RETAIL VENTURES, INC. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For the quarterly period ended August 4, 2007 |
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 1-10767
RETAIL VENTURES, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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20-0090238 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3241 Westerville Road, Columbus, Ohio
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43224 |
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(Address of principal executive offices)
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(Zip Code) |
(614) 471-4722
Registrants telephone number, including area code
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of outstanding Common Shares, without par value, as of August 31, 2007 was 48,623,430.
RETAIL VENTURES, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
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August 4, |
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February 3, |
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2007 |
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2007 |
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ASSETS |
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Cash and equivalents |
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$ |
165,509 |
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$ |
160,221 |
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Restricted cash |
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253 |
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511 |
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Short-term investments |
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100,475 |
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98,650 |
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Accounts receivable, net |
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16,592 |
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16,781 |
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Accounts receivable from related parties |
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1,176 |
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3,777 |
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Inventories |
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582,243 |
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545,584 |
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Prepaid expenses and other assets |
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42,559 |
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36,686 |
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Deferred income taxes |
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41,817 |
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25,737 |
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Total current assets |
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950,624 |
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887,947 |
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Property and equipment, net |
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299,604 |
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279,909 |
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Long-term investments |
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2,500 |
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Goodwill |
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25,899 |
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25,899 |
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Tradenames and other intangibles, net |
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32,880 |
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34,976 |
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Deferred income taxes |
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11,486 |
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26,114 |
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Other assets |
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10,846 |
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12,372 |
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Total assets |
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$ |
1,333,839 |
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$ |
1,267,217 |
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The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-2-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share amounts)
(unaudited)
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August 4, |
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February 3, |
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2007 |
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2007 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Accounts payable |
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$ |
286,281 |
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$ |
212,434 |
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Accounts payable to related parties |
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5,846 |
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4,902 |
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Accrued expenses: |
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Compensation |
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33,915 |
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40,886 |
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Taxes |
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51,286 |
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45,227 |
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Other |
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78,897 |
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92,894 |
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Warrant liability |
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1,996 |
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3,594 |
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Warrant liability related parties |
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97,410 |
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212,806 |
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Current maturities of long-term obligations |
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861 |
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765 |
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Total current liabilities |
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556,492 |
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613,508 |
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Long-term obligations, net of current maturities |
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Non-related parties |
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273,816 |
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265,283 |
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Related parties |
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250 |
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500 |
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Conversion feature of long-term debt |
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22,819 |
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62,770 |
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Other noncurrent liabilities |
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102,675 |
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95,108 |
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Minority interest |
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150,547 |
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138,428 |
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Shareholders equity: |
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Common shares, without par value;
160,000,000 authorized; issued, including
7,551 treasury shares, 48,623,430 and
47,270,777 outstanding, respectively |
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302,632 |
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276,690 |
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Accumulated deficit |
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(74,783 |
) |
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(184,461 |
) |
Treasury shares, at cost, 7,551 shares |
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(59 |
) |
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(59 |
) |
Accumulated other comprehensive loss |
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(550 |
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(550 |
) |
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Total shareholders equity |
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227,240 |
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91,620 |
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Total liabilities and shareholders equity |
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$ |
1,333,839 |
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$ |
1,267,217 |
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The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-3-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Three months ended |
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Six months ended |
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August 4, |
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July 29, |
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August 4, |
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July 29, |
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2007 |
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2006 |
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2007 |
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2006 |
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Net Sales |
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$ |
732,733 |
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$ |
684,508 |
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$ |
1,486,807 |
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$ |
1,406,021 |
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Cost of sales |
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(458,073 |
) |
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(409,557 |
) |
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(908,213 |
) |
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(840,445 |
) |
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Gross profit |
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274,660 |
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274,951 |
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578,594 |
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565,576 |
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Selling, general and administrative expenses |
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(282,537 |
) |
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(264,793 |
) |
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(574,112 |
) |
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|
(542,317 |
) |
Change in the fair value of derivative instruments |
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|
26,953 |
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|
(311 |
) |
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|
41,549 |
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|
(1,237 |
) |
Change in the fair value of derivative instruments -
related parties |
|
|
97,831 |
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|
(15,032 |
) |
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|
95,784 |
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(78,915 |
) |
License fees and other income |
|
|
2,371 |
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|
1,660 |
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|
5,335 |
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|
3,222 |
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Operating profit (loss) |
|
|
119,278 |
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(3,525 |
) |
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|
147,150 |
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|
(53,671 |
) |
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|
|
|
|
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|
|
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Interest expense |
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(6,230 |
) |
|
|
(3,418 |
) |
|
|
(12,403 |
) |
|
|
(6,284 |
) |
Interest expense related parties |
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|
(8 |
) |
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|
(1,264 |
) |
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|
(21 |
) |
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(2,528 |
) |
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|
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Total interest expense |
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|
(6,238 |
) |
|
|
(4,682 |
) |
|
|
(12,424 |
) |
|
|
(8,812 |
) |
Interest income |
|
|
3,041 |
|
|
|
2,339 |
|
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|
5,757 |
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|
|
3,977 |
|
|
|
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|
|
|
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|
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Interest expense, net |
|
|
(3,197 |
) |
|
|
(2,343 |
) |
|
|
(6,667 |
) |
|
|
(4,835 |
) |
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Income (loss) before income taxes and minority interest |
|
|
116,081 |
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|
(5,868 |
) |
|
|
140,483 |
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|
(58,506 |
) |
|
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|
|
|
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|
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|
|
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|
Provision for income taxes |
|
|
(7,451 |
) |
|
|
(4,473 |
) |
|
|
(20,338 |
) |
|
|
(10,319 |
) |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) before minority interest |
|
|
108,630 |
|
|
|
(10,341 |
) |
|
|
120,145 |
|
|
|
(68,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
(2,412 |
) |
|
|
(5,660 |
) |
|
|
(11,187 |
) |
|
|
(12,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
106,218 |
|
|
$ |
(16,001 |
) |
|
$ |
108,958 |
|
|
$ |
(80,949 |
) |
|
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Basic and diluted income (loss) per share: |
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|
|
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Basic |
|
$ |
2.21 |
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|
$ |
(0.36 |
) |
|
$ |
2.28 |
|
|
$ |
(1.88 |
) |
Diluted |
|
$ |
1.81 |
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|
$ |
(0.36 |
) |
|
$ |
1.84 |
|
|
$ |
(1.88 |
) |
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Shares used in per share calculations: |
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|
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|
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Basic |
|
|
48,157 |
|
|
|
45,013 |
|
|
|
47,714 |
|
|
|
43,037 |
|
Diluted |
|
|
58,776 |
|
|
|
45,013 |
|
|
|
59,073 |
|
|
|
43,037 |
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-4-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands)
(unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
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|
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|
|
|
|
|
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|
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(Accumulated) |
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Accumulated |
|
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|
|
|
|
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Common |
|
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|
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Deficit/ |
|
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Deferred |
|
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|
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Other |
|
|
|
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Common |
|
|
Shares |
|
|
Common |
|
|
Retained |
|
|
Compensation |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
in Treasury |
|
|
Shares |
|
|
Earnings |
|
|
Expense |
|
|
Shares |
|
|
Loss |
|
|
Total |
|
Balance, January 28, 2006 |
|
|
39,857 |
|
|
|
8 |
|
|
$ |
159,617 |
|
|
$ |
(36,082 |
) |
|
$ |
(1 |
) |
|
$ |
(59 |
) |
|
$ |
(6,929 |
) |
|
$ |
116,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,949 |
) |
Minimum pension liability, net
of income tax benefit of $237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369 |
|
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80,580 |
) |
Capital transactions of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,306 |
|
Stock based compensation
expense, before related tax effects |
|
|
|
|
|
|
|
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215 |
|
Exercise of stock options |
|
|
109 |
|
|
|
|
|
|
|
854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854 |
|
Exercise of warrants |
|
|
7,000 |
|
|
|
|
|
|
|
110,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,317 |
|
Excess tax benefit related to
stock options exercised |
|
|
|
|
|
|
|
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329 |
|
Reclassification of unamortized
deferred compensation |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 29, 2006 |
|
|
46,966 |
|
|
|
8 |
|
|
$ |
271,331 |
|
|
$ |
(115,725 |
) |
|
$ |
0 |
|
|
$ |
(59 |
) |
|
$ |
(6,560 |
) |
|
$ |
148,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 3, 2007 |
|
|
47,271 |
|
|
|
8 |
|
|
$ |
276,690 |
|
|
$ |
(184,461 |
) |
|
$ |
0 |
|
|
$ |
(59 |
) |
|
$ |
(550 |
) |
|
$ |
91,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,958 |
|
FIN 48 adoption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641 |
) |
Capital transactions of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,361 |
|
Stock based
compensation
expense, before related tax effects |
|
|
|
|
|
|
|
|
|
|
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259 |
|
Exercise of stock options |
|
|
19 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
Exercise of warrants |
|
|
1,333 |
|
|
|
|
|
|
|
25,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 4, 2007 |
|
|
48,623 |
|
|
|
8 |
|
|
$ |
302,632 |
|
|
$ |
(74,783 |
) |
|
$ |
0 |
|
|
$ |
(59 |
) |
|
$ |
(550 |
) |
|
$ |
227,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-5-
RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, |
|
|
July 29, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
108,958 |
|
|
$ |
(80,949 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and discount on debt |
|
|
1,810 |
|
|
|
602 |
|
Stock based compensation expense |
|
|
259 |
|
|
|
215 |
|
Stock based compensation expense of subsidiary |
|
|
1,361 |
|
|
|
1,557 |
|
Depreciation and amortization |
|
|
30,709 |
|
|
|
27,757 |
|
Change in fair value of derivative instruments ($(95,784) and
$78,915 related parties, respectively) |
|
|
(137,333 |
) |
|
|
80,152 |
|
Deferred income taxes and other noncurrent liabilities |
|
|
(6,568 |
) |
|
|
(12,197 |
) |
Loss on disposal of assets |
|
|
242 |
|
|
|
1,370 |
|
Minority interest in consolidated subsidiary |
|
|
11,187 |
|
|
|
12,124 |
|
Other |
|
|
932 |
|
|
|
729 |
|
Change in working capital, assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,790 |
|
|
|
(1,094 |
) |
Inventories |
|
|
(36,659 |
) |
|
|
(61,381 |
) |
Prepaid expenses and other assets |
|
|
(5,183 |
) |
|
|
(299 |
) |
Accounts payable |
|
|
73,012 |
|
|
|
29,520 |
|
Proceeds from tenant and construction allowances |
|
|
12,042 |
|
|
|
3,562 |
|
Accrued expenses |
|
|
(14,861 |
) |
|
|
6,887 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
42,698 |
|
|
|
8,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
258 |
|
|
|
|
|
Cash paid for property and equipment |
|
|
(46,798 |
) |
|
|
(19,210 |
) |
Purchases of available-for-sale investments |
|
|
(23,200 |
) |
|
|
(69,025 |
) |
Maturities and sales from available-for-sale investments |
|
|
18,875 |
|
|
|
22,100 |
|
Purchase of intangible asset |
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(50,886 |
) |
|
|
(66,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments of capital lease obligations |
|
|
(345 |
) |
|
|
(304 |
) |
Payment on term loan |
|
|
(250 |
) |
|
|
|
|
Net increase in revolving credit facility |
|
|
8,000 |
|
|
|
37,000 |
|
Debt issuance costs |
|
|
|
|
|
|
(1,170 |
) |
Excess tax benefit related to stock options exercised |
|
|
|
|
|
|
329 |
|
Proceeds from exercise of warrants |
|
|
6,000 |
|
|
|
31,500 |
|
Proceeds from exercise of stock options |
|
|
71 |
|
|
|
854 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
13,476 |
|
|
|
68,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and equivalents |
|
|
5,288 |
|
|
|
10,629 |
|
Cash and equivalents, beginning of period |
|
|
160,221 |
|
|
|
138,731 |
|
|
|
|
|
|
|
|
Cash and equivalents, end of period |
|
$ |
165,509 |
|
|
$ |
149,360 |
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.
-6-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BUSINESS OPERATIONS
Retail Ventures, Inc. (Retail Ventures or RVI) and its wholly-owned subsidiaries, including
but not limited to, Value City Department Stores LLC (Value City) and Filenes Basement, Inc.
(Filenes Basement), and its controlled subsidiary DSW Inc. (DSW) are herein referred to
collectively as the Company.
The Company operates four segments in the United States of America (United States). The
Value City and Filenes Basement segments operate full-line, off-price department stores. The
DSW segment sells branded shoes and accessories. The Corporate segment consists of all revenue
and expenses related to the corporate entities that are not allocated to the other segments. As
of August 4, 2007, there were a total of 113 Value City stores located principally in the
Midwest, mid-Atlantic and southeastern United States, 236 DSW stores located in major
metropolitan areas throughout the United States and 34 Filenes Basement stores located in
major metropolitan areas in the Northeast and Midwest. DSW also supplies shoes, under supply
arrangements, to 331 locations for other non-related retailers in the United States.
On July 5, 2005, DSW completed an initial public offering (IPO). As of August 4, 2007, Retail
Ventures owned Class B Common Shares of DSW representing approximately 63.0% of DSWs
outstanding common shares and approximately 93.2% of the combined voting power of such shares.
DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on
the New York Stock Exchange under the symbol DSW.
Value City. Located in the Midwest, mid-Atlantic and southeastern United States and operating
principally under the name Value City for over 80 years, this segments strategy has been to
provide exceptional value by offering a broad selection of brand name merchandise at prices
substantially below conventional retail prices. In December 2006, RVI announced that it is
exploring strategic alternatives for the Value City operations, including a possible sale of the
division. RVI has retained financial advisors to assist in this effort to enhance shareholder
value. RVI also stated that there can be no assurance that this process will result in any
specific transaction.
DSW. Located in major metropolitan areas throughout the United States, DSW stores offer a wide
selection of brand name and designer dress, casual and athletic footwear for men and women, as
well as accessories. During the six months ended August 4, 2007, DSW opened 14 new stores and
closed one store. Additionally, pursuant to a license agreement with Filenes Basement, DSW
operates leased shoe departments in most Filenes Basement stores. As of August 4, 2007, DSW,
pursuant to supply agreements, operated 267 leased shoe departments for Stein Mart, Inc., 63 for
Gordmans, Inc. and one for Frugal Fannies Fashion Warehouse. Supply agreements results are
included within the DSW segment. During the six months ended August 4, 2007, DSW added three new
non-affiliated leased departments, four affiliated leased departments and ceased operations in
two non-affiliated leased departments and one affiliated leased department.
Filenes Basement. Filenes Basement stores are located primarily in the Northeast and Midwest.
Filenes Basement focuses on providing top tier brand name merchandise at everyday low prices
for mens and womens apparel, jewelry, shoes, accessories and home goods. During the six
months ended August 4, 2007, Filenes Basement opened four stores and closed one store.
Corporate. The Corporate segment represents the corporate assets, liabilities and expenses not
allocated to other segments through corporate allocation or shared service arrangements. The
remaining results of operation are comprised of debt related expenses, income on investments and
intercompany notes expenses, the latter of which is eliminated in consolidation.
2. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements should be read in conjunction with the
Companys Annual Report for the fiscal year ended February 3, 2007 on Form 10-K, as filed with
the Securities and Exchange Commission (the SEC) on April 5, 2007 (the 2006 Annual Report).
In the opinion of management, the unaudited interim condensed consolidated financial statements
reflect all adjustments, consisting of only normal recurring adjustments, which are necessary to
present fairly the condensed consolidated financial position, results of operations and cash
flows for the periods presented.
3. ADOPTION OF ACCOUNTING STANDARDS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48), and in May 2007, the FASB issued FASB
Staff Position FIN 48-1, Definition of
-7-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Settlement in FASB Interpretation No. 48, which clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. The evaluation of a tax position in accordance
with FIN 48 is a two step process. The first step is recognition: the enterprise determines
whether it is more likely than not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on the technical
merits of the position. The second step is measurement: a tax position that meets the more
likely than not recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN
48 provides for a cumulative effect of a change in accounting principle to be recorded as an
adjustment to the opening balance of retained earnings upon the initial adoption. The Company
adopted FIN 48 effective February 4, 2007. The impact of the adoption of this interpretation is
disclosed in Note 10.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements which defines
fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures
about fair value measurements. The intent of this standard is to ensure consistency and
comparability in fair value measurements and enhanced disclosures regarding the measurements.
This statement is effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company is currently evaluating the impact this statement
may have on its consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159). This statement allows entities to choose to measure
financial instruments and certain other financial assets and financial liabilities at fair
value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact this statement may have on its consolidated financial
statements.
4. STOCK BASED COMPENSATION
Retail Ventures Stock Compensation Plans
The
Company has an Amended and Restated 2000 Stock Incentive Plan that provides for the
issuance of equity awards covering up to 13,000,000 common shares, including stock options,
stock appreciation rights and restricted stock, to management, key employees of Retail Ventures
and affiliates, consultants (as defined in the plan), and non-employee directors of Retail
Ventures. Options granted under the plan generally vest 20% per year on a cumulative basis and
remain exercisable for a period of ten years from the date of grant.
The
Company has an Amended and Restated 1991 Stock Option Plan that provided for the
grant of equity awards covering up to 4,000,000 common shares. Options granted under the plan
are generally exercisable 20% per year on a cumulative basis and remain exercisable for a period
of ten years from the date of grant.
During the three and six months ended August 4, 2007, the Company recorded stock based
compensation expense of approximately $1.2 million and $2.3 million, respectively, which
includes approximately $1.1 million and $2.0 million, respectively, of expenses recorded by DSW.
Stock-based compensation expense is included in selling, general and administrative expenses in
the Condensed Consolidated Statements of Operations.
The following tables summarize the activity of the Companys stock options, stock appreciation
rights (SARs) and restricted stock units (RSUs) for the six months ended August 4, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended August 4, 2007 |
|
|
|
Stock |
|
|
|
|
|
|
|
|
|
Options |
|
|
SARs |
|
|
RSUs |
|
Outstanding beginning of period |
|
|
1,335 |
|
|
|
978 |
|
|
|
170 |
|
Granted |
|
|
25 |
|
|
|
140 |
|
|
|
47 |
|
Exercised |
|
|
(19 |
) |
|
|
(2 |
) |
|
|
|
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(10 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period |
|
|
1,331 |
|
|
|
1,081 |
|
|
|
217 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable end of period |
|
|
1,207 |
|
|
|
176 |
|
|
|
n/a |
|
-8-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Stock Options
The following table illustrates the weighted-average assumptions used in the option-pricing
model for options granted in each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, |
|
|
July 29, |
|
|
|
2007 |
|
|
2006 |
|
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.53 |
% |
|
|
4.86 |
% |
Expected volatility of Retail Ventures common shares |
|
|
56.26 |
% |
|
|
66.79 |
% |
Expected option term |
|
5.0 years |
|
5.0 years |
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
The weighted-average grant date fair value of each option granted in the three months ended
August 4, 2007 and July 29, 2006 was $10.76 and $6.24 per share, respectively, and for the six
months ended August 4, 2007 and July 29, 2006 was $10.90 and $6.94 per share, respectively.
Stock Appreciation Rights
Reductions of expense of $4.9 million and $4.2 million, respectively, were recorded during the
three and six months ended August 4, 2007 relating to SARs. The amount of SARs accrued at August
4, 2007 was $2.9 million. During the six months ended August 4, 2007, less than $0.1 million was
paid to settle exercised SARs.
Restricted Stock Units
Total compensation expense costs recognized related to the RSUs in the three and six months ended
August 4, 2007 were a reduction of expenses of $1.0 million and $0.3 million, respectively. The
amount of RSUs accrued at August 4, 2007 was $1.9 million.
Restricted Shares
The Company issued restricted common shares to certain key employees pursuant to individual
employment agreements and certain other grants from time to time which are approved by the Board
of Directors. The agreements condition the vesting of the shares generally upon continued
employment with the Company, with such restrictions expiring over various periods ranging from
three to five years. The market value of the shares at the date of grant is charged to expense on
a straight-line basis over the period that the restrictions lapse. As of August 4, 2007, the
Company had no outstanding restricted common shares. At February 3, 2007, the Company had
outstanding approximately 500 restricted common shares which represent less than 1% of the common
basic and diluted shares outstanding.
DSW Stock Compensation Plan
DSW has a 2005 Equity Incentive Plan that provides for the issuance of equity awards to purchase
up to 4,600,000 common shares, including stock options, RSUs and director stock units, to
management, key employees of DSW and affiliates, consultants (as defined in the plan), and
non-employee directors of DSW. DSW options, RSUs and director stock units are not included in
the number of shares used in the basic or dilutive calculation of earnings per share of Retail
Ventures.
-9-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following tables summarize the activity of DSWs stock options and RSUs for the six months
ended August 4, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended August 4, 2007 |
|
|
|
Stock |
|
|
|
|
|
|
Options |
|
|
RSUs |
|
Outstanding beginning of period |
|
|
1,084 |
|
|
|
135 |
|
Granted |
|
|
496 |
|
|
|
15 |
|
Exercised |
|
|
(13 |
) |
|
|
|
|
Cancelled |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(60 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
Outstanding end of period |
|
|
1,507 |
|
|
|
147 |
|
|
|
|
|
|
|
|
Exercisable end of period |
|
|
324 |
|
|
|
n/a |
|
Stock Options
The following table illustrates the weighted-average assumptions used in the option-pricing
model for options granted in each of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, |
|
|
July 29, |
|
|
|
2007 |
|
|
2006 |
|
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.90 |
% |
|
|
4.92 |
% |
Expected volatility of DSW common shares |
|
|
36.46 |
% |
|
|
41.00 |
% |
Expected option term |
|
5.0 years |
|
4.8 years |
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
The weighted-average grant date fair value of each option granted in the three months ended
August 4, 2007 and July 29, 2006 was $15.52 and $15.25 per share, respectively, and for the six
months ended August 4, 2007 and July 29, 2006 was $17.66 and $13.39 per share, respectively.
Restricted Stock Units
The total aggregate intrinsic value of nonvested RSUs at August 4, 2007 was $4.6 million. As of
August 4, 2007, the total compensation cost related to nonvested RSUs not yet recognized was
approximately $2.1 million with a weighted average expense recognition period remaining of 2.0
years. The weighted average exercise price for all RSUs is zero.
Director Stock Units
DSW issues stock units to directors of DSW who are not employees of DSW or Retail Ventures.
During the six months ended August 4, 2007, DSW granted 7,426 director stock units and expensed
$0.3 million related to these grants. As of August 4, 2007, 34,964 DSW director stock units had
been issued and no DSW director stock units had been settled.
-10-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. INVESTMENTS
Short-term and long-term investments include auction rate securities and are classified as
available-for-sale securities. These securities are recorded at cost, which approximates fair
value due to their variable interest rates, which typically reset every 7 to 275 days. Despite
the long-term nature of their stated contractual maturities, the Company has the intent and
ability to quickly liquidate these securities. As a result of the resetting variable rates,
there are no cumulative gross unrealized or realized holding gains or losses from these
investments. All income generated from these investments is recorded as interest income.
During the six months ended August 4, 2007, $23.2 million of cash was used to purchase
available-for-sale securities while $18.9 million was generated by the sale of
available-for-sale securities.
The table below details the investments classified as available-for-sale at August 4, 2007 and
February 3, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2007 |
|
|
February 3, 2007 |
|
|
|
Maturity of |
|
|
Maturity of |
|
|
|
Less than 1 year |
|
|
1 to 3 years |
|
|
Less than 1 year |
|
|
1 to 3 years |
|
Aggregate fair value |
|
$ |
100,475 |
|
|
$ |
2,500 |
|
|
$ |
98,650 |
|
|
$ |
|
|
Gross unrecognized holding gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized holding losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
100,475 |
|
|
$ |
2,500 |
|
|
$ |
98,650 |
|
|
$ |
|
|
6. LONG-TERM OBLIGATIONS AND WARRANT LIABILITIES
Long term obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 4, |
|
|
February 3, |
|
|
|
2007 |
|
|
2007 |
|
Credit facilities: |
|
|
|
|
|
|
|
|
Revolving credit facilities |
|
$ |
113,000 |
|
|
$ |
105,000 |
|
Senior Loan Agreement related parties |
|
|
250 |
|
|
|
500 |
|
PIES |
|
|
143,750 |
|
|
|
143,750 |
|
Discount on PIES |
|
|
(9,723 |
) |
|
|
(10,697 |
) |
|
|
|
|
|
|
|
|
|
|
247,277 |
|
|
|
238,553 |
|
Capital lease obligations |
|
|
27,650 |
|
|
|
27,995 |
|
|
|
|
|
|
|
|
|
|
|
274,927 |
|
|
|
266,548 |
|
Less current maturities |
|
|
(861 |
) |
|
|
(765 |
) |
|
|
|
|
|
|
|
|
|
$ |
274,066 |
|
|
$ |
265,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit outstanding: |
|
|
|
|
|
|
|
|
RVI revolving credit facility |
|
$ |
24,877 |
|
|
$ |
19,355 |
|
DSW revolving credit facility |
|
$ |
19,888 |
|
|
$ |
13,448 |
|
Availability under revolving credit facilities: |
|
|
|
|
|
|
|
|
RVI revolving credit facility |
|
$ |
76,119 |
|
|
$ |
66,838 |
|
DSW revolving credit facility |
|
$ |
130,112 |
|
|
$ |
136,552 |
|
Premium Income Exchangeable SecuritiesSM (PIES)
The embedded exchange feature of the Premium Income Exchangeable SecuritiesSM
(PIES) is accounted for as a derivative, which is recorded at fair value, and changes in fair
value are reflected in the statement of operations. Accordingly, the accounting for the
embedded derivative addresses the variations in the fair value of the obligation to settle the
PIES when the market value exceeds or is less than the threshold appreciation price. The fair
value of the conversion feature at the date of issuance of $11.7 million was equal to the amount
of the discount of the PIES and is being amortized into interest expense over the term of the
PIES.
-11-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During the three and six months ended August 4, 2007, the Company recorded a reduction of
expense related to the change in fair value of the conversion feature of the PIES of $25.3
million and $40.0 million, respectively. As of August 4, 2007 and February 3, 2007, the fair
value liability recorded for the conversion feature was $22.8 million and $62.8 million,
respectively.
Warrants
For the three months ended August 4, 2007 and July 29, 2006, the Company recorded a reduction of
expenses of $99.5 million and a charge of $15.3 million, respectively, for the change in fair
value of the Term Loan Warrants and Conversion Warrants (together, the Warrants). For the six
months ended August 4, 2007 and July 29, 2006, the Company recorded a reduction of expenses of
$97.4 million and a charge of $80.2 million, respectively, for the change in fair
value of the Warrants. No tax benefit has been recognized in connection with this charge.
These derivative instruments do not qualify for hedge accounting
under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS No. 133); therefore, changes in the
fair values are recognized in earnings in the period of change.
Retail Ventures estimates the fair values of derivatives based on the Black-Scholes Pricing
Model using current market rates and records all derivatives on the balance sheet at fair value.
The fair market value of the Warrants was $99.4 million and $216.4 million at August
4, 2007 and February 3, 2007, respectively. As the Warrants may be exercised for either common
shares of RVI or common shares of DSW owned by RVI, the settlement of the Warrants will not
result in a cash outlay by the Company.
During the three and six months ended August 4, 2007, Retail Ventures received $6.0 million in
connection with the exercises by Cerberus Partners, L.P. (Cerberus) of its remaining
Conversion Warrants for 1,333,333 of RVIs common shares at an exercise price of $4.50 per
share. In connection with this exercise, the senior loan agreement between Cerberus and Value
City immediately matured in accordance with its terms. On June 11, 2007, Value City repaid the
$250,000 principal amount of the loan, together with all accrued and unpaid interest thereon.
During the three and six months ended July 29, 2006, Retail Ventures received $9.0 million and
$31.5 million, respectively, in connection with the exercises by Cerberus of Conversion Warrants
for 2,000,000 and 7,000,000, respectively, of RVIs common shares at an exercise price of $4.50
per share. There were no exercises of the Term Loan Warrants during the three and six months
ended August 4, 2007 or the three and six months ended July 29, 2006.
7. PENSION BENEFIT PLANS
The
Company adopted SFAS No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans as of February 3, 2007. The following
table shows the components of net periodic benefit cost of the Companys pension benefit plans
for the three and six months ended August 4, 2007 and July 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
August 4, |
|
|
July 29, |
|
|
August 4, |
|
|
July 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Service cost |
|
$ |
9 |
|
|
$ |
11 |
|
|
$ |
17 |
|
|
$ |
21 |
|
Interest cost |
|
|
371 |
|
|
|
362 |
|
|
|
743 |
|
|
|
725 |
|
Expected return on plan assets |
|
|
(489 |
) |
|
|
(443 |
) |
|
|
(978 |
) |
|
|
(886 |
) |
Amortization of transition asset |
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(18 |
) |
|
|
(19 |
) |
Amortization of net loss |
|
|
130 |
|
|
|
150 |
|
|
|
261 |
|
|
|
301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
12 |
|
|
$ |
71 |
|
|
$ |
25 |
|
|
$ |
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company anticipates contributing approximately $1.4 million in fiscal 2007 to meet
minimum funding requirements. The Company did not make a contribution during the six months
ended August 4, 2007 towards the $1.4 million contribution estimated for fiscal 2007.
-12-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. EARNINGS PER SHARE
Basic earnings (loss) per share are based on the net income (loss) and a simple weighted average
of common shares outstanding. Diluted earnings (loss) per share reflects the potential dilution
of common shares, related to outstanding stock options, SARs and warrants, calculated using the
treasury stock method. The numerator for the diluted earnings (loss) per share calculation is
the net income (loss). The denominator is the weighted average number of shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
August 4, |
|
|
July 29, |
|
|
August 4, |
|
|
July 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Weighted average shares outstanding |
|
|
48,157 |
|
|
|
45,013 |
|
|
|
47,714 |
|
|
|
43,037 |
|
Assumed exercise of dilutive SARs |
|
|
306 |
|
|
|
|
|
|
|
348 |
|
|
|
|
|
Assumed exercise of dilutive stock options |
|
|
620 |
|
|
|
|
|
|
|
641 |
|
|
|
|
|
Assumed exercise of dilutive Term Loan Warrants |
|
|
3,241 |
|
|
|
|
|
|
|
3,351 |
|
|
|
|
|
Assumed exercise of dilutive Conversion Warrants |
|
|
6,452 |
|
|
|
|
|
|
|
7,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares for computations of dilutive earnings per share |
|
|
58,776 |
|
|
|
45,013 |
|
|
|
59,073 |
|
|
|
43,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended August 4, 2007, all potentially dilutive instruments stock
options, SARs and warrants were dilutive. For the three and six months ended July 29, 2006,
all potentially dilutive instruments stock options, SARs and warrants were anti-dilutive.
The total amount of securities outstanding at July 29, 2006 that were not included in dilutive
earnings per share because to do so would have been anti-dilutive for the periods presented, but
could potentially dilute basic earnings per share in the future were:
|
|
|
|
|
|
|
July 29, 2006 |
|
|
|
(in thousands) |
|
SARs |
|
|
1,615 |
|
Stock options |
|
|
1,650 |
|
Term Loan Warrants |
|
|
4,413 |
|
Conversion Warrants |
|
|
9,667 |
|
|
|
|
|
All potentially dilutive instruments |
|
|
17,345 |
|
|
|
|
|
9. ACCUMULATED OTHER COMPREHENSIVE LOSS
The balance sheet caption Accumulated other comprehensive loss of $0.6 million at both August
4, 2007 and February 3, 2007, relates to the Companys minimum pension liability, net of income
tax. For the six months ended August 4, 2007 the comprehensive income was the same as the net
income. For the six months ended July 29, 2006, the total comprehensive loss was $80.6 million.
10. INCOME TAXES
The Company establishes valuation allowances for deferred tax assets when the amount of expected
future taxable income is not likely to support the use of the deduction or credit. The Company
has determined that there is a probability that future taxable income may not be sufficient to
fully utilize deferred tax assets (state net operating losses and charitable contribution carry
forwards) which expire in future years at various dates depending on the jurisdiction. The
allowance as of August 4, 2007 and February 3, 2007 was $17.3 million and $15.6 million,
respectively. Based on available data, the Company believes it is more likely than not that the
remaining deferred tax assets will be realized.
The tax rate of 14.5% for the six month period ended August 4, 2007 reflects the impact of the
change in fair value of warrants, included in book income but not tax income, and an additional
valuation allowance of $1.7 million on state net deferred tax assets.
Effective February 4, 2007, the Company adopted the provisions of FIN 48. The adoption of FIN
48 resulted in an unfavorable adjustment of $0.8 million to beginning retained earnings, which
includes $0.1 million recorded by DSW.
-13-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of February 4, 2007, the total amount of unrecognized tax benefits was $9.7 million.
Unrecognized tax benefits of $9.6 million would affect the Companys effective tax rate if
recognized. There were no significant changes in unrecognized tax benefits in the second
quarter of 2007.
The Company is no longer subject to U.S. federal or state and local income tax examinations by
tax authorities for the fiscal years prior to 2000. The Companys U.S. federal income tax
returns for fiscal years 2003, 2004 and 2005 are no longer under examination by the IRS.
However, there are several state audits and appeals ongoing for fiscal years from 2000 through
2006. The Company estimates the range of possible changes that may result from the examinations
to be insignificant at this time.
RVI is planning to amend certain federal and state tax returns within the next 12 months which
will reverse a tax benefit of $6.2 million related to the deduction of deferred state taxes. The
amount was reserved for in fiscal 2006.
Consistent with its historical financial reporting, the Company has elected to classify interest
expense related to income tax liabilities, when applicable, as part of the interest expense in
its condensed consolidated statement of operations rather than income tax expense. The Company will
continue to classify income tax penalties as part of operating expenses in its condensed
consolidated statements of operations. As of August 4, 2007 and February 4, 2007, approximately
$2.1 million and $2.0 million, respectively, was accrued for the payment of interest and
penalties.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
A supplemental schedule of non-cash investing and financing activities is presented below:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, |
|
|
July 29, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest to non-related parties |
|
$ |
9,991 |
|
|
$ |
4,724 |
|
Interest to related parties |
|
$ |
21 |
|
|
$ |
2,514 |
|
Income taxes |
|
$ |
26,829 |
|
|
$ |
25,420 |
|
|
|
|
|
|
|
|
|
|
Noncash activities: |
|
|
|
|
|
|
|
|
Increase in accounts payable due to asset purchases |
|
$ |
1,779 |
|
|
$ |
35 |
|
Additional paid in capital transferred from warrant liability for warrant exercises |
|
$ |
19,612 |
|
|
$ |
78,817 |
|
12. SEGMENT REPORTING
The Company is managed in four operating segments: Value City, DSW, Filenes Basement, and
Corporate. During the third quarter of fiscal 2006, the Companys business segments were
realigned to reflect how the Company manages the business. The realignment resulted in the
addition of a Corporate segment. The Corporate segment includes activities that are not
allocated to individual segments. Prior year segment tables have been updated to conform to this
realignment.
All of the Companys segment operations are located in the United States. The Company has
identified such segments based on chief operating decision maker responsibilities and measures
segment profit (loss) as operating profit (loss), which is defined as profit (loss) before
interest expense, income taxes and minority interest. Capital expenditures in parenthesis
represent assets transferred to other segments.
-14-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The tables below present segment information for the three and six months ended August 4, 2007
and July 29, 2006 and total assets by segment as of August 4, 2007 and February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
|
Filene's |
|
|
|
|
|
|
Intersegment |
|
|
|
|
|
|
City |
|
|
DSW |
|
|
Basement |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Three months ended August 4,
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
268,095 |
|
|
$ |
348,718 |
|
|
$ |
115,920 |
|
|
|
|
|
|
|
|
|
|
$ |
732,733 |
|
Operating (loss) profit |
|
|
(11,758 |
) |
|
|
8,326 |
|
|
|
(2,074 |
) |
|
$ |
124,784 |
|
|
|
|
|
|
|
119,278 |
|
Depreciation and amortization |
|
|
5,946 |
|
|
|
5,684 |
|
|
|
3,383 |
|
|
|
783 |
|
|
|
|
|
|
|
15,796 |
|
Interest expense |
|
|
3,106 |
|
|
|
143 |
|
|
|
1,874 |
|
|
|
3,153 |
|
|
$ |
(2,038 |
) |
|
|
6,238 |
|
Interest income |
|
|
96 |
|
|
|
2,091 |
|
|
|
15 |
|
|
|
2,877 |
|
|
|
(2,038 |
) |
|
|
3,041 |
|
Benefit (provision) for income
taxes |
|
|
5,426 |
|
|
|
(3,753 |
) |
|
|
1,117 |
|
|
|
(10,241 |
) |
|
|
|
|
|
|
(7,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
160 |
|
|
|
20,546 |
|
|
|
2,703 |
|
|
|
50 |
|
|
|
|
|
|
|
23,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 4, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
418,246 |
|
|
$ |
674,886 |
|
|
$ |
194,296 |
|
|
$ |
325,295 |
|
|
$ |
(278,884 |
) |
|
$ |
1,333,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
|
Filene's |
|
|
|
|
|
|
Intersegment |
|
|
|
|
|
|
City |
|
|
DSW |
|
|
Basement |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Three months ended July 29,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
290,362 |
|
|
$ |
301,302 |
|
|
$ |
92,844 |
|
|
|
|
|
|
|
|
|
|
$ |
684,508 |
|
Operating (loss) profit |
|
|
(10,112 |
) |
|
|
23,097 |
|
|
|
(1,167 |
) |
|
$ |
(15,343 |
) |
|
|
|
|
|
|
(3,525 |
) |
Depreciation and amortization |
|
|
6,248 |
|
|
|
4,891 |
|
|
|
2,077 |
|
|
|
700 |
|
|
|
|
|
|
|
13,916 |
|
Interest expense |
|
|
3,417 |
|
|
|
142 |
|
|
|
1,123 |
|
|
|
938 |
|
|
$ |
(938 |
) |
|
|
4,682 |
|
Interest income |
|
|
948 |
|
|
|
2,117 |
|
|
|
3 |
|
|
|
209 |
|
|
|
(938 |
) |
|
|
2,339 |
|
Benefit (provision) for income
taxes |
|
|
4,286 |
|
|
|
(9,731 |
) |
|
|
972 |
|
|
|
|
|
|
|
|
|
|
|
(4,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
4,603 |
|
|
|
8,256 |
|
|
|
2,988 |
|
|
|
(2,068 |
) |
|
|
|
|
|
|
13,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
438,899 |
|
|
$ |
603,785 |
|
|
$ |
175,287 |
|
|
$ |
328,208 |
|
|
$ |
(278,962 |
) |
|
$ |
1,267,217 |
|
-15-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
|
Filene's |
|
|
|
|
|
|
Intersegment |
|
|
|
|
|
|
City |
|
|
DSW |
|
|
Basement |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Six months ended August 4,
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
556,330 |
|
|
$ |
705,715 |
|
|
$ |
224,762 |
|
|
|
|
|
|
|
|
|
|
$ |
1,486,807 |
|
Operating (loss) profit |
|
|
(24,914 |
) |
|
|
45,544 |
|
|
|
(10,813 |
) |
|
$ |
137,333 |
|
|
|
|
|
|
|
147,150 |
|
Depreciation and amortization |
|
|
11,563 |
|
|
|
10,874 |
|
|
|
6,711 |
|
|
|
1,561 |
|
|
|
|
|
|
|
30,709 |
|
Interest expense |
|
|
6,224 |
|
|
|
281 |
|
|
|
3,617 |
|
|
|
6,377 |
|
|
$ |
(4,075 |
) |
|
|
12,424 |
|
Interest income |
|
|
173 |
|
|
|
3,948 |
|
|
|
37 |
|
|
|
5,674 |
|
|
|
(4,075 |
) |
|
|
5,757 |
|
Benefit (provision) for income
taxes |
|
|
11,262 |
|
|
|
(18,946 |
) |
|
|
5,056 |
|
|
|
(17,710 |
) |
|
|
|
|
|
|
(20,338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
88 |
|
|
|
39,221 |
|
|
|
9,272 |
|
|
|
(16 |
) |
|
|
|
|
|
|
48,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
|
Filene's |
|
|
|
|
|
|
Intersegment |
|
|
|
|
|
|
City |
|
|
DSW |
|
|
Basement |
|
|
Corporate |
|
|
Eliminations |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Six months ended July 29,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
604,789 |
|
|
$ |
617,789 |
|
|
$ |
183,443 |
|
|
|
|
|
|
|
|
|
|
$ |
1,406,021 |
|
Operating (loss) profit |
|
|
(19,695 |
) |
|
|
50,986 |
|
|
|
(4,810 |
) |
|
$ |
(80,152 |
) |
|
|
|
|
|
|
(53,671 |
) |
Depreciation and amortization |
|
|
12,497 |
|
|
|
9,792 |
|
|
|
4,166 |
|
|
|
1,302 |
|
|
|
|
|
|
|
27,757 |
|
Interest expense |
|
|
6,416 |
|
|
|
282 |
|
|
|
2,114 |
|
|
|
1,798 |
|
|
$ |
(1,798 |
) |
|
|
8,812 |
|
Interest income |
|
|
1,941 |
|
|
|
3,581 |
|
|
|
11 |
|
|
|
242 |
|
|
|
(1,798 |
) |
|
|
3,977 |
|
Benefit (provision) for income taxes |
|
|
8,195 |
|
|
|
(21,425 |
) |
|
|
2,911 |
|
|
|
|
|
|
|
|
|
|
|
(10,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
4,771 |
|
|
|
12,488 |
|
|
|
3,578 |
|
|
|
(1,588 |
) |
|
|
|
|
|
|
19,249 |
|
13. COMMITMENTS AND CONTINGENCIES
As previously reported, on March 8, 2005, Retail Ventures announced that it had learned of the
theft of credit card and other purchase information from a portion of the Companys customers.
On April 18, 2005, Retail Ventures issued the findings from its investigation into the theft.
The theft covered transaction information involving approximately 1.4 million credit cards and
data from transactions involving approximately 96,000 checks.
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in a putative class action
lawsuit which seeks unspecified monetary damages, credit monitoring and other relief. The
lawsuit seeks to certify a class of consumers that is limited geographically to consumers who
made purchases at certain stores in Ohio. A second class action lawsuit was resolved in May 2007
after DSW prevailed on a motion to dismiss on all claims in the District Court for the Southern
District of Ohio and, on appeal, the parties agreed to a Stipulation of Dismissal filed with the
U.S. Court of Appeals for the 6th Circuit.
There can be no assurance that there will not be additional proceedings or claims brought
against DSW in the future. DSW has contested and will continue to vigorously contest the claims
made against DSW and will continue to explore its defenses and possible claims against others.
DSW estimated that the potential exposure for losses related to this theft, including exposure
under currently pending proceedings, ranges from approximately $6.5 million to approximately
$9.5 million. Because of many factors, including the possible settlement of claims and
recoverability under insurance policies, there is no amount in the estimated range that
represents a better estimate than any other amount in the range. Therefore, in accordance with
Financial Accounting Standard No. 5, Accounting for Contingencies, the Company accrued a charge
to operations in the first quarter of fiscal 2005 equal to the low end of the range set forth
above, or $6.5 million. As the situation develops and more information becomes available, the
amount of the reserve may increase or decrease accordingly. The amount of any such change may be
material to DSWs results of operations or financial condition. As of August 4, 2007, the
balance of the associated accrual for potential exposure
-16-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
was $3.2 million. Subsequent to August 4, 2007, DSW paid an additional $2.7 million from the reserve, leaving a balance of $0.5
million.
The Company is involved in various legal proceedings that are incidental to the conduct of its
business. The Company estimates the range of liability related to pending litigation where the
amount of the range of loss can be estimated. The Company records its best estimate of a loss
when the loss is considered probable. Where a liability is probable and there is a
range of estimated loss, the Company records the most likely estimated liability related to the
claim. In the opinion of management, the amount of any liability with respect to these
proceedings will not be material to the Companys results of operations or financial condition.
As additional information becomes available, the Company will assess the potential liability
related to its pending litigation and revise the estimates as needed. Revisions in its estimates
and potential liability could materially impact the Companys results of operations and
financial condition.
-17-
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
As used in this Quarterly Report on Form 10-Q (this Report) and except as the context otherwise
may require, RVI, Retail Ventures, Company, we, us, and our refers to Retail Ventures,
Inc. and its wholly-owned subsidiaries, including but not limited to, Value City Department Stores
LLC (Value City) and Filenes Basement, Inc. (Filenes Basement), and DSW Inc. (DSW), a
controlled subsidiary, and DSWs wholly-owned subsidiaries, including but not limited to, DSW Shoe
Warehouse, Inc. (DSWSW).
OVERVIEW
Retail Ventures is a holding company operating retail stores in three of its four segments: Value
City, DSW and Filenes Basement. Value City is a full-line, value-price retailer carrying mens,
womens and childrens apparel, accessories, jewelry, shoes, home fashions, electronics and
seasonal items. Located in the Midwest, mid-Atlantic and southeastern United States of America
(United States) and operating for over 80 years, Value Citys strategy has been to provide
exceptional value by offering a broad selection of brand name merchandise at prices substantially
below conventional retail prices. As of August 4, 2007, there were 113 Value City stores in
operation. DSW is a leading United States specialty branded footwear retailer operating 236 shoe
stores in 36 states as of August 4, 2007. DSW offers a wide selection of brand name and designer
dress, casual and athletic footwear for women and men. DSWs typical customers are brand-, quality-
and style-conscious shoppers who have a passion for footwear and accessories. Filenes Basement
stores are located in major metropolitan areas of the eastern and Midwestern United States.
Filenes Basements mission is to provide the best selection of stylish, high-end designer and
famous brand name merchandise at surprisingly affordable prices in mens and womens apparel,
jewelry, shoes, accessories and home goods. As of August 4, 2007, there were 34 Filenes Basement
stores in operation. The Corporate segment consists of all revenue and expenses related to the
corporate entities that are not allocated to the other segments.
We intend for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in certain key items in those financial
statements from period to period, and the primary factors that accounted for those changes, as well
as how certain accounting principles affect our financial statements. The discussion also provides
information about the financial results of the various segments of our business to provide a better
understanding of how those segments and their results affect the financial condition and results of
operations of the Company as a whole. This discussion should be read in conjunction with our
financial statements and accompanying notes as of August 4, 2007.
On July 5, 2005, DSW completed an initial public offering (IPO). As of August 4, 2007, Retail
Ventures owned Class B Common Shares of DSW representing approximately 63.0% of DSWs outstanding
common shares and approximately 93.2% of the combined voting power of such shares. Retail Ventures
accounted for the sale of DSW as a capital transaction. DSW is a controlled subsidiary of Retail
Ventures and its Class A Common Shares are traded on the New York Stock Exchange under the symbol
DSW.
In December 2006, we announced that we are exploring strategic alternatives for the Value City
operations, including a possible sale of the division. RVI has retained financial advisors to
assist in this effort to enhance shareholder value. We also stated that there can be no assurance
that this process will result in any specific transaction.
The retail industry is highly competitive. We compete with a variety of conventional and discount
retail stores, including national, regional and local independent department and specialty stores,
as well as with catalog operations, on-line providers, factory outlet stores and other off-price
stores. Our operating entities, Value City, DSW and Filenes Basement, have different target
customers and different strategies, but each focuses on this basic principle: the value to the
customer is the result of the quality of the merchandise in relationship to the price paid.
-18-
Cautionary Statement Regarding Forward-Looking Information for Purposes of the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995
Some of the statements in this Quarterly Report on Form 10-Q contain forward-looking statements
which reflect our current views with respect to, among other things, future events and financial
performance. You can identify these forward-looking statements by the use of forward-looking words
such as outlook, believes, expects, potential, continues, may, should, seeks,
approximately, predicts, intends, plans, estimates, anticipates or the negative version
of those words or other comparable words. Any forward-looking statements contained in this
Quarterly Report on Form 10-Q are based upon our historical performance and on current plans,
estimates and expectations and assumptions relating to our operations, results of operations,
financial condition, growth strategy and liquidity. The inclusion of this forward-looking
information should not be regarded as a representation by us or any other person that the future
plans, estimates or expectations contemplated by us will be achieved. Such forward-looking
statements are subject to numerous risks, uncertainties and other factors that may cause actual
results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking statements. In addition to
the risks discussed in Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended February 3, 2007, as filed with the Securities and Exchange Commission (the
SEC) on April 5, 2007 (the 2006 Annual Report), and other factors discussed from time to time
in our other filings with the SEC, some important factors that could cause actual results,
performance or achievements for the Company to differ materially from those discussed in
forward-looking statements include, but are not limited to, the following:
|
|
|
our success in opening and operating new stores on a timely and profitable basis; |
|
|
|
|
maintaining good relationships with our vendors; |
|
|
|
|
our ability to anticipate and respond to fashion trends; |
|
|
|
|
fluctuation of our comparable store sales and quarterly financial performance; |
|
|
|
|
disruption of our distribution operations; |
|
|
|
|
our dependence on DSW for key services; |
|
|
|
|
failure to retain our key executives or attract qualified new personnel; |
|
|
|
|
outcome of the Value City operations strategic analysis; |
|
|
|
|
our competitiveness with respect to style, price, brand availability and customer
service; |
|
|
|
|
declining general economic conditions; |
|
|
|
|
risks inherent to international trade with countries that are major manufacturers of
apparel and footwear; and |
|
|
|
|
security risks related to the electronic processing and transmission of confidential
customer information. |
If one or more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results, performance or achievements may vary materially
from what we may have projected. Furthermore, new factors emerge from time to time and it is not
possible for management to predict all such factors, nor can it assess the impact of any such
factor on the business or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking statement. Any
forward-looking statement speaks only as of the date on which such statement is made. RVI
undertakes no obligation to update any forward-looking statement to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of unanticipated
events.
CRITICAL ACCOUNTING POLICIES
Managements Discussion and Analysis discusses the results of operations and financial condition as
reflected in our consolidated financial statements, which have been prepared in accordance with
generally accepted accounting principles. As discussed in the Notes to the Consolidated Financial
Statements that are included in our 2006 Annual Report, the preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
commitments and contingencies at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, management evaluates its
estimates and judgments, including, but not limited to, those related to inventory valuation,
depreciation, amortization, recoverability of long-lived assets including intangible assets, the
calculation of retirement benefits, estimates for self insurance reserves for health and welfare,
workers compensation and casualty insurance, income taxes, contingencies, litigation and revenue
recognition. Management bases its estimates and judgments on its historical experience
-19-
and other relevant factors, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. The
process of determining significant estimates is fact specific and takes into account factors such
as historical experience, current and expected economic conditions, product mix, and in some cases,
actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make
adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered provide a meaningful
basis for the accounting policies applied in the preparation of the consolidated financial
statements, we cannot guarantee that our estimates and assumptions will be accurate. As the
determination of these estimates requires the exercise of judgment, actual results inevitably will
differ from those estimates, and such differences may be material to the financial statements.
We believe the following represent the most critical estimates and assumptions, among others, used
in the preparation of our consolidated financial statements. We have discussed the selection,
application and disclosure of the critical accounting policies with the Audit Committee and our
Board of Directors.
|
|
|
Revenue recognition. Revenue from merchandise sales are recognized at the point
of sale, net of returns and exclude sales tax. Revenue from gift cards is deferred
and the revenue is recognized upon redemption of the gift cards. The Company did
not recognize income during these periods from unredeemed gift cards and
merchandise credits. The Company will continue to review its historical activity
and will recognize income from unredeemed gift cards and merchandise credits when
deemed appropriate. |
|
|
|
|
Cost of sales and merchandise inventories. We use the retail method of
accounting for substantially all of our merchandise inventories. Merchandise
inventories are stated at the lower of cost, determined using the first-in,
first-out basis, or market, using the retail inventory method. The retail inventory
method is widely used in the retail industry due to its practicality. Under the
retail inventory method, the valuation of inventories at cost and the resulting
gross margins are calculated by applying a calculated cost to retail ratio to the
retail value of inventories. The cost of the inventory reflected on our Condensed
Consolidated Balance Sheets is decreased by charges to cost of sales at the time
the retail value of the inventory is lowered through the use of markdowns. Hence,
earnings are negatively impacted as merchandise is marked down prior to sale.
Reserves to value inventory at the lower of cost or market were $39.4 million and
$44.4 million at August 4, 2007 and February 3, 2007, respectively. |
|
|
|
|
Inherent in the calculation of inventories are certain significant management
judgments and estimates, including setting the original merchandise retail value or
markon, markups of initial prices established, reduction of pricing due to customers
value perception or perceived value (known as markdowns), and estimates of losses
between physical inventory counts or shrinkage, which, combined with the averaging
process within the retail method, can significantly impact the ending inventory
valuation at cost and the resulting gross margins. |
|
|
|
|
Investments. Short-term and long-term investments include auction rate
securities and are classified as available-for-sale securities. These securities
are recorded at cost, which approximates fair value due to their variable interest
rates, which typically reset every 7 to 275 days. Despite the long-term nature of
their stated contractual maturities, the Company has the intent and ability to
quickly liquidate these securities. As a result of the resetting variable rates,
there are no cumulative gross unrealized or realized holding gains or losses from
these investments. All income generated from these investments is recorded as
interest income. As of August 4, 2007, the Company held $100.5 million in
short-term investments and $2.5 million in long-term investments, and at February
3, 2007, the Company held $98.7 million in short-term investments and no long
term investments. |
|
|
|
|
Asset impairment and long-lived assets. We must periodically evaluate the
carrying amount of our long-lived assets, primarily property and equipment, and
finite life intangible assets when events and circumstances warrant such a review
to ascertain if any assets have been impaired. The carrying amount of a long-lived
asset is considered impaired when the carrying value of the asset exceeds the
expected future cash |
-20-
|
|
|
flows (undiscounted and without interest) from the asset. Our reviews are conducted
at the lowest identifiable level which includes a store. The impairment loss
recognized is the excess of the carrying value, based on discounted future cash
flows, of the asset over its fair value. Should an impairment loss be realized, it
will be included in operating expenses. |
|
|
|
|
We believe at this time that the remaining long-lived assets carrying values and
useful lives continue to be appropriate. To the extent these future projections or
our strategies change, our conclusion regarding impairment may differ from our
current estimates. |
|
|
|
|
Store Closing Reserve. During the six months ending August 4, 2007, the Company
recorded charges associated with the closing of one DSW store and one Filenes
Basement store and accruals for the severance related to the temporary shut down of
the Downtown Crossing location. During the six months ending July 29, 2006, the
Company recorded charges associated with the closing of two DSW stores. The
operating lease at one of the two stores was terminated through the exercise of a
lease kick-out option. During the first six months of 2006, the Company closed one
Filenes Basement store for which closing costs were accrued during the fourth
quarter of 2005. |
The table below sets forth the significant components and activity related to these
closing reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
February 3, |
|
|
Related |
|
|
|
|
|
|
|
|
|
|
August 4, |
|
|
|
2007 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
2007 |
|
|
|
(in thousands) |
|
Lease Costs |
|
$ |
1,866 |
|
|
$ |
380 |
|
|
$ |
(429 |
) |
|
$ |
|
|
|
$ |
1,817 |
|
Employee severance and termination benefits |
|
|
|
|
|
|
1,958 |
|
|
|
(33 |
) |
|
|
|
|
|
|
1,925 |
|
Other |
|
|
|
|
|
|
22 |
|
|
|
(18 |
) |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,866 |
|
|
$ |
2,360 |
|
|
$ |
(480 |
) |
|
$ |
|
|
|
$ |
3,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
January 28, |
|
|
Related |
|
|
|
|
|
|
|
|
|
|
July 29, |
|
|
|
2006 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
2006 |
|
|
|
(in thousands) |
|
Lease Costs |
|
$ |
2,130 |
|
|
$ |
392 |
|
|
$ |
(440 |
) |
|
$ |
233 |
|
|
$ |
2,315 |
|
Employee severance and termination benefits |
|
|
277 |
|
|
|
55 |
|
|
|
(296 |
) |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,407 |
|
|
$ |
447 |
|
|
$ |
(736 |
) |
|
$ |
233 |
|
|
$ |
2,351 |
|
|
|
|
Self-insurance reserves. We record estimates for certain health and
welfare, workers compensation and general liability 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 general liability insurance exceed
those anticipated, reserves recorded may not be sufficient, and, to the extent
actual results vary from assumptions, earnings would be impacted. For example, for
workers compensation and liability claims estimates, a 1% increase or decrease to
the assumptions for claims costs and loss development factors would increase or
decrease our self-insurance accrual at August 4, 2007 by $0.4 million. The
self-insurance reserves were $16.4 million and $17.5 million at August 4, 2007 and
February 3, 2007, respectively. |
|
|
|
|
Pension. The obligations and related assets of defined benefit retirement plans
are included in the Notes to the Consolidated Financial Statements in the Companys
2006 Annual Report. Plan assets, which consist primarily of marketable equity and
debt instruments, are valued using market quotations. Plan obligations and the
annual pension expense are determined by independent actuaries and through the use
of a number of assumptions. Key assumptions in measuring the plan obligations
include the discount rate, the rate of salary
|
-21-
|
|
|
increases and the estimated future return on plan assets. In determining the discount
rate, we utilize the yield on fixed-income investments currently available with
maturities corresponding to the anticipated timing of the benefit payments. Salary
increase assumptions are based upon historical experience and anticipated future
management actions. Asset returns are based upon the anticipated average rate of
earnings expected on the invested funds of the plans. At August 4, 2007, the
actuarial assumptions of our plans have remained unchanged from our 2006 Annual
Report. To the extent actual results vary from assumptions, earnings would be
impacted. At August 4, 2007, the weighted-average actuarial assumptions applied to
our plans were: a discount rate of 6.0%, assumed salary increases of 3.0% and a
long-term rate of return on plan assets of 8.0%. |
|
|
|
|
Customer loyalty program. DSW maintains a customer loyalty program for the DSW
stores in which program members receive a discount on future purchases. Upon
reaching the target-earned threshold, members receive certificates for these
discounts which must be redeemed within six months. DSW accrues the anticipated
redemptions of the discount earned at the time of the initial purchase. To estimate
these costs, DSW is required to make assumptions related to customer purchase
levels and redemption rates based on historical experience. The accrued liability
as of August 4, 2007 and February 3, 2007 was $4.9 million and $5.0 million,
respectively. |
|
|
|
|
Change in fair value of derivative instruments. In
accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, the Company recognizes all derivatives on the
balance sheet at fair value. For derivatives that are not designated as hedges
under SFAS No. 133, changes in the fair values are recognized in earnings in the
period of change. For the three and six months ended August 4, 2007, the Company
recorded income related to the change in fair value of warrants of $99.5 million
and $97.4 million, respectively. For the three and six months ended July 29, 2006,
the Company recorded a charge related to the change in fair value of warrants of
$15.3 million and $80.2 million, respectively. For the three and six months ended
August 4, 2007, the Company recorded income related to the change in the fair value
of the conversion feature of the PIES of $25.3 million and $40.0 million,
respectively. The PIES were not outstanding during the three and six months ended
July 29, 2006. |
|
|
|
|
Income taxes. We are required to determine the aggregate amount of income tax
expense to accrue and the amount which will be currently payable based upon tax
statutes of each jurisdiction in which we do business. In making these estimates,
we adjust income based on a determination of generally accepted accounting
principles for items that are treated differently by the applicable taxing
authorities. Deferred tax assets and liabilities, as a result of these differences,
are reflected on our balance sheet for temporary differences that will reverse in
subsequent years. A valuation allowance is established against deferred tax assets
when it is more likely than not that some or all of the deferred tax assets will
not be realized. If our management had made these determinations on a different
basis, our tax expense, assets and liabilities could be different. During the six
months ended August 4, 2007, we increased the valuation allowance on state net
deferred tax assets in the amount of $0.4 million which resulted from an increase
of net state deferred tax assets. Also, during the six months ended August 4, 2007,
we established an additional valuation allowance of $1.3 million for state net
operating loss carryforwards. |
Following the completion of the DSW IPO in June 2005, DSW is no longer included in
Retail Ventures consolidated federal tax return.
-22-
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage relationships to net
sales of the listed items included in the Companys Condensed Consolidated Statements of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
August 4, |
|
|
July 29, |
|
|
August 4, |
|
|
July 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(62.5 |
) |
|
|
(59.8 |
) |
|
|
(61.1 |
) |
|
|
(59.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
37.5 |
|
|
|
40.2 |
|
|
|
38.9 |
|
|
|
40.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
(38.5 |
) |
|
|
(38.7 |
) |
|
|
(38.6 |
) |
|
|
(38.5 |
) |
Change in the fair value of derivative instruments |
|
|
3.6 |
|
|
|
0.0 |
|
|
|
2.8 |
|
|
|
(0.1 |
) |
Change in the fair value of derivative instruments -
related parties |
|
|
13.4 |
|
|
|
(2.2 |
) |
|
|
6.4 |
|
|
|
(5.6 |
) |
License fees and other income |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
|
|
16.3 |
|
|
|
(0.5 |
) |
|
|
9.9 |
|
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(0.9 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
|
|
(0.4 |
) |
Interest expense related parties |
|
|
0.0 |
|
|
|
(0.2 |
) |
|
|
0.0 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(0.9 |
) |
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
|
(0.6 |
) |
Interest income |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(0.5 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest |
|
|
15.8 |
|
|
|
(0.9 |
) |
|
|
9.5 |
|
|
|
(4.1 |
) |
Provision for income taxes |
|
|
(1.0 |
) |
|
|
(0.6 |
) |
|
|
(1.4 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest |
|
|
14.8 |
|
|
|
(1.5 |
) |
|
|
8.1 |
|
|
|
(4.9 |
) |
Minority interest |
|
|
(0.3 |
) |
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
14.5 |
% |
|
|
(2.3 |
)% |
|
|
7.3 |
% |
|
|
(5.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED AUGUST 4, 2007 COMPARED TO THREE MONTHS ENDED JULY 29, 2006
Net Sales. Net sales increased $48.2 million, or 7.0%, to $732.7 million from $684.5 million for
the three months ended August 4, 2007 compared to the three months ended July 29, 2006. Comparable
store sales increased 0.3% and, by segment, were:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
|
|
Increase (Decrease) |
|
Value City |
|
|
(7.3 |
)% |
|
|
(2.2 |
)% |
DSW |
|
|
5.9 |
% |
|
|
2.2 |
% |
Filenes Basement |
|
|
7.0 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
|
Total |
|
|
0.3 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
Value City net sales were $268.1 million for the three months ended August 4, 2007, a $22.3 million
decrease over the comparable period, or a 7.7% decrease. Comparable store sales decreased 7.3%,
over the comparable period. The decrease in comparable sales at Value City is
comprised of declines in all major categories. Mens, womens and childrens apparel had declines
of 5.4%, 3.9%, and 13.9%, respectively. Jewelry and hardlines had declines of 12.4% and 9.8%,
respectively. The declines are due to a decrease of 9.1% in
transactions and a decrease in the units
per basket of 0.9%, partially offset by the average unit retail increase of 2.9%. The overall
average retail customer basket increased 2.0%.
-23-
DSW net sales were $348.7 million for the three months ended August 4, 2007, a $47.4 million
increase over the comparable period, or a 15.7% increase. The increase in DSW sales includes a net
increase of 31 DSW stores, 117 non-affiliated leased shoe departments and eight affiliated leased
shoe departments. The DSW store locations opened subsequent to July 29, 2006 added $32.3 million
in sales for the quarter ended August 4, 2007, while the leased shoe departments opened subsequent
to July 29, 2006 added $12.7 million for the quarter ended August 4, 2007. Leased shoe department
sales comprised 12.2% of DSW segment net sales in the second quarter of fiscal 2007, compared to 10.3% in the second quarter
of fiscal 2006. The increase in sales was partially offset by the loss of sales from the closed
stores and leased departments of $4.8 million.
DSW comparable
store sales in the second quarter of fiscal 2007 increased 5.9%,
compared to the second quarter of fiscal 2006. For the second quarter of fiscal 2007, DSW
comparable store sales increased in womens by 7.0%, mens by 2.7%, accessories by 8.6% and
athletic by 8.2%. Increases in comparable sales in all categories were primarily driven by
significant promotional activity through the summer sale and the sandal sale events.
Filenes Basement net sales were $115.9 million for the three months ended August 4, 2007, a $23.1
million increase over the comparable period, or a 24.9% increase. Comparable store sales, excluding
the Downtown Crossing store, increased 3.9%, over the comparable period last year.
The Downtown Crossing location will temporarily cease operations in the fall of 2007 due to the
extensive renovation planned for the building by the buildings new owner, and when the renovation
is complete will resume operations in the spring of 2009. Filenes Basement opened nine new stores,
subsequent to July 29, 2006, which had net sales of $18.3 million during the three months ended
August 4, 2007. In addition, Filenes Basement closed one store that was operating in the previous
year resulting in a decrease in net sales of $1.0 million compared to last year. The merchandise
categories of mens, womens, accessories and jewelry had comparable sales increases of 9.9%, 6.4%,
12.8% and 6.2%, respectively.
Gross Profit. Total gross profit decreased $0.3 million from $275.0 million for the three months
ended July 29, 2006 to $274.7 million for the three months ended August 4, 2007. Gross profit, as a
percent of sales, decreased to 37.5% from 40.2% in the comparable period.
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
Value City |
|
|
36.6 |
% |
|
|
37.9 |
% |
DSW |
|
|
38.2 |
% |
|
|
43.4 |
% |
Filenes Basement |
|
|
37.3 |
% |
|
|
36.9 |
% |
|
|
|
|
|
|
|
Total |
|
|
37.5 |
% |
|
|
40.2 |
% |
|
|
|
|
|
|
|
Value Citys gross profit decreased $11.9 million to $98.1 million in the second quarter of fiscal
2007 from $110.0 million in the second quarter of fiscal 2006, and decreased as a percent of net
sales from 37.9% in the second quarter of fiscal 2006 to 36.6% in the second quarter of fiscal
2007. The decrease is due to the decline in sales and increased
markdowns, partially offset by increased initial
markup.
DSW gross profit increased $2.6 million to $133.3 million in the second quarter of fiscal 2007 from
$130.7 million in the second quarter of fiscal 2006, and decreased as a percent of net sales from
43.4% in the second quarter of fiscal 2006 to 38.2% in the second quarter of fiscal 2007. The
margin for the second quarter of fiscal 2007 was negatively impacted by an increase in the markdown
rate as a result of markdowns related to the second quarter promotional activities in both the
store and leased department segments. This was partially offset by an increase in initial mark-up.
In the leased departments, the decrease in gross profit as a percentage of sales was driven by
markdowns taken in the stores added in January 2007.
Filenes Basement gross profit increased $9.1 million to $43.3 million in the second quarter of
fiscal 2007 from $34.2 million in the second quarter of fiscal 2006, and increased as a percent of
net sales from 36.9% in the second quarter of fiscal 2006 to 37.3% in
the second quarter of fiscal 2007.
The increase is due to an increase in initial markup, partially offset by an increase in markdowns
at the Downtown Crossing location.
-24-
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A)
expenses increased $17.7 million from $264.8 million in the second quarter of fiscal 2006 to $282.5
million for the second quarter of fiscal 2007. As a percent of sales, SG&A expense decreased to
38.5% for the second quarter of fiscal 2007 compared to 38.7% in the comparable quarter last year. SG&A
expense, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
Value City |
|
|
41.4 |
% |
|
|
41.7 |
% |
DSW |
|
|
36.1 |
% |
|
|
35.8 |
% |
Filenes Basement |
|
|
41.2 |
% |
|
|
40.6 |
% |
|
|
|
|
|
|
|
Total |
|
|
38.5 |
% |
|
|
38.7 |
% |
|
|
|
|
|
|
|
The Value City segments SG&A expense decreased $10.3 million and decreased as a percent of sales
for the three months ended August 4, 2007 compared to the three months ended July 29, 2006. The
decrease in SG&A expenses is partially a result of an $8.2 million decrease in personnel expense
due to the elimination of positions subsequent to July 29, 2006. Occupancy expenses decreased $0.3
million primarily due to reduced depreciation expense.
DSW segment SG&A expense increased $18.1 million and increased as a percent of sales for the three
months ended August 4, 2007 compared to the three months ended July 29, 2006. The increase in SG&A
as a percent of sales was in part the result of an increase in store expenses, marketing, and
overhead expenses, and was partially offset by a decrease in pre-opening costs. DSW SG&A expenses, excluding
pre-opening costs, for DSW stores and leased shoe departments opened subsequent to July 29, 2006
were $10.9 million for the three months ended August 4, 2007. SG&A expenses for the second quarter
of fiscal 2007 include $0.6 million in pre-opening costs compared to $1.5 million in pre-opening
costs in the second quarter of fiscal 2006. Pre-opening costs are expensed as incurred and
therefore do not necessarily reflect expenses for the stores opened in a given fiscal period.
Filenes Basement SG&A expenses increased $10.1 million and increased as a percent of sales
for the three months ended August 4, 2007 compared to the three months ended July 29, 2006. SG&A
expenses, excluding pre-opening expenses, for stores opened subsequent to July 29, 2006 were $7.3
million for the three months ended August 4, 2007. Pre-opening costs decreased in Filenes Basement
by approximately $0.2 million for the three months ended August 4, 2007 compared with the three
months ended July 29, 2006. The Downtown Crossing stores SG&A expenses increased $2.3
million primarily due to additional depreciation and severance expense recorded due to the pending
temporary store closing.
Change in Fair Value of Derivative Instruments. During the three months ended August 4, 2007 and
July 29, 2006, the Company recorded non-cash income of $99.5 million and non-cash charges of $15.3
million, respectively, representing the changes in fair value of the Conversion Warrants and Term
Loan Warrants primarily driven by the change in RVI stock price and the exercise of Conversion
Warrants in June of 2007. During the three months ended August 4, 2007, non-cash income of $25.3
million was recorded related to the change in the fair value of the conversion feature of the PIES.
The PIES were not outstanding during the three months ended July 29, 2006.
License Fees and Other Income. License fees and other income were $2.4 million and $1.7 million
for the three months ended August 4, 2007 and July 29, 2006, respectively. The increase is
primarily attributable to the warranty income and third party sales programs. These sources of
income can vary based on customer traffic and contractual arrangements.
Operating Profit (Loss). Operating profit for the quarter ended August 4, 2007 was $119.3 million
compared to an operating loss of $3.5 million for the quarter ended July 29, 2006, an improvement
of $122.8 million. Operating profit as a percent of sales was 16.3% for August 4, 2007 and
operating loss as a percent of sales was 0.5% for July 29, 2006.
The operating profit for the quarter ended August 4, 2007 for the Corporate segment is primarily
due to non-cash income of $25.3 million that reflects the change in the fair value of the
conversion feature of the PIES and $99.5 million which represents the changes in fair value of the
Conversion Warrants and Term Loan Warrants. The operating loss for the quarter ended July 29, 2006
for the Corporate segment was primarily due to the $15.3 million non-cash charge which represented
the changes in
-25-
fair value of the Conversion Warrants and Term Loan Warrants. There were no PIES
outstanding during the three months ended July 29, 2006.
Operating profit (loss) as a percent of sales for the remaining segments were:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
Value City |
|
|
(4.4 |
)% |
|
|
(8.8 |
)% |
DSW |
|
|
2.4 |
% |
|
|
7.7 |
% |
Filenes Basement |
|
|
(1.8 |
)% |
|
|
(1.3 |
)% |
|
|
|
|
|
|
|
Total |
|
|
16.3 |
% |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
Interest Expense. Interest expense for the quarter ended August 4, 2007 increased $1.5 million to
$6.2 million compared to the second quarter of fiscal 2006. The increase is due primarily to an
increase of $84.2 million in average borrowings due to the issuance of the PIES during August 2006,
partially offset by a decrease in our weighted average borrowing rate of 1.0% during the three
months ended August 4, 2007 compared to the three months ended July 29, 2006.
Interest Income. Interest income increased $0.7 million over the same period last year due
primarily to the increase in cash and investments over the same period in the prior year.
Income Taxes. The three months ended August 4, 2007 reflects a tax expense of $7.5 million or 6.4%
effective tax rate as compared to a negative 76.2% effective tax rate for the three months ended
July 29, 2006. The effective tax rate of 6.4% reflects the impact of the change in fair value of
the Term Loan Warrants, Conversion Warrants and conversion feature of the PIES, all of which are
included for book income but not tax income, and an additional valuation allowance of $1.1 million
on all state net deferred tax assets.
Minority Interest. For the second quarter of fiscal 2007, net income was offset by $2.4 million to
reflect that portion of the income attributable to DSW minority shareholders.
Net Income (Loss). For the second quarter of fiscal 2007, net income increased $122.2 million from
the second quarter of fiscal 2006 and represents 14.5% of net sales versus negative 2.3% of net
sales, respectively. The increased net income for the second quarter of fiscal 2007 was primarily
attributable to increased net sales of $48.2 million and the
$140.1 million increase in non-cash income from
the change in fair value of the warrants and conversion feature of
the PIES compared to the three months ended July 29, 2006.
SIX MONTHS ENDED AUGUST 4, 2007 COMPARED TO SIX MONTHS ENDED JULY 29, 2006
Net Sales. Net sales increased $80.8 million, or 5.7%, to $1.49 billion from $1.41 billion for the
six months ended August 4, 2007 compared to the six months ended July 29, 2006. Comparable store
sales decreased 2.6% and, by segment, were:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
|
|
Increase (Decrease) |
|
Value City |
|
|
(8.0 |
)% |
|
|
0.2 |
% |
DSW |
|
|
0.9 |
% |
|
|
3.2 |
% |
Filenes Basement |
|
|
4.3 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
Total |
|
|
(2.6 |
)% |
|
|
2.1 |
% |
|
|
|
|
|
|
|
Value City net sales were $556.3 million for the six months ended August 4, 2007, a $48.5 million
decrease over the comparable period, or an 8.0% decrease. Comparable store sales decreased 8.0%
over the comparable period. The decrease in comparable sales is comprised of
declines in all major categories. Mens, womens and childrens apparel had
-26-
declines of 7.6%, 4.7%, and 15.3%, respectively. Jewelry and hardlines had declines of 20.6% and 7.3%, respectively.
The declines are due to a decrease of 8.8% in the number of
transactions and a decrease in the units
per basket of 0.9%, partially offset by the average unit retail increase of 1.7%. The overall
customer basket increased 0.8%.
DSW net sales were $705.7 million for the six months ended August 4, 2007, an $87.9 million
increase over the comparable period, or a 14.2% increase. The increase in sales includes a net
increase of 31 stores, eight affiliated leased shoe departments and 117 non-affiliated leased shoe departments compared to July 29, 2006. The store locations
opened subsequent to July 29, 2006 added $59.6 million in
sales for the six months ended August 4,
2007, while the leased shoe departments opened subsequent to July 29, 2006 added $27.9 million for
the six months ended August 4, 2007. Leased shoe department sales comprised 12.7% of DSW segment net
sales in the six months ended August 4, 2007, compared to 10.3% in the six months ended July 29,
2006. The increase in sales was partially offset by the loss of sales from the closed stores and
leased departments of $8.8 million.
DSW
comparable store sales in the six months ended August 4, 2007 increased 0.9%,
compared to the six months ended July 29, 2006. For the six months ended August 4, 2007, DSW
comparable store sales increased in womens by 1.1%, athletic by 4.6%, and accessories by 0.4%, and
decreased in mens by 0.1%.
Filenes Basement net sales were $224.8 million for the six months ended August 4, 2007, a $41.3
million increase over the comparable period, or a 22.5% increase. Comparable store sales, excluding
the Downtown Crossing store, increased 3.2%, over the comparable period last year.
Filenes Basement opened nine new stores subsequent to July 29, 2006, which had net sales of $34.3
million during the six months ended August 4, 2007. In addition, Filenes Basement closed one store
that was operating in the previous year resulting in a decrease in net store sales of $1.6 million
compared to last year. The merchandise categories of mens, womens and accessories had comparable
store sales increases of 7.6%, 2.5% and 12.0%, respectively, which
were partially offset by the comparable store sales
decrease of 2.5% in the jewelry category.
Gross Profit. Total gross profit increased $13.0 million from $565.6 million for the six months
ended July 29, 2006 to $578.6 million for the six months ended August 4, 2007. Gross profit, as a
percent of sales decreased to 38.9% as compared to 40.2% during the comparable period.
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
Value City |
|
|
36.4 |
% |
|
|
38.1 |
% |
DSW |
|
|
41.6 |
% |
|
|
43.4 |
% |
Filenes Basement |
|
|
36.7 |
% |
|
|
36.4 |
% |
|
|
|
|
|
|
|
Total |
|
|
38.9 |
% |
|
|
40.2 |
% |
|
|
|
|
|
|
|
Value Citys gross profit decreased $27.9 million to $202.6 million in the six months ended August
4, 2007 from $230.5 million in the six months ended July 29, 2006, and decreased as a percent of
net sales from 38.1% in the six months ended July 29, 2006 to 36.4% in the six months ended August
4, 2007. The decrease is due to the decline in sales and increased markdowns, partially offset by
increased initial markup as a percent of sales.
DSW gross profit increased $25.3 million to $293.6 million in the six months ended August 4, 2007
from $268.3 million in the six months ended July 29, 2006, and decreased as a percent of net sales
from 43.4% in the six months ended July 29, 2006 to 41.6% in the six months ended August 4, 2007.
The gross margin for the six months ended August 4, 2007 was negatively impacted by an increase in
the markdown rate as a result of significant promotional activity in both stores and leased
departments. This was partially offset by an increase in the initial mark-up. In the leased
departments, the decrease in gross profit as a percentage of sales was driven by markdowns taken in
the stores added in January 2007.
Filenes Basement gross profit increased $15.7 million to $82.4 million in the six months ended
August 4, 2007 from $66.7 million in the six months ended July 29, 2006, and increased as a percent
of net sales from 36.4% in the six months ended July 29, 2006 to 36.7% in the six months ended
August 4, 2007. The increase is primarily due to increased initial markups, partially offset by
increased markdowns on clearance merchandise sold at the Downtown Crossing location.
-27-
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $31.8 million from $542.3 million in six months ended July 29, 2006 to $574.1 million for
the six months ended August 4, 2007. As a percent of sales, SG&A expense was 38.6% for the six
months ended August 4, 2007 compared to 38.5% in the comparable quarter last year.
SG&A expense, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
Value City |
|
|
41.3 |
% |
|
|
41.7 |
% |
DSW |
|
|
35.5 |
% |
|
|
35.2 |
% |
Filenes Basement |
|
|
43.6 |
% |
|
|
41.5 |
% |
|
|
|
|
|
|
|
Total |
|
|
38.6 |
% |
|
|
38.5 |
% |
|
|
|
|
|
|
|
The Value City segments SG&A expense decreased $22.5 million and decreased as a percent of sales
for the six months ended August 4, 2007 compared to the six months ended July 29, 2006. The
decrease in SG&A expenses is partially a result of a $17.2 million decrease in personnel expense
due to the elimination of positions subsequent to July 29, 2006. Occupancy expenses decreased $2.5
million primarily due to reduced depreciation expense and building maintenance costs.
DSW segment SG&A expense increased $32.7 million and increased as a percent of sales for the six
months ended August 4, 2007 compared to the six months ended July 29, 2006. DSW SG&A expenses,
excluding pre-opening costs, for DSW stores and leased shoe departments opened subsequent to July
29, 2006 were $23.0 million for the six months ended August 4, 2007. SG&A expenses for the six
months ended August 4, 2007 include $2.2 million in pre-opening costs compared to $2.4 million in
pre-opening costs in the six months ended July 29, 2006. Pre-opening costs are expensed as
incurred and therefore do not necessarily reflect expenses for the stores opened in a given fiscal
period. The increase in SG&A expenses as a percent of sales was in part the result of an increase in overhead
expenses, partially offset by a decrease in pre-opening and marketing
expenses.
Filenes Basement SG&A expenses increased $21.9 million and increased as a percent of sales for the
six months ended August 4, 2007 compared to the six months ended July 29, 2006. New store SG&A
expenses, excluding pre-opening expenses, were $13.2 million for the six months ended August 4,
2007, and pre-opening costs increased in Filenes Basement by approximately $2.1 million during the
six months ended August 4, 2007 compared with the six months ended July 29, 2006. The
Downtown Crossing stores SG&A expenses increased $4.1 million primarily due to additional
depreciation and severance expense recorded due to the pending temporary store closing.
Change in Fair Value of Derivative Instruments. During the six months ended August 4, 2007 and
July 29, 2006, the Company recorded non-cash income of $97.4 million and a non-cash charge of $80.2
million, respectively, representing the changes in fair value of the Conversion Warrants and Term
Loan Warrants primarily driven by the change in RVI stock price and the exercise of Conversion
Warrants in June of 2007. During the six months ended August 4, 2007, non-cash income of $40.0
million was recorded related to the change in the fair value of the conversion feature of the PIES.
The PIES were not outstanding during the six months ended July 29, 2006.
License Fees and Other Income. License fees and other income were $5.3 million and $3.2 million
for the six months ended August 4, 2007 and July 29, 2006, respectively. The increase is
primarily attributable to the warranty income and third party sales programs. These sources
of income can vary based on customer traffic and contractual arrangements.
Operating Profit (Loss). Operating profit for the six months ended August 4, 2007 was $147.2
million compared to an operating loss of $53.7 million for the six months ended July 29, 2006, an
improvement of $200.9 million. Operating profit as a percent of sales was 9.9% for the six months
ended August 4, 2007 and operating loss as a percent of sales was 3.8% for the six months ended
July 29, 2006.
-28-
The operating profit for the six months ended August 4, 2007 for the Corporate segment is primarily
due to non-cash income of $137.3 million from the change in the fair value of the conversion
feature of the PIES, Conversion Warrants and Term Loan Warrants. The operating loss for the six
months ended July 29, 2006 for the Corporate segment was primarily due to the $80.2 million
non-cash charge which represented the changes in fair value of the Conversion Warrants and Term
Loan Warrants. There were no PIES outstanding during the six months ended July 29, 2006.
Operating profit (loss) as a percent of sales by the remaining segments were:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
August 4, 2007 |
|
|
July 29, 2006 |
|
Value City |
|
|
(4.5 |
)% |
|
|
(16.5 |
)% |
DSW |
|
|
6.5 |
% |
|
|
8.3 |
% |
Filenes Basement |
|
|
(4.8 |
)% |
|
|
(2.6 |
)% |
|
|
|
|
|
|
|
Total |
|
|
9.9 |
% |
|
|
(3.8 |
)% |
|
|
|
|
|
|
|
Interest Expense. Interest expense for the six months ended August 4, 2007 increased $3.6 million
to $12.4 million compared to the six months ended July 29, 2006. The increase is due primarily to
an increase of $93.1 million in average borrowings due to the issuance of the PIES during August
2006 partially offset by a decrease in our weighted average borrowing rate of 1.0% during the six
months ended August 4, 2007, compared to the six months ended July 29, 2006.
Interest Income. Interest income increased $1.8 million over the same period last year due
primarily to the increase in cash and short-term investments over the same period in the prior
year.
Income Taxes. The six months ended August 4, 2007 reflects a tax expense of $20.3 million or a
14.5% effective tax rate as compared to a negative 17.6% effective tax rate for the six months
ended July 29, 2006. The effective tax rate of 14.5% reflects the impact of the change in fair
value of the Term Loan Warrants, Conversion Warrants and conversion feature of the PIES all of
which are included for book income but not tax income and an additional valuation allowance of $1.7
million on all state net deferred tax assets.
Minority Interest. For the six months ended August 4, 2007, net income was offset by $11.2 million
to reflect that portion of the income attributable to DSW minority shareholders.
Net Income (Loss). For the six months ended August 4, 2007, net income increased $189.9 million
from the six months ended July 29, 2006 and represents 7.3% of net sales versus negative 5.8% of
net sales, respectively. The net income for the six months ended August 4, 2007 was primarily
attributable to the $137.3 million non-cash income from the change in fair value of the warrants
and conversion feature of the PIES. The net loss for the six months ended July 29, 2006 was
primarily attributable to the $80.2 million non-cash charge for the change in fair value of
warrants.
SEASONALITY
Our business is affected by the pattern of seasonality common to most retail businesses.
Historically, the majority of our sales and operating profit have been generated during the early
spring, back-to-school and Christmas selling seasons for our Value City segment and, more recently,
our Filenes Basement segment. DSW net sales have typically been higher in spring and early fall,
when DSWs customers interest in new seasonal styles increases.
LIQUIDITY AND CAPITAL RESOURCES
During the three and six months ended August 4, 2007, Retail Ventures issued 1,333,333, of its
common shares at an exercise price of $4.50 per share to Cerberus Partners, L.P. (Cerberus) in
connection with the exercise by Cerberus of its remaining Conversion Warrants. In connection with
this exercise, Retail Ventures received approximately $6.0 million. During the three
-29-
and six months
ended July 29, 2006, Retail Ventures issued 2,000,000 and 7,000,000, respectively, of its common
shares at an exercise price of $4.50 per share to Cerberus in connection with the exercises by
Cerberus of a portion of its outstanding Conversion Warrants. In connection with these exercises,
Retail Ventures received $9.0 million and $31.5 million, respectively, during the three and six
months ended July 29, 2006.
Our primary ongoing cash requirements are for seasonal and new store inventory purchases and
capital expenditures in connection with expansion, remodeling and information technology
development. The primary sources of funds for these
liquidity needs are cash flow from operations and credit facilities. Our working capital and
inventory levels typically build throughout the year and reach the highest level in the fall,
peaking during the holiday selling season.
Net working capital was $394.1 million and $274.4 million at August 4, 2007 and February 3, 2007,
respectively. The increase in net working capital is primarily due to the increased cash and cash
equivalents, inventory levels, deferred income taxes and decrease in warrant liability, partially
offset by an increase in accounts payable. Current ratios at those dates were 1.70 and 1.45,
respectively.
Net cash provided by operating activities was $42.75 million for the six months ended August 4,
2007 as compared to $8.6 million provided by operating activities for the six months ended July 29,
2006. The net cash provided by operating activities for the six months ended August 4, 2007 is
primarily due to net income for the period after adjusting for the non-cash depreciation expense
and the change in the fair value of derivative instruments.
During the six months ended August 4, 2007, the Company had capital expenditures of $48.6 million
of which $46.8 million was paid during the six months. Of this amount, the Company incurred $21.4
million for new stores, $3.8 million for improvements in existing stores, $11.0 million related to
DSWs corporate office expansion, $7.9 million related to DSWs start-up of an e-commerce channel
and $4.5 million for information technology equipment upgrades and new systems, excluding the
e-commerce channel.
DSW plans to open at least 35 new stores during fiscal 2007 and at least 30 new stores in each of
the next three fiscal years. DSW expects to spend approximately $100 million for capital
expenditures in fiscal 2007. These expenditures include investments to make improvements to DSWs
information systems, remodel stores, accelerate store growth, and the start-up of an e-commerce
channel.
Filenes Basement opened four new stores during the six months ended August 4, 2007. Filenes
Basement expects to spend $17.7 million for capital expenditures
during fiscal 2007, including plans
to open approximately two additional stores, fully remodel a store and improve its existing
distribution facility.
Retail Ventures maintains three separate credit facilities, each of which was outstanding as of
August 4, 2007: (i) a four-year amended and restated $275.0 million revolving credit facility (the
VCDS Revolving Loan) under which Value City, Retail Ventures and certain subsidiaries of Retail
Ventures (other than DSW and DSWSW) are co-borrowers or co-guarantors; (ii) a five-year $150.0
million revolving credit facility (the DSW Revolving Loan) under which DSW and DSWSW are
co-borrowers and co-guarantors; and (iii) an amended and restated $0.25 million senior
non-convertible loan facility, which is held by Schottenstein Stores Corporation (SSC) (the
Non-Convertible Loan), under which Value City is the borrower and Retail Ventures and certain
subsidiaries of Retail Ventures (other than DSW and DSWSW) are co-guarantors. Retail Ventures also
has outstanding $143.8 million of 6.625% Mandatory Exchangeable Notes due September 15, 2011, or
PIES (Premium Income Exchangeable SecuritiesSM). Collectively, the VCDS Revolving Loan,
DSW Revolving Loan, Non-Convertible Loan and PIES are sometimes referred to as the Credit
Facilities.
The Company is not subject to any financial covenants; however, certain of the Credit Facilities
contain numerous non-financial covenants relating to the Companys management and operation. These
non-financial covenants include, among other restrictions, limitations on indebtedness, guarantees,
mergers, acquisitions, fundamental corporate changes, financial reporting requirements, budget
approval, disposition of assets, investments, loans and advances, liens, dividends, stock
purchases, transactions with affiliates, issuance of securities and the payment of and
modifications to debt instruments under these agreements.
-30-
The Credit Facilities are described more fully below:
$275 Million Secured Revolving Credit Facility The VCDS Revolving Loan
Under the VCDS Revolving Loan, Filenes Basement, Retail Ventures Jewelry, Inc. and certain of
Value Citys wholly-owned subsidiaries are named as co-borrowers. The VCDS Revolving Loan is
guaranteed by Retail Ventures and certain of its subsidiaries. Neither DSW nor DSWSW are borrowers
or guarantors under the VCDS Revolving Loan. The VCDS Revolving Loan has borrowing base
restrictions and provides for borrowings at variable interest rates based on LIBOR, the prime rate
and the Federal Funds effective rate, plus a margin. In addition to the borrowing base
restrictions, 10% of the facility is deemed an excess reserve and is not available for borrowing.
Obligations under the VCDS Revolving Loan are secured by a lien on substantially all of the
personal property of Retail Ventures and its wholly-owned subsidiaries, excluding shares of DSW
owned by Retail Ventures. At August 4, 2007, $76.1 million was available under the VCDS Revolving
Loan, direct borrowings aggregated $113.0 million and $24.9 million in letters of credit were
issued and outstanding. At February 3, 2007, $66.8 million was available under the VCDS Revolving
Loan, direct borrowings aggregated $105.0 million and $19.4 million in letters of credit were
issued and outstanding. The maturity date of the VCDS Revolving Loan is July 5, 2009.
$150 Million Secured Revolving Credit Facility The DSW Revolving Loan
Under the DSW Revolving Loan, DSW and its wholly-owned subsidiary, DSWSW, are named as
co-borrowers. The DSW Revolving Loan is subject to a borrowing base restriction and provides for
borrowings at variable interest rates based on LIBOR, the prime rate and the Federal Funds
effective rate, plus a margin. In addition, if at any time DSW utilizes over 90% of DSWs borrowing
capacity under the facility, DSW must comply with a fixed charge coverage ratio test set forth in
the facility document. DSWs and DSWSWs obligations under the DSW Revolving Loan are secured by a
lien on substantially all of their personal property and a pledge of all of DSWs shares of DSWSW.
At August 4, 2007 and February 3, 2007, $130.1 million and $136.6 million, respectively, was
available under the DSW Revolving Loan and no direct borrowings were outstanding. At August 4, 2007
and February 3, 2007, $19.9 million and $13.4 million, respectively, in letters of credit were
issued and outstanding. The maturity date of the DSW Revolving Loan is July 5, 2010.
$0.25 Million Senior Non-Convertible Loan
On July 5, 2005, the Company entered into an amended and restated $50.0 million senior
non-convertible loan facility, held equally by Cerberus and SSC, under which Value City was the
borrower and RVI and certain of its wholly-owned subsidiaries were co-guarantors. Pursuant to this
Non-Convertible Loan, RVI issued to SSC and Cereberus the Conversion Warrants which are exercisable
from time to time until the later of June 11, 2007 and the repayment in full of Value Citys
obligations under the Non-Convertible Loan. On August 16, 2006, the Non-Convertible Loan was again
amended and restated whereby the Company (i) paid $49.5 million of the then aggregate $50.0 million
outstanding balance, (ii) secured the remaining $0.5 million balance with cash collateral accounts,
(iii) pledged DSW stock sufficient for the exercise of the Conversion Warrants, and (iv) obtained a
release of the capital stock of DSW held by RVI used to secure the Non-Convertible Loan. The final
maturity date of the Non-Convertible Loan held by each of SSC and Cerberus is the earlier of (i)
June 10, 2009 or (ii) the date that the Conversion Warrants held by each lender are exercised. On
June 11, 2007, the outstanding principal balance of the Non-Convertible Loan of $0.25 million owed
to Cerberus was prepaid, together with accrued interest thereon, when Cerberus
completed the exercise of its remaining Conversion Warrants.
$143,750,000 Premium Income Exchangeable SecuritiesSM (PIES)
On August 16, 2006, Retail Ventures issued PIES in the aggregate principal amount of $125 million.
On September 15, 2006, Retail Ventures closed on the exercise by the sole underwriter of its entire
option to purchase an additional aggregate principal amount of $18,750,000 of PIES. RVI used a
portion of the net proceeds of the PIES offering to repay an intercompany note due to Value City,
and Value City used such proceeds and other funds to repay $49.5 million of the outstanding
principal amount of the Non-Convertible Loan.
The PIES bear a coupon at an annual rate of 6.625% of the principal amount, payable quarterly in
arrears on March 15, June 15, September 15 and December 15 of each year, commencing on December 15,
2006 and ending on September 15, 2011. Except to the extent RVI exercises its cash settlement
option, the PIES are mandatorily exchangeable, on the maturity date, into
-31-
Class A Common Shares of DSW, no par value per share, which are issuable upon exchange of DSW Class
B Common Shares, no par value per share, beneficially owned by RVI. On the maturity date, each
holder of the PIES will receive a number of DSW Class A Common Shares per $50.0 principal amount of
PIES equal to the exchange ratio described in the RVI prospectus filed with the SEC on August 11,
2006, or if RVI elects, the cash equivalent thereof or a combination of cash and DSW Class A Common
Shares. The exchange ratio is equal to the number of DSW Class A Common Shares determined as
follows: (i) if the applicable market value of DSW Class A Common Shares equals or exceeds $34.95,
the exchange ratio will be 1.4306 shares; (ii) if the applicable market value of DSW Class A Common
Shares is less than $34.95 but greater than $27.41, the exchange ratio will be between 1.4306 and
1.8242 shares; and (iii) if the applicable market value of DSW Class A Common Shares is less than
or equal to $27.41, the exchange ratio will be 1.8242 shares, subject to adjustment as provided in
the PIES. The maximum aggregate number of DSW Class A Common Shares deliverable upon exchange of
the PIES is 5,244,575 DSW Class A Common Shares subject to adjustment as provided in the PIES.
Contractual Obligations and Off-Balance Sheet Arrangements
During the current year, we have continued to enter into various construction commitments,
including capital items to be purchased for projects that are under construction or for which a
lease has been signed. Our obligations under these commitments aggregated approximately $15.2
million at August 4, 2007. In addition, at August 4, 2007, lease agreements have been signed for 38
new DSW and Filenes Basement store locations to be opened over the next 18 months, with annual
aggregate rent of approximately $17.1 million and average terms of approximately 10 years.
Associated with the new lease agreements, we will receive approximately $9.1 million of
construction allowances and tenant improvement allowances which will be used to fund future capital
expenditures.
The Company has no off-balance sheet arrangements as of August 4, 2007 and February 3, 2007 as
that term is defined by the SEC.
PROPOSED ACCOUNTING STANDARDS
The FASB periodically issues statements and interpretations, some of which require implementation
by a date falling within or after the close of the fiscal year. See Note 3 to the Condensed
Consolidated Financial Statements for a discussion of the new accounting standards issued or
implemented during the three months ended August 4, 2007.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates, which may adversely affect our
financial position, results of operations and cash flows. In seeking to minimize the risks from
interest rate fluctuations, we manage exposures through our regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial instruments. We do
not use financial instruments for trading or other speculative purposes and are not party to any
leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings under the VCDS Revolving Loan
and the DSW Revolving Loan. At August 4, 2007, direct borrowings aggregated $113.0 million and an
additional $44.8 million in letters of credit were outstanding against these revolving credit
facilities.
A hypothetical 100 basis point increase in interest rates on our variable rate debt outstanding for
the six months ended August 4, 2007, net of income taxes, would have an approximately $0.3
million impact on our financial position, liquidity and results of operations.
Derivative Instruments
For derivatives that are not designated as hedges under SFAS No. 133, changes in the fair values
are recognized in earnings in the period of change. Retail Ventures estimates the fair value of
derivatives based on pricing models using current market rates and records all derivatives on the
balance sheet at fair value. As of August 4, 2007 and February 3, 2007, Retail Ventures did not
have any derivatives designated as hedges.
-32-
Warrants
As of August 4, 2007, the aggregate fair value liability recorded relating to both the Term Loan
Warrants and Conversion Warrants was $99.4 million. The $66.1 million value ascribed to the
Conversion Warrants was estimated as of August 4, 2007 using the Black-Scholes Pricing Model with
the following assumptions: risk-free interest rate of 4.40%; expected life of 1.9 years; expected
volatility of 36.5%; and an expected dividend yield of 0.0%. The $33.3 million value ascribed to
the Term Loan Warrants was estimated as of August 4, 2007 using the Black-Scholes Pricing Model
with the following assumptions: risk-free interest rate of 4.46%; expected life of 4.9 years;
expected volatility of 54.5%; and an expected dividend yield of 0.0%. As the Warrants may be
exercised for either common shares of RVI or Class A common shares of DSW owned by RVI, the
settlement of the Warrants will not result in a cash outlay by the Company.
Conversion Feature of PIES
During the six months ended August 4, 2007, the Company recorded a reduction of expenses related to
the change in fair value of the conversion feature of the PIES of $40.0 million. As of August 4,
2007, the fair value liability recorded for the conversion feature was $22.8 million. The fair
value was estimated using the Black-Scholes Pricing Model with the following assumptions: risk-free
interest rate of 5.4%; expected life of 4.1 years; expected volatility of 40.3%; and an expected
dividend yield of 0.0%. The fair value of the conversion feature at the date of issuance of $11.7
million is equal to the amount of the discount of the PIES and is being amortized into interest
expense over the term of the PIES.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the
Securities and Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed,
summarized, and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to the Companys management, including its
principal executive and principal financial officers, to allow timely decisions regarding required
disclosures.
The Company, under the supervision and with the participation of its management, including its
principal executive officer and principal financial officer, performed an evaluation of the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act). Based on that evaluation, the Companys principal executive
and principal financial officers concluded, as of August 4, 2007, that such disclosure controls and
procedures were effective.
No change in the Companys internal control over financial reporting occurred during the Companys
fiscal quarter ended August 4, 2007 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported, on March 8, 2005, Retail Ventures announced that it had learned of the
theft of credit card and other purchase information from a portion of the Companys customers. On
April 18, 2005, Retail Ventures issued the findings from its investigation into the theft. The
theft covered transaction information involving approximately 1.4 million credit cards and data
from transactions involving approximately 96,000 checks.
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in a putative class action lawsuit
which seeks unspecified monetary damages, credit monitoring and other relief. The lawsuit seeks to
certify a class of consumers that is limited geographically to consumers who made purchases at
certain stores in Ohio. A second class action lawsuit was resolved in May 2007 after we prevailed
on a motion to dismiss on all claims in the District Court for the Southern District of Ohio and,
on appeal, the parties agreed to a Stipulation of Dismissal filed with the U.S. Court of Appeals
for the 6th Circuit.
-33-
There can be no assurance that there will not be additional proceedings or claims brought against
DSW in the future. DSW has contested and will continue to vigorously contest the claims made
against DSW and will continue to explore its defenses and possible claims against others.
DSW estimated that the potential exposure for losses related to this theft including exposure under
currently pending proceedings, ranges from approximately $6.5 million to approximately $9.5
million. Because of many factors, including the possible settlement of claims and recoverability
under insurance policies, there is no amount in the estimated range that represents a better
estimate than any other amount in the range. Therefore, in accordance with Financial Accounting
Standard No. 5, Accounting for Contingencies, the Company accrued a charge to operations in the
first quarter of fiscal 2005 equal to the low end of the range set forth above, or $6.5 million. As
the situation develops and more information becomes available, the amount of the reserve may
increase or decrease accordingly. The amount of any such change may be material to DSWs results of
operations or financial condition. As of August 4, 2007, the balance of the associated accrual for
potential exposure was $3.2 million. Subsequent to August 4, 2007, DSW paid an additional $2.7
million from the reserve, leaving a balance of $0.5 million.
The Company is involved in various legal proceedings that are incidental to the conduct of its
business. The Company estimates the range of liability related to pending litigation where the
amount of the range of loss can be estimated. The Company records its best estimate of a loss when
the loss is considered probable. Where a liability is probable and there is a range of estimated
loss, the Company records the most likely estimated liability related to the claim. In the opinion
of management, the amount of any liability with respect to these proceedings will not be material
to the Companys results of operations or financial condition. As additional information becomes
available, the Company will assess the potential liability related to its pending litigation and
revise the estimates as needed. Revisions in its estimates and potential liability could materially
impact the Companys results of operations and financial condition.
Item 1A. Risk Factors.
For the quarter ended August 4, 2007, there were no material changes to the Companys previously
disclosed risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Recent Sales of Unregistered Securities. Not applicable
(b) Use of Proceeds. Not applicable
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Retail Ventures made no purchases of its common shares during the second quarter of the 2007 fiscal
year.
Limitation on Payment of Dividends-We have paid no cash dividends and we do not anticipate paying
cash dividends on our common shares during fiscal 2007. Presently we expect that all of our future
earnings will be retained for development of our businesses. The payment of any future cash
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. Certain of the Companys Credit Facilities restrict the payment of
dividends by any borrower or guarantor, other than dividends paid in stock of the issuer or paid to
another affiliate, and cash dividends can only be paid to Retail Ventures by any borrower or
guarantor up to the aggregate amount of $5.0 million less the amount of any loans or advances made
to Retail Ventures by any borrower or guarantor.
-34-
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
Retail Ventures held its 2007 Annual Meeting of the Shareholders on June 13, 2007. Proxies for the
meeting were solicited pursuant to Section 14(a) of the Exchange Act. Holders of 43,149,420 common
shares of Retail Ventures were present at the meeting, representing 91.28% of Retail Ventures
47,272,796 common shares issued and outstanding and entitled to vote.
Proposal No. 1
The following persons were elected as members of Retail Ventures Board of Directors to serve until
the annual meeting following their election or until their successors are duly elected and
qualified. Each person received the number of votes for or the number of shareholder votes with
authority withheld indicated below.
|
|
|
|
|
|
|
|
|
|
|
Shares voted FOR |
|
|
Shares WITHHELD |
|
Henry L. Aaron |
|
|
31,097,644 |
|
|
|
12,051,776 |
|
Ari Deshe |
|
|
42,322,498 |
|
|
|
826,922 |
|
Jon P. Diamond |
|
|
42,322,220 |
|
|
|
827,200 |
|
Elizabeth M. Eveillard |
|
|
42,152,896 |
|
|
|
996,524 |
|
Lawrence J. Ring |
|
|
42,152,547 |
|
|
|
996,873 |
|
Jay L. Schottenstein |
|
|
42,330,759 |
|
|
|
818,661 |
|
Harvey L. Sonnenberg |
|
|
42,152,097 |
|
|
|
997,323 |
|
James L. Weisman |
|
|
42,154,197 |
|
|
|
995,223 |
|
Heywood Wilansky |
|
|
42,321,948 |
|
|
|
827,472 |
|
Proposal No. 2
The
2007 Retail Ventures, Inc. Cash Incentive Compensation Plan was presented and approved by the shareholders. The
number of shareholder votes for, against and abstained are indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares voted FOR |
|
|
Shares voted AGAINST |
|
|
Shares ABSTAINED |
|
Cash Incentive Compensation Plan |
|
|
37,926,516 |
|
|
|
172,474 |
|
|
|
51,085 |
|
Item 5. Other Information. None
Item 6. Exhibits. See Index to Exhibits on page 37.
-35-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
RETAIL VENTURES, INC.
(Registrant)
|
|
Date: September 13, 2007 |
By: |
/s/ James A. McGrady
|
|
|
|
James A. McGrady |
|
|
|
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary of Retail Ventures, Inc.
(duly authorized officer and chief
financial officer) |
|
|
-36-
INDEX TO EXHIBITS
|
|
|
Exhibit Number |
|
Description |
|
|
|
10.1
|
|
Agreement of Lease, dated July 9, 2007 between Jubilee Limited
Partnership, an affiliate of Schottenstein Stores Corporation and Filenes
Basement, re: Aventura, FL Filenes Basement store. |
|
|
|
12
|
|
Ratio of Earnings to Fixed Charges |
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer |
|
|
|
32.1
|
|
Section 1350 Certification of
Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
-37-