ACQUISITION AND EQUITY METHOD INVESTMENT

Town Shoes- On May 12, 2014, DSW Inc. acquired a 49.2% ownership interest in Town Shoes for $75.1 million Canadian dollars ("CAD") ($68.9 million USD at the purchase date). As of October 29, 2016, DSW Inc.'s ownership interest is 46.3%. The dilution of the Company's ownership is due to Town Shoes' employee exercise of stock options. DSW Inc.'s initial stake provides 50% voting control and board representation equal to the co-investor.

Additionally, the Town Shoe co-investor holds a put option to sell the remaining portion of the company in fiscal 2017 to DSW Inc., and for the subsequent two years. DSW Inc. holds a call option to purchase the remaining portion of the company in fiscal 2018, and for the subsequent two years, if the Town Shoe co-investor has not exercised their put option. DSW Inc. purchased $100 million CAD during the first quarter of fiscal 2015 (approximately $79 million USD at purchase date) to take advantage of the strength of the dollar and in anticipation of funding the future purchase of the remaining interest in Town Shoes. The funds are also available to fund other business opportunities or return to U.S. operations, if needed. As this was a cash transaction, the gains or losses related to the purchase of the CAD were recorded in the consolidated statement of operations. During the first quarter of fiscal 2015, the Company recorded $3.3 million in foreign currency exchange gains related to the purchase of CAD within non-operating income. The Company invested the CAD in available-for-sale securities in the second quarter of fiscal 2015. The accumulated comprehensive loss was impacted by an increase of $2.1 million for the three months ended October 29, 2016 due to remeasurement and a decrease of $3.1 million for the nine months ended October 29, 2016 due to remeasurement.

The investment in Town Shoes decreased from January 30, 2016 to October 29, 2016. The change in the investment balance is driven by DSW Inc.'s portion of Town's income or loss, foreign currency translation adjustments and amortization of purchase price adjustments.

The note receivable from Town Shoes increased from January 30, 2016 to October 29, 2016. The change in the note receivable balance is driven by payment-in-kind interest earned and foreign currency translation adjustments.

Ebuys- On March 4, 2016, the Company acquired Ebuys, a digital marketplace and accessories retailer, for a total preliminary purchase price of $116.4 million. In addition to cash consideration of $60.4 million, the preliminary purchase price included future payments that are contingent upon the achievement of specified milestones. The Company recorded a contingent consideration obligation of $56.0 million at the purchase date. Goodwill was calculated as the excess of the consideration paid over the fair value of the net assets acquired.

During the third quarter of fiscal 2016, the Company made various measurement period adjustments in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations, which impacted the opening goodwill balance and the preliminary purchase price. As a result of these adjustments, the updated preliminary purchase price as of October 29, 2016 was $113.3 million, which includes cash consideration of $59.5 million and a contingent consideration obligation of $53.8 million. The purchase price allocation for the Ebuys acquisition is still preliminary and subject to change throughout the remainder of the measurement period based on the finalization of the detailed valuations and working capital adjustments. The following table represents the preliminary and updated preliminary purchase price allocation (in thousands):



	Preliminary Purchase Price Allocation as of March 4, 2016			Adjustments			Updated Preliminary Purchase Price Allocation as of October 29, 2016
Accounts and other receivables	$	1,623		$	(287	)	$	1,336
Inventory	30,152			291			30,443
Other current assets	191			335			526
Property and equipment	1,221			22			1,243
Goodwill	54,785			(3,476		)	51,309
Other intangible assets⁽¹⁾	41,301			(200		)	41,101
Accounts payable and other long-term liabilities	(12,862		)	227			(12,635		)
Total preliminary purchase price	$	116,411		$	(3,088	)	$	113,323

(1) The preliminary fair value of intangible assets of $41.1 million includes $24.0 million for online retailer relationships with a 10 year amortizable life; $11.0 million for trade names with a 15 year amortizable life; $5.7 million for non-compete agreements with a 5 year amortizable life; and $0.4 million for customer relationships with a 5 year amortizable life. Amortization expense related to these definite-lived intangibles was $2.9 million for the nine months ended October 29, 2016. The estimated fair values of the intangible assets were determined using various methods under the income approach, which includes establishing a forecast of the estimated future net cash flows expected to accrue directly or indirectly to the owner of the asset over its remaining useful life and discounting these estimated future net cash flows to their present value using a market rate of return.

The reduction of the preliminary purchase price of $3.1 million includes a decrease in the contingent consideration liability of $2.2 million. The Company re-evaluated the liability based on additional information about facts and circumstances that existed at the acquisition date that were obtained after that date, which qualify as measurement period adjustments, and represent a reduction to the opening goodwill balance. The remaining $0.9 million decrease in the preliminary purchase price relates to a working capital settlement DSW Inc. will receive from Ebuys, which also reduced the opening goodwill balance. The other adjustments noted above represent minor measurement period adjustments that offset goodwill and have no impact to the purchase price.

Per ASC Topic 805, Business Combinations, the acquirer shall disclose pro-forma financial information as though the business combination had occurred as of the beginning of the comparable prior annual reporting period. For the acquisition of Ebuys in March 2016, pro-forma information was not practicable to obtain as of the time that financial statements were ready for issuance.

In connection with the acquisition of Ebuys, the Company adopted or updated the following significant accounting policies:

Business Combinations- In accordance with ASC Topic 805, Business Combinations, the Company recognizes assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities, based on fair value estimates as of the date of acquisition. The purchase price allocation process requires management to make significant estimates and assumptions with respect to the fair value of any intangible assets acquired, deferred revenues assumed, or contingent consideration within the arrangement. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions or estimates.

Contingent Consideration- The Company agreed to pay additional amounts to the sellers contingent upon achievement of certain negotiated goals. The Company has recognized a liability for this contingent obligation based on its estimated fair value at the date of acquisition with any differences between the acquisition-date fair value and the ultimate settlement of the obligation being recognized as an adjustment to income from operations. For the three and nine months ended October 29, 2016, the change in fair value of contingent consideration, which represents the accretion related to the contingent consideration liability, was $1.5 million and $5.1 million, respectively, which is recognized within the statement of operations.

Inventories- Merchandise inventories for Ebuys are accounted for using the cost method, where the cost is based on invoice cost.