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The following is an excerpt from a 10-K/A SEC Filing, filed by RETAIL VENTURES INC on 4/18/2005.
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RETAIL VENTURES INC - 10-K/A - 20050418 - BUSINESS

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.(“Retail Ventures”) and its wholly owned subsidiaries, including but not limited to, Value City Department Stores LLC (“Value City”), DSW Inc., formerly known as Shonac Corporation, (“DSW”) and Filene’s Basement, Inc.(“Filene’s Basement”).

Restatement

     We have restated the consolidated balance sheet at January 31, 2004, and the consolidated statements of operations, shareholders’ equity and cash flows for the fiscal years ended January 31, 2004 and February 1, 2003 in this Annual Report on Form 10-K (see Note 4 to the consolidated financial statements on page F- 13 of this Annual Report) and the related Notes thereto, to correct our historical accounting for operating leases. The restatement adjustments had no impact on net sales or comparable store sales. We have not amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement, and the financial statements and related financial statement information contained in those reports should no longer be relied upon. Throughout this Annual Report on Form 10-K, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

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, as amended (the “Exchange Act”). 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.”

ITEM 1. BUSINESS.

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 57% 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 Annual Report beginning on page 36.

     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 leased 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 DSW, an Ohio corporation, from Nacht Management, Inc. and SSC. Subsequently we acquired the remaining DSW shares. DSW has 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, a Delaware corporation, a wholly owned subsidiary of Filene’s Basement Corp., in March 2000.

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     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. 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, Inc. The reorganization was affected by a merger which was previously approved by the Company’s shareholders. Since October 2003, the Company’s common shares have been listed for trading under the ticker symbol “RVI” on the New York Stock Exchange.

     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.

     The Company announced on March 14, 2005 that DSW had filed a registration statement with the SEC and will pursue an initial public offering (the “IPO”). The Company expects that DSW will complete the IPO in fiscal 2005, subject to market conditions. After the IPO, the Company expects to own a majority of the outstanding common shares of DSW. Prior to the IPO, the Company will enter into agreements with DSW related to the separation of its business from DSW, including a master separation agreement, a shared services agreement and a tax separation agreement. The Company’s current intent is to continue to hold its DSW common shares following the offering. However, other than with respect to a customary 180 day lock up period following the IPO, the Company is not subject to any contractual obligation to retain its controlling interest.

General

     We are managed in three operating segments: Value City, DSW and Filene’s Basement.

      Value City. As of January 29, 2005, we operated 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. Subsequent to year end, we closed two under-performing stores.

      DSW. As of January 29, 2005, we also operated a chain of 172 DSW stores located throughout the United States. The DSW stores offer a wide selection of brand name and designer dress, casual and athletic footwear for men and women. Additionally, pursuant to a license agreement with Filene’s Basement, DSW operates leased shoe departments in most Filene’s Basement stores. Results of operations of the leased shoe departments are included with the Filene’s Basement segment. In July 2002 and June 2004, respectively, DSW entered into supply agreements with Stein Mart, Inc. (“Stein Mart”) and Gordmans, Inc. (“Gordmans”) to supply merchandise to some of the Stein Mart’s and all of the Gordmans’ shoe departments. As of January 29, 2005, we operated 153 leased departments for Stein Mart and 48 for Gordmans. Results of the supply agreements are included with the DSW segment and represent substantially all of the leased operations of the segment. Subsequent to year end, as of the date of this Annual Report, we have opened five new DSW stores and re-categorized two DSW/Filene’s Basement combination locations as leased shoe departments and which will be included in the Filene’s Basement segment. For stores scheduled to open in fiscal 2005, as of January 29, 2005, we have signed leases for 23 new stores and two store relocations.

      Filene’s Basement. As of January 29, 2005, we operated 26 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. Subsequent to year end, as of the date of this Annual Report, we opened one new Filene’s Basement store.

     See Note 12 of Notes to consolidated financial statements beginning on page F-23 of this Annual Report for detailed financial information regarding our three operating segments.

Value City

     As an off-price retailer, Value City’s strategy is to 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, each of which creates 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 value oriented 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.

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      Merchandising

      Selection. Value City is a full-line, off-price retailer carrying men’s, women’s and children’s apparel, accessories, jewelry, shoes, home furnishings, toys, health and beauty care items and commodities. Off-price retailing, as distinguished from traditional full-price and discount retailing is characterized by the purchase by the retailer of brand name merchandise at prices below normal cost to most retailers. We build 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 is a value seeker who is budget minded with a moderate income level. Value City strives 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 assortments and a deep selection of goods within each category. Value City stores carry over 700 classifications 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 or reducing less productive departments, introducing new merchandise categories or growing existing merchandise categories to improve store profitability and meet the changing needs of our customers. We continue to evaluate the impact of in-season merchandise to the overall assortment and will look to increase the sourcing and introduction of this merchandise in the current selling season sooner than we have historically.

     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 to ensure a constant offering 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 20% to 70% below initial prices charged by traditional department 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.

     Well-known designer labels, brand names and original retailer names are displayed throughout our Value City stores. Many items carry labels and/or original price tags showing brand names identifiable with 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” below 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. We believe our buyers have established good relationships with suppliers and are frequently invited to evaluate entire lots of merchandise held for sale. We review these offerings and acquire the mix and quantities of merchandise we want and need, up to and including the entire lot. 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 available vendor production time. As a result of our relationships, reputation and experience, suppliers offer special purchase opportunities to us as well as others prior to attempting to dispose of merchandise through other channels. Most brand name merchandise manufacturers are open to selling merchandise to Value City for resale at our discounted prices as we provide a stable and known outlet. 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 prices while achieving our initial markup goals.

     We purchase merchandise from more than 4,000 suppliers, none of which accounted for a material percentage of purchases during the past fiscal year. Except for greeting cards, our-front end register program and soft drinks, we do not maintain any long-term or exclusive commitments to purchase merchandise from any one supplier. We employ several different purchasing strategies. We regularly purchase overstocked or overproduced items from manufacturers and other retailers, including end-of-season, out-of-season / packaway 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 across all

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categories. 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 growing portion of our overall merchandising needs.

      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. Our 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 and use a media buying service that purchases our media for us. During fiscal 2004, Value City introduced a gift card program in its stores.

      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 January 29, 2005, 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. We believe our stores offer customers a convenient shopping experience.

     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. In fiscal 2004, Value City offered a layaway program in approximately 60% of its stores that was used by our budget and moderate-income customers. We have discontinued the layaway program in our operations for fiscal 2005. We also maintain a reasonable return policy.

     Our Value City 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 assistant managers 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 Value City 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 involve 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.

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      Expansion . No new department stores were added in fiscal 2004 or 2003 and none are currently planned for fiscal 2005. 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. 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 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 5 distribution centers located in Columbus, Ohio. Our distribution facilities utilize material handling equipment, including mechanized conveyor systems to separate and collate shipments to the stores. The aggregate area of the distribution facilities is approximately 2,040,000 square feet; however, use of multi-tier processing levels in some of the distribution centers increases the operating capacity by approximately 380,000 square feet. In 2004, we consolidated operations, resulting in the closure of one of our Columbus Distribution Centers. The consolidation included the conversion of a 300,000 square foot facility to outbound pool shipping. The conversion resulted in reduced outbound transportation costs and increased speed of delivery to our stores.

     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

     In connection with the reorganization completed in December 2004, Value City and DSW agreed to terminate the supply agreement whereby Value City utilized DSW to operate the shoe departments in the Value City stores. The inter-company activity is eliminated in our consolidated financial statements. In fiscal 2005, shoe departments in Value City will be opened and operated by Value City and its own associates. Retail Ventures Jewelry, Inc., a wholly owned subsidiary of Retail Ventures, operates the jewelry departments in all Value City stores. Licensees supply their own merchandise and generally supply their own store fixtures. License 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 United States Patent and Trademark Office (“USPTO”). As of January 29, 2005, we had four department stores in Columbus that operated 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.

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DSW

     DSW’s goal is to further strengthen its position as a leading specialty branded footwear retailer of choice in the United States. DSW’s core focus is to offer customers a vast, exciting selection of in-season styles with the convenience and value they desire. DSW believes its 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 July 2002 and June 2004, respectively, DSW, entered into supply agreements with Stein Mart and Gordmans to supply merchandise to some of the Stein Mart’s and all of the Gordmans’ shoe departments. As of January 29, 2005, we operated 153 leased departments for Stein Mart and 48 for Gordmans. The Stein Mart and Gordmans operations are included with the DSW segment and represent substantially all of the leased operations of the segment.

      Merchandising

      Selection. DSW stores offer a large selection of brand name and designer merchandise. DSW stores carry primarily in-season footwear found in specialty and department stores and branded make-ups (shoes made exclusively for a retailer). DSW stores also offer a complementary selection of handbags, hosiery and other accessories that appeal to its brand- and fashion-conscious customers. DSW’s strategy is designed to ensure that a broad and consistent selection of merchandise is available at all times.

      Value. Through its buying organization, DSW is able to provide its customers with high-quality, in-season fashions at everyday prices that it believes are competitive with the typical sale price found at specialty retailers and department stores. DSW employs a consistent pricing strategy that typically provides customers with the same price on merchandise from the day it is received until it goes into the planned clearance rotation. In order to provide additional value to its regular customers, DSW developed a customer loyalty program called “Reward Your Style.” This program offers additional savings to frequent shoppers and encourages repeat sales.

      Convenience . DSW organizes most of its stores on a single level, which allows customers to view the entire store and product offering as they enter and move quickly to the area where their desired styles are located. All the merchandise is displayed on the selling floor with self-service fixtures to enable customers to view and touch the merchandise without feeling rushed. This self-service concept empowers customers to shop quickly and easily because they do not have to rely on a salesperson to check for sizes and styles. Although all DSW stores are designed for self-service shopping, sales associates are available to help customers locate merchandise and to assist as needed.

      Supplier Relationships and Purchasing

     Through its buying organization, DSW is able to provide its customers with high-quality, in-season fashions at everyday prices that it believes are competitive with the typical sale price found at specialty retailers and department stores. DSW employs a consistent pricing strategy that typically provides customers with the same price on merchandise from the day it is received until it goes into the planned clearance rotation. DSW believes it has good relationships with its vendors. DSW purchases merchandise directly from more than 300 domestic and foreign vendors as of January 29, 2005. As the number of DSW locations increases and its sales volumes grow, DSW believes there will continue to be adequate sources available to acquire a sufficient supply of quality goods in a timely manner and on satisfactory economic terms.

     DSW’s merchandising group continually monitors current fashion trends as well as historical sales trends to identify popular styles and styles that may become popular in the upcoming season, and has a flexible incremental buying process that enables it to order styles frequently throughout the year. DSW has implemented quality control programs under which DSW buyers and store managers inspect incoming merchandise for fit, color and material, as well as for overall quality of manufacturing. DSW does not generally experience quality problems related to merchandise manufactured overseas.

      Advertising and Promotion

     Our marketing strategy for DSW focuses on communicating the selection, convenience and value offered by DSW through the use of the slogan “The Shoes of the Moment. The Deal of a Lifetime.” We utilize television, radio and print media advertising as well as in-store promotions.

     In early 1998, the “Reward Your Style” customer loyalty program at DSW was introduced. The program seeks to motivate members to shop at DSW by offering them a $25 reward certificate for every $250 they spend. In addition to customer rewards, the program regularly communicates with customers through direct mail, e-mail and the DSW website. While the program develops

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customer loyalty, it also provides DSW with valuable market intelligence and purchasing information regarding its most frequent customers. During fiscal 2003, DSW introduced a gift card program in its stores.

      Stores

      Store Location, Design and Operations.

     Typical DSW stores are approximately 25,000 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. Of the 172 DSW stores open as of January 29, 2005, 145 are either freestanding or located in shopping centers, which provide customers with direct access to parking, and the remainder are in shopping malls or downtown locations. For added convenience, DSW stores have a centralized check-out, which aids customers in quickly locating the cashier for efficient processing. 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.

     At DSW, 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. We prefer to fill store management and field supervisor positions through internal promotions.

     As of January 29, 2005, DSW stores are organized into the West, Central and East geographic regions, composed of 13, 7 and 12 districts, respectively. Each region is supported by a Regional Vice President or Director, who supervise senior district, district and area managers headquartered in the respective region, district or area. The Regional Vice Presidents and Directors spend the majority of their time in their stores to ensure adherence to merchandising, operational and personnel standards. The typical staff for a DSW store consists of a store manager and two assistant managers who supervise 15 to 25 full and part-time hourly associates. Each store manager reports directly to one of 32 district or area managers, each of whom in turn reports to one of three Regional Vice Presidents or Regional Directors who in turn report to the Senior Vice President of Store Operations. 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. Store managers are an important source of information concerning local market conditions, trends and customer preferences. DSW provides compensation bonuses to store managers which are largely based on store profitability and inventory control.

      Expansion . We opened 31 new DSW stores in fiscal 2004 and plan to open approximately 30 additional stores in each fiscal year from fiscal 2005 through fiscal 2009. For stores scheduled to open in fiscal 2005, as of January 29, 2005, we have signed leases for 23 new stores and two store relocations. We plan to open stores both in markets in which we currently operate and in new markets.

     In general, our evaluation of potential new stores focuses on store size, configuration, location and lease terms. We target high-traffic real estate locations, with new stores sized as appropriate to fit market potential. An ideal DSW store is either freestanding on the peripheral road of a mall, in a power strip center, in a shopping center or in a high traffic urban shopping zone. We target not only locations with high traffic and visibility, but also locations near other large format, category leading retailers, such as Bed Bath & Beyond, Barnes & Noble and Staples, and we insist on favorable lease terms. We intend, over time, to cluster our stores in strategic metropolitan areas to enhance name recognition, lower average per store advertising costs and achieve economies of scale in management and distribution.

     After we approve a site, we negotiate lease terms and begin planning the store layout and design. We typically devote between four and six weeks from the time we take possession of a store to prepare for its opening. During fiscal 2004, the average investment required to open a new DSW store was approximately $1.7 million per store. Of this amount, in fiscal 2004, gross inventory typically accounted for approximately $880,000, fixtures and leasehold improvements typically accounted for approximately $600,000 (prior to tenant allowances) and pre-opening advertising and other pre-opening expenses typically accounted for approximately $250,000. All our stores are leased or subleased.

      Distribution

     DSW’s distribution center is located in an approximately 707,000 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

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advantage of each selling season. This distribution center facility uses a warehouse management system updated in 2003, and material handling equipment, including conveyor systems, to separate and collate shipments to DSW stores. DSW uses a cross dock conveyor system which enhances the movement of merchandise, through the distribution facility, using vendor advance shipment notifications (“ASNs”). DSW may need to increase our distribution capacity in 2006 to accommodate our expanding retail store base.

      Leased Departments and Supply Agreements

     DSW has operated leased shoe departments for Filene’s Basement since March 2000. The inter-company activity is eliminated in our 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 January 29, 2005, DSW operated leased shoe departments in 23 Filene’s Basement locations. Effective as of January 30, 2005, DSW updated and reaffirmed its contractual arrangement with Filene’s Basement.

     DSW has operated shoe departments in all the Value City stores. The inter-company activity is eliminated in our consolidated financial statements. In connection with the reorganization completed in December 2004, Value City and DSW agreed to terminate the supply agreement whereby Value City utilized DSW to operate the shoe departments in all Value City stores. In fiscal 2005, the shoe departments in Value City stores will be operated by Value City and its own employees.

     DSW also operates leased shoe departments for three non-affiliated retailers. DSW entered into Supply Agreements to merchandise the shoe departments in Stein Mart and Gordmans stores as of July 2002 and June 2004, respectively. DSW owns the merchandise and fixtures and provides supervisory assistance in these covered locations, and it receives a percentage of net sales as payment. Stein Mart and Gordmans provide the sales associates. As of January 29, 2005, DSW supplied merchandise to 153 Stein Mart stores and 48 Gordmans stores. As of January 29, 2005, DSW also supplied merchandise to a single Frugal Fannie’s Fashion Warehouse store in Westwood, Massachusetts.

      Segment Seasonality

     The DSW business, measured in terms of net sales, is subject to seasonal trends. This segment’s net sales, measured on a comparable stores basis, have typically been higher in spring and early fall, when its customers’ interest in new seasonal styles increases. In addition, when measured in terms of operating profit, the DSW segment has historically experienced lower levels of profitability in the fourth quarter of our fiscal year, due primarily to moderately lower sales in the fourth quarter. Unlike many other retailers, DSW has not historically experienced a large increase in net sales during the 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®, DSW Shoe Warehouse® and Reward Your Style®.

Filene’s Basement

     Our strategy for 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. We believe Filene’s Basement, a well-known institution in Boston since 1908, is consistent with the Company’s overall 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 up-front purchasing. We believe that up-front 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.

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     We also accelerated our buying of 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.

      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. We purchase merchandise from more than 2,500 suppliers, none of which accounted for a material percentage of purchases during the past fiscal year.

      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. In fiscal 2004, we purchased in-store sign printing equipment which permits us to download promotional rack signing directly to the store as needed. 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 in its stores.

     During the third quarter of 2004, Filene’s Basement implemented a limited-time customer rewards program that ended in December 2004. The rewards program provided qualifying customers with Filene’s Basement gift cards in various denominations based on their cumulative spending during the program period. Over 200,000 customers joined the customer rewards program while less than 100,000 qualified for some denomination of gift card. The Company plans to utilize this customer database for direct mail and e-mail marketing efforts during fiscal 2005.

      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 16.8% of Filene’s Basement’s total sales during fiscal 2004.

     Most of our Filene’s Basement stores are located in suburban areas, near large residential neighborhoods, and average approximately 31,500 square feet of selling space per store (approximately 45,000 square feet of total 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 January 29, 2005, Filene’s Basement operated 25 branch stores, in addition to our downtown Boston location, in eight states and the District of Columbia. Generally, each 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 in the branch stores of 30 days and in the Downtown Boston location of 14 days.

     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 Executive Vice President, Stores & Operations.

     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

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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 at least four new Filene’s Basement stores during fiscal 2005. 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 11 to 13 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.

      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. In 2005, the Auburn Distribution Center is being upgraded to accommodate the current volume of business and the anticipated growth in new stores for 2005 and beyond.

      License Agreements and Leased Departments

     Filene’s Basement licenses cosmetics and certain other incidental departments to independent third parties. The aggregate annual license fees for the 2004 fiscal year were approximately $1.4 million. Filene’s Basement also uses DSW to manage the in-store shoe departments on a leased department basis. Retail Ventures Jewelry, Inc., a wholly owned subsidiary of Retail Ventures, operates the jewelry departments in all Filene’s Basement stores. 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. Leased 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. Leased departments complement the operations of our stores and facilitate the uniformity of the in store merchandising strategy including the overall emphasis on value.

     DSW has operated leased shoe departments for Filene’s Basement since March 2000. Effective as of January 30, 2005, DSW updated and reaffirmed its contractual arrangement 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 January 29, 2005, DSW operated leased shoe departments in 23 Filene’s Basement locations. This inter-company activity is eliminated in our consolidated financial statements.

      Segment Seasonality

     Filene’s Basement customer traffic increases in the fall and the Christmas holiday season.

      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 USPTO 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 for all of our segments, including warehouse operations, store billing, inventory control, merchandising and automated accounting. We utilize registers with full scanning capabilities to increase speed and

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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 enhanced inventory productivity and merchandise assortments for our stores. A warehouse management system was also implemented for the jewelry operations during February 2004 and improved the efficiency of our distribution centers and improved the flow of merchandise to our stores. These types of systems will be implemented in the future to support hardlines and softlines. New point of sale (“POS”) software was successfully implemented in all Value City stores in fiscal 2004. Registers were replaced to improve the customer transaction experience and enhance back office efficiency in fiscal 2004. New wireless hand held scanners and wireless printers were implemented in fiscal 2004 in conjunction with the POS system for markdown and inventory processing. The ability to sell magnetic gift cards was implemented by the end of fiscal 2004. In addition, in the first quarter of 2005, Value City customers will be able to open a new Value City credit card at all of its POS registers as a customer convenience. Value City systems run on two AS/400’s and open systems computers.

     Filene’s Basement utilizes the JDA merchandise management system to track and manage merchandise inventory at its stores. A warehouse management system is used at the distribution center to process and distribute merchandise to the stores. Filene’s Basement utilizes POS registers with full scanning capabilities to increase speed and accuracy at customer checkout and facilitate inventory restocking. The ability to sell magnetic gift cards was implemented for the 2003 holiday season. In 2004, Filene’s Basement installed high quality color printers in all of its stores to enhance store signage. Filene’s Basement systems run on an AS/400 and open systems computers.

     In order to promote its continued growth, DSW has undertaken several major initiatives to build upon the merchandise management system and warehouse management systems that support DSW. An electronic data interchange (“EDI”) project is underway to utilize product UPC barcodes and electronic exchange of purchase orders, ASNs and invoices with our top vendors. As of January 29, 2005, approximately 70% of our footwear product is processed using UPC barcodes which has reduced processing costs and improved flow of goods through the distribution center to the stores. EDI purchase orders and ASNs were piloted with key vendors in early 2004. They accounted for approximately 20% of the volume of our shipments as of the end of fiscal 2004, and DSW expects they will be approximately 50% by the end of fiscal 2005. This will speed the flow of goods from the vendor to DSW stores, as well as reduce the amount of inventory needed in our warehouse. Additionally, new merchandise planning and merchandise allocation systems were implemented in 2003 to improve inventory productivity and store assortments and reduce supply chain cycle time.

     DSW utilizes POS registers with full scanning capabilities to increase speed and accuracy at customer checkouts and facilitate inventory restocking. In 2003, a new, completely wireless POS system was implemented in all DSW stores, resulting in more efficient customer checkouts and back office operations. This enables DSW to complete new store openings more efficiently and simply. The ability to sell magnetic gift cards was implemented for the 2003 holiday season. In addition, in October 2004, DSW launched an application that provides DSW with the ability to look up a customer’s “Reward Your Style” number at POS registers. DSW anticipates that in the first quarter of fiscal 2005, the POS system will be further upgraded with debit card terminals and signature capture. DSW will continually enhance system security.

     Program administration, operations and analysis for the “Reward Your Style” program was brought in-house on February 1, 2005. Prior to this time, these functions were contracted out to a third party. DSW uses enterprise data warehouse and customer relationship management software to manage the program. DSW expects this will allow it to support, expand and integrate “Reward Your Style” with the POS system to improve the customer experience while reducing costs.

     In March 2005, we announced that we had learned of the theft of credit card and other purchase information relating to all customers who made purchases at 103 DSW stores between mid-November 2004 and mid-February of 2005. We now believe that the theft occurred at 108 DSW stores. We have contacted federal law enforcement authorities, who are involved in the investigation. We are taking steps to address the situation, including a review of our technology systems in conjunction with a leading computer security firm, and we are also working with credit card companies and issuers to mitigate the situation. We cannot yet reasonably estimate what the potential liability to us will be in connection with these events, and we do not yet know what effect this incident may have on our customers’ perceptions of us.

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     A focus of our information technology program is to leverage our technology infrastructure and systems whenever appropriate to simplify and become more efficient. In addition, we also expect to continually enhance system security. All of our segments are now supported by enterprise financial, human resource and e-mail systems. We automated our corporate environment with a document management system in fiscal 2003 for invoice processing to move toward an efficient, paperless environment. In fiscal 2003, we implemented financial reporting and analysis and financial planning systems to augment and streamline these processes. In fiscal 2004, 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.

Associates

     The mission of the Company’s human resource department includes ensuring the Company’s 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 January 29, 2005, we had approximately 18,000 associates of which 9,000 were full-time and the balance were part-time. Approximately 1,300 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.

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.

     Value City and Filene’s Basement provide perceived high value by offering easily recognized brand-name merchandise at discounted prices. We believe Filene’s Basement’s niche, however, is the top-tier of the off-price retailing category and its sales events shape its image as having a special “cachet”. In 2004, Filene’s Basement’s famous one-day bridal gown sale, commonly referred to as “the running of the brides,” was held in nine stores in different geographic areas. This event creates great excitement and generates both regional and national media attention.

     Based on the unique retail format and the high quality, in-season selection of its shoe merchandise, DSW believes that it provides a distinct shoe-shopping destination for its customers. DSW believes that its customers prefer its wide selection of in-season merchandise compared to product offerings of typical traditional department stores, mall-based company stores, national chains, single-brand specialty retailers and independent shoe retailers because those retailers generally offer a more limited selection at higher average prices and in a less convenient format than does DSW. In addition, DSW believes that it will successfully compete against competitors who have attempted to duplicate its format because they typically offer assortments with fewer recognizable brands and more styles from prior seasons. DSW does not view non-brand-oriented discount retailers as its prime competitors. These non-brand-oriented discount retailers may offer footwear at lower price points; however, they generally offer lower quality, private label shoes.

Available Information

     We maintain an Internet website at www.retailventuresinc.com . 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 on 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 Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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