DSW Inc · S-3/A · On 8/4/06
Filed On 8/4/06 7:59pm ET · SEC File 333-134227 · Accession Number 950123-6-9956
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
8/07/06 DSW Inc S-3/A 8/04/06 2:184 Bowne of NY City...01/FA
Pre-Effective Amendment to Registration Statement for Securities Offered Pursuant to a Transaction · Form S-3
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1: S-3/A Pre-Effective Amendment to Registration Statement HTML 1,143K
for Securities Offered Pursuant to a
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S-3/A · Pre-Effective Amendment to Registration Statement for Securities Offered Pursuant to a Transaction
Document Table of Contents
| Page | (sequential) | | | | (alphabetic) | Top |
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- Alternative Formats (RTF, XML, et al.)
- Business
- Certain Relationships and Related Party Transactions
- Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005
- Consolidated Statements of Cash Flows for the years ended January 28, 2006, January 29, 2005 and January 31, 2004
- Consolidated Statements of Income for the years ended January 28, 2006, January 29, 2005 and January 31, 2004
- Consolidated Statements of Shareholders Equity for the years ended January 28, 2006, January 29, 2005, January 31, 2004 and February 1, 2003
- Description of Capital Stock
- Description of Indebtedness
- Dividend Policy
- Experts
- Forward-Looking Statements
- Incorporation of Certain Information by Reference
- Index to Consolidated Financial Statements
- Legal Matters
- Management
- Management S Discussion and Analysis of Financial Condition and Results of Operations
- Material U.S. Federal Income and Estate Tax Consequences
- Notes to Consolidated Financial Statements
- Plan of Distribution
- Price Range of Class A Common Shares
- Principal Shareholders
- Prospectus Summary
- Report of Independent Registered Public Accounting Firm
- Risk Factors
- Selected Consolidated Financial and Operating Data
- Selling Shareholder, The
- Table of Contents
- The Selling Shareholder
- Use of Proceeds
- Where You Can Find More Information
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| 1 | 1st Page
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| " | Table of Contents
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| " | Prospectus Summary
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| " | Risk Factors
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| " | Forward-Looking Statements
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| " | Use of Proceeds
|
| " | The Selling Shareholder
|
| " | Price Range of Class A Common Shares
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| " | Dividend Policy
|
| " | Selected Consolidated Financial and Operating Data
|
| " | Management S Discussion and Analysis of Financial Condition and Results of Operations
|
| " | Business
|
| " | Management
|
| " | Certain Relationships and Related Party Transactions
|
| " | Principal Shareholders
|
| " | Description of Indebtedness
|
| " | Description of Capital Stock
|
| " | Material U.S. Federal Income and Estate Tax Consequences
|
| " | Plan of Distribution
|
| " | Legal Matters
|
| " | Experts
|
| " | Where You Can Find More Information
|
| " | Incorporation of Certain Information by Reference
|
| " | Index to Consolidated Financial Statements
|
| " | Report of Independent Registered Public Accounting Firm
|
| " | Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005
|
| " | Consolidated Statements of Income for the years ended January 28, 2006, January 29, 2005 and January 31, 2004
|
| " | Consolidated Statements of Shareholders Equity for the years ended January 28, 2006, January 29, 2005, January 31, 2004 and February 1, 2003
|
| " | Consolidated Statements of Cash Flows for the years ended January 28, 2006, January 29, 2005 and January 31, 2004
|
| " | Notes to Consolidated Financial Statements
|
This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
| AMENDMENT NO. 4 ON FORM S-3 |
As filed with the Securities and Exchange Commission on
August 4, 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
ON FORM S-3 TO
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DSW INC.
(Exact name of registrant as specified in its charter)
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Ohio |
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5661 |
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31-0746639 |
(State or Other Jurisdiction of
Incorporation or Organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification No.) |
4150 East 5th Avenue
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant’s Principal Executive Offices)
William L. Jordan
General Counsel
4150 East 5th Avenue
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Copies to:
Approximate date of commencement of proposed sale to the
public: From time to time after the effective date of this
Registration Statement.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box. o
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of earlier effective registration statement for
the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following
box. o
If this form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed to
register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following
box. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information
in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and is
not soliciting offers to buy these securities in any state or
jurisdiction where the offer or sale is not
permitted.
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PROSPECTUS
Shares
Class A Common Shares
This prospectus relates to up
to Class A
Common Shares of DSW Inc. that may be delivered by Retail
Ventures, Inc., or Retail Ventures,
on ,
2011 (or earlier if exchange is accelerated upon an acceleration
following an event of default under the PIES), to holders of
Retail
Ventures’ %
Mandatorily Exchangeable Notes Due
September 15, 2011, or
PIES
sm,
that Retail Ventures is offering by means of a separate
prospectus. Under the terms of the PIES, Retail Ventures will
have an obligation to deliver (unless Retail Ventures elects to
settle the PIES in cash), on
September 15, 2011 (or earlier
if exchange is accelerated), a maximum
of of
our Class A Common Shares per $50 principal amount of PIES,
and a maximum
of of
our Class A Common Shares in the aggregate, subject to
exchange adjustments as provided in the PIES. To the extent that
the underwriter in Retail Ventures’ offering of PIES
exercises in full its option to purchase additional PIES, this
prospectus will relate to up to an
additional of
our Class A Common Shares.
This prospectus accompanies a prospectus of Retail Ventures
relating to the sale of the Retail Ventures PIES. This
prospectus relates only to our Class A Common Shares that
Retail Ventures may deliver to the holders of the PIES. The
Retail Ventures prospectus is not a part of this prospectus and
is not
incorporated by reference into this prospectus. We will
not receive any of the proceeds from the sale of the PIES or the
delivery of Class A Common Shares to which this prospectus
relates and will have no obligation with respect to the PIES.
Our Class A Common Shares are listed on the New York Stock
Exchange, or NYSE, under the symbol
“DSW.” On
August 3, 2006, the last reported sale price of the
Class A Common Shares on the NYSE was $29.82 per share.
Investing in our Class A Common Shares involves
risks.
See “Risk Factors” beginning on page 7.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
,
2006
This prospectus relates only to our Class A Common
Shares that Retail Ventures may be required to deliver to the
holders of the PIES. Retail Ventures is offering the PIES in an
offering that is described in a separate prospectus. Retail
Ventures has attached this prospectus to its prospectus in order
to provide information about us and our Class A Common
Shares. Retail Ventures’ prospectus does not constitute a
part of this prospectus and is not incorporated by reference
into this prospectus.
We have no obligations with respect to Retail Ventures’
PIES. Accordingly, we are not under any obligation to take the
interests of Retail Ventures or the holders of the PIES into
consideration for any reason. We will not receive any of the
proceeds from Retail Ventures’ offering of the PIES and are
not responsible for, and have not participated 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) holders of the
PIES will receive at maturity. We are not involved with the
administration or trading of the PIES.
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this
prospectus, as well as the
information incorporated by reference
herein, with respect to DSW. We have not, and the underwriter
for the offering of the PIES has not, authorized any other
person to provide you with different information. If anyone
provides you with different or inconsistent information, you
should not rely on it. We are not, and the underwriter for the
offering of the PIES is not, making an offer to sell these
securities in any jurisdiction where an offer or sale is not
permitted. You should assume that the information appearing in
this prospectus or any
documents incorporated by reference is
accurate as of the date of the applicable document. Our
business, financial condition, results of operations and
prospects may have changed since that date.
The market share and industry data disclosed under
“Business — Industry Overview and
Competition” in this prospectus have been obtained from NPD
Fashionworld®,
a division of NPD Group, Inc.
i
PROSPECTUS SUMMARY
This summary highlights material information about our business
contained elsewhere in this prospectus. This summary does not
contain all the information you should consider before investing
in our Class A Common Shares. Before investing in our
Class A Common Shares, you should read this entire
prospectus carefully, including the “Risk Factors” and
“Forward-Looking Statements” sections and the
consolidated financial statements and notes to those
consolidated financial statements beginning on
page F-1.
In this prospectus, our fiscal years ended
February 2,
2002,
February 1, 2003,
January 31, 2004,
January 29, 2005 and
January 28, 2006 are referred to
as fiscal 2001, 2002, 2003, 2004 and 2005, respectively. Our
fiscal year consists of 52 or 53 weeks and ends on the
Saturday closest to January 31 in each year. All years shown
consisted of 52 weeks. Our 2006 fiscal year contains
53 weeks. Our consolidated financial results as part of
Retail Ventures contained in this prospectus may not reflect
what our financial results would have been had we been a
stand-alone company during the periods presented.
OUR BUSINESS
Overview
DSW is a leading U.S. specialty branded footwear retailer
operating 204 DSW stores in 33 states as of
April 29,
2006. We offer a wide selection of brand name and designer
dress, casual and athletic footwear for women and men. Our core
focus is to create a distinctive store experience that satisfies
both the rational and emotional shopping needs of our customers
by offering them a vast, exciting selection of in-season styles
combined with the convenience and value they desire. We believe
this combination of selection, convenience and value
differentiates us from our competitors and appeals to a broad
range of consumers. As of
April 29, 2006, Retail Ventures,
which is a holding company operating retail stores in three
segments (DSW, Value City and Filene’s Basement), owned
approximately 27.7 million of our Class B Common
Shares, or in excess of 63.1% of our total outstanding shares
and 93.2% of the combined voting power of our outstanding Common
Shares.
DSW allows customers to personalize their shopping experience by
offering a “sea of shoes” that are accessible,
easy-to-shop, and
fulfill a broad range of style and fashion desires. Typical DSW
stores are approximately 25,000 square feet, with over 85%
of total square footage used as selling space. Over
30,000 pairs of shoes in more than 2,000 styles are
displayed on the selling floor of most of our stores, compared
to a significantly smaller product offering at typical
department stores. Our stores feature self-service fixtures that
allow customers to view, touch, and try on the product without
relying on salespeople to check availability. Our locations have
clear signage, and well-trained sales associates are available
to assist customers as desired. New footwear merchandise is
organized by style on the main floor, and clearance goods are
organized by size in the rear of the store. The store layout
allows customers who do not have time for relaxed browsing to
swiftly identify the shoe styles they are seeking and shop in a
targeted, time-efficient manner.
Our goal is to further strengthen our position as a leading
specialty branded retailer of adult footwear in the United
States. Since 1998, we have accelerated our expansion by
investing in new stores, merchandise development, technology and
our people to support further growth and enhance our
performance. In fiscal 2005, we generated $1.14 billion in
net sales and $70.1 million in operating profit. During the
same period, we sold over 27.3 million pairs of shoes.
Our Competitive Strengths
We believe that our leading market position is driven by the
following competitive strengths:
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Breadth of Product Offerings. Our goal is to excite our
customers with a “sea of shoes” by offering the
largest selection of brand name and designer merchandise of any
footwear retailer or typical department store in the nation. |
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Our Distinctive and Convenient Store Layout. We cater to
both passionate shoe enthusiasts who take pleasure in our wide
product offering and to time-constrained customers who know
exactly what they want. All merchandise is displayed on the
selling floor with self-service fixtures, clear signage and
spacious aisles. |
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The Value Proposition Offered to Our Customers. We
provide our customers with high-quality, in-season fashions at
everyday prices that we believe are competitive with the typical
sale price found at specialty retailers and department stores.
Through our customer loyalty program called “Reward Your
Style,” we offer additional savings to frequent shoppers. |
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Demonstrated Ability to Consistently Deliver Profitable
Growth. Over the five-fiscal-year period ended
January 28, 2006, our store base, net sales and operating
profit have grown at compound annual rates of 21%, 22% and 48%,
respectively. In fiscal 2005, we generated $1.14 billion in
net sales and $70.1 million in operating profit, or 6.1% of
net sales. |
Growth Strategy
We plan to pursue the following three strategies for growth in
sales and earnings:
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Expanding Our Store Base. We believe our retail concept
provides substantial opportunity for expansion. Over the
five-fiscal-year period ended January 28, 2006, we have
opened 124 DSW stores, including 29 new stores in fiscal
2005, and plan to open approximately 30 stores in each
fiscal year from fiscal 2006 through fiscal 2010. As of
April 29, 2006, we have signed leases for an additional
20 stores to be opened in fiscal 2006 and 2007. We intend,
over time, to cluster stores in strategic areas to enhance name
recognition and achieve economies of scale. |
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Driving Sales Through Enhanced Merchandising. We intend
to increase the number of customer transactions and average
transaction value by continually refining our merchandise mix
and undertaking other initiatives, such as expanding vendor
relationships, increasing sales within existing merchandise
categories and extending into related product categories. |
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Leveraging Our Operating Model. As we grow our business
and fill in markets to their full potential, we believe we will
continue to improve our profitability by leveraging our cost
structure. We also intend to continue investing in our
infrastructure to enhance our planning and allocation, inventory
management, distribution and point of sale functions. |
Leased Shoe Department Businesses
As of
April 29, 2006, we operated a total of 216 leased
shoe departments for three non-affiliated retailers. As of
April 29, 2006, we also operated 25 leased shoe departments
for Filene’s Basement, Inc., or Filene’s Basement, a
wholly-owned subsidiary of Retail Ventures. We pay a specified
percentage of net sales as rent to these retailers. In fiscal
2005, leased shoe department sales comprised 10.5% of our total
sales.
Relationship with Retail Ventures
In connection with our initial public offering in July 2005, we
entered into several agreements with Retail Ventures related to
the separation of our business operations from Retail Ventures,
including, among others, a master separation agreement and a
shared services agreement. Many aspects of our business which
were fully managed and controlled by us without Retail
Ventures’ involvement continue to operate as they did prior
to the initial public offering. We continue to manage operations
for critical functions such as merchandise buying, planning and
allocation, distribution and store operations. Under the shared
services agreement, which became effective as of
January 30, 2005, we provide services to several
subsidiaries of Retail Ventures relating to planning and
allocation support, distribution services and transportation
management, site research, lease negotiation, store design and
construction management. Retail Ventures provides us with
services relating to import administration, risk management,
information technology, tax, logistics, legal services,
financial services, shared benefits administration and payroll
and maintains insurance for us and for our directors, officers
and employees. The initial term of the shared services agreement
expires
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at the end of fiscal 2007 and will be extended automatically for
additional one-year terms unless terminated by one of the
parties. With respect to each shared service, we cannot
reasonably anticipate whether the services will be shared for a
period shorter or longer than the initial term.
Retail Ventures has advised us that its current intent is to
continue to hold all the Class B Common Shares owned by it,
except to the extent necessary to satisfy obligations under
warrants it has granted to certain of its lenders and its
obligations under the PIES. The Class B Common Shares of
DSW held by Retail Ventures are currently subject to liens in
favor of these lenders, as well as a lien granted to Value City
Department Stores LLC, or Value City. For further discussion of
these warrant agreements, see “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations — The DSW Separation,” “Certain
Relationships and Related Party Transactions — Notes,
Credit Agreements and Guarantees” and “Description of
Indebtedness.”
Retail Ventures is currently subject to (a) contractual
obligations with its lenders to retain ownership of at least 55%
by value of the Common Shares of DSW for so long as the Value
City non-convertible loan, or the non-convertible loan, facility
remains outstanding and (b) contractual obligations with
its warrantholders to retain enough DSW Common Shares to be able
to satisfy its obligations to deliver such shares to its
warrantholders if the warrantholders elect to exercise their
warrants in full for DSW Class A Common Shares (without
regard to any limitations on exercisability of the warrants).
Upon completion of the offering of the PIES by Retail Ventures,
Retail Ventures will be released from these contractual
obligations with its lenders as well as the liens on the Common
Shares of DSW described above. However, Retail Ventures will
pledge sufficient DSW Common Shares to the collateral agent for
the PIES to enable Retail Ventures to satisfy its obligations to
deliver 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 Retail Ventures
to satisfy its obligations to the warrantholders to deliver
Class A Common Shares upon exercise of the warrants. Retail
Ventures will continue to be subject to usual and customary
restrictive covenants under the Value City revolving credit
facility. In addition, Retail Ventures has agreed not to sell or
otherwise dispose of any of our Common Shares for a period of
90 days after the date of this prospectus without the prior
written consent of Lehman Brothers Inc. as the underwriter for
the offering of the PIES, except to the extent necessary to
allow for the transfer of our Class A Common Shares by
Retail Ventures upon exercise of warrants for our Class A
Common Shares by Schottenstein Stores Corporation, or SSC,
Cerberus Partners L.P., or Cerberus, or Millennium Partners,
L.P., or Millennium, or their permitted transferees. See
“Plan of Distribution —
Lock-up
Agreements.” There can be no assurance concerning the
period of time during which Retail Ventures will maintain its
ownership of our Common Shares. For a further discussion of the
ongoing relationships between us and Retail Ventures, and the
risks relating to our relationship with and separation from
Retail Ventures, see
“Risk Factors — Risks
Relating to our Business” and
“Risks Relating to our
Relationship with and Separation From Retail Ventures” and
“Certain Relationships and Related Party
Transactions — Relationships Between Our Company and
Retail Ventures.”
Our Corporate Information
We were incorporated on January 20, 1969, as Shonac
Corporation. We opened our first DSW store in Dublin, Ohio in
July 1991. In 1998, Value City Department Stores, Inc., which
subsequently became a wholly-owned subsidiary of Retail
Ventures, purchased DSW and affiliated shoe businesses from SSC
and Nacht Management, Inc. In December 2004, Retail Ventures
completed a corporate reorganization, or the reorganization,
whereby Value City Department Stores, Inc., a wholly-owned
subsidiary of Retail Ventures, merged with and into Value City,
another wholly-owned subsidiary of Retail Ventures. In turn,
Value City transferred all the issued and outstanding shares of
DSW to Retail Ventures in exchange for a promissory note. In
February 2005, we changed our name from Shonac Corporation to
DSW Inc. In July 2005, we completed an initial public offering
of our Class A Common Shares, selling approximately
16.2 million shares at an offering price of $19.00 per
share.
3
Information on our
website is provided for informational
purposes only and should not be considered to be part of, or
incorporated by reference in, this prospectus.
Recent Developments
On
May 30, 2006, we entered into an amended and restated
supply agreement to supply shoes to Stein Mart, Inc., or Stein
Mart. Under the terms of this agreement, we will be the
exclusive supplier of shoes to all Stein Mart stores that have
shoe departments. As of
April 29, 2006, we supplied
merchandise to 158 Stein Mart stores. Under the amended and
restated supply agreement, we will be supplying merchandise to
an additional 102 Stein Mart stores beginning in 2007. We will
own the merchandise until the merchandise is sold to the
customer. We will receive a percentage of the net revenue
generated from the sale of the merchandise, consistent with our
original supply agreement with Stein Mart. The amended and
restated supply agreement terminates on
December 31, 2009,
but will automatically extend for another three years in the
event that neither party gives notice of its intent not to renew.
For the thirteen weeks ended
July 29, 2006, compared to the
thirteen weeks ended
July 30, 2005, we reported a
comparable store sales increase of 2.2%. Net sales for the
thirteen weeks ended
July 29, 2006 increased 9.1% to $301.3
million from $276.2 million for the same period last year.
Comparable store sales increased 3.2% for the year-to-date
period and net sales increased 10.7% to $617.8 million from
$558.0 million for the same period last year. As of
July 29, 2006, we operated 205 stores in 33 states and
supplied footwear to 239 leased locations (25 for related
retailers and 214 for non-related retailers) in the United
States.
4
OUR CORPORATE STRUCTURE
The following diagram sets forth our corporate structure as of
April 29, 2006.
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Assumes the issuance of (i) 8,333,333 Retail Ventures
common shares issuable upon the exercise of convertible
warrants, (ii) 1,594,377 Retail Ventures common shares
issuable upon the exercise of term loan warrants, and
(iii) up to 479,792 Retail Ventures common shares issuable
pursuant to the anti-dilution provisions of the term loan
warrants. |
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As of April 29, 2006, holders of Class A Common Shares
own approximately 36.9% of our outstanding Common Shares and
6.8% of the combined voting power of our outstanding Common
Shares. |
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As of April 29, 2006, Retail Ventures, which holds 100% of
our Class B Common Shares, owns in excess of 63.1% of our
outstanding Common Shares and 93.2% of the combined voting power
of our outstanding Common Shares. |
THE OFFERING
This prospectus relates only to our Class A Common Shares
that Retail Ventures may deliver to the holders of the PIES. The
PIES are obligations of Retail Ventures. We will have no
obligation of any kind with respect to the PIES. We will not
receive any of the proceeds from the sale of the PIES or the
delivery of Class A Common Shares to which this prospectus
relates.
5
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
We present below summary historical financial data. The
following summary historical financial data (i) as of
April 29, 2006 and for the thirteen week periods ended
April 30, 2005 and
April 29, 2006 were derived from
our unaudited historical condensed consolidated financial
statements included elsewhere in this prospectus, (ii) as
of
January 29, 2005 and
January 28, 2006 and for each
of the fiscal years 2003, 2004 and 2005 were derived from our
audited historical consolidated financial statements included
elsewhere in this prospectus, (iii) as of
January 31,
2004 were derived from our audited consolidated financial
statements not included herein, and (iv) as of
April 30, 2005 were derived from our unaudited condensed
consolidated financial statements not included herein.
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For the Thirteen | |
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For the Fiscal Year Ended | |
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Weeks Ended | |
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1/31/04 | |
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1/29/05 | |
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1/28/06 | |
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4/30/05 | |
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4/29/06 | |
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(Dollars in thousands except net sales per average gross square foot) | |
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Statement of Income Data:
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Net
sales(1)
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$ |
791,348 |
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$ |
961,089 |
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$ |
1,144,061 |
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$ |
281,806 |
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$ |
316,487 |
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Gross profit
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$ |
202,927 |
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$ |
270,211 |
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$ |
315,719 |
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$ |
82,798 |
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$ |
93,287 |
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Operating
profit(2)
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$ |
28,053 |
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$ |
56,109 |
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$ |
70,112 |
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$ |
15,053 |
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$ |
27,889 |
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Net
income(2)
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$ |
14,807 |
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$ |
34,955 |
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$ |
37,181 |
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$ |
6,980 |
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$ |
17,519 |
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Balance Sheet Data:
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Total assets
|
|
$ |
291,184 |
|
|
$ |
395,437 |
|
|
$ |
507,715 |
|
|
$ |
407,115 |
|
|
$ |
548,474 |
|
|
Working
capital(3)
|
|
$ |
103,244 |
|
|
$ |
138,919 |
|
|
$ |
238,528 |
|
|
$ |
151,715 |
|
|
$ |
258,423 |
|
|
Current
ratio(4)
|
|
|
2.39 |
|
|
|
2.28 |
|
|
|
2.71 |
|
|
|
2.21 |
|
|
|
2.60 |
|
|
Long term
obligations(5)
|
|
$ |
35,000 |
|
|
$ |
55,000 |
|
|
$ |
— |
|
|
$ |
205,000 |
|
|
$ |
— |
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of DSW stores at end of period
(6)
|
|
|
142 |
|
|
|
172 |
|
|
|
199 |
|
|
|
172 |
|
|
|
204 |
|
|
DSW total square footage at end of
period(7)
|
|
|
3,571,498 |
|
|
|
4,372,671 |
|
|
|
5,061,642 |
|
|
|
4,502,278 |
|
|
|
5,167,201 |
|
|
Average gross square footage at end of
period(8)
|
|
|
3,364,094 |
|
|
|
4,010,245 |
|
|
|
4,721,129 |
|
|
|
4,440,123 |
|
|
|
5,102,802 |
|
|
Net sales per average gross sq. ft.
(9)
|
|
$ |
214 |
|
|
$ |
217 |
|
|
$ |
217 |
|
|
$ |
57 |
|
|
$ |
56 |
|
|
Number of leased shoe departments at end of period
|
|
|
168 |
|
|
|
224 |
|
|
|
238 |
|
|
|
231 |
|
|
|
241 |
|
|
Total comparable store sales change
(10)
|
|
|
5.9 |
% |
|
|
5.0 |
% |
|
|
5.4 |
% |
|
|
4.4 |
% |
|
|
4.2 |
% |
|
|
| (1) |
Includes net sales of leased shoe departments. |
| |
| (2) |
Results for the fiscal year ended January 28, 2006 and for
the thirteen weeks ended April 30, 2005 include a
$6.5 million pre-tax charge and a $3.9 million
after-tax charge in operating profit and net income,
respectively, related to the reserve for estimated losses
associated with the theft of credit card and other purchase
information. |
| |
| (3) |
Working capital represents current assets less current
liabilities. |
| |
| (4) |
Current ratio represents current assets divided by current
liabilities. |
| |
|
|
| (5) |
Comprised of borrowings under the Value City revolving credit
facility to which we were previously a party. The balance as of
April 30, 2005 also includes $165 million owed to
Retail Ventures. See “Description of
Indebtedness — The $165.0 Million Intercompany
Note.” |
|
|
| |
| (6) |
Number of DSW stores for each period presented prior to fiscal
2005 includes two combination DSW/ Filene’s Basement stores
which were re-categorized as leased shoe departments at the
beginning of fiscal 2005. |
| |
| (7) |
DSW total square footage represents the total amount of square
footage at the end of the period for DSW stores only; it does
not reflect square footage of leased shoe departments. |
| |
| (8) |
Average gross square footage represents the monthly average of
square feet for DSW stores only for each period presented and
consequently reflects the effect of opening stores in different
months throughout the period. |
| |
| (9) |
Net sales per average gross square foot is the result of
dividing net sales for DSW stores only for the period presented
by average gross square footage calculated as described in
footnote 8 above. |
| |
| (10) |
Comparable DSW stores and comparable leased shoe departments are
those units that have been in operation for at least
14 months at the beginning of the fiscal year. Stores or
leased shoe departments, as the case may be, are added to the
comparable base at the beginning of the year and are dropped for
comparative purposes in the month that they are closed. |
6
RISK FACTORS
Investing in our Class A Common Shares involves a high
degree of risk. You should carefully consider the following
factors, as well as other information contained in this
prospectus and incorporated by reference in this prospectus,
before deciding to invest in our Class A Common Shares. If
any of the following risks actually occurs, our business,
financial condition, operating results or cash flow could suffer
materially and adversely. In this case, the trading price of our
Class A Common Shares could decline, and you could lose all
or part of your investment.
Safe Harbor Under the Private Securities Litigation Reform
Act of 1995
Certain information in this registration statement of which this
prospectus is a part, particularly information regarding future
economic performance and finances, and plans, expectations and
objectives of management, is forward-looking. The following
factors, in addition to other possible factors not listed, could
affect our actual results and cause such results to differ
materially from those expressed in forward-looking statements:
Risks Relating to Our Business
|
|
|
We intend to continue to open approximately 30 new DSW
stores per year from fiscal 2006 to fiscal 2010, which could
strain our resources and have a material adverse effect on our
business and financial performance. |
Our continued and future growth largely depends on our ability
to successfully open and operate new DSW stores on a profitable
basis. During fiscal 2005, fiscal 2004 and fiscal 2003, we
opened 29, 30 (net of one store closing during that period)
and 16 new DSW stores, respectively. As of
April 29, 2006,
we have also opened five new stores for fiscal 2006. We intend
to open approximately 30 stores per year in each fiscal year
from fiscal 2006 through fiscal 2010. As of
April 29, 2006,
we have signed leases for an additional 20 stores. During fiscal
2005, the average investment required to open a typical new DSW
store was approximately $1.4 million. 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.
|
|
|
We may be unable to open all the 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 and
results of operations. |
We intend to open approximately 30 stores per year in each
fiscal year from fiscal 2006 through fiscal 2010. 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 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; |
| |
| |
• |
open new stores at costs not significantly greater than those
anticipated; |
7
|
|
|
| |
• |
successfully open new DSW stores in regions of the United States
in which we currently have few or no stores; |
| |
| |
• |
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 DSW stores could be delayed
or prevented, could cost more than anticipated and could divert
resources from other areas of our business, any of which could
have a material adverse effect on our business, financial
condition and results of operations.
To the extent that we open new DSW 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 and results
of operations.
|
|
|
We rely on our good relationships with vendors 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 and, therefore, our success
depends on maintaining good relations with our vendors. 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. If we fail to
strengthen our relations with our existing vendors 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, our ability to obtain a sufficient amount
and variety of merchandise at favorable prices may be limited,
which could have a negative impact on our competitive position.
In addition, our inability to stock our DSW stores with
in-season merchandise at attractive prices could result in lower
net sales and decreased customer interest in our stores, which,
in turn, would adversely affect our financial performance.
During fiscal 2005, taking into account industry consolidation,
merchandise supplied to DSW by three key vendors accounted for
approximately 22% of our net sales. The loss of or a reduction
in the amount of merchandise made available to us by any one of
these key vendors could have an 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 have a material adverse effect on our
business, financial condition 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 to attract our target customers in that
region. 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; |
8
|
|
|
| |
• |
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 an adverse effect on our
business, financial condition and results of operations.
|
|
|
Our comparable store sales and quarterly financial
performance may fluctuate for a variety of reasons, which could
result in a decline in the price of our Class A 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. 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 DSW store openings and related
pre-opening and other
start-up costs; |
| |
| |
• |
levels of pre-opening expenses associated with new DSW stores; |
| |
| |
• |
changes in our merchandise mix; |
| |
| |
• |
changes in and regional variations in demographic and population
characteristics; |
| |
| |
• |
timing of promotional events; |
| |
| |
• |
seasonal fluctuations due to weather conditions; |
| |
| |
• |
actions by our competitors; and |
| |
| |
• |
general U.S. economic conditions and, in particular, the
retail sales environment. |
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. Our future financial performance may
fall below the expectations of securities analysts and
investors. In that event, the price of our Class A Common
Shares would likely decline. For more information on our
quarterly results of operations, see “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
|
|
|
We rely on a single distribution center. The loss or
disruption of our centralized distribution center could have a
material adverse effect on our business and operations. |
Most of our inventory is shipped directly from suppliers to a
single centralized distribution center in Columbus, Ohio, where
the inventory is then processed, sorted and shipped to one of 12
pool locations located throughout the country and then on to our
stores. 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 will impose on our receiving and distribution system,
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 believe that our distribution center is adequate to
meet our foreseeable needs, we may need to increase our
distribution capacity in the future to accommodate our expanding
retail business. Because our ability to expand our distribution
facilities at our current site is limited, we may need to
acquire, construct or lease additional distribution facilities
in other geographic locations to accommodate our planned
expansion.
9
We may also need to invest in additional information technology
to achieve a unified receiving and distribution system.
While we maintain business interruption and property insurance,
in the event our 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 our distribution
center, our insurance may not be sufficient, and insurance
proceeds may not be timely paid to us.
|
|
|
We are dependent on Retail Ventures to provide us with
many key services for our business. |
From 1998 until our initial public offering in July 2005, we
were operated as a wholly-owned subsidiary of Value City
Department Stores, Inc. or Retail Ventures, and many key
services required by us for the operation of our business are
currently provided by Retail Ventures and its
subsidiaries. We
have entered into agreements with Retail Ventures related to the
separation of our business operations from Retail Ventures
including, among others, a master separation agreement and a
shared services agreement. Under the terms of the shared
services agreement, which was effective as of
January 30,
2005, Retail Ventures provides us with key services relating to
import administration, risk management, information technology,
tax, logistics, legal services, financial services, shared
benefits administration and payroll. Additionally, Retail
Ventures maintains insurance for us and for our directors,
officers and employees. In turn, we provide several
subsidiaries
of Retail Ventures with services relating to planning and
allocation support, distribution services and transportation
management, site research, lease negotiation, store design and
construction management. The initial term of the shared services
agreement expires at the end of fiscal 2007 and will be extended
automatically for additional one-year terms unless terminated by
one of the parties. With respect to each shared service, we
cannot reasonably anticipate whether the services will be shared
for a shorter or longer than the initial term. We believe it is
necessary for Retail Ventures to provide these services for us
under the shared services agreement to facilitate the efficient
operation of our business as we transition to becoming an
independent public company. We, as a result, are dependent on
our relationship with Retail Ventures for shared services. See
“Certain Relationships and Related Party
Transactions — Relationships Between Our Company and
Retail Ventures — Agreements Relating to our
Separation from Retail Ventures.”
Once the transition periods specified in the shared services
agreement have expired and are not renewed, or if Retail
Ventures 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 an adverse effect on our
business, financial condition and results of operations.
|
|
|
Our failure to retain our existing senior management team
and to continue to attract qualified new personnel could
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 several of these officers. For more information
on our management team and their employment agreements and
severance agreements, see “Management.” 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 types of
personnel is intense, and we may not be successful in
attracting, assimilating and retaining the personnel required to
grow and operate our business profitably.
|
|
|
We may be unable to compete favorably in our highly
competitive market. |
The retail footwear market is highly competitive with few
barriers to entry. We compete against a diverse group of
retailers, both small and large, including locally owned shoe
stores, regional and national department
10
stores, specialty retailers and discount chains. 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, results of operations and
our market share.
|
|
|
A decline in general economic conditions, or the outbreak
or escalation of war or terrorist acts, could lead to reduced
consumer demand for our footwear and accessories. |
Consumer spending habits, including spending for the footwear
and related accessories 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, primarily from China, Brazil and
Italy. We believe that almost all the merchandise we purchased
during fiscal 2005 was manufactured outside the United States.
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; |
| |
| |
• |
U.S. laws 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 an adverse effect on our business.
11
|
|
|
Our secured revolving credit facility could limit our
operational flexibility. |
We have entered into a $150 million secured revolving
credit facility with a term expiring July 2010. Under this
facility, we and our subsidiary, DSW Shoe Warehouse, Inc., or
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. Our obligations under our
secured revolving credit facility are secured by a lien on
substantially all our and our subsidiary’s personal
property and a pledge of our shares of DSWSW. In addition, our
secured revolving credit facility contains usual and customary
restrictive covenants relating to our management and the
operation of our business. These covenants, among other things,
restrict our ability to grant liens on our assets, incur
additional indebtedness, open or close stores, pay cash
dividends and redeem our stock, enter into transactions with
affiliates and merge or consolidate with another entity. In
addition, if at any time we utilize over 90% of our borrowing
capacity under this facility, we must comply with a fixed charge
coverage ratio test set forth in the facility documents. These
covenants could restrict our operational flexibility, and any
failure to comply with these covenants or our payment
obligations would limit our ability to borrow under the secured
revolving credit facility and, in certain circumstances, may
allow the lenders thereunder to require repayment. For more
information regarding our secured revolving credit facility, see
“Description of Indebtedness.”
|
|
|
From the time of our acquisition by Value City Department
Stores, Inc. in 1998 until the completion of our initial public
offering in July 2005, we were not operated as an entity
separate from Value City and Retail Ventures, and, as a result,
our historical financial information may not be indicative of
our historical financial results or future financial
performance. |
Our consolidated financial information included in this
prospectus may not be indicative of our future financial
performance. This is because these statements do not necessarily
reflect our historical financial condition, results of
operations and cash flows as they would have been had we been
operated during all the periods presented as a separate,
stand-alone entity.
Our consolidated financial information assumes that we, for the
periods presented, had existed as a separate legal entity, and
has been derived from the consolidated financial statements of
Retail Ventures. Some costs have been reflected in the
consolidated financial statements that are not necessarily
indicative of the costs that we would have incurred had we
operated as an independent, stand-alone entity for all periods
presented. These costs include allocated portions of Retail
Ventures’ corporate overhead, interest expense and income
taxes.
|
|
|
We face security risks related to our electronic
processing and transmission of confidential customer
information. On March 8, 2005, Retail Ventures announced
the theft of credit card and other purchase information relating
to our 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 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, may result in a
compromise or breach of the 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 our customers. On
April 18, 2005, Retail Ventures issued the findings from
its investigation into the theft. The theft was of transaction
information involving approximately 1.4 million credit
cards and data from transactions involving approximately 96,000
checks.
12
We and Retail Ventures contacted and continue to cooperate with
law enforcement and other authorities with regard to this
matter. We are involved in several legal proceedings arising out
of this incident, including four putative class action lawsuits,
which seek unspecified monetary damages, credit monitoring and
other relief. Each of the four lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to
certify a nationwide class that would include every consumer who
used a credit card, debit card, or check to make purchases at
DSW between November 2004 and March 2005 and whose transaction
data was taken during the data theft incident. The other three
lawsuits seek to certify classes of consumers that are limited
geographically. Those cases use different putative class
definitions to identify consumers who made purchases at certain
stores in Ohio, Michigan, and Illinois. On
July 26, 2006,
the Michigan federal district court granted DSW’s motion to
dismiss the Michigan lawsuit and so ordered the dismissal of
that lawsuit.
In connection with this matter, we entered into a consent order
with the Federal Trade Commission, or 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.
We have not admitted any wrongdoing or that the facts alleged in
the FTC’s proposed unfairness complaint are true. Under the
consent order, we will pay no fine or damages. We have agreed,
however, to maintain a comprehensive information security
program and to undergo a biannual assessment of such program by
an independent third party.
There can be no assurance that there will not be additional
proceedings or claims brought against us in the future. We have
contested and will continue to vigorously contest the claims
made against us and will continue to explore our defenses and
possible claims against others.
We estimate that the potential exposures for losses related to
this theft ranges from approximately $6.5 million to
approximately $9.5 million. Because of many factors,
including the early development of information regarding the
theft, the early stage of the lawsuits asserted against us and
recoverability under insurance policies, there is no amount in
the estimated range that represents a better estimate than any
other amount in the range. Therefore, in accordance with
Financial Accounting Standard No. 5,
“Accounting for
Contingencies,” we accrued a charge to operations in the
first quarter of fiscal 2005 equal to the low end of the range
set forth above, or $6.5 million. To our knowledge, no
class action lawsuits brought by consumers alleging claims
similar to those asserted in the putative class actions against
us 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
April 29, 2006, the
balance of the associated accrual for potential exposure was
$4.6 million.
Risks Relating to Our Class A Common Shares and this
Offering
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The PIES may adversely affect the market price for our
Class A Common Shares. |
The market price of our Class A Common Shares is likely to
be influenced by the PIES. For example, the market price of our
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 Class A Common Shares received upon exchange of
the PIES, (b) possible sales of our Class A Common
Shares by investors who view the PIES as a more attractive means
of equity participation in us than owning our Class A
Common Shares and (c) hedging or arbitrage trading activity
that may develop involving the PIES and our Class A Common
Shares.
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We are controlled directly by Retail Ventures and
indirectly by SSC, whose interests may differ from those of our
other shareholders. |
As of
April 29, 2006, Retail Ventures, a public
corporation, owns 100% of our Class B Common Shares, which
represents in excess of 63.1% of our outstanding Common Shares.
These shares collectively represent approximately 93.2% of the
combined voting power of our outstanding Common Shares. As of
April 29,
13
2006, SSC owned approximately 42.8% of the outstanding common
shares of Retail Ventures and beneficially owned approximately
53.6% (assumes issuance of (i) 8,333,333 shares of
Retail Ventures common stock issuable upon the exercise of
convertible warrants, (ii) 1,594,377 shares of Retail
Ventures common stock issuable upon the exercise of term loan
warrants, and (iii) 479,792 shares of Retail Ventures
common stock issuable pursuant to the anti-dilution provisions
of the term loan warrants) of the outstanding common shares of
Retail Ventures. SSC, a privately held corporation, is
controlled by Jay L. Schottenstein, the Chairman of the Boards
of Directors of DSW and Retail Ventures and our Chief Executive
Officer, and members of his immediate family. Given their
respective ownership interests, Retail Ventures and, indirectly,
SSC, are able to control or substantially influence the outcome
of all matters submitted to our shareholders for approval,
including:
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mergers or other business combinations; and |
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acquisitions or dispositions of assets. |
The interests of Retail Ventures or SSC may differ from or be
opposed to the interests of our other shareholders, and their
control may have the effect of delaying or preventing a change
in control that may be favored by other shareholders. See
“Principal Shareholders” and “Certain
Relationships and Related Party Transactions.”
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SSC and Retail Ventures 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 Retail
Ventures, SSC and us in the area of employee recruiting and
retention. Any competition could intensify if Value City begins
to carry an assortment of shoes in its stores similar to those
found in our stores, target customers similar to ours or adopt a
similar business model or strategy for its shoe businesses.
Given that Value City is a wholly-owned subsidiary of Retail
Ventures and DSW is not wholly-owned, Retail Ventures and SSC
may be inclined to direct relevant corporate opportunities to
them rather than us.
Our amended and restated
articles of incorporation provide that
Retail Ventures and SSC are under no obligation to communicate
or offer any corporate opportunity to us. In addition, Retail
Ventures and SSC have the right to engage in similar activities
as us, do business with our suppliers and customers and, except
as limited by the master separation agreement, 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 and real estate
acquisitions. The provisions also outline how corporate
opportunities are to be assigned in the event that our, Retail
Ventures’ or SSC’s directors and officers learn of
corporate opportunities. See
“Certain Relationships and
Related Party Transactions — Provisions of Our Amended
Articles of Incorporation Governing Corporate Opportunities and
Related Party Transactions.”
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Some of our directors and officers also serve as directors
and officers of Retail Ventures, and may have conflicts of
interest because they may own Retail Ventures stock or options
to purchase Retail Ventures stock, or they may receive cash- or
equity-based awards based on the performance of Retail
Ventures. |
Some of our directors and officers also serve as directors or
officers of Retail Ventures and may own Retail Ventures stock or
options to purchase Retail Ventures stock, or they may be
entitled to participate in the Retail Ventures Plans as defined
in “Management — Executive
Compensation — Employee Incentive Plans.” Jay L.
Schottenstein is our Chief Executive Officer and Chairman of the
Board of Directors and Chairman of the Board of Directors of
Retail Ventures; Heywood Wilansky is a director of DSW and Chief
Executive Officer of Retail Ventures; Harvey L. Sonnenberg is a
director of DSW and of Retail Ventures; James A. McGrady is a
Vice President of DSW and the Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of Retail Ventures;
and Steven E. Miller is Senior Vice President and Controller of
both DSW and Retail Ventures. The Retail Ventures Plans provide
cash- and equity-based compensation to employees based on Retail
Ventures’ performance. These employment arrangements and
ownership interests or cash- or equity-based awards could
create, or appear to create, potential conflicts of interest
when directors
14
or officers who own Retail Ventures stock or stock options or
who participate in the Retail Ventures Plans are faced with
decisions that could have different implications for Retail
Ventures than they do for us. These potential conflicts of
interest may not be resolved in our favor.
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We do not expect to pay dividends in the foreseeable
future. |
We anticipate that future earnings will be used principally to
finance our retail expansion. Thus, we do not intend to pay cash
dividends on our Common Shares in the foreseeable future.
Provisions in our secured revolving credit facility may also
restrict us from declaring dividends. Our board of directors
will have sole discretion to determine the dividend amount, if
any, to be paid. Our board of directors will consider a number
of factors, including applicable provisions of Ohio corporate
law, our financial condition, capital requirements, funds
generated from operations, future business prospects, applicable
contractual restrictions and any other factors our board may
deem relevant. For further description of our dividend policy,
see “Dividend Policy.”
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If our existing shareholders or holders of rights to
purchase our Common Shares sell the shares they own, or if
Retail Ventures distributes its Common Shares to its
shareholders, it could adversely affect the price of our
Class A Common Shares. |
The market price of our Class A Common Shares could decline
as a result of market sales by our existing shareholders,
including Retail Ventures, or a distribution of our Common
Shares to Retail Ventures’ shareholders or the perception
that such sales or distributions will occur. These sales or
distributions also might make it difficult for us to sell equity
securities in the future at a time and at a price that we deem
appropriate. We cannot predict the size of future sales of our
Common Shares.
As of
April 29, 2006, there were 16,198,528 of our
Class A Common Shares outstanding (including
17,453 shares of director stock units issuable pursuant to
the terms of DSW’s equity incentive plan). Additionally, we
have issued 131,300 restricted Class A Common Shares and
stock units pursuant to the terms of DSW’s equity incentive
plan. As of
April 29, 2006, there were 27,702,667 of our
Class B Common Shares outstanding, which are restricted
securities within the meaning of Rule 144 under the
Securities Act but are eligible for resale subject to applicable
volume, manner of sale, holding period and other limitations of
Rule 144.
SSC, Cerberus and Millennium have the right to acquire our
Class A Common Shares from Retail Ventures pursuant to
warrant agreements they have with Retail Ventures. For further
discussion of these warrant agreements, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — The DSW
Separation,” “Certain Relationships and Related Party
Transactions — Notes, Credit Agreements and
Guarantees” and “Description of Indebtedness.”
We, Retail Ventures, each of Retail Ventures’ executive
officers and directors and SSC, as well as each of our executive
officers and directors, have agreed to a “lock-up,”
meaning that neither we nor they will sell any Common Shares
without the prior consent of Lehman Brothers Inc. as the
underwriter for the offering of the PIES for 90 days
following the date of this prospectus, except to the extent
necessary to allow for the transfer of our Class A Common
Shares by Retail Ventures upon exercise of warrants for DSW
Class A Common Shares by SSC, Cerberus or Millennium, or
their permitted transferees. SSC may also transfer the warrants
issued by Retail Ventures and held by it as of the date of this
prospectus without such consent. See “Plan of
Distribution — Lock-up Agreements.” These
warrants are exercisable at the option of the holder into either
Retail Ventures Common Shares or Class A Common Shares of
DSW held by Retail Ventures.
Upon the expiration of the
lock-up period, all
these Common Shares are eligible for future sale, subject to the
applicable volume, manner of sale, holding period and other
limitations of Rule 144. Retail Ventures has registration
rights with respect to its DSW Common Shares in specified
circumstances pursuant to the master separation agreement. In
addition, SSC and Cerberus (and any party to whom either of them
transfers at least 15% of their interest in registrable DSW
Common Shares) have the right to require that we register for
resale in specified circumstances the Class A Common Shares
issued to them upon exercise of their warrants, and each of
these entities and Millennium will be entitled to participate in
registrations initiated by
15
the other entities. See “Certain Relationships and Related
Party Transactions” for a discussion of Common Shares that
may be sold into the public market in the future.
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Our amended articles of incorporation, amended and
restated code of regulations and Ohio state law contain
provisions that may have the effect of delaying or preventing a
change in control of DSW. This could adversely affect the value
of your shares. |
Our amended
articles of incorporation authorize our board of
directors to issue up to 100,000,000 preferred shares and to
determine the powers, preferences, privileges, rights (including
voting rights) qualifications, limitations and restrictions on
those shares, without any further vote or action by the
shareholders. The rights of the holders of our Class A
Common Shares will be subject to, and may be adversely affected
by, the rights of the holders of any preferred shares that may
be issued in the future. The issuance of preferred shares could
have the effect of delaying, deterring or preventing a change in
control and could adversely affect the voting power of the
Class A Common Shares.
In addition, provisions of our amended articles of
incorporation, amended and restated code of regulations and Ohio
law, together or separately, could discourage potential
acquisition proposals, delay or prevent a change in control and
limit the price that certain investors might be willing to pay
in the future for our Common Shares. Among other things, these
provisions establish a staggered board, require a supermajority
vote to remove directors, and establish certain advance notice
procedures for nomination of candidates for election as
directors and for shareholder proposals to be considered at
shareholders’ meetings. For further description of these
provisions of amended
articles of incorporation, amended and
restated code of regulations and Ohio law, see
“Description
of Capital Stock — Anti-Takeover Effects of Certain
Provisions of our Amended Articles of Incorporation, our Amended
and Restated Code of Regulations and Ohio Law.”
Risks Relating to our Relationship with and Separation from
Retail Ventures
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The agreements we entered into with Retail Ventures in
connection with our initial public offering could restrict our
operations and adversely affect our financial condition. |
We and Retail Ventures have entered into a number of agreements
governing our separation from and our relationship with Retail
Ventures, including a master separation agreement and a shared
services agreement. Accordingly, the terms and provisions of
these agreements may be less favorable to us than terms and
provisions we could have obtained in arm’s length
negotiations with unaffiliated third parties.
We and Retail Ventures have entered into a tax separation
agreement. The tax separation agreement governs the respective
rights, responsibilities and obligations of Retail Ventures and
us with respect to tax liabilities and benefits, tax attributes,
tax contests and other matters regarding taxes and related tax
returns. Although Retail Ventures has informed us that it does
not currently intend or plan to undertake a spin-off of our
stock to Retail Ventures’ shareholders, we and Retail
Ventures have agreed to set forth our respective rights,
responsibilities and obligations with respect to any possible
spin-off in the tax separation agreement. If Retail Ventures
were to decide to pursue a possible spin-off, we have agreed to
cooperate with Retail Ventures and to take any and all actions
reasonably requested by Retail Ventures in connection with such
a transaction. We have also agreed not to knowingly take or fail
to take any actions that could reasonably be expected to
preclude Retail Ventures’ ability to undertake a tax-free
spin-off. In addition, we generally would be responsible for any
taxes resulting from the failure of a spin-off to qualify as a
tax-free transaction to the extent such taxes are attributable
to, or result from, any action or failure to act by us or
certain transactions in our stock (including transactions over
which we would have no control, such as acquisitions of our
stock and the exercise of warrants, options, exchange rights,
conversion rights or similar arrangements with respect to our
stock) following or preceding a spin-off. We would also be
responsible for a percentage (based on the relative market
capitalizations of DSW and Retail Ventures at the time of such
spin-off) of such taxes to the extent such taxes are not
otherwise attributable to us or Retail Ventures. Our agreements
in connection with such tax matters last indefinitely. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Separation
Agreements” and
“Certain Relationships and Related
Party Transactions — Relationships Between Our Company
and Retail Ventures.”
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We may be prevented from issuing stock to raise capital,
to effectuate acquisitions or to provide equity incentives to
members of our management and board of directors. |
Beneficial ownership of at least 80% of the total voting power
and 80% of each class of nonvoting capital stock is required in
order for Retail Ventures to effect a tax-free spin-off of DSW
or certain other tax-free transactions. Although Retail Ventures
has informed us that it does not currently intend or plan to
undertake a spin-off of our stock to Retail Ventures’
shareholders, under the terms of our tax separation agreement,
we have agreed that for so long as Retail Ventures continues to
own greater than 50% of the voting control of our outstanding
stock, we will not knowingly take or fail to take any action
that could reasonably be expected to preclude Retail
Ventures’ ability to undertake a tax-free spin-off. In
addition, Retail Ventures is currently subject to
(a) contractual obligations with its lenders to retain
ownership of at least 55% by value of the Common Shares of DSW
for so long as the non-convertible loan facility remains
outstanding and (b) contractual obligations with its
warrantholders to retain enough DSW Common Shares to be able to
satisfy its obligations to deliver such shares to its
warrantholders if the warrantholders elect to exercise their
warrants in full for DSW Class A Common Shares (without
regard to any limitations on exercisability of the warrants).
Upon completion of the offering of the PIES by Retail Ventures,
Retail Ventures will be released from these contractual
obligations with its lenders as well as certain liens on the
Common Shares of DSW in favor of these lenders and a lien
granted to Value City. However, Retail Ventures will pledge
sufficient DSW Common Shares to the collateral agent for the
PIES to enable Retail Ventures to satisfy its obligations to
deliver 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 Retail Ventures
to satisfy its obligations to the warrantholders to deliver
Class A Common Shares upon exercise of the warrants. These
restrictions may prevent us from issuing additional equity
securities to raise capital, to effectuate acquisitions or to
provide management or director equity incentives. See
“Certain Relationships and Related Party
Transactions — Relationships Between Our Company and
Retail Ventures.”
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Our prior and continuing relationship with Retail Ventures
exposes us to risks attributable to Retail Ventures’
businesses. |
Retail Ventures is obligated to indemnify us for losses that a
party may seek to impose upon us or our affiliates for
liabilities relating to the Retail Ventures business that are
incurred through a breach of the master separation agreement or
any ancillary agreement by Retail Ventures or its non-DSW
affiliates, if such losses are attributable to Retail Ventures
in connection with our initial public offering or are not
expressly assumed by us under the master separation agreement.
Any claims made against us that are properly attributable to
Retail Ventures or Value City in accordance with these
arrangements requires us to exercise our rights under the master
separation agreement to obtain payment from Retail Ventures. We
are exposed to the risk that, in these circumstances, Retail
Ventures cannot, or will not, make the required payment. If this
were to occur, our business and financial performance could be
adversely affected. See “Certain Relationships and Related
Party Transactions.”
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Possible future sales of Class A Common Shares by
Retail Ventures, SSC, Cerberus and Millennium could adversely
affect prevailing market prices for the Class A Common
Shares. |
The Class B Common Shares held by Retail Ventures are
currently subject to liens in favor of SSC and Cerberus, as well
as a lien granted to Value City. However, Retail Ventures may
sell any and all of the Common Shares held by it upon the
consent of these lenders, subject to applicable securities laws
and the restrictions set forth below. For a discussion of these
liens, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — The
DSW Separation” and “Description of
Indebtedness.” In addition, SSC, Cerberus and Millennium
have the right to acquire from Retail Ventures our Class A
Common Shares. Sales or distribution by Retail Ventures, SSC,
Cerberus and Millennium of a substantial number of Class A
Common Shares in the public market or to their respective
shareholders, or the perception that such SSC, Cerberus and
Millennium sales or distributions could occur, could adversely
affect prevailing market prices for the Class A Common
Shares. See “Certain Relationships and Related Party
Transactions —
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Relationships Between
our Company and Retail
Ventures — Agreements Relating to our Separation from
Retail Ventures — Exchange Agreement.”
Retail Ventures has advised us that its current intent is to
continue to hold all the Common Shares owned by it, except to
the extent necessary to satisfy obligations under warrants it
has granted to SSC, Cerberus, and Millennium and obligations
under the PIES. See “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — The DSW Separation,” “Certain
Relationships and Related Party Transactions — Notes,
Credit Agreements and Guarantees” and “Description of
Indebtedness.” In addition, Retail Ventures is currently
subject to (a) contractual obligations with its lenders to
retain ownership of at least 55% by value of our Common Shares
for so long as the non-convertible loan facility remains
outstanding and (b) contractual obligations with its
warrantholders to retain enough DSW Common Shares to be able to
satisfy its obligations to deliver such shares to its
warrantholders if the warrantholders elect to exercise their
warrants in full for DSW Class A Common Shares (without
regard to any limitations on exercisability of the warrants).
Upon completion of the offering of the PIES by Retail Ventures,
Retail Ventures will be released from these contractual
obligations with its lenders, as well as the liens on the Common
Shares of DSW described above. However, Retail Ventures will
pledge sufficient DSW Common Shares to the collateral agent for
the PIES to enable Retail Ventures to satisfy its obligations to
deliver 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 Retail Ventures
to satisfy its obligations to the warrantholders to deliver
Class A Common Shares upon exercise of the warrants. In
addition, Retail Ventures has agreed not to sell or otherwise
dispose of any DSW Common Shares that Retail Ventures holds for
a period of 90 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc. as
underwriter for the offering of the PIES, except to the extent
necessary to allow for the transfer of our Class A Common
Shares by Retail Ventures upon exercise of warrants by SSC,
Cerberus or Millennium, or their permitted transferees, for DSW
Class A Common Shares. See “Plan of
Distribution — Lock-up Agreements.”
If Retail Ventures were to require funds to service or refinance
its indebtedness or to fund its operations in the future and
could not obtain capital from alternative sources, it could seek
to sell some or all of the DSW Common Shares that it holds in
order to obtain such funds.
Similarly, SSC, Cerberus and Millennium are not subject to any
contractual obligation to retain Class A Common Shares they
may acquire from Retail Ventures, except that SSC has agreed not
to sell or otherwise dispose of any of our Common Shares for a
period of 90 days after the date of this prospectus without
the prior written consent of Lehman Brothers Inc., though SSC
may transfer the warrants issued by Retail Ventures and held by
it as of the date of this prospectus without such consent. These
warrants are exercisable at the option of the holder either into
Retail Ventures’ common shares or into Class A Common
Shares of DSW held by Retail Ventures. As a result, there can be
no assurance concerning the period of time during which Retail
Ventures, SSC, Cerberus or Millennium will maintain their
respective beneficial ownership of Common Shares in the future.
Retail Ventures, SSC and Cerberus (and any party to whom either
of them transfers at least 15% of their interest in registrable
DSW Common Shares) have registration rights with respect to
their respective Common Shares, which would facilitate any
future distribution, and SSC, Cerberus and Millennium will be
entitled to participate in the registrations initiated by the
other entities. See
“Certain Relationships and Related
Party Transactions — Relationships Between Our Company
and Retail Ventures.”
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FORWARD-LOOKING STATEMENTS
Some of the statements under
“Prospectus Summary,”
“Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
“Business” and elsewhere in this prospectus, including
information incorporated by reference herein, may contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, which reflect our current views
with respect to, among other things, future events and financial
performance. You can identify these forward-looking statements
by the use of forward-looking words such as
“outlook,”
“believes,” “expects,”
“potential,” “continues,” “may,”
“will,” “should,” “seeks,”
“approximately,” “predicts,”
“intends,” “plans,” “estimates,”
“anticipates” or the negative version of those words
or other comparable words. Any forward-looking statements
contained in this prospectus are based upon our historical
performance and on current plans, estimates and expectations.
The inclusion of this forward-looking information should not be
regarded as a representation by us, the underwriter for the
offering of the PIES or any other person that the future plans,
estimates or expectations contemplated by us will be achieved.
Such forward-looking statements are subject to various risks and
uncertainties. Accordingly, there are or will be important
factors that could cause our actual results to differ materially
from those indicated in these statements. We believe that these
factors include but are not limited to those described under
“Risk Factors.” These factors should not be construed
as exhaustive and should be read in conjunction with the other
cautionary statements that are included in this prospectus. We
do not undertake any obligation to publicly update or review any
forward-looking statement, whether as a result of new
information, future developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we may
have projected. Any forward-looking statements you read in this
prospectus reflect our current views with respect to future
events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of
operations, financial condition, growth strategy and liquidity.
You should specifically consider the factors identified in this
prospectus that could cause actual results to differ before
making an investment decision.
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USE OF PROCEEDS
This prospectus relates only to our Class A Common Shares
that Retail Ventures may deliver to the holders of the PIES. We
will not receive any of the proceeds from the sale of the PIES
or the delivery of Class A Common Shares to which this
prospectus relates and will have no obligation with respect to
the PIES.
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THE SELLING SHAREHOLDER
The selling shareholder of our Class A Common Shares
offered hereby is Retail Ventures. As of
April 29, 2006,
Retail Ventures owned 27,702,667 of our Class B Common
Shares, or in excess of 63.1% of our total outstanding Common
Shares and 93.2% of the combined voting power of our outstanding
Common Shares. Until the settlement of the PIES, Retail Ventures
will retain all voting and other beneficial rights in the
Class B Common Shares it pledges to secure the PIES,
subject to liens in favor of the collateral agent for the
benefit of the holders of the PIES. Pursuant to an exchange
agreement with Retail Ventures, upon the request of Retail
Ventures, we are required to exchange some or all of the
Class B Common Shares held by Retail Ventures for
Class A Common Shares, and we will deliver to the
collateral agent such number of our Class A Common Shares
as may be necessary to satisfy Retail Ventures’ obligations
under the PIES upon receipt of notice from the collateral agent
and exchange of a corresponding number of Class B Common
Shares.
Under the terms of the PIES offered by Retail Ventures, Retail
Ventures will have an obligation to deliver (unless Retail
Ventures elects to settle the PIES in cash), on
September 15, 2011 (or earlier if exchange is accelerated),
a maximum
of Class A
Common Shares per $50 principal amount of PIES, and a maximum
of Class A
Common Shares in the aggregate, subject to exchange adjustments
as provided in the PIES. The PIES will be exchanged into a
number of Class A Common Shares equal to the exchange
ratio, as provided in the PIES.
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PRICE RANGE OF CLASS A COMMON SHARES
We completed our initial public offering on
July 5, 2005.
Our Class A Common Shares are listed for trading under the
ticker symbol
“DSW” on the NYSE. The following table
sets forth the high and low sales prices of our Class A
Common Shares as reported on the NYSE Composite Tape during the
periods indicated. As of
April 29, 2006, there were 5
holders of record of our Class A Common Shares and one
holder of record of our Class B Common Shares.
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Fiscal 2005:
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Second Quarter
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$ |
27.50 |
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$ |
23.11 |
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Third Quarter
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27.32 |
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17.50 |
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Fourth Quarter
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28.10 |
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20.00 |
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Fiscal 2006
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First Quarter
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32.61 |
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26.32 |
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Second Quarter
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37.39 |
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28.26 |
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35.22 |
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29.52 |
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DIVIDEND POLICY
We do not anticipate paying cash dividends on our Common Shares
in the foreseeable future. Presently, we expect that all of our
future earnings will be retained for development of our
business. The payment of any future dividends will be at the
discretion of our board of directors and will depend upon, among
other things, future earnings, operations, capital requirements,
our general financial condition and general business conditions.
In March 2005, we incurred intercompany indebtedness to fund a
$165.0 million dividend to Retail Ventures. Additionally,
in May 2005, we incurred intercompany indebtedness to fund a
$25 million dividend to Retail Ventures. In July 2005, we
repaid both of these notes in full from the net proceeds of our
initial public offering.
Our credit facility restricts the payment of dividends by us or
our
subsidiaries, other than dividends paid in stock, and cash
dividends can only be paid to Retail Ventures by us up to the
aggregate amount $5.0 million, less the amount of any loan
advances made to Retail Ventures by us or our
subsidiaries. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources” and
“Description of
Indebtedness — Our Secured Revolving Credit
Facility.”
23
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We present below summary historical financial data. The
following summary historical financial data (i) as of
April 29, 2006 and for the thirteen week periods ended
April 30, 2005 and
April 29, 2006, were derived from
our unaudited historical condensed consolidated financial
statements included elsewhere in this prospectus, (ii) as
of
January 29, 2005 and
January 28, 2006 and for each
of fiscal years 2003, 2004 and 2005 were derived from our
audited historical consolidated financial statements included
elsewhere in this prospectus, (iii) as of
February 2,
2002,
February 1, 2003 and
January 31, 2004 and for
each of fiscal years 2001 and 2002 were derived from our audited
consolidated financial statements not included herein, and
(iv) as of
April 30, 2005 were derived from our
unaudited condensed consolidated financial statements not
included herein.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
For the | |
| |
|
|
|
Thirteen Weeks | |
| |
|
For the Fiscal Year Ended | |
|
Ended | |
| |
|
| |
|
| |
| |
|
2/2/02 | |
|
2/1/03 | |
|
1/31/04 | |
|
1/29/05 | |
|
1/28/06 | |
|
4/30/05 | |
|
4/29/06 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands except per share information and net sales per average gross square foot) | |
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales(1)
|
|
$ |
523,509 |
|
|
$ |
644,345 |
|
|
$ |
791,348 |
|
|
$ |
961,089 |
|
|
$ |
1,144,061 |
|
|
$ |
281,806 |
|
|
$ |
316,487 |
|
|
Gross profit
|
|
$ |
123,396 |
|
|
$ |
158,756 |
|
|
$ |
202,927 |
|
|
$ |
270,211 |
|
|
$ |
315,719 |
|
|
$ |
82,798 |
|
|
$ |
93,287 |
|
|
Operating
profit(2)
|
|
$ |
4,668 |
|
|
$ |
17,781 |
|
|
$ |
28,053 |
|
|
$ |
56,109 |
|
|
$ |
70,112 |
|
|
$ |
15,053 |
|
|
$ |
27,889 |
|
|
Net
income(2)
|
|
$ |
239 |
|
|
$ |
8,060 |
|
|
$ |
14,807 |
|
|
$ |
34,955 |
|
|
$ |
37,181 |
|
|
$ |
6,980 |
|
|
$ |
17,519 |
|
|
Earnings per share (basic and
diluted)(3)
|
|
$ |
0.01 |
|
|
$ |
0.29 |
|
|
$ |
0.53 |
|
|
$ |
1.26 |
|
|
$ |
1.00 |
|
|
$ |
0.25 |
|
|
$ |
0.40 |
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
232,821 |
|
|
$ |
295,703 |
|
|
$ |
291,184 |
|
|
$ |
395,437 |
|
|
$ |
507,715 |
|
|
$ |
407,115 |
|
|
$ |
548,474 |
|
|
Working
capital(4)
|
|
$ |
60,121 |
|
|
$ |
87,141 |
|
|
$ |
103,244 |
|
|
$ |
138,919 |
|
|
$ |
238,528 |
|
|
$ |
151,715 |
|
|
$ |
258,423 |
|
|
Current
ratio(5)
|
|
|
1.77 |
|
|
|
2.07 |
|
|
|
2.39 |
|
|
|
2.28 |
|
|
|
2.71 |
|
|
|
2.21 |
|
|
|
2.60 |
|
|
Long term
obligations(6)
|
|
$ |
325 |
|
|
$ |
54,116 |
|
|
$ |
35,000 |
|
|
$ |
55,000 |
|
|
$ |
— |
|
|
$ |
205,000 |
|
|
$ |
— |
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of DSW
stores:(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Beginning of period
|
|
|
78 |
|
|
|
104 |
|
|
|
126 |
|
|
|
142 |
|
|
|
172 |
|
|
|
172 |
|
|
|
199 |
|
| |
|
New stores
|
|
|
26 |
|
|
|
22 |
|
|
|
16 |
|
|
|
31 |
|
|
|
29 |
|
|
|
7 |
|
|
|
5 |
|
| |
|
Closed/re-categorized
stores(7)
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
End of period
|
|
|
104 |
|
|
|
126 |
|
|
|
142 |
|
|
|
172 |
|
|
|
199 |
|
|
|
177 |
|
|
|
204 |
|
| |
Comparable DSW stores
(units)(8)
|
|
|
54 |
|
|
|
74 |
|
|
|
102 |
|
|
|
124 |
|
|
|
139 |
|
|
|
139 |
|
|
|
168 |
|
| |
DSW total square footage at end of
period(9)
|
|
|
2,583,295 |
|
|
|
3,180,006 |
|
|
|
3,571,498 |
|
|
|
4,372,671 |
|
|
|
5,061,642 |
|
|
|
4,502,278 |
|
|
|
5,167,201 |
|
| |
|
Average gross square footage
(10)
|
|
|
2,217,108 |
|
|
|
2,912,545 |
|
|
|
3,364,094 |
|
|
|
4,010,245 |
|
|
|
4,721,129 |
|
|
|
4,440,123 |
|
|
|
5,102,802 |
|
| |
|
Net sales per average gross
sq. ft.(11)
|
|
$ |
230 |
|
|
$ |
214 |
|
|
$ |
214 |
|
|
$ |
217 |
|
|
$ |
217 |
|
|
$ |
57 |
|
|
$ |
56 |
|
|
Number of leased shoe departments at end of period
|
|
|
16 |
|
|
|
113 |
|
|
|
168 |
|
|
|
224 |
|
|
|
238 |
|
|
|
231 |
|
|
|
241 |
|
|
Total comparable store sales
change(8)
|
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
5.9 |
% |
|
|
5.0 |
% |
|
|
5.4 |
% |
|
|
4.4 |
% |
|
|
4.2 |
% |
|
|
|
| |
(1) |
Includes net sales of leased shoe departments. |
| |
| |
(2) |
Results for the fiscal year ended January 28, 2006 and for
the thirteen weeks ended April 30, 2005 include a
$6.5 million pre-tax charge, and a $3.9 million
after-tax charge in operating profit and net income,
respectively, related to the reserve for estimated losses
associated with the theft of credit card and other purchase
information. |
24
|
|
|
| |
(3) |
For fiscal 2001-2004, computed based upon 27.7 million
shares outstanding. During fiscal 2001-2004, we were a
wholly-owned subsidiary of Retail Ventures. For fiscal 2005,
computed based upon a weighted average of 37.2 million
basic shares outstanding and 37.3 million diluted shares
outstanding. For the thirteen weeks ended April 30, 2005,
computed based upon 27.7 million shares outstanding. For
the thirteen weeks ended April 29, 2006, computed based
upon a weighted average of 43.9 million basic shares
outstanding and 44.1 million diluted shares outstanding. |
| |
| |
(4) |
Working capital represents current assets less current
liabilities. |
| |
| |
(5) |
Current ratio represents current assets divided by current
liabilities. |
| |
|
|
| |
(6) |
Comprised of borrowings under the Value City revolving credit
facility to which we were previously a party. The balance as of
April 30, 2005 also includes $165 million owed to
Retail Ventures. See “Description of
Indebtedness — The $165.0 Million Intercompany
Note.” |
|
|
| |
| |
(7) |
Number of DSW stores for each fiscal period presented prior to
fiscal 2005 includes two combination DSW/ Filene’s Basement
stores which were re-categorized as leased shoe departments in
the first quarter of fiscal 2005. |
| |
| |
(8) |
Comparable DSW stores and comparable leased shoe departments are
those units that have been in operation for at least
14 months at the beginning of the fiscal year. Stores or
leased shoe departments, as the case may be, are added to the
comparable base at the beginning of the year and are dropped for
comparative purposes in the month that they are closed. |
| |
| |
(9) |
DSW total square footage represents the total amount of square
footage at the end of the period for DSW stores only; it does
not reflect square footage of leased shoe departments. |
|
|
| (10) |
Average gross square footage represents the monthly average of
square feet for DSW stores only for each period presented and
consequently reflects the effect of opening stores in different
months throughout the period. |
| |
| (11) |
Net sales per average gross square foot is the result of
dividing net sales for DSW stores only for the period presented
by average gross square foot calculated as described in
footnote 10 above. |
25
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 Statements” 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
prospectus, including “Prospectus Summary —
Summary Consolidated Financial Information,”
“Capitalization” and “Selected Consolidated
Financial and Operating Data.” 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 prospectus.
Overview
DSW is a leading U.S. specialty branded footwear retailer
operating 204 DSW stores in 33 states as of
April 29,
2006, with net sales of approximately $1.14 billion in
fiscal 2005. We offer in our DSW stores a combination of
selection, convenience and value that we believe differentiates
us from our competitors such as mall-based department stores,
national chains and independent shoe retailers and appeals to
consumers from a broad range of socioeconomic and demographic
backgrounds. In addition to operating DSW stores, as of
April 29, 2006, we operated a total of 216 leased shoe
departments for three non-affiliated retailers, including
158 leased shoe departments for Stein Mart; 57 for
Gordman’s, Inc., or Gordmans; and one for Frugal
Fannie’s Fashion Warehouse, or Frugal Fannie’s. As of
April 29, 2006, we also operated 25 leased shoe departments
for Filene’s Basement, a wholly-owned subsidiary of Retail
Ventures. We plan to further strengthen our position as a
leading specialty branded footwear retailer by pursuing three
primary strategies for growth — expanding our store
base, driving sales through enhanced merchandising and
continuing to improve profitability.
The first DSW store was opened in July 1991. From 1998 until the
completion of our initial public offering in July 2005, we
operated as a subsidiary of Retail Ventures and its
predecessors, and our assets, liabilities and operating results
were included in the financial statements of Value City
Department Stores, Inc. or Retail Ventures since the time of our
acquisition by Value City Department Stores, Inc. and the
formation of Retail Ventures, respectively. Upon completion of
our initial public offering, DSW became a publicly-traded
company and operates its business as a stand-alone entity. For
more information regarding the separation of the DSW business
from Retail Ventures, please see
“— Separation
Agreements” and
“Certain Relationships and Related
Party Transactions — Relationships Between Our Company
and Retail Ventures.” As of
April 29, 2006, Retail
Ventures owned approximately 27.7 million of our
Class B Common Shares, or in excess of 63.1% of our
outstanding shares, representing approximately 93.2% of the
aggregate voting power of our outstanding Common Shares.
We also operate leased shoe departments for three non-affiliated
retailers and one affiliated retailer in our leased department
segment. We entered into supply agreements to merchandise
certain non-affiliated shoe departments in Stein Mart, Gordmans
and Frugal Fannie’s stores as of July 2002, June 2004 and
September 2003, respectively. We have operated leased shoe
departments for Filene’s Basement since its acquisition by
Retail Ventures in March 2000. Effective as of
January 30,
2005, we updated and reaffirmed our contractual arrangement with
Filene’s Basement. We own the merchandise, record sales of
merchandise net of returns and sales tax, own the fixtures
(except for Filene’s Basement) and provide supervisory
assistance in these covered locations. Stein Mart, Gordmans,
Frugal Fannie’s and Filene’s Basement provide the
sales associates. We pay a percentage of net sales as rent.
Our consolidated financial statements, which are discussed
below, reflect the historical position, results of operations
and cash flows of the DSW business, which has been transferred
to us from Retail Ventures or other affiliates pursuant to the
reorganization. They assume that DSW, for the periods presented,
had existed as a separate legal entity. Our consolidated
financial statements reflect the accounting policies adopted by
26
Retail Ventures in the preparation of its financial statements.
Some costs have been reflected in the consolidated financial
statements that are not necessarily indicative of the costs that
DSW would have incurred had it operated as an independent,
stand-alone entity for all periods presented. These costs
include allocated portions of Retail Ventures’ corporate
overhead, interest expense and income taxes.
DSW generates revenues by purchasing primarily in-season shoes
and accessories directly from vendors for sale to customers in
DSW stores and leased shoe departments. We have operated leased
shoe departments in Filene’s Basement stores since April
2000, in Stein Mart stores since July 2002, in Gordmans stores
since June 2004 and in the Frugal Fannie’s store since
September 2003.
The main growth strategy for our business is to increase total
net sales through DSW store expansion while maintaining positive
comparable store sales growth for DSW stores. We intend to open
approximately 30 stores per year in each fiscal year from fiscal
2006 through fiscal 2010. As of
April 29, 2006, we have
signed leases for an additional 20 stores for fiscal 2006 and
2007. For fiscal 2006, we expect to spend $13.4 million and
$20.0 million, respectively, for capital expenditures and
inventory in connection with new DSW store openings. We expect
to receive approximately $7.5 million in tenant allowances
in connection with these store openings. We plan to finance
investment in new DSW stores with cash flows from operating
activities and may draw from our $150 million secured
revolving credit facility if necessary. However, we may be
unable to open new stores contemplated by our growth plan on a
timely basis. For a further discussion of the risks associated
with our growth strategy, see
“Risk Factors —
Risks Relating to Our Business.”
We expect our expenses to increase as we operate the additional
stores and support the increasing size of the business. However,
we will strive to limit the growth rate of our expenses to a
rate that is less than the growth rate of net sales. We expect
the increase in net sales to come primarily from an increase in
our market share, as we do not expect a significant increase in
the total footwear market.
We utilize economic and demographic information to select new
DSW store locations that we believe will generate additional
incremental sales with minimal negative effects on existing
stores. The selection of stores is based on evaluating total
sales expectations for the location, as well as the
appropriateness of the size and rent. In the past, we have
closed stores which have not been profitable, and we may do so
again in the future. In addition, we have also moved stores to
other locations in the same market. In fiscal years 2002, 2003,
and 2004, we opened DSW stores that were approximately 6% larger
than the average store size of a typical DSW store in prior
fiscal years. In fiscal 2005, the average size of our new stores
equaled the average size of our stores existing at the beginning
of the year. However, to date, the sales volumes of these newer
stores have been less than our average store sales, and, as a
result, we have experienced a decrease in net sales per average
gross square foot. As the newer stores increase their net sales
and we open new stores sized to fit market potential, we expect
to improve our net sales per gross square foot performance in
the future. Beginning in fiscal 2006, we believe the average
square footage of our new stores will be less than the current
chain average.
We anticipate that cash from operations, together with our
existing cash, will be adequate to fund operating expenses,
working capital, capital expenditures and our planned retail
expansion. We may also draw from our $150 million secured
revolving credit facility, if necessary. However, there can be
no assurance as to the future availability of external financing
or internally generated funds required to execute our DSW store
expansion strategy as planned. For more information regarding
our plans for funding our operations and expansion, see
“— Liquidity and Capital Resources.”
In evaluating DSW’s results of operations, our management
refers to a number of key financial and non-financial measures
relating to the performance of our business. Among our key
financial results are net sales,
27
operating profit and net income. Non-financial measures that we
use in evaluating our performance include number of DSW stores
and leased shoe departments, net sales per average gross square
foot for DSW stores, and change in comparable stores sales.
The following describes certain line items set forth in our
consolidated statement of income:
Net Sales. We record net sales exclusive of sales tax and
net of returns. For comparison purposes, we define stores or
leased shoe departments as comparable or non-comparable. A
store’s or leased shoe department’s sales are included
in comparable sales if the store or leased shoe department has
been in operation at least 14 months at the beginning of
the fiscal year. Stores and leased shoe departments are excluded
from the comparison in the month that they close. Stores that
are remodeled or relocated are excluded from the comparison if
there is a material change in the size of the store or if the
store is relocated out of its area.
Cost of Sales. Our cost of sales includes the cost of
merchandise, distribution and warehousing (including
depreciation), store occupancy (excluding depreciation),
permanent and point of sale reductions, markdowns and shrinkage.
Since the beginning of fiscal 2005, our cost of sales also
reflects the impact of shared services.
Operating Expenses. Operating expenses include expenses
related to store selling, store management and store payroll
costs, advertising, leased shoe department operations, store
depreciation and amortization, pre-opening advertising and other
pre-opening costs (which are expensed as incurred), corporate
expenses for buying services, information services, depreciation
expense for corporate cost centers, marketing, legal, finance,
outside professional services, allocable costs from Retail
Ventures and other corporate related departments and benefits
for associates and related payroll taxes. Since the beginning of
fiscal 2005, our operating expenses also reflect the cost of
shared services and the cost of operating as a public company.
Corporate level expenses are primarily attributable to
operations at our corporate offices in Columbus, Ohio.
We follow a 52/53-week
fiscal year that ends on the Saturday nearest to January 31 in
each year. Fiscal 2005, 2004 and 2003 each consisted of
52 weeks. Our current fiscal year consists of 53 weeks.
Our business is subject to seasonal trends. Our net sales,
measured on a comparable stores basis, have typically been
higher in spring and early fall, when our customers’
interest in new seasonal styles increases. Unlike many other
retailers, we have not historically experienced a large increase
in net sales during our fourth quarter associated with the
winter holiday season.
In connection with the completion of our initial public offering
in July 2005, we entered into several agreements with Retail
Ventures in connection with the separation of our business from
the Retail Ventures group.
Master Separation Agreement. The master separation
agreement contains key provisions relating to the separation of
our business from Retail Ventures. The master separation
agreement requires us to exchange information with Retail
Ventures, follow certain accounting practices and resolve
disputes with Retail Ventures in a particular manner. We also
have agreed to maintain the confidentiality of certain
information and preserve available legal privileges. The
separation agreement also contains provisions relating to the
allocation of the costs of our initial public offering,
indemnification, non-solicitation of employees and employee
benefit matters.
Under the master separation agreement, we agreed to effect up to
one demand registration per calendar year of our Common Shares,
whether Class A or Class B, held by Retail Ventures,
if requested by Retail Ventures. We have also granted Retail
Ventures the right to include its DSW Common Shares in an
unlimited number of other registrations of such shares initiated
by us or on behalf of our other shareholders.
28
Shared Services Agreement. Many aspects of our business,
which were fully managed and controlled by us without Retail
Ventures’ involvement, continue to operate as they did
prior to our initial public offering. We continue to manage
operations for critical functions such as merchandise buying,
planning and allocation, distribution and store operations.
Under the shared services agreement, which became effective as
of
January 30, 2005, we provide services to several
subsidiaries of Retail Ventures relating to planning and
allocation support, distribution services and transportation
management, site research, lease negotiation, store design and
construction management. Retail Ventures provides us with
services relating to import administration, risk management,
information technology, tax, logistics, legal services,
financial services, shared benefits administration and payroll
and maintains insurance for us and for our directors, officers,
and employees.
The initial term of the shared services agreement expires at the
end of fiscal 2007 and will be extended automatically for
additional one-year terms unless terminated by one of the
parties. With respect to each shared service, we cannot
reasonably anticipate whether the services will be shared for a
period shorter or longer than the initial term.
Tax Separation Agreement. Until the completion of our
initial public offering in July 2005, we had historically been
included in Retail Ventures’ consolidated group, or the
Consolidated Group, for U.S. federal income tax purposes as
well as in certain consolidated, combined or unitary groups
which include Retail Ventures and/or certain of its
subsidiaries, or a Combined Group, for state and local income
tax purposes. We entered into a tax separation agreement with
Retail Ventures that became effective upon consummation of our
initial public offering. Pursuant to the tax separation
agreement, we and Retail Ventures generally make payments to
each other such that, with respect to tax returns for any
taxable period in which we or any of our
subsidiaries are
included in the Consolidated Group or any Combined Group, the
amount of taxes paid by us is determined, subject to certain
adjustments, as if we and each of our
subsidiaries included in
the Consolidated Group or Combined Group filed our own
consolidated, combined or unitary tax return. Retail Ventures
prepares pro forma tax returns for us with respect to any tax
return filed with respect to the Consolidated Group or any
Combined Group in order to determine the amount of tax
separation payments under the tax separation agreement. We have
the right to review and comment on such pro forma tax returns.
We are responsible for any taxes with respect to tax returns
that include only us and our
subsidiaries.
Retail Ventures is exclusively responsible for preparing and
filing any tax return with respect to the Consolidated Group or
any Combined Group. We generally are responsible for preparing
and filing any tax returns that include only us and our
subsidiaries. Retail Ventures has agreed to undertake to provide
these services with respect to our separate tax returns. For the
tax services provided to us by Retail Ventures, we pay Retail
Ventures a monthly fee equal to 50% of all costs associated with
the maintenance and operation of Retail Ventures’ tax
department (including all overhead expenses). In addition, we
reimburse Retail Ventures for 50% of any third party fees and
expenses generally incurred by Retail Ventures’ tax
department and 100% of any third party fees and expenses
incurred by Retail Ventures’ tax department solely in
connection with the performance of the tax services provided to
us.
Retail Ventures is primarily responsible for controlling and
contesting any audit or other tax proceeding with respect to the
Consolidated Group or any Combined Group; provided, however,
that, except in cases involving taxes relating to a spin-off, we
have the right to control decisions to resolve, settle or
otherwise agree to any deficiency, claim or adjustment with
respect to any item for which we are solely liable under the tax
separation agreement. Pursuant to the tax separation agreement,
we have the right to control and contest any audit or tax
proceeding that relates to any tax returns that include only us
and our
subsidiaries. We and Retail Ventures have joint control
over decisions to resolve, settle or otherwise agree to any
deficiency, claim or adjustment for which we and Retail Ventures
could be jointly liable, except in cases involving taxes
relating to a spin-off. Disputes arising between the parties
relating to matters covered by the tax separation agreement are
subject to resolution through specific dispute resolution
provisions.
We have been included in the Consolidated Group for periods in
which Retail Ventures owned at least 80% of the total voting
power and value of the our outstanding stock. Following
completion of our initial public offering in July 2005, we are
no longer included in the Consolidated Group. Each member of a
29
consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the U.S. federal income
tax liability of each other member of the consolidated group.
Similarly, in some jurisdictions, each member of a consolidated,
combined or unitary group for state, local or foreign income tax
purposes is jointly and severally liable for the state, local or
foreign income tax liability of each other member of the
consolidated, combined or unitary group. Accordingly, although
the tax separation agreement allocates tax liabilities between
us and Retail Ventures, for any period in which we were included
in the Consolidated Group or a Combined Group, we could be
liable in the event that any income tax liability was incurred,
but not discharged, by any other member of the Consolidated
Group or a Combined Group.
Retail Ventures has informed us that it does not currently
intend or plan to undertake a spin-off of our stock to Retail
Ventures shareholders. Nevertheless, we and Retail Ventures have
set forth our respective rights, responsibilities and
obligations with respect to any possible spin-off in the tax
separation agreement. If Retail Ventures were to decide to
pursue a possible spin-off, we have agreed to cooperate with
Retail Ventures and to take any and all actions reasonably
requested by Retail Ventures in connection with such a
transaction. We have also agreed not to knowingly take or fail
to take any actions that could reasonably be expected to
preclude Retail Ventures’ ability to undertake a tax-free
spin-off. In addition, we generally would be responsible for any
taxes resulting from the failure of a spin-off to qualify as a
tax-free transaction to the extent such taxes are attributable
to, or result from, any action or failure to act by us or
certain transactions in our stock (including transactions over
which we would have no control, such as acquisitions of our
stock and the exercise of warrants, options, exchange rights,
conversion rights or similar arrangements with respect to our
stock) following or preceding a spin-off. We would also be
responsible for a percentage (based on the relative market
capitalizations of us and Retail Ventures at the time of such
spin-off) of such taxes to the extent such taxes are not
otherwise attributable to us or Retail Ventures. Our agreements
in connection with such spin-off matters last indefinitely. In
addition, present and future majority-owned affiliates of ours
or Retail Ventures will be bound by our agreements, unless
Retail Ventures or we, as applicable, consent to grant a release
of an affiliate (such consent cannot be unreasonably withheld,
conditioned or delayed), which may limit our ability to sell or
otherwise dispose of such affiliates. Additionally, a minority
interest participant(s) in a future joint venture, if any, would
need to evaluate the effect of the tax separation agreement on
such joint venture, and such evaluation may negatively affect
their decision whether to participate in such a joint venture.
Furthermore, the tax separation agreement may negatively affect
our ability to acquire a majority interest in a joint venture.
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Critical Accounting Policies and Estimates |
The preparation of our consolidated financial statements in
conformity with generally accepted accounting principles, or
GAAP, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of commitments and contingencies at the date of the
financial statements and reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, we
evaluate our estimates and judgments, including, but not limited
to, those related to inventory valuation, depreciation,
amortization, recoverability of long-lived assets (including
intangible assets), estimates for self insurance reserves for
health and welfare, workers’ compensation and casualty
insurance, customer loyalty program, income taxes,
contingencies, litigation and revenue recognition. We base these
estimates and judgments on our historical experience and other
factors we believe to be relevant, the results of which form the
basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other
sources. The process of determining significant estimates is
fact-specific and takes into account factors such as historical
experience, current and expected economic conditions, product
mix, and in some cases, actuarial and appraisal techniques. We
constantly re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
While we believe that our historical experience and other
factors considered provide a meaningful basis for the accounting
policies applied in the preparation of the consolidated
financial statements, we cannot guarantee that our estimates and
assumptions will be accurate. As the determination of these
estimates requires the exercise of judgment, actual results
inevitably will differ from those estimates, and such
differences may be material to our financial statements.
30
We believe the following represent the most significant
accounting policies, critical estimates and assumptions, among
others, used in the preparation of our consolidated financial
statements:
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Revenue Recognition. Revenues from merchandise sales are
recognized at the point of sale and are net of returns and
exclude sales tax. Revenue from gift cards is deferred and the
revenue is recognized upon redemption of the gift cards. |
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Cost of Sales and Merchandise Inventories. Merchandise
inventories are stated at the lower of cost, determined using
the first-in, first-out
basis, or market, using the retail inventory method. The retail
inventory method is widely used in the retail industry due to
its practicality. Under the retail inventory method, the
valuation of inventories at cost and the resulting gross profit
are calculated by applying a calculated cost to retail ratio to
the retail value of inventories. The cost of the inventory
reflected on our consolidated balance sheet is decreased by
charges to cost of sales at the time the retail value of the
inventory is lowered through the use of markdowns. Hence,
earnings are negatively impacted as merchandise is marked down
prior to sale. Reserves to value inventory at the lower of cost
or market were $19.6 million on April 29, 2006 and
$19.2 million on January 28, 2006. Inherent in the
calculation of inventories are certain significant management
judgments and estimates, including setting the original
merchandise retail value or mark-on, markups of initial prices
established, reductions in prices due to customers’
perception of value (known as markdowns), and estimates of
losses between physical inventory counts, or shrinkage, which,
combined with the averaging process within the retail inventory
method, can significantly impact the ending inventory valuation
at cost and the resulting gross profit. |
We include in the cost of sales
expenses associated with warehousing, distribution and store
occupancy. Warehousing costs are comprised of labor, benefits
and other labor-related costs associated with the operations of
the warehouse, which are primarily payroll-related taxes and
benefits. The non-labor costs associated with warehousing
include rent, depreciation, insurance, utilities and maintenance
and other operating costs that are passed to us from the
landlord. Distribution costs include the transportation of
merchandise to the warehouse and from the warehouse to our
stores. Store occupancy costs include rent, utilities, repairs,
maintenance, insurance and janitorial costs and other costs
associated with licenses and occupancy-related taxes, which are
primarily real estate taxes passed to us by our landlords.
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Asset Impairment and Long-lived Assets. We must
periodically evaluate the carrying amount of our long-lived
assets, primarily property and equipment, and finite life
intangible assets when events and circumstances warrant such a
review to ascertain if any assets have been impaired. The
carrying amount of a long-lived asset is considered impaired
when the carrying value of the asset exceeds the expected future
cash flows from the asset. Our reviews are conducted at the
lowest identifiable level, which includes a store. The
impairment loss recognized is the excess of the carrying amount
of the asset over its fair value, estimated on discounted cash
flow. Should an impairment loss be realized, it will be included
in cost of sales. The amount of impairment losses recorded in
fiscal 2005 was $0.2 million, all of which was recorded in
the fourth quarter. No impairment losses have been recorded
during the thirteen weeks ended April 29, 2006. We believe
at this time that the long-lived assets’ carrying values
and useful lives continue to be appropriate. To the extent these
future projections or our strategies change, our conclusion
regarding asset impairment may differ from our current estimates. |
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Self-insurance Reserves. We record estimates for certain
health and welfare, workers compensation and casualty insurance
costs that are self-insured programs. These estimates are based
on actuarial assumptions and are subject to change based on
actual results. Should the total cost of claims for health and
welfare, workers compensation and casualty insurance exceed
those anticipated, reserves recorded may not be sufficient, and,
to the extent actual results vary from assumptions, earnings
would be impacted. |
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Customer Loyalty Program. We maintain a customer loyalty
program for our DSW stores in which customers receive a future
discount on qualifying purchases. The “Reward Your
Style” program is |
31
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designed to promote customer awareness and loyalty and provide
us with the ability to communicate with our customers and
enhance our understanding of their spending trends. Upon
reaching the target spending level, customers may redeem these
discounts on a future purchase. Generally, these future
discounts must be redeemed within six months. We accrue the
estimated costs of the anticipated redemptions of the discount
earned at the time of the initial purchase and charge such costs
to operating expense based on historical experience. The
estimates of the costs associated with the loyalty program
require us to make assumptions related to customer purchase
levels and redemption rates. The accrued liability as of
April 29, 2006 and January 28, 2006 was
$10.2 million and $8.3 million, respectively. To the
extent assumptions of purchases and redemption rates vary from
actual results, earnings would be impacted. |
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Income Taxes. We are required to determine the aggregate
amount of income tax expense to accrue and the amount which will
be currently payable based upon tax statutes of each
jurisdiction we do business in. In making these estimates, we
adjust income based on a determination of generally accepted
accounting principles for items that are treated differently by
the applicable taxing authorities. Deferred tax assets and
liabilities, as a result of these differences, are reflected on
our balance sheet for temporary differences that will reverse in
subsequent years. A valuation allowance is established against
deferred tax assets when it is more likely than not that some or
all of the deferred tax assets will not be realized. If our
management had made these determinations on a different basis,
our tax expense, assets and liabilities could be different. |
Results of Operations
As of
April 29, 2006, we operated 204 DSW stores and leased
shoe departments in 158 Stein Mart stores, 57 Gordmans stores,
25 Filene’s Basement stores and one Frugal Fannie’s
store. We manage our operations in two segments, defined as DSW
stores and leased departments. The leased departments are
comprised of leased shoe departments in Stein Mart, Gordmans,
Frugal Fannie’s and Filene’s Basement. The following
table represents selected components of our historical
consolidated results of operations, expressed as percentages of
net sales:
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For the Fiscal Year Ended | |
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For the | |
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For the | |
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Thirteen Weeks | |
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Thirteen Weeks | |
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January 31, | |
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January 29, | |
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January 28, | |
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Ended | |
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Ended | |
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2004 | |
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2005 | |
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2006 | |
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April 30, | |
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April 29, | |
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(52 Weeks) | |
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(52 Weeks) | |
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(52 Weeks) | |
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2005 | |
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2006 | |
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Net sales, including sales from leased departments
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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Cost of sales
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(74.4 |
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(71.9 |
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(72.4 |
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(70.6 |
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(70.5 |
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Gross profit
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25.6 |
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28.1 |
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27.6 |
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29.4 |
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29.5 |
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Operating expenses
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(22.1 |
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(22.3 |
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(21.5 |
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(24.1 |
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(20.7 |
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Operating profit
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3.5 |
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5.8 |
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6.1 |
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5.3 |
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8.8 |
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Interest (expense) Income, net
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(0.3 |
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(0.3 |
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(0.6 |
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(1.2 |
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0.4 |
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Income before income taxes
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3.2 |
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5.5 |
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5.5 |
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4.1 |
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9.2 |
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Provision for income taxes
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(1.3 |
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(1.9 |
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(2.3 |
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(1.6 |
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Net income
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1.9 |
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3.6 |
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3.2 |
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2.5 |
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5.5 |
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Net Sales. Net sales for the thirteen week period ended
April 29, 2006 increased by 12.3%, or $34.7 million,
to $316.5 million from $281.8 million in the thirteen
week period ended
April 30, 2005. Our comparable store
sales in the first quarter of fiscal 2006 improved 4.2% compared
to the first quarter of fiscal 2005. The increase in DSW sales
includes a net increase of 27 DSW stores and ten non-affiliated
leased shoe departments. The DSW store locations opened
subsequent to
April 30, 2005 added $21.1 million
32
in sales for the quarter ended
April 29, 2006, while the
leased shoe departments opened subsequent to
April 30, 2005
added $1.0 million for the quarter ended
April 29,
2006. Leased shoe department sales comprised 10.3% of total net
sales in the first quarter of fiscal 2006, compared to 10.8% in
the first quarter of fiscal 2005.
For the first quarter of fiscal 2006, DSW comparable store sales
increased in women’s by 5.5%, athletic by 3.2%, men’s
by 1.7%, and accessories by 3.1%. Sales increases in the
women’s category were driven by increases in the seasonal
classes, while the increase in the athletic category was the
result of an increase in the women’s and men’s fashion
classes. The increase in men’s was driven by the young
men’s class. The increase in the accessories category was
driven by an increase in gifts.
Gross Profit. Gross profit increased $10.5 million
to $93.3 million in the first quarter of fiscal 2006 from
$82.8 million in the first quarter of fiscal 2005, and
increased as a percentage of net sales from 29.4% in the first
quarter of fiscal 2005 to 29.5% in the first quarter of fiscal
2006. The margin for the first quarter of fiscal 2006 was
positively affected by an increased initial markup, a reduction
of the internal shrink accrual rate to the comparable prior year
period and decreased warehouse expense. Those positive factors
were mostly offset by an increase in markdowns and increase in
occupancy expense. The store occupancy expense increased from
12.6% of net sales in the first quarter of fiscal 2005 to 12.9%
of net sales in the first quarter of fiscal 2006. The increase
in store occupancy expense is the result of increases in lease
expense for new stores. Warehouse expense as a percentage of net
sales decreased from 1.7% in the first quarter of fiscal 2005 to
1.1% in the first quarter of fiscal 2006. The decrease in
warehouse expense is the result of improved operational
efficiencies achieved through the use of electronic shipping
information and increased unit volumes.
Operating Expenses. For the first quarter of fiscal 2006,
operating expenses decreased $2.3 million to
$65.4 million from $67.7 million in the first quarter
of fiscal 2005, which represented 20.7% and 24.1% of net sales,
respectively. The favorable operating percent was in part the
result of leveraging store expenses and marketing, and a
reduction in pre-opening costs. In addition, operating costs for
the first quarter of fiscal 2005 included a charge of
$6.5 million related to an estimate for potential losses
related to the theft of credit card and other purchase
information. Operating expenses for the first quarter of fiscal
2006 include $0.9 million in pre-opening costs compared to
$1.5 million in pre-opening costs in the first quarter of
fiscal 2005. Pre-opening costs are expensed as incurred and
therefore do not necessarily reflect expenses for the stores
opened in a given fiscal period. Included in operating expenses
is the related operating cost, excluding occupancy, associated
with operating the leased shoe departments. The DSW stores and
leased shoe departments that opened subsequent to
April 30,
2005 added $3.4 million in expenses compared to the first
quarter of fiscal 2005, excluding pre-opening and occupancy
(excluding depreciation and amortization) expenses.
Operating Profit. Operating profit was $27.9 million
in the first quarter of fiscal 2006 compared to
$15.1 million in the first quarter of fiscal 2005, and
increased as a percentage of net sales from 5.3% in the first
quarter of fiscal 2005 to 8.8% in the first quarter of fiscal
2006. Operating profit as a percentage of net sales was impacted
by the leveraging of operating expenses and the estimate for
potential losses related to the theft of credit card and other
purchase information that was incurred in the first quarter of
the prior fiscal year.
Interest Income (Expense). Interest income for the first
quarter of fiscal 2006 was $1.3 million as compared to
$3.5 million of interest expense for the first quarter of
fiscal 2005. Interest income for the quarter was the result of
investment activity from funds generated by our initial public
offering in July 2005 and from operations. The interest expense
incurred in the first quarter of fiscal 2005 includes
$2.7 million of interest due to RVI relating to
$165.0 million of indebtedness incurred to fund a dividend
and $0.7 million of interest on direct borrowings under the
Value City Revolving Credit Facility.
Income Taxes. Our effective tax rate for the first
quarter of fiscal 2006 was 40.0%, compared to 39.5% for the
first quarter of fiscal 2005.
Net Income. For the first quarter of fiscal 2006, net
income increased $10.5 million, or 151.0%, over the first
quarter of fiscal 2005 and represented 5.5% and 2.5% of net
sales, respectively. This increase was
33
primarily the result of the decrease in operating expenses due
to the leveraging of operating expenses and the
$6.5 million charge in the first quarter of the prior
fiscal year for estimated potential losses related to the theft
of credit card and other purchase information and the interest
income during the period as opposed to having interest expense
in the prior fiscal year.
Net Sales. Net sales for the fifty-two weeks ended
January 28, 2006 increased by 19.0%, or
$183.0 million, to $1.14 billion from
$961.1 million in the fifty-two week period ended
January 29, 2005. Our comparable store sales in fiscal 2005
improved 5.4% compared to the previous fiscal year. The increase
includes an increase of 29 new DSW stores, 11 non-affiliated
leased shoe departments and one Filene’s Basement leased
shoe department during fiscal 2005. The new DSW locations added
$59.8 million in sales compared to fiscal 2004, while the
new leased shoe departments added $3.7 million. Leased shoe
department sales comprised 10.5% of total net sales in fiscal
2005, compared to 9.4% in fiscal 2004.
Compared with fiscal 2004, DSW comparable store sales for fiscal
2005 increased in women’s 6.8%, athletic 6.4%, men’s
3.8% and decreased in accessories 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 an expanded assortment offering in
casual and fashion. The decrease in accessories was due to a
narrowing of the offering in gift products.
Gross Profit. Gross profit increased $45.5 million
to $315.7 million in fiscal 2005 from $270.2 million
in fiscal 2004, and decreased as a percentage of net sales from
28.1% in fiscal 2004 to 27.6% in fiscal 2005. The decrease is
primarily attributable to increased markdowns in all categories
as we executed all of our planned clearance rotations. In fiscal
2004, we did not undertake one of our planned clearance
rotations in the third quarter. The decrease was partially
offset by an increase in initial markup. The increase in initial
markups is the result of increased average unit retail prices
and the ability to buy at lower costs, which is due to the fact
that we placed larger orders. We are not expecting to continue
increasing our initial mark up at the same pace as prior years.
Warehouse expense as a percentage of net sales decreased from
2.2% in fiscal 2004 to 1.4% in fiscal 2005. The decrease in
warehouse expense is the result of improved operational
efficiencies achieved through the use of electronic shipping
information, increased unit volumes and the application of the
shared service agreement for the full year. This decrease in
warehouse expense was partially offset by increases in store
occupancy, from 12.9% of net sales in fiscal 2004 to 13.4% of
net sales in fiscal 2005. The increase in the store occupancy
was the result of an increase in the penetration of the leased
business compared to the total.
Operating Expenses. For fiscal 2005, operating expenses
increased $31.5 million from $214.1 million in fiscal
2004 to $245.6 million in fiscal 2005. Operating expenses
represented 22.3% of net sales in fiscal 2004 and 21.5% of net
sales in fiscal 2005. Operating expenses for fiscal 2005 include
$7.7 million in pre-opening costs compared to
$10.8 million in the prior fiscal year. Pre-opening costs
are expensed as incurred and therefore do not necessarily
reflect expenses for the stores opened in a given fiscal year.
Included in operating expenses is the related operating cost
associated with operating the leased shoe departments, excluding
occupancy. The new DSW stores and leased shoe departments added
$9.9 million in expenses compared to fiscal 2004, excluding
pre-opening expenses. Fiscal 2005 operating expenses also
included a $6.5 million charge related to the theft of
credit card and other purchase information discussed below.
During the first quarter of fiscal 2005, we accrued an estimated
liability related to the theft of credit card and other purchase
information. Potential exposures for losses related to stolen
information were estimated to fall within a range of
approximately $6.5 million to approximately
$9.5 million. Because of many factors, including the early
development of information regarding the theft and
recoverability under insurance policies, there is no amount in
the estimated range that represents a better estimate than any
other amount in the range. Therefore, in accordance with
Financial Accounting Standard No. 5, Accounting for
34
Contingencies, we have accrued a charge to operations equal to
the low end of the range set forth above, or $6.5 million.
At
January 28, 2006 the balance of the reserve was
approximately $4.8 million.
Operating Profit. Operating profit was $70.1 million
in fiscal 2005 compared to $56.1 million in fiscal 2004,
and increased as a percentage of net sales from 5.8% in fiscal
2004 to 6.1% in fiscal 2005. Operating profit was positively
affected by the full year of operations for our DSW stores and
leased shoe departments opened in fiscal 2004.
Interest Expenses. Interest expense, net of interest
income, was $7.5 million in fiscal 2005 compared to
$2.7 million in fiscal 2004. Interest expense increased in
fiscal 2005 as a result of interest paid to Retail Ventures
related to dividends paid via a note prior to our initial public
offering. Interest expense includes the amortization of debt
issuance costs of $0.6 million and $0.5 million in
fiscal 2005 and fiscal 2004, respectively. As of
January 28, 2006, we had no debt.
Income Taxes. Our effective tax rate for fiscal 2005 was
40.6%, compared to 34.5% for fiscal 2004. The favorable rate
experienced in fiscal 2004, primarily in the fourth quarter, was
driven by several factors which included the deductibility of
certain expenses associated with the termination benefits of the
former Chief Executive Officer of Retail Ventures, among others.
Net Sales. Net sales for the fifty-two weeks ended
January 29, 2005 increased by 21.4%, or
$169.8 million, to $961.1 million from
$791.3 million in the fifty-two week period ended
January 31, 2004. Our comparable store sales in fiscal 2004
improved 5.0% compared to the previous fiscal year. The increase
includes a net increase of 30 new DSW stores, 51 non-affiliated
leased shoe departments and five Filene’s Basement leased
shoe departments in fiscal 2004. The new DSW locations added
$82.0 million in sales compared to fiscal 2003, while the
new leased shoe departments added $12.7 million. Leased
shoe department sales comprised 9.4% of total net sales in
fiscal 2004, compared to 8.9% in fiscal 2003.
Compared with fiscal 2003, DSW comparable store sales increased
in women’s 4.3%, athletic 11.6% and accessories 9.6%, and
decreased in the men’s category by 0.3%. Sales increases in
women’s were driven by increases in dress, better and
sandals in the spring and women’s casual in the fall. The
increase in athletic was the result of sales increases in
fashion athletic in both the men’s and women’s
categories. The increase in accessories was the result of
additional new merchandise being offered.
Gross Profit. Gross profit increased $67.3 million
to $270.2 million in fiscal 2004 from $202.9 million
in fiscal 2003, and increased as a percentage of net sales from
25.6% in fiscal 2003 to 28.1% in fiscal 2004. This increase is
primarily attributable to increased initial markups and a
decrease in markdowns when compared to the prior fiscal year.
The initial markup increase is the result of increased average
unit retail prices and the ability to buy at lower costs, which
is due to the fact that we placed larger orders. The decreased
markdowns relate to the fact that we did not execute a planned
rotation of clearance due to our favorable clearance position in
September 2004. Warehouse expense as a percentage of net sales
decreased from 2.5% in fiscal 2003 to 2.2% in fiscal 2004. The
decrease in warehouse expense is the result of improved
operational efficiencies achieved through the use of electronic
shipping information and increased unit volumes. This decrease
in warehouse expense was partially offset by increases in store
occupancy, from 12.8% of net sales in fiscal 2003 to 12.9% of
net sales in fiscal 2004.
Operating Expenses. For fiscal 2004, operating expenses
increased $39.2 million from $174.9 million in fiscal
2003 to $214.1 million in fiscal 2004. Operating expenses
represented 22.1% of net sales in fiscal 2003 and 22.3% of net
sales in fiscal 2004. Operating expenses for fiscal 2004 include
$10.8 million in pre-opening costs compared to
$5.1 million in the prior fiscal year. Pre-opening costs
are expensed as incurred and therefore do not necessarily
reflect expenses for the stores opened in a given fiscal year.
Included in operating expenses is the related operating cost
associated with operating the leased shoe departments, excluding
occupancy. The new DSW stores and leased shoe departments added
$14.8 million in expenses compared to fiscal 2003,
excluding pre-opening expenses.
35
Operating Profit. Operating profit was $56.1 million
in fiscal 2004 compared to $28.1 million in fiscal 2003,
and increased as a percentage of net sales from 3.5% in fiscal
2003 to 5.8% in fiscal 2004. Operating profit was positively
affected by the full year of operations for our DSW stores and
leased shoe departments opened in fiscal 2003.
Interest Expense. Interest expense, net of interest
income, was $2.7 million in each of fiscal 2004 and fiscal
2003. Interest expense in fiscal 2004 was the result of an
increase in the average weighted borrowing rate, offset in part
by a decrease in average weighted borrowings. Interest expense
includes the amortization of debt issuance costs of
$0.5 million in each of fiscal 2004 and fiscal 2003.
Income Taxes. Our effective tax rate for fiscal 2004 was
34.5%, compared to 41.5% for fiscal 2003. The favorable rate
experienced in fiscal 2004, primarily in the fourth quarter, was
driven by several factors which included the deductibility of
certain expenses associated with the termination benefits of the
former Chief Executive Officer of Retail Ventures, among others.
The favorable effective tax rate is not expected to continue
into the future as we anticipate our effective tax rate will
approximate its statutory rate.
Quarterly Results
|
|
|
Quarterly Operations Data |
The following tables set forth unaudited quarterly condensed
consolidated statements of operations data, expressed in
thousands of dollars. This quarterly information is unaudited,
but has been prepared on the same basis as the annual
consolidated financial statements included elsewhere in this
prospectus and, in the opinion of our management, reflects all
adjustments necessary for a fair representation of the
information for the periods presented. This quarterly condensed
statement of income data should be read in conjunction with our
audited consolidated financial statements and the related notes
included elsewhere in this prospectus. Results of operations for
any quarter are not necessarily indicative of results for any
future period or for the full fiscal year.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended | |
| |
|
| |
| |
|
April 30, | |
|
July 30, | |
|
October 29, | |
|
January 28, | |
|
April 29, | |
| |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except per share data) | |
|
Net sales
|
|
$ |
281,806 |
|
|
$ |
276,211 |
|
|
$ |
302,240 |
|
|
$ |
283,804 |
|
|
$ |
316,487 |
|
|
Cost of sales
|
|
|
(199,008 |
) |
|
|
(199,848 |
) |
|
|
(219,221 |
) |
|
|
(210,265 |
) |
|
|
(223,200 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
82,798 |
|
|
|
76,363 |
|
|
|
83,019 |
|
|
|
73,539 |
|
|
|
93,287 |
|
|
Operating expenses
|
|
|
(67,745 |
) |
|
|
(55,675 |
) |
|
|
(65,292 |
) |
|
|
(56,895 |
) |
|
|
(65,398 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating profit
|
|
|
15,053 |
|
|
|
20,688 |
|
|
|
17,727 |
|
|
|
16,644 |
|
|
|
27,889 |
|
|
Interest (expense) income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non-related
|
|
|
(849 |
) |
|
|
(1,092 |
) |
|
|
149 |
|
|
|
879 |
|
|
|
1,324 |
|
| |
Related parties
|
|
|
(2,672 |
) |
|
|
(3,920 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income before income taxes
|
|
|
11,532 |
|
|
|
15,676 |
|
|
|
17,876 |
|
|
|
17,523 |
|
|
|
29,213 |
|
|
Income taxes expense
|
|
|
(4,552 |
) |
|
|
(6,425 |
) |
|
|
(6,965 |
) |
|
|
(7,484 |
) |
|
|
(11,694 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
6,980 |
|
|
$ |
9,251 |
|
|
$ |
10,911 |
|
|
$ |
10,039 |
|
|
$ |
17,519 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.25 |
|
|
$ |
0.28 |
|
|
$ |
0.25 |
|
|
$ |
0.23 |
|
|
$ |
0.40 |
|
| |
Diluted
|
|
$ |
0.25 |
|
|
$ |
0.28 |
|
|
$ |
0.25 |
|
|
$ |
0.23 |
|
|
$ |
0.40 |
|
36
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen Weeks Ended | |
| |
|
| |
| |
|
May 1, | |
|
July 31, | |
|
October 30, | |
|
January 29, | |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except per share data) | |
|
Net sales
|
|
$ |
232,559 |
|
|
$ |
234,403 |
|
|
$ |
262,444 |
|
|
$ |
231,683 |
|
|
Cost of sales
|
|
|
(164,972 |
) |
|
|
(167,464 |
) |
|
|
(184,991 |
) |
|
|
(173,451 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
67,587 |
|
|
|
66,939 |
|
|
|
77,453 |
|
|
|
58,232 |
|
|
Operating expenses
|
|
|
(53,782 |
) |
|
|
(51,305 |
) |
|
|
(60,664 |
) |
|
|
(48,351 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating profit
|
|
|
13,805 |
|
|
|
15,634 |
|
|
|
16,789 |
|
|
|
9,881 |
|
|
Interest expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non-related
|
|
|
(726 |
) |
|
|
(745 |
) |
|
|
(989 |
) |
|
|
(274 |
) |
| |
Related parties
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before income taxes
|
|
|
13,079 |
|
|
|
14,889 |
|
|
|
15,800 |
|
|
|
9,607 |
|
|
Provision for income taxes
|
|
|
(5,263 |
) |
|
|
(5,992 |
) |
|
|
(6,358 |
) |
|
|
(807 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
7,816 |
|
|
$ |
8,897 |
|
|
$ |
9,442 |
|
|
$ |
8,800 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per
share(1)
|
|
$ |
0.28 |
|
|
$ |
0.32 |
|
|
$ |
0.34 |
|
|
$ |
0.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The earnings per share calculations for each quarter are based
upon the applicable weighted average shares outstanding for each
period and may not necessarily be equal to the full year share
amount. |
Seasonality
Our business, measured in terms of net sales, is subject to
seasonal trends. Our net sales, measured on a comparable stores
basis, have typically been higher in spring and early fall, when
our customers’ interest in new seasonal styles increases.
Unlike many other retailers, we have not historically
experienced a large increase in net sales during our fourth
quarter associated with the winter holiday season.
Liquidity and Capital Resources
Our primary ongoing cash requirements are for seasonal and new
store inventory purchases, capital expenditures in connection
with our expansion, the remodeling of existing stores and
infrastructure growth. Since our initial public offering in July
2005, we have funded our expenditures with cash flows from
operations. Prior to the initial public offering, we funded our
expenditures with cash flows from operations and borrowings
under the credit facilities to which we had been a party. Our
working capital and inventory levels typically build seasonally.
We believe that we will be able to continue to fund our
operating requirements and the expansion of our business
pursuant to our growth strategy in the future with existing
cash, cash flows from operations and borrowings under the DSW
secured revolving credit facility, if necessary.
$150 Million Secured Revolving Credit Facility.
Simultaneously with the amendment and restatement of the Value
City revolving credit facility described below, we entered into
a new $150 million secured revolving credit facility with a
term of five years. Under this facility, we and our subsidiary,
DSWSW, are named as co-borrowers. This facility 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. Our obligations
under the secured revolving credit facility are secured by a
lien on substantially all of our and our subsidiary’s
personal property and a pledge of our shares of DSWSW. In
addition, our secured revolving credit facility contains usual
and customary restrictive covenants relating to our management
and the operation of our business. These covenants restrict,
among other things, our ability to grant liens on our assets,
incur additional indebtedness, open or close stores, pay cash
dividends and make other distributions to Retail Ventures in
excess of $5.0 million in the aggregate, redeem our stock,
transfer our or DSWSW’s
37
assets to Retail Ventures, enter into transactions with
affiliates and merge or consolidate with another entity. In
addition, if at any time we utilize over 90% of our borrowing
capacity under this facility, we must comply with a fixed charge
coverage ratio test set forth in the facility documents. At
April 29, 2006 and
January 28, 2006,
$141.0 million and $136.4 million was available under
the $150 million secured revolving credit facility and no
direct borrowings were outstanding. At
April 29, 2006 and
January 28, 2006, $9.0 million and $13.6 million
in letters of credit were issued and outstanding.
|
|
|
Transactions with Retail Ventures |
Union Square Store Guaranty by Retail Ventures. In
January 2004, we entered into a lease agreement with 40 East 14
Realty Associates, L.L.C., an unrelated third party, for our
Union Square store in New York, New York. In connection with the
lease, Retail Ventures has agreed to guarantee payment of our
rent and other expenses and charges and the performance of our
other obligations.
Intercompany Accounts. Prior to the completion of our
initial public offering in July 2005, DSW and Retail Ventures
used intercompany transactions in the conduct of their
operations. Under this arrangement, Retail Ventures acted as a
central processing location for payments for the acquisition of
merchandise, payroll, outside services, capital additions and
expenses by controlling the payroll and accounts payable
activities for all Retail Ventures’
subsidiaries, including
DSW. DSW transferred cash received from sales of merchandise to
cash accounts controlled by Retail Ventures. The concentration
of cash and the offsetting payments for merchandise, expenses,
capital assets and accruals for future payments were accumulated
on our balance sheet in advances to affiliates. The balance of
advances to affiliates fluctuated based on DSW’s activities
with Retail Ventures.
Following completion of our initial public offering, DSW’s
intercompany activities have been limited to those arrangements
set forth in the shared services agreement and the other
agreements between DSW and Retail Ventures. DSW no longer
concentrates its cash from the sale of merchandise into Retail
Ventures’ accounts but into its own DSW accounts. DSW pays
for its own merchandise, expenses and capital additions from
newly established disbursement accounts. Any intercompany
payments are made pursuant to the terms of the shared services
agreement and other agreements between DSW and Retail Ventures.
|
|
|
The DSW Separation from Retail Ventures |
Upon completion of our initial public offering in July 2005,
Retail Ventures amended or amended and restated the existing
credit facilities and other debt obligations of Value City and
its other affiliates, including certain facilities under which
DSW had rights and obligations as a co-borrower and/or
co-guarantor. We are no
longer a party to any of these agreements.
The Value City Revolving Credit Facility. Prior to
completion of our initial public offering in July 2005, we were
party to a Loan and Security Agreement, as amended, entered into
with National City Business Credit, Inc., or National City, as
administrative agent, and the other parties named therein,
originally entered into in June 2002. Upon the completion of our
initial public offering, this revolving credit agreement was
amended and restated and we were released from our obligations
as a party thereto.
The Value City Term Loan Facility. Prior to
completion of our initial public offering in July 2005, we were
party to a Financing Agreement, as amended, among Cerberus, as
agent and lender, and SSC as lender, and the other parties named
as co-borrowers
therein, originally entered into in June 2002. Upon the
completion of our initial public offering, the indebtedness with
respect to this term loan was repaid in full, this term loan
agreement was terminated and we were released from our
obligations as a party thereto.
Under the terms of this term loan agreement, SSC and Cerberus
each provided us, Value City and the other Retail Ventures
affiliates named as
co-borrowers with a
separate $50 million term loan comprised of two tranches
with initial three-year terms. In July 2004, the maturity dates
of these loans were extended until
June 11, 2006. In
connection with the second tranche of these term loans, Retail
Ventures issued to each of Cerberus and SSC warrants to
purchase 1,477,396 common shares of Retail Ventures at a
purchase price of $4.50 per share, subject to adjustment.
In September 2002, Back Bay Capital Funding LLC, or Back Bay,
38
bought from each of Cerberus and SSC a $1.5 million
interest in each of the tranches of their term loans for an
aggregate $6.0 million interest, and Back Bay received from
each of Cerberus and SSC a corresponding portion of the warrants
to purchase Retail Ventures common shares originally issued in
connection with the second tranche of their term loans.
Effective
November 23, 2005, Millennium Partners, L.P.
purchased from Back Bay term loan warrants to purchase an
aggregate of 177,288 of Retail Ventures common shares, subject
to adjustment. The term loans’ stated rate of interest per
annum through
June 11, 2004 was 14% if paid in cash and 15%
if the
co-borrowers
elected a
paid-in-kind,
or PIK, option. During the first two years of the term loans,
the
co-borrowers could
elect to pay all interest in PIK. During the final two years of
the term loans, the stated rate of interest was 15.0% if paid in
cash or 15.5% if by PIK, and the PIK option was limited to 50%
of the interest due. For fiscal 2002 and fiscal 2003, the
co-borrowers elected to
pay interest in cash.
In connection with the amendment of this term loan agreement,
Retail Ventures amended the outstanding warrants to provide SSC,
Cerberus and Millennium the right, from time to time, in whole
or in part, to (i) acquire Retail Ventures common shares at
the then current conversion price (subject to the anti-dilution
provisions), (ii) acquire from Retail Ventures our
Class A Common Shares at an exercise price of
$19.00 per share (subject to anti-dilution provisions) or
(iii) acquire a combination thereof.
Assuming an exercise price per share of $19.00, SSC and Cerberus
would each receive from Retail Ventures 328,915 of our
Class A Common Shares, and Millennium would receive 41,989
Class A Common Shares, if they exercised these warrants in
full exclusively for DSW Common Shares. The warrants expire in
June 2012. Although Retail Ventures has informed us that it does
not currently intend or plan to undertake a spin-off of DSW
Common Shares to Retail Ventures’ shareholders, in the
event that Retail Ventures effects a spin-off of its DSW Common
Shares to its shareholders in the future, the holders of
outstanding unexercised warrants will receive the same number of
DSW Common Shares that they would have received had they
exercised their warrants in full for Retail Ventures common
shares immediately prior to the record date of the spin-off,
without regard to any limitations on exercise in the warrants.
Following the completion of any such spin-off, the warrants will
be exercisable solely for Retail Ventures common shares.
We have entered into an exchange agreement with Retail Ventures
whereby, upon the request of Retail Ventures, we will be
required to exchange some or all of our Class B Common
Shares held by Retail Ventures for Class A Common Shares.
The Value City Senior Subordinated Convertible
Loan Facility. Prior to completion of our initial
public offering in July 2005, we were a
co-guarantor under the
Amended and Restated Senior Subordinated Convertible Loan
Agreement, entered into by Value City, as borrower, Cerberus, as
agent and lender, SSC, as lender, and DSW and the other parties
named as guarantors, originally entered into in June 2002. Upon
the completion of our initial public offering, this convertible
loan agreement was amended and restated and we are no longer a
party thereto.
In connection with the amendment and restatement of this
convertible loan agreement, Retail Ventures repaid
$25 million of this facility and the convertible loan was
converted into a non-convertible loan. The capital stock of DSW
held by Retail Ventures currently secures the non-convertible
loan. This lien will be released upon completion of the PIES
offering by Retail Ventures. However, Retail Ventures will
pledge sufficient DSW Common Shares to the collateral agent for
the PIES to enable Retail Ventures to satisfy its obligations to
deliver 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 Retail Ventures
to satisfy its obligations to the warrantholders to deliver
Class A Common Shares upon exercise of the warrants. In
connection with the amendment and restatement of the convertible
loan agreement in July 2005, Retail Ventures agreed to issue to
SSC and Cerberus convertible warrants which are exercisable from
time to time until the later of
June 11, 2007 and the
repayment in full of Value City’s obligations under the
amended and restated loan agreement. Under the convertible
warrants, SSC and Cerberus will have the right, from time to
time, in whole or in part, to (i) acquire Retail Ventures
common shares at the conversion price referred to in the
convertible loan (subject to anti-dilution provisions),
(ii) acquire from Retail Ventures our Class A
39
Common Shares at an exercise price of $19.00 per share
(subject to anti-dilution provisions) or (iii) acquire a
combination thereof.
On
March 13, 2006, Retail Ventures issued 2,000,000 of its
common shares to Cerberus in connection with the partial
exercise of Cerberus’ outstanding convertible warrants. The
common shares were issued at an exercise price of $4.50 per
share for an aggregate cash purchase price of $9,000,000. On
April 26, 2006, Retail Ventures issued an additional
3,000,000 of its common shares to Cerberus in connection with
the partial exercise of Cerberus’ outstanding convertible
warrants. These common shares were issued at an exercise price
of $4.50 per share for an aggregate cash purchase price of
$13,500,000. On
July 26, 2006, Retail Ventures issued an
additional 2,000,000 of its common shares to Cerberus in
connection with the partial exercise of Cerberus’
outstanding convertible warrants. These common shares were
issued at an exercise price of $4.50 per share for an aggregate
cash purchase price of $9,000,000. Following this exercise,
Cerberus’ remaining convertible warrants entitle Cerberus
to acquire 315,790 of our Class A Common Shares (subject to
anti-dilution provisions) if they exercise their remaining
warrants exclusively for DSW Common Shares. As of
April 29,
2006, SSC would receive 1,973,684 of our Class A Common
Shares from Retail Ventures (subject to anti-dilution
provisions) if they exercised these warrants exclusively for DSW
Common Shares.
Although Retail Ventures has informed us that it does not
currently intend or plan to undertake a spin-off of Common
Shares to Retail Ventures’ shareholders, in the event that
Retail Ventures effects a spin-off of its DSW Common Shares to
its shareholders in the future, the holders of outstanding
unexercised warrants will receive the same number of DSW Common
Shares that they would have received had they exercised their
warrants in full for Retail Ventures common shares immediately
prior to the record date of the spin-off, without regard to any
limitation on exercise contained in the warrants. Following the
completion of any such spin-off, the warrants will be
exercisable solely for Retail Ventures common shares.
Value City Intercompany Note. The capital stock of DSW
held by Retail Ventures currently secures a $240 million
Value City intercompany note made payable by Retail Ventures to
Value City, which was executed and delivered on
January 1,
2005 in connection with the transfer of all the capital stock of
DSW and Filene’s Basement by Value City to Retail Ventures
on that date. Under the terms of the Value City intercompany
note, the lien granted to Value City on the DSW capital stock
held by Retail Ventures will be released upon written notice
that warrants held by Cerberus, SSC and Millennium are to be
exercised in exchange for DSW capital stock held by Retail
Ventures and to be delivered by Retail Ventures upon the
exercise of such warrants. The lien will also be released upon
repayment of the note in full. In connection with the offering
of the PIES by Retail Ventures, the lien on the DSW capital
stock that secures the Value City intercompany note will be
released and the approximately $49.7 million remaining
balance of the Value City intercompany note will be repaid.
The $165.0 Million Intercompany Note. In March 2005,
we incurred intercompany indebtedness to fund a
$165.0 million dividend to Retail Ventures. We repaid this
note in full in July 2005.
The $25.0 Million Intercompany Note. In May 2005, we
incurred intercompany indebtedness to fund a $25.0 million
dividend to Retail Ventures. We repaid this note in full in July
2005.
Cross-Corporate Guarantees. We previously entered into
cross-corporate guarantees with various financing institutions
pursuant to which we, Retail Ventures, Filene’s Basement
and Value City, jointly and severally, guaranteed payment
obligations owed to these entities under factoring arrangements
they have entered into with vendors who may provide merchandise
to some or all of Retail Ventures’
subsidiaries. In July
2005, we terminated these cross-corporate guarantees and no
amounts remain guaranteed by us.
For the thirteen week period ended
April 29, 2006, our net
cash provided by operations was $38.2 million, compared to
$25.8 million provided by operations for the thirteen week
period ended
April 30, 2005. The $12.4 million
increase in cash provided by operations over the comparable
period is primarily due to increased net income and an increase
in accounts payable partially offset by an increase in inventory.
40
Net working capital increased $19.9 million to
$258.4 million at
April 29, 2006 from
$238.5 million at
January 28, 2006, primarily due to
increased cash and inventory related to new stores opened in
fiscal 2006. Current assets divided by current liabilities at
April 29, 2006 and
January 28, 2006 were 2.6 and 2.7,
respectively.
We operate all our stores, warehouses and corporate office space
from leased facilities. Lease obligations are accounted for
either as operating leases or as capital leases. We disclose in
the notes to the financial statements included elsewhere in this
prospectus the minimum payments due under operating or capital
leases.
For fiscal 2005, our cash used in investing activities amounted
to $25.3 million compared to $33.9 million for fiscal
2004. For each fiscal year from fiscal 2003 through fiscal 2005,
our cash used in investing activities consisted of capital
expenditures. Cash used for capital expenditures was
$25.3 million, $33.9 million, and $22.1 million
for fiscal 2005, fiscal 2004, and fiscal 2003, respectively.
Capital expenditures were related primarily to new stores.
Our future capital expenditures will depend primarily on the
number of new stores we open, the number of existing stores we
remodel and the timing of these expenditures. In fiscal 2005, we
opened 29 new DSW stores. We plan to open approximately 30
stores per year in each fiscal year from fiscal 2006 through
fiscal 2010. During fiscal 2005, the average investment required
to open a typical new DSW store was approximately
$1.4 million. Of this amount, gross inventory typically
accounted for $680,000, fixtures and leasehold improvements
typically accounted for $460,000 (prior to tenant allowances)
and pre-opening advertising and other pre-opening expenses
typically accounted for $280,000. We plan to finance investment
in new stores with existing cash and cash flows from operating
activities, and may draw upon our revolving credit facility, if
necessary.
For fiscal 2005, our net cash provided by financing activities
was $32.4 million, compared to $19.9 million for
fiscal 2004, and net cash used by financing activities of
$19.2 million in fiscal 2003. The cash provided of
$32.4 million in fiscal 2005 was primarily the result of
the proceeds from the sale of stock from our initial public
offering, offset by the amounts we paid to Retail Ventures for
our intercompany indebtedness arising from our dividends to
Retail Ventures and the repayment of our obligations under our
prior credit facilities.
Contractual and Other Obligations
We have the following minimum commitments under contractual
obligations, as defined by the Securities and Exchange
Commission, or SEC. 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. Other long-term
liabilities are defined as long-term liabilities that are
reflected on our balance sheet in accordance with GAAP. Based on
this definition, the table below includes only those
contracts
which include fixed or minimum obligations. It does not include
normal purchases, which are made in the ordinary course of
business.
41
The following table provides aggregated information about
contractual obligations and other long-term liabilities as of
January 28, 2006:
Contractual Obligations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
| |
|
|
| |
|
|
|
No |
| |
|
|
|
Less than | |
|
|
|
More than | |
|
Expiration |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
Date |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| |
|
(Dollars in thousands) |
|
Long-term debt
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital lease and operating lease
obligations(1)
|
|
|
804,322 |
|
|
|
91,666 |
|
|
|
184,028 |
|
|
|
173,870 |
|
|
|
354,758 |
|
|
|
— |
|
|
Construction
commitments(2)
|
|
|
299 |
|
|
|
299 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchase
obligations(3)
|
|
|
495 |
|
|
|
375 |
|
|
|
120 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
805,116 |
|
|
$ |
92,340 |
|
|
$ |
184,148 |
|
|
$ |
173,870 |
|
|
$ |
354,758 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Our operating leases require us to pay for common area
maintenance costs and real estate taxes. In fiscal 2005, these
common area maintenance costs and real estate taxes represented
30.1% of our required lease payments. These costs and taxes vary
year by year and are based almost entirely on actual costs
incurred and taxes paid incurred by the landlord. As such, they
are not included in the lease obligations presented above. |
| |
| (2) |
Construction commitments include capital items to be purchased
for projects that were under construction, or for which a lease
had been signed, as of January 28, 2006. |
| |
| (3) |
Many of our purchase obligations are cancelable by us without
payment or penalty, and we have excluded such obligations, along
with all associate employment and intercompany obligations. |
We had outstanding letters of credit that totaled approximately
$9.0 million at
April 29, 2006 and $13.6 million
at
January 28, 2006. If certain conditions are met under
these arrangements, we would be required to satisfy the
obligations in cash. Due to the nature of these arrangements and
based on historical experience, we do not expect to make any
significant payment outside of terms set forth in these
arrangements.
As of
April 29, 2006, we have entered into various
construction commitments, including capital items to be
purchased for projects that were under construction, or for
which a lease has been signed. Our obligations under these
commitments aggregated to approximately $0.3 million as of
April 29, 2006. In addition, as of
April 29, 2006, we
have signed lease agreements for 20 new store locations
with annual rent of approximately $7.6 million. In
connection with the new lease agreements, we will receive
approximately $5.8 million of tenant allowances, which will
reimburse us for expenditures at these locations.
We operate all our stores, warehouses and corporate office space
from leased facilities. Lease obligations are accounted for
either as operating leases or as capital leases based on lease
by lease review at lease inception. We had no capital leases
outstanding as of
April 29, 2006.
On
July 5, 2005, subsequent to our initial public offering,
we paid in full the principal balance of both the
$165 million and $25 million dividend notes plus
accrued interest of approximately $6.6 million to Retail
Ventures, $20 million outstanding on DSW’s old secured
revolving credit facility and a $10 million intercompany
advance from Retail Ventures used to pay down on the outstanding
old credit facility borrowing.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 123 (revised 2004), or
SFAS No. 123R,
Share-Based Payment. This
statement revised SFAS No. 123,
Accounting for
Stock-Based Compensation, and requires companies to expense
the value of employee stock options and similar awards. The
effective date of this standard is interim and annual periods
beginning after
June 15, 2005. No stock options or similar
awards have been granted by DSW as of fiscal years 2004 and
2003. In April 2005, the SEC delayed the compliance date for
SFAS No. 123R until the beginning of our fiscal year
42
2006. We will utilize the modified prospective method of
adoption. We expect that the impact of adoption of
SFAS 123R to our results of operations will be similar, on
an annualized basis, to the pro forma disclosures presented in
Note 3 of the Notes to our Consolidated Financial
Statements.
In November 2005, the FASB issued FIN 47, Accounting for
Conditional Asset Retirement Obligations, or FIN 47,
which clarified the term “conditional asset retirement
obligation” as used in FASB Statement No. 143,
Accounting for Asset Retirement Obligations. Conditional
asset retirement obligation refers to a legal obligation to
perform an asset retirement activity in which the timing and/or
method of settlement are dependent on a future event that may or
may not be within the control of the entity. While the timing
and/or method of settlement is unknown, the obligation to
perform the asset retirement obligation is unconditional.
FIN 47 requires that the fair value of the asset retirement
activity be recorded when it can be reasonably estimated. The
adoption of FIN 47 during the fourth quarter of fiscal 2005
did not have a material impact on our financial position or
results of operations.
In July 2006, the FASB issued FIN 48,
Accounting for
Uncertainty in Income Taxes, 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 that amount of
benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement. FIN 48 provides for a cumulative effect of
a change in accounting principle to be recorded upon the initial
adoption. This interpretation is effective for fiscal years
beginning after
December 15, 2006. We are currently
evaluating the impact this proposed interpretation will have on
our consolidated financial statements.
Proposed Accounting Standards
An exposure draft of the proposed amendment to FASB Statement
No. 132,
Employer’s Accounting for Defined Benefit
Pension and Other Postretirement Plans — an amendment
of FASB Statements No. 87, 88, 106 and 132R, was issued
in March 2006. This Exposure Draft would amend the FASB
Statements No. 87, 88, 106 and 132R. The intent of the
Exposure Draft is to require an employer to recognize as a
component of other comprehensive income, net of tax, the
actuarial gains and losses and prior service costs and credits
that arise during the period. The comment deadline on this
Exposure Draft is
May 31, 2006, with a planned effective
date for fiscal years ending after
December 31, 2006. We do
not believe that the impact of this proposed amendment will have
a material effect on our results of operations.
An exposure draft of a proposed SFAS,
Fair Value
Measurements, was issued in June 2004. This exposure draft
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. FASB expects to
issue a final statement by
June 30, 2006. We are currently
evaluating the impact this exposure draft will have on our
consolidated financial statements.
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. We have not entered into
any
“off-balance sheet” arrangements, as that term is
described by the SEC, as of
April 29, 2006.
Quantitative and Qualitative Disclosures About Market Risk
Our cash and cash equivalents are maintained only with
maturities of 90 days or less. Our short-term investments
have interest reset periods of 35 days or less. These
financial instruments may be subject to
43
interest rate risk through lost income should interest rates
increase during their limited term to maturity or resetting of
interest rates. As of
April 29, 2006 and
January 28,
2006, there was no long-term debt outstanding. Future
borrowings, if any, would bear interest at negotiated rates and
would be subject to interest rate risk. Because we have no
outstanding debt, we do not believe that a hypothetical adverse
change of 10% in interest rates would have a material effect on
our financial position.
Inflation
Our results of our 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 our 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.
44
BUSINESS
Company Overview
DSW is a leading U.S. specialty branded footwear retailer
operating 204 shoe stores in 33 states as of
April 29,
2006. We offer a wide selection of brand name and designer
dress, casual and athletic footwear for women and men. Our
typical customers are brand-, quality- and style-conscious
shoppers who have a passion for footwear and accessories. Our
core focus is to create a distinctive store experience that
satisfies both the rational and emotional shopping needs of our
customers by offering them a vast, exciting selection of
in-season styles combined with the convenience and value they
desire. We believe this combination of selection, convenience
and value differentiates us from our competitors and appeals to
consumers from a broad range of socioeconomic and demographic
backgrounds.
Since its inception, DSW has evolved into a distinctive,
consumer-friendly retail concept that allows customers to
personalize their shopping experience by offering a “sea of
shoes” that are accessible,
easy-to-shop, and
fulfill a broad range of style and fashion desires. We cater to
customers who take pleasure in the hunt for the perfect shoe and
value the shopping experience itself as an enjoyable pastime.
Typical DSW stores are approximately 25,000 square feet,
with over 85% of total square footage used as selling space.
Over 30,000 pairs of shoes in more than 2,000 styles are
displayed on the selling floor of most of our stores, compared
to a significantly smaller product offering at typical
department stores. Our stores feature self-service fixtures that
allow customers to view, touch, and try on the product without
relying on salespeople to check availability. Our locations have
clear signage, and well-trained sales associates are available
to assist customers as desired. New footwear merchandise is
organized by style on the main floor, and clearance goods are
organized by size in the rear of the store. Accessories and
impulse items are featured at the front. The store layout allows
customers who do not have time for relaxed browsing to swiftly
identify the shoe styles they are seeking and shop in a
targeted, time-efficient manner.
Our goal is to further strengthen our position as a leading
specialty branded retailer of adult footwear in the United
States. Since 1998, we have accelerated our expansion by
investing in new stores, merchandise development, technology and
our people to support further growth and enhance our
performance. In fiscal 2005, we generated $1.14 billion in
net sales and $70.1 million in operating profit. During the
same period, we sold over 27.3 million pairs of shoes. Over
the five-fiscal-year period ended
January 28, 2006, we have
grown our DSW store base, net sales and operating profit at
compound annual rates of approximately 21%, 22% and 48%,
respectively. See
“Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and our historical consolidated financial statements and the
notes thereto.
We also operate leased shoe departments for three non-affiliated
retailers and one affiliated retailer. We entered into supply
agreements to merchandise the non-affiliated shoe departments in
Stein Mart, Gordmans and Frugal Fannie’s stores as of July
2002, June 2004 and September 2003, respectively. We have
operated leased shoe departments for Filene’s Basement, a
wholly-owned subsidiary of Retail Ventures, since its
acquisition by Retail Ventures in March 2000. Effective as of
January 30, 2005, we updated and reaffirmed our contractual
arrangement with Filene’s Basement. We own the merchandise,
record sales of merchandise net of returns and sales tax, own
the fixtures (except for Filene’s Basement) and provide
supervisory assistance in these covered locations. Stein Mart,
Gordmans, Frugal Fannie’s and Filene’s Basement
provide the sales associates. We pay a percentage of net sales
as rent. As of
April 29, 2006, we supplied merchandise to
158 Stein Mart stores, 57 Gordmans stores, one Frugal
Fannie’s store and 25 Filene’s Basement stores. On
May 30, 2006, we entered into an amended and restated
supply agreement to supply shoes to an additional 102 Stein Mart
stores beginning in 2007.
Corporate History
We were incorporated on January 20, 1969 as Shonac
Corporation and opened our first DSW store in Dublin, Ohio in
July 1991. In 1998, Value City Department Stores, Inc., which
subsequently became a wholly-owned subsidiary of Retail
Ventures, purchased DSW and affiliated shoe businesses from
SSC and Nacht Management, Inc. In December 2004, Retail
Ventures carried out a corporate reorganization whereby
45
Value City Department Stores, Inc., a wholly-owned subsidiary of
Retail Ventures, merged with and into Value City, another
wholly-owned subsidiary of Retail Ventures. In turn, Value City
transferred all the issued and outstanding shares of DSW to
Retail Ventures in exchange for a promissory note. In February
2005, we changed our name from Shonac Corporation to DSW Inc. In
July 2005, we completed an initial public offering of our
Class A Common Shares, selling approximately
16.2 million shares at an offering price of $19.00 per
share. As of
April 29, 2006, Retail Ventures owned
approximately 27.7 million of our Class B Common
Shares, or in excess of 63.1% of our total outstanding shares
and 93.2% of the combined voting power of our outstanding Common
Shares.
Competitive Strengths
We believe that our leading market position is driven by our
competitive strengths — the breadth of our branded
product offerings, our distinctive and convenient store layout,
the value proposition offered to our customers and our
demonstrated ability to deliver profitable growth on a
consistent basis. Over the past few years, we have broadened our
merchandise assortment, honed our retail operating model and
continued our dedication to providing quality in season products
at attractive prices. We believe we will continue to improve our
ability to leverage these competitive strengths and we believe
we will attract and retain talented managers and merchandisers.
|
|
|
The Breadth of Our Product Offerings |
Our goal is to excite our customers with a “sea of
shoes” that fulfill a broad range of style and fashion
needs. We believe that our typical store offers the largest
selection of brand name and designer merchandise of any footwear
retailer or typical department store in the nation. We carry
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. We also offer a complementary selection of
handbags, hosiery and other accessories which appeal to our
brand- and fashion-conscious customers.
Our strategy is designed to ensure that a broad and consistent
selection of merchandise is available. We keep merchandise fresh
by receiving new shipments at least weekly and by trying to put
new items on the selling floor within 24 hours of delivery.
Our goal is to provide our customers with a wide selection of
in-season branded merchandise every day that increases our
customers’ likelihood of finding the right shoe at the
right price each time they visit our stores. The continual
turnover of new merchandise encourages customers to visit often
and see the new styles that arrive each week.
We strive to improve the quality and breadth of our vendor
relationships. We primarily purchase in-season merchandise
directly from more than 300 domestic and foreign vendors. Our
buyers have established strong, mutually beneficial
relationships with vendors that view DSW as a significant
distribution channel for their branded offerings. Our suppliers
consider us to be an attractive retail channel due to both the
scale and geographic reach of our store base and our willingness
to buy merchandise across a broad selection of styles. The
quality of our vendor relationships allows us to secure an
extensive assortment of in-season merchandise and distinguishes
us from other shoe retailers.
|
|
|
Our Distinctive and Convenient Store Layout |
We provide our customers with the highest level of convenience
based on our belief that customers should be empowered to
control and personalize their shopping experiences. Our store
layout and visual merchandising techniques provide a convenient
shopping process, regardless of the type of shoe-buying
experience our customers’ desire on a particular trip.
Indulge in Your Passion for Shoes. We cater to the
passionate shoe enthusiast and indulge customers who love to
shop. Customers take pleasure in our wide product offering in
search of the products that best suit their needs. Our
merchandise is displayed on the selling floor with self-service
fixtures to enable customers to view and touch the merchandise.
We believe this self-service aspect provides our customers with
46
maximum convenience as they are able to browse and try on the
merchandise without feeling rushed or pressured into making a
decision too quickly. Therefore, customers are able to shop at
their own pace as they savor the thrill and enjoyment of
indulging their passion for shoes. Although all DSW stores are
designed for self-service shopping, sales associates are
available to help customers locate merchandise and to assist as
needed.
Easy Shopping Experience. DSW also caters to shoppers who
are time-constrained and come to our stores knowing exactly what
they want. Our wide selection ensures that they are more likely
to find styles they are seeking at DSW than at other shoe
retailers, thereby minimizing the risk of leaving empty-handed.
The stores are also designed for an efficient shopping
experience. Our self-service concept empowers our customers to
shop quickly and easily because they do not have to rely on a
salesperson to check for sizes and styles. Typical DSW stores
are approximately 25,000 square feet, with over 85% of
total square footage used as selling space. We organize most of
our stores 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. We display shoes in
a logical manner that groups together similar styles such as
dress, casual, seasonal and athletic merchandise. In our
self-liquidating clearance racks, shoes are grouped by size and
displayed in the rear of the store. Of the 204 DSW stores open
as of
April 29, 2006, 170 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, we provide a
centralized check-out, which aids customers in quickly locating
the cashier for efficient processing.
|
|
|
The Value Proposition Offered to Our Customers |
Through our buying organization, we are able to provide our
customers with high-quality, in-season fashions at prices that
we believe are competitive with the typical sale price found at
specialty retailers and department stores. We employ a
consistent pricing strategy that typically provides our
customers with the same price on our merchandise from the day it
is received until it goes into our planned clearance rotation.
Our pricing strategy differentiates us from our competitors who
usually price and promote merchandise at discounts available
only for limited time periods. We find that 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
our customers, we prominently display our price and the
corresponding vendor’s suggested retail price for each pair
of shoes.
Our graduated, self-liquidating clearance process includes
moving shoes to the large clearance racks located in the rear of
the store when only a few pairs remain. Because this process
also applies to our fastest-moving merchandise, some of our
shoppers benefit from steep price reductions on our most popular
items. This process provides more floor space for new
merchandise at a faster rate.
We believe that customers value our pricing strategy —
knowing that no matter when our customers shop with us, they are
typically assured of receiving our best value price on whatever
merchandise they purchase. We believe our everyday value prices
are competitive with the typical sale price found at most of our
competitors. During fiscal 2005, the average ticket price for a
pair of shoes (including clearance stock) in a DSW store was
approximately $41.
In order to provide additional value to shoe enthusiasts and
other regular customers, we developed a customer loyalty program
called
“Reward Your Style.” This program offers
additional savings to frequent shoppers and encourages repeat
sales. We target market to
“Reward Your Style” members
throughout the year. We classify these members by frequency and
use direct mail and on-line communication to stimulate further
sales and traffic. As of
January 28, 2006, over
6.8 million members enrolled in the
“Reward Your
Style” loyalty program had purchased merchandise in the
previous two fiscal years, up from approximately
5.5 million members as of
January 29, 2005. In fiscal
2005, approximately 60% of DSW store net sales were generated by
shoppers in the loyalty program, and these shoppers spent an
average of 19% more per purchase than customers who were not
enrolled.
47
|
|
|
Demonstrated Ability to Consistently Deliver Profitable
Growth |
Since 1998, we have focused our operating model on selection,
convenience and value. We believe that the profitable growth we
have achieved in the past is attributable to our operating model
and management’s focus on store-level profitability and
economic payback.
Over the five fiscal years ended
January 28, 2006, our net
sales and operating profit have grown at compound annual growth
rates of 22% and 48%, respectively. In addition, for all our
annual new store classes since 1996, we have achieved positive
operating cash flow within two years of opening. We intend to
continue to focus on net sales, operating profit and cash flow
per annual new store class as we pursue our growth strategy.
Growth Strategy
We plan to continue to strengthen our position as a leading
specialty branded footwear retailer by pursuing the following
three primary strategies for growth in sales and
profitability — expanding our store base, driving
sales through enhanced merchandising and leveraging our
operating model. For additional information regarding our growth
strategy, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Overview — Expansion Strategy.”
We believe our specialty retail concept has broad national
appeal and provides substantial opportunity for new store
expansion. Over the five-fiscal-year period ended
January 28, 2006, we have rapidly expanded our store base
by opening 124 DSW stores, including 29 new stores in fiscal
2005. As of
April 29, 2006, we operated 204 shoe stores in
33 states and have signed leases for an additional 20
stores, 13 of which we expect to open in fiscal 2006. We plan to
open approximately 30 stores in each fiscal year from fiscal
2006 through fiscal 2010 and believe that opening stores at this
rate will not compromise our new store economics. We plan to
open stores both in markets in which we currently operate and in
new markets.
Based on an internal planning model created in fiscal 2005, we
believe that we have the long-term potential to operate over 400
stores in the United States, including the 204 stores existing
as of
April 29, 2006. Our long-range planning model is
based on an examination of each metropolitan area we currently
serve or desire to serve. The objective of the analysis is to
understand the demand for our products in each market over time,
and our ability to capture that demand. The analysis also looks
at our current penetration levels in the markets we serve, and
our expected deepening of those penetration levels as we
continue to grow our brand and become the shoe retailer of
choice in our markets.
Site Selection. In general, our evaluation of potential
new stores focuses on store size, configuration, location, and
lease terms. Beginning in fiscal 2005, we also began to enhance
our methodologies of selecting sites by incorporating additional
statistical factors. This has allowed us to develop a deeper
understanding of the center types and trade areas we wish to
serve over time. It has also allowed us to better understand key
leading indicators of our success in a market. We believe these
enhancements will provide us with a deeper knowledge of the
characteristics of a successful DSW location, and in turn, help
us develop a quality real estate portfolio that meets our
financial expectations.
New Store Model. After we approve a site, we negotiate
lease terms and begin planning the store layout and design. We
typically devote approximately six weeks from the time we take
possession to prepare a store for its opening. During fiscal
2005 the average investment required to open a new DSW store was
approximately $1.4 million per store. Of this amount, in
fiscal 2005, gross inventory typically accounted for
approximately $680,000, fixtures and leasehold improvements
typically accounted for approximately $460,000 (prior to tenant
allowances) and pre-opening advertising and other pre-opening
expenses typically accounted for approximately $280,000. All our
stores are leased.
48
|
|
|
Driving Sales Through Enhanced Merchandising |
We intend to increase the number of customer transactions and
average transaction value by continually refining our
merchandise mix. Our 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. We track store performance and sales trends
on a weekly basis and have a flexible incremental buying process
that enables us to order styles frequently throughout each
season, in contrast to department stores, which typically make
one large purchase at the beginning of the season.
Expanding Vendor Relationships. We have established
strong vendor relationships that allow us to gain favorable
access to high quality, brand name merchandise at attractive
prices. These favorable relationships also allow us to make
opportunistic in-season merchandise purchases that may be
offered to us from time to time. We intend to capitalize on the
success of our existing vendor relationships as well as identify
and develop new supply sources, in particular to enhance our
offering of designer brands.
Increasing Sales Within Existing Merchandise Categories.
In order to further increase sales within our existing
women’s, men’s and athletic shoe categories, we aim to
increase the quality and breadth of existing vendor offerings
and to keep our product mix fresh and on target by testing new
fashions and actively monitoring sell-through rates in our
stores. Additionally, we employ marketing initiatives, including
broad advertising campaigns, the “Reward Your Style”
loyalty program and sales of gift cards to encourage repeat
visits and attract new customers.
Extending Into New Product Categories. While shoes are
the main focus of DSW, we believe offering a complementary
assortment of handbags, hosiery and other accessories is an
important driver of profitable sales. We will continue to
explore new, related product categories that we believe could
enhance sales.
|
|
|
Leveraging Our Operating Model |
As we grow our business and fill in markets to their full
potential, we believe we will continue to improve our
profitability by leveraging our cost structure, particularly in
the areas of advertising, regional management, distribution and
overhead functions. Additionally, we intend to continue
investing in our infrastructure to improve our operating and
financial performance. Most significantly, we believe continued
investment in information systems will enhance our efficiency in
areas such as merchandise planning and allocation, inventory
management, distribution and point of sale functions, among
others.
DSW Store Locations
As of
April 29, 2006, we operated 204 DSW stores in
33 states in the United States. The table below shows the
locations of our DSW stores by region as of
April 29, 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Northeast |
|
West |
|
Central |
|
Southeast |
| |
|
Connecticut
|
|
3 |
|
Arizona |
|
5 |
|
Illinois |
|
10 |
|
Alabama |
|
1 |
|
Delaware
|
|
1 |
|
California |
|
15 |
|
Indiana |
|
6 |
|
Florida |
|
15 |
|
Maine
|
|
1 |
|
Colorado |
|
6 |
|
Iowa |
|
1 |
|
Georgia |
|
8 |
|
Maryland
|
|
6 |
|
Nevada |
|
3 |
|
Kansas |
|
3 |
|
North Carolina |
|
4 |
|
Massachusetts
|
|
8 |
|
Oregon |
|
1 |
|
Michigan |
|
11 |
|
Tennessee |
|
3 |
|
New Hampshire
|
|
1 |
|
Texas |
|
20 |
|
Minnesota |
|
5 |
|
Virginia |
|
10 |
|
New Jersey
|
|
8 |
|
|
|
|
|
Missouri |
|
4 |
|
|
|
|
|
New York
|
|
17 |
|
|
|
|
|
Nebraska |
|
1 |
|
|
|
|
|
Pennsylvania
|
|
10 |
|
|
|
|
|
Ohio |
|
11 |
|
|
|
|
|
Rhode Island
|
|
1 |
|
|
|
|
|
Oklahoma |
|
1 |
|
|
|
|
| |
|
|
|
|
|
|
|
Wisconsin |
|
4 |
|
|
|
|
49
Merchandising
DSW stores offer a wide selection of high quality, in-season and
fashion-oriented footwear, handbags and accessories with
everyday prices that we believe are competitive with the typical
sale price found at specialty retailers and department stores.
Our merchandising group continually monitors current fashion
trends, as well as historical sales trends, to identify popular
styles and those that may become popular in the upcoming season.
We believe that our stores offer the largest selection of brand
name and designer merchandise of any footwear retailer or
typical department store in the nation. We primarily carry
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 towards the particular
demographics of the location. A typical DSW store carries over
2,000 shoe styles, compared to a significantly smaller product
offering at typical department stores. Our goal is to offer a
wide selection of on-trend branded merchandise that greatly
increases our customers’ likelihood of finding the right
shoe at the right price in one trip.
We believe our wide selection of merchandise from
moderate-priced brands to higher-end designer goods contributes
to a distinctive shopping experience for our customers. This
breadth of brands differentiates us from price-oriented
retailers and builds strong customer loyalty. We purchase
in-season designer and branded merchandise both on a planned and
opportunistic basis.
In the main portion of each of our stores, the shoes are
organized by style in order to highlight the breadth of our
merchandise assortment. However, when only a few pairs of a
style remain, we place those shoes on a clearance rack organized
by size in the rear of the store and reduce their prices
periodically. Our clearance approach has been successful in
creating additional excitement and traffic in our stores and in
moving the remaining merchandise quickly. It also creates
available floor space for new styles and a wider selection of
shoes.
We separate our DSW merchandise into four total
categories — women’s dress and casual footwear;
men’s dress and casual footwear; athletic footwear; and
accessories. While shoes are the main focus of DSW, we also
offer a complementary assortment of handbags, hosiery and other
accessories. The following table sets forth the approximate
percentage of our sales attributable to each DSW merchandise
category in fiscal 2005:
| |
|
|
| Category |
|
Percent of Net Sales |
| |
|
|
|
Women’s
|
|
64% |
|
Men’s
|
|
17% |
|
Athletic
|
|
13% |
|
Accessories and Other
|
|
6% |
|
|
|
Buying, Planning and Allocation |
As of
January 28, 2006, our merchandising group consists of
a Vice Chairman and Chief Merchandising Officer, two Vice
President General Merchandising Managers, a Vice President
Planning and Allocation, a Corporate Merchandise Manager, two
divisional merchandise managers, and three senior buyers. For
each major product category, there is a buyer, an assistant
buyer, a merchandise planner and a store planner, whose
responsibility is allocation. We begin the buying process for
our DSW stores in January for the following fall merchandise and
in June for the following spring merchandise. Once our buyers
determine the styles and merchandise mix for an upcoming season,
they focus on purchasing the required quantities at the lowest
cost and the highest quality available, as well as within the
most advantageous flow or timetable.
Our planning and allocation group serves as strategic partner
to, and exercises financial control over, the buying team. Each
buyer’s purchasing plan is reviewed on a monthly basis by
the Vice Chairman and Chief Merchandising Officer and the Vice
President Planning and Allocation. Monthly updates based on
seasonal trends are incorporated into the buying plan. We
believe this organizational scheme helps maximize our
50
buying opportunities while maintaining appropriate
organizational and financial control. Since October 2003, all
functional areas within planning and allocation have been
supported by a software package that integrates financial
analysis into the planning and allocation process. While this
software is already yielding positive results, we believe that
continued use of this software will yield additional
improvements in our planning and allocation functions.
Merchandise planning at the category level, for pre-season
planning and in-season adjustments, is developed through strong
relationships with our buying organization. Channel planning at
the store level tailors the assortment of merchandise by store
based on each store’s customer demographics and balances
the merchandise mix by factoring in volume and space management
objectives. Allocation management, which directs the flow of
merchandise from our distribution center to the individual
stores, allows us to quickly respond and adjust assortments
based on trend, store and style specific sales patterns. Our
allocation decisions are based not only on quantity and
assortment, but also include consideration of price, vendor,
color and other style characteristics. We believe that this
approach to planning and allocation allows us to optimize our
ability to deliver the right merchandise to the right store at
the right time, thereby increasing sales and reducing the need
for markdowns.
We believe we have good relationships with our vendors. We
purchase merchandise directly from more than 300 domestic and
foreign vendors as of
January 28, 2006. Our vendors include
suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. Most of our
domestic vendors import a large portion of their merchandise
from abroad. We have implemented quality control programs under
which our DSW buyers and store managers inspect incoming
merchandise for fit, color and material, as well as for overall
quality of manufacturing. As the number of DSW locations
increases and our sales volumes grow, we believe 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. After giving effect to
consolidation among our vendors, during fiscal 2005, merchandise
supplied by our three top vendors accounted for approximately
22% of our net sales.
We believe that many vendors view us as a significant
distribution channel for their branded offerings and appreciate
our uncomplicated purchasing program. Our vendor relationships
result in greater access to high quality, in-season merchandise
at attractive prices.
Marketing and Advertising
Our marketing strategy for DSW focuses on communicating the
selection, convenience and value offered by DSW through the use
of the slogan “Indulge in your passion for shoes.” We
utilize television, radio and print media advertising as well as
in-store promotions. In fiscal 2005, we spent
$38.0 million, or 3.3% of our net sales, on advertising,
excluding costs to promote each new store opening, which are
included in pre-opening expenses. We also maintain a gift card
program with the intent to generate additional sales by reaching
new customers and increasing awareness of the DSW concept.
In early 1998, we introduced the
“Reward Your Style”
customer loyalty program at DSW. The
“Reward Your
Style” program seeks to motivate members to shop at DSW by
offering them a $25 reward certificate for every $250 they
spend. In addition to customer rewards, the program regularly
communicates with customers through direct mail,
e-mail and the DSW
website. Messages include fashion updates, new arrivals and
other shopping information. As of
January 28, 2006, over
6.8 million members enrolled in the
“Reward Your
Style” program had purchased merchandise in the previous
two fiscal years and, in fiscal 2005, approximately 60% of DSW
store net sales were generated by shoppers in the loyalty
program. We believe that this program has successfully increased
the shopping frequency and average transaction size of our
customers.
51
While the program develops customer loyalty, it also provides us
with valuable market intelligence and purchasing information
regarding our most frequent customers. We carefully analyze the
members’ transaction activity and use this information to
directly advertise, to encourage repeat shopping and to
communicate with our customers. By understanding the
characteristics of our best DSW customers, we are able to
identify other existing customers in lower spending groups with
similar profiles and target communications and advertisements to
increase the attractiveness of our offerings to them, which we
believe results in increases in their spending level.
Staffing and Operations
At DSW, store associates receive training to maximize the
customer shopping experience in our 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. We also
maintain a store management training program to develop the
skills of management personnel and to provide an ongoing talent
pool for future store expansion. We prefer to fill store
management and field supervisor positions through internal
promotions.
DSW stores are organized into the West, Central, Northeast and
Southeast 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 a district or area manager,
each of whom in turn reports to one of four Regional Vice
Presidents or Regional Directors, who in turn report to the
Chief Operating Officer. Our DSW 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. Our store
managers are an important source of information concerning local
market conditions, trends and customer preferences. We provide
bonuses to our store managers which are largely based on store
profitability and inventory control.
Distribution
DSW’s 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 we can
take full advantage of each selling season. This distribution
center facility uses a warehouse management system, upgraded in
2003, and material handling equipment, including automated
conveyor systems, to separate and collate shipments to our
stores. We use a cross dock conveyor system which enhances the
movement of merchandise through the distribution facility using
vendor advance shipment notifications, or ASNs. We have invested
in technology and have made process improvements in our
distribution center. As a result, we believe that our current
receiving and distribution process and infrastructure will
support our anticipated growth for our expanding retail store
base for the foreseeable future. We continue to examine how
goods flow to stores and plan to continue to refine this process.
Most of our inventory is shipped directly from suppliers to a
single centralized distribution center in Columbus, Ohio, where
the inventory is then processed, sorted and shipped to one of 12
pool locations located throughout the country and then on to our
stores. Over time, we expect to increase the amount of
merchandise that bypasses the distribution center on initial
allocations.
Management Information and Control Systems
We believe a high level of automation is essential to
maintaining and improving our competitive position and executing
our expansion strategy. We rely upon computer systems to provide
information for all areas of our business, including merchandise
planning and allocation, inventory control, distribution,
warehouse operations, financial planning, store billing, point
of sale and automated payroll and accounting. We focus on
leveraging our technology infrastructure and systems whenever
appropriate to simplify our processes and
52
increase our efficiency. We continually update our technical
infrastructure for our stores, corporate headquarters and
distribution center.
In order to promote our continued growth, we have undertaken
several major initiatives to build upon the merchandise
management system and warehouse management systems that support
DSW. An electronic data interchange, or EDI, project is underway
to utilize product UPC barcodes and electronic exchange of
purchase orders, ASNs and invoices with our top vendors. As of
January 28, 2006, approximately 80% of our footwear product
is processed using UPC bar codes, 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. They accounted for approximately 40%
of the volume of our shipments as of the end of fiscal 2005, and
we expect they will represent approximately 70% of volume by the
end of fiscal 2006. This will speed the flow of goods from the
vendor to DSW stores, as well as reduce the amount of inventory
needed in our warehouse. Additionally, new merchandise planning
and merchandise allocation systems were implemented in 2003 to
improve inventory productivity and store assortments and reduce
supply chain cycle time.
We utilize point of sale, or POS, registers with full scanning
capabilities to increase speed and accuracy at customer
checkouts and facilitate inventory restocking. In October 2004,
we launched an application that provides us with the ability to
look up a customer’s “Reward Your Style” number
at POS registers. In fiscal 2005, the POS system was further
upgraded with debit card terminals and signature capture.
We use enterprise data warehouse and customer relationship
management software to manage the “Reward Your Style”
program. We expect this will allow us to support, expand and
integrate “Reward Your Style” with the POS system to
improve the customer experience while reducing costs.
Information technology support is provided to us as a shared
service under the shared services agreement by Retail
Ventures’ information technology department for a period
that ends at the end of fiscal 2007 and will extend
automatically unless terminated by one of the parties.
Industry Overview and Competition
According to NPD
Fashionworld®,
a market research company, for the twelve months ended January
2006, DSW captured 2.3% of the $36.6 billion U.S. adult
footwear market. Based on our unique retail format and the high
quality, in-season selection of our shoe merchandise, we believe
that DSW provides a distinct shoe-shopping destination for our
customers. We view our primary competitors to be department
stores. According to NPD
Fashionworld®,
for the twelve months ended January 2006, department stores
represented 12.4% of the footwear market based on dollar volume,
decreasing from 13.0% for the same period a year ago. DSW also
competes with mall-based company stores, national chains,
independent shoe retailers, single-brand specialty retailers and
brand-oriented discounters.
We believe shoppers prefer our 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 we
do. In addition, we believe that we successfully compete against
retailers who have attempted to duplicate our format because
they typically offer assortments with fewer recognizable brands
and more styles from prior seasons.
Although our prices are value-oriented, our core customer is not
the low-price shoe buyer. Therefore, we do not view
non-brand-oriented discount retailers as our prime competitors.
These non-brand-oriented discount retailers may offer footwear
at lower price points; however, they generally offer lower
quality, private label shoes. In contrast, we serve customers
who are typically brand-, quality- and style-conscious shoppers.
As such, we believe they prefer our value offerings to those of
the non-brand oriented discount stores. In addition, we believe
we will increase our market share as discount shoppers realize
that they can buy higher quality brands and more fashionable
shoes in our stores’ clearance sections for prices only
slightly higher than what they are willing to spend at a
discount store.
53
Leased Shoe Department Businesses
We have operated leased shoe departments for Filene’s
Basement, a wholly-owned subsidiary of Retail Ventures, since
its acquisition by Retail Ventures in March 2000. Effective as
of
January 30, 2005, we updated and reaffirmed our
contractual arrangement with Filene’s Basement. Under the
new agreement, we own the merchandise, record sales of
merchandise net of returns and sales tax and provide supervisory
assistance in all covered locations. We pay a percentage of net
sales as rent. Filene’s Basement provides the fixtures and
sales associates. As of
April 29, 2006, we operated leased
shoe departments in 25 Filene’s Basement locations. In
three of these locations, Filene’s Basement licenses and
uses the name DSW in connection with the leased shoe departments.
We also operate leased shoe departments for three non-affiliated
retailers. We entered into supply agreements to merchandise the
shoe departments in Stein Mart, Gordmans and Frugal
Fannie’s stores as of July 2002, June 2004 and September
2003, respectively. We own the merchandise, record sales of
merchandise net of returns and sales tax, provide fixtures and
provide supervisory assistance in these covered locations. Stein
Mart, Gordmans and Frugal Fannie’s provide the sales
associates. We pay a percentage of net sales as rent. As of
April 29, 2006, we supplied merchandise to 158 Stein Mart
stores, 57 Gordmans stores and one Frugal Fannie’s store.
On
May 30, 2006, we entered into an amended and restated
supply agreement to supply shoes to an additional 102 Stein Mart
stores beginning in 2007. Under the terms of this agreement, we
will be the exclusive supplier of shoes to all Stein Mart stores
that have shoe departments.
As of
January 28, 2006, our leased shoe department segment
was supported by a store field operations group, a merchandising
group and a planning and allocation group that are separate from
the DSW stores segment.
The leased business store field operations is supported by a
Vice President of Leased Businesses, who supervises district and
area managers headquartered in the specific district or area.
The managers spend their time in the lessors’ stores
assisting the lessors’ staff with merchandise and
operational matters. Each district and area manager reports
directly to the Vice President of Leased Businesses who reports
to the Chief Operating Officer.
The merchandise group consists of a Divisional Merchandise
Manager of Leased Businesses, who supervises the buying staff.
The Divisional Merchandise Manager reports directly to the Chief
Merchandising Officer. The planning and allocation group
consists of a Manager of Planning & Allocation Leased,
who supervises merchandise and store planners. See “Notes
to Consolidated Financial Statements — Note 11.
Segment Reporting.”
Intellectual Property
We have registered a number of trademarks and service marks in
the United States and internationally, including
DSW
®,
DSW Shoe
Warehouse
®
and Reward Your
Style
®.
The renewal dates for these U.S. trademarks are
April 25, 2015,
May 23, 2015, and
June 22, 2009,
respectively.
We believe that our trademarks and service marks, especially
those related to the DSW concept, have significant value and are
important to building our name recognition. We aggressively
protect our patented fixture designs, as well as our packaging,
store design elements, marketing slogans and graphics. To
protect our brand identity, we have also protected the DSW
trademark in several foreign countries.
Properties
All DSW stores, our principal executive office and all our
distribution, warehouse and office facilities are leased or
subleased. As of
April 29, 2006, we leased or subleased 15
DSW stores and our main warehouse facility from entities
affiliated with SSC. We also signed a lease with affiliates of
SSC for one additional store expected to be opened in fiscal
2006. The remaining DSW stores are leased from unrelated
entities. Most of the DSW store leases provide for a minimum
annual rent plus a percentage of gross sales over specified
breakpoints. Most of our leases are for a fixed term with
options for three to five extension periods, each of which is
for a period of four or five years, exercisable at our option.
54
As of
April 29, 2006, we operated 204 DSW stores. See
“— DSW Store Locations” for a listing of the
states where our DSW stores are located.
Our warehouse and distribution facility is located in an
approximately 700,000 square foot facility in Columbus,
Ohio. The lease expires in December 2016 and has three renewal
options with terms of five years each. While we believe that
this facility is adequate to meet our foreseeable needs, we may
need to increase our distribution capacity in the future to
accommodate our expanding retail business. Our principal
executive office is also located on the site of our main
warehouse and distribution facility in Columbus, Ohio. We may
expand our office space in this facility in the near future. If
we do so, we may incur additional capital expenditures to build
out this additional space.
Associates
As of
January 28, 2006, we employed approximately
4,950 associates. None of our associates is covered by any
collective bargaining agreement.
We offer competitive wages, comprehensive medical and dental
insurance, vision care, company-paid and supplemental life
insurance programs, associate-paid long-term and short-term
disability insurance and a 401(k) plan to our full-time
associates and some of our part-time associates.
We have not experienced any work stoppages, and we consider our
relations with our associates to be good.
Legal Proceedings
As previously reported, on
March 8, 2005, Retail Ventures
announced that it had learned of the theft of credit card and
other purchase information from a portion of DSW customers. On
April 18, 2005, Retail Ventures issued the findings from
its investigation into the theft. The theft covered transaction
information involving approximately 1.4 million credit
cards and data from transactions involving approximately
96,000 checks.
We and Retail Ventures contacted and continue to cooperate with
law enforcement and other authorities with regard to this
matter. We are involved in several legal proceedings arising out
of this incident, including four putative class action lawsuits,
which seek unspecified monetary damages, credit monitoring and
other relief. Each of the four lawsuits seeks to certify a
different class of consumers. One of the lawsuits seeks to
certify a nationwide class that would include every consumer who
used a credit card, debit card, or check to make purchases at
DSW between November 2004 and March 2005 and whose transaction
data was taken during the data theft incident. The other three
lawsuits seek to certify classes of consumers that are limited
geographically. Those cases use different putative class
definitions to identify consumers who made purchases at certain
stores in Ohio, Michigan, and Illinois. On
July 26, 2006,
the Michigan federal district court granted DSW’s motion to
dismiss the Michigan lawsuit and so ordered the dismissal of
that lawsuit.
In connection with this matter, we entered into a consent order
with the 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.
We have not admitted any wrongdoing or that the facts alleged in
the FTC’s proposed unfairness complaint are true. Under the
consent order, we will pay no fine or damages. We have agreed,
however, to maintain a comprehensive information security
program, and to undergo a biannual assessment of such program by
an independent third party.
There can be no assurance that there will not be additional
proceedings or claims brought against DSW in the future. We have
contested and will continue to vigorously contest the claims
made against us and will continue to explore our defenses and
possible claims against others.
We estimate that the potential exposures for losses related to
this theft range from approximately $6.5 million to
approximately $9.5 million. Because of many factors,
including the early development of
55
information regarding the theft, the early stage of the lawsuits
asserted against us and recoverability under insurance policies,
there is no amount in the estimated range that represents a
better estimate than any other amount in the range. Therefore,
in accordance with Financial Accounting Standard No. 5,
“Accounting for Contingencies,” we accrued a charge to
operations in the first quarter of fiscal 2005 equal to the low
end of the range set forth above, or $6.5 million. To our
knowledge, no class action lawsuits brought by consumers
alleging claims similar to those asserted in the putative class
actions against us 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.
Although difficult to quantify, since the announcement of the
theft, we have not discerned any material negative effect on
sales trends we believe is attributable to the theft. However,
this may not be indicative of the long-term developments
regarding this matter.
We are involved in various other legal proceedings that are
incidental to the conduct of our business. We estimate the range
of liability related to pending litigation where the amount of
the range of loss can be estimated. We recorded our best
estimate of a loss when the loss is considered probable. Where a
liability is probable and there is a range of estimated loss, we
recorded the most likely estimated liability related to the
claim. In the opinion of management, the amount of any liability
with respect to these proceedings will not be material. As
additional information becomes available, we will assess the
potential liability related to our pending litigation and revise
the estimates. Revisions in our estimates and potential
liability could materially impact our results of operations and
financial condition.
56
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information about our
directors, director nominees and executive officers, together
with their positions and ages:
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position With Us |
| |
|
| |
|
|
|
Jay L. Schottenstein
|
|
|
52 |
|
|
Chief Executive Officer and Chairman of the Board of Directors |
|
Deborah L. Ferrée
|
|
|
52 |
|
|
Vice Chairman and Chief Merchandising Officer |
|
Peter Z. Horvath
|
|
|
48 |
|
|
President |
|
Kevin M. Lonergan
|
|
|
57 |
|
|
Executive Vice President and Chief Operating Officer |
|
|
|
|
42 |
|
|
Executive Vice President, Chief Financial Officer and Treasurer |
|
Derek Ungless
|
|
|
57 |
|
|
Executive Vice President and Chief Marketing Officer |
|
Harris Mustafa
|
|
|
52 |
|
|
Executive Vice President, Supply Chain and Merchandise Planning
and Allocation |
|
Carolee Friedlander*
|
|
|
65 |
|
|
Director |
|
Philip B. Miller*
|
|
|
68 |
|
|
Director |
|
James D. Robbins*
|
|
|
59 |
|
|
Director |
|
Harvey L. Sonnenberg
|
|
|
64 |
|
|
Director |
|
Allan J. Tanenbaum*
|
|
|
59 |
|
|
Director |
|
Heywood Wilansky
|
|
|
58 |
|
|
Director |
|
|
| * |
Independent directors under NYSE rules. |
Each of our executive officers holds office until his or her
successor is elected or appointed and qualified or until his or
her resignation or removal, if earlier. Each director listed
below holds office until his successor is duly elected or
appointed and qualified or until his earlier death, retirement,
disqualification, resignation or removal.
Jay L. Schottenstein serves as our Chief Executive
Officer and Chairman of the Board of Directors. He was appointed
as our Chief Executive Officer in March 2005.
Mr. Schottenstein became a director of DSW in March 2005.
He has been Chairman of the Board of Directors of Retail
Ventures, American Eagle Outfitters, Inc. and SSC since March
1992 and was Chief Executive Officer of Retail Ventures from
April 1991 to July 1997 and from July 1999 to December 2000.
Mr. Schottenstein served as Vice Chairman of SSC from 1986
until March 1992 and as a director of SSC since 1982. He served
in various executive capacities at SSC since 1976.
Mr. Schottenstein is also a director of American Eagle
Outfitters, Inc. and Retail Ventures.
Deborah L. Ferrée has served as our Vice Chairman
and Chief Merchandising Officer since January 2006.
Ms. Ferrée joined us in November 1997. She served as
our President and Chief Merchandising Officer from November 2004
until January 2006. From March 2002 until November 2004, she
served as Executive Vice President and Chief Merchandising
Officer. Prior to that, she served as Senior Vice President of
Merchandising beginning in September 2000, and Vice President of
Merchandising beginning in October 1997. Prior to joining us,
Ms. Ferrée worked in the retail industry for more than
30 years in various positions, including serving as
Divisional Merchandising Manager of Shoes, Accessories and
Intimate Apparel for Harris Department Store, women’s buyer
for Ross Stores and Divisional Merchandise Manager of the May
Company.
57
Peter Z. Horvath has served as our President since
January 2006. From January 2005 until January 2006,
Mr. Horvath served as our Executive Vice President and
Chief Operating Officer. He has extensive retail experience,
having spent nineteen years with the Limited Brands business. He
has held numerous finance function roles within various
divisions of Limited Brands, most recently serving as Senior
Vice President of Merchandise Planning and Allocation for the
entire Limited Brands enterprise from April 2002 to August 2004.
From February 1997 to April 2002, he served as Chief Financial
Officer for multiple apparel divisions of Limited Brands. From
1985 to February 1997, Mr. Horvath held various positions
with Limited Brands, including Vice President Controller of
Express, Inc. and Director of Financial Reporting for Limited
Stores.
Kevin M. Lonergan serves as our Executive Vice President
and Chief Operating Officer. Prior to joining us in January
2006, Mr. Lonergan served as Vice President of the West
Zone for American Eagle Outfitters, beginning in January 2004,
where he was responsible for 397 stores in 30 states.
Prior to that time, Mr. Lonergan served as Executive Vice
President and Chief Operating Officer of Old Navy, a division of
Gap, Inc., where he oversaw all store operations and helped
build the newly formed Old Navy division from its inception in
1993. Prior to serving in that capacity, Mr. Lonergan held
executive positions at various divisions of Gap, Inc., Target
and Carson Pirie Scott. Mr. Lonergan has over 35 years
of business experience in all phases of retail, including
department stores, specialty and mass merchandising, and has
been responsible for many areas of business, including stores,
operations, finance, real estate, human resources, systems, and
customer service.
Douglas J. Probst serves as our Executive Vice President,
Chief Financial Officer and Treasurer. Mr. Probst joined
DSW in March 2005. From April 1990 to February 2005, he held
various positions with Too Inc., a company spun-off from The
Limited, Inc., including Vice President of Finance and
Controller from May 2004 to February 2005, Vice President
Finance from October 2003 to May 2004 and Vice President
Financial Analysis and Store Control from December 1999 to
October 2003. From August 1986 to March 1990, he was in the
practice of public accounting with KPMG. Mr. Probst is a
certified public accountant.
Derek Ungless serves as our Executive Vice President and
Chief Marketing Officer, a position he has held since June 2005.
From April 2002 to May 2005, he was Executive Vice President of
Marketing for Express, part of Limited Brands. Mr. Ungless
was Senior Vice President and Head of Global Brand Design of the
Estee Lauder brand, part of Estee Lauder Companies Inc. from
September 2000 until November 2001 and was Executive Vice
President and Creative Director of Brooks Brothers from October
1997 until September 2000. Mr. Ungless has over twelve
years of experience working in the retail industry.
Harris Mustafa serves as our Executive Vice President,
Supply Chain and Merchandise Planning and Allocation. Prior to
joining us in July 2006, Mr. Mustafa served as Executive
Vice President, Private Brand and Product Development at Saks
Department Store Group, beginning in 2004, and as Senior Vice
President, Planning and Operations, Private Brand Group at Saks
Department Store Group from 2003 to 2004. From 2002 to 2003
Mr. Mustafa was Senior Vice President, Business Planning at
Williams-Sonoma, Inc. From 1987 to 2002, Mr. Mustafa held
various positions at Payless ShoeSource, Inc., including Senior
Vice President, Managing Director Payless ShoeSource
International from 1999 to 2002 and Senior Vice President,
Merchandising Distribution from 1995 to 1999.
Carolee Friedlander has served as a director of DSW since
2005. Ms. Friedlander serves as a founding partner of
Circle Financial Group, a membership organization that provides
wealth management services, and has held that position since
August 2004. From July 2001 to August 2004, Ms. Friedlander
served as Senior Vice President of Retail Brand Alliance, Inc.,
and as President and Chief Executive Officer of Carolee Designs,
Inc., a subsidiary of Retail Brand Alliance. Prior to that,
Ms. Friedlander served as President and Chief Executive
Officer of Carolee Designs, a fashion accessory company she
founded in 1973 and sold to Retail Brand Alliance in July 2001.
Philip B. Miller has served as a director of DSW since
2005. Mr. Miller is the President of Philip B. Miller
Associates, a consulting firm, and an Operating Director of
Tri-Artisan Capital Partners, a privately held merchant bank,
and has held those positions since July 2001. Mr. Miller
also serves on the Board of
58
Directors of St. John Knits, a position he has held since
December 2002, and as its interim Chief Executive Officer since
March 2006. Mr. Miller served as Chairman and Chief
Executive Officer of Saks Fifth Avenue, Inc. from 1993 until
January 2000 and continued as Chairman of that company until
July 2001. From 1983 to 1990, Mr. Miller served as Chairman
and Chief Executive Officer of Marshall Fields, Inc.
Mr. Miller also serves as a director of Kenneth Cole
Productions, Inc.
James D. Robbins has served as a director of DSW since
2005. From 1993 until his retirement in June 2001,
Mr. Robbins served as Managing Partner of the Columbus,
Ohio office of PricewaterhouseCoopers LLP. Mr. Robbins is a
certified public accountant. Mr. Robbins currently holds
directorships in Dollar General Corporation and Huntington
Preferred Capital, Inc., positions he has held since March 2002
and November 2001, respectively. Mr. Robbins also serves as
chairman of the audit committees of both of these companies.
Harvey L. Sonnenberg has served as a director of DSW
since 2005. Mr. Sonnenberg has been a partner in the
certified public accounting firm, Weiser, LLP, since November
1994. Mr. Sonnenberg is active in a number of professional
organizations, including the American Institute of Certified
Public Accountants and the New York State Society of Certified
Public Accountants, and has long been involved in rendering
professional services to the retail and apparel industry.
Mr. Sonnenberg is a certified public accountant.
Mr. Sonnenberg is a director of Retail Ventures.
Allan J. Tanenbaum has served as a director of DSW since
2005. Mr. Tanenbaum currently serves as General Counsel and
Managing Director of Equicorp Partners, LLC, an Atlanta-based
private investment and advisory firm. From February 2001 to
December 31, 2005, Mr. Tanenbaum served as Senior Vice
President, General Counsel and Corporate Secretary for AFC
Enterprises, Inc., a franchisor and operator of quick-service
restaurants. From June 1996 to February 2001, Mr. Tanenbaum
was a shareholder in Cohen Pollock Merlin Axelrod &
Tanenbaum, P.C., an Atlanta, Georgia law firm, where he
represented corporate clients in connection with mergers and
acquisitions and other commercial transactions.
Heywood Wilansky has served as a director of DSW since
2005. Mr. Wilansky has been the President and Chief
Executive Officer of Retail Ventures since November 2004. Before
joining Retail Ventures, he 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. Mr. Wilansky is also a director
of Retail Ventures and Bertucci’s Corporation.
Board Composition
Our amended and restated code of regulations authorizes seven
directors to serve on the board of directors, or board. As of
May 1, 2006, the following individuals serve on the board
of directors: Mr. Schottenstein, Ms. Friedlander,
Mr. Miller, Mr. Robbins, Mr. Sonnenberg,
Mr. Tannenbaum and Mr. Wilansky.
Pursuant to our amended and restated code of regulations, when
the authorized number of directors is six or more, but less than
nine, the directors are divided into two classes, designated as
Class I and Class II. The members of each class serve
for a staggered, two-year term, except that Class I
directors in the initial term immediately following our initial
public offering in July 2005 serve for one year. Each director
is elected to serve until the election of the director’s
successor at an annual meeting of shareholders for the election
of directors for the year in which the director’s term
expires or at a special meeting called for that purpose. As of
the date of this prospectus, we do not anticipate increasing or
decreasing the authorized number of directors.
|
|
|
| |
• |
Class I Directors. Messrs. Wilansky,
Sonnenberg, Tanenbaum and Ms. Friedlander, whose terms will
expire at the 2008 annual meeting of shareholders; and |
| |
| |
• |
Class II Directors. Messrs. Schottenstein,
Miller, and Robbins, whose terms will expire at the 2007 annual
meeting of shareholders. |
59
Our board has determined that a majority of our directors are
independent as defined under the NYSE rules.
Committees of the Board of Directors
Our Board of Directors has a Nominating and Corporate Governance
Committee, a Compensation Committee and an Audit Committee, all
of which are comprised solely of independent directors as
defined under applicable SEC rules and the listing standards of
the NYSE.
Audit Committee. The Audit Committee assists the board in
fulfilling its oversight responsibility relating to our
financial statements and the financial reporting process,
compliance with legal and regulatory requirements, the
qualifications and independence of our independent public
accountants, our system of internal controls, the internal audit
function, our code of ethical conduct, retaining and, if
appropriate, terminating the independent public accountants and
approving audit and non-audit services to be performed by the
independent public accountants.
The members of our Audit Committee are Messrs. Robbins
(Chair), Miller and Tanenbaum. The Board of Directors has
determined that each of them is independent and is financially
literate in accordance with the applicable SEC rules and listing
standards of the NYSE. The Board has also determined that our
Audit Committee’s Chairman, James D. Robbins, qualifies as
an audit committee financial expert as such term is defined by
the SEC under Item 401(h) of
Regulation S-K.
Nominating and Corporate Governance Committee. The
Nominating and Corporate Governance Committee’s functions
include assisting the Board in determining the desired
qualifications of directors, identifying potential individuals
meeting those qualification criteria, proposing to the board a
slate of nominees for election by the shareholders and reviewing
candidates nominated by shareholders. In addition, the
nominating and corporate governance committee reviews the
Corporate Governance Principles, makes recommendations to the
board with respect to other corporate governance principles
applicable to us, oversees the annual evaluation of the board
and management and reviews management and board succession plans.
The members of our Nominating and Corporate Governance Committee
are Messrs. Tanenbaum (Chair) and Robbins, and
Ms. Friedlander, each of whom is independent as discussed
above.
Compensation Committee. The Compensation Committee’s
functions include evaluating the Chief Executive Officer’s
performance, setting the Chief Executive Officer’s annual
compensation; reviewing and approving the compensation packages
of our other executive officers; making recommendations to the
board with respect to our incentive compensation, retirement and
other benefit plans; making administrative and compensations
decisions under such plans; and recommending to the board the
compensation for non-employee board members.
The members of our Compensation Committee are
Messrs. Miller (Chair) and Robbins and
Ms. Friedlander. Each member of the Compensation Committee
is independent as discussed above. None of the members of the
Compensation Committee are present or former officers of our
Company or are themselves or any of their affiliates, if any,
parties to agreements with us.
Compensation Committee Interlocks and Insider
Participation
Ms. Friedlander and Messrs. Miller and Robbins serve
on our Compensation Committee. None of the members of our
Compensation Committee during fiscal 2005 had at any time been
an officer or employee of
our Company or any of our
subsidiaries. None of our executive officers served as a member
of the board or compensation committee of any other entity which
had an executive officer serving as a member of our Compensation
Committee during fiscal 2005.
60
Compensation of Directors
In connection with the completion of our initial public
offering, in July 2005 we granted each of Ms. Friedlander
and Messrs. Miller, Robbins, Sonnenberg and Tanenbaum 3,100
stock units under the DSW 2005 Equity Plan as a retainer for
their service as a director. Additionally in fiscal 2005, we
paid a pro rata portion of the $50,000 annual cash retainer
described below to each of Ms. Friedlander and
Messrs. Miller, Robbins, Sonnenberg and Tanenbaum.
We intend to pay an annual retainer to our directors who are not
employees of DSW or Retail Ventures (currently,
Ms. Friedlander and Messrs. Miller, Robbins,
Sonnenberg and Tanenbaum). The annual retainer will consist of
$50,000 in cash and a grant of a number of stock units with a
value equal to $50,000, determined by using the fair market
value of a Class A Common Share at the date of grant. For
fiscal 2006 and thereafter, we intend to issue stock units for
the annual retainer to eligible directors at the time of our
Annual Meeting of Shareholders. The cash portion of the retainer
is paid quarterly and each eligible director may elect to
receive their cash retainer and committee chairperson fees in
the form of stock units.
Stock units issued to a director are fully vested on the date of
grant, but will not be distributable to the director until the
director leaves the board (for any reason). When the director
leaves the board, the stock units owed to the director will be
settled in DSW Class A Common Shares (with cash for any
fractional shares), unless the director’s award agreement
provides for a cash settlement. The stock units will be settled
in a lump sum transfer, and the compensated director may not
defer settlement or spread the settlement over a longer period
of time.
Directors have no voting rights in respect of the stock units,
but they will have the power to vote the DSW Class A Common
Shares received upon settlement of the award. In general,
directors have equivalent rights to receive dividends paid on
our Class A Common Shares. Each director will be
“credited” with the same dividend that would be issued
if the stock unit was a Class A Common Share. The amounts
associated with the dividend equivalent rights will not be
distributed until the director’s stock unit award is
settled at the time that the director leaves the board. We will
be entitled to a tax deduction when the award is settled, and
the director will be taxed on the then fair market value of the
award.
Directors do not receive any additional compensation for
attending board meetings or board committee meetings. However,
the chairmen of the Audit Committee, Nominating and Corporate
Governance Committee and Compensation Committee each receive an
additional $10,000, $5,000 and $7,500 in cash or stock units (as
they may elect) per year, respectively. We pay this compensation
on a quarterly basis. All members of our board of directors are
reimbursed for reasonable costs and expenses incurred in
attending meetings of our board of directors and its committees.
Codes of Conduct
We have adopted a code of ethics that applies to all our
directors, officers and employees, including our 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 have been
designated as the
“Code of Conduct” and the
“Code
of Ethics for Senior Financial Officers,” respectively. We
intend to disclose any amendment to, or waiver from, any
applicable provision of the Code of Conduct or Code of Ethics
for Senior Financial Offices (if such amendment or waiver
relates to elements listed under Item 406(b) of
Regulation
S-K and
applies to our directors, principal executive officer, principal
financial officer, principal accounting officer or controller,
or persons performing similar functions) by posting such
information on our corporate and investor
website at
www.dswshoe.com.
Executive Compensation
Prior to completion of our initial public offering in July 2005,
we were a wholly-owned subsidiary of Retail Ventures. As such,
the Compensation Committee and Board of Directors of Retail
Ventures established the compensation of our named executive
officers and all equity awards, cash bonuses and other
compensation was paid pursuant to Retail Ventures’ plans.
61
The following table summarizes compensation awarded or paid to,
or earned by, our Chief Executive Officer and each of the next
four most highly compensated executive officers during each of
our last three fiscal years. We refer to these officers as our
“named executive officers” in other parts of this
prospectus.
Summary Compensation Table
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Long Term Compensation | |
| |
|
|
|
|
|
|
|
|
|
| |
| |
|
|
|
|
|
|
|
|
|
Awards | |
|
Payouts | |
|
|
| |
|
|
|
|
|
| |
|
| |
|
|
| |
|
|
|
Annual Compensation | |
|
|
|
Securities | |
|
|
|
|
| |
|
|
|
| |
|
Restricted | |
|
Underlying | |
|
|
|
|
| |
|
|
|
|
|
Other Annual | |
|
Stock | |
|
Options/ | |
|
LTIP | |
|
All Other | |
| Name and |
|
Fiscal | |
|
Salary | |
|
Bonus | |
|
Compensation | |
|
Award(s) | |
|
SARs | |
|
Payouts(1) | |
|
Compensation(2) | |
| Principal Position |
|
Year | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
(#) | |
|
($) | |
|
($) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Jay L. Schottenstein
|
|
|
2005 |
|
|
$ |
224,824 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
$ |
1,322 |
|
| |
Chairman and Chief
|
|
|
2004 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
| |
Executive Officer
|
|
|
2003 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
Deborah L. Ferrée
|
|
|
2005 |
|
|
$ |
700,000 |
|
|
$ |
912,576 |
(3) |
|
$ |
46,559 |
(4) |
|
$ |
535,800 |
(5) |
|
|
150,000 |
|
|
|
None |
|
|
$ |
15,929 |
|
| |
Vice Chairman and
|
|
|
2004 |
|
|
$ |
553,083 |
|
|
$ |
710,938 |
|
|
|
|
(6) |
|
|
None |
|
|
|
None |
|
|
$ |
345,000 |
|
|
$ |
8,037 |
|
| |
Chief Merchandising
|
|
|
2003 |
|
|
$ |
510,337 |
|
|
$ |
402,079 |
|
|
|
|
(6) |
|
|
None |
|
|
|
None |
|
|
$ |
345,000 |
|
|
$ |
9,428 |
|
| |
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Z. Horvath
|
|
|
2005 |
|
|
$ |
500,000 |
|
|
$ |
726,840 |
(3) |
|
|
|
(6) |
|
$ |
535,800 |
(5) |
|
|
150,000 |
|
|
|
None |
|
|
|
None |
|
| |
President
|
|
|
2004 |
|
|
$ |
28,846 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
| |
|
|
|
2003 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
|
|
2005 |
|
|
$ |
302,885 |
|
|
$ |
364,512 |
(3) |
|
|
|
(6) |
|
$ |
247,000 |
(5) |
|
|
70,000 |
|
|
|
None |
|
|
|
None |
|
| |
Executive Vice President, |
|
|
2004 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
| |
Chief Financial Officer,
|
|
|
2003 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
| |
and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derek Ungless
|
|
|
2005 |
|
|
$ |
218,077 |
|
|
$ |
222,610 |
(3) |
|
|
|
(6) |
|
$ |
144,400 |
(5) |
|
|
40,000 |
|
|
|
None |
|
|
|
None |
|
| |
Executive Vice President |
|
|
2004 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
| |
and Chief Marketing |
|
|
2003 |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
| |
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
In July 2002, the Compensation Committee of Retail Ventures
recommended and the Board of Directors of Retail Ventures
approved the establishment of a “value creation”
program, pursuant to which cash payments were made to certain
participants including Ms. Ferrée.
Ms. Ferrée was awarded an aggregate of $690,000
pursuant to the program, subject to a risk of forfeiture on
termination of employment, $345,000 of which was paid during
fiscal 2004 and fiscal 2003, respectively. |
| |
| (2) |
The amounts shown in this column for each named executive
officer includes contributions or other allocations to Retail
Ventures’ 401(k) Plan and Employee Stock Purchase Plan for
the named executive officer, as follows: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
401(k) Plan and Associate | |
| |
|
Stock Purchase Plan | |
| |
|
| |
| Name |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Jay L. Schottenstein
|
|
$ |
1,322 |
|
|
|
None |
|
|
|
None |
|
|
Deborah L. Ferrée
|
|
$ |
8,983 |
|
|
$ |
8,037 |
|
|
$ |
9,428 |
|
|
Peter Z. Horvath
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
Derek Ungless
|
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
| |
For fiscal 2005, includes $6,946 reimbursement (including a tax
gross up of $2,219) for cancelled vacation costs to
Ms. Ferrée. |
|
|
| (3) |
Bonus amounts for 2005 are comprised of the following: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Incentive | |
|
Discretionary | |
|
Signing | |
| Officer |
|
Compensation | |
|
Bonus | |
|
Bonus | |
| |
|
| |
|
| |
|
| |
|
Deborah L. Ferrée
|
|
$ |
637,006 |
|
|
$ |
275,571 |
|
|
|
— |
|
|
Peter Z. Horvath
|
|
$ |
455,004 |
|
|
$ |
196,836 |
|
|
$ |
75,000 |
|
|
|
|
$ |
226,515 |
|
|
$ |
97,997 |
|
|
$ |
40,000 |
|
|
Derek Ungless
|
|
$ |
103,033 |
|
|
$ |
44,577 |
|
|
$ |
75,000 |
|
|
|
| (4) |
Includes $44,890 related to perquisites paid by us, $1,136
relating to country club dues and membership fees paid by us and
$533 relating to country club tax gross up. |
62
|
|
| (5) |
The value (determined based on the closing price of the
Class A Common Shares on the NYSE on the date of grant) of
28,200 restricted stock units (“Units”) awarded to
Ms. Ferrée and Mr. Horvath, 13,000 Units awarded
to Mr. Probst, and 7,600 Units awarded to Mr. Ungless,
as of June 28, 2005 pursuant to our initial public
offering. The Units vest on June 28, 2009 and do not have
voting or dividend rights. As of January 28, 2006, the
value of the shares underlying the Units was $761,400 for
Ms. Ferrée and Mr. Horvath, $351,000 for
Mr. Probst, and $205,200 for Mr. Ungless (determined
based on the closing price of our Class A Common Shares on
the NYSE on the last trading day before January 28, 2006). |
| |
| (6) |
The aggregate amount of perquisites and other benefits paid to
the named officers in these fiscal years did not exceed the
lesser of $50,000 or 10% of the total of annual salary and bonus
reported for the named executive officer. |
The following table sets forth information concerning individual
grants of DSW stock options and stock appreciation rights
(“SARS”) made during the last fiscal year to each of
the named executive officers.
DSW Options/ SAR Grants in Last Fiscal Year
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Individual Grants | |
| |
|
| |
| |
|
|
|
Potential Realizable Value | |
| |
|
|
|
at Assumed Annual Rates | |
| |
|
Number of | |
|
% of Total | |
|
|
|
of Stock Price | |
| |
|
Securities | |
|
Options/SARs | |
|
|
|
Appreciation for Option | |
| |
|
Underlying | |
|
Granted to | |
|
Exercise or | |
|
|
|
Term(1) | |
| |
|
Options/SARs(2) | |
|
Employees in | |
|
Base Price | |
|
Expiration | |
|
| |
| Name |
|
Granted (#) | |
|
Fiscal Year | |
|
($/share) | |
|
Date | |
|
5% | |
|
10% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Jay L. Schottenstein
|
|
|
None |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deborah L. Ferrée
|
|
|
150,000 |
|
|
|
17.81 |
% |
|
$ |
19.00 |
|
|
|
6/28/15 |
|
|
$ |
1,792,350 |
|
|
$ |
4,542,166 |
|
|
Peter Z. Horvath
|
|
|
150,000 |
|
|
|
17.81 |
% |
|
$ |
19.00 |
|
|
|
6/28/15 |
|
|
$ |
1,792,350 |
|
|
$ |
4,542,166 |
|
|
|
|
|
70,000 |
|
|
|
8.31 |
% |
|
$ |
19.00 |
|
|
|
6/28/15 |
|
|
$ |
836,430 |
|
|
$ |
2,119,677 |
|
|
Derek Ungless
|
|
|
40,000 |
|
|
|
4.75 |
% |
|
$ |
19.00 |
|
|
|
6/28/15 |
|
|
$ |
477,960 |
|
|
$ |
1,211,244 |
|
|
|
| (1) |
Represents the potential realizable value of each grant of
options/ SARS assuming that the market price of the common
shares appreciates in value from the date of grant to the end of
the option term at either a 5% or 10% annualized rate, based on
the difference between the assumed per share value and the per
share option exercise price, multiplied by the total number of
option shares. |
| |
| (2) |
Options were granted with an exercise price equal to the market
price at the grant date and vest ratably over five years from
the date of grant. |
The following table sets forth information regarding each
individual exercise of stock options to purchase DSW
Class A Common Shares made during the last fiscal year by
each of the named executive officers.
DSW Aggregated Option/ SAR Exercises in Last Fiscal Year and
Fiscal Year End Option Values
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of | |
|
|
| |
|
|
|
|
|
Securities Underlying | |
|
Value of Unexercised | |
| |
|
Shares | |
|
|
|
Unexercised Options/SARs | |
|
In-the-Money Options/SARs | |
| |
|
Acquired | |
|
Value | |
|
at Fiscal Year-end (#) | |
|
at Fiscal Year-end ($)(1) | |
| |
|
on Exercise | |
|
Realized | |
|
| |
|
| |
| Name |
|
(#) | |
|
($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Jay L. Schottenstein
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deborah L. Ferrée
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
150,000 |
|
|
|
— |
|
|
$ |
1,200,000 |
|
|
Peter Z. Horvath
|
|
|
— |
|
|
|
— |
|
|
|
30,000 |
|
|
|
120,000 |
|
|
$ |
240,000 |
|
|
$ |
960,000 |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
70,000 |
|
|
|
— |
|
|
$ |
560,000 |
|
|
Derek Ungless
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
40,000 |
|
|
|
— |
|
|
$ |
320,000 |
|
|
|
| (1) |
Represents the total gain which would be realized if all
in-the-money options
held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference
between the per share option exercise price and the per share
fair market value of DSW Class A Common Shares at year end
of $27.00. An option is
in-the-money if the
fair market value of the underlying shares exceeds the exercise
price of the option. |
63
The following table sets forth information regarding each
individual exercise of stock options to purchase Retail Ventures
common shares made during the last fiscal year by each of the
named executive officers.
Retail Ventures Aggregated Option/ SAR Exercises in Last
Fiscal Year and
Fiscal Year End Option Values
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of | |
|
|
| |
|
|
|
|
|
Securities Underlying | |
|
Value of Unexercised | |
| |
|
Shares | |
|
|
|
Unexercised Options/SARs | |
|
In-the-Money Options/SARs | |
| |
|
Acquired | |
|
|
|
at Fiscal Year-end (#) | |
|
at Fiscal Year-end ($)(1) | |
| |
|
on Exercise | |
|
Value | |
|
| |
|
| |
| Name |
|
(#) | |
|
Realized ($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Jay L. Schottenstein
|
|
|
— |
|
|
|
— |
|
|
|
50,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deborah L. Ferrée
|
|
|
250,000 |
|
|
$ |
1,875,250 |
|
|
|
86,000 |
|
|
|
216,000 |
|
|
$ |
635,060 |
|
|
$ |
1,777,680 |
|
|
Peter Z. Horvath
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Derek Ungless
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
| (1) |
Represents the total gain which would be realized if all
in-the-money options
held at year end were exercised, determined by multiplying the
number of shares underlying the options by the difference
between the per share option exercise price and the per share
fair market value of Retail Ventures common shares at year end
of $12.73. An option is
in-the-money if the
fair market value of the underlying shares exceeds the exercise
price of the option. |
Equity Compensation Plan Table
The following table sets forth additional information as of
January 28, 2006, about our Class A Common Shares that
may be issued upon the exercise of options and other rights
under our existing equity compensation plans and arrangements,
divided between plans approved by our shareholders and plans or
arrangements not submitted to our shareholders for approval. The
information includes the number of shares covered by, and the
weighted average exercise price of, outstanding options,
warrants and other rights and the number of shares remaining
available for future grants, excluding the shares to be issued
upon exercise of outstanding options, warrants, and other rights.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Securities | |
| |
|
Number of Securities to | |
|
|
|
Remaining Available for | |
| |
|
be Issued Upon | |
|
Weighted-average | |
|
Issuance Under Equity | |
| |
|
Exercise of Outstanding | |
|
Exercise Price of | |
|
Compensation Plans | |
| |
|
Options, Warrants and | |
|
Outstanding Options, | |
|
(excluding Securities | |
| |
|
Rights | |
|
Warrants and Rights | |
|
Reflected in Column(a) | |
| Plan Category |
|
(a) | |
|
(b) | |
|
(c) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security
holders(1)(2)
|
|
|
1,062,513 |
|
|
$ |
19.54 |
|
|
|
3,537,487 |
|
|
Equity compensation plans not approved by security holders
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Total
|
|
|
1,062,513 |
|
|
$ |
19.54 |
|
|
|
3,537,487 |
|
|
|
| (1) |
DSW Inc. 2005 Equity Incentive Plan. |
| |
| (2) |
Includes 914,200 shares issuable pursuant to the exercise
of outstanding stock options, 131,300 shares issuable
pursuant to restricted stock units, and 17,013 shares
issuable pursuant to director stock units. Since the restricted
stock units and director stock units have no exercise price,
they are not included in the weighted average exercise price
calculation in column (b). |
Employee Incentive Plans
|
|
|
The Retail Ventures Incentive Plans |
Some of our employees (including our named executive officers)
and non-employee directors have participated in or are eligible
to participate in equity incentive plans sponsored by Retail
Ventures which provide them an opportunity to earn incentive
cash compensation and to receive equity-based compensation
64
related to the common shares of Retail Ventures. These plans
include the Amended and Restated Retail Ventures, Inc. 1991
Stock Option Plan, or the Retail Ventures 1991 Option Plan, the
Retail Ventures, Inc. Amended and Restated 2000 Stock Incentive
Plan, or the Retail Ventures 2000 Stock Incentive Plan, and the
Value City Department Stores, Inc. 2003 Incentive Compensation
Plan, or the Retail Ventures 2003 Incentive Plan and the Retail
Ventures, Inc. Employee Stock Purchase Plan, or the Retail
Ventures ESPP, which was terminated as of
May 27, 2005. All
of these plans are collectively referred to as the Retail
Ventures Plans. Some of our officers and employees may also
participate in the Retail Venture Plans, other than the Retail
Ventures ESPP.
After our initial public offering, awards previously issued
under the Retail Ventures Plans remained outstanding and
continue to be earned or exercisable under their terms.
All of the Retail Ventures Plans (other than the Retail Ventures
ESPP) are administered by the Retail Ventures Board of
Directors, or a committee comprised of independent board members
who are “outside directors” within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the Code. The Retail Ventures ESPP was administered
by a committee comprised of several Retail Ventures employees.
Subject to the terms of each plan, the administrator of each
Retail Ventures Plan decides who may participate, when awards
are granted, the number and types of awards granted and the
terms and conditions that must be met to earn the award,
including the period over which a cash award is earned and the
period over which an equity award may be earned and exercised or
settled. The plan administrator also determines the exercise
price of the stock options and stock appreciation rights granted
under any Retail Ventures Plans.
Subject to shareholder approval in certain instances, the Retail
Ventures Board of Directors may amend, suspend or terminate the
Retail Ventures Plans at any time, provided that no such
amendment, suspension or termination may adversely affect any
award previously granted to a participant without their consent.
Awards granted under the Retail Ventures Plans are generally not
transferable by the participant except by will or the laws of
descent and distribution, and options are exercisable, during
the lifetime of the participant, only by the participant or his
guardian or legal representative, unless otherwise permitted by
the plan administrator.
With the exception of the Retail Ventures ESPP, the Retail
Ventures Plans are intended to permit the payment of
performance-based compensation within the meaning of
Section 162(m) of the Code, which generally limits the
deduction that Retail Ventures may take for compensation paid in
excess of $1,000,000 to certain of its “covered
officers” in any one calendar year. Under
Section 162(m) of the Code, compensation that is
“qualified performance-based compensation” within the
meaning of Section 162(m) of the Code, will not be subject
to this limitation if certain requirements are met. Any payments
that are intended to be deductible as “qualified
performance-based compensation” under Section 162(m)
of the Code must be based on one or more of the performance
measures listed in the Retail Ventures Plans as previously
approved by the shareholders of Retail Ventures and which
otherwise satisfy requirements applicable to “qualified
performance-based compensation” under Section 162(m)
of the Code.
The DSW Incentive Plans
In connection with our initial public offering, our board of
directors adopted and our shareholders approved the DSW Inc.
2005 Equity Incentive Plan, or the DSW 2005 Equity Plan, and the
DSW Inc. 2005 Cash Incentive Compensation Plan, or the DSW 2005
Cash Incentive Plan, to enable us to attract, retain and reward
outstanding employees, directors and consultants through cash
incentives and/or equity-based compensatory awards, including
incentive stock options (within the meaning of Section 422
of the Code), non-qualified stock options, performance shares,
performance units, restricted stock, restricted stock units,
stock appreciation rights and stock units. The DSW 2005 Equity
Plan and the DSW 2005 Cash Incentive Plan are collectively
referred to as the DSW Plans. We have granted stock options to
employees and consultants to purchase up to 900,000 registered
Class A Common Shares at an exercise price per share equal
to the initial
65
public offering price per share and up to 100,000 restricted
Class A Common, have been issued to employees at a price
per share equal to the initial public offering price per share.
Some of our officers, including those who also simultaneously
hold positions with Retail Ventures, may participate in both the
Retail Ventures Plans described above and in the DSW Plans.
Also, some Retail Ventures employees providing services to DSW
may be eligible to participate in the DSW Plans.
The DSW Plans are administered by the Compensation Committee of
our board of directors with respect to awards granted to
consultants and employees after the offering and were
administered by the entire board with respect to awards granted
to employees and consultants before our initial public offering
and to non-employee directors before and after our initial
public offering. The Compensation Committee is comprised of at
least two members who satisfy the independence requirements of
current NYSE listing standards, are “outside
directors” within the meaning of Section 162(m) of the
Code, and are “non-employee directors” within the
meaning of
Rule 16b-3 under
the Exchange Act.
Awards granted under the DSW Plans are generally not
transferable by the participant except by will or the laws of
descent and distribution, and each award is exercisable, during
the lifetime of the participant, only by the participant or his
guardian or legal representative, unless permitted by the
committee.
The DSW Plans are intended to permit us to deliver
performance-based compensation within the meaning of
Section 162(m) of the Code, which generally limits the
deduction that we may take for compensation paid in excess of
$1,000,000 to certain of our executive officers in any one
calendar year. Under Section 162(m) of the Code,
compensation that is “qualified performance-based
compensation” within the meaning of Section 162(m) of
the Code, will not be subject to this limitation if certain
requirements are met. Any awards that are intended to be
deductible as “qualified performance-based
compensation” under Section 162(m) of the Code must be
based on one or more of the performance measures listed in the
DSW Plans and otherwise satisfy the requirements applicable to
“qualified performance-based compensation” under
Section 162(m) of the Code.
In the event of a change in control of DSW, all awards will vest
or become exercisable and generally will be settled for cash.
However, the value of any acceleration of vesting will, if
appropriate, be reduced to avoid any golden parachute penalties
under Sections 280G or 4999 of the Code unless otherwise
provided in an award agreement or another written agreement
(such as an employment agreement) between DSW and an affected
employee. Generally, a change in control is defined in the DSW
Plans to include (i) a change in a majority of DSW’s
directors during any
12-month period,
(ii) with some exceptions (including exceptions for
acquisitions by Retail Ventures, SSC, trusts established for
members of the Schottenstein family and Cerberus Partners Ltd.),
the acquisition by any person (or a group of persons acting
together) of more than 30% of DSW’s outstanding voting
securities and sufficient voting power to elect a majority of
DSW’s board, (iii) a merger or business combination
affecting DSW and after which DSW shareholders hold less than
50% of the surviving entity’s voting power, (iv) a
complete dissolution or liquidation of DSW and (v) any
other transaction that the board decides will have at least as
material an effect on DSW as any of the transactions specified
above.
Our board or the Compensation Committee of the board may
terminate, suspend or amend the DSW Plans at any time without
shareholder approval, except to the extent necessary to satisfy
applicable law or listing requirements. However, generally no
amendment may adversely affect any rights of a participant under
an outstanding award without their consent. Unless terminated
sooner, the DSW 2005 Equity Plan will terminate automatically
ten years from the date of its implementation.
The DSW 2005 Equity Plan authorizes 4,600,000 shares of our
common shares to be issued under the plan, all of which may be
issued through the exercise of incentive stock options. The DSW
2005 Equity Plan also provides that any shares subject to an
unfulfilled award (e.g., a forfeited option or an award settled
for cash in an amount that is less than the award’s fair
market value less any exercise price) may be subject to a
subsequent award under the plan.
66
The DSW 2005 Equity Plan provides that our employees may receive
incentive stock options, our employees and consultants may
receive nonstatutory stock options, restricted stock, restricted
stock units, performance shares and performance units and stock
appreciation rights and that our compensated directors may
receive nonstatutory options, restricted stock, restricted stock
units or stock unit awards.
The DSW 2005 Equity Plan allows the Compensation Committee, in
its discretion, to issue stock options to purchase shares of DSW
under the DSW 2005 Equity Plan in substitution for stock options
to purchase shares of Retail Ventures previously granted to our
employees under the Retail Ventures 1991 Option Plan and/or the
Retail Ventures 2000 Stock Incentive Plan. The aggregate value
and general features of these substitute options are determined
in accordance with Section 424 of the Code and the
regulations thereunder.
The maximum number of our shares underlying options that may be
issued annually to any executive officer is 500,000 and the
maximum number of whole-share grants (such as restricted stock
and performance shares) is 100,000.
The DSW 2005 Equity Plan limits participants’ ability to
exercise awards they hold when they terminate employment. Under
these rules (and unless the award agreement specifies
otherwise), (i) all options, restricted stock, restricted
stock units, stock units and stock appreciation rights that are
affiliated with or issued in tandem with an option held by an
employee or a compensated director who retires (i.e., in the
case of employees, after reaching age 65 and completing
five years of service or, in the case of compensated directors,
after completing one full term as a compensated director after
reaching age 65) becomes disabled as defined in the 2005
Equity Plan or dies will become exercisable and may be exercised
anytime within one year (three months in the case of incentive
stock options held by an employee who is retiring) after
termination because of retirement, disability or death or, if
shorter, the date the award would expire under its terms
(ii) all options, restricted stock, restricted stock units,
stock units and stock appreciation rights that are affiliated
with or issued in tandem with an option held by a consultant who
becomes disabled (as defined in the DSW 2005 Equity Plan) or
dies will become exercisable and may be exercised anytime within
one year after termination because of disability or death or, if
shorter, the date the award would expire under its terms and
(iii) all exercisable awards held by a participant whose
employment terminates for any other reason (other than for
“cause” as defined in the DSW 2005 Equity Plan) may be
exercised anytime within 90 days after termination or, if
shorter, the date the award would expire under its terms and all
awards that are not exercisable at termination will be
forfeited. The effect of termination on performance shares,
performance units and stock appreciation rights that are not
affiliated with or issued in tandem with an option will be
specified in the award agreement. All awards (whether or not
then exercisable) held by a participant who is terminated for
“cause” (as defined in the DSW 2005 Equity Plan) are
immediately forfeited and may not be exercised at any time.
Subject to applicable legal requirements, at any time prior to a
change in control of DSW, the compensation committee is
authorized to cancel any or all outstanding stock options and
other awards granted under the DSW 2005 Equity Plan. Upon
cancellation, we are obligated to pay the participants only with
respect to those options and awards that are then exercisable.
With respect to outstanding stock options that are exercisable
when cancelled, we will pay the participant the difference
between the fair market value of the common shares underlying
the stock option and the exercise price of the stock option.
With respect to other awards under the DSW 2005 Equity Plan
which are exercisable when cancelled, we will pay the
participant the fair market value of the common shares subject
to the award.
Based on federal income tax laws currently in effect, we believe
that we will not be entitled to a federal income tax deduction
when an incentive stock option, nonstatutory stock option,
restricted stock award, restricted stock unit award, performance
stock award, performance stock unit award or stock unit award is
granted and participants will not be required to include any
amount in federal taxable income at that time. Except in the
case of incentive stock options, we will be entitled to a
federal income deduction in the year these awards are settled or
exercised and participants will be required to recognize
ordinary federal income taxes on the same amount in the same
year. The amount of our federal income tax deduction (and the
amount simultaneously taxable to the participant) will be the
fair market value of the award when it is settled in the case of
a restricted stock award, restricted stock unit award,
performance stock award, performance stock unit
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award and stock unit award. In the case of nonstatutory stock
options, the amount of our federal income tax deduction (and the
amount simultaneously taxable to participants) will be the
difference between the price a participant pays to exercise the
nonstatutory stock option and the fair market value of the stock
acquired when the option is exercised. Generally, upon exercise
of an incentive stock option, we would not be entitled to any
federal income tax deduction and the participant would not
recognize income upon exercise. If the participant (i) does
not dispose of the shares within two years after the date of the
grant and one year after the transfer of shares upon exercise
and (ii) is an employee of ours or of one of our
subsidiaries from the date of the grant through and until three
months before the exercise date, any gain from a subsequent sale
of shares acquired through incentive stock options would be
taxed to the participant as a long-t
