Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-10767
RETAIL VENTURES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Ohio 20-0090238
- ---------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(614) 471-4722
---------------------------------------------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Shares, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 the filing
requirements for at least the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES ___ NO X
The aggregate market value of voting stock held by non-affiliates of the
registrant computed by reference to the price at which such voting stock was
last sold, as of August 2, 2003, was $26,450,655.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 33,993,156 Common Shares were
outstanding at April 5, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 9, 2004 are incorporated by reference into Parts
II and III.
TABLE OF CONTENTS
ITEM NO. PAGE
- -------- ----
PART I
1. Business.......................................................................................... 3
2. Properties........................................................................................ 13
3. Legal Proceedings................................................................................. 14
4. Submission of Matters to a Vote of Security Holders............................................... 14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters......................... 15
6. Selected Financial Data........................................................................... 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................ 17
7A. Quantitative and Qualitative Disclosures about Market Risk ....................................... 26
8. Financial Statements and Supplementary Data....................................................... 26
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................................ 26
9A. Controls and Procedures .......................................................................... 26
PART III
10. Directors and Executive Officers of the Registrant................................................ 27
11. Executive Compensation............................................................................ 28
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
Matters........................................................................................ 28
13. Certain Relationships and Related Transactions.................................................... 28
14. Principal Accountant Fees and Services............................................................ 28
PART IV
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.................................... 29
Signatures.............................................................................................. 30
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report............................................................................ F-1
Consolidated Balance Sheets............................................................................. F-2
Consolidated Statements of Operations................................................................... F-3
Consolidated Statements of Shareholders' Equity......................................................... F-4
Consolidated Statements of Cash Flows................................................................... F-5
Notes to Consolidated Financial Statements.............................................................. F-6
SCHEDULES
II - Valuation and Qualifying Accounts.................................................................. S-1
Index to Exhibits....................................................................................... E-1
2
PART I
As used in this Annual Report on Form 10-K and except as the context
otherwise may require, "Company", "we", "us", and "our" refers to Retail
Ventures, Inc. and its wholly owned subsidiaries, including but not limited to,
Value City Department Stores, Inc. ("Value City"), DSW Shoe Warehouse,
Inc.("DSW") and Filene's Basement, Inc.("Filene's Basement").
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify such forward-looking statements by the
words "expects", "intends", "plans", "projects", "believes", "estimates" and
similar expressions. In the normal course of business, we, in an effort to help
keep our shareholders and the public informed about our operations, may from
time to time issue such forward-looking statements, either orally or in writing.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings or other aspects of
operating results. We base the forward-looking statements on our current
expectations, estimates, and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Annual Report on Form 10-K or elsewhere,
could differ materially from those stated in the forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those in our forward-looking statements is contained
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
AVAILABLE INFORMATION
We maintain an Internet website at www.valuecity.com (this uniform
resource locator, or URL, is an inactive textual reference only and is not
intended to incorporate the Company's website in this Annual Report on Form
10-K). We file our reports with the Securities and Exchange Commission (the
"SEC") and make available free of charge, on or through our website, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports of Form
8-K, proxy and information statements and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC.
ITEM 1. BUSINESS.
On October 8, 2003, the Company reorganized its corporate structure
into a holding company form whereby Retail Ventures, Inc., an Ohio corporation,
became the successor issuer to Value City Department Stores, Inc. As a result of
the reorganization, Value City Department Stores, Inc. became a wholly-owned
subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of
Value City became holders of an identical number of common shares of Retail
Ventures, Inc. The reorganization was affected by a merger which was previously
approved by the Company's shareholders. Since October 8, 2003, the Company's
common shares have been listed for trading under the ticker symbol "RVI" on the
New York Stock Exchange.
GENERAL
We are managed in three operating segments: Value City Department
Stores ("Value City"), DSW Shoe Warehouse, Inc. ("DSW") and Filene's Basement,
Inc. ("Filene's Basement").
VALUE CITY. We operate a chain of 116 off-price department stores
located in the Midwestern, Eastern and Southern states, principally under the
name Value City. For over 80 years, our strategy has been to provide exceptional
value by offering a broad selection of brand name merchandise at prices
substantially below conventional retail prices.
DSW. We also operate a chain of 142 DSW stores located throughout the
United States. The DSW stores are upscale shoe stores offering a wide selection
of branded dress and casual footwear below traditional retail prices.
Additionally, Shonac Corporation, the parent company of DSW, pursuant to license
agreements with Value City and Filene's Basement, operates licensed shoe
departments in most Value City and Filene's Basement stores. Results of
operations of the licensed shoe departments are included with the Value City and
Filene's Basement segments. In July 2002, Shonac Corporation entered into a
Supply Agreement with Stein Mart, Inc. ("Stein Mart") to supply merchandise to
some of Stein Mart's shoe departments. Results of the supply agreement are
included with the DSW segment and represent substantially all of the leased
operations of the segment.
3
FILENE'S BASEMENT. Finally, we operate 21 Filene's Basement stores
located primarily in major metropolitan areas such as Boston, New York City,
Atlanta, Chicago and Washington, D.C. Filene's Basement focuses on providing the
top tier brand names at everyday low prices for men's and women's apparel,
jewelry, shoes, accessories and home goods.
See Note 11 of Notes to Consolidated Financial Statements beginning on
page F-21 of this annual report for detailed financial information regarding our
three segments.
HISTORY OF OUR BUSINESS
We opened our first Value City department store in Columbus, Ohio in
1917. Until our initial public offering on June 18, 1991, Value City department
stores operated as a division of Schottenstein Stores Corporation ("SSC"). SSC
owns approximately 53% of our common shares. We also have a number of ongoing
related party agreements and arrangements with SSC. These are more fully
described in Item 13 of this report beginning on page 28.
In July 1997, we entered into agreements with Mazel Stores, Inc.
("Mazel") to create VCM, Ltd. ("VCM"), a 50/50 joint venture. Since 1997, VCM
has operated the licensed health and beauty care, toy and sporting goods
departments in our Value City stores and, beginning in fiscal 2000, began
operating the food department. Effective at the close of business February 2,
2002, we purchased Mazel's interest in the partnership.
In May, 1998, we purchased substantially all of the common shares of
Shonac Corporation, an Ohio corporation, from Nacht Management, Inc. and SSC.
Subsequently we acquired the remaining shares. Shonac had been the shoe licensee
in principally all of the Value City stores since its inception in 1969 and has
operated the DSW chain of retail shoe stores since the opening of the first
store in 1991.
We acquired substantially all of the assets and assumed certain
liabilities of Filene's Basement Corp., a Massachusetts corporation, and
Filene's Basement, Inc., a Delaware corporation, a wholly owned subsidiary of
Filene's Basement Corp, in March 2000.
On October 8, 2003, the Company reorganized its corporate structure
into a holding company form of organizational structure whereby Retail Ventures,
Inc. became the successor issuer to Value City Department Stores, Inc. As a
result of the reorganization, Value City Department Stores, Inc, an Ohio
corporation, became a wholly owned subsidiary of Retail Ventures, Inc.
In connection with the reorganization, holders of common shares of
Value City became holders of an identical number of common shares of Retail
Ventures, Inc. The reorganization was affected by a merger which was previously
approved by the Company's shareholders. Since October 8, 2003, the Company's
common shares have been listed for trading under the ticker symbol "RVI" on the
New York Stock Exchange.
VALUE CITY DEPARTMENT STORES
As an off-price retailer, we take advantage of inventory imbalances
along the retail supply chain. These imbalances occur as a result of cancelled
orders, excess production, and consumer changes in demand which create
opportunities for us. In this role, we offer ourselves as an important
alternative to manufacturers as an additional distribution source for their
goods. In addition, we believe we have a core of customers that have embraced
off-price retailing as an attractive retail concept and we continue to market to
those who seek this alternative concept to traditional retail offerings.
MERCHANDISING
Selection. Value City is a full-line, off-price retailer carrying
men's, women's and children's apparel, housewares, giftware, home furnishings,
toys, jewelry, shoes, health, beauty care items and commodities. Off-price
retailing, as distinguished from traditional full-price retailing and discount
or off-brand merchandising, is characterized by the purchase by the retailer of
primarily high quality brand name merchandise, at prices below normal cost to
most retailers. We accomplish our merchandise content by taking advantage of
imbalances in the inventory supply chain between the manufacturer and other
retailers and these retailers and the ultimate consumer. A portion of the cost
savings is then passed on to our customers through lower prices. The Value City
customer we generally attract with these items and price points are value
seekers, budget minded and/or moderate-income. Our Value City stores strive to
offer customers one-stop-shopping for the categories of merchandise we carry.
The large size of our Value City stores facilitates the offering of a wide range
of merchandise categories with broad, deep selections of goods within each
category. Value City stores carry over 100,000 different items of merchandise,
similar to the items generally found in traditional department, specialty and
discount stores. We continually refine the Value City merchandise mix by
eliminating less productive departments and introducing new merchandise
categories to improve store profitability and meet the changing needs of our
customers.
4
We believe our customers are attracted to Value City stores by the
continuous new offerings and flow of value-priced and fashion right merchandise.
At the same time, we purchase continuing lines of merchandise from our vendor
contacts to ensure constant availability and allotment of certain basic
categories of merchandise as well as current fashion trends.
Value Pricing. Value City stores offer quality brand name merchandise
at prices typically 30% to 70% below initial prices charged by traditional
department, discount or specialty stores for similar items and at prices
comparable to or lower than prices charged by other off-price retailers. We can
offer exceptional values because our buyers purchase merchandise directly from
manufacturers and other vendors generally at prices substantially below those
paid by conventional retailers. This allows us to pass on the savings directly
to our budget minded and/or moderate-income customers. See "Supplier
Relationships and Purchasing" on page 5 of this annual report for more
information.
Well-known designer labels, brand names and original retailer names are
prominently displayed throughout our Value City stores. Many items carry labels
and/or original price tags showing brand names identifiable with major
designers, manufacturers and retail stores, as well as tags showing original
retail, comparable or "nationally advertised" prices. In certain cases,
suppliers may require removal of labels or original retail price tags as a
condition to a special purchase arrangement. See "Supplier Relationships and
Purchasing" on page 5 of this annual report for more information.
SUPPLIER RELATIONSHIPS AND PURCHASING
An important factor in our operations has been the relationships we
have developed with our various suppliers and our many years of experience in
purchasing merchandise directly from manufacturers and other vendors at prices
substantially below those generally paid by conventional retailers. Over the
years, our buyers have established excellent relationships with suppliers and
have developed a reputation for the ability to purchase entire lots of
merchandise. Continuously, we seek to find and negotiate special purchase
opportunities. The apparel industry is extremely fragmented in terms of
merchandise supply; thus, the dynamics of the markets continue to change, and we
attempt to take advantage of the innumerable disconnects in this supply chain
such as overproduction, other retailers' cancellations and overruns. As a result
of our relationships, reputation and experience, many suppliers offer special
purchase opportunities to us prior to attempting to dispose of merchandise
through other channels. Manufacturers of brand name merchandise are not
reluctant to sell merchandise to Value City for resale at our discounted prices
as we provide a stable and known outlet for manufacturing imbalances. By selling
their merchandise through our retail stores, we are able to assure these
suppliers the merchandise will be sold without disturbing their regular channels
of distribution.
Although we cannot quantify the reduction in prices we pay for special
purchases compared to the prices paid by our competitors for similar purchases,
we believe that such special purchases are made at prices sufficiently favorable
to enable us to offer merchandise to our customers at very competitive price
points.
We purchase merchandise from more than 4,700 suppliers, none of which
accounted for a material percentage of purchases during the past fiscal year.
Except for greeting cards we do not maintain any long-term or exclusive
commitments to purchase merchandise from any one supplier. We employ several
purchasing strategies. We regularly purchase overstocked or overproduced items
from manufacturers and other retailers, including end-of-season, out-of-season
and end-of-run merchandise and manufacturers' slight irregulars. From time to
time, but less frequently from our historical practice, we purchase all or
substantially all of the inventories of financially distressed retailers and
make other special purchases. We also have started more aggressively to seek
advantageous buying opportunities and sourcing overseas, particularly in
non-apparel categories. We make merchandise purchases for these broad purposes:
packaway, opportunistic needs and up-front planned requirements. Packaway
purchases are used as a method of sourcing closeout merchandise found in the
market and warehousing theses goods until the following season. Packaway
merchandise lags the normal retail distribution by approximately one selling
season and generally has a level of risk above other purchases. We purchase
in-season merchandise opportunistically during the selling season when seasonal
merchandise presents itself and the cost of the acquisition allows for
sufficient retail markup. Up-front planned purchases occur in advance of our
season and represent a significant part of some areas of our non-apparel
businesses and a lesser part of our apparel business.
The relatively large size of our Value City stores provides us with the
flexibility to purchase full lots of merchandise that may not be available to
other off-price retailers with smaller stores requiring more targeted purchases.
Although there is growing competition for the kinds of special purchases that we
seek, we believe that, because of the factors discussed above, we will be able
to obtain sufficient supplies of desirable merchandise at favorable prices in
the future.
ADVERTISING AND PROMOTION
We have committed substantial resources to advertising. Value City
advertises frequently in print, including newspapers, circulars and flyers, and
on television and radio. The promotional strategy is carefully planned and
budgeted to include not only institutional and seasonal promotions, but also
weekly storewide sales events highlighting recent buy-outs and other specially
purchased brand name merchandise designed to maximize customer interest. In some
cases, a supplier may prohibit the advertising or non-store promotion of its
brand name. We utilize advertising agencies to assist us in promoting our Value
City brand recognition.
5
STORES
Store Location, Design and Operations. We believe our customers are
attracted to our stores principally by the wide assortment of quality items at
substantial savings.
Our Value City stores are generally open from 9:30 a.m. until 9:30 p.m.
Monday through Saturday and 11:00 a.m. until 6:00 p.m. on Sunday. All of the
stores are located in leased facilities. Of the 116 Value City stores open as of
April 5, 2004, 33 are freestanding, 56 are located in shopping centers and 27
are located in enclosed malls. Our Value City stores average approximately
87,000 square feet, with approximately 70% of the total area of each store
representing selling space. The stores are generally laid out on a single level,
with central traffic aisles providing access to major departments. Each
department strives to display and stock large quantities and assortments of
merchandise, giving the store a full appearance. Our stores offer customers a
convenient, pleasurable shopping experience and a high level of satisfaction.
All of our Value City stores are designed for self-service shopping,
although sales personnel are available to help customers locate merchandise and
to assist in the selection and fitting of apparel, jewelry, and footwear. Value
City's associate training programs are designed to assure that every associate
maintains the highest level of professionalism and places customer service at
the forefront. In all stores, a customer service desk is conveniently located,
generally adjacent to the central checkout area. To promote the ease of
checkout, we utilize point of sale scanning systems that expedite the checkout
process by providing automated check and credit approval and price lookup. We
accept all major credit cards and also provide a private label credit card
program. Value City offers a layaway program in approximately 60% of its stores
that is widely used by our budget and moderate-income customers, and we also
maintain a reasonable return policy.
Our stores are organized into separate geographic regions and
districts, each with a territory or district manager. Territory and district
managers are headquartered in their region and spend the majority of their time
in their stores to ensure adherence to merchandising, operational and personnel
standards. The typical staff for a Value City store consists of a store manager,
several assistants and full and part-time hourly associates. Each store manager
reports directly to one of the territory or district managers, and each of the
territory or district managers reports to a Regional Vice President who in turn
reports to the Senior Vice President of Store Operations.
Our store managers are responsible on a day-to-day basis for the
overall condition of their stores, customer relations, personnel hiring and
scheduling, and all other operational matters arising in the stores. Each store
manager is compensated, in part, based on the performance of their store. Our
store managers are an important source of information concerning local market
conditions, trends and customer preferences.
We prefer to fill management positions through promotion of existing
associates. A store management training program is maintained to develop the
management skills of associates and to provide a source of management personnel
for future store expansion.
We continually refurbish our stores by updating the merchandise
displays, department locations and in-store signage. The costs of refurbishing
on a per store basis are generally not substantial. On an annual basis, we
select stores to be remodeled, which generally involves more significant changes
to the interior than the exterior of the store. We have in the past utilized our
own internal architectural design staff, construction crews and carpentry shop
to assist in refurbishing and remodeling store interiors and to build in-store
display tables and racks.
Expansion. No new department stores were added in fiscal 2003, 2002 or
2001 and none are currently planned for fiscal 2004. We continue to explore
exceptional real estate opportunities basing any potential future expansions on
site qualities, national economic trends and existing store performance.
DISTRIBUTION
Our distribution facilities are designed to enable us to prioritize the
processing of merchandise on short notice and to deliver merchandise to stores
within days of receipt. This allows our buyers to purchase merchandise very late
in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we are
capable of devoting warehouse space to out-of-season goods for our Value City
stores. Such merchandise is generally warehoused until the most opportune time
to begin a season before closeouts are available. Our ability to purchase and
quickly distribute our warehouse merchandise in substantial quantities has
enabled us to offer high-quality merchandise to customers at prices
significantly below usual retail prices. We believe that this ability
distinguishes us from the typical discount or department store and provides us
with a competitive advantage in making purchases as favorable opportunities
arise.
We use a regionalized distribution strategy with 6 distribution centers
located in Columbus, Ohio. The aggregate area of the distribution facilities is
approximately 2,300,000 square feet; however, use of multi-tier processing
levels in some of the distribu-
6
tion centers increases the operating capacity by approximately 380,000 square
feet. In addition, to expedite the flow of merchandise, we use third party
processors as needed.
Our distribution facilities utilize material handling equipment,
including mechanized conveyor systems to separate and collate shipments to the
stores. Our distribution facilities are designed to allow priority delivery of
late season purchases and fast-moving merchandise to our stores to take full
advantage of the remaining selling seasons.
Merchandise is processed, ticketed and consolidated prior to shipment
to the stores to ensure full-truck loads and minimize shipping costs. We lease
our fleet of road tractors and approximately 70% of our semi-rig trailers, with
the remainder being owned. Our fleet makes the majority of all deliveries to the
stores.
LICENSE AGREEMENTS
Value City utilizes Shonac Corporation, the parent company of DSW, to
operate the shoe departments in substantially all the Value City stores. The
inter-company activity is eliminated in our consolidated financial statements.
In a few stores, Value City licenses space to third party licensees. Licensees
supply their own merchandise and generally supply their own store fixtures.
Licensed departments complement the operations of our stores and facilitate the
uniformity of the in-store merchandising strategy, including the overall
emphasis on value.
SEGMENT SEASONALITY
Value City customer traffic increases in the early Spring,
back-to-school and Christmas holiday seasons. These seasonal periods are
critical to Value City's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
The service mark "Value City" has been registered by SSC in the U.S.
Patent and Trademark Office. Our four department stores in Columbus operate
under the tradename "Schottenstein's," which has been registered by SSC in the
State of Ohio. We are entitled to use such names for the sole purpose of
operating department stores on an exclusive basis pursuant to a perpetual
license from SSC. SSC also operates a chain of furniture stores under the name
"Value City Furniture." We have also registered in the U.S. Patent and Trademark
Office various trademarks used in our marketing program.
DSW
The mission of our DSW stores is to be the retailer of choice for
branded footwear by satisfying customers' expectation for selection, convenience
and value. We use the tagline "The Shoes of the Moment. The Deal of a Lifetime."
and offer a "Reward Your Style" program to frequent shoppers. In July 2002,
Shonac Corporation, the parent of DSW, entered into a Supply Agreement with
Stein Mart, Inc. (Stein Mart) to supply merchandise to some of Stein Mart's shoe
departments. The Stein Mart operations are included with the DSW segment and
represent substantially all of the leased operations of the segment.
MERCHANDISING
Selection. DSW stores attract customers because of their wide
assortment of top quality name brand dress, casual and athletic footwear for men
and women. The product offering is a selection of regularly changing in season
and fashion-oriented footwear, handbags and accessories. Our assortments are
targeted to maximize regional opportunities.
Value Pricing. DSW price points are targeted to be up to 50% lower than
the regular prices of other specialty retailers and traditional department
stores. To enhance our merchandise sourcing strategy, maintain quality, lower
costs and shortened delivery cycles we have identified and established
relationships with cost-efficient manufacturers and suppliers of quality
merchandise.
The DSW leased operations attract customers by having top quality name
brand dress and casual footwear for men and women. The footwear reflects the
fashion statements being made within the total store. The DSW leased department
price points target up to 40% off the regular price points found at traditional
department stores. Our licensed shoe departments also participate in all store
wide promotions and sale events.
SUPPLIER RELATIONSHIPS AND PURCHASING
DSW's merchandising group constantly monitors current fashion trends as
well as historical sales trends to identify popular styles and styles that may
become popular in the upcoming season. Once our buyers determine the styles and
merchandise mix for any upcoming season, they focus on purchasing the
appropriate quantities of each category at the lowest cost and the highest
quality available.
7
DSW believes it has good relationships with its vendors. Merchandise is
purchased from both domestic and foreign suppliers directly or through agents.
Vendors include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others or both. DSW believes that, consistent with
the retail footwear industry as a whole, most of its domestic vendors import a
large portion of their merchandise from abroad. We have implemented quality
control programs under which buyers inspect incoming merchandise for fit, color
and material, as well as for overall quality of manufacturing. As the number of
DSW locations increase, we believe there will be adequate sources available to
acquire and/or produce a sufficient supply of quality goods in a timely manner
and on satisfactory economic terms.
ADVERTISING AND PROMOTION
Our DSW stores currently use a market campaign, primarily radio and
television, focusing on the term "Thrill of the Hunt". This campaign is
supplemented by print promotions, as needed, but our media focus is television.
In addition, a valuable marketing tool for DSW is the "Reward Your Style"
customer loyalty program. Customers are asked to join the program during the
checkout procedure. By analyzing the member database, as well as the sales
transactions of those members, we are able to direct the advertising to
encourage repeat shopping and to reach targeted customers. DSW also sponsors
certain LPGA events and athletes.
STORES
Store Location, Design and Operations. Our DSW stores average
approximately 25,000 square feet, with about 87% of the total area of each store
representing selling space. The stores' exteriors feature black and white color
schemes and in many cases, windows with striped awnings. The store interiors are
well lighted and feature a unique display concept, a simple case presentation
which groups the shoes together by style. Interior signage is tasteful and kept
to a minimum. The shoe stores are primarily located on a single level, with the
cases of shoes forming the aisles in the stores. Customers can see the entire
store and merchandise when they enter. Of the 150 DSW stores open as of April 5,
2004, 14 are freestanding, 115 are in shopping centers and 21 are in enclosed
malls. The stores are generally open from 10:00 a.m. until 9:00 p.m. Monday
through Saturday and 11:00 a.m. until 6:00 p.m. on Sunday. All stores are
located in leased facilities.
All of our DSW stores are designed for self-service shopping. Sales
personnel are available to help customers locate merchandise and to assist as
needed. We utilize point of sale scanning systems to expedite the checkout
process. These systems provide automated checks, credit approval and price
lookup. DSW accepts all major credit cards and promotes gift card purchases.
At DSW, all associates receive training to maximize the customer
shopping experience in our self-service environment. Training components consist
of customer acknowledgement, neat, clean and orderly store conditions for ease
of shopping, efficient checkout process and friendly service. A store management
training program is maintained to develop the skills of management personnel and
to provide an ongoing talent pool for future store expansion. We prefer to fill
store management and field supervisor positions through internal promotions.
This supports our Company culture.
Our stores are organized into two separate geographic regions and
several districts. Each region is supported by a Regional Vice President and
District Managers who are headquartered in their respective region or district.
They spend the majority of their time in their stores to ensure adherence to
merchandising, operational and personnel standards.
The typical staff for a DSW store consists of a store manager and two
assistant managers who supervise 15 to 25 full and part-time hourly associates.
Each store manager reports directly to one of 28 district managers who in turn
report to one of two Regional Vice Presidents who in turn report to the Senior
Vice President of Store Operations.
Our DSW store managers are responsible on a day-to-day basis for
customer relations, personnel hiring and scheduling, and all other operational
matters arising in the stores. Our store managers are an important source of
information concerning local market conditions, trends and customer preferences.
Each store manager is compensated, in part, based on the performance of his
store.
Expansion. We plan to open 35 new DSW shoe stores during fiscal 2004 in
both existing and new markets with an emphasis on locating stores in highly
visible sites on high traffic streets in vibrant trade areas. Factors considered
in evaluating new store sites include store size, demographics and lease terms.
We seek to cluster stores in targeted metropolitan areas to enhance name
recognition, share in advertising costs and achieve economies of scale in
management, distribution and marketing.
Based upon our experience, we estimate the average cost of opening a
new DSW shoe store ranges from approximately $1.0 million to $2.0 million,
including leasehold improvements, fixtures, inventory, pre-opening expenses and
other costs. Preparations for opening a DSW shoe store generally take eight to
ten weeks. We charge pre-opening expenses to operations as incurred. It has been
our experience that new stores generally achieve profitability and contribute to
net income following the first year of operations. It is not uncommon to receive
lease incentives for our DSW store openings.
8
We continually refurbish our stores by updating the merchandise
displays and in-store signage. The costs of refurbishing on a per store basis
are generally not substantial. On an annual basis, we select stores to be
remodeled, which generally involves more significant changes to the interior
than the exterior of the store. We maintain our own architectural design staff.
DISTRIBUTION
Shonac Corporation and DSW's principal offices and distribution center
operations are located in a 700,000 square foot facility in Columbus, Ohio. This
distribution center facility uses a modern warehouse management system and
material handling equipment, including conveyor systems, to separate and collate
shipments to our stores. This includes a recently added cross dock conveyor
system that enhances the movement of merchandise, through the distribution
facility, using vendor advance shipment notifications ("ASNs"). This system will
also support the ability of this facility to handle DSW's anticipated growth in
2004. The design of the distribution center facilitates the prompt delivery of
priority purchases and fast selling footwear to stores so we can take full
advantage of each selling season.
LEASED DEPARTMENTS AND SUPPLY AGREEMENTS
Shonac Corporation, the parent company of DSW, operates the shoe
departments in most Value City and Filene's Basement stores. The results of
operations for the licensed shoe departments are included with Value City and
Filene's Basement segments.
DSW has a supply agreement to merchandise shoe departments in Stein
Mart which began in July 2002. The shoe departments in these stores range from
500 to 4,000 square feet. DSW provides the merchandise, fixtures and field
supervision in all leased locations. Stein Mart provides the sales associates
per the supply agreement. As of April 5, 2004, Shonac was supplying merchandise
to 151 Stein Mart stores.
SEGMENT SEASONALITY
The shoe business experiences increased sales in both early Spring and
Fall seasons in relationship to the change in footwear desired by the DSW
customer. These seasonal periods are critical to DSW's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
We have registered in the U.S. Patent and Trademark Office a number of
trademarks and service marks, including: DSW; DSW Shoe Warehouse; Coach and
Four; Crown Shoes; Reward Your Style; Flites; Jonathan Victor; Kristi G; Lakota
Trail; Landmarks; Sandler; Shoes by Kari; and Sylvia Cristie.
FILENE'S BASEMENT
Filene's Basement strategy focuses on providing the top tier brand
names at everyday low prices for men's and women's apparel, jewelry, shoes,
accessories and home goods. We believe Filene's Basement, a well-known
institution in Boston since 1908, parallels our merchandising philosophy of
delivering value-priced merchandise to our customers.
MERCHANDISING
Selection. Filene's Basement stores offer branded apparel, home goods
and accessories. The branded merchandise represents a focused assortment of
fashionable, nationally recognized men's and women's apparel, shoes, accessories
and home goods bearing prominent designers' and manufacturers' names. Branded
merchandise constitutes most of the product line and is often obtained through
opportunistic purchases from a diverse group of quality manufacturers and
vendors, including direct imports from some of the most prominent European
designers.
Value Pricing. Filene's Basement stores have changed their purchasing
philosophy over the last year from buying in-season closeouts to more upfront
purchasing. We believe that upfront purchasing will promote a consistent flow of
name brand purchases to our stores. We now place approximately 40% of our
purchases up front. We also have become more aggressive in placing purchases of
make-up goods in Europe, such as sweaters, knits and cold weather goods. We
believe this will ensure a consistent flow of goods into our stores.
We also accelerated our buying end-of-season merchandise and holding it
for the next selling season. This allows us to establish a reliable flow of name
brand goods for opening season assortments in February and August.
9
SUPPLIER RELATIONSHIPS AND PURCHASING
Because of the longstanding relationships Filene's Basement has with
vendors, it receives quality buying opportunities at competitive prices. These
longstanding relationships make Filene's Basement a prime choice for vendors
with overruns, department store cancellations and unmet volume objectives.
ADVERTISING AND PROMOTION
Filene's Basement employs a multi-media approach, using print,
broadcast and direct mail. Event based marketing and brand awareness have been
the main marketing messages. The communication strategy is designed to target
customer segments and generate increased store trips and cross shopping
opportunities. During fiscal 2003, Filene's Basement introduced a gift card
program to its stores.
STORES
Store Location, Design and Operations. Our Filene's Basement Boston
store is a landmark institution recognized by generations of New England
families and visitors as a source of quality off-price men's and women's
merchandise. The downtown location is famous for a unique marketing concept -
the Automatic Markdown Plan - whereby certain merchandise is automatically
discounted based on the number of days the merchandise has been on the sales
floor. Filene's Basement believes the Automatic Markdown Plan, found only in the
downtown Boston location, generates a sense of shopping urgency and creates
customer excitement and loyalty. Our Filene's Basement downtown Boston store
subleases 178,000 square feet (approximately 65,300 square feet of selling
space) on four floors. The sublease terminates in 2009 with rights on behalf of
Filene's Basement to extend until 2024. The Boston store generated approximately
19% of Filene's Basement's total sales during fiscal 2003.
Most of our Filene's Basement stores are located in suburban areas,
near large residential neighborhoods, and average approximately 40,000 square
feet of selling space per store. The downtown Boston location and stores in New
York, Chicago, Atlanta and Washington D.C. are located in urban areas. As of
April 5, 2004, Filene's Basement operates 22 branch stores in eight states and
the District of Columbia. Generally, the branch store's selling space uses a
prototypical "racetrack" aisle layout for merchandise presentation. The branch
stores are designed to be convenient and attractive in their merchandise
presentation, dressing rooms, checkouts and customer service areas. Their
merchandise mix is similar to that of the Boston flagship store. The branch
stores do not operate under the Automatic Markdown Plan, although markdowns are
taken as required.
All of our Filene's Basement stores are designed for self-service
shopping, although sales personnel are available to help customers locate
merchandise and to assist in the selection and fitting of apparel and footwear.
In all stores, a customer service desk is conveniently located generally
adjacent to the central checkout area. To promote the ease of checkout we
utilize point of sale scanning systems that expedite the checkout process by
providing automated check and credit approval and price lookup. Sales associates
are trained to create a "customer-friendly" environment. Filene's Basement
accepts all major credit cards, and also provides a private label credit card
program. Filene's Basement maintains a reasonable return policy.
Our Filene's Basement stores' typical staff consists of a general
manager, an assistant store manager, merchandising group managers and full and
part-time associates. Each general manager reports to a Regional Vice President
who in turn reports to the Senior Vice President, Director of Stores.
Filene's Basement store managers are responsible on a day-to-day basis
for customer relations, personnel hiring and scheduling, and all other
operational matters arising in the stores. Each store manager is compensated, in
part, based on the performance of his store. Our store managers are an important
source of information concerning local market conditions, trends and customer
preferences.
We prefer to fill management positions through promotion of existing
associates.
Expansion. We plan to open 4 new Filene's Basement stores during fiscal
2004. Based upon our experience, we estimate the average cost of opening a new
Filene's Basement store is between $4.0 million to $5.0 million including
leasehold improvements, fixtures, inventory, pre-opening expenses and other
costs. Preparations for opening a Filene's Basement store generally take eight
to ten weeks. We charge pre-opening expenses to operations as incurred. It has
been our experience that new stores generally achieve profitability and
contribute to net income following the first full year of operations.
We continually update our stores by changing the merchandise displays
and in-store signage. The annual cost of refurbishing on a per store basis is
generally not substantial and is treated as on-going cost of operations. We
utilize our own architectural design staff, construction crews and carpentry
shop as needed to assist in the refurbishing and remodeling of a store or to
build in-store display tables and racks.
10
DISTRIBUTION
Filene's Basement's merchandise is processed and distributed from a
457,000 square foot leased distribution facility situated on 32.8 acres with
adjacent rail service in Auburn, Massachusetts, outside of metropolitan Boston,
Massachusetts.
LICENSE AGREEMENTS
Filene's Basement licenses cosmetics and certain other incidental
departments to independent third parties. The aggregate annual license fees for
the fiscal year ended January 31, 2004 were approximately $1.5 million. Filene's
Basement also uses Shonac Corporation, the parent company of DSW, to manage the
in-store shoe departments on a lease department basis. The inter-company
activity is eliminated in our consolidated financial statements.
Licensees supply their own merchandise and generally supply their own
store fixtures. In most instances, licensees utilize our associates to operate
their departments. The licensees reimburse us for all costs associated with such
associates. Licensed departments are operated under our general supervision and
licensees are required to abide by our policies with regard to pricing, quality
of merchandise, refunds and store hours. Licensed departments complement the
operations of our stores and facilitate the uniformity of the in store
merchandising strategy including the overall emphasis on value.
SEGMENT SEASONALITY
Filene's Basement customer traffic increases in the early Spring and
the Christmas holiday seasons. These seasonal periods are critical to Filene's
Basement's annual operating targets.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
Filene's Basement has an exclusive, perpetual, worldwide, royalty-free
license to use the name Filene's Basement and Filene's Basement of Boston
trademark and service mark registrations as well as certain other tradenames.
Filene's Basement's exclusive licensee status with respect to these registered
marks has been recorded with the United States Patent and Trademark Office and
relevant state offices.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
We believe a high level of automation is essential to maintaining and
improving our competitive position. We rely upon computerized systems to provide
information at all levels, including warehouse operations, store billing,
inventory control, merchandising and automated accounting.
We utilize point of sale ("POS") registers with full scanning
capabilities to increase speed and accuracy at customer checkouts and facilitate
inventory restocking.
We utilize automated distribution center systems to track and control
the receipt, processing, storage and shipping of product to the stores.
Value City has embarked on major projects to replace its legacy
systems with industry leading solutions from various vendors. Value City has
implemented sales audit, accounts payable, allocation, merchandise management
and retail data warehouse systems for its jewelry business during February 2004
that will enhance inventory productivity and merchandise assortments for our
stores. A warehouse management system was also implemented for the jewelry
operations during February 2004 and will improve the efficiency of our
distribution centers and speed the flow of merchandise to our stores. These
types of systems will be implemented in the future to support hardlines and
softlines. A new POS software was successfully piloted in one store during the
fourth quarter of 2003 and will be implemented in all Value City stores in
fiscal 2004. All POS registers will be replaced to improve the customer
transaction experience and enhance back office efficiency in fiscal 2004. New
wireless hand held scanners and wireless printers were successfully piloted in
one store in the fourth quarter of 2003 and will be implemented in fiscal 2004
in conjunction with the POS system for markdown and inventory processing and
will be used for reducing lines "queue busting" during very busy shopping
periods. Value City systems run on two AS/400's and open systems computers.
Filene's Basement shares an AS/400 with Value City.
DSW has undertaken several major initiatives to build upon the Essentus
merchandise management system and Retek warehouse management systems that
support the Company. An EDI (electronic data interchange) project is underway to
utilize product UPC barcodes and electronic exchange of purchase orders, ASNs
and invoices with our top vendors. At this time, 70% of DSW's product is
processed using the UPC bar code which has reduced processing costs and improved
flow of goods through the distribution center to the stores. EDI purchase orders
and ASN's were successfully piloted with key vendors in 2003 and will be
implemented for 50% of volume during fiscal 2004. This will speed the flow of
goods from the vendor to the DSW stores. New, state-
11
of-the-art, completely wireless POS systems have been rolled out to all DSW
stores resulting in a faster, easier customer checkout and a more efficient back
office operation. A completely wireless store supports fast and easy new store
openings. Gift cards are sold at POS starting during the 2003 holiday season. In
order to support the continued growth of DSW, merchandise planning and
merchandise allocation systems were implemented in June and September 2003,
respectively, to improve inventory productivity and store assortments. Business
intelligence tools in conjunction with datamarts are used for business analysis
and decision support. DSW systems run on UNIX computer systems.
We automated our corporate environment with a document management
system in 2003 for invoice processing to move toward an efficient, paperless
environment. In 2003, we implemented financial reporting and analysis and
financial planning systems to augment and streamline these processes. We have
embarked on a data warehouse project to provide capabilities for customer and
advertising analysis as well as to support a new loss prevention system.
A focus of our information technology program is to leverage our
technology infrastructure and systems whenever appropriate to simplify and
become more efficient. All segments are now supported by enterprise financial,
human resource and e-mail systems.
ASSOCIATES
The mission of the Human Resource department includes ensuring the
Company business plans, organization structure, talent development and bench
strength meet the Company's needs for associate effectiveness to improve quality
of work product, superior customer service, shareholder value and our profit.
As of April 5, 2004, we had approximately 18,400 associates of which
9,000 were full-time and the balance were part-time. Approximately 1,400 of
these associates in 21 stores are covered by collective bargaining agreements.
We believe that, in general, we have satisfactory relations with all of our
associates.
Group hospitalization, surgical, medical, vision, dental, disability
and life insurance benefits and a 401(k) plan are provided to full-time
non-union associates. We are a co-sponsor with SSC in these plans. We also
sponsor an associate stock purchase plan and a stock option plan for salaried
associates.
COMPETITION
The retail industry is highly competitive. We compete with a variety of
conventional and discount retail stores, including national, regional and local
independent department and specialty stores, as well as with catalog operations,
on-line providers, factory outlet stores and other off-price stores. Our
operating entities - Value City, DSW and Filene's Basement - have different
target customers and different strategies, but each focus on the basic equation:
Value = Quality/Price.
In the discount or off-price retailing segment, we differentiate
ourselves through our Value City store format and the breadth of our product
offering. Our large stores differ from most other off-price retailers that tend
to operate substantially smaller stores focusing predominantly on either hard or
soft goods. Our large stores enable us to offer a broad range of brands and
products.
In addition, because we purchase much of our inventory
opportunistically, we compete for merchandise with other national and regional
off-price apparel and discount outlets. Many of our competitors handle identical
or similar lines of merchandise and have comparable locations, and some have
greater financial resources than we do.
Competitive factors important to our customers include fashion, value,
merchandise selection, brand name recognition and, to a lesser degree, store
location. We compete primarily on the basis of value, merchandise quality and
selection. We believe our competitive advantages include: our reputation in the
marketplace for being able to purchase entire lots of merchandise; our ability
either to quickly distribute or to hold the merchandise for sale at the most
opportune time; our full-line merchandise and style offerings; and our broad
range of brand names.
Our fastest growing brand, DSW, provides a varied selection of quality
shoes, convenience and value to its customers. The resulting benefits of this
unique selling proposition fuels the high satisfaction index customers attribute
to their DSW shopping experience. Our customers enjoy a friendly, warm shopping
atmosphere with ease of store navigation.
Like Value City, Filene's Basement provides perceived high value by
offering easily recognized brand-name merchandise at surprisingly affordable
prices. Its niche, however, is the top-tier of the off-price retailing category
and its legendary sales events shape its image as having a special "cachet".
12
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores we
operated as of January 31, 2004:
Filene's
Value City DSW Basement Total
---------- --- -------- -----
Arizona - 2 - 2
California - 12 - 12
Colorado - 4 - 4
Connecticut - 2 - 2
Delaware 3 - - 3
Florida - 8 - 8
Georgia 4 6 1 11
Illinois 16 8 2 26
Indiana 7 3 - 10
Kansas - 3 - 3
Kentucky 4 - - 4
Maryland 8 4 - 12
Massachusetts - 6 8 14
Michigan 9 8 - 17
Minnesota - 4 - 4
Missouri 7 2 - 9
Nevada - 2 - 2
New Hampshire - 1 - 1
New Jersey 7 6 1 14
New York - 12 4 16
North Carolina 1 2 - 3
Ohio 23 11 1 35
Oklahoma - 1 - 1
Pennsylvania 18 9 1 28
Rhode Island - 1 - 1
Tennessee 1 3 - 4
Texas - 12 - 12
Virginia 4 7 - 11
Washington D.C. - - 3 3
West Virginia 4 - - 4
Wisconsin - 3 - 3
---------- --- -------- -----
116 142 21 279
---------- --- -------- -----
We maintain buying offices in Columbus, Ohio; Boston, Massachusetts;
New York, New York and Los Angeles, California. We operate 7
warehouse/distribution complexes located in Columbus, Ohio and one distribution
facility in Auburn, Massachusetts. In addition, to expedite the flow of
merchandise to certain clusters of stores, we use third party processors and
utilize vendor direct shipments where such use is advantageous. Our executive
offices occupy approximately 45,000 square feet in a building which includes a
store and also serves as one of our apparel distribution centers.
The stores and all of the warehouse, buying and executive office
facilities are leased or subleased except for one owned shoe store location. As
of January 31, 2004, we leased or subleased 36 stores and 6 warehouse facilities
and a parcel of land from SSC or entities affiliated with SSC. The remaining
stores and warehouses are leased from unrelated entities. Most of the store
leases provide for an annual rent based upon a percentage of gross sales, with a
specified minimum rent.
Our warehouse and distribution facilities for our Value City, DSW and
Filene's Basement businesses are adequate for our current needs and we believe
that such facilities, with certain modifications and additional equipment, will
be adequate for our foreseeable future demands.
We plan to consolidate corporate office functions for our Columbus,
Ohio based associates. Occupancy for the new leased corporate office facility is
scheduled for late 2004.
13
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common shares are listed for trading under the ticker symbol "RVI"
on the New York Stock Exchange. The following table sets forth the high and low
sales prices of our Common Shares as reported on the NYSE Composite Tape during
the periods indicated. As of April 5, 2004, there were 532 holders of record of
our common shares.
HIGH LOW
Fiscal 2002:
First Quarter $4.62 $3.04
Second Quarter 4.40 2.20
Third Quarter 2.68 1.55
Fourth Quarter 3.73 1.50
Fiscal 2003:
First Quarter $2.26 $1.48
Second Quarter 3.25 1.90
Third Quarter 5.88 2.02
Fourth Quarter 6.30 4.10
Fiscal 2004:
First Quarter (through April 5, 2004) $8.09 $5.02
We have paid no dividends and we do not anticipate paying cash
dividends on our common shares during fiscal 2004. Presently we expect that all
of our future earnings will be retained for development of our businesses. The
payment of any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. The Company's credit facility restricts the payment of dividends by
the Company or any affiliate of the borrower or guarantor, other than dividends
paid in stock of the issuer or paid to another affiliate, and cash dividends can
only be paid to the Company by its subsidiaries up to the aggregate amount of
$5.0 million less the amount of any borrower advances made to the Company by any
subsidiaries. The Company credit facilities are more fully explained in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 17 of this Annual Report.
In connection with our refinancing, we amended and restated our $75
million convertible loan on June 11, 2002. Pursuant to the terms of the
convertible loan, the lenders may, at their option, convert the convertible loan
into shares of our common stock at a conversion rate of $4.50 per share, subject
to adjustment. We relied on the exemption from registration contained in Section
4(2) of the Securities Act of 1933 for this issuance.
In connection with our refinancing, on September 26, 2002 we issued
warrants to purchase 2,954,792 shares of our common stock at $4.50 per share,
subject to adjustment. We relied on the exemption from registration contained in
Section 4(2) of the Securities Act of 1933 for this issuance.
The information required by this Item, other than the information set
forth above, is incorporated herein by reference from the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
2004.
15
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated various
selected financial information. Such selected consolidated financial data should
be read in conjunction with the Consolidated Financial Statements of Retail
Ventures, Inc. including the notes thereto, set forth in Item 8 of this Annual
Report on Form 10-K and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in Item 7 of this Annual Report
on Form 10-K.
For the Fiscal Year Ended
---------------------------------------------------------------------------------
1/31/04 2/1/03 2/2/02 2/3/01(1) 1/29/00
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Net Sales (2) $2,594,206 $2,450,719 $2,283,878 $2,213,017 $1,670,176
Operating Profit (loss) $ 28,401 $ 30,583 $ (16,344) $ (135,601) $ 65,788
(Loss) income before
cumulative effect
of accounting change $ (4,446) $ (1,585) $ (28,723) $ (101,791) $ 33,468
Cumulative effect of
accounting change -- $ (2,080) -- -- --
Net (Loss) Income $ (4,446) $ (3,665) $ (28,723) $ (101,791) $ 33,468
Basic (loss) earnings
per share before
cumulative effect of
accounting change $ (0.13) $ (0.05) $ (0.85) $ (3.03) $ 1.03
Cumulative effect of
accounting change -- $ (0.06) -- -- --
Basic (loss) earnings
per share $ (0.13) $ (0.11) $ (0.85) $ (3.03) $ 1.03
Diluted (loss) Earnings
per Share $ (0.13) $ (0.11) $ (0.85) $ (3.03) $ 1.02
Total Assets $ 863,945 $ 831,799 $ 880,311 $ 908,009 $ 744,181
Working Capital $ 234,857 $ 181,390 $ 228,775 $ 211,402 $ 205,011
Current Ratio 1.89 1.60 1.79 1.66 1.82
Long-term Obligations $ 326,940 $ 264,664 $ 337,199 $ 326,449 $ 144,168
Number of: (3)
Value City Stores 116 116 117 119 105
DSW Stores 142 126 104 78 58
Filene's Basement Stores 21 20 20 19 --
Net Sales per Selling Sq. Ft. (4) $ 225 $ 224 $ 233 $ 234 $ 221
Comparable Sales Change (5) 1.2% (3.5)% (2.4)% (1.1)% 7.2%
(1) Fiscal 2000 includes 53 weeks; all other years contain 52 weeks.
(2) Excludes sales of licensed departments. Effective February 2, 2002, we
acquired the remaining 50% interest in a joint venture. Results of our
percentage ownership in the joint venture are reflected in joint
venture operations.
(3) Includes all stores operating at the end of the fiscal year.
(4) Presented in whole dollars and excludes licensed departments and stores
not operated during the entire fiscal period.
(5) Comparable Store Sales Change excludes licensed departments. A store is
considered to be comparable if it is opened 14 months at the beginning
of the fiscal year. For fiscal year 2000, comparable store sales are
computed using like 52-week periods.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, in some cases have affected the
matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations. These same factors could cause our future financial
performance in fiscal 2004 and beyond to differ materially from those expressed
or implied in any such forward-looking statements. These factors include:
decline in demand for our merchandise, our ability to achieve our business
plans, expected cash flow from operations, vendor and their factor relations,
flow of merchandise, compliance with our credit agreements, our ability to
strengthen our liquidity and increase our credit availability, the availability
of desirable store locations on suitable terms, changes in consumer spending
patterns, marketing strategies, consumer preferences and overall economic
conditions, the impact of competition and pricing, changes in weather patterns,
changes in existing or potential duties, tariffs or quotas, paper and printing
costs, the ability to hire and train associates and development of management
information systems.
Our operations have been historically seasonal, with a disproportionate
amount of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons for Value City and Filene's Basement. DSW seasonal
sales occur both in early Spring and Fall. As a result of seasonality, any
factors negatively affecting us during these periods, including adverse weather,
the timing and level of markdowns or unfavorable economic conditions, could have
a material adverse effect on our financial condition and results of operations
for the entire year.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis discusses the results of
operations and financial condition as reflected in our consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. As discussed in Note 1 to our Consolidated Financial
Statements, the preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of commitments and contingencies at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. On an ongoing basis, management evaluates its estimates and judgments,
including, but not limited to, those related to inventory valuation,
depreciation, amortization, recoverability of long-lived assets including
intangible assets, the calculation of retirement benefits, estimates for self
insurance reserves for health and welfare, workers' compensation and casualty
insurance, income taxes, contingencies, 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 statements, we cannot guarantee that our
estimates and assumptions will be accurate. As the determination of these
estimates requires the exercise of judgment, actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
We believe the following represent the most critical estimates and
assumptions, among others, used in the preparation of our consolidated financial
statements. We have discussed the selection, application and disclosure of the
critical accounting policies with our audit committee.
- Revenue recognition. Revenues from our retail
operations are recognized at the latter of point of
sale or the delivery of goods to the customer. Retail
revenues are reduced by a provision for anticipated
returns based on historical trends.
- 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 method is widely
used in the retail industry due to its practicality.
Under the retail inventory method, the valuation of
inventories at cost and the resulting gross margins
are calculated by applying a calculated cost to
retail ratio to the retail value of inventories. The
cost of the inventory reflected on our consolidated
balance sheet is decreased by charges to cost of
sales at the time the retail value of the inventory
is lowered through the use of markdowns. 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 $34.2
million and $32.5 million at the end of fiscal 2003
and 2002, respectively.
17
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 customer's
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.
- Long-lived assets. In evaluating the fair value and
future benefits of long-lived assets, we perform an
analysis of the anticipated undiscounted future cash
flows of the related long-lived asset and reduce the
carrying value by the excess where the recorded value
exceeds the fair value.
During fiscal 2003, we recorded a $0.3 million charge
related to long-lived assets at store operating
units.
During fiscal 2002, we recorded two different charges
related to long-lived assets. The first charge was
for goodwill impairment as a result of the
implementation of SFAS 142, which requires that
goodwill no longer be amortized, but would be subject
to annual fair value based impairment tests. The
initial tests for goodwill impairment, as of February
3, 2002, resulted in a non-cash charge of $3.4
million, $2.1 million net of taxes, which is reported
in our Consolidated Statement of Operations as of
February 1, 2003 in the caption "Cumulative effect of
accounting change." Substantially all of the charge
relates to goodwill associated with our purchase of
Mazel's interest in VCM and is included in the net
loss for the year ended February 1, 2003. At the end
of the current fiscal year we have on our books $37.6
million of goodwill subject to annual testing. The
second charge of $0.6 million related to long-lived
assets at store operating units. The result of
reviewing undiscounted cash flows for stores under
SFAS 144, identified stores where the recorded value
of the asset exceeded the fair value.
We believe at this time that the long-lived assets'
carrying values and useful lives continue to be
appropriate. To the extent these future projections
or our strategies change, the conclusion regarding
impairment may differ from our current estimates.
- Self-insurance reserves. We record estimates for
certain health and welfare, workers compensation and
casualty insurance costs that are self-insured
programs. These estimates are based on actuarial
assumptions and are subject to change based on actual
results. Should a greater amount of claims occur
compared to what was estimated for costs of certain
health and welfare, workers compensation and casualty
insurance increase beyond what was anticipated,
reserves recorded may not be sufficient and to the
extent actual results vary from assumptions, earnings
would be impacted.
- Pension. The obligations and related assets of
defined benefit retirement plans are presented in
Note 5 of the Notes to Consolidated Financial
Statements. Plan assets, which consist primarily of
marketable equity and debt instruments, are valued
using market quotations. Plan obligations and the
annual pension expense are determined by independent
actuaries and through the use of a number of
assumptions. Key assumptions in measuring the plan
obligations include the discount rate, the rate of
salary increases and the estimated future return on
plan assets. In determining the discount rate, we
utilize the yield on fixed-income investments
currently available with maturities corresponding to
the anticipated timing of the benefit payments.
Salary increase assumptions are based upon historical
experience and anticipated future management actions.
Asset returns are based upon the anticipated average
rate of earnings expected on the invested funds of
the plans. At January 31, 2004, the weighted-average
actuarial assumption of our plans were: discount rate
6.0%, assumed salary increases 4% and long-term rate
of return on plan assets 8%. To the extent actual
results vary from assumptions, earnings would be
impacted.
- Customer loyalty program. We maintain a customer
loyalty program for our DSW operations in which
customers receive a future discount on qualifying
purchases. The "Reward Your Style" program is
designed to promote customer awareness and loyalty
plus provide the Company with the ability to
communicate with our customers and enhance our
understanding of their spending trends. Upon reaching
the target level, customers may redeem these
discounts on a future purchase. Generally, these
future discounts must be redeemed in one year. We
accrue the estimated costs of the anticipated
redemptions of the discount earned at the time of the
initial purchase and charge such costs to selling,
general and administrative expense based on
historical experience. The estimates of the costs
associated with the loyalty program require us to
make assumptions related to customer purchase levels
and redemption rates. The accrued liability as of
January 31, 2004 and February 1, 2003 was $3.0
million and $2.2 million, respectively. To the extent
assumptions of purchases and redemption rates vary
from actual results, earnings would be impacted.
18
- Income taxes. We do business in numerous
jurisdictions that impose taxes. Management is
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. The estimation process involves
adjusting income determined by the application of
generally accepted accounting principles for items
that are treated differently by the applicable taxing
authorities. Deferred tax assets and liabilities are
reflected on our balance sheet for temporary
differences that will reverse in subsequent years. If
different management judgments had been made, our tax
expense, assets and liabilities could be different.
During fiscal 2003, we established a reserve for
deferred income tax assets of $1.5 million for carry
forwards related to state and local net operating
losses and for excess contribution carry forwards.
See Note 10 to our Consolidated Financial Statements
on page F-20 of this Annual Report for a discussion
of our significant accounting policies.
RESULTS OF OPERATIONS
We operate three business segments. Value City and Filene's Basement
segments operate full-line, off-price department stores. Our DSW segment sells
better-branded off-price shoes and accessories. As of January 31, 2004, a total
of 116 Value City, 21 Filene's Basement and 142 DSW stores were open. The
following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in our Consolidated
Statements of Operations.
For the Year Ended
- -------------------------------------------------------------------------------------------------
1/31/04 2/1/03 2/2/02
52 Weeks 52 Weeks 52 Weeks
- ------------------------------------------------------------------------------------------------
Net sales, excluding sales
licensed departments 100.0% 100.0% 100.0%
Cost of sales (61.4) (61.8) (62.6)
- ------------------------------------------------------------------------------------------------
Gross profit 38.6 38.2 37.4
Selling, general and
administrative expenses (37.7) (37.3) (38.9)
License fees and
other income 0.2 0.3 0.8
- ------------------------------------------------------------------------------------------------
Operating profit (loss) 1.1 1.2 (0.7)
Interest expense, net (1.3) (1.3) (1.3)
- ------------------------------------------------------------------------------------------------
Loss before
cumulative effect of accounting
change and income taxes (0.2) (0.1) (2.0)
Benefit (provision) for income taxes -- -- 0.7
- ------------------------------------------------------------------------------------------------
Loss before cumulative
effect of accounting change (0.2) (0.1) (1.3)
Cumulative effect of accounting
change, net of income taxes -- (0.1) --
- ------------------------------------------------------------------------------------------------
Net loss (0.2)% (0.2)% (1.3)%
- ------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JANUARY 31, 2004 COMPARED TO FISCAL YEAR ENDED FEBRUARY 1,
2003
Sales. Sales for the fifty-two weeks ended January 31, 2004 (fiscal
2003), increased by 5.9% to $2.59 billion from $2.45 billion in the fifty-two
week period of fiscal year 2002. By segment comparable store sales were:
2003 2002
---- ----
Value City Department Stores (0.7)% (5.1)%
DSW 5.6% (0.1)%
Filene's Basement 2.6% 0.3%
- ---------------------------------------------------------------------------------------------------
Total 1.2% (3.5)%
- ---------------------------------------------------------------------------------------------------
19
Comparable store sales percentages were impacted negatively by
unseasonable weather in the early part of fiscal 2003 in all segments. All 116
Value City stores are in our comparative store base. Value City's non-apparel
comparable sales increased 2.1% for the twelve months and apparel comparable
sales declined 2.4% for the fiscal year. The children's apparel division had an
increase of 2.1%, while the men's and ladies' apparel divisions had comparable
sales declines of 4.6% and 2.4%, respectively. DSW comparable store sales
improved 5.6% as overall sales rose almost $143.7 million to $772.6 million for
the year. The DSW increase includes a net increase of 16 stores. Filene's
Basement sales rose $13.7 million to $316.9 million for the fiscal year.
Filene's Basement total stores increased due to a single opening during the
fiscal year.
Gross profit. Consolidated gross profit increased $64.9 million from
$936.1 million to $1,001.0 million, and increased as a percentage of net sales
from 38.2% to 38.6%. Value City's gross profit decrease is primarily
attributable to lower average unit retail prices as a result of lower initial
markups during the year. Gross profit for our DSW and Filene's Basement segments
improved as the result of higher initial markups on merchandise purchases and a
reduction in markdowns. Gross profit, as a percent of sales by segment, was:
2003 2002
---- ----
Value City Department Stores 38.4% 38.9%
DSW 41.0% 39.4%
Filene's Basement 33.4% 32.2%
- -------------------------------------------------------------------------------------------
Total 38.6% 38.2%
- -------------------------------------------------------------------------------------------
SG&A. For the year, consolidated selling, general and administrative
expenses ("SG&A") increased $65.3 million to $978.2 million or 37.7% of sales.
The year ended January 31, 2004 includes approximately $1.6 million for store
closings, a $16.7 million increase in advertising and $4.3 million in
pre-opening costs for new stores. New store openings in the period were limited
to our DSW and Filene's Basement segments. Preparations for opening a DSW store
or a Filene's Basement store generally take eight to ten weeks. Pre-opening
costs are expensed as incurred. It has been our experience that new stores for
each of our segments generally achieve profitability and contribute to net
income after the first full year of operations. Pre-opening expense for the 16
new DSW stores was $3.7 million in fiscal 2003 compared to $2.6 million for the
22 new stores opened in prior year. Pre-opening expense was $0.6 million in each
of fiscal 2003 and 2002 for the 1 new Filene's Basement store opened in each of
those periods. SG&A, as a percent of sales by segment, were:
2003 2002
---- ----
Value City Department Stores 38.3% 37.9%
DSW 37.7% 37.2%
Filene's Basement 34.9% 33.9%
- -------------------------------------------------------------------------------------------
Total 37.7% 37.3%
- -------------------------------------------------------------------------------------------
License fees and other income. Overall license fees and other income
decreased $1.8 million from $7.4 million to $5.6 million. License fees decreased
$0.8 million, or 29.1%, as a result of lower sales from licensees. Other income
decreased $1.0 million, or 21.6%, from $4.8 million to $3.7 million. Other
income is comprised of layaway fees and vending income. These sources of income
vary based on customer traffic and contractual arrangements.
Operating profit. Operating profit was $28.4 million in fiscal 2003
compared to $30.6 million in fiscal 2002. As a percentage of net sales operating
profit was 1.1% and 1.2% in fiscal 2003 and 2002, respectively.
Interest expense. Interest expense, net of interest income, increased
$2.1 million from $32.5 million in fiscal 2002 to $34.6 million in fiscal 2003
due primarily to an increase in average weighted borrowings and an increase in
the average weighted borrowing rate. Interest expense includes the amortization
of debt discount of $2.0 million.
20
FISCAL YEAR ENDED FEBRUARY 1, 2003 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2,
2002
Sales. Sales for the fifty-two weeks ended February 1, 2003 (fiscal
2002), increased by 7.3% to $2.45 billion from $2.28 billion in the fifty-two
week period of fiscal 2001. By segment, comparable store sales were:
2002 2001
---- ----
Value City Department Stores (5.1)% (3.7)%
DSW (0.1)% 0.0%
Filene's Basement 0.3% 2.2%
- -------------------------------------------------------------------------------------------
Total (3.5)% (2.4)%
- -------------------------------------------------------------------------------------------
The comparable store sales percentage declines were attributable to a
highly competitive and promotional retail environment and the effects of a
softening economy. Value City's non-apparel comparable sales decreased 3.8% and
apparel comparable sales declined 6.6% in fiscal 2002. The ladies's, men's and
children's apparel divisions represented approximately 58% of total retail sales
for fiscal 2002. Sales declines in these divisions were 2.7%, 9.9% and 8.4%,
respectively. DSW reflected a slightly negative comparable store rate as overall
sales rose almost $119.6 million to $629.0 million for the year. The DSW
increase in fiscal 2002 included a net increase of 22 stores. The Filene's
Basement segment's sales increased $9.8 million to $303.2 million for fiscal
2002 including a slight increase in comparative store sale percentage. Filene's
Basement total stores opened remained unchanged due to a single opening and a
single closing during the fiscal year.
Gross profit. Consolidated gross profit increased $81.7 million from
$854.4 million to $936.1 million, and increased as a percentage of net sales
from 37.4% to 38.2%. The Value City segment's gross profit improvement is
primarily the result of improved initial merchandise costs negotiated with
vendors and higher retail offering in our stores. Additionally, Value City
increased control over inventory quantities and markdowns and reduced the loss
associated with shrink from the prior year. Gross profit for our DSW segment
improved as a result of higher initial markups on merchandise purchases and a
reduction in markdowns. Our Filene's Basement segment's gross profit was
negatively affected by early and excess markdowns required to sell and reduce
inventories. Gross profit, as a percent of sales by segment, was:
2002 2001
---- ----
Value City Department Stores 38.9% 37.6%
DSW 39.4% 38.2%
Filene's Basement 32.2% 35.1%
- ------------------------------------------------------------------------------------------
Total 38.2% 37.4%
- ------------------------------------------------------------------------------------------
SG&A. For the year, consolidated selling, general and administrative
expenses ("SG&A") increased $24.2 million to $912.9 million or 37.3% of sales.
Our fifty-two week period ended February 1, 2003 includes approximately $0.6
million for FASB 144 write-off, $3.3 million related to write-off of unamortized
debt costs, $1.1 million for store closings, $6.0 million for severance costs
related to workforce reductions during the year and the relocation of our Value
City merchandising office from Boston to New York. The relocation of the Value
City buyers from Boston to New York City provides merchants with a closer
proximity to our markets and vendors. In addition, we evaluated stores with
negative or inadequate cash flows to determine if any assets were impaired. New
store openings in the period were limited to our DSW and Filene's Basement
segments. Preparations for opening a DSW store or a Filene's Basement store
generally take eight to ten weeks. Pre-opening costs are expensed as incurred.
It has been our experience that new stores for each of our segments generally
achieve profitability and contribute to net income after the first full year of
operations. No Value City stores were opened less than twelve months during
fiscal 2002. Twenty-two DSW stores were opened less than twelve months in fiscal
2002 and had a pre-tax net operating loss of $2.6 million, including $2.6
million of pre-opening expenses. Twenty-six DSW stores were opened less than
twelve months during fiscal 2001 and had a pre-tax net operating loss of $2.5
million, including $0.1 million of pre-opening expenses. Filene's Basement had
one store opened less than twelve months in fiscal 2002 with a pre-tax net
operating profit of $0.1 million, including $0.6 million of pre-opening
expenses. SG&A as a percent of sales by segment were:
2002 2001
---- ----
Value City Department Stores 37.9% 40.6%
DSW 37.2% 37.4%
Filene's Basement 33.9% 32.9%
- ------------------------------------------------------------------------------------------
Total 37.3% 38.9%
- ------------------------------------------------------------------------------------------
21
License fees and other income. Overall license fees and other income
decreased $10.6 million in fiscal 2002. License fees decreased $9.6 million, or
78.5%, from $12.2 million to $2.6 million, as a result of lower sales from
unrelated licensees. Fees from the VCM joint venture of $9.7 million in fiscal
2001, did not occur in fiscal 2002 because the operations were consolidated in
fiscal 2002 as a result of the purchase of our partner's 50% interest in the VCM
joint venture at the close of business on February 2, 2002. Other income
decreased $0.9 million, or 16.8%, from $5.7 million to $4.8 million. Other
income is comprised of layaway fees and vending income. These sources of income
vary based on customer traffic and contractual arrangements.
Operating profit. Operating profit increased to $30.6 million in fiscal
2002 from a loss of $16.3 million in fiscal 2001, and increased as a percentage
of net sales from a loss of 0.7% in fiscal 2001 to a profit of 1.2% in fiscal
2002.
Interest expense. Interest expense, net of interest income, increased
$4.0 million from $28.5 million to $32.5 million due primarily to an increase in
interest rates as a result of new term debt, offset partially by a decrease in
average borrowings. Interest expense also included amortization of debt discount
of $1.3 million.
Equity in loss of joint venture. Equity in loss of joint venture in
fiscal 2001 of $0.4 million was the result of operations in the VCM joint
venture with Mazel. We acquired Mazel's interest in VCM at the close of business
February 2, 2002 and have included the operations of these departments in the
consolidated statements presented.
Cumulative effect of accounting change. We also implemented a new
accounting principle during fiscal 2002 resulting in the impairment of goodwill.
The charge for the application of the new principle was $2.1 million net of tax,
or 0.1% of sales. We retained a valuation professional to assist in the
calculation of impairment. Our initial test was performed as of the beginning of
the fiscal year while our annual test occurred in the middle of the fourth
quarter. Goodwill will be subject to annual impairment tests and results of such
tests cannot be predicted.
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 back-to-school and Christmas selling seasons for
our Value City segment and, more recently, our Filene's Basement segment. The
shoe business experiences increased sales in both early Spring and Fall seasons
in relationship to the change in footwear desired by the DSW customer.
FISCAL YEAR
We follow a 52/53-week fiscal year that ends on the Saturday nearest to
January 31. Fiscal 2003, 2002 and 2001 each contain 52 weeks.
INCOME TAXES
Our effective tax rate for fiscal 2003 was 27.9% versus 17.0% for
fiscal 2002. The effective tax benefits are negatively impacted due to the
increase in non-deductible expenses for tax purposes associated with the
amortization of the warrants issued in connection with our long term debt.
During our fiscal year ended January 31, 2004, we established a valuation
allowance for our deferred tax assets of $1.5 million. The reserve reflects a
reduction in the estimated amount for future tax deductions, primarily for state
and local taxes and excess contribution carry forwards.
Our effective tax rate for fiscal 2002 was 17.0% versus 36.5% for
fiscal 2001. There was an increase in the effective tax rate primarily due to
the increase in non-deductible expenses for tax purposes and the fluctuation in
taxable income. However, that increase was then off-set by the tax effect of the
write-off of financing costs.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which require
implementation by a date falling within or after the close of the fiscal year.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Under this Statement,
obligations that meet the definition of a liability will be recognized
consistently with the retirement of the associated tangible long-lived assets.
This Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. We assessed the impact of SFAS No. 143 and there
was none.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. The adoption of SFAS No. 145 did not have a significant effect on the
Company's results of operations or its financial position. However, it
22
did require that the Company reclassify the loss on the extinguishment of debt
of approximately $3.3 million from extraordinary loss to selling, general and
administrative expense, in the Company's consolidated financial statement of
operations in fiscal 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which requires the consolidation of
certain entities considered to be variable interest entities ("VIEs"). An entity
is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital is
insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of the
VIE's expected losses or residual returns if they occur. FIN 46 provides certain
exceptions to these rules, relating to qualifying special purpose entities
("QSPE's") subject to the requirements of SFAS No. 140. Upon its original
issuance, FIN 46 required that VIEs created after January 31, 2003 would be
consolidated immediately, while VIEs created prior to February 1, 2003 were to
be consolidated as of July 1, 2003.
In October 2003, the FASB deferred the effective date for consolidation
of VIEs created prior to February 1, 2003 to December 31, 2003 for calendar
year-end companies, with earlier application encouraged.
In December 2003, the FASB published a revision to FIN 46 ("FIN 46R")
to clarify some of the provisions of the original interpretation and to exempt
certain entities from its requirements. FIN 46R provides special effective date
provisions to enterprises that fully or partially applied to FIN 46 prior to the
issuance of the revised interpretation. In particular, entities that have
already adopted FIN 46 are not required to adopt FIN 46R until the quarterly
reporting period ended May 1, 2004. The Company is currently reviewing the
provisions of FIN 46R and will adopt FIN 46R for the quarterly reporting period
ending May 1, 2004.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances), many of which were
previously classified as equity. This statement was effective for financial
instruments entered into or modified after May 31, 2003 and for pre-existing
instruments as of the beginning of the first interim period beginning after June
15, 2003. Initial adoption of this accounting pronouncement did not have a
material impact on the Company's consolidated financial statements.
The FASB's Emerging Issues Task Force ("EITF") Issue No. 02-16,
"Accounting By A Customer (Including A Reseller) For Cash Consideration Received
From A Vendor" addressed the accounting treatment for vendor allowances. The
adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on the
Company's financial position or results of operations.
INFLATION
The results of operations and financial condition are presented based
upon historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
that the effect of inflation, if any, on the results of operations and financial
condition has been minor; however, there can be no assurance that the business
will not be affected by inflation in the future.
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing cash requirements are for seasonal and new store
inventory purchases, capital expenditures in connection with expansion and
remodeling and infrastructure growth, primarily information technology
development. The primary sources of funds for these liquidity needs are cash
flow from operations and credit facilities. Our working capital and inventory
levels typically build throughout the fall, peaking during the holiday selling
season.
Net working capital was $234.9 million and $181.4 million at January
31, 2004 and February 1, 2003, respectively. Current ratios at those dates were
1.9 and 1.6, respectively. Net cash provided by operating activities totaled
$6.2 million and $90.3 million in fiscal 2003 and 2002, respectively. The net
cash decrease is reflective of several items, primarily the increase in
inventory of $30.5 million, the reduction in accounts payable of $13.9 million
and the reduction of accrued expenses of $23.7 million, which were funded from
operations and borrowings under our revolving credit facility. The increases in
inventories for new stores were: $13.8 million for DSW, $5.6 million for
licensed departments and $2.1 million for the opening of Filene's Basement.
Cash used for capital expenditures was $68.7 million and $41.8 million
for fiscal 2003 and 2002, respectively. During fiscal 2003, capital expenditures
included $16.2 million for new stores, $29.2 million for improvements in
existing stores, $5.7 million for office, warehousing and operations of our shoe
business and $17.6 million for MIS equipment upgrades and new systems. A source
of cash from investing activity was proceeds from lease incentives which are
amortized as a reduction of rent expense over the life of the lease.
On June 11, 2002, Value City Department Stores, Inc., together with
certain other principal subsidiaries of Retail Ventures, Inc., entered into a
$525.0 million refinancing that consists of three separate credit facilities
(collectively, the "Credit Facilities"): (i) a three-year $350.0 million
revolving credit facility (the "Revolving Credit Facility"), (ii) two $50.0
million term loan facilities provided equally by Cerberus Partners, L.P. and
Schottenstein Stores Corporation (the "Term Loans"), and (iii) an amended and
re-
23
stated $75.0 million senior subordinated convertible loan, initially entered
into by us on March 15, 2000, which is held equally by Cerberus Partners, L.P.
and SSC (the "Convertible Loan"). These Credit Facilities are guaranteed by
Retail Ventures, Inc. and substantially all of its subsidiaries.
We are not subject to any financial covenants under these credit
facilities, however, there are numerous restrictive covenants relating to our
management and operation. These non-financial covenants include, among other
restrictions, limitations on indebtedness, guarantees, mergers, acquisitions,
fundamental corporate changes, financial reporting requirements, budget
approval, disposition of assets, investments, loans and advances, liens,
dividends, stock purchases, transactions with affiliates, issuance of securities
and the payment of and modification to debt instruments. These Credit Facilities
are also subject to an Intercreditor Agreement, which provides for an
established order of payment of obligations from the proceeds of collateral upon
default (the "Intercreditor Agreement").
$350 Million Revolving Credit Facility
Under the Revolving Credit Facility, the borrowing base formula is
structured in a manner that allows us and our subsidiaries availability based on
the value of inventories and receivables. Primary security for the Revolving
Credit Facility is provided by a first priority lien on all of our inventory and
accounts receivable, as well as certain intercompany notes and payment
intangibles. Subject to the Intercreditor Agreement, the Revolving Credit
Facility also has a second priority perfected interest in all of the collateral
securing the Term Loans. Interest on borrowings is calculated at the bank's base
rate or Eurodollar rate plus 2.00% to 2.75%, depending upon the level of average
excess availability we maintain. The maturity date is June 11, 2005. At January
31, 2004 and February 1, 2003, $137.7 million and $169.3 million were available,
respectively, under the Revolving Credit Facility. Direct borrowings aggregated
$125.0 million and $64.0 million for fiscal 2003 and fiscal 2002, respectively,
while $23.4 million and $19.2 million letters of credit were issued and
outstanding for fiscal 2003 and fiscal 2002, respectively.
$100 Million Term Loans - Related Parties
The Term Loans are comprised of a $50.0 million Term Loan B and a $50.0
million Term Loan C. All obligations under the Term Loans are senior debt and,
subject to the Intercreditor Agreement, have the same rights and privileges as
the Revolving Credit Facility and the Convertible Loan. We and our principal
subsidiaries are obligated on the facility. The maturity date is June 11, 2005.
The Term Loans' stated rate of interest per annum during the initial
two years is 14% if paid in cash and 15% if we elect a paid-in-kind ("PIK")
option. During the first two years of the Term Loans, we may pay all interest in
PIK. During the final year of the Term Loans, the stated rate of interest is
15.0% if paid in cash or 15.5% if PIK, and the PIK option is limited to 50% of
the interest due. For the years ended January 31, 2004 and February 1, 2003, we
elected to pay interest in cash.
We issued 2,954,792 warrants ("Warrants") to purchase shares of common
stock, at an initial exercise price of $4.50 per share, to the Term Loan C
Lenders. The Warrants are exercisable at any time prior to June 11, 2012. We
have granted the Term Loan C Lenders registration rights with respect to the
shares issuable upon exercise of the Warrants. The $6.1 million value ascribed
to the Warrants was estimated as of the date of issuance using the Black-Scholes
Pricing Model with the following assumptions: risk-free interest rate of 5.6%;
expected life of 10 years; expected volatility of 47%; illiquidity discount of
10%; and an expected dividend yield of 0%. The related debt discount is
amortized into interest expense over the life of the debt.
The number of shares issuable varies upon the occurrence of the
following: (i) the issuance of additional shares of common stock without
consideration or for a consideration per share less than the Warrant exercise
price; (ii) the declaration of any dividend; (iii) the combination or
consolidation of the outstanding shares of common stock into a lesser number of
shares; (iv) the issuance or sale of additional shares at a price per share less
than the current market price but greater than the Warrant exercise price; (v)
the issuance of convertible securities which are convertible into shares of
common stock; and/or (vi) the exchange of shares in a merger or other business
combination.
$75 Million Senior Subordinated Convertible Loan - Related Parties