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Article by DailyStocks_admin    (06-21-08 09:18 AM)

Filed with the SEC from Jun 5 to Jun 11:

Retail Ventures (RVI)
Ohio retail mogul Jay L. Schottenstein reported owning 29.86 million shares (50.6%) in Retail Ventures, operator of the Filene's Basement store chain.
BUSINESS OVERVIEW

History of Our Business
The first Value City department store was opened in Columbus, Ohio in 1917. Until the initial public offering of Value City Department Stores, Inc. on June 18, 1991, Value City department stores operated as a division of Schottenstein Stores Corporation (“SSC”).
On October 8, 2003, the Company reorganized its corporate structure into a holding company form whereby Retail Ventures, 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. In connection with the reorganization, holders of common shares of Value City Department Stores, Inc. became holders of an identical number of common shares of Retail Ventures. The reorganization was effected by a merger which was previously approved by Value City Department Stores, Inc.’s shareholders. Since October 2003, Retail Ventures’ Common Shares have been listed for trading under the ticker symbol “RVI” on the New York Stock Exchange.
As of February 2, 2008, SSC owned approximately 39.5% of the outstanding RVI Common Shares and beneficially owned approximately 50.2% (assumes issuance of (i) 8,333,333 RVI Common Shares issuable upon the exercise of conversion warrants, (ii) 1,731,460 RVI Common Shares issuable upon the exercise of term loan warrants and (iii) 342,709 RVI Common Shares issuable upon exercise of term loan warrants) of the outstanding RVI common shares. In addition to SSC’s ownership of our common shares, we also have a number of ongoing related party agreements and arrangements with SSC, which are more fully described in Item 13 of this Annual Report on Form 10-K beginning on page 49.
In December 2004, the Company completed another corporate reorganization whereby Value City Department Stores, Inc. merged with and into Value City Department Stores LLC, a newly created, wholly-owned subsidiary of Retail Ventures. In connection with this reorganization, Value City transferred all the issued and outstanding shares of DSW and Filene’s Basement to Retail Ventures in exchange for a promissory note.
On July 5, 2005, DSW completed an initial public offering (“IPO”) of 16,171,875 Class A Common Shares sold at a price to the public of $19.00 per share and raising net proceeds of $285.8 million, net of the underwriters’ commission and before expenses of approximately $7.8 million. RVI accounted for the sale of DSW as a capital transaction. Associated with this transaction, a deferred tax liability of $65.5 million was recorded. As of February 2, 2008, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.0% of DSW’s outstanding common shares and approximately 93.2% of the combined voting power of such shares. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on the New York Stock Exchange under the symbol “DSW”.
In conjunction with the separation of their businesses following the IPO, Retail Ventures and DSW entered into several agreements, including, among others, a master separation agreement, a shared services agreement, a tax separation agreement and subsequently an IT transfer agreement. Retail Ventures’ current intent is to continue to hold its DSW Class B Common Shares, except to the extent necessary to satisfy obligations under warrants it has granted to SSC, Cerberus Partners, L.P. (“Cerberus”) and Millennium Partners L.P. (“Millennium”) and under its 6.625% Mandatorily Exchangeable Notes due September 15, 2011, or Premium Income Exchangeable Securities SM (“PIES”). Retail Ventures is subject to contractual obligations (a) with its warrantholders to retain enough DSW common shares to be able to satisfy its obligations to deliver such shares to its warrantholders if the warrantholders elect to exercise their warrants in full for DSW Class A common shares and (b) with the holders of its PIES to retain ownership of a number of DSW Class B common shares (which are exchangeable by Retail Ventures for DSW Class A common shares) equal to the maximum number of Class A common shares deliverable by Retail Ventures upon exchange of the PIES.
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an after-tax loss of $90.0 million on the transaction. As part of the transaction, Retail Ventures issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI common shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the change in ownership and operation of Value City Department Stores, Retail Ventures agreed to provide or arrange for the provision of certain transition services principally related to information technology, finance and human resources to Value City Department Stores for a period of one year unless otherwise extended by both parties.

General
We operate our business in the three segments described below:
DSW. DSW is a leading U.S. specialty branded footwear retailer operating 259 shoe stores in 37 states as of February 2, 2008. Its stores offer a wide selection of better-branded dress, casual and athletic footwear for women and men. DSW’s typical customers are brand-, quality- and style-conscious shoppers who have a passion for footwear and accessories. DSW’s core focus is to create a distinctive store experience that satisfies both the rational and emotional shopping needs of its customers by offering them a vast, exciting selection of in-season styles and brands combined with the convenience and value they desire. The stores average approximately 24,000 square feet and hold approximately 30,000 pairs of shoes. DSW believes this combination of selection, convenience and value differentiates it from its competitors and appeals to consumers from a broad range of socioeconomic and demographic backgrounds. In addition, DSW operates leased shoe departments for three non-related retailers in a combined 342 stores and in 36 stores for RVI’s wholly-owned subsidiary Filene’s Basement.
Filene’s Basement. Filene’s Basement stores are located primarily in major metropolitan areas of the Northeast and Midwest United States. Filene’s Basement’s mission is to provide the best selection of stylish, high-end designer and famous brand name merchandise at surprisingly affordable prices in men’s and women’s apparel, jewelry, shoes, accessories and home goods. Filene’s Basement focuses on serving the customer with discriminating fashion taste who appreciates an excellent value. These stores have a large selection of upscale designer and better-branded merchandise, including couture items imported directly from the fashion capitals of Europe. Famous for its unique bridal dress promotions, now hailed as the “Running of the Brides™,” Filene’s Basement believes that it is also distinctive in its offering of great fashion, high quality and affordable prices. As of February 2, 2008, there were 36 Filene’s Basement stores in operation.
Corporate. The Corporate segment represents the corporate assets, liabilities and expenses not allocated to other segments through corporate allocation or shared service arrangements. The remaining results of operation are comprised of debt related expenses, income on investments and interest on intercompany notes, the latter of which is eliminated in consolidation.
See Note 13 of Notes to Consolidated Financial Statements beginning on page F-31 of this Annual Report on Form 10-K for detailed financial information regarding our three operating segments.
.
DSW
DSW’s goal is to continue to strengthen its position as a leading better-branded footwear retailer by pursuing the following three primary strategies for growth in sales and profitability: expanding its store base, driving sales through enhanced merchandising and investment in its infrastructure.
DSW operates leased departments for three non-affiliated retailers and one affiliated retailer. DSW entered into supply agreements to merchandise the non-affiliated shoe departments in Stein Mart, Inc., Gordmans, Inc., and Frugal Fannie’s Fashion Warehouse stores as of July 2002, June 2004 and September 2003, respectively. DSW has operated leased shoe departments for Filene’s Basement since its acquisition by Retail Ventures in March 2000. DSW owns the merchandise, records sales of merchandise net of returns and sales tax, owns the fixtures (except for Filene’s Basement) and provides supervisory assistance in the covered locations. Stein Mart, Gordmans, Frugal Fannie’s and Filene’s Basement provide the sales associates. DSW pays a percentage of net sales as rent. As of February 2, 2008, DSW supplied merchandise to 278 Stein Mart stores, 63 Gordmans stores, one Frugal Fannie’s store and 36 Filene’s Basement stores. Beginning in fiscal 2006, DSW’s leased shoe department segment has been supported by a store field operations group, a merchandising group and a planning and allocation group (except for Filene’s Basement) that are separate from the DSW stores group.
Merchandising
Selection. DSW’s goal is to excite its customers with a “sea of shoes” that fulfill a broad range of style and fashion needs. DSW stores sell a large selection of better-branded merchandise. It purchases directly from more than 400 domestic and foreign vendors, primarily in-season footwear found in specialty and department stores and branded make-ups (shoes made exclusively for a retailer), with selection at each store geared toward the particular demographics of the location. A typical DSW store carries approximately 30,000 pairs of shoes in over 2,000 styles compared to a significantly smaller product offering at typical department stores.
DSW separates its merchandise into four primary categories — women’s dress and casual footwear; men’s dress and casual footwear; athletic footwear; and accessories. While shoes are the main focus of DSW, also offered is a complementary assortment of handbags, hosiery and other accessories.

Value. Through the DSW buying organization, DSW is able to provide its customers with high-quality, in-season fashions at prices that it believes are competitive with the typical sale price found at specialty retailers and department stores. DSW generally employs a consistent pricing strategy that typically provides its customers with the same price on its merchandise from the day it is received until it goes into DSW’s planned clearance rotation. The DSW pricing strategy differentiates DSW from competitors who usually price and promote merchandise at discounts available only for limited time periods. DSW finds customers appreciate having the power to shop for value when it is most convenient for them, rather than waiting for a department store or specialty retailer to have a sale event.
In order to provide additional value to its customers, DSW maintains a customer loyalty program for the DSW stores in which program members receive a future discount on qualifying purchases. This program offers additional savings to frequent shoppers and encourages repeat sales. Upon reaching the target-earned threshold, members receive certificates for these discounts which must be redeemed in six months.
Convenience. DSW believes it provides customers with the highest level of convenience based on DSW’s belief that customers should be empowered to control and personalize their shopping experiences. DSW merchandise is displayed on the selling floor with self-service fixtures to enable customers to view and touch the merchandise. DSW stores are laid out in a logical manner that groups together similar styles such as dress, casual, seasonal and athletic merchandise. DSW believes this self-service aspect provides DSW customers with maximum convenience as they are able to browse and try on the merchandise without feeling rushed or pressured into making a decision too quickly.
Advertising and Promotion
The marketing strategy for DSW focuses on communicating the selection, convenience and value offered by DSW through the use of television, radio and print media advertising as well as in-store promotions. DSW also maintains a gift card program with the intent to generate additional sales by reaching new customers.
During the third quarter of 2006 DSW re-launched its loyalty program, which included changing the name from “Reward Your Style” to “DSW Rewards,” the points threshold to receive a certificate and the certificate amounts. The changes were designed to improve customer awareness, customer loyalty and DSW’s ability to communicate with its customers. DSW target markets to “DSW Rewards” members throughout the year. DSW classifies these members by frequency and uses direct mail and on-line communications to stimulate further sales and traffic. As of February 2, 2008, over 8.6 million members enrolled in the “DSW Rewards” loyalty program had purchased merchandise in the previous two fiscal years, up from approximately 7.3 million members as of February 3, 2007. In fiscal 2007, approximately 69% of DSW store net sales were generated by shoppers in the loyalty program, up from approximately 66% of DSW store net sales in fiscal 2006.
Stores
Store Location, Design and Operations. Typical DSW stores are approximately 24,000 square feet, with over 85% of total square footage used as selling space. Most DSW stores are organized on a single level, which allows customers to view the entire store and product offering as they enter and move quickly to the area where their desired styles are located. Interiors are well-lit, with informative signage, and spacious aisles allow ease of movement throughout the store. Shoes in the stores are displayed in a logical manner that groups together similar styles such as dress, casual, seasonal and athletic merchandise. Clearance shoes are grouped by size and displayed on racks in the rear of the store.
Store associates receive training to maximize the customer shopping experience in DSW’s self-service environment. Training components consist of customer service, maintaining neat, clean and orderly store conditions for ease of shopping, efficient checkout process and friendly service. DSW also maintains a store management training program to develop the skills of management personnel and to provide an ongoing talent pool for future store expansion. DSW prefers to fill store management and field supervisor positions through internal promotions.
Expansion. DSW opened 37 new stores in fiscal 2007, and as of February 2, 2008, DSW has signed leases for 37 new stores that are scheduled to open in fiscal 2008 and fiscal 2009.
DSW plans to open at least 30 stores in each fiscal year from fiscal 2008 through fiscal 2010. DSW’s plan is to open stores in both new and existing markets while continuing to expand its store portfolio to include lifestyle and regional mall locations in addition to its traditional power strip venues. In general, DSW’s evaluation of potential new stores focuses on location within a retail area, demographics, co-tenancy, store size and configuration, and lease terms. DSW’s long-range planning model includes analysis of every major metropolitan area in the country with the objective of understanding the demand for its products in each market over time, and its ability to capture that demand. The analysis also looks at DSW’s current penetration levels in the markets DSW serves and DSW’s expected deepening of its penetration levels as DSW continues to grow its brand to become the shoe retailer of choice in the market.
During fiscal 2007, the average investment required to open a new DSW store was approximately $1.6 million, prior to construction and tenant allowances. Of this amount, in fiscal 2007, gross inventory typically accounted for approximately $0.6 million, fixtures and leasehold improvements typically accounted for approximately $0.9 million and pre-opening advertising and other pre-opening expenses typically accounted for approximately $0.1 million.
Distribution
DSW’s primary distribution center is located in an approximately 700,000 square foot facility in Columbus, Ohio. The design of the distribution center facilitates the prompt delivery of priority purchases and fast-selling footwear to stores so DSW can take full advantage of each selling season. In January 2007, DSW implemented a distribution center bypass process which improved speed-to-market for initial deliveries to stores on the West Coast. As part of this process, DSW has engaged a third party logistics service provider to receive orders originating from suppliers on the West Coast or imports entering the United States at a West Coast port of entry. These initial shipments are then shipped by this service provider to DSW pool points and onwards to the stores bypassing the Columbus distribution center facility. DSW will continue to evaluate expansion of this process for applicability in other parts of the country. In fiscal 2007, DSW signed a lease for a fulfillment center which will process orders from its e-commerce channel.
Leased Departments and Supply Agreements
DSW has operated leased shoe departments for Filene’s Basement since March 2000. The intercompany activity is eliminated in the consolidated financial statements. Effective January 30, 2005, DSW updated and reaffirmed its contractual relationship with Filene’s Basement. Under the new agreement, DSW owns the merchandise and provides supervisory assistance in all covered locations and receives a percentage of net sales as payment. Filene’s Basement provides the fixtures and sales associates. As of February 2, 2008, DSW operated leased shoe departments in 36 Filene’s Basement locations.
As of February 2, 2008, DSW also supplied merchandise to 278 Stein Mart stores, 63 Gordmans stores and one Frugal Fannie’s store, as discussed in greater detail above.
Segment Seasonality
DSW’s business is subject to seasonal trends. DSW store net sales have typically been higher in spring and early fall, when its customers’ interest in new seasonal styles increases. Unlike many other retailers, DSW has not historically experienced a large increase in net sales during its fourth quarter associated with the winter holiday season.
Service Marks, Trademarks and Tradenames
DSW has registered a number of trademarks and service marks in the United States and internationally, including DSW® and DSW Shoe Warehouse®. The renewal dates for these U.S. trademarks are April 25, 2015 and May 23, 2015, respectively. DSW believes that its trademarks and service marks, especially those related to the DSW concept, have significant value and are important to building name recognition. To protect the brand identity, DSW has also protected the DSW trademark in several foreign countries.
DSW also holds patents related to its unique store fixture, which gives DSW greater efficiency in stocking and operating those stores that have the fixture. DSW aggressively protects its patented fixture designs, as well as its packaging, store design elements, marketing slogans and graphics.
FILENE’S BASEMENT
Filene’s Basement’s mission is to be the premiere destination for discriminating value-driven shoppers for their designer and famous brand fashion needs. Filene’s Basement strives to provide the best selection of stylish, designer and famous brand name merchandise at surprisingly affordable prices in men’s and women’s apparel, jewelry, shoes, accessories and home goods. Filene’s Basement stores have a large selection of upscale designer and better-branded merchandise, including couture items imported directly from the fashion capitals of Europe. Famous for its unique bridal dress promotions, now hailed as the “Running of the Brides,”™ Filene’s Basement believes that it is also unique in its offering of great fashion, high quality and extraordinary prices. The Downtown Crossing Boston store temporarily closed in the fall of 2007 to allow for extensive building renovations by the landlord, at the landlord’s cost. The store will open when the renovation is completed and is expected to resume operations in the spring of 2009.

CEO BACKGROUND
Jay L. Schottenstein, Chairman of the Company, American Eagle Outfitters, Inc., a retail chain, and SSC since March 1992 and Chief Executive Officer of the Company from April 1991 to July 1997 and from July 1999 to December 2000. Since March 2005, Mr. Schottenstein also serves as Chairman and Chief Executive Officer of DSW. Mr. Schottenstein served as Chief Executive Officer of American Eagle Outfitters, Inc. from 1992 to 2002. Mr. Schottenstein served as Vice Chairman of SSC from 1986 until March 1992 and as a director of SSC since 1982. He served as President of the Furniture Division of SSC from 1985 through June 1993 and in various other executive capacities since 1976. Mr. Schottenstein is also a director of American Eagle Outfitters, Inc. and DSW.

Henry L. Aaron*, Mr. Aaron presently serves as Senior Vice President of the Atlanta National League Baseball Club, Inc., a professional sports organization, as Chairman of 755 Restaurant Corp., a quick service restaurant company, and as a director of Medallion Financial Corp., a specialty finance company, along with a number of other private business interests.

Ari Deshe, Chairman and Chief Executive Officer of Safe Auto Insurance Company, a property and casualty insurance company since 1996 and President and Chief Executive Officer of Safe Auto Insurance Company from 1993 to 1996. Prior to that, Mr. Deshe served as President of Safe Auto Insurance Agency from 1992 to 1993 and President of Employee Benefit Systems, Inc. from 1982 to 1992.

Jon P. Diamond, Vice Chairman since November 2004, President and Chief Operating Officer since 1996 and Executive Vice President and Chief Operating Officer from 1993 to 1996 of Safe Auto Insurance Company. Mr. Diamond has served SSC in various management positions since 1983, including serving as Vice President of SSC from March 1987 to March 1993. Mr. Diamond is also a director of American Eagle Outfitters, Inc.

Elizabeth M. Eveillard*, Ms. Eveillard is an independent consultant since 2003. Ms. Eveillard served as Senior Managing Director and a Consultant, Retailing and Apparel Group, of Bear, Stearns & Co., Inc., an investment banking company, from 2000 until 2003. Prior to that time, Ms. Eveillard served as the Managing Director, Head of Retailing Industry Group, of PaineWebber Inc., a brokerage firm, from 1988 to 2000. From 1972 to 1988, Ms. Eveillard held various executive positions including Managing Director in the Merchandising Group with Lehman Brothers. Ms. Eveillard is also a director of Tween Brands, Inc. and Birks & Mayors, Inc.

Lawrence J. Ring*, Chancellor Professor of Business Administration and (2004) EMBA Alumni Distinguished Professor of Executive Education, The Mason School of Business, The College of William and Mary (“W&M”) since 2001. In addition, Mr. Ring has also been an Adjunct Professor of Business Administration, The School of Executive Education, Babson College since 2000. From 1997 to 2002, Mr. Ring served as Faculty Coordinator of Executive Programs at W&M. From 1991 to 2000, he served as Professor of Business Administration at W&M, and from 1994 to 2002, he served as Adjunct Assistant Professor, Department of Family and Community Medicine, Eastern Virginia Medical School. Professor Ring is also a member of the Board of Directors of: C. Lloyd Johnson Company, Inc., Norfolk, Virginia; Mr. Price Group, Ltd., Durban, South Africa; and the Williamsburg Landing Corporation. He also served as a member of the International Advisory Board of Angus and Coote Jewelers, Sydney, Australia from 2000 to 2007.

Harvey L. Sonnenberg*, Senior Partner and CPA in the consulting firm Weiser LLP since November 1994. Mr. Sonnenberg is active in a number of professional organizations including the American Institute of CPAs and the New York State Society of CPAs and has long been involved in rendering professional services to the retail and apparel industry. Mr. Sonnenberg is also a director of DSW.

Heywood Wilansky, President and Chief Executive Officer of the Company since November 2004. Prior to joining the Company, he served as President and Chief Executive Officer of Filene’s Basement, Inc., a retailer and subsidiary of the Company (“Filene’s Basement”), from February 2003 to November 2004. Mr. Wilansky was a Professor, Global Retail Management, University of Maryland Business School from August 2002 to February 2003. From August 2000 to January 2003, he was President and Chief Executive Officer of Strategic Management Resources, LLC, a consulting firm. From August 1995 to July 2000, he was President and Chief Executive Officer of Bon Ton Stores. Mr. Wilansky is also a director of Bertucci’s Corporation and DSW.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW
Retail Ventures is a holding company with three operating segments: Filene’s Basement, DSW and Corporate. DSW is a United States specialty branded footwear retailer operating 259 shoe stores in 37 states as of February 2, 2008. DSW offers a large selection of better-branded merchandise. DSW’s typical customers are brand-, quality- and style-conscious shoppers who have a passion for footwear and accessories. Filene’s Basement stores are located primarily in major metropolitan areas in the northeast and midwest United States. Filene’s Basement’s mission is to provide the best selection of stylish, high-end designer and famous brand name merchandise at surprisingly affordable prices in men’s and women’s apparel, jewelry, shoes, accessories and home goods. As of February 2, 2008, there were 36 Filene’s Basement stores in operation. The Corporate segment consists of all corporate assets, liabilities and expenses that are not allocated to the other segments.
On July 5, 2005, DSW completed an initial public offering (“IPO”) of 16,171,875 Class A Common Shares sold at a price to the public of $19.00 per share and raising net proceeds of $285.8 million, net of the underwriters’ commission and before expenses of approximately $7.8 million. As of February 2, 2008, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.0% of DSW’s outstanding Common Shares and approximately 93.2% of the combined voting power of such shares. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on the New York Stock Exchange under the symbol “DSW.” Retail Ventures accounted for the sale of DSW as a capital transaction. Associated with this transaction, a deferred tax liability of $65.5 million was recorded.
On January 23, 2008, Retail Ventures disposed of an 81% ownership interest in its Value City Department Stores business to VCHI Acquisition Co., a newly formed entity owned by VCDS Acquisition Holdings, LLC, Emerald Capital Management LLC and Crystal Value, LLC. Retail Ventures received no net cash proceeds from the sale, paid a fee of $500,000 to the purchaser, and recognized an after-tax loss of $90.0 million on the transaction. As part of the transaction, Retail Ventures issued warrants to VCHI Acquisition Co. to purchase 150,000 RVI Common Shares, at an exercise price of $10.00 per share, and exercisable within 18 months of January 23, 2008. To facilitate the change in ownership and operation of Value City Department Stores, Retail Ventures agreed to provide or arrange for the provision of certain transition services principally related to information technology, finance and human resources to Value City Department Stores for a period of one year unless otherwise extended by both parties.
Following the disposition of Value City certain corporate services employees that provided shared services were hired by Value City and certain other corporate service positions were eliminated. RVI and DSW are in the process of finalizing the transfer of the following shared service departments to DSW: Finance; Internal Audit; Tax; Human Resource Information Systems; and Risk Management. The companies have initiated steps regarding the transfer of employees in these departments to DSW. The definitive terms and conditions of the transfer have not yet been agreed upon. The allocation of shared service expenses will have an increased expense impact on DSW and Filene’s Basement.
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole. This discussion should be read in conjunction with our financial statements and accompanying notes included in this Annual Report on Form 10-K.

Key Financial Measures
In evaluating the results of operations, our management refers to a number of key financial and non-financial measures relating to the performance of our business segments. Among our key financial measures are net sales, operating profit, and net income. Non-financial measures that we use in evaluating our performance include number of stores, leased operations, net sales per average gross square foot for our stores and change in comparable store sales. Comparable store sales is a measure which indicates the performance of our existing stores by measuring the growth in sales for such stores for a particular period over the corresponding period in the prior year. For fiscal 2007 and prior years, we considered comparable store sales to be sales at stores that were open 14 months as of the prior fiscal year end. Comparable store sales are also referred to as “comp-store” sales by others within the retail industry. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales may not necessarily be comparable to similarly titled measures reported by other companies.
The Company’s revenues are generated through sales from existing stores and through sales from new stores. In fiscal 2007, DSW opened 37 new stores and closed one store, and Filene’s Basement opened seven new stores and closed two stores. For fiscal 2008, Filene’s Basement plans to open at least one new store and DSW plans to open at least 30 additional stores. During fiscal 2007, Filene’s Basement ceased operations in two stores temporarily due to remodeling, one of which reopened in fiscal 2007 while the other is not expected to reopen until fiscal 2009.
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, or GAAP. 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 and litigation. Management bases its estimates and judgments on its historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.
While we believe that our historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
We believe the following represent the most critical estimates and assumptions, among others, used in the preparation of our consolidated financial statements. We have discussed the selection, application and disclosure of the critical accounting policies with our Audit Committee.
• Revenue recognition . Revenues from merchandise sales are recognized at the point of sale, net of returns and exclude sales tax. Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift card. Our policy is to recognize income from breakage of gift cards when the likelihood of redemption of the gift card is remote. In the fourth quarter of fiscal 2007, we determined that we had accumulated enough historical data to recognize income from gift card breakage. We recognized $0.4 million as miscellaneous income from gift card breakage in fiscal 2007. Prior to the fourth quarter of fiscal 2007, we had not recognized any income from gift card breakage.

• Cost of sales and merchandise inventories . We use the retail method of accounting for substantially all of our merchandise inventories. Merchandise inventories are stated at the realizable value, determined using the first-in, first-out basis, or market, using the retail inventory method. The retail inventory method is widely used in the retail industry due to its practicality. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. The cost of the inventory reflected on our 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. Accordingly, earnings are negatively impacted as merchandise is marked down prior to sale. Reserves to value inventory at its realizable value were $31.8 million and $25.0 million at the end of fiscal 2007 and 2006, respectively.

Inherent in the calculation of inventories are certain significant management judgments and estimates, including setting the original merchandise retail value (known as markon), markups of initial prices established, reduction of pricing due to customers’ perceived value (known as markdowns) and estimates of losses between physical inventory counts or shrinkage, which, combined with the averaging process within the retail method, can significantly impact the ending inventory valuation at cost, and the resulting gross margins.

• Investments . Investments, which include demand notes and auction rate securities, are classified as available-for-sale securities. These demand notes and auction rate securities are recorded at cost, which approximates fair value due to their variable interest rates, which typically reset every 3 to 189 days. All income generated from these investments is recorded as interest income.

DSW records an investment impairment charge at the point it is believed an investment has experienced a decline in value that is other-than-temporary. In determining whether an impairment has occurred, DSW reviews information about the underlying investment that is publicly available and assesses its ability to hold the securities for the foreseeable future. The investment is written down to its current market value at the time the impairment is deemed to have occurred. Any other-than-temporary impairment charge could materially affect DSW’s results of operations.

As of February 2, 2008 and February 3, 2007, DSW held $70.0 million and $98.7 million, respectively, in short-term investments. As of February 2, 2008, DSW held $12.5 million in long-term investments and held no long-term investments as of February 3, 2007. DSW’s long-term investment balance includes $10.0 million in auction rate securities that failed at auction after February 2, 2008 and were presented as long-term as it is unknown if DSW will be able to liquidate these securities within one year.

• Asset impairment and long-lived assets . We must periodically evaluate the carrying amount of our long-lived assets, primarily property and equipment, and finite life intangible assets when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset is considered impaired when the carrying amount of the asset exceeds the expected future cash flows from the asset. Our reviews are conducted at the lowest identifiable level which includes a store. The impairment loss recognized is the excess of the carrying value of the asset over its fair value, based on discounted future cash flows. Should an impairment loss be realized, it will be included in operating expenses. Assets acquired for stores that have been previously impaired are not capitalized when acquired if the store’s expected future cash flow remains negative. During fiscal 2007, 2006 and 2005, we recorded impairment losses of $5.6 million, $0.8 million, and $0.5 million, respectively, related to long-lived assets at store operating units. We believe at this time that the carrying values and useful lives of long-lived assets continue to be appropriate. To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from our current estimates.

• Store closing reserve . During the 2007 fiscal year, the Company recorded charges associated with the closing of one DSW and two Filene’s Basement stores. During the 2006 fiscal year, the Company recorded charges associated with the closing of five DSW stores. The operating lease at one of the five stores was terminated through the exercise of a lease kick-out option. During the first quarter of 2006, the Company closed one Filene’s Basement store for which closing costs were accrued during the fourth quarter of fiscal 2005. These reserves are monitored on at least a quarterly basis for changes in circumstances. The store closing reserves were $0.4 million and $0.1 million at the end of fiscal 2007 and 2006, respectively.

• Self-insurance reserves . We record estimates for certain health and welfare, workers’ compensation and casualty insurance costs that are self-insured programs. Self insurance reserves include actuarial estimates of both claims filed, carried at their expected ultimate settlement value, and claims incurred but not yet reported. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. Health and welfare estimates are calculated utilizing claims development estimates based on historical experience and other factors. Workers’ compensation and general liability estimates are calculated, utilizing claims development estimates based on historical experience and other factors. We have purchased stop loss insurance to limit our exposure to any significant exposure on a per person basis for health and welfare and on a per claim basis for workers’ compensation and casualty insurance. Although we do not anticipate the amounts ultimately paid will differ significantly from our estimates, self-insurance reserves could be affected if future claims experience differs significantly from the historical trends and the actuarial assumptions. For example, for workers’ compensation and general liability estimates, a 1% increase or decrease to the assumptions for claims costs and loss development factors would increase or decrease our self-insurance by less than $0.1 million. The self-insurance reserves were $3.0 million and $3.6 million at the end of fiscal 2007 and 2006, respectively. The decrease in self-insurance reserves was principally associated with the decrease in general liability.

• Pension . The obligations and related assets of defined benefit retirement plans are presented in Note 8 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. 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 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. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans. At both February 3, 2007 and February 2, 2008, the weighted-average actuarial assumptions applied to our plan were a discount rate of 6.0% and long-term rate of return on plan assets of 8.0%. To the extent actual results vary from assumptions, earnings would be impacted.

• Customer loyalty program . DSW maintains a customer loyalty program for the DSW stores in which program members receive a discount on future purchases. Upon reaching the target-earned threshold, members receive certificates for these discounts which must be redeemed within six months. During the third quarter of fiscal 2006 DSW re-launched its loyalty program, which included changing the name from “Reward Your Style” to “DSW Rewards”, the points threshold to receive a certificate and the certificate amounts. The changes were designed to improve customer awareness, customer loyalty and DSW’s ability to communicate with its customers. DSW accrues the anticipated redemptions of the discount earned at the time of the initial purchase. To estimate these costs, DSW is required to make assumptions related to customer purchase levels and redemption rates based on historical experience. The accrued liability as of February 2, 2008 and February 3, 2007 was $6.4 million and $5.0 million, respectively.

• Change in fair value of derivative instruments . In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, the Company recognizes all derivatives on the balance sheet at fair value. For derivatives that are not designated as hedges under SFAS No. 133, changes in the fair values are recognized in earnings in the period of change. The Company uses the Black-Scholes Pricing Model to calculate the fair value of derivative instruments.

For the fiscal years ended February 2, 2008 and February 3, 2007, the Company recorded a benefit of $154.6 million and a charge of $124.8 million, respectively, related to the change in fair value of warrants. For the fiscal years ended February 2, 2008 and February 3, 2007, the Company recorded a reduction of expenses of $93.6 million and a charge of $51.1 million, respectively, related to the change in the fair value of the conversion feature of the PIES.

• Income taxes . We are required to determine the aggregate amount of income tax expense to accrue and the amount which will be currently payable based upon tax statutes of each jurisdiction in which we do business. In making these estimates, we adjust income based on a determination of generally accepted accounting principles for items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities, as a result of these differences, are reflected on our balance sheet for temporary differences that will reverse in subsequent years. A valuation allowance is established against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. If our management had made these determinations on a different basis, our tax expense, assets and liabilities could be different. During fiscal 2007, we established an additional valuation reserve of $84.9 million for deferred tax assets. During fiscal 2006, we established an additional valuation reserve of $2.2 million for deferred tax assets. During fiscal 2005, we established an additional valuation reserve of $14.4 million for state net operating loss carry forwards and wrote off $4.0 million of deferred tax assets no longer deductible as a result of changes in state income tax laws in Ohio.

Following the completion of the DSW IPO in June 2005, DSW is no longer included in Retail Ventures’ consolidated federal tax return. Following the disposition of an 81% ownership interest in the Value City operations during January 2008, Value City is no longer included in Retail Ventures’ consolidated federal tax return.
RESULTS OF OPERATIONS
We operate three business segments. Our Filene’s Basement segment operates full-line, off-price junior department stores. Our DSW segment is a specialty branded footwear retailer. As of February 2, 2008, a total 36 Filene’s Basement and 259 DSW stores were open. The Corporate segment consists of all corporate assets, liabilities and expenses not allocated to the other segments through corporate allocation or shared service arrangements. As a result of RVI’s disposition of an 81% ownership interest in its Value City operations during fiscal 2007, the results of the Value City Operations are included in discontinued operations.

Seasonality
Our business is affected by the pattern of seasonality common to most retail businesses. Historically, the majority of our sales and operating profit have been generated during the early fall and winter holiday selling seasons for our Filene’s Basement segment. DSW net sales have typically been higher in spring and early fall, when DSW’s customers’ interest in new seasonal styles increases.
Fiscal Year
We follow a 52/53-week fiscal year that ends on the Saturday nearest to January 31. Fiscal years 2007 and 2005 consisted of 52 weeks. Fiscal year 2006 consisted of 53 weeks. Unless otherwise stated, references to years in this report relate to fiscal years rather than calendar years.

Fiscal Year Ended February 2, 2008 (“fiscal 2007”) Compared To Fiscal Year Ended February 3, 2007 (“fiscal 2006”)

Sales. Sales for fiscal 2007 increased by 9.7% to $1.87 billion from $1.71 billion for fiscal 2006.

DSW net sales increase includes the impact of a net increase of 36 new DSW stores, 12 non-affiliated leased departments and six Filene’s Basement leased departments during fiscal 2007. Leased department sales comprised 12.5% of total net sales in fiscal 2007, compared to 10.2% in fiscal 2006. As compared to fiscal 2006, DSW stores that were new in fiscal 2007 added $66.3 million in sales, which was partially offset by a decrease in sales of $17.1 million from DSW stores that closed in fiscal 2006 and 2007. As compared to fiscal 2006, leased departments that were new in fiscal 2006, primarily the Stein Mart leased departments opened in January 2007, added $44.3 million in sales. Increases in other store classes were offset by decreases due to the impact of the 53 rd week as compared to fiscal 2006. DSW comparable store sales in fiscal 2007 decreased 0.8%, or $8.9 million, compared to the previous fiscal year.

Compared with fiscal 2006, DSW comparable store sales for fiscal 2007 decreased in women’s and men’s by 1.0% and 2.1%, respectively, while increasing in athletic and accessories by 1.0% and 4.3%, respectively.
Filene’s Basement net sales for the fifty-two weeks ended February 2, 2008 increased 9.1%, or $38.8 million, to $466.3 million from $427.5 million in the fifty-three weeks ended February 3, 2007. The increase in net sales is primarily due to the comparable store sales increase of 3.6%, and a net increase of five stores over the prior year’s period. As compared to fiscal 2006, stores that were new in fiscal 2007 added $35.6 million in sales, which was partially offset by a decrease in sales of $24.1 million from stores that closed in fiscal 2007. The merchandise categories of men’s, women’s and accessories had comparable sale increases of 6.5%, 0.8%, and 12.4%, respectively. The merchandise categories of home and jewelry had comparable sale decreases of 1.6% and 5.8%, respectively.
Gross Profit. Total gross profit increased $42.1 million, or 5.9%, from $708.9 million to $751.0 million. Gross profit, as a percentage of sales, decreased to 40.1% compared to 41.5% for the prior year’s period. The decrease in the overall margin rate is attributable to the decreases in gross profit at the DSW and Filene’s Basement segments.

DSW gross profit increased $33.1 million to $583.8 million in fiscal 2007 from $550.7 million in 2006, and decreased as a percentage of net sales from 43.1% in fiscal 2006 to 41.5% in fiscal 2007. The increase of approximately $33.1 million in gross profit is primarily attributable to the overall increase in sales. The decrease as a percentage of sales is attributable to increased markdowns partially offset by an increase in initial markup. The increase in markdowns in fiscal 2007 was a result of increased promotional activity as compared to fiscal 2006.
Filene’s Basement gross profit increased $9.0 million to $167.2 million in fiscal 2007 from $158.2 million in fiscal 2006, and decreased as a percentage of net sales from 37.0% in fiscal 2006 to 35.9% in fiscal 2007. The increase of approximately $9.0 million in gross profit is attributable to the overall increase in sales. The decrease as a percentage of sales is attributable to increased markdowns due in part to clearance merchandise sold at the Downtown Crossing Boston store partially offset by an increase in initial markup.
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses increased $80.1 million from $614.0 million in fiscal 2006 to $694.1 million in fiscal 2007. Total SG&A expense associated with new DSW and Filene’s Basement stores and new leased shoe departments not opened in the prior year, excluding pre-opening costs, was $35.8 million. Pre-opening costs increased approximately $0.3 million for fiscal 2007 compared to fiscal 2006.

For fiscal 2007, the DSW segment SG&A expense increased $54.3 million to $507.3 million from $453.0 million in fiscal 2006 which represented 36.1% and 35.4% of net sales, respectively. The increase in SG&A expenses was a result of increases in home office related expenses of $17.7 million, professional fees of $3.0 million, and $6.0 million of expenses related to the start-up of DSW’s e-commerce channel. The DSW stores and leased departments that opened subsequent to February 3, 2007 added $20.4 million and $1.2 million in SG&A expenses in fiscal 2007, respectively. The increases in SG&A expenses were partially offset by a decrease of bonus expense of $14.4 million and a decrease in marketing expenses as compared to fiscal 2006 due to nonrecurring expenses related to the change in the loyalty program in 2006. In total, the home office increase over the prior year was approximately 0.7% of sales.
The Filene’s Basement segment SG&A expense increased $25.9 million to $194.8 million in fiscal 2007 from $168.9 million in fiscal 2006 and increased as a percent of sales from 39.5% in fiscal 2006 to 41.8% in fiscal 2007. Personnel expense, occupancy expense and other operating expenses each increased $2.1 million, $19.3 million and $4.5 million, respectively. The occupancy expenses associated with new Filene’s Basement stores opened in fiscal 2007, excluding pre-opening costs was $14.2 million. Pre-opening expense increased $1.0 million to $3.7 million in fiscal 2007 from $2.7 million in fiscal 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

THREE MONTHS ENDED MAY 3, 2008 COMPARED TO THREE MONTHS ENDED MAY 5, 2007
Net Sales . Net sales for the three months ended May 3, 2008 increased $0.5 million, or 0.1%, to $466.3 million compared to $465.8 million for the three months ended May 5, 2007.

DSW’s net sales were $366.3 million for the three months ended May 3, 2008, a $9.3 million increase over the comparable period, or 2.6%. The 39 DSW store locations that opened subsequent to May 5, 2007 and its e-commerce site added $27.5 million in sales for the quarter ended May 3, 2008, while the 22 leased shoe departments that opened subsequent to May 5, 2007 added $1.5 million in sales for the quarter ended May 3, 2008. These increases were partially offset by a decrease of 5.4%, or $18.0 million, in comparable store sales as compared to the first quarter of fiscal 2007. The decrease in comparable sales was a result of decreased traffic, average unit retail and units in the basket. For the first quarter of fiscal 2008, DSW comparable store sales decreased in women’s by 5.8%, men’s by 3.8%, accessories by 8.1%, and the athletic category by 5.7%. The increase in sales was also partially offset by a decrease in sales of $1.9 million from three leased departments and one DSW store that closed during fiscal 2007.
Filene’s Basement net sales were $100.0 million for the three months ended May 3, 2008, an $8.8 million decline over the comparable period, or 8.1%. The decrease is due to Filene’s Basement closing two stores, one in the first quarter and one in the third quarter of fiscal 2007, resulting in a decrease in net sales of $12.7 million compared to last year. This decrease was partially offset by an increase in net sales of $5.3 million compared to last year resulting from seven new stores that opened subsequent to February 3, 2007. Also included in the overall change in sales is a $1.6 million decrease due to Filene’s Basement fine jewelry operations converting to a third-party leased department in the fourth quarter of 2007. The merchandise categories of men’s and accessories had comparable sales increases of 1.7% and 6.6%, respectively, while women’s had a comparable sales decrease of 3.3%. Sales related to off season purchases increased 26.6% which represents 6.7% of comparable net sales.
Gross Profit. Total gross profit decreased $6.2 million from $199.4 million for the three months ended May 5, 2007 to $193.2 million for the three months ended May 3, 2008. Gross profit decreased, as a percent of sales, from 42.8% for the three months ended May 5, 2007 to 41.4% for the three months ended May 3, 2008.

DSW gross profit decreased $5.1 million to $155.2 million in the first quarter of fiscal 2008 from $160.3 million in the first quarter of fiscal 2007, and decreased as a percent of net sales from 44.9% in the first quarter of fiscal 2007 to 42.4% in the first quarter of fiscal 2008. The decrease as a percent of sales is primarily attributable to increased markdowns partially offset by an increase in initial mark-up.
Filene’s Basement gross profit decreased $1.0 million to $38.1 million in the first quarter of fiscal 2008 from $39.1 million in the first quarter of fiscal 2007, and increased as a percent of net sales from 36.0% in the first quarter of 2007 to 38.1% in the first quarter of 2008. The increase as a percent of sales is due to an increase in initial markups and a decrease in markdowns as a percent of sales.
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses increased $13.4 million from $172.7 million in the first quarter of fiscal 2007 to $186.1 million for the first quarter of fiscal 2008. As a percent of sales, SG&A expense was 39.9% for the first quarter of 2008 compared to 37.1% in the comparable quarter last year.

DSW segment SG&A expense increased $15.4 million and increased as a percent of sales for the three months ended May 3, 2008 compared to the three months ended May 5, 2007. The increase in SG&A expense as a percent of sales was primarily the result of deleveraged store and home office expenses. In the first quarter of fiscal 2008, the DSW stores and e-commerce site opened subsequent to May 5, 2007 added $12.3 million in expenses, while the leased departments opened after May 5, 2007 added expenses of $0.4 million. These expenses exclude pre-opening expenses.
Filene’s Basement SG&A expenses decreased $2.2 million and increased as a percent of sales for the three months ended May 3, 2008 compared to the three months ended May 5, 2007. SG&A expenses increased as a percent of sales as a result of increased occupancy and corporate expenses, partially offset by decreased personnel expense and advertising expense. SG&A expenses, excluding pre-opening expenses, for stores opened subsequent to May 5, 2007 were $2.3 million. Filene’s Basement closed two stores during fiscal 2007 resulting in a reduction of expenses of $5.2 million. Pre-opening costs decreased in Filene’s Basement by approximately $2.3 million during the three months ended May 3, 2008 compared with the three months ended May 5, 2007.
Change in Fair Value of Derivative Instruments. During the three months ended May 3, 2008 and May 5, 2007, the Company recorded non-cash reduction of expenses representing the changes in fair value of the Conversion Warrants and Term Loan Warrants of $18.4 million and a charge of $2.1 million, respectively. During the three months ended May 3, 2008 and May 5, 2007, a reduction of expenses of $18.8 million and $14.7 million, respectively, was recorded related to the change in the fair value of the conversion feature of the PIES. The change in the fair value of the derivatives is primarily due to the declines in the RVI and DSW stock prices.
License Fees and Other Income. License fees and other income were $1.6 million and $1.8 million for the three months ended May 3, 2008 and May 5, 2007, respectively. These sources of income can vary based on customer traffic and contractual arrangements.
Operating Profit. Operating profit for the quarter ended May 3, 2008 was $45.9 million compared to $41.0 million for the quarter ended May 5, 2007, an improvement of $4.9 million. Operating profit as a percent of sales was 9.8% and 8.8% for May 3, 2008 and May 5, 2007, respectively.

The increase in the Corporate segment operating profit for the quarter ended May 3, 2008 and May 5, 2007 is primarily due to the non-cash reduction of expenses from the change in fair value of derivative instruments.
Interest Expense. Interest expense for the quarter ended May 3, 2008 increased $0.9 million to $4.0 million compared to the first quarter of fiscal 2007. The increase is due primarily to increased average borrowings partially offset by a decreased weighted average borrowing rate of 0.4% during the three months ended May 3, 2008, compared to the three months ended May 5, 2007.
Interest Income. Interest income decreased $1.5 million in the first quarter of fiscal 2008 over the same period last year due primarily to the replacement of short-term investments with lower yielding money market funds.
Income Taxes. The effective tax rate for the three months ended May 3, 2008 was 15.0% compared to a 46.1% effective tax rate for the three months ended May 5, 2007. The effective tax rate of 15.0% reflects the impact of the change in fair value of the Term Loan Warrants and Conversion Warrants which are included for book income but not tax income and a reduction in the valuation allowance of $2.2 million on all state net deferred tax assets.
Minority Interest. For the first quarter of fiscal 2008, net income was impacted by $3.8 million to reflect that portion of the income attributable to DSW minority shareholders.
Income from Continuing Operations. For the first quarter of fiscal 2008, income from continuing operations increased $19.7 million from the first quarter of fiscal 2007 and represents 7.0% of net sales versus 2.8% of net sales, respectively. The increase in income from continuing operations for the first quarter of fiscal 2008 was primarily attributable to the $24.6 million increase in non-cash income from the change in fair value of the warrants and conversion feature of the PIES and the $12.2 million decrease in tax expense partially offset by the $13.4 million increase in SG&A expense.
Loss from Discontinued Operations. The $6.7 million, net of tax, decrease in the loss from discontinued operations is primarily due to the disposition of the 81% ownership interest in the Value City operations recorded by Retail Ventures during the fourth quarter of fiscal 2007. The loss from discontinued operations for the three months ended May 3, 2008 consists of additional costs primarily the adjustments of guarantees recorded by Retail Ventures. The loss for the three months ended May 5, 2007 consists of the Value City Department Store operations which included sales of $288.2, income tax benefit of $5.8 million and a net loss of $10.4 million, net of tax
Seasonality
Our business is affected by the pattern of seasonality common to most retail businesses. Historically, the majority of our sales and operating profit have been generated during the early fall and winder holiday seasons for our Filene’s Basement segment. DSW net sales have typically been higher in spring and early fall, when DSW’s customers’ interest in new seasonal styles increases.
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing cash requirements are for debt services plus 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 for Filene’s Basement. For DSW, the inventory levels increase relative to the expected sales increase when its customer’s interest in new seasonal styles increases.
Net working capital was $317.3 million and $295.9 million at May 3, 2008 and February 2, 2008, respectively. The increase in net working capital is primarily due to the increased cash and cash equivalents and inventory levels and decreased warrant liability partially offset by a decrease in short-term investments. Current ratios at those dates were 2.14 and 1.98, respectively.
Net cash provided by operating activities from continuing operations was $0.9 million for the three months ended May 3, 2008 as compared to $9.4 million provided by operating activities from continuing operations for the three months ended May 5, 2007. The net cash provided by operating activities for the three months ended May 3, 2008 is primarily due to net income for the period after adjusting for the non-cash depreciation expense, decrease in inventories and the change in the fair value of derivative instruments.
During the three months ended May 3, 2008 the Company had capital expenditures of $19.9 million. The Company paid $22.9 million during the quarter for capital expenditures which includes previous expenditures that were included in accounts payable at February 2, 2008. Of this amount, the Company incurred $9.1 million for new stores, $4.0 million for improvements in existing stores, $0.5 million related to office and warehousing, $1.9 million related to DSW’s e-commerce channel and $4.4 million related to information technology upgrades and new systems.
Filene’s Basement plans to open at least one new store, fully remodel a store and improve its existing distribution facility in fiscal 2008. Filene’s Basement expects to spend approximately $6.5 million for capital expenditures during fiscal 2008.
DSW expects to spend approximately $85 million for capital expenditures in fiscal 2008. These expenditures include investments to make improvements to DSW’s information systems, remodel stores, accelerate store growth, and the continued investment in its e-commerce channel.
The Company maintains three separate credit facilities: (1) a $100 million revolving credit facility under which Filene’s Basement is the borrower and RVI and certain of its wholly-owned subsidiaries are guarantors (the “Filene’s Basement Revolving Loan”); (2) a $150 million revolving credit facility under which DSW and DSWSW are co-borrowers and DSW and its wholly-owned subsidiaries, including DSWSW, are co-guarantors (the “DSW Revolving Loan”); and (3) a $0.25 million senior non-convertible loan facility under which RVI is the borrower and RVI and certain of its wholly-owned subsidiaries are co-guarantors (the “Non-Convertible Loan”). RVI also has outstanding $143.8 million of 6.625% Mandatorily Exchangeable Notes due September 15, 2001, or PIES. Collectively, the Filene’s Basement Revolving Loan, the DSW Revolving Loan, the Non-Convertible Loan and the PIES are sometimes referred to herein as the “Credit Facilities.”
The Company is not subject to any financial covenants; however, certain of the Credit Facilities contain numerous non-financial covenants relating to the Company’s management and operation. These non-financial covenants include, among other restrictions, limitations on indebtedness, guarantees, mergers, acquisitions, fundamental corporate changes, financial reporting requirements, budget approval, disposition of assets, investments, loans and advances, liens, dividends, stock purchases, transactions with affiliates, issuance of securities and the payment of and modifications to debt instruments under these agreements.

CONF CALL

Heywood Wilansky

Today’s call will review the fourth quarter and year-end operating results for Retail Ventures. The earnings release went out earlier today and the way the format will work today is we’re going to have Jim McGrady review the results and then I believe we’ll just take questions at that point and time from the audience.

So, without further ado I’d to introduce Jim McGrady our Chief Financial Officer to review the results for fourth quarter and the year-end.

James A. McGrady

I’d like to restate for you the company’s policy with respect to forward-looking information pursuant to the Private Securities Litigation Reform Act of 1995. Statements made in the course of this call that are not truly historical such as statements regarding the company’s or management’s intentions, expectations or projections of the future are forward-looking statements.

Actual results could materially differ from those forward-looking statements. Again, factors that could cause or contributed to such differences include but are not limited to the factors and the risks that are discussed in the company’s Form 10-K for the period ended February 3, 2007 and the soon to be filed fiscal 2008 Form 10-K plus the other reports filed from time-to-time by the company with the Securities & Exchange Commission.

Forward-looking statements made during this call are based upon information presently available to the company and the company assumes no obligation to update any such forward-looking statements.

I think, as everybody’s probably aware, on January 23 we announced that we had disposed of 81% of our ownership interest in the Value City Department Store operation to BCHI Acquisitions. Just as a reminder to everybody the results of the operations for Value City Department Stores during the period was controlled by RVI, are reported as discontinued operations in our financial statements along with the loss on the transaction which is about $90 million.

Today we announced our fourth quarter net loss of $125.7 million or about $2.59 per share on a diluted basis. This compares to a net loss of $35.9 million or $0.76 per share on a diluted basis for the prior year’s quarter.

The loss from continuing operations for the quarter was $9 million or $0.19 again on a diluted basis compared to a loss from continuing operations of $40.6 million or $0.86 per share on a diluted basis last year.

For the fiscal year we are reporting a net income of $51.4 million or $0.91 per share on a diluted basis compared to the prior year’s net loss of $150.9 million or $3.35 on a diluted basis. The income from continuing operations for the year ended February 2, 2008 was $202.1 million or $3.56 a share on a diluted basis. The loss from continuing operations of $128.6 million or $2.85 per share diluted was reported in the prior year.

For the fourth quarter and year-to-date periods we recognized again, as we have in the past year and the past couple of years a non-cash reduction of expense related to the changes in the current value of the conversion warrants, term loan warrants and the conversions feature of those [inaudible] which is the debt that we issued about a little over a year ago. The expense was about $19.5 million and $248.2 million for the quarter and for the year this year.

In the press release we had provided a reconciliation of the non-GAAP income from continuing operations so you can see what the effect of those adjustments for the warrant and everything was. I won’t go through that at this point in time but it is available in the press release.

Total sales for the fourth quarter decreased $6.9 million or about 1.5% to $452 million from $458.9 million last year. The comparable store sales for the quarter decreased about 0.1% and by segment that quarterly decrease was DSW was -1.7 and Filene’s Basement was a positive 4.8. On a year-to-date we were -.8 and DSW and 3.6 positive at Filene’s Basement for an overall .3 positive. Again, these numbers are also included in today’s press release.

DSW sales were about $332.5 million overall which is a one point increase in the quarter and that included a net increase of 36 new stores plus 12 non-affiliated leased show departments and six Filene’s Basements shoe departments. The merchandise categories of men’s, women’s and athletics had comparable sales decreases of .7%, 2.6% and 9.7% respectively while our accessories division at DSW had an increase of 5.7%. The Filene’s Basement sales decreased 8% in the quarter to $119.5 million and that includes a net increase of five new stores.

The merchandise categories of home, jewelry and children’s had comparable sales decreases of 3.6%, 24.5 and 1.6% respectively. The men’s and accessories categories had comparable sales increases of 8.9% and 19.1% respectively. Noting that the decrease in jewelry department as you may know that earlier in the year we did transfer most of the operations of the jewelry to a lease department with an affiliated third party and most of that is now recognized through lease department income so we would expect to see a sales decline of about that on a comparable basis.

As we take a look at our margin, total gross margin for the fourth quarter decreased $14.7 million to $170 million. In the fourth quarter gross profit as a percentage of sales decreased 260 basis points to 37.6% from the previous year’s 40.2%. The decrease in gross profit is comprised of a decline at DSW of $8.5 million and at Filene’s Basement of $6.2 million. For the quarter gross profit as a percent of sales was 38.7% at DSW and 34.7% at Filene’s Basement. DSW’s gross profit for the quarter as a percent of sales decreased from 41.7% to 38.7 as I noted earlier.

The decrease is attributable to increased markdowns partially offset by an additional higher markup on some of the goods. Filene’s Basement’s gross profit for the quarter as a percentage of net sales decreased from 36.7% to 34.7% and is attributable to increased markdowns due in part to clearance merchandise that we were selling at the downtown Boston store but again, we did have improvement in the initial markup for that operating unit. For the year-to-date period total gross profit increased $42.1 million to $751 million and as a percentage of sales decreased 140 basis points to 40.1%.

Our total selling, general and administrative expenses for the quarter increased by $11.6 million to $172.6 million and as a percentage of sales was 38.2%. For the year-to-date period SG&A increased $80.1 million to $694.1 million or 37.1% of sales. As we take a look at our operating profit by the operating segments for the quarter DSW was $972,000 positive, Filene’s Basement was a negative of about $1.9 million.

There’s a $19.5 million profit at what we call the corporate division which is primarily the warrants, the change in fair value of the warrants and the converts and features like that and that is $18.6 million. If we adjust for those derivatives that come out of there we would have an overall operating loss of about $900,000. Again if we take a look at the prior year quarter that would have been somewhere around $26.2 million.

As we take a look at our interest expense we see that it was $1.9 million for the fourth quarter compared to $300,000 worth of income for the quarter last year. For the year, net interest expense was $3.1 million. This was about a $900,000 increase from the prior year. The increase was primarily due to the increased average borrowings during fiscal 2007.

As an offset interest income rose $3.2 million to $10.5 million and this is primarily due to the investments that are held at the DSW segment. Our cash raises is somewhat unusual for the quarter and I think it’s probably better just to look at it for the year. Again, the derivatives, that valuation adjustment that’s in there has had a very, very significant impact on the rate as well as the valuation allowances that we’ve taken on some state and local deferred taxes.

As we turn to our balance sheet our total inventory was $339 million compared to $328.6 million last year which is about a 3.3% increase which really kind of keeps pace with the store growth that we have out there. Our net working capital was $295.9 million and this compares to $274.4 for the prior year.

The current ratios were 1.98 and 1.45 respectively and if we were to adjust for taking in the value derivatives and everything like that the working capital would have been $338.1 million with a current ratio of 2.3. This is kind of a valuation that you might want to take a look at. Net cash use for capital expenditures was approximately $118.9 million during the year a lot being that depreciation and amortization totaled about $40.8 million compared with about $33.1 million last year.

During fiscal ‘07 we spent our money on about $52.4 million in new store capital expenditures, $9.4 million for improvements to existing stores, $15.9 million for office and warehousing and $6.3 million related to the start up of the DSW ecommerce channel. We also had about $14.9 million that we expended for IT equipment upgrades and new systems.

Our EBITDA from continuing operations is $4.9 million versus a -$31.5 for last year. Again, as always adjusting for the warrant expense and income that’s run through the statements for each of those years it would have been $12.4 million and a positive $33.7 for the prior year. As you can see those adjustments are pretty significant as we go through the year.

The availability under our secured revolving credit facilities was $161.3 million that’s for both DSW and the Filene’s Basement facility combined. On a consolidated basis the outstanding lines of credit totaled approximately $3.4 million and about $15.7 million for DSW. Our current consolidated availability is $162 million which is comprised of $22 million of availability under the Filene’s Basement revolver and $140 million for the DSW revolver.

That concludes the historical review of operations for the quarter and some of the highlights for the year. Again, a lot of these comparisons are in the press release and at this time we are not going to provide fiscal 2008 outlook and we’re going to have to wait until we can get some guidance from DSW and work through some of the Value City shared service expenses that we’re going to allocate to them.

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