity awards covering up to 13,000,000 common shares, including stock options, stock appreciation rights and restricted stock, to management, key employees of Retail Ventures and affiliates, consultants (as defined in the plan), and non-employee directors of Retail Ventures. Options granted under the plan generally vest 20% per year on a cumulative basis and remain exercisable for a period of ten years from the date of grant.

The Company has an Amended and Restated 1991 Stock Option Plan that provided for the grant of equity awards covering up to 4,000,000 common shares. Options granted under the plan 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 the nine months ended November 1, 2008 and November 3, 2007, included in income from continuing operations is stock based compensation expense of $4.3 million and $3.8 million, respectively, which includes $3.3 million and $3.1 million, respectively of expenses recorded by DSW, before accounting for the minority interest.

The following tables summarize the activity of the Company’s stock options, stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) for the nine months ended November 1, 2008 (in thousands):

		Nine months ended November 1, 2008
		Stock Options				SARs				RSUs
Outstanding, beginning of period			1,312				725				57
Granted			88
Exercised			(65	)							(35	)
Forfeited			(237	)			(330	)
Outstanding, end of period			1,098				395				22
Exercisable, end of period			1,046				227

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

Stock Options

The weighted-average grant date fair value of options granted in the three months ended November 1, 2008 and November 3, 2007 was $2.18 per share and $6.26 per share, respectively, and for the nine months ended November 1, 2008 and November 3, 2007 was $3.15 per share and $9.35 per share, respectively. The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented.

		Nine months ended
		November 1,				November 3,
		2008				2007
Assumptions:
Risk-free interest rate			2.9	%			4.6	%
Expected volatility of Retail Ventures common shares			56.1	%			56.7	%
Expected option term			5.0	years			5.0	years
Expected dividend yield			0.0	%			0.0	%

Stock Appreciation Rights

Expense of $0.3 million and reduction of expenses of $0.6 million were recorded in continuing operations during the three months ended November 1, 2008 and November 3, 2007, respectively, relating to SARs. Expense of $0.8 million and reduction of expenses of $4.8 million were recorded in continuing operations during the nine months ended November 1, 2008 and November 3, 2007, respectively, relating to SARs.

Restricted Stock Units

Total compensation expense costs recognized in continuing operations related to restricted stock units for the three months ended November 1, 2008 was a reduction of expenses of less than $0.1 million and for the three months ended November 3, 2007 was a reduction of expenses of $0.5 million. Total compensation expense costs recognized in continuing operations related to restricted stock units for the nine months ended November 1, 2008 was an expense of $0.1 million and for the nine months ended November 3, 2007 was a reduction of expenses of $0.8 million, respectively. The amount accrued for restricted stock units at November 1, 2008 and February 2, 2008 was less than $0.1 million and $0.2 million, respectively.

Restricted Shares

The Company issued restricted common shares to certain key employees pursuant to individual employment agreements and certain other grants from time to time, which are approved by the Board of Directors. The agreements condition the vesting of the shares generally upon continued employment with the Company with such restrictions expiring over various periods ranging from three to five years. The market value of the shares at the date of grant is charged to expense on a straight-line basis over the period that the restrictions lapse. As of both November 1, 2008 and February 2, 2008, the Company had no outstanding restricted common shares.

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, RSUs and director stock units, to management, key employees of DSW and affiliates, consultants (as defined in the plan), and non-employee directors of DSW. DSW stock options, RSUs and director stock units are not included in the number of shares used in the basic or dilutive calculation of earnings per share of Retail Ventures.

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

		Stock Options
		The following table summarizes the activity of DSW’s stock options for the nine months ended November 1, 2008 (in thousands):

		Nine months ended
		November 1, 2008
Outstanding, beginning of period			1,520
Granted			1,040
Exercised			(1	)
Forfeited			(402	)
Outstanding, end of period			2,157
Exercisable, end of period			523

The weighted-average grant date fair value of each option granted during the three months ended November 1, 2008 and November 3, 2007 was $6.91 per share and $11.54 per share, respectively, and for the nine months ended November 1, 2008 and November 3, 2007 was $5.89 per share and $17.38 per share, respectively. The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented:

		Nine months ended
		November 1,				November 3,
		2008				2007
Assumptions:
Risk-free interest rate			2.8	%			4.5	%
Expected volatility of DSW common shares			48.1	%			39.4	%
Expected option term		4.9 years				5.0 years
Expected dividend yield			0.0	%			0.0	%

Restricted Stock Units

The following table summarizes the activity of DSW’s RSUs for the nine months ended November 1, 2008 (in thousands):

		Nine months ended
		November 1, 2008
Outstanding, beginning of period			151
Granted			133
Vested			(4	)
Forfeited			(58	)
Outstanding, end of period			222

The total aggregate intrinsic value of nonvested RSUs at November 1, 2008 was $2.9 million. As of November 1, 2008, the total compensation cost related to nonvested RSUs not yet recognized was approximately $2.2 million with a weighted average expense recognition period remaining of 2.2 years. The weighted average exercise price for all RSUs is zero.

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

		Director Stock Units
		DSW issues stock units to directors of DSW who are not employees of DSW or Retail Ventures. During the nine months ended November 1, 2008, DSW granted 43,887 director stock units, and expensed $0.6 million related to these grants. During the nine months ended November 3, 2007, DSW granted 9,294 director stock units and expensed $0.3 million relating to the grants. As of November 1, 2008, 81,823 director stock units had been issued and no director stock units had been settled.
6.		INVESTMENTS
		The long-term investments balance at both November 1, 2008 and February 2, 2008 includes auction rate securities that failed at auction subsequent to February 2, 2008 and are presented as long-term as it is unknown if the Company will be able to liquidate these securities within one year. As a result, for the nine months ended November 1, 2008, the Company recorded a temporary impairment of approximately $1.6 million, before taxes, related to its long-term investments. The auction rate securities are typically available for auction every 91 to 182 days.
		Short-term investments at November 1, 2008 include variable rate demand notes, tax exempt bonds, tax advantaged bonds, tax exempt commercial paper and certificates of deposit. Tax exempt commercial paper and certificates of deposit mature approximately every 28 to 126 days. The other types of short-term investments generally have interest reset dates every 7 to 9 days. Despite the long-term nature of the stated contractual maturities of the bonds, tax exempt commercial paper and variable rate demand notes, the Company has the ability to quickly liquidate these securities. As a result, the Company has classified these securities as available for sale. At February 2, 2008, the short-term investment balance included variable rate demand notes and auction rate securities. All investments are recorded in the DSW segment.
		The following table discloses the major categories of investments as of November 1, 2008 and February 2, 2008:

		Short-term investments								Long-term investments
		November 1,				February 2,				November 1,				February 2,
		2008				2008				2008				2008
		(in thousands)
Available for sale:
Tax exempt bonds		$	50,765
Tax advantaged bonds			1,000
Variable rate demand notes			18,150			$	44,505
Tax exempt commercial paper			5,000
Certificates of deposit			10,000
Auction rate securities							25,500			$	6,050			$	12,500
Unrealized losses included in accumulated other comprehensive loss											(1,557	)
Total available for sale		$	84,915			$	70,005			$	4,493			$	12,500

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

7.		LONG-TERM OBLIGATIONS AND WARRANT LIABILITIES
		Long term obligations consist of the following (in thousands):

		November 1,				February 2,
		2008				2008
Credit facilities:
Revolving credit facilities		$	43,000			$	22,500
Senior Loan Agreement — related parties			250				250
Premium Income Exchangeable Securities			133,750				143,750
Discount on Premium Income Exchangeable Securities			(6,691	)			(8,707	)
		$	170,309			$	157,793
Letters of credit outstanding:
Filene’s Basement revolving credit facility		$	3,022			$	3,360
DSW revolving credit facility		$	10,547			$	15,711
Availability under revolving credit facilities:
Filene’s Basement revolving credit facility		$	32,996			$	26,996
DSW revolving credit facility		$	139,453			$	134,289

		Premium Income Exchangeable SecuritiesSM (PIES)
		The embedded exchange feature of the Premium Income Exchangeable SecuritiesSM (“PIES”) is accounted for as a derivative, which is recorded at fair value based upon the income approach using the Black-Scholes pricing model in accordance with SFAS 157 using level 2 inputs such as current market rates and changes in fair value, and is reflected in the statements 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 is being amortized into interest expense over the term of the PIES.
		During the three and nine months ended November 1, 2008, the Company recorded expense of $2.9 million and a reduction of expense of $23.9 million, respectively related to the change in fair value of the conversion feature of the PIES. During the three and nine months ended November 3, 2007, the Company recorded a reduction of expense related to the change in fair value of the conversion feature of the PIES of $42.6 million and $82.6 million, respectively. As of November 1, 2008 and February 2, 2008, the fair value asset recorded for the conversion feature of the PIES was $52.3 million and $30.8 million, respectively.
		On October 10, 2008, Retail Ventures repurchased 200,000 units of PIES for an aggregate purchase price of $5.6 million, which resulted in a reduction of the long-term obligation of $10.0 million. Retail Ventures recorded a gain of $1.5 million on the repurchase which is included in other non-operating income on the statements of operations.
		Warrants
		VCHI Acquisition Co. Warrants
		On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. As part of the transaction, Retail Ventures issued warrants (“the VCHI

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

		Warrants”) to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008.
		The VCHI Warrants are not derivative instruments as defined under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). The VCHI Warrants were measured at fair value on the date of the transaction, January 23, 2008, and recorded within equity. The $0.1 million value ascribed to the VCHI Warrants was estimated as of January 23, 2008 using the Black-Scholes Pricing Model.
		Term Loan Warrants and Conversion Warrants
		For the three and nine months ended November 1, 2008, the Company recorded a reduction of expenses of $10.8 million and $37.9 million, respectively, for the change in fair value of the Term Loan Warrants and Conversion Warrants (together, the “Warrants”). For the three and nine months ended November 3, 2007, the Company recorded a reduction of expenses of $48.7 million and $146.1 million, respectively, for the change in fair value of the Warrants. No tax change has been recognized in connection with this charge. These derivative instruments do not qualify for hedge accounting under SFAS No. 133 and, therefore, changes in the fair values are recognized in earnings in the period of change.
		In accordance with SFAS 133 and SFAS 157, Retail Ventures estimates the fair values of derivatives based on the income approach using the Black-Scholes pricing model using level 2 inputs such as current market rates and records all derivatives on the balance sheet at fair value. The fair value of the Warrants was $4.3 million and $42.2 million at November 1, 2008 and February 2, 2008, 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.
		Deferred Rent
		Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the initial lease term. For these leases, the Company recognizes the related rental expense on a straight-line basis and records the difference between the amount charged to expense and the rent paid as deferred rent and begins amortizing such deferred rent upon the delivery of the lease location by the lessor. The amounts of deferred rent included in other noncurrent liabilities on the balance sheet at November 1, 2008 and February 2, 2008 were $41.6 million and $38.1 million, respectively.
		Construction and Tenant Allowances
		The Company receives cash allowances from landlords, which are deferred and amortized on a straight-line basis over the life of the lease as a reduction of rent expense. These unamortized allowances were $85.9 million and $76.2 million at November 1, 2008 and February 2, 2008, respectively.
8.		PENSION BENEFIT PLAN
		The Company contributed $0.5 million in the second quarter of fiscal 2008 to meet minimum funding requirements. The following table shows the components of net periodic benefit (cost) of the Company’s pension benefit plan (in thousands):

		Three months ended								Nine months ended
		November 1,				November 3,				November 1,				November 3,
		2008				2007				2008				2007
Interest cost		$	234			$	227			$	701			$	681
Expected return on plan assets			(282	)			(303	)			(844	)			(909	)
Amortization of transition asset			(9	)			(10	)			(28	)			(29	)
Amortization of net loss			111				61				332				183
Net periodic benefit (cost)		$	54			$	(25	)		$	161			$	(74	)

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

9.		EARNINGS PER SHARE
		Basic earnings per share is based on net income and a simple weighted average of common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares, related to outstanding stock options, SARs and Warrants, calculated using the treasury stock method. The numerator for the diluted earnings per share calculation is net income. The denominator is the weighted average number of shares outstanding. The following table shows the composition of the number of shares used for the computations of dilutive earnings per share (in thousands):

		Three months ended								Nine months ended
		November 1,				November 3,				November 1,				November 3,
		2008				2007				2008				2007
Weighted average shares outstanding			48,681				48,616				48,665				48,014
Assumed exercise of dilutive SARs							182				9				293
Assumed exercise of dilutive stock options			136				506				187				596
Assumed exercise of dilutive Term Loan Warrants							2,545				326				3,083
Assumed exercise of dilutive Conversion Warrants							4,806				616				6,281
Number of shares for computations of dilutive earnings per share			48,817				56,655				49,803				58,267

The amount of securities outstanding at November 1, 2008 and November 3, 2007 that was not included in the computation of dilutive earnings per share because the equity unit’s exercise price was greater than the average market price of the common shares for the period and, therefore, the effect would be anti-dilutive, was as follows (in thousands):

		Three months ended								Nine months ended
		November 1,				November 3,				November 1,				November 3,
		2008				2007				2008				2007
SARs			395				525				364				525
Stock options			650				187				308				187
VCHI Warrants			150								150
Term Loan Warrants			3,684
Conversion Warrants			8,333
Total of all potentially dilutive instruments			13,212				712				822				712

10.		ACCUMULATED OTHER COMPREHENSIVE LOSS
		The balance sheet caption Accumulated other comprehensive loss of $2.8 million and $1.8 million at November 1, 2008 and February 2, 2008, respectively, includes the Company’s minimum pension liability, net of income tax and the unrealized loss on available-for-sale securities, net of income tax. For the nine months ended November 1, 2008, total comprehensive income was $55.9 million. For the nine months ended November 3, 2007, comprehensive income and net income were the same.
11.		INCOME TAXES
		The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for quarterly events. The Company’s effective tax rate of 28.6% for the nine month period ended November 1, 2008 reflects the impact of the change in fair value of warrants, included in book income but not tax income and a reduction in valuation allowances of $0.5 million on federal and state deferred tax assets. The Company’s effective tax rate for the nine months ended November 3, 2007 was 21.0% and reflects the impact of the change in fair value of warrants, included in book income but not tax income, and an additional valuation allowance of $2.7 million on state deferred tax assets.

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

		The Company establishes valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. The Company has determined that there is a probability that future taxable income may not be sufficient to fully utilize deferred tax assets. The allowances as of November 1, 2008 and February 2, 2008 were $100.0 million and $100.5 million, respectively. Based on available data, the Company believes it is more likely than not that the remaining deferred tax assets will be realized.
		Consistent with its historical financial reporting, the Company has elected to classify interest expense related to income tax liabilities, when applicable, as part of the interest expense in its condensed consolidated statements of operations rather than income tax expense. The Company will continue to classify income tax penalties as part of selling, general and administrative expenses in its condensed consolidated statements of operations.
12.		SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
		A supplemental schedule of non-cash investing and financing activities is presented below (in thousands):

		Nine months ended
		November 1,				November 3,
		2008				2007
Cash paid during the period for:
Interest		$	8,234			$	8,456
Income taxes		$	13,109			$	45,647
Noncash activities:
Increase in accounts payable and accrued expenses due to asset purchases		$	257			$	3,603

13.		SEGMENT REPORTING
		The Company is operated in three segments: DSW, Filene’s Basement and Corporate. All of the operations are located in the United States. As a result of RVI’s disposition of an 81% ownership interest in its Value City operations on January 23, 2008, the results of the previously disclosed Value City segment are included in discontinued operations (see Note 4) and Value City is therefore no longer included as a reportable segment of the Company. 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. The goodwill balance of $25.9 million outstanding at November 1, 2008 and February 2, 2008 is recorded in the DSW segment. The Corporate segment includes activities that are not allocated to individual segments. Capital expenditures in parenthesis represent assets transferred to other segments.

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

The tables below present segment information for the three and nine months ended November 1, 2008 and November 3, 2007 (in thousands):

						Filene’s								Intersegment
		DSW				Basement				Corporate				Eliminations				Total
Three months ended November 1, 2008
Net Sales		$	391,355			$	112,150											$	503,505
Operating profit (loss)			20,917				(4,486	)		$	7,858								24,289
Depreciation and amortization			8,698				2,490				440								11,628
Interest expense			270				2,285				2,971			$	(1,728	)			3,798
Interest income			956				12				1,939				(1,728	)			1,179
Income tax (expense) benefit			(8,425	)			196				(1,985	)							(10,214	)
Capital expenditures			22,806				2,031				8				(147	)			24,698
As of November 1, 2008
Total assets			785,383				170,400				229,006				(124,434	)			1,060,355
Three months ended November 3, 2007
Net Sales		$	367,380			$	122,014											$	489,394
Operating profit (loss)			34,805				(5,177	)		$	91,347								120,975
Depreciation and amortization			6,277				3,023				777								10,077
Interest expense			140				1,911				3,165			$	(2,037	)			3,179
Interest income			1,673				70				2,927				(2,037	)			2,633
Income tax (expense) benefit			(13,906	)			2,577				(18,372	)							(29,701	)
Capital expenditures			30,853				5,416				(746	)							35,523
As of February 2, 2008
Total assets			693,882				162,099				222,361				(126,377	)			951,965

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

						Filene’s								Intersegment
		DSW				Basement				Corporate				Eliminations				Total
Nine months ended November 1, 2008
Net Sales		$	1,114,794			$	314,781											$	1,429,575
Operating profit (loss)			54,602				(24,110	)		$	61,759								92,251
Depreciation and amortization			24,409				8,352				1,700								34,461
Interest expense			848				6,725				9,583			$	(5,182	)			11,974
Interest income			2,677				39				5,791				(5,182	)			3,325
Income tax (expense) benefit			(22,008	)			275				(2,641	)							(24,374	)
Capital expenditures			66,732				3,513				19				(147	)			70,117
Nine months ended November 3, 2007
Net Sales		$	1,073,095			$	346,776											$	1,419,871
Operating profit (loss)			80,349				(15,990	)		$	228,680								293,039
Depreciation and amortization			17,151				9,734				2,466								29,351
Interest expense			421				5,528				9,542			$	(6,112	)			9,379
Interest income			5,621				107				8,602				(6,112	)			8,218
Income tax (expense) benefit			(32,852	)			7,633				(36,082	)							(61,301	)
Capital expenditures			70,074				14,688				(762	)							84,000

14.		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 the Company’s 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. During the second quarter of fiscal 2008, in a putative class action captioned Levine vs. DSW, DSW prevailed on a motion for summary judgment on all claims in the Court of Common Pleas, Cuyahoga County, Ohio.  Settlement of this case did not have a material impact on the Company’s results of operations or financial condition. The Company currently has no pending litigation relating to this matter. As of November 1, 2008, the Company decreased the balance of the associated reserve from $0.5 million to $0.1 million.
		The Company is involved in various 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 of the 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 most likely estimated liability related to the claim. In the opinion of management, the amount of any potential liability with respect to these proceedings will not be material to the Company’s results of operations or financial condition. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise the estimates as needed. Revisions in its estimates and potential liability could materially impact the Company’s results of operations and financial condition.

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

		Guarantees
		RVI completed the disposition of an 81% ownership interest in its Value City business segment on January 23, 2008. Retail Ventures or its wholly-owned subsidiary, Retail Ventures Services, Inc. (“RVS”), had guaranteed or in certain circumstances may be responsible for certain liabilities of Value City. If Value City does not pay creditors whose obligations RVI or RVS had guaranteed, RVI may become subject to various risks associated with such refusal to pay creditors or any insolvency or bankruptcy proceedings.
		As of November 1, 2008 RVI had recorded an estimated maximum potential liability of $15.9 million, of which $3.9 million is classified as short-term, for the guarantees of Value City commitments including, but not limited to: guaranteed severance for certain Value City employees of $0.8 million; approximately $2.2 million for the amount of lease obligations for certain equipment leases; amounts recognized under certain income tax liabilities of approximately $5.0 million; amounts owed under certain employee benefit plans of approximately $4.1 million for the amount that may be due if the plans are not fully funded on a termination basis; approximately $1.4 million for the guarantee of certain workers compensation claims for events prior to the disposition date and the guarantee of the amount of unpaid management fees from Value City to VCHI for a period of one year following the transaction of $2.4 million. As of February 2, 2008, RVI had recorded an estimated maximum potential liability of $26.6 million for the guarantees of Value City commitments described above as well as guarantees with various financing institutions for Value City inventory purchases made prior to the disposition date. The reduction in the liability through November 1, 2008 is due to Value City payments to factors, passage of time and revaluation of the guarantees. Changes in the amount of guarantees are included in the income (loss) from discontinued operations on the statements of operations.
		As the guaranteed underlying obligations are paid down or otherwise liquidated by Value City, subject to certain statutory requirements, RVI will recognize a reduction of the associated liability. In certain instances, RVI or RVS may have the ability to reduce the estimated maximum potential liability of $15.9 million. As of the date of this report, the amount of any reduction is not reasonably estimable.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Quarterly Report on Form 10-Q (this “Report”) and except as the context otherwise may require, “RVI”, “Retail Ventures” “Company”, “we”, “us”, and “our” refers to Retail Ventures, Inc. and its wholly-owned subsidiaries, including but not limited to, Filene’s Basement, Inc. (“Filene’s Basement”), DSW Inc. (“DSW”), a controlled subsidiary, and DSW’s wholly-owned subsidiaries, including but not limited to, DSW Shoe Warehouse, Inc. (“DSWSW”).

OVERVIEW

Retail Ventures is a holding company operating retail stores in two of its three segments: DSW and Filene’s Basement. DSW is a leading United States branded footwear specialty retailer operating 295 shoe stores in 37 states as of November 1, 2008 and dsw.com and supplies shoes, under supply arrangements, for 345 locations for other non-related retailers in the United States. DSW and dsw.com offer a large selection of better-branded merchandise. 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 in major metropolitan areas of the northeastern 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 November 1, 2008, there were 36 Filene’s Basement stores in operation. The Corporate segment consists of all corporate assets, liabilities and expenses that are not allocated to the other segments. Retail Ventures’ common shares are listed on the New York Stock Exchange under the ticker symbol “RVI”.

As of November 1, 2008, Retail Ventures owned Class B Common Shares of DSW representing approximately 62.9% of DSW’s outstanding common shares and approximately 93.1% 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”.

On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores (“Value City”) business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an after-tax loss on the transaction of $81.1 million, including a reduction of the loss of $8.9 million recorded in the nine months ended November 1, 2008. As part of the transaction, Retail Ventures issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the change in ownership and operation of Value City Department Stores, Retail Ventures agreed to provide or arrange for the provision of certain transition services principally related to information technology, finance and human resources to Value City for a period of one year unless otherwise extended by both parties. On October 26, 2008, Value City filed for bankruptcy protection and announced that it would close its remaining stores. We have negotiated an agreement with Value City to continue to provide services post bankruptcy filing, including risk management, financial services, benefits administration, payroll and information technology services, in exchange for a weekly payment.

Following the disposition of Value City, certain corporate services employees that provided shared services were hired by Value City and certain other corporate service positions were eliminated. Pursuant to an amendment to the existing shared services agreement between RVI and DSW, RVI transferred the following shared service departments to DSW during the nine months ended November 1, 2008: Finance; Internal Audit; Tax; Human Resource Information Systems; and Risk Management. The employees in these departments were transferred to DSW during the nine months ended November 1, 2008. Due to the disposition of an 81% ownership interest in Value City, the allocation of shared service expenses has had, and will continue to have, an increased expense impact on DSW and Filene’s Basement.

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 period to period, 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 condensed consolidated financial statements and accompanying notes included in Item 1 of Part I of this Report.

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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 the risks discussed in “Part I, Item 1A, Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended February 2, 2008, as filed with the Securities and Exchange Commission (the “SEC”) on April 25, 2008 (the “2007 Annual Report”), and in “Part II, Item 1A. Risk Factors” in this Form 10-Q 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 and operating new 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;
	•		impact of the disposition of a majority interest in Value City and the reliance on remaining subsidiaries to pay indebtedness and shared service obligations;
	•		the risk of Value City not paying us or its other creditors, for which Retail Ventures may have some liability;
	•		disruption of our distribution operations;
	•		our dependence on DSW for key services;
	•		the success of dsw.com;
	•		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;
	•		liquidity and investment risks related to our investments;
	•		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 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. 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.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the results of operations and financial condition as reflected in our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. As discussed in the Notes to the Consolidated Financial Statements that are included in our 2007 Annual Report, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including, but not limited to, those related to inventory valuation, depreciation, amortization, recoverability of long-lived assets including intangible assets, the calculation of retirement benefits, estimates for self insurance reserves for health and welfare, workers’ compensation and casualty insurance, income taxes, contingencies, allowance for doubtful accounts 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 the Audit Committee and our Board of Directors.

	•		Revenue recognition. Revenue from merchandise sales is recognized upon customer receipt of merchandise, are net of returns and sales tax and are not recognized until collectability is reasonably assured. Net sales also include revenues from shipping and handling while the related costs are included in cost of sales. Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift cards. Our policy is to recognize income from breakage of gift cards when the likelihood of redemption of a gift card is remote. In the fourth quarter of fiscal 2007, we determined that we had accumulated enough historical data to recognize income from gift card breakage. We recognized $0.2 million and $0.5 million, respectively, as miscellaneous income from gift card breakage during the three and nine months ended November 1, 2008. Miscellaneous income is included in License Fees and Other Income in the Condensed Consolidated Statements of Operations. We did not recognize any income from gift card breakage during the three and nine months ended November 3, 2007.
	•		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 realizable value, 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 condensed consolidated balance sheets is decreased by charges to cost of sales at the time the retail value of the inventory is lowered through the use of markdowns. Hence, earnings are negatively impacted as merchandise is marked down prior to sale. Reserves to value inventory at the realizable value were $28.7 million and $31.8 million at November 1, 2008 and February 2, 2008, respectively.
			Inherent in the calculation of inventories are certain significant management judgments and estimates, including setting the original merchandise retail value (known as mark-on), markups of initial prices established, reductions in pricing 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 method, can significantly impact the ending inventory valuation at cost and the resulting gross profit.
	•		Cash and cash 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. The carrying amounts approximate fair value.
	•		Allowance for doubtful accounts. We monitor our exposure for credit losses and record related allowances for doubtful accounts. Allowances are estimated based upon specific accounts receivable balances, where a risk of default has been identified. As of November 1, 2008 and February 2, 2008, our allowances for doubtful accounts were $1.2 million and $0.4 million, respectively. The increase in our allowance is primarily related to the collectability of receivables from Value City.
	•		Investments. We determine the appropriate balance sheet classification of our investments at time of purchase and evaluate the classification at each balance sheet date. If we have the intent and ability to hold the investments to maturity, investments are classified as held-to-maturity. Held to maturity securities are stated at amortized cost plus accrued interest. Otherwise, our investments are classified as available-for-sale.
			Investments, which can include variable rate demand notes, tax exempt bonds, tax advantaged bonds, tax exempt commercial paper, certificates of deposit and auction rate securities, are classified as available-for-sale securities or held to maturity. All income generated from these investments is recorded as interest income. Our investments in auction rate securities have variable interest rates, which typically reset every 91 to 182 days and are presented as long-term as it is unknown if the Company will be able to liquidate these securities within one year. Tax exempt commercial paper and certificates of deposit mature approximately every 28 to 126 days. The

			other short-term investments generally have interest rate reset dates every 7 to 9 days. Despite the long-term nature of the stated contractual maturities of the bonds, tax exempt commercial paper and variable rate demand notes, the Company has the ability to quickly liquidate these securities and classifies these securities as short-term investments accordingly.
			We evaluate our investments for impairment and whether an impairment is other-than-temporary. In determining whether an impairment has occurred, we review information about the underlying investment that is publicly available and assess our ability to hold the securities for the foreseeable future. Based on the nature of the impairment(s), we would record a temporary impairment as an unrealized loss in other comprehensive income or an other-than-temporary impairment in earnings. The investment is written down to its current market value at the time the impairment is deemed to have occurred.
	•		Asset impairment and long-lived assets. We periodically evaluate the carrying amount of our long-lived assets, primarily property and equipment, and finite life intangible assets when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset is considered impaired when the carrying value of the asset exceeds the expected future cash flows from the asset. Our reviews are conducted at the lowest identifiable level, which includes a store. The impairment loss recognized is the excess of the carrying amount of the asset over its fair value, based on projected discounted cash flows using a discount rate determined by management. Any impairment loss realized is included in operating expenses. We believe at November 1, 2008 that the carrying values and useful lives of long-lived assets are appropriate. To the extent these future projections or our strategies change, the conclusion regarding the impairment may differ from our current estimates.
	•		Store closing reserve. During the nine months ended November 1, 2008, the Company recorded charges associated with the closing of one DSW store and two Filene’s Basement stores, one of which closed in fiscal 2007. During the nine months ended November 3, 2007, the Company recorded charges associated with the closing of one DSW store and two Filene’s Basement stores, including the accruals for the severance related to the temporary shut down of the Downtown Crossing location. These store closing reserves are monitored on at least a quarterly basis for changes in circumstances.
			The table below sets forth the significant components and activity related to these closing reserves (in thousands):

		Balance at												Balance at
		February 2,				Related								November 1,
		2008				Charges				Payments				2008
Lease costs		$	15							$	(15	)
Employee severance and termination benefits			389			$	75				(461	)		$	3
Other							136				(136	)
Total		$	404			$	211			$	(612	)		$	3