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 |
For the quarterly period ended November 3, 2007
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 |
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.
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ on-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
The number of outstanding Common Shares, without par value, as of November 30, 2007 was 48,623,430.
RETAIL VENTURES, INC.
TABLE OF CONTENTS
-1-
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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November 3, |
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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 |
|
$ |
145,722 |
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$ |
160,221 |
|
Restricted cash |
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255 |
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|
511 |
|
Short-term investments |
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94,700 |
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98,650 |
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Accounts receivable, net |
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15,963 |
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|
16,781 |
|
Accounts receivable from related parties |
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1,903 |
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|
3,777 |
|
Inventories |
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656,412 |
|
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|
545,584 |
|
Prepaid expenses and other assets |
|
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43,375 |
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|
36,686 |
|
Deferred income taxes |
|
|
43,620 |
|
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|
25,737 |
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|
Total current assets |
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1,001,950 |
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|
887,947 |
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|
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Property and equipment, net |
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317,905 |
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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 |
|
Tradenames and other intangibles, net |
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31,822 |
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|
34,976 |
|
Deferred income taxes |
|
|
|
|
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|
26,114 |
|
Conversion feature of long-term debt |
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|
19,812 |
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Other assets |
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12,989 |
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12,372 |
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Total assets |
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$ |
1,412,877 |
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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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November 3, |
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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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$ |
304,953 |
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$ |
212,434 |
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Accounts payable to related parties |
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5,915 |
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4,902 |
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Accrued expenses: |
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|
|
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|
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|
Compensation |
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29,064 |
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|
40,886 |
|
Taxes |
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35,893 |
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45,227 |
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Other |
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88,293 |
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92,894 |
|
Warrant liability |
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1,131 |
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3,594 |
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Warrant liability related parties |
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49,559 |
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212,806 |
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Current maturities of long-term obligations |
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882 |
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|
765 |
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Total current liabilities |
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515,690 |
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613,508 |
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Long-term obligations, net of current maturities |
Non-related parties |
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317,090 |
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265,283 |
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Related parties |
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250 |
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|
500 |
|
Conversion feature of long-term debt |
|
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62,770 |
|
Deferred income taxes and other noncurrent liabilities |
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|
122,090 |
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|
95,108 |
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Minority interest |
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159,272 |
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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 and outstanding, including
7,551 treasury shares, 48,623,430 and
47,270,777, respectively |
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|
304,965 |
|
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276,690 |
|
Accumulated deficit |
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|
(5,871 |
) |
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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 |
) |
|
Total shareholders equity |
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|
298,485 |
|
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|
91,620 |
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|
Total liabilities and shareholders equity |
|
$ |
1,412,877 |
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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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Nine months ended |
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November 3, |
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October 28, |
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November 3, |
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October 28, |
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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 |
|
$ |
787,841 |
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|
$ |
787,619 |
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$ |
2,274,648 |
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|
$ |
2,193,640 |
|
Cost of sales |
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|
(479,020 |
) |
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|
(472,090 |
) |
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(1,387,233 |
) |
|
|
(1,312,535 |
) |
|
Gross profit |
|
|
308,821 |
|
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|
315,529 |
|
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|
887,415 |
|
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881,105 |
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Selling, general and administrative
expenses |
|
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(301,711 |
) |
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|
(301,939 |
) |
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|
(875,823 |
) |
|
|
(844,256 |
) |
Change in the fair value of derivative
instruments |
|
|
43,497 |
|
|
|
(28,009 |
) |
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|
85,046 |
|
|
|
(29,246 |
) |
Change in the fair value of derivative
instruments related parties |
|
|
47,850 |
|
|
|
(2,565 |
) |
|
|
143,634 |
|
|
|
(81,480 |
) |
License fees and other income |
|
|
3,150 |
|
|
|
2,192 |
|
|
|
8,485 |
|
|
|
5,414 |
|
|
Operating profit (loss) |
|
|
101,607 |
|
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|
(14,792 |
) |
|
|
248,757 |
|
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|
(68,463 |
) |
|
|
|
|
|
|
|
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|
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|
|
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Interest expense |
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|
(6,541 |
) |
|
|
(7,980 |
) |
|
|
(18,944 |
) |
|
|
(14,264 |
) |
Interest expense related parties |
|
|
(7 |
) |
|
|
(4,176 |
) |
|
|
(28 |
) |
|
|
(6,704 |
) |
|
Total interest expense |
|
|
(6,548 |
) |
|
|
(12,156 |
) |
|
|
(18,972 |
) |
|
|
(20,968 |
) |
Interest income |
|
|
3,030 |
|
|
|
2,194 |
|
|
|
8,787 |
|
|
|
6,171 |
|
|
Interest expense, net |
|
|
(3,518 |
) |
|
|
(9,962 |
) |
|
|
(10,185 |
) |
|
|
(14,797 |
) |
|
Income (loss) before income taxes and
minority interest |
|
|
98,089 |
|
|
|
(24,754 |
) |
|
|
238,572 |
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|
(83,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Provision for income taxes |
|
|
(21,572 |
) |
|
|
(3,411 |
) |
|
|
(41,910 |
) |
|
|
(13,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) before minority interest |
|
|
76,517 |
|
|
|
(28,165 |
) |
|
|
196,662 |
|
|
|
(96,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
(8,295 |
) |
|
|
(5,909 |
) |
|
|
(19,482 |
) |
|
|
(18,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
68,222 |
|
|
$ |
(34,074 |
) |
|
$ |
177,180 |
|
|
$ |
(115,023 |
) |
|
|
|
|
|
|
|
|
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|
|
|
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|
Basic and diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
|
$ |
1.40 |
|
|
$ |
(0.72 |
) |
|
$ |
3.69 |
|
|
$ |
(2.59 |
) |
Diluted |
|
$ |
1.20 |
|
|
$ |
(0.72 |
) |
|
$ |
3.04 |
|
|
$ |
(2.59 |
) |
|
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|
|
|
|
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|
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|
Shares used in per share calculations: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
48,616 |
|
|
|
47,053 |
|
|
|
48,014 |
|
|
|
44,376 |
|
Diluted |
|
|
56,655 |
|
|
|
47,053 |
|
|
|
58,267 |
|
|
|
44,376 |
|
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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|
|
|
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|
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|
|
|
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|
Number of Shares |
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|
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|
(Accumulated |
|
|
|
|
|
|
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|
|
Accumulated |
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
Deficit)/ |
|
Deferred |
|
|
|
|
|
Other |
|
|
|
|
Common |
|
Shares |
|
Common |
|
Retained |
|
Compensation |
|
Treasury |
|
Comprehensive |
|
|
|
|
Shares |
|
in Treasury |
|
Shares |
|
Earnings |
|
Expense |
|
Shares |
|
Loss |
|
Total |
|
Balance, January 28, 2006 |
|
|
39,865 |
|
|
|
8 |
|
|
$ |
159,617 |
|
|
$ |
(36,082 |
) |
|
$ |
(1 |
) |
|
$ |
(59 |
) |
|
$ |
(6,929 |
) |
|
$ |
116,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,023 |
) |
Minimum pension liability, net
of income tax benefit of $237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368 |
|
|
|
368 |
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114,655 |
) |
Capital transactions of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,032 |
|
Stock based compensation
expense, before related tax effects |
|
|
|
|
|
|
|
|
|
|
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472 |
|
Exercise of stock options |
|
|
320 |
|
|
|
|
|
|
|
1,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,925 |
|
Exercise of warrants |
|
|
7,000 |
|
|
|
|
|
|
|
110,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,317 |
|
Excess tax benefit related to
stock options exercised |
|
|
|
|
|
|
|
|
|
|
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111 |
|
Reclassification of unamortized
deferred compensation |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2006 |
|
|
47,185 |
|
|
|
8 |
|
|
$ |
273,441 |
|
|
$ |
(149,073 |
) |
|
$ |
0 |
|
|
$ |
(59 |
) |
|
$ |
(6,561 |
) |
|
$ |
117,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 3, 2007 |
|
|
47,271 |
|
|
|
8 |
|
|
$ |
276,690 |
|
|
$ |
(184,461 |
) |
|
$ |
0 |
|
|
$ |
(59 |
) |
|
$ |
(550 |
) |
|
$ |
91,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,180 |
|
Cumulative effect of FIN 48 adoption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641 |
) |
Capital transactions of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,051 |
|
Reclassification of Stock Appreciation
Rights |
|
|
|
|
|
|
|
|
|
|
1,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,934 |
|
Stock based compensation
expense, before related tax effects |
|
|
|
|
|
|
|
|
|
|
658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
658 |
|
Exercise of stock options |
|
|
19 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71 |
|
Exercise of warrants |
|
|
1,333 |
|
|
|
|
|
|
|
25,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, November 3, 2007 |
|
|
48,623 |
|
|
|
8 |
|
|
$ |
304,965 |
|
|
$ |
(5,871 |
) |
|
$ |
0 |
|
|
$ |
(59 |
) |
|
$ |
(550 |
) |
|
$ |
298,485 |
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
November 3, |
|
|
October 28, |
|
|
|
2007 |
|
|
2006 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
177,180 |
|
|
$ |
(115,023 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Amortization of debt issuance costs and discount on debt |
|
|
2,730 |
|
|
|
3,677 |
|
Stock based compensation expense |
|
|
2,709 |
|
|
|
3,133 |
|
Depreciation and amortization |
|
|
46,532 |
|
|
|
41,071 |
|
Change in fair value of derivative instruments (($143,634) and
$81,480 related parties, respectively) |
|
|
(228,680 |
) |
|
|
110,726 |
|
Deferred income taxes and other noncurrent liabilities |
|
|
17,264 |
|
|
|
(12,434 |
) |
Loss on disposal of assets |
|
|
141 |
|
|
|
770 |
|
Impairment of fixed assets |
|
|
3,106 |
|
|
|
817 |
|
Minority interest in consolidated subsidiary |
|
|
19,482 |
|
|
|
18,033 |
|
Other |
|
|
1,362 |
|
|
|
799 |
|
Change in working capital, assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,692 |
|
|
|
(6,819 |
) |
Inventories |
|
|
(110,828 |
) |
|
|
(152,109 |
) |
Prepaid expenses and other assets |
|
|
(8,559 |
) |
|
|
(6,721 |
) |
Accounts payable |
|
|
89,752 |
|
|
|
87,401 |
|
Proceeds from tenant and construction allowances |
|
|
19,242 |
|
|
|
4,331 |
|
Accrued expenses |
|
|
(25,712 |
) |
|
|
31,961 |
|
|
Net cash provided by operating activities |
|
|
8,413 |
|
|
|
9,613 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
256 |
|
|
|
(500 |
) |
Cash paid for property and equipment |
|
|
(80,865 |
) |
|
|
(33,328 |
) |
Purchases of available-for-sale investments |
|
|
(87,100 |
) |
|
|
(150,400 |
) |
Maturities and sales from available-for-sale investments |
|
|
88,550 |
|
|
|
75,050 |
|
Purchase of intangible asset |
|
|
(21 |
) |
|
|
|
|
|
Net cash used in investing activities |
|
|
(79,180 |
) |
|
|
(109,178 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments of capital lease obligations |
|
|
(553 |
) |
|
|
(462 |
) |
Payment on term loan |
|
|
(250 |
) |
|
|
(49,500 |
) |
Net increase in revolving credit facility |
|
|
51,000 |
|
|
|
22,500 |
|
Debt issuance costs |
|
|
|
|
|
|
(5,964 |
) |
Excess tax benefit related to stock options exercised |
|
|
|
|
|
|
1,111 |
|
Proceeds from issuance of PIES |
|
|
|
|
|
|
143,750 |
|
Proceeds from exercise of warrants |
|
|
6,000 |
|
|
|
31,500 |
|
Proceeds from exercise of stock options |
|
|
71 |
|
|
|
1,925 |
|
|
Net cash provided by financing activities |
|
|
56,268 |
|
|
|
144,860 |
|
|
Net (decrease) increase in cash and equivalents |
|
|
(14,499 |
) |
|
|
45,295 |
|
Cash and equivalents, beginning of period |
|
|
160,221 |
|
|
|
138,731 |
|
|
Cash and equivalents, end of period |
|
$ |
145,722 |
|
|
$ |
184,026 |
|
|
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 November 3, 2007, there were a total of 113 Value City stores located principally in the
Midwest, mid-Atlantic and southeastern United States, 250 DSW stores located throughout the
United States and 36 Filenes Basement stores located primarily in the Northeast and Midwest.
DSW also supplies shoes, under supply arrangements, to 339 locations for other non-related
retailers in the United States. |
|
|
|
As of November 3, 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 approximately 90 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, we announced that we
are exploring strategic alternatives for the Value City operations. These alternatives
currently include a possible sale of some or all of the Value City operations or the
discontinuance of its operations. RVI has retained financial and other advisors to assist in
this effort to enhance shareholder value. During fiscal 2007 RVI and Value City management have
aggressively pursued, and continue to aggressively pursue, transactions and strategic
alternatives with potentially interested investors and other parties. We stated in December
2006 and reiterate that there can be no assurance that this process will result in any specific
transaction. On October 3, 2007 Value City entered into an agreement with Burlington Coat
Factory Warehouse Corporation to assign or sublease up to 24 locations such that the affected
stores will close their operations on or before the end of March, 2008. Subsequent to November
3, 2007, to date RVI has been unable to consummate an additional significant transaction for
this segment. To attempt to limit losses in the event that an additional significant
transaction is not achieved, Value City has taken the following significant measures, among
others: 1) it has significantly reduced the purchase of inventory for the 2008 spring and summer
seasons and, in the absence of a change in circumstances, at this time is not placing orders for future deliveries of inventory; and 2) it has decreased its personnel through attrition, including positions responsible for buying and allocating goods, and the elimination of positions. If
no additional significant transaction is achieved and Value City decides to discontinue
operations, we currently believe that these measures would enable Value City to close its
remaining stores in the same time frame as the closing of those stores affected by the
Burlington Coat Factory transaction. To date, the Company has not determined its final strategic
plan, the Board of Directors has not approved a plan nor does management have the authority to
enter into a final plan. As a result the Company has accounted for the Value City segment in
continuing operations in these financial statements. |
|
|
|
DSW. Located 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 nine months ended November 3, 2007, DSW opened 28 new stores and closed one store.
Additionally, pursuant to a license agreement with Filenes Basement, DSW operates leased
departments in all Filenes Basement stores. As of November 3, 2007, DSW, pursuant to supply
agreements, operated 275 leased 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 nine months ended November 3, 2007, DSW added 11 new non-affiliated leased
departments and seven 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 nine months ended November 3, 2007, Filenes
Basement opened seven stores and closed two stores. |
-7-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
Corporate. The Corporate segment represents the corporate assets, liabilities and expenses not
allocated to other segments through corporate allocation or shared service arrangements. This
segments 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. |
|
DISPOSITION OF VALUE CITY LEASES AND LEASE PROPERTIES |
|
|
|
On October 3, 2007, Retail Ventures announced that Value City signed a definitive agreement
(the Lease Transfer Agreement) to assign or sublease up to 24 locations (the Leased
Premises) to Burlington Coat Factory as part of Retail Ventures previously announced review of
strategic alternatives to generate value for shareholders. The 24 stores will continue to
operate through the holiday season and will close by the end of March, 2008. Based on the
agreement, the final number of stores is subject to change. Proceeds from the assignment and
sublease of the stores will be used to reduce Value Citys debt. The transaction is expected to
close in the first quarter of 2008. |
|
4. |
|
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 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 11. |
|
|
|
In September 2006, the FASB issued FASB Statement
No. 157, Fair Value Measurements (FAS 157), 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 FASB has provided
a one-year deferral for the implementation of FAS 157 for
non-financial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. 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. |
|
5. |
|
STOCK BASED COMPENSATION |
|
|
|
Retail Ventures Stock Compensation Plans |
|
|
|
The Company has an Amended and Restated 2000 Stock Incentive Plan (the 2000 Plan) that
provides for the issuance of equity awards covering up to 13,000,000 common shares, including
stock options, stock appreciation rights and restricted stock, to management, key employees of
Retail Ventures and affiliates, consultants (as defined in the plan), and non- |
-8-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
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 nine months ended November 3, 2007, the Company recorded stock based
compensation expense of approximately $1.5 million and $3.8 million, respectively, which
includes approximately $1.1 million and $3.1 million, respectively, of expenses recorded by DSW.
During the three and nine months ended October 28, 2006, the Company recorded stock based
compensation expense of approximately $1.4 million and $3.1 million, respectively, which
includes approximately $1.1 million and $2.7 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 nine months ended November 3, 2007
(in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended November 3, 2007 |
|
|
Stock |
|
|
|
|
|
|
Options |
|
SARs |
|
RSUs |
|
|
|
Outstanding beginning of period |
|
|
1,335 |
|
|
|
978 |
|
|
|
170 |
|
Granted |
|
|
37 |
|
|
|
140 |
|
|
|
47 |
|
Exercised |
|
|
(19 |
) |
|
|
(2 |
) |
|
|
|
|
Forfeited |
|
|
(12 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
Outstanding end of period |
|
|
1,341 |
|
|
|
1,081 |
|
|
|
217 |
|
|
|
|
Exercisable end of period |
|
|
1,219 |
|
|
|
224 |
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
November 3 , |
|
|
October 28, |
|
|
|
2007 |
|
|
2006 |
|
|
Assumptions
Risk-free interest rate |
|
|
4.6 |
% |
|
|
4.9 |
% |
Expected volatility of Retail Ventures common shares |
|
|
56.7 |
% |
|
|
65.2 |
% |
Expected option term |
|
5.0 years |
|
|
4.8 years |
|
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
The weighted-average grant date fair value of each option granted in the three months ended
November 3, 2007 and October 28, 2006 was $6.26 and $9.88 per share, respectively, and for the
nine months ended November 3, 2007 and October 28, 2006 was $9.35 and $9.08 per share,
respectively. |
|
|
|
Stock Appreciation Rights |
|
|
|
During the quarter ended November 3, 2007, the Compensation Committee of the Board of Directors
determined to settle all future exercises of SARs granted under the 2000 Plan in the form of
common shares, except as prohibited by the individuals award agreement. As a result of this
change, $1.9 million was reclassified from noncurrent liabilities to equity on the balance sheet. |
|
|
|
Reductions of expense of $0.6 million and $4.8 million, respectively, were recorded during the
three and nine months ended November 3, 2007 relating to SARs. The amount of SARs accrued in
noncurrent liabilities at November 3, 2007 was $0.4 million. During the nine months ended
November 3, 2007, less than $0.1 million was paid to settle exercised SARs. |
-9-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
Restricted Stock Units |
|
|
|
Total compensation expense costs recognized related to RSUs in the three and nine months ended
November 3, 2007 were a reduction of expenses of $0.5 million and $0.8 million, respectively. The
amount of RSUs accrued at November 3, 2007 was $1.4 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 November 3, 2007, the
Company had no outstanding restricted common shares. At February 3, 2007, the Company had
outstanding approximately 500 restricted common shares which represented 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 DSW common shares, including stock options, RSUs and director stock units, to
management, key employees of DSW and affiliates, consultants (as defined in the plan) and
non-employee directors of DSW. DSW stock options, RSUs and director stock units are not included
in the number of shares used in the basic or dilutive calculation of earnings per share of
Retail Ventures. |
|
|
|
The following tables summarize the activity of DSWs stock options and RSUs for the nine months
ended November 3, 2007 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
November 3, 2007 |
|
|
Stock |
|
|
|
|
Options |
|
RSUs |
|
|
|
Outstanding beginning of period |
|
|
1,084 |
|
|
|
135 |
|
Granted |
|
|
520 |
|
|
|
23 |
|
Exercised |
|
|
(13 |
) |
|
|
|
|
Forfeited |
|
|
(71 |
) |
|
|
(3 |
) |
|
|
|
Outstanding end of period |
|
|
1,520 |
|
|
|
155 |
|
|
|
|
Exercisable end of period |
|
|
331 |
|
|
|
n/a |
|
|
|
The following table illustrates the weighted-average assumptions used in the option-pricing
model for options granted in each of the periods presented. |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
November 3, |
|
October 28, |
|
|
2007 |
|
2006 |
|
Assumptions |
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.5 |
% |
|
|
4.6 |
% |
Expected volatility of DSW common shares |
|
|
39.4 |
% |
|
|
40.5 |
% |
Expected option term |
|
5.0 years |
|
|
4.8 years |
|
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
The weighted-average grant date fair value of each option granted in the three months ended
November 3, 2007 and October 28, 2006 was $11.54 and $11.76 per share, respectively, and for the
nine months ended November 3, 2007 and October 28, 2006 was $17.38 and $12.93 per share,
respectively.
|
-10-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
Restricted Stock Units |
|
|
|
The total aggregate intrinsic value of nonvested RSUs at November 3, 2007 was $3.3 million. As
of November 3, 2007, the total compensation cost related to nonvested RSUs not yet recognized
was approximately $3.7 million with a weighted average expense recognition period remaining of
1.9 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 nine months ended November 3, 2007, DSW granted 9,294 director stock units and
expensed $0.3 million related to these grants. As of November 3, 2007, 36,832 DSW director stock
units had been issued and no DSW director stock units had been settled. |
6. |
|
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 189 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 nine months ended November 3, 2007, $87.1 million of cash was used to purchase
available-for-sale securities while $88.6 million was generated by the sale of
available-for-sale securities. |
|
|
|
The table below details the investments classified as available-for-sale at November 3, 2007 and
February 3, 2007 (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2007 |
|
|
February 3, 2007 |
|
|
|
Maturity of |
|
|
Maturity of |
|
|
|
Less than 1 |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
year |
|
|
1 to 3 years |
|
|
year |
|
|
1 to 3 years |
|
Aggregate fair value |
|
$ |
94,700 |
|
|
$ |
2,500 |
|
|
$ |
98,650 |
|
|
$ |
|
|
Gross unrecognized holding gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized holding losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount |
|
$ |
94,700 |
|
|
$ |
2,500 |
|
|
$ |
98,650 |
|
|
$ |
|
|
7. |
|
LONG-TERM OBLIGATIONS AND WARRANT LIABILITIES |
|
|
Long-term obligations consist of the following (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
November 3, |
|
February 3, |
|
|
2007 |
|
2007 |
Credit facilities: |
|
|
|
|
|
|
|
|
Revolving credit facilities |
|
$ |
156,000 |
|
|
$ |
105,000 |
|
Senior Loan Agreement related parties |
|
|
250 |
|
|
|
500 |
|
PIES |
|
|
143,750 |
|
|
|
143,750 |
|
Discount on PIES |
|
|
(9,220 |
) |
|
|
(10,697 |
) |
|
|
|
|
290,780 |
|
|
|
238,553 |
|
Capital lease obligations |
|
|
27,442 |
|
|
|
27,995 |
|
|
|
|
|
318,222 |
|
|
|
266,548 |
|
Less current maturities |
|
|
(882 |
) |
|
|
(765 |
) |
|
|
|
$ |
317,340 |
|
|
$ |
265,783 |
|
|
|
|
|
|
|
|
|
|
|
Letters of credit outstanding: |
|
|
|
|
|
|
|
|
RVI revolving credit facility |
|
$ |
14,757 |
|
|
$ |
19,355 |
|
DSW revolving credit facility |
|
$ |
13,014 |
|
|
$ |
13,448 |
|
Availability under revolving credit facilities: |
|
|
|
|
|
|
|
|
RVI revolving credit facility |
|
$ |
75,909 |
|
|
$ |
66,838 |
|
DSW revolving credit facility |
|
$ |
136,986 |
|
|
$ |
136,552 |
|
-11-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
Amendment to the VCDS Revolving Loan |
|
|
|
On October 3, 2007, the Company and certain of its wholly-owned subsidiaries, including
Value City as lead borrower, entered into a Second Amendment to Amended and Restated Loan and
Security Agreement (the Second Amendment) with National City Business Credit, Inc., as
administrative agent and collateral agent, and the revolving credit lenders named therein. Under
the Second Amendment, certain provisions of the VCDS Revolving Loan were modified and amended in
order to permit Value Citys disposition of the Leased Premises in accordance with the terms of
the Lease Transfer Agreement and to consent to VCDS and RVIs execution and performance of the
Lease Transfer Agreement. |
|
|
|
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. |
|
|
|
During the three and nine months ended November 3, 2007, the Company recorded a reduction of
expense related to the change in fair value of the conversion feature of the PIES of $42.6
million and $82.6 million, respectively. During the three and nine months ended October 28,
2006, the Company recorded a charge related to the change in the fair value of the conversion
feature of the PIES from the date of issuance to October 28, 2006 of $28.0 million. As of
November 3, 2007 and February 3, 2007, the fair value asset recorded for the conversion feature
was $19.8 million and the fair value liability recorded for the conversion feature was $62.8
million, respectively. |
|
|
|
Warrants |
|
|
|
For the three months ended November 3, 2007 and October 28, 2006, the Company recorded a
reduction of expenses of $48.7 million and a charge of $2.6 million, respectively, for the
change in fair value of the Term Loan Warrants and Conversion Warrants (together, the
Warrants). For the nine months ended November 3, 2007 and October 28, 2006, the Company
recorded a reduction of expenses of $146.1 million and a charge of $82.7 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 $50.7 million and $216.4 million at November 3, 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 nine months ended November 3, 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 nine months ended October 28, 2006, Retail Ventures received $31.5 million in
connection with the exercises by Cerberus of Conversion Warrants for 7,000,000 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 nine months ended November 3, 2007
or the three and nine months ended October 28, 2006. |
-12-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
Deferred Rent |
|
|
|
Many of the Companys operating leases contain predetermined fixed increases of the minimum
rental rate during the initial lease term. For these leases, the Company recognizes the
related rental expense on a straight-line basis and records the difference between the amount
charged to expense and the rent paid as deferred rent and begins amortizing such deferred rent
upon the delivery of the lease location by the lessor. The amounts of deferred rent were
included in the other noncurrent liabilities caption and were $40.6 million and $36.5 million
at November 3, 2007 and February 3, 2007, respectively. |
|
|
|
Tenant and Construction Allowances |
|
|
|
The Company receives cash allowances from landlords, which are deferred and amortized on a
straight-line basis over the life of the lease as a reduction of rent expense. These
allowances were $70.4 million and $57.0 million at November 3, 2007 and February 3, 2007,
respectively. |
8. |
|
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 nine months ended
November 3, 2007 and October 28, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
November 3, |
|
|
October 28, |
|
|
November 3, |
|
|
October 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
(in thousands)
|
Service cost |
|
$ |
9 |
|
|
$ |
11 |
|
|
$ |
26 |
|
|
$ |
32 |
|
Interest cost |
|
|
373 |
|
|
|
362 |
|
|
|
1,116 |
|
|
|
1,087 |
|
Expected return on plan assets |
|
|
(490 |
) |
|
|
(443 |
) |
|
|
(1,468 |
) |
|
|
(1,329 |
) |
Amortization of transition asset |
|
|
(10 |
) |
|
|
(9 |
) |
|
|
(28 |
) |
|
|
(28 |
) |
Amortization of net loss |
|
|
131 |
|
|
|
150 |
|
|
|
392 |
|
|
|
451 |
|
|
Net periodic benefit cost |
|
$ |
13 |
|
|
$ |
71 |
|
|
$ |
38 |
|
|
$ |
213 |
|
|
|
|
The Company contributed the full $1.4 million estimated fiscal 2007 contribution to meet minimum
funding requirements during the nine months ended November 3, 2007. |
9. |
|
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 |
|
|
Nine months ended |
|
|
|
November 3, |
|
|
October 28, |
|
|
November 3, |
|
|
October 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
(in thousands)
|
Weighted average shares outstanding |
|
|
48,616 |
|
|
|
47,053 |
|
|
|
48,014 |
|
|
|
44,376 |
|
Assumed exercise of dilutive SARs |
|
|
182 |
|
|
|
|
|
|
|
293 |
|
|
|
|
|
Assumed exercise of dilutive stock options |
|
|
506 |
|
|
|
|
|
|
|
596 |
|
|
|
|
|
Assumed exercise of dilutive Term Loan
Warrants |
|
|
2,545 |
|
|
|
|
|
|
|
3,083 |
|
|
|
|
|
Assumed exercise of dilutive Conversion
Warrants |
|
|
4,806 |
|
|
|
|
|
|
|
6,281 |
|
|
|
|
|
|
Number of shares for computations of
dilutive earnings per share |
|
|
56,655 |
|
|
|
47,053 |
|
|
|
58,267 |
|
|
|
44,376 |
|
|
-13-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
The amount of securities outstanding at November 3, 2007 and October 28, 2006 that was 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 was: |
|
|
|
|
|
|
|
|
|
|
|
November 3, |
|
|
October 28, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
(in thousands)
|
SARs |
|
|
525 |
|
|
|
1,182 |
|
Stock options |
|
|
187 |
|
|
|
1,445 |
|
Term Loan Warrants |
|
|
|
|
|
|
4,413 |
|
Conversion Warrants |
|
|
|
|
|
|
9,667 |
|
|
All potentially dilutive instruments |
|
|
712 |
|
|
|
16,707 |
|
|
10. |
|
ACCUMULATED OTHER COMPREHENSIVE LOSS |
|
|
|
The balance sheet caption Accumulated other comprehensive loss of $0.6 million at both
November 3, 2007 and February 3, 2007 relates to the Companys minimum pension liability, net of
income tax. For the nine months ended November 3, 2007 the comprehensive income was the same as
the net income. For the nine months ended October 28, 2006, the total comprehensive loss was
$114.7 million. |
11. |
|
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 November 3, 2007 and February 3, 2007 was $18.3 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 17.6% for the nine-month period ended November 3, 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 $2.7 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. |
|
|
|
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 third quarter
of 2007. |
|
|
|
The Company is no longer subject to U.S. federal income tax examinations by tax authorities for
fiscal years prior to 2004 or state and local income tax examinations for fiscal years prior to
2002. 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 $5.1 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 statements 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 November 3, 2007 and February 4, 2007,
approximately $2.2 million and $2.0 million, respectively, was accrued for the payment of
primarily interest as well as penalties. |
-14-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
12. |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
A supplemental schedule of non-cash investing and financing activities is presented below: |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
November 3, |
|
|
October 28, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
(in thousands)
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest to non-related parties |
|
$ |
14,985 |
|
|
$ |
7,087 |
|
Interest to related parties |
|
$ |
28 |
|
|
$ |
7,928 |
|
Income taxes |
|
$ |
45,721 |
|
|
$ |
28,984 |
|
|
|
|
|
|
|
|
|
|
Noncash activities: |
|
|
|
|
|
|
|
|
Increase in accounts payable due to asset purchases |
|
$ |
3,780 |
|
|
$ |
844 |
|
Additional paid in capital transferred from warrant liability
for warrant exercises |
|
$ |
19,612 |
|
|
$ |
78,817 |
|
Reclassification of SARs from noncurrent liabilities to equity |
|
$ |
1,934 |
|
|
$ |
|
|
13. |
|
SEGMENT REPORTING |
|
|
|
The Company is managed in four operating segments: Value City, DSW, Filenes Basement, and
Corporate. The Corporate segment includes activities that are not allocated to the other
business segments. |
|
|
|
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 in the
table below represent assets transferred between segments. |
|
|
|
The tables below present segment information for the three and nine months ended November 3,
2007 and October 28, 2006 and total assets by segment as of November 3, 2007 and February 3,
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
(in thousands) |
Three months ended
November 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
298,447 |
|
|
$ |
367,380 |
|
|
$ |
122,014 |
|
|
|
|
|
|
|
|
|
|
$ |
787,841 |
|
Operating (loss) profit |
|
|
(19,368 |
) |
|
|
34,805 |
|
|
|
(5,177 |
) |
|
$ |
91,347 |
|
|
|
|
|
|
|
101,607 |
|
Depreciation and amortization |
|
|
5,607 |
|
|
|
6,277 |
|
|
|
3,023 |
|
|
|
916 |
|
|
|
|
|
|
|
15,823 |
|
Interest expense |
|
|
3,369 |
|
|
|
140 |
|
|
|
1,911 |
|
|
|
3,165 |
|
|
$ |
(2,037 |
) |
|
|
6,548 |
|
Interest income |
|
|
397 |
|
|
|
1,673 |
|
|
|
70 |
|
|
|
2,927 |
|
|
|
(2,037 |
) |
|
|
3,030 |
|
Benefit (provision) for
income taxes |
|
|
8,130 |
|
|
|
(13,906 |
) |
|
|
2,577 |
|
|
|
(18,373 |
) |
|
|
|
|
|
|
(21,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
735 |
|
|
|
30,853 |
|
|
|
5,416 |
|
|
|
(746 |
) |
|
|
|
|
|
|
36,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
397,262 |
|
|
$ |
680,734 |
|
|
$ |
202,606 |
|
|
$ |
411,158 |
|
|
$ |
(278,883 |
) |
|
$ |
1,412,877 |
|
-15-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Three months ended
October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
341,205 |
|
|
$ |
332,219 |
|
|
$ |
114,195 |
|
|
|
|
|
|
|
|
|
|
$ |
787,619 |
|
Operating (loss) profit |
|
|
(11,343 |
) |
|
|
25,224 |
|
|
|
1,901 |
|
|
$ |
(30,574 |
) |
|
|
|
|
|
|
(14,792 |
) |
Depreciation and amortization |
|
|
6,100 |
|
|
|
4,409 |
|
|
|
2,170 |
|
|
|
635 |
|
|
|
|
|
|
|
13,314 |
|
Interest expense |
|
|
8,158 |
|
|
|
145 |
|
|
|
2,887 |
|
|
|
2,809 |
|
|
$ |
(1,843 |
) |
|
|
12,156 |
|
Interest income |
|
|
225 |
|
|
|
1,708 |
|
|
|
11 |
|
|
|
2,093 |
|
|
|
(1,843 |
) |
|
|
2,194 |
|
Benefit (provision) for
income taxes |
|
|
8,290 |
|
|
|
(10,786 |
) |
|
|
(717 |
) |
|
|
(198 |
) |
|
|
|
|
|
|
(3,411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
2,068 |
|
|
|
9,309 |
|
|
|
6,205 |
|
|
|
419 |
|
|
|
|
|
|
|
18,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
438,899 |
|
|
$ |
603,785 |
|
|
$ |
175,287 |
|
|
$ |
328,208 |
|
|
$ |
(278,962 |
) |
|
$ |
1,267,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Nine months ended
November 3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
854,777 |
|
|
$ |
1,073,095 |
|
|
$ |
346,776 |
|
|
|
|
|
|
|
|
|
|
$ |
2,274,648 |
|
Operating (loss) profit |
|
|
(44,282 |
) |
|
|
80,349 |
|
|
|
(15,990 |
) |
|
$ |
228,680 |
|
|
|
|
|
|
|
248,757 |
|
Depreciation and amortization |
|
|
17,170 |
|
|
|
17,151 |
|
|
|
9,734 |
|
|
|
2,477 |
|
|
|
|
|
|
|
46,532 |
|
Interest expense |
|
|
9,593 |
|
|
|
421 |
|
|
|
5,528 |
|
|
|
9,542 |
|
|
$ |
(6,112 |
) |
|
|
18,972 |
|
Interest income |
|
|
570 |
|
|
|
5,621 |
|
|
|
107 |
|
|
|
8,601 |
|
|
|
(6,112 |
) |
|
|
8,787 |
|
Benefit (provision) for
income taxes |
|
|
19,392 |
|
|
|
(32,852 |
) |
|
|
7,633 |
|
|
|
(36,083 |
) |
|
|
|
|
|
|
(41,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
823 |
|
|
|
70,074 |
|
|
|
14,688 |
|
|
|
(762 |
) |
|
|
|
|
|
|
84,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
|
|
Filenes |
|
|
|
|
|
Intersegment |
|
|
|
|
City |
|
DSW |
|
Basement |
|
Corporate |
|
Eliminations |
|
Total |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
945,994 |
|
|
$ |
950,008 |
|
|
$ |
297,638 |
|
|
|
|
|
|
|
|
|
|
$ |
2,193,640 |
|
Operating (loss) profit |
|
|
(31,038 |
) |
|
|
76,210 |
|
|
|
(2,909 |
) |
|
$ |
(110,726 |
) |
|
|
|
|
|
|
(68,463 |
) |
Depreciation and amortization |
|
|
18,597 |
|
|
|
14,201 |
|
|
|
6,336 |
|
|
|
1,937 |
|
|
|
|
|
|
|
41,071 |
|
Interest expense |
|
|
14,573 |
|
|
|
428 |
|
|
|
5,001 |
|
|
|
4,607 |
|
|
$ |
(3,641 |
) |
|
|
20,968 |
|
Interest income |
|
|
2,166 |
|
|
|
5,290 |
|
|
|
22 |
|
|
|
2,334 |
|
|
|
(3,641 |
) |
|
|
6,171 |
|
Benefit (provision) for
income taxes |
|
|
16,485 |
|
|
|
(32,211 |
) |
|
|
2,194 |
|
|
|
(198 |
) |
|
|
|
|
|
|
(13,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
6,839 |
|
|
|
21,798 |
|
|
|
9,783 |
|
|
|
(1,170 |
) |
|
|
|
|
|
|
37,250 |
|
-16-
RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
14. |
|
COMMITMENTS AND CONTINGENCIES |
|
|
|
As previously reported, on March 8, 2005, Retail Ventures announced that it had learned of the
theft of credit card and other purchase information from a portion of the 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. |
|
|
|
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 November 3, 2007, the
balance of the associated accrual for potential exposure was $0.5 million. |
|
|
|
The Company is involved in various other legal proceedings that are incidental to the conduct of
its business. The Company estimates the range of liability related to pending litigation where
the amount of the range of loss can be estimated. The Company records its best estimate of a
loss when the loss is considered probable. Where a liability is probable and there is a range of
estimated loss, the Company records the most likely estimated liability related to the claim. In
the opinion of management, the amount of any potential liability with respect to these proceedings will
not be material to the 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 approximately 90 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 November 3, 2007, there were 113 Value City
stores in operation. DSW is a leading United States specialty branded footwear retailer operating
250 shoe stores in 36 states as of November 3, 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 Northeast and Midwest. 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 November 3, 2007, there were 36 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 November 3, 2007.
As of November 3, 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. These alternatives currently include a possible sale of some or all of the Value City
operations or the discontinuance of its operations. RVI has retained financial and other advisors
to assist in this effort to enhance shareholder value. During fiscal 2007 RVI and Value City
management have aggressively pursued, and continue to aggressively pursue, transactions and
strategic alternatives with potentially interested investors and other parties. We stated in
December, 2006 and reiterate that there can be no assurance that this process will result in any
specific transaction. For the past three fiscal years Value City has experienced cumulative
operating losses and operating losses have continued through the first three quarters of fiscal
2007. Based on current circumstances, Value City expects to incur an additional operating loss in
the fourth quarter of fiscal 2007.
On October 3, 2007 Value City entered into an agreement with Burlington Coat Factory Warehouse
Corporation to assign or sublease up to 24 locations such that the affected stores will close their
operations on or before the end of March, 2008. Subsequent to November 3, 2007, to date RVI has
been unable to consummate an additional significant transaction for this segment. To attempt to
limit losses in the event that an additional significant transaction is not achieved, Value City
has taken the following significant measures, among others: 1) it has significantly reduced the
purchase of inventory for the 2008 spring and summer seasons and, in the absence of a change in
circumstances, at this time is not placing orders for future deliveries of inventory;
-18-
and 2) it has decreased its
personnel through attrition, including positions responsible for
buying and allocating goods, and the elimination of positions. If no additional significant transaction is achieved and Value City
decides to discontinue its operations, we currently believe that these measures would enable Value
City to close its remaining stores in the same time frame as the closing of those stores affected
by the Burlington Coat Factory transaction. To date, the Company has not
determined its final strategic plan, the Board of Directors has not approved a plan nor does
management have the authority to enter into a final plan. As a result
the Company has accounted
for the Value City segment in continuing operations in these financial statements.
The impact on RVI of the potential termination or sale of Value Citys remaining operations cannot
be predicted with any certainty, but could have a materially adverse effect on RVIs operations,
liquidity and financial position.
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.
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 Part II, Item 1A, Risk Factors of this
Quarterly Report on Form 10-Q 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 any forward-looking statements
include, but are not limited to, the following:
|
|
|
Uncertainty as to whether we will consummate a significant transaction for Value
City or instead discontinue its operations, and the ability of RVI to continue to meet
its obligations and continue operations in the event of a significant transaction or
discontinuance of Value City operations; |
|
|
|
|
Whether the outcome of the Value City strategic analysis will create an event of
default or accelerate our obligations under the PIES or the VCDS Revolving Loan; |
|
|
|
|
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; |
|
|
|
|
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.
|
-19-
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,
change in fair value of derivative instruments, depreciation, amortization, recoverability of
long-lived assets including intangible assets, the calculation of retirement benefits, estimates
for self insurance reserves for health and welfare, workers compensation and casualty insurance,
income taxes, contingencies, litigation and revenue recognition. Management bases its estimates and
judgments on its historical experience and other relevant factors, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, current and expected economic conditions,
product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these
significant factors and make adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered provide a meaningful
basis for the accounting policies applied in the preparation of the consolidated financial
statements, we cannot guarantee that our estimates and assumptions will be accurate. As the
determination of these estimates requires the exercise of judgment, actual results inevitably will
differ from those estimates, and such differences may be material to the financial statements.
We believe the following represent the most critical estimates and assumptions, among others, used
in the preparation of our consolidated financial statements. We have discussed the selection,
application and disclosure of the critical accounting policies with the Audit Committee and our
Board of Directors.
|
|
|
Revenue recognition. Revenue from merchandise sales is recognized at the point
of sale, net of returns and excludes 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 $46.2 million and
$44.4 million at November 3, 2007 and February 3, 2007, respectively.
|
-20-
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 189 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 November 3, 2007, the Company held $94.7 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 longterm
investments. |
|
|
|
|
Asset impairment and long-lived assets. We must periodically evaluate the
carrying amount of our long-lived assets, primarily property and equipment, and
finite life intangible assets when events and circumstances warrant such a review
to ascertain if any assets have been impaired. The carrying amount of a long-lived
asset is considered impaired when the carrying value of the asset exceeds the
expected future cash flows (undiscounted and without interest) from the asset. Our
reviews are conducted at the lowest identifiable level which includes a store. The
impairment loss recognized is the excess of the carrying value, based on discounted
future cash flows, of the asset over its fair value. Should an impairment loss be
realized, it will be included in operating expenses. |
Impairment charges of $3.1 million and $0.8 million were recorded during the nine
months ended November 3, 2007 and the nine months ended October 28, 2006,
respectively. 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 nine months ended November 3, 2007, the
Company recorded charges associated with the closing of one DSW store and two
Filenes Basement stores, including the accruals for the severance related to the
temporary shut down of the Downtown Crossing location. During the nine months ended
October 28, 2006, the Company recorded charges associated with the closing of four
DSW stores. The operating lease at one of the four DSW stores was terminated
through the exercise of a lease kick-out option. During the first nine 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 |
|
|
|
|
|
|
|
|
|
|
November |
|
|
|
2007 |
|
|
Charges |
|
|
Payments |
|
|
Adjustments |
|
|
3, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Lease Costs |
|
$ |
1,866 |
|
|
$ |
455 |
|
|
$ |
(1,765 |
) |
|
$ |
(141 |
) |
|
$ |
415 |
|
Employee severance and termination benefits |
|
|
|
|
|
|
2,104 |
|
|
|
(655 |
) |
|
|
|
|
|
|
1,449 |
|
Other |
|
|
|
|
|
|
772 |
|
|
|
(772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,866 |
|
|
$ |
3,331 |
|
|
$ |
(3,192 |
) |
|
$ |
(141 |
) |
|
$ |
1,864 |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
-21-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
January 28, |
|
Related |
|
|
|
|
|
|
|
|
|
October |
|
|
2006 |
|
Charges |
|
Payments |
|
Adjustments |
|
28, 2006 |
|
|
(in thousands) |
Lease Costs |
|
$ |
2,130 |
|
|
$ |
528 |
|
|
$ |
(1,143 |
) |
|
$ |
233 |
|
|
$ |
1,748 |
|
Employee severance and termination benefits |
|
|
277 |
|
|
|
55 |
|
|
|
(332 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
64 |
|
|
Total |
|
$ |
2,407 |
|
|
$ |
647 |
|
|
$ |
(1,475 |
) |
|
$ |
233 |
|
|
$ |
1,812 |
|
|
|
|
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 November 3, 2007 by $0.4 million. The
self-insurance reserves were $17.3 million and $17.5 million at November 3, 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 actuaries and through the use of a number
of assumptions. Key assumptions in measuring the plan obligations include the
discount rate, the rate of salary increases and the estimated future return on plan
assets. In determining the discount rate, we utilize the yield on fixed-income
investments currently available with maturities corresponding to the anticipated
timing of the benefit payments. Salary increase assumptions are based upon
historical experience and anticipated future management actions. Asset returns are
based upon the anticipated average rate of earnings expected on the invested funds
of the plans. At November 3, 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 November 3, 2007, the
weighted-average actuarial assumptions applied to our plans were: a discount rate
of 6.0%; assumed salary increases of 3.0%; and 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 November 3, 2007 and February 3, 2007 was $5.8 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
nine months ended November 3, 2007, the Company recorded income related to the
change in fair value of warrants of $48.7 million and $146.1 million, respectively.
For the three and nine months ended October 28, 2006, the Company recorded a
charge related to the change in fair value of warrants of $2.6 million and $82.7
million, respectively. For the three and nine months ended November 3, 2007, the
Company recorded income related to the change in the fair value of the conversion
feature of the PIES of $42.6 million and $82.6 million,
|
-22-
respectively. For the three and nine months ended October 28, 2006, the Company
recorded a charge related to the change in the fair value of the conversion feature
of the PIES of $28.0 million.
|
|
|
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 nine
months ended November 3, 2007, we increased the valuation allowance on state net
deferred tax assets in the amount of $1.1 million as a result of an increase of net
state deferred tax assets. Also, during the nine months ended November 3, 2007, we
established an additional valuation allowance of $1.6 million for state net
operating loss carryforwards. |
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 |
|
|
Nine months ended |
|
|
|
November 3, |
|
|
October 28, |
|
|
November 3, |
|
|
October 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
(60.8 |
) |
|
|
(59.9 |
) |
|
|
(61.0 |
) |
|
|
(59.8 |
) |
|
Gross profit |
|
|
39.2 |
|
|
|
40.1 |
|
|
|
39.0 |
|
|
|
40.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
(38.3 |
) |
|
|
(38.3 |
) |
|
|
(38.5 |
) |
|
|
(38.5 |
) |
Change in the fair value of derivative
instruments |
|
|
5.5 |
|
|
|
(3.6 |
) |
|
|
3.7 |
|
|
|
(1.4 |
) |
Change in the fair value of derivative
instruments related parties |
|
|
6.1 |
|
|
|
(0.3 |
) |
|
|
6.3 |
|
|
|
(3.7 |
) |
License fees and other income |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
Operating profit (loss) |
|
|
12.9 |
|
|
|
(1.9 |
) |
|
|
10.9 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(0.8 |
) |
|
|
(1.0 |
) |
|
|
(0.8 |
) |
|
|
(0.7 |
) |
Interest expense related parties |
|
|
0.0 |
|
|
|
(0.5 |
) |
|
|
0.0 |
|
|
|
(0.3 |
) |
|
Total interest expense |
|
|
(0.8 |
) |
|
|
(1.5 |
) |
|
|
(0.8 |
) |
|
|
(1.0 |
) |
Interest income |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
Interest expense, net |
|
|
(0.4 |
) |
|
|
(1.2 |
) |
|
|
(0.4 |
) |
|
|
(0.7 |
) |
|
Income (loss) before income taxes and
minority interest |
|
|
12.5 |
|
|
|
(3.1 |
) |
|
|
10.5 |
|
|
|
(3.8 |
) |
Provision for income taxes |
|
|
(2.7 |
) |
|
|
(0.4 |
) |
|
|
(1.8 |
) |
|
|
(0.6 |
) |
|
Income (loss) before minority interest |
|
|
9.8 |
|
|
|
(3.5 |
) |
|
|
8.7 |
|
|
|
(4.4 |
) |
Minority interest |
|
|
(1.1 |
) |
|
|
(0.8 |
) |
|
|
(0.9 |
) |
|
|
(0.8 |
) |
|
Net income (loss) |
|
|
8.7 |
% |
|
|
(4.3 |
)% |
|
|
7.8 |
% |
|
|
(5.2 |
)% |
|
-23-
THREE MONTHS ENDED NOVEMBER 3, 2007 COMPARED TO THREE MONTHS ENDED OCTOBER 28, 2006
Net Sales. Net sales increased $0.2 million to $787.8 million from $787.6 million for the three
months ended November 3, 2007 compared to the three months ended October 28, 2006. Comparable store
sales decreased 7.3% and, by segment, were:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
|
|
Increase (Decrease)
|
Value City |
|
|
(13.4 |
)% |
|
|
1.4 |
% |
DSW |
|
|
(3.0 |
)% |
|
|
2.6 |
% |
Filenes Basement |
|
|
1.2 |
% |
|
|
4.5 |
% |
|
Total |
|
|
(7.3 |
)% |
|
|
2.3 |
% |
|
Value City net sales were $298.4 million for the three months ended November 3, 2007, a $42.8
million decrease over the comparable period, or a 12.5% decrease. Comparable store sales decreased
13.4% over the comparable period. The decrease in comparable sales at Value City was comprised of
declines in all major categories. Mens, womens and childrens apparel had declines of 13.5%,
14.0%, and 17.7%, respectively. Jewelry and hardlines had declines of 6.0% and 11.2%,
respectively. The declines were due to a decrease of 9.9% in transactions and a 5.2% average unit
retail price decrease, partially offset by an increase in the units per basket of 1.4%. The overall
average retail customer basket decreased 3.9%.
DSW net sales were $367.4 million for the three months ended November 3, 2007, a $35.2 million
increase over the comparable period, or a 10.6% increase. The increase in DSW sales includes a net
increase of 35 DSW stores, 114 non-affiliated leased shoe departments and seven affiliated leased
shoe departments. The DSW store locations opened subsequent to October 28, 2006 added $28.2
million in sales for the quarter ended November 3, 2007, while the leased shoe departments opened
subsequent to October 28, 2006 added $11.7 million for the quarter ended November 3, 2007. Leased
shoe department sales comprised 12.5% of DSW segment net sales in the third quarter of fiscal 2007,
compared to 10.1% in the third quarter of fiscal 2006. The increase in sales was partially offset
by the loss of sales from the closed stores and closed leased departments of $3.4 million.
DSW comparable store sales in the third quarter of fiscal 2007 decreased 3.0%, compared to the
third quarter of fiscal 2006, due principally to a decline in customer traffic. For the third quarter of
fiscal 2007, DSW comparable store sales decreased in womens and mens by 5.0% and 5.3%,
respectively, and increased in accessories and athletic by 10.7% and 2.2%, respectively.
Filenes Basement net sales were $122.0 million for the three months ended November 3, 2007, a $7.8
million increase over the comparable period, or a 6.8% increase. Comparable store sales increased
1.2%, over the comparable period last year. The Downtown Crossing location temporarily ceased
operations in the fall of 2007 due to the extensive renovation planned for the building by the
buildings new owner, and is estimated to resume operations in the spring of 2009. Filenes
Basement opened eight new stores subsequent to October 28, 2006 which had net sales of $11.7
million during the three months ended November 3, 2007. In addition, Filenes Basement closed two
stores that were operating in the previous year resulting in a decrease in net sales of $10.5
million compared to last year. The merchandise categories of mens, accessories and jewelry had
comparable store sales increases of 1.5%, 5.9% and 3.6%, respectively, while home and womens had
comparable store sales decreases of 4.2% and 1.8%, respectively.
Gross Profit. Total gross profit decreased $6.7 million from $315.5 million for the three months
ended October 28, 2006 to $308.8 million for the three months ended November 3, 2007. Gross profit,
as a percent of sales, decreased to 39.2% from 40.1% in the comparable period.
-24-
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
Value City |
|
|
34.8 |
% |
|
|
37.0 |
% |
DSW |
|
|
44.0 |
% |
|
|
43.7 |
% |
Filenes Basement |
|
|
35.5 |
% |
|
|
38.4 |
% |
|
Total |
|
|
39.2 |
% |
|
|
40.1 |
% |
|
Value Citys gross profit decreased $22.5 million to $103.9 million in the third quarter of fiscal
2007 from $126.4 million in the third quarter of fiscal 2006, and decreased as a percent of net
sales from 37.0% in the third quarter of fiscal 2006 to 34.8% in the third quarter of fiscal 2007.
The decrease is due to the decline in sales and increased markdowns, partially offset by increased
initial markups.
DSW gross profit increased $16.3 million to $161.6 million in the third quarter of fiscal 2007 from
$145.3 million in the third quarter of fiscal 2006, and increased as a percent of net sales from
43.7% in the third quarter of fiscal 2006 to 44.0% in the third quarter of fiscal 2007. The
increase as a percent of net sales was primarily due to an increase in initial markups, partially
offset by an increase in markdowns.
Filenes Basement gross profit decreased $0.4 million to $43.4 million in the third quarter of
fiscal 2007 from $43.8 million in the third quarter of fiscal 2006, and decreased as a percent of
net sales from 38.4% in the third quarter of fiscal 2006 to 35.5% in the third quarter of fiscal
2007. The decrease in gross margin as a percent of sales is due to an increase in markdowns,
primarily on clearance merchandise sold at the Downtown Crossing location, partially offset by
increased initial markups. Filenes Basement gross profit, excluding the Downtown Crossing
location, decreased as a percent of net sales from 38.8% in the third quarter of fiscal 2006 to
38.4% in the third quarter of fiscal 2007. The decrease in gross margin as a percent of sales is
due to an increase in markdowns, offset by increased initial markups.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A)
expenses decreased $0.2 million from $301.9 million in the third quarter of fiscal 2006 to $301.7
million for the third quarter of fiscal 2007. As a percent of sales, SG&A expense was 38.3% for
both the third quarter of fiscal 2007 and the comparable quarter last year. SG&A expense, as a
percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
Value City |
|
|
41.7 |
% |
|
|
40.7 |
% |
DSW |
|
|
34.9 |
% |
|
|
36.3 |
% |
Filenes Basement |
|
|
41.8 |
% |
|
|
38.9 |
% |
|
Total |
|
|
38.3 |
% |
|
|
38.3 |
% |
|
Value City segment SG&A expenses decreased $14.4 million and increased as a percent of sales for
the three months ended November 3, 2007 compared to the three months ended October 28, 2006. The
decrease in SG&A expenses was partially a result of a $6.1 million decrease in personnel expense
primarily due to a decrease in the SARs expense and the elimination of positions subsequent to
October 28, 2006. In addition, there was a decrease in advertising expenses of $4.9 million due to
reduced marketing.
DSW segment SG&A expenses increased $7.5 million and decreased as a percent of sales for the three
months ended November 3, 2007 compared to the three months ended October 28, 2006. The decrease in
SG&A expenses as a percent of sales was primarily due to the decrease in bonus expense of $8.3
million primarily due to the reversal of the current year-to-date bonus accrual and a decrease in marketing
expenses as compared to third quarter 2006 due to the nonrecurring expenses related to the change
in the loyalty program. These decreases were partially offset by increases in home office personnel
and $1.7 million related to the start-up of the e-commerce channel. DSW SG&A expenses, excluding
pre-opening costs, for DSW stores and leased shoe departments opened subsequent to October 28, 2006
were $11.7 million for the three months ended November 3, 2007.
-25-
Filenes Basement segment SG&A expenses increased $6.6 million and increased as a percent of sales
for the three months ended November 3, 2007 compared to the three months ended October 28, 2006.
SG&A expenses, excluding pre-opening expenses, for stores opened subsequent to October 28, 2006
were $7.3 million for the three months ended November 3, 2007. Pre-opening costs decreased in
Filenes Basement by approximately $1.1 million for the three months ended November 3, 2007
compared with the three months ended October 28, 2006.
Change in Fair Value of Derivative Instruments. During the three months ended November 3, 2007 and
October 28, 2006, the Company recorded non-cash income of $48.7 million and non-cash charges of
$2.6 million, respectively, representing the change in fair value of the Conversion Warrants and
Term Loan Warrants (together, the 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 November 3,
2007, non-cash income of $42.6 million was recorded related to the change in the fair value of the
conversion feature of the PIES. During the three months ended October 28, 2006, a non-cash charge
of $28.0 million was recorded related to the change in the fair value of the conversion feature of
the PIES.
License Fees and Other Income. License fees and other income were $3.2 million and $2.2 million
for the three months ended November 3, 2007 and October 28, 2006, respectively. The increase is
primarily attributable to insurance proceeds of $0.8 million recorded during the three months ended
November 3, 2007 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 November 3, 2007 was $101.6
million compared to an operating loss of $14.8 million for the quarter ended October 28, 2006, an
improvement of $116.4 million. Operating profit as a percent of sales was 12.9% for the quarter
ended November 3, 2007 and operating loss as a percent of sales was 1.9% for the quarter ended
October 28, 2006.
The operating profit for the quarter ended November 3, 2007 for the Corporate segment was primarily
due to non-cash income of $48.7 million which represents the change in fair value of the Warrants
and $42.6 million that reflects the change in the fair value of the conversion feature of the PIES.
The operating loss for the quarter ended October 28, 2006 for the Corporate segment was primarily
due to the $2.6 million non-cash charge which represented the change in fair value of the Warrants.
During the three months ended October 28, 2006, $28.0 million was recorded as a non-cash charge to
reflect the change in the fair value of the conversion feature of PIES from the date of issuance to
October 28, 2006.
Operating profit (loss) as a percent of sales for the remaining segments was:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
Value City |
|
|
(6.5 |
)% |
|
|
(3.3 |
)% |
DSW |
|
|
9.5 |
% |
|
|
7.6 |
% |
Filenes Basement |
|
|
(4.2 |
)% |
|
|
1.7 |
% |
|
Total |
|
|
12.9 |
% |
|
|
(1.9 |
)% |
|
Interest Expense. Interest expense for the quarter ended November 3, 2007 decreased $5.6 million to
$6.5 million compared to the third quarter of fiscal 2006. The decrease was due primarily to a $3.9
million make-whole provision associated with the payment of $49.5 million of Non-Convertible Loans
which was recorded during the three months ended October 28, 2006, partially offset by an increase
of $46.9 million in average borrowings during the three months ended November 3, 2007 compared to
the three months ended October 28, 2006.
Interest Income. Interest income increased $0.8 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 November 3, 2007 reflects a tax expense of $21.6 million or a
22.0% effective tax rate as compared to a negative 13.8% effective tax rate for the three months
ended October 28, 2006. The effective tax rate of 22.0% reflects the impact of the change in fair
value of the Warrants which are
-26-
included for book income but not tax income, and an additional valuation allowance of $1.0 million
on all state net deferred tax assets.
Minority Interest. For the third quarter of fiscal 2007, net income was offset by $8.3 million to
reflect that portion of the income attributable to DSW minority shareholders.
Net Income (Loss). For the third quarter of fiscal 2007, net income increased $102.3 million from
the third quarter of fiscal 2006 and represented 8.7% of net sales versus negative 4.3% of net
sales, respectively. The increased net income for the third quarter of fiscal 2007 was primarily
attributable to the $121.9 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 October 28, 2006,
partially offset by an increase in income tax expense of $18.2 million.
NINE MONTHS ENDED NOVEMBER 3, 2007 COMPARED TO NINE MONTHS ENDED OCTOBER 28, 2006
Net Sales. Net sales increased $81.0 million, or 3.7%, to $2.27 billion from $2.19 billion for the
nine months ended November 3, 2007 compared to the nine months ended October 28, 2006. Comparable
store sales decreased 4.2% and, by segment, were:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
|
|
Increase (Decrease)
|
Value City |
|
|
(10.0 |
)% |
|
|
0.6 |
% |
DSW |
|
|
(0.5 |
)% |
|
|
3.0 |
% |
Filenes Basement |
|
|
3.3 |
% |
|
|
4.8 |
% |
|
Total |
|
|
(4.2 |
)% |
|
|
2.1 |
% |
|
Value City net sales were $854.8 million for the nine months ended November 3, 2007, a $91.2
million decrease over the comparable period, or a 9.6% decrease. Comparable store sales decreased
10.0% over the comparable period. The decrease in comparable sales is comprised of declines in all
major categories. Mens, womens and childrens apparel had declines of 9.9%, 8.1% and 16.3%,
respectively. Jewelry and hardlines had declines of 16.4% and 8.7%, respectively. The declines
were due to a decrease of 9.2% in the number of transactions, a decrease in the units per basket of
0.1% and the average unit retail price decrease of 0.8%. The overall customer basket decreased
0.9%.
DSW net sales for the nine months ended November 3, 2007 increased by 13.0%, or $123.1 million, to
$1.1 billion from $950.0 million for the nine months ended October 28, 2006. The increase in DSW
net sales includes a net increase of 35 DSW stores, 114 non-affiliated leased departments and seven
affiliated leased departments. The DSW store locations and leased departments opened subsequent to
October 28, 2006 added $64.1 million and $36.6 million, respectively, in sales for the nine months
ended November 3, 2007. Leased department sales comprised 12.6% of total net sales in the nine
months ended November 3, 2007, compared to 10.2% in the nine months ended October 28, 2006. The
increase in sales was partially offset by the loss of sales from the closed stores and closed
leased departments of $7.7 million.
DSW comparable store sales for the nine months ended November 3, 2007 decreased 0.5% compared to
the nine months ended October 28, 2006 due principally to a decline in customer traffic. For the nine months
ended November 3, 2007, DSW comparable store sales decreased in womens and mens by 1.1% and 1.9%,
respectively, and increased in both athletic and accessories by 3.8%.
Filenes Basement net sales were $346.8 million for the nine months ended November 3, 2007, a $49.1
million increase over the comparable period, or a 16.5% increase. Comparable store sales for the
nine months ended November 3, 2007 increased 3.3% and excluding the Downtown Crossing store,
increased 2.5% over the comparable period last year. Filenes Basement opened eight new stores
subsequent to October 28, 2006 which had net sales of $26.5 million during the nine months ended
November 3, 2007. In addition, Filenes Basement closed two stores that were operating in the
previous year resulting in a decrease in net store sales of $9.2 million compared to last year.
The merchandise categories of mens, womens and accessories had comparable store sales increases
of 5.6%, 1.0% and 9.9%, respectively, which were partially offset by the comparable store sales
decrease of 0.7% in the jewelry category.
-27-
Gross Profit. Total gross profit increased $6.3 million from $881.1 million for the nine months
ended October 28, 2006 to $887.4 million for the nine months ended November 3, 2007. Gross profit,
as a percent of sales, decreased to 39.0% as compared to 40.2% during the comparable period last
year.
Gross profit, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
Value City |
|
|
35.9 |
% |
|
|
37.7 |
% |
DSW |
|
|
42.4 |
% |
|
|
43.5 |
% |
Filenes Basement |
|
|
36.3 |
% |
|
|
37.1 |
% |
|
Total |
|
|
39.0 |
% |
|
|
40.2 |
% |
|
Value Citys gross profit decreased $50.5 million to $306.4 million in the nine months ended
November 3, 2007 from $356.9 million for the nine months ended October 28, 2006, and decreased as a
percent of net sales from 37.7% in the nine months ended October 28, 2006 to 35.9% in the nine
months ended November 3, 2007. The decrease was due to the decline in sales and increased
markdowns, partially offset by increased initial markups as a percent of sales.
DSW gross profit increased $41.6 million to $455.2 million in the nine months ended November 3,
2007 from $413.6 million for the nine months ended October 28, 2006, and decreased as a percent of
net sales from 43.5% in the nine months ended October 28, 2006 to 42.4% in the nine months ended
November 3, 2007. The gross margin for the nine months ended November 3, 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
markups. In the leased departments, the decrease in gross profit as a percentage of sales was the
result of markdowns taken in the stores added in January 2007.
Filenes Basement gross profit increased $15.3 million to $125.8 million for the nine months ended
November 3, 2007 from $110.5 million in the nine months ended October 28, 2006, and decreased as a
percent of net sales from 37.1% in the nine months ended October 28, 2006 to 36.3% in the nine
months ended November 3, 2007. The decrease in gross margin as a percent of sales is primarily due
to an increase in markdowns on clearance merchandise sold at the Downtown Crossing location,
partially offset by increased initial markups. Filenes Basement gross profit, excluding the
Downtown Crossing location, increased as a percent of net sales from 37.9% in the nine months ended
October 28, 2006 to 38.4% in the nine months ended November 3, 2007. The increase in gross margin
as a percent of sales is due to an increase in initial markups partially offset by increased
markdowns.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $31.5 million from $844.3 million in the nine months ended October 28, 2006 to $875.8 million
for the nine months ended November 3, 2007. As a percent of sales, SG&A expense was 38.5% for both
the nine months ended November 3, 2007 and the comparable period last year.
SG&A expense, as a percent of sales by segment, was:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
Value City |
|
|
41.4 |
% |
|
|
41.4 |
% |
DSW |
|
|
35.3 |
% |
|
|
35.6 |
% |
Filenes Basement |
|
|
43.0 |
% |
|
|
40.5 |
% |
|
Total |
|
|
38.5 |
% |
|
|
38.5 |
% |
|
Value City segment SG&A expenses decreased $36.9 million for the nine months ended November 3, 2007
compared to the nine months ended October 28, 2006, but did not change as a percentage of sales.
The decrease in SG&A expenses was partially a result of a $23.4 million decrease in personnel
expense primarily due to decreased SARs expense and the elimination of positions subsequent to
October 28, 2006. Occupancy expenses decreased $4.8 million primarily due to reduced depreciation
expense and building maintenance costs.
-28-
DSW segment SG&A expenses increased $40.2 million and decreased as a percent of sales for the nine
months ended November 3, 2007 compared to the nine months ended October 28, 2006. DSW SG&A
expenses, excluding pre-opening costs, for DSW stores and leased shoe departments opened subsequent
to October 28, 2006 were $27.8 million for the nine months ended November 3, 2007. The decrease in
SG&A expenses as a percent of sales was primarily due to the decrease in bonus expense of $8.7
million primarily due to the reversal of the current year-to-date bonus accrual and a decrease in marketing
expenses as compared to the nine months ended October 28, 2006 due to nonrecurring expenses related
to the change in the loyalty program. This was partially offset by increases in home office
personnel related expenses and $4.0 million of expenses related to the start-up of the e-commerce
channel.
Filenes Basement SG&A expenses increased $28.5 million and increased as a percent of sales for the
nine months ended November 3, 2007 compared to the nine months ended October 28, 2006. SG&A
expenses, excluding pre-opening expenses, for stores that opened subsequent to October 28, 2006 and
stores that were open for a partial year as of October 28, 2006, increased $22.2 million for the
nine months ended November 3, 2007. Pre-opening costs increased in Filenes Basement by
approximately $1.0 million during the nine months ended November 3, 2007 compared with the nine
months ended October 28, 2006. The Downtown Crossing stores SG&A expenses increased $2.4 million
primarily due to additional depreciation and severance expense recorded due to the temporary store
closing.
Change in Fair Value of Derivative Instruments. During the nine months ended November 3, 2007 and
October 28, 2006, the Company recorded non-cash income of $146.1 million and a non-cash charge of
$82.7 million, respectively, representing the change in fair value of the Warrants primarily driven
by the change in RVI stock price and the exercise of Conversion Warrants in June of 2007. During
the nine months ended November 3, 2007, non-cash income of $82.6 million was recorded related to
the change in the fair value of the conversion feature of the PIES. During the nine months ended
October 28, 2006, a non-cash charge of $28.0 million was recorded related to the change in the fair
value of the conversion feature of PIES from the date of issuance to October 28, 2006.
License Fees and Other Income. License fees and other income were $8.5 million and $5.4 million
for the nine months ended November 3, 2007 and October 28, 2006, respectively. The increase was
primarily attributable to insurance proceeds recorded during the nine months ended November 3, 2007
of $0.9 million 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 nine months ended November 3, 2007 was $248.8
million compared to an operating loss of $68.5 million for the nine months ended October 28, 2006,
an improvement of $317.3 million. Operating profit as a percent of sales was 10.9% for the nine
months ended November 3, 2007 and operating loss as a percent of sales was 3.1% for the nine months
ended October 28, 2006.
The operating profit for the nine months ended November 3, 2007 for the Corporate segment was
primarily due to non-cash income of $228.7 million from the change in the fair value of the
conversion feature of the Warrants and the conversion feature of the PIES. The operating loss for
the nine months ended October 28, 2006 for the Corporate segment was primarily due to the $82.7
million non-cash charge which represented the changes in fair value of the Conversion Warrants and
Term Loan Warrants. During the nine months ended October 28, 2006, $28.0 million was recorded as a
non-cash charge for the fair value of the conversion feature of PIES from the date of issuance to
October 28, 2006.
Operating profit (loss) as a percent of sales by the remaining segments were:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
November 3, 2007 |
|
October 28, 2006 |
|
Value City |
|
|
(5.2 |
)% |
|
|
(3.3 |
)% |
DSW |
|
|
7.5 |
% |
|
|
8.0 |
% |
Filenes Basement |
|
|
(4.6 |
)% |
|
|
(1.0 |
)% |
|
Total |
|
|
10.9 |
% |
|
|
(3.1 |
)% |
|
-29-
Interest Expense. Interest expense for the nine months ended November 3, 2007 decreased $2.0
million to $19.0 million compared to the nine months ended October 28, 2006. The decrease was due
primarily to a $3.9 million make-whole provision associated with the payment of $49.5 million of
Non-Convertible Loans which was recorded during the three months ended October 28, 2006 and a
decrease in our weighted average borrowing rate of 0.6%. The decreases were partially offset by an
increase of $77.7 million in average borrowings due to the issuance of the PIES during August 2006.
Interest Income. Interest income increased $2.6 million over the same period last year due
primarily to the increase in short-term investments over the same period in the prior year.
Income Taxes. The nine months ended November 3, 2007 reflects a tax expense of $41.9 million or a
17.6% effective tax rate as compared to a negative 16.5% effective tax rate for the nine months
ended October 28, 2006. The effective tax rate of 17.6% reflects the impact of the change in fair
value of the Warrants which are included for book income
but not tax income, and an additional valuation allowance of $2.7 million on all state net deferred
tax assets.
Minority Interest. For the nine months ended November 3, 2007, net income was offset by $19.5
million to reflect that portion of the income attributable to DSW minority shareholders.
Net Income (Loss). For the nine months ended November 3, 2007, net income increased $292.2 million
from the nine months ended October 28, 2006 and represented 7.8% of net sales versus negative 5.2%
of net sales, respectively. The increased net income for the nine months ended November 3, 2007 was
primarily attributable to the $228.7 million non-cash income from the change in fair value of the
Warrants and conversion feature of the PIES. The net loss for the nine months ended October 28,
2006 was primarily attributable to the $82.7 million non-cash charge for the change in fair value
of the Warrants and $28.0 million non-cash change in the fair value of the conversion feature of
the PIES recorded during the nine months ended October 28, 2006.
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 nine months ended November 3, 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 nine months ended
October 28, 2006, Retail Ventures issued 7,000,000 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 $31.5
million during the nine months ended October 28, 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 $486.3 million and $274.4 million at November 3, 2007 and February 3, 2007,
respectively. The increase in net working capital was primarily due to the increased inventory
levels, deferred income taxes and decrease in warrant liability, partially offset by an increase in
accounts payable. Current ratios at those dates were 1.94 and 1.45, respectively.
Net cash provided by operating activities was $8.4 million for the nine months ended November 3,
2007 as compared to $9.6 million provided by operating activities for the nine months ended October
28, 2006. The net cash provided by operating activities
-30-
for the nine months ended November 3, 2007 was primarily due to a decrease in accounts payable,
proceeds from tenant and construction allowances and 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 nine months ended November 3, 2007, the Company had capital expenditures of $84.8
million, of which $80.9 million was paid during the period. Of this amount, the Company incurred
$37.1 million for new stores, $8.0 million for improvements in existing stores, $14.6 million
related to DSWs corporate office expansion, $14.2 million related to DSWs start-up of an
e-commerce channel and $10.9 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 seven new stores during the nine months ended November 3, 2007. Filenes
Basement expects to spend $17.7 million for capital expenditures during fiscal 2007, including
costs to improve its existing distribution facility.
Retail Ventures maintains three separate credit facilities, each of which was outstanding as of
November 3, 2007: (i) a four-year amended and restated $275.0 million revolving credit facility
(the VCDS Revolving Loan) under which Value City, Retail Ventures and certain 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 herein 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, insolvency, fundamental corporate changes, financial reporting requirements,
budget approval, disposition of assets, investments, loans and advances, liens, dividends, stock
purchases, transactions with affiliates, issuance of securities and the payment of and
modifications to debt instruments under these agreements.
The Credit Facilities are described more fully below:
$275 Million Secured Revolving Credit Facility The VCDS Revolving Loan
Under the VCDS Revolving Loan, VCDS is named as lead borrower and 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 November 3, 2007, $75.9 million
was available under the VCDS Revolving Loan, direct borrowings aggregated $156.0 million and $14.8
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.
-31-
$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 November 3, 2007 and February 3, 2007, $137.0 million and $136.6 million, respectively, was
available under the DSW Revolving Loan and no direct borrowings were outstanding. At November 3,
2007 and February 3, 2007, $13.0 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.
In determining possible sources of cash, Retail Ventures may only obtain distributions or loans
from its subsidiaries to the extent permitted by the DSW Revolving Loan and the VCDS Revolving Loan
and subject to applicable law. The DSW Revolving Loan prohibits DSW from paying dividends and/or
loaning money to Retail Ventures in an aggregate amount in excess of $5.0 million. The VCDS
Revolving Loan contains the same prohibition with the aggregate $5.0 million limit applicable to
all borrowers and guarantors combined, with the exception of an additional $4.0 million per fiscal
year available for dividend or loan purposes to the extent necessary to pay interest, fees and
other charges, but not principal, on the PIES.
$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. 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. The final maturity date of the $0.25 million Non-Convertible
Loan held by SSC is the earlier of (i) June 10, 2009 or (ii) the date that the Conversion Warrants
held by SSC are exercised.
$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 Class A Common Shares of
DSW, no par value per share, which are issuable upon exchange of DSW Class B Common Shares, no par
value per share, beneficially owned by RVI. On the maturity date, each holder of the PIES will
receive a number of DSW Class A Common Shares per $50.00 principal amount of PIES equal to the
exchange ratio described in the RVI prospectus filed with the SEC on August 11, 2006 or, if RVI
elects, the cash equivalent thereof or a combination of cash and DSW Class A Common Shares. The
exchange ratio is equal to the number of DSW Class A Common Shares determined as follows: (i) if
the applicable market value of DSW Class A Common Shares equals or exceeds $34.95, the exchange
ratio will be 1.4306 shares; (ii) if the applicable market value of DSW Class A Common Shares is
less than $34.95 but greater than $27.41, the exchange ratio will be between 1.4306 and 1.8242
shares; and (iii) if the applicable market value of DSW Class A
-32-
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.
Liquidity and Capital Resources Considerations Relating to the Value City Operations
In December 2006, we announced that we are exploring strategic alternatives for the Value City
operations. These alternatives currently include a possible sale of some or all of the Value City
operations or the discontinuance of its operations. RVI has retained financial and other advisors
to assist in this effort to enhance shareholder value. During fiscal 2007 RVI and Value City
management have aggressively pursued, and continue to aggressively pursue, transactions and
strategic alternatives with potentially interested investors and other parties. We stated in
December 2006, and reiterate in this report, that there can be no assurance that this process will
result in any specific transaction. On October 3, 2007 Value City entered into an agreement with
Burlington Coat Factory Warehouse Corporation to assign or sublease up to 24 locations such that
the affected stores will close their operations on or before the end of March, 2008. Subsequent to
November 3, 2007, to date, RVI has been unable to consummate an additional significant transaction
for this segment. To attempt to limit losses in the event that an additional significant
transaction is not achieved, Value City has taken the following significant measures, among others:
1) it has significantly reduced the purchase of inventory for the 2008 spring and summer seasons
and, in the absence of a change in circumstances, at this time is not placing orders for future deliveries of inventory; and 2) it has decreased its personnel through attrition, including positions responsible for buying and allocating goods, and the elimination of positions. If no additional
significant transaction is achieved and Value City decides to discontinue operations, we currently
believe that these measures would enable Value City to close all of the Value City stores in the
same time frame as the closing of those stores affected by the Burlington Coat Factory transaction. To date, the Company has not determined its final strategic plan, the Board of Directors has not
approved a plan nor does management have the authority to enter into a final plan. As a result the
Company has accounted for the Value City operations in continuing operations in these financial
statements. The impact on RVI of the potential termination or sale of Value Citys operations
cannot be predicted with any certainty, but could have a materially adverse effect on RVIs
operations, liquidity and financial position.
The implementation of any strategic alternative for the Value City business operations will require
the prior consent of lenders under the Credit Facilities. The lenders are not required to provide
consent, and there are no assurances that the lenders will consent to any strategies which may be
proposed.
In addition to the typical bankruptcy and insolvency events of default in the VCDS Revolving Loan,
an event of default would also occur (absent consent of waiver from the lenders) if there is any
act by Retail Ventures or Value City which is determined to be the initiation of a substantial
liquidation of Value City.
Upon the occurrence of any event of default, or if an event of default has not occurred but average
excess availability under the VCDS Revolving Loan is less than $45.0 million for a period of five
consecutive business days, all amounts owed thereunder may be accelerated by the lenders and the
lenders may seize control of all cash of the co-borrowers and co-guarantors, and apply the same to
the VCDS Revolving Loan on a daily basis. The lenders will also be entitled to exercise all other
remedies provided for in the VCDS Revolving Loan.
Value City historically financed its operations principally through operating cash flow, working
capital, credit facilities and the issuance of debt. For the past three fiscal years Value City has
experienced cumulative operating losses and operating losses have continued through the first three
quarters of fiscal 2007. Based on current circumstances, Value City contemplates incurring an
additional operating loss in the fourth quarter of fiscal 2007. These operating losses have reduced
working capital levels and increased the need for Value City to incur borrowings under the VCDS
Revolving Loan, which RVI guarantees.
The accompanying financial statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and classification of liabilities that
might result should Value City not continue as a going concern.
Retail Ventures or its wholly-owned subsidiary, Retail Ventures Services, Inc. (RVS), has
guaranteed or may be responsible for certain liabilities of Value City in addition to amounts owed
under the VCDS Revolving Loan, including, but not limited to:
-33-
amounts owed under certain guarantees with various financing institutions; amounts owed under
guarantees of Value Citys operations regarding equipment leases; amounts owed under
certain employee benefit plans; and amounts owed by RVS under certain service agreements through which
Value City obtains general services or information technology equipment or licenses
As of November 3, 2007, it is not possible to estimate the amounts that Retail Ventures might be
obligated to pay for liabilities of Value City, but it may be a substantial and material amount.
If Value City does not continue as a going concern and Value City is unable to pay its obligations
with respect to the foregoing indebtedness guaranteed by Retail Ventures or RVS, all of these
guarantees may become immediately due and payable by Retail Ventures or RVS, as applicable, which
would have a material adverse effect on RVI.
Additionally, as of November 3, 2007, Value City owed Retail Ventures and other RVI affiliates, a total of $60.9 million,
$34.5 million in the form of an intercompany note and related interest relating to a loan by Retail Ventures to Value
City from a portion of the proceeds received from the issuance of the
PIES, and $26.4 million in
ordinary course payables owed with respect to intercompany services and advances. Value City is also jointly and severally liable for an additional amount owed by Filenes Basement
as part of the same intercompany note. This intercompany note cannot be prepaid without the prior
written consent of the lenders under the VCDS revolving loan. If Value City
does not continue as a going concern and is unable to repay these amounts to Retail Ventures, or other RVI affiliates, this
would have an adverse impact on Retail Ventures cash flow, and could restrict its ability to pay
its obligations, including its ability to pay in cash principal and interest payments due under the
PIES and the guarantees described above.
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 $11.8
million at November 3, 2007. In addition, at November 3, 2007, lease agreements had been signed for
34 new DSW and Filenes Basement store locations to be opened over the next 18 months, with annual
aggregate rent of approximately $12.5 million and average terms of approximately 10 years.
Associated with the new lease agreements, we will receive approximately $12.6 million of
construction allowances and tenant improvement allowances which will be used to fund future capital
expenditures.
The Company had no off-balance sheet arrangements as of November 3, 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 our fiscal year. See Note 4 to the Condensed
Consolidated Financial Statements for a discussion of the new accounting standards issued or
implemented during the nine months ended November 3, 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 November 3, 2007, direct borrowings aggregated $156.0 million and an
additional $27.8 million in letters of credit were outstanding against these revolving credit
facilities.
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A hypothetical 100 basis point increase in interest rates on our variable rate debt outstanding for
the nine months ended November 3, 2007, net of income taxes, would have an approximately $0.5
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 November 3, 2007 and February 3, 2007, Retail Ventures did not
have any derivatives designated as hedges.
Warrants
As of November 3, 2007, the aggregate fair value liability recorded relating to the Warrants was
$50.7 million. The $31.8 million value ascribed to the Conversion Warrants was estimated as of
November 3, 2007 using the Black-Scholes Pricing Model with the following assumptions: risk-free
interest rate of 3.75%; expected life of 1.63 years; expected volatility of 37.07%; and an expected
dividend yield of 0.0%. The $18.9 million value ascribed to the Term Loan Warrants was estimated as
of November 3, 2007 using the Black-Scholes Pricing Model with the following assumptions: risk-free
interest rate of 4.01%; expected life of 4.63 years; expected volatility of 54.53%; 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 nine months ended November 3, 2007, the Company recorded a reduction of expenses related
to the change in fair value of the conversion feature of the PIES of $82.6 million. As of November
3, 2007, the fair value asset recorded for the conversion feature was $19.8 million. The fair value
was estimated using the Black-Scholes Pricing Model with the following assumptions: risk-free
interest rate of 5.02%; expected life of 3.88 years; expected volatility of 40.90%; and an expected
dividend yield of 0.0%. The fair value of the conversion feature of the PIES 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 November 3, 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 November 3, 2007 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
-35-
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 DSW customers. On April
18, 2005, Retail Ventures issued the findings from its investigation into the theft. The theft
covered transaction information involving approximately 1.4 million credit cards and data from
transactions involving approximately 96,000 checks.
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in 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.
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 November 3, 2007, the balance of the associated accrual
for potential exposure was $0.5 million.
The Company is involved in various other legal proceedings that are incidental to the conduct of
its business. The Company estimates the range of liability related to pending litigation where the
amount 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 November 3, 2007, there were no material changes to the Companys previously
disclosed risk factors except as disclosed below.
We are continuing to explore strategic alternatives for our Value City operations, including the
possible sale of some or all of the remaining Value City operations or the discontinuance of its
operations, which could disrupt our business and may have a materially adverse effect on our
future financial performance, liquidity and financial position.
In December 2006, we announced that we are exploring strategic alternatives for the Value City
operations. These alternatives currently include a possible sale of some or all of the Value City
operations or the discontinuance of its operations. RVI has retained financial and other advisors
to assist in this effort to enhance shareholder value. During fiscal 2007 RVI and Value City
management have aggressively pursued, and continue to aggressively pursue, transactions and
strategic alternatives with potentially interested investors and other parties. We stated in
December, 2006 and reiterate that there can be no assurance that this process will result in any
specific transaction. On October 3, 2007 Value City entered into an agreement with Burlington
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Coat Factory Warehouse Corporation to assign or sublease up to 24 locations such that the affected
stores will close their operations on or before the end of March, 2008. Subsequent to the nine
months ended November 3, 2007, to date RVI has been unable to consummate an additional significant
transaction for this segment. To attempt to limit losses in the event that an additional
significant transaction is not achieved, Value City has taken the following significant measures,
among others: 1) it has significantly reduced the purchase of inventory for the 2008 spring and
summer seasons and, in the absence of a change in circumstances, at this time is not placing orders for future deliveries of inventory; and 2) it has decreased its personnel through attrition, including positions responsible for buying and allocating goods, and the elimination of positions. If no additional
significant transaction is achieved and Value City decides to discontinue operations, we currently
believe that these measures would enable Value City to close its remaining stores in the same time
frame as the closing of those stores affected by the Burlington Coat Factory transaction. To date,
the Company has not determined its final strategic plan, the Board of Directors has not approved a
plan nor does management have the authority to enter into a final plan. As a result the Company
has accounted for the Value City operations in continuing operations in these financial statements.
With any strategic alternative, including the possible sale or discontinuance of the Value City
operations, there are risks that future operating results could be unfavorably impacted if business
disruptions occur as a result of implementing the strategic alternative or activities related to
the strategic alternative. There is no assurance that any strategic alternative or possible sale
of Value City will be consummated, or that any strategic alternative or possible sale of Value City
will be at a price or on terms that are favorable to the Company. The impact on RVI of the
potential termination of Value Citys operations cannot be predicted with any certainty, but it
could have a materially adverse effect on RVIs operations, liquidity and financial position.
This risk factor updates and replaces the first two risk factors in the Companys Annual Report on
Form 10-K for the fiscal year ended February 3, 2007.
Terms of the VCDS Revolving Loan provide that an Event of Default would occur if prior consent of
the lenders is not obtained in order to proceed with any of the strategic alternatives that would
involve the possible sale or liquidation of the Value City business. There are no assurances that
the requisite lender consent will be given, or that the VCDS Revolving Loan will not be declared in
default as a result of actions taken in furtherance of any strategic alternative involving a sale
or the liquidation of the Value City operations.
The VCDS Revolving Loan provides that an Event of Default would occur if prior consent of the
lenders is not obtained in order to proceed with any of the strategic alternatives that would
involve a possible sale or liquidation of the Value City business. The lenders are under no
obligation to grant their consent, and there are no assurances that this consent will be given. If
the lenders do not consent to the implementation of any of the strategic alternatives which we may
propose, a default will occur under the VCDS Revolving Loan, which could result in all amounts then
outstanding becoming immediately due and payable. A default under the VCDS Revolving Loan could
also occur if the lenders make the determination that Retail Ventures or Value City has taken, or
proceeds to take, any act to initiate a program of substantial liquidation.
In the event that we or certain of our subsidiaries, including Value City, commence any proceeding
seeking liquidation, reorganization or similar relief under any bankruptcy law, we may suffer
material adverse effects on our business as a result of the acceleration of our obligations under
the PIES.
Certain events of bankruptcy, insolvency or reorganization relating to us or our significant
subsidiaries constitute automatic acceleration events that lead to the PIES becoming immediately
due for exchange into DSW Class A Common Shares. For example, if a significant subsidiary
commences a proceeding seeking liquidation, reorganization or similar relief under any bankruptcy
law, our obligations under the PIES will automatically accelerate. In such event, in addition to
the PIES becoming due for exchange, the accrued and unpaid coupons and yield maintenance premium
would also be due and payable in cash or, at our election, additional DSW Class A Common Shares.
The number of DSW Class A Common Shares deliverable to holders, in respect of the principal amount
of the PIES and, if we were to so elect, the accrued and unpaid coupons and yield maintenance
premium, would be calculated based on the then-current market prices of the DSW Class A Common
Shares. At the market price of DSW Class A Common Shares as of the date hereof, the maximum number
of DSW Class A Common Shares deliverable under the indenture in exchange for PIES would be
deliverable. Upon any acceleration of our obligations under the PIES, we would lose the
opportunity to benefit from any appreciation in the value of such shares, both as any such
appreciation may have benefited the Company under the formula for calculation of the PIES exchange
ratio and otherwise.
-37-
Retail Ventures is a holding company and relies on its subsidiaries to make payments on its
indebtedness and meet its obligations.
Retail Ventures is a holding company and all our operations are conducted through our subsidiaries.
Therefore, we rely on the cash flow of our subsidiaries to meet our obligations, including our
obligations under the PIES. The ability of these subsidiaries to distribute to Retail Ventures by
way of dividends, distributions, interest or other payments (including intercompany loans) is
subject to various restrictions, including restrictions imposed by the facilities governing our and
our subsidiaries indebtedness, and future indebtedness may also limit or prohibit such payments.
In addition, the ability of our subsidiaries to make such payments may be limited by relevant
provisions of the laws of their respective jurisdictions of organization.
If the Value City subsidiary is sold or we discontinue the operations of Value City, our reliance
on our remaining subsidiaries to make payments on our indebtedness and meet our obligations may
increase. For example, Filenes Basement and DSW will have to absorb certain costs currently paid by Value
City. DSW, Filenes Basement and Value City receive shared services from RVI, and DSW provides
services to RVI and its subsidiaries. The costs associated with many of these shared services are
allocated among the entities based upon the percent of an entitys sales compared to total sales,
or, in some cases, a usage based charge. In the event that Value City significantly reduces or
ceases operations, its allocation percentage of shared expenses would decrease, which would
increase DSWs and Filenes Basement allocation percentage of future shared service expenses.
Additionally, in the event that Value City significantly reduces or ceases operations, DSW would
not be able to allocate as much or any expense to RVI relating to Value Citys utilization of
information technology and shoe processing services. This increased allocation percentage and
reduction in expense allocation could be material and have a negative effect on the financial
position of the remaining entities.
If the Company decides to discontinue Value Citys operations, RVI and Value City may become
subject to various risks associated with any insolvency or bankruptcy proceedings.
If the Company decides to discontinue Value Citys operations, RVI and Value City may become
subject to risks associated with any possible Value Citys insolvency or bankruptcy filing,
including risks and uncertainties inherent in such proceedings and the inability to predict the
precise effect of any reorganization and/or liquidation process on Value Citys business and
creditors or on RVI and its results of operation and financial condition. In the event of a Value
City bankruptcy filing, Value City may not be able to develop, prosecute, confirm and consummate a
plan of reorganization or liquidation on a timely basis or at all, and creditors or other parties
in interest may seek and obtain bankruptcy court approval to terminate or shorten the exclusivity
period for Value City to propose and confirm a plan of reorganization or liquidation, to request
the appointment of a Chapter 11 trustee, or to convert any Value City bankruptcy case to a
Chapter 7 liquidation, any of which could prolong the bankruptcy proceeding. Such actions could also increase the costs
and expenses incurred in connection with any bankruptcy proceeding. Additionally, creditors of
Value City may seek to assert claims against RVI and its subsidiaries other than Value City,
whether or not such claims currently exist or have any merit. If such claims were successful, RVI would have to obtain funding sources to the extent cash on hand, lending facilities or cash generated from operations were insufficient to satisfy those obligations. RVI may also be
required to record impairment charges or write-offs as a result of any bankruptcy proceeding and to
incur expenses and liabilities associated with any bankruptcy proceeding. Additionally, any Value
City bankruptcy and the publicity surrounding its filing could adversely affect the businesses and
relationships with employees, customers and suppliers of RVI and its subsidiaries other than Value
City. All of the foregoing circumstances or events could have a material adverse impact on RVIs
financial condition and results of operations.
We will require strong cash flows from our operations to support capital requirements, operations and
debt repayment.
In order to fully implement our expansion strategy,
we will require strong cash flows from operations to support our capital requirements,
our general operating activities and to fund debt repayment and the availability of financing
sources. Our inability to generate sufficient cash flows to support these activities or the lack of
availability of financing in adequate amounts and on appropriate terms could adversely affect our
financial performance or our earnings per share growth.
We may be unable to quickly monetize our investment in DSW shares.
As of November 3, 2007, Retail Ventures owned DSW Class B Common Shares representing approximately
63.0% of DSWs outstanding Common Shares and approximately 93.2% of the combined voting power of
such shares. DSW Class A Common Shares are listed on the New York Stock Exchange under the symbol
DSW. DSW Class B Common Shares may be exchanged into DSW Class A Common Shares at Retail
Ventures option. Absent registration, DSW Common Shares held by Retail Ventures are deemed to be
restricted stock, which would limit our ability to liquidate any of such shares if we chose to do
so.
-38-
Pursuant to the terms of the Master Separation Agreement dated July 5, 2005 by and between Retail
Ventures and DSW, DSW agreed to effect up to one demand registration per calendar year of DSW Class
A Common Shares or DSW Class B Common Shares held by Retail Ventures. Our ability to liquidate DSW
Common Shares on an expedited basis may be restricted due to the lead time required to register
such shares with the Securities and Exchange Commission.
We face security risks related to our electronic processing and transmission of confidential
customer information. On March 8, 2005, we announced the theft of credit card and other purchase
information related to DSW customers. This security breach could materially adversely affect our
reputation and business and subject us to liability.
We rely on commercially available encryption software and on other technologies to provide security
for processing and transmission of confidential customer information, such as credit card numbers.
Advances in computer capabilities, new discoveries in the field of cryptography, or other events or
developments, including improper acts by third parties, could result in a compromise or breach of
security measures we use to protect customer transaction data. Compromises of these security
systems could have a material adverse effect on our reputation and business, and may subject us to
significant liabilities and reporting obligations. A party who is able to circumvent our security
measures could misappropriate our information, cause interruptions in our operations, damage our
reputation and customers willingness to shop in our stores and subject us to possible liability.
We may be required to expend significant capital and other resources to protect against these
security breaches or to alleviate problems caused by these breaches.
As previously reported, on March 8, 2005, Retail Ventures announced that it had learned of the
theft of credit card and other purchase information from a portion of DSW customers. On April 18,
2005, Retail Ventures issued the findings from its investigation into the theft. The theft covered
transaction information involving approximately 1.4 million credit cards and data from transactions
involving approximately 96,000 checks.
DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other
authorities with regard to this matter. The Company is involved in 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.
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 estimates that the potential exposure for losses related to this theft, including exposure
under currently pending proceedings, ranges from approximately $6.5 million to approximately
$9.5 million. Because of many factors, including the 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, DSW accrued a charge to operations in the
first quarter of fiscal 2005 equal to the low end of the range set forth above, or $6.5 million. As
the situation develops and more information becomes available, the amount of the reserve may
increase or decrease accordingly. The amount of any such change may be material to DSWs results of
operations or financial condition. As of November 3, 2007, the balance of the associated accrual
for potential exposure was $0.5 million.
The temporary cessation of operations at the Downtown Crossing Boston Filenes Basement store could
lead to reduced sales when that location resumes operations.
The Downtown Crossing Boston Filenes Basement is the original, landmark Filenes Basement store.
The Downtown Crossing store generated 12.9% and 15.1% of Filenes Basement segment sales during
fiscal 2006 and 2005, respectively. Filenes Basement temporarily ceased operations at the
Downtown Crossing location in of the fall of 2007 due to the complex redevelopment of the building
housing the original store. Filenes Basement is estimated to resume operations in the basement of
the new development in the spring of 2009. The approximately 18-month temporary cessation of
business in this Downtown Crossing store could result, upon its reopening, in reduced customer
traffic and sales at this location.
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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 third 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. Further, additional dividends and loans up to $4.0
million in any fiscal year may be made to Retail Ventures by any borrower or guarantor for the sole
purposes of paying interest, fees or other charges, but not principal, on the PIES, to the extent
that loan payments made to Retail Ventures by Value City and Filenes Basement on account of
certain intercompany indebtedness are not sufficient to allow Retail Ventures to make such required
payments with respect to the PIES.
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits. See Index to Exhibits on page 42.
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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: December 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) |
|
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INDEX TO EXHIBITS
|
|
|
Exhibit Number |
|
Description |
|
|
|
10.1 |
|
Agreement to Acquire Leases and Lease Properties, dated October 3, 2007
(incorporated herein by reference to Exhibit 10.1 to the Companys Form 8-K filed
on October 4, 2007). |
|
|
|
10.2 |
|
Second Amendment to Amended and Restated Loan and Security Agreement,
dated October 3, 2007 (incorporated herein by reference to Exhibit 10.2 to the
Companys form 8-K filed on October 4, 2007). |
|
|
|
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 |
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