What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-09-04 compared with 2020-06-19 · 329 added, 180 removed, 342 unchanged (60% of the section changed)

3 unchanged sentences

(unaudited and in thousands, except per share amounts)

Three months ended

Three months ended Six months ended

August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Net sales $ 489,714 $ 855,952 $ 972,497 $ 1,729,241

Cost of sales ( 452,672 ) ( 594,779 ) ( 961,915 ) ( 1,208,735 )

4 unchanged sentences

Interest expense, net ( 3,788 ) ( 1,972 ) ( 5,946 ) ( 3,773 )

Non-operating expenses, net

Non-operating income (expenses), net 743 199 656 ( 143 )

Income (loss) before income taxes ( 139,009 ) 39,494 ( 465,212 ) 81,332

5 unchanged sentences

Weighted average shares used in per share calculations:

Basic shares 72,142 73,529 72,028 75,267

Diluted shares 72,142 74,316 72,028 76,281

3 unchanged sentences

(unaudited and in thousands)

Three months ended

Three months ended Six months ended

August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Net income (loss) $ ( 98,214 ) $ 27,407 $ ( 314,072 ) $ 58,601

Other comprehensive income (loss), net of income taxes:

Foreign currency translation loss

Foreign currency translation gain (loss) 1,290 461 ( 2,251 ) ( 253 )

Unrealized net gain on debt securities — 196 195 438

Reclassification adjustment for net gains realized in net income

Total other comprehensive loss, net of income taxes

Reclassification adjustment for net losses (gains) realized in net income (loss) — 23 ( 368 ) ( 65 )

Total other comprehensive income (loss), net of income taxes 1,290 680 ( 2,424 ) 120

Total comprehensive income (loss) $ ( 96,924 ) $ 28,087 $ ( 316,496 ) $ 58,721

3 unchanged sentences

(unaudited and in thousands)

February 1, 2020

August 1, 2020 February 1, 2020 August 3, 2019

Cash and cash equivalents

$ 206,720 $ 86,564 $ 51,762

— 24,974 25,504

Accounts receivable, net

49,240 89,151 85,162

445,044 632,587 706,168

Prepaid expenses and other current assets

69,456 67,534 55,561

Total current assets

770,460 900,810 924,157

Property and equipment, net

332,730 395,009 402,779

Operating lease assets

797,413 918,801 975,963

93,655 113,644 116,280

Intangible assets

15,663 22,846 21,112

Deferred tax assets

182,866 31,863 29,515

Equity investment

56,690 57,760 55,033

23,780 24,337 32,407

$ 2,273,257 $ 2,465,070 $ 2,557,246

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable

$ 224,693 $ 299,072 $ 289,457

Accrued expenses

202,831 194,264 173,437

Current operating lease liabilities

241,694 186,695 185,969

Total current liabilities

669,218 680,031 648,863

393,000 190,000 235,000

Non-current operating lease liabilities

778,826 846,584 905,546

Other non-current liabilities

25,586 27,541 38,590

Total liabilities

1,866,630 1,744,156 1,827,999

Commitments and contingencies

1 unchanged sentence

Common shares paid-in capital, no par value

980,749 971,380 963,312

Treasury shares, at cost

Retained earnings

( 515,065 ) ( 515,065 ) ( 498,436 )

Retained earnings (deficit)

( 54,138 ) 267,094 266,957

Accumulated other comprehensive loss

( 4,919 ) ( 2,495 ) ( 2,586 )

Total shareholders' equity

406,627 720,914 729,247

Total liabilities and shareholders' equity

$ 2,273,257 $ 2,465,070 $ 2,557,246

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

2 unchanged sentences

(unaudited and in thousands, except per share data)

Number of shares

Class A common shares

Class B common shares

Treasury shares

Common shares paid in capital

Treasury shares

Retained earnings

Accumulated other comprehensive loss

Three months ended May 2, 2020

Number of shares Amounts

Class A common shares Class B common shares Treasury shares Common shares paid in capital Treasury shares Retained earnings (deficit) Accumulated other comprehensive loss Total

Three months ended August 1, 2020

Balance, May 2, 2020 64,302 7,733 22,169 $ 975,304 $ ( 515,065 ) $ 44,076 $ ( 6,209 ) $ 498,106

— — — — — ( 98,214 ) — ( 98,214 )

Stock-based compensation activity 276 — — 5,445 — — — 5,445

Other comprehensive income — — — — — — 1,290 1,290

Balance, August 1, 2020 64,578 7,733 22,169 $ 980,749 $ ( 515,065 ) $ ( 54,138 ) $ ( 4,919 ) $ 406,627

Three months ended August 3, 2019

Balance, May 4, 2019 67,434 7,733 18,501 $ 957,100 $ ( 448,436 ) $ 257,453 $ ( 3,266 ) $ 762,851

Net income — — — — — 27,407 — 27,407

Stock-based compensation activity 145 — — 6,212 — — — 6,212

Repurchase of Class A common shares ( 2,668 ) — 2,668 — ( 50,000 ) — — ( 50,000 )

Dividends ($ 0.25 per share)

— — — — — ( 17,903 ) — ( 17,903 )

Other comprehensive income — — — — — — 680 680

Balance, August 3, 2019 64,911 7,733 21,169 $ 963,312 $ ( 498,436 ) $ 266,957 $ ( 2,586 ) $ 729,247

Six months ended August 1, 2020

Balance, February 1, 2020 64,033 7,733 22,169 $ 971,380 $ ( 515,065 ) $ 267,094 $ ( 2,495 ) $ 720,914

— — — — — ( 314,072 ) — ( 314,072 )

Stock-based compensation activity 545 — — 9,369 — — — 9,369

Dividends ($ 0.10 per share)

— — — — — ( 7,160 ) — ( 7,160 )

Other comprehensive loss — — — — — — ( 2,424 ) ( 2,424 )

Balance, May 2, 2020

Three months ended May 4, 2019

Balance, August 1, 2020 64,578 7,733 22,169 $ 980,749 $ ( 515,065 ) $ ( 54,138 ) $ ( 4,919 ) $ 406,627

Six months ended August 3, 2019

Balance, February 2, 2019 70,672 7,733 15,091 $ 953,801 $ ( 373,436 ) $ 254,718 $ ( 2,706 ) $ 832,377

Cumulative effect of accounting change — — — — — ( 9,556 ) — ( 9,556 )

Net income — — — — — 58,601 — 58,601

Stock-based compensation activity 317 — — 9,511 — — — 9,511

1 unchanged sentence

Dividends ($ 0.50 per share)

Other comprehensive loss

Balance, May 4, 2019

— — — — — ( 36,806 ) — ( 36,806 )

Other comprehensive income — — — — — — 120 120

Balance, August 3, 2019 64,911 7,733 21,169 $ 963,312 $ ( 498,436 ) $ 266,957 $ ( 2,586 ) $ 729,247

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

2 unchanged sentences

(unaudited and in thousands)

Three months ended

Six months ended

August 1, 2020 August 3, 2019

Cash flows from operating activities:

Net income (loss) $ ( 314,072 ) $ 58,601

Adjustments to reconcile net income to net cash used in operating activities:

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

44,075 42,485

Stock-based compensation expense

Deferred income taxes

( 152,988 ) 1,043

Income from equity investment

( 4,423 ) ( 4,692 )

Distributions received from equity investment

Impairment charges

Gain on settlement ( 8,990 ) —

Change in operating assets and liabilities, net of acquired amounts:

Accounts receivable

30,699 ( 14,800 )

186,965 ( 61,748 )

Prepaid expenses and other current assets

( 847 ) ( 2,972 )

Accounts payable

( 67,282 ) 30,683

Accrued expenses

26,693 ( 24,677 )

Operating lease assets and liabilities, net

Net cash used in operating activities

44,777 ( 8,935 )

Net cash provided by (used in) operating activities

( 79,619 ) 34,192

Cash flows from investing activities:

Cash paid for property and equipment ( 22,141 ) ( 40,259 )

Purchases of available-for-sale investments — ( 3,014 )

Sales of available-for-sale investments 24,755 47,764

Proceeds from settlement 4,166 —

Net cash provided by (used in) investing activities

1 unchanged sentence

Borrowing on revolving line of credit

251,000 320,700

Payments on revolving line of credit

( 48,000 ) ( 245,700 )

Cash paid for treasury shares

— ( 125,000 )

Dividends paid

( 7,160 ) ( 36,806 )

( 2,646 ) ( 397 )

Net cash provided by (used in) financing activities

193,194 ( 87,203 )

Effect of exchange rate changes on cash balances

( 199 ) ( 286 )

Net increase (decrease) in cash, cash equivalents, and restricted cash

120,156 ( 48,806 )

Cash, cash equivalents, and restricted cash, beginning of period

86,564 100,568

Cash and cash equivalents, end of period

$ 206,720 $ 51,762

Supplemental disclosures of cash flow information:

Cash paid (received) for income taxes

$ 165 $ 21,796

Cash paid for interest on debt

$ 5,606 $ 4,052

Cash paid for operating lease liabilities

$ 62,262 $ 118,563

Non-cash investing and financing activities:

Property and equipment purchases not yet paid

$ 1,981 $ 8,648

Operating lease liabilities arising from lease asset additions

Increase (decrease) to operating lease assets and lease liabilities for modifications

$ 9,408 $ 9,184

Increase to operating lease assets and lease liabilities for modifications

$ 23,195 $ 48,029

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

15 unchanged sentences

Retail segment includes stores operated in the U.S.

under the DSW Designer Shoe Warehouse banner and its related e-commerce site.

The Canada Retail segment includes stores operated in Canada under The Shoe Company, Shoe Warehouse, DSW Designer Shoe Warehouse banners and related e-commerce sites.

under the DSW banner and its related e-commerce site.

The Canada Retail segment includes stores operated in Canada under The Shoe Company, Shoe Warehouse, DSW banners and related e-commerce sites.

The Brand Portfolio segment includes the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels ("First Cost"), and the sale of branded products on direct-to-consumer e-commerce sites.

7 unchanged sentences

The balance sheet at February 1, 2020 has been derived from the audited financial statements at that date.

The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 , as amended, (the "2019 Form 10-K") filed with the SEC on May 1, 2020 and amended on May 7, 2020.

The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2019 Form 10-K.

Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31.

2 unchanged sentences

Impact of COVID-19- In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic.

To help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S.

and Canada, effective March 18, 2020.

Our e-commerce businesses have continued to be available to customers, with our fulfillment center and stores utilized for the fulfillment of online orders to be shipped to customers or available for curbside pickup.

The impact of the COVID-19 outbreak, including the temporary closure of all of our stores, has had a material adverse effect on our business, liquidity, financial condition, and results of operations.

During the three months ended May 2, 2020, we made, and may continue to make, adjustments to our operational plans, inventory controls, liquidity management by delaying lease and vendor payments, and reductions to our expense and capital expenditure plans.

We have already taken a number of actions including implementing temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave.

We are taking a phased approach as we reopen stores and we expect to have nearly all North American stores open by the end of June 2020.

As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, during the three months ended May 2, 2020 , we updated our impairment analysis for our U.S.

Retail and Canada Retail segments at the

On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S.

In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions.

However, as this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, liquidity management, and reductions to our expense and capital expenditure plans.

With the easing of stay-at-home orders and other state-imposed restrictions on non-essential businesses, during the second quarter and into the third quarter of fiscal 2020, we have re-opened the majority of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions.

In July 2020, we implemented an internal reorganization and reduction of our workforce, resulting in the elimination of over 1,000 associate positions, including approximately 220 vacant positions that will not be filled.

The charges recorded as a result of this reorganization are included in our integration and restructuring costs discussed below.

DESIGNER BRANDS INC.

1 unchanged sentence

( unaudited )

store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets.

Given the continuation of overall depressed consumer sentiment, customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all.

We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures resulted in a sharp decline in our net sales and cash flows during the first half of fiscal 2020.

Although the majority of our stores are now open, we are experiencing, and may continue to experience, significantly reduced customer traffic and net sales.

Our retailer customers in the Brand Portfolio Segment are having similar experiences.

As a result of the material reduction in net sales and cash flows during fiscal 2020, we updated our impairment analysis for our U.S.

Retail and Canada Retail segments at the store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets.

The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group (categorized as Level 3 under the fair value hierarchy).

During the three months ended May 2, 2020 , we recorded impairment charges of $ 84.9 million for under-performing stores ( $ 65.2 million and $ 19.7 million for the U.S.

In addition, we evaluated other long-lived assets based on our intent to use such assets going forward.

During the three months ended August 1, 2020, we recorded an impairment charge of $ 6.7 million for the U.S.

Retail segment.

During the six months ended August 1, 2020, we recorded impairment charges of $ 92.8 million ($ 73.1 million and $ 19.7 million for the U.S.

Retail and Canada Retail segments, respectively).

Also during the three months ended May 2, 2020 , we recorded an impairment charge of $ 6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).

Also during the six months ended August 1, 2020, we recorded an impairment charge of $ 6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).

We evaluate goodwill and other indefinite lived intangible assets for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist.

As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets during the three months ended May 2, 2020 .

We calculated the fair value of the reporting units with goodwill and for The Shoe Company tradename primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy).

Our analysis concluded that the fair values of the First Cost reporting unit within the Brand Portfolio segment and The Shoe Company tradename within the Canada Retail segment did not exceed their respective carrying values.

Accordingly, during the three months ended May 2, 2020 , we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment, and $ 1.1 million for The Shoe Company tradename included in the Canada Retail segment.

As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets during the first quarter of fiscal 2020.

We calculated the fair value of the reporting units with goodwill primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy).

Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value.

Accordingly, during the six months ended August 1, 2020, we recorded an impairment charge of $ 20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

For goodwill within the U.S.

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Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market.

Under the retail inventory method, the valuation of inventories reflects reductions for merchandise that was marked down prior to the end of the first quarter of fiscal 2020 with charges to cost of sales.

Under the retail inventory method, the valuation of inventories reflects reductions for merchandise marked down with charges to cost of sales.

As a result, earnings are negatively impacted as the merchandise is marked down prior to sale.

Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value.

For all inventories, we also monitored slow-moving and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores.

For the three months ended May 2, 2020 , we recorded $ 84.0 million of additional reserves over the same period last year.

Inventories for the Canada Retail and Brand Portfolio segments are accounted for using weighted average cost method and are stated at the lower of cost or net realizable value.

For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores.

During the six months ended August 1, 2020, we recorded approximately $ 64.0 million of additional inventory reserves over the same period last year.

On March 27, 2020, the U.S.

government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments.

government enacted the CARES Act, which, among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments.

Based on our evaluation of the CARES Act, we qualify for certain employer payroll tax credits, which are treated as government subsidies to offset related operating expenses, as well as the deferral of payroll and other tax payments in the future.

Similar credits and deferrals were also available in Canada.

During the three months ended May 2, 2020 , the qualified payroll tax credits reduced our operating expenses by $ 4.5 million on our condensed consolidated statements of operations.

We expect to record additional payroll tax credits from government agencies in second quarter of fiscal 2020 to offset qualified wages paid to our employees and we intend to defer qualified payroll and other tax payments where permitted.

During the three and six months ended August 1, 2020, the qualified payroll tax credits reduced our operating expenses by $ 3.5 million and $ 7.9 million, respectively, on our condensed consolidated statement of operations.

We expect to record additional payroll tax credits from government agencies in the third quarter of fiscal 2020 to offset qualified wages paid to our employees and we intend to defer qualified payroll and other tax payments where permitted.

We recorded our income tax expense, deferred tax assets and related liabilities based on management’s best estimates.

2 unchanged sentences

federal statutory tax rate was 35%, as opposed to the current rate of 21%.

As of May 2, 2020 , we did not significantly adjust the valuation allowance on deferred tax assets based on available evidence.

As of August 1, 2020, we did not significantly adjust the valuation allowance on deferred tax assets based on available evidence.

However, we will continue to monitor the realizability of our deferred tax assets, particularly in certain jurisdictions where the outbreak has created significant net operating losses.

Our ability to recover these deferred tax assets depends on several factors, including the amount of net operating losses we can carry back and our ability to project future taxable income.

Net deferred tax assets as of May 2, 2020 were $ 139.3 million , which are all related to jurisdictions where we expect to incur significant net operating losses in the near term, although the risks of failing to realize these benefits vary across the jurisdictions.

Our effective tax rate changed from 25.4 % for the three months ended May 4, 2019 to 33.8 % for the three months ended May 2, 2020 .

The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S.

federal statutory tax rate was 35%.

In addition, during the three months ended May 2, 2020 , we incurred $ 1.7 million of incremental costs directly related to instituting COVID-19 safety precautions, including pre-open cleaning services, signs used to encourage customers in social

Our ability to recover these deferred tax assets depends on several factors, including the amount

DESIGNER BRANDS INC.

1 unchanged sentence

( unaudited )

distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items.

We expect to record additional similar costs during the remainder of fiscal 2020 as we serve our customers in the safest way possible and in compliance with applicable government mandates.

The COVID-19 pandemic remains a rapidly evolving situation.

The continuation of the outbreak or a new surge in cases may cause new or prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors, including a potential reduction in consumer spending.

As such, the ultimate impacts of the COVID-19 outbreak to our businesses are highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Integration and Restructuring Costs- During the three months ended May 2, 2020 and May 4, 2019 , we incurred integration and restructuring costs, which consisted primarily of severance of $ 1.7 million and $ 1.3 million , respectively, and professional fees and other integration costs of $ 0.1 million and $ 1.2 million , respectively.

of net operating losses we can carry back and our ability to project future taxable income.

Total deferred tax assets as of August 1, 2020 were $ 182.9 million, which are all related to jurisdictions where we expect to incur significant net operating losses in the near term, although the risks of failing to realize these benefits vary across the jurisdictions.

Our effective tax rate changed from 27.9 % for the six months ended August 3, 2019 to 32.5 % for the six months ended August 1, 2020.

The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S.

federal statutory tax rate was 35%.

In addition, during the three and six months ended August 1, 2020, we incurred $ 6.4 million and $ 8.1 million, respectively, of incremental costs directly related to COVID-19, including termination fees, pre-open cleaning services, signs used to encourage customers in social distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items.

We expect to record additional similar costs during the remainder of fiscal 2020 as we strive to protect our associates and serve our customers in the safest way possible and in compliance with applicable government mandates.

The COVID-19 pandemic remains challenging.

The continuation of the outbreak or a new surge in cases may cause new and prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors and preferences, which may necessitate further shifts in our business model, and potential reductions in consumer spending.

As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Integration and Restructuring Costs- During the three months ended August 1, 2020 and August 3, 2019, we incurred integration and restructuring costs, which consisted primarily of severance of $ 7.3 million and $ 2.4 million, respectively, and professional fees and other integration costs of $ 1.2 million and $ 7.2 million, respectively.

During the six months ended August 1, 2020 and August 3, 2019, we incurred integration and restructuring costs, which consisted primarily of severance of $ 9.0 million and $ 3.6 million, respectively, and professional fees and other integration costs of $ 1.2 million and $ 8.5 million, respectively.

These costs are included in operating expenses in the condensed consolidated statements of operations.

As of May 2, 2020 and May 4, 2019 , we had accrued severance of $ 2.6 million and $ 3.4 million , respectively, included in accrued expenses on the condensed consolidated balance sheets.

Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc.

and its subsidiaries, including variable interest entities.

As of August 1, 2020 and August 3, 2019, we had accrued severance of $ 8.4 million and $ 4.6 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.

Lease Modifications- In response to the COVID-19 outbreak, we negotiated deferrals of lease payments to be repaid over various time periods, with no substantive changes to the total consideration.

For these deferrals, we have elected to treat the changes as modifications to our leases, which resulted in remeasuring the related lease assets and liabilities and including non-lease components per our policy.

Gain on Settlement- During the three months ended August 1, 2020, we recognized a gain of $ 9.0 million, recorded to operating expenses in the condensed consolidated statements of operations, due to a settlement with a vendor for costs incurred on internal-use software that was capitalized and impaired in a previous fiscal year.

During the three months ended August 1, 2020, we collected $ 4.2 million, net of legal costs incurred, and recorded a $ 4.8 million receivable included in accounts receivable on the condensed consolidated balance sheets, which has been subsequently received.

Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands and its subsidiaries, including variable interest entities.

All intercompany accounts and transactions have been eliminated in consolidation.

1 unchanged sentence

dollars ("USD"), unless otherwise noted.

Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period.

Certain estimates and assumptions use forecasted financial information using information reasonably available to us, along with the estimated, but uncertain, future impacts of the COVID-19 outbreak.

Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, legal reserves, foreign tax contingent liabilities, income taxes, and self-insurance reserves.

Although these estimates and assumptions are based on management's knowledge of current events and actions it may undertake in the future, changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.

Cash, Cash Equivalents, and Restricted Cash - Cash and cash equivalents represent cash, money market funds and credit card receivables that generally settle within three days.

Restricted cash represented cash that was restricted as to withdrawal or usage and consisted of a mandatory cash deposit for certain outstanding letters of credit.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:

(in thousands)

February 1, 2020

Cash and cash equivalents

Restricted cash, included in prepaid expenses and other current assets

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows

Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions it may undertake in the future, and changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

Fair Value- Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

5 unchanged sentences

These investments were measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2).

The carrying value of

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature.

The carrying value of borrowing under the Credit Facility approximates its fair value based on its term and variable interest rate.

The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature.

The carrying value of borrowing under our senior unsecured revolving credit agreement (the "Credit Facility") approximates its fair value based on its term and variable interest rate.

Prior Period Reclassifications- Certain prior period reclassifications were made to conform to the current period presentation, consistent with the changes made during the fourth quarter of fiscal 2019.

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The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements.

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

Disaggregation of Net Sales- The following table presents net sales disaggregated by product and service category for each segment:

Three months ended

(in thousands)

Three months ended Six months ended

(in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Retail segment:

3 unchanged sentences

Accessories and other 23,194 43,811 41,166 87,337

393,977 677,920 771,050 1,369,760

Canada Retail segment:

3 unchanged sentences

Accessories and other 2,052 2,785 3,050 5,140

49,582 63,306 78,911 115,122

Brand Portfolio segment:

Wholesale 15,563 88,577 82,867 180,331

Commission income 5,018 7,525 10,141 11,204

Direct-to-consumer 9,877 6,845 19,563 15,958

30,458 102,947 112,571 207,493

Other 22,266 29,480 35,889 65,087

Total segment net sales 496,283 873,653 998,421 1,757,462

1 unchanged sentence

Total net sales $ 489,714 $ 855,952 $ 972,497 $ 1,729,241

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

Deferred Revenue Liabilities- We record deferred revenue liabilities, included in accrued expenses on the condensed consolidated balance sheets, for remaining obligations we have to our customers.

The following table presents the changes and total balances for gift cards and our loyalty programs:

Three months ended

(in thousands)

Three months ended Six months ended

(in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Beginning of period $ 30,908 $ 30,066 $ 35,461 $ 34,998

7 unchanged sentences

End of period $ 14,797 $ 16,034 $ 14,797 $ 16,034

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

RELATED PARTY TRANSACTIONS

Schottenstein Affiliates

As of May 2, 2020 , the Schottenstein Affiliates consisted of entities owned or controlled by Jay L.

As of August 1, 2020, the Schottenstein Affiliates consisted of entities owned or controlled by Jay L.

Schottenstein, the executive chairman of our Board of Directors, and members of his family.

As of May 2, 2020 , the Schottenstein Affiliates beneficially owned approximately 16 % of the Company's outstanding common shares, representing approximately 52 % of the combined voting power, consisting of, in the aggregate, 3.7 million Class A common shares and 7.7 million Class B common shares.

The following summarizes the related party transactions with Schottenstein Affiliates for the relevant periods:

Leases- We lease our fulfillment center and certain store locations owned by Schottenstein Affiliates.

As of August 1, 2020, the Schottenstein Affiliates beneficially owned approximately 16 % of the Company's outstanding common shares, representing approximately 52 % of the combined voting power, consisting of, in the aggregate, 3.7 million Class A common shares and 7.7 million Class B common shares.

The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:

Leases- We lease our fulfillment center and certain store locations owned by the Schottenstein Affiliates.

See Note 13, Leases , for rent expense and future minimum lease payment requirements associated with the Schottenstein Affiliates.

Other Purchases and Services- During the three months ended May 2, 2020 and May 4, 2019 , we had other purchases and services we incurred from Schottenstein Affiliates of $ 1.3 million and $ 1.9 million , respectively.

Due to Related Parties- As of May 2, 2020 , February 1, 2020 and May 4, 2019 , we had amounts due to related parties of $ 0.9 million , $ 0.9 million and $ 0.8 million , respectively, included in accounts payable on the condensed consolidated balance sheets.

Other Purchases and Services- During the three months ended August 1, 2020 and August 3, 2019, we had other purchases and services we incurred from the Schottenstein Affiliates of $ 1.2 million and $ 1.5 million, respectively.

During the six months ended August 1, 2020 and August 3, 2019, we had other purchases and services we incurred from the Schottenstein Affiliates of $ 2.5 million and $ 3.4 million, respectively.

Due to Related Parties- As of August 1, 2020, February 1, 2020 and August 3, 2019, we had amounts due to the Schottenstein Affiliates of $ 0.4 million, $ 0.9 million and $ 0.5 million, respectively, included in accounts payable on the condensed consolidated balance sheets.

We have a 40 % interest in our equity investment in ABG-Camuto.

We entered into a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto.

During the three months ended May 2, 2020 and May 4, 2019 , we recorded $ 4.4 million and $ 5.7 million of royalty expense payable to ABG-Camuto, respectively.

As of May 2, 2020 , February 1, 2020 and May 4, 2019 , we had $ 0.1 million , $ 0.3 million and $ 0.8 million payable to ABG-Camuto, respectively, included in accrued expenses on the condensed consolidated balance sheets.

During the three months ended August 1, 2020 and August 3, 2019, we recorded $ 4.6 million and $ 3.6 million of royalty expense payable to ABG-Camuto, respectively.

During the six months ended August 1, 2020 and August 3, 2019, we recorded $ 9.0 million and $ 9.3 million of royalty expense payable to ABG-Camuto, respectively.

As of August 1, 2020 and February 1, 2020, we had $ 0.1 million and $ 0.3 million payable to ABG-Camuto, respectively, included in accrued expenses on the condensed consolidated balance sheets.

EARNINGS (LOSS) PER SHARE

2 unchanged sentences

The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings (loss) per share:

Three months ended

Three months ended Six months ended

(in thousands)

August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Weighted average basic shares outstanding

72,142 73,529 72,028 75,267

Dilutive effect of stock-based compensation awards

— 787 — 1,014

Weighted average diluted shares outstanding

For the three months ended May 2, 2020 and May 4, 2019 , the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 5.6 million and 2.0 million , respectively.

72,142 74,316 72,028 76,281

For the three months ended August 1, 2020 and August 3, 2019, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 5.9 million and 4.6 million, respectively.

For the six months ended August 1, 2020 and August 3, 2019, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 5.5 million and 2.9 million, respectively.

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:

Three months ended

(in thousands)

Three months ended Six months ended

(in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Stock options $ 407 $ 563 $ 870 $ 1,386

Restricted and director stock units 5,272 4,798 9,726 8,345

The following table summarizes the stock-based compensation award activity for the three months ended May 2, 2020 :

$ 5,679 $ 5,361 $ 10,596 $ 9,731

The following table summarizes the stock-based compensation award activity for the six months ended August 1, 2020:

Number of shares

(in thousands)

Stock Options

Time-Based RSUs

Performance-Based RSUs

(in thousands) Stock Options Time-Based RSUs Performance-Based RSUs

Outstanding - beginning of period 3,761 1,687 768

Granted — 3,423 11

Exercised / vested — ( 259 ) ( 204 )

6 unchanged sentences

The following table provides additional information for our common shares:

February 1, 2020

(in thousands)

August 1, 2020 February 1, 2020 August 3, 2019

(in thousands) Class A Class B Class A Class B Class A Class B

Authorized shares 250,000 100,000 250,000 100,000 250,000 100,000

3 unchanged sentences

We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.

Share Repurchases- During the six months ended August 1, 2020, we did not repurchase any Class A common shares.

During the six months ended August 3, 2019, we repurchased 6.1 million Class A common shares at a cost of $ 125.0 million.

DESIGNER BRANDS INC.

1 unchanged sentence

( unaudited )

Share Repurchases- During the three months ended May 2, 2020 , we did not repurchase any Class A common shares.

During the three months ended May 4, 2019 , we repurchased 3.4 million Class A common shares at a cost of $ 75.0 million .

Effective April 30, 2020, our Credit Facility no longer permits share repurchases.

Accumulated Other Comprehensive Loss- Changes for the balances of each component of accumulated other comprehensive loss were as follows (all amounts are net of tax):

Three months ended

(in thousands)

Foreign Currency Translation

Available-for-Sale Securities

Foreign Currency Translation

Available-for-Sale Securities

August 1, 2020 August 3, 2019

(in thousands) Foreign Currency Translation Available-for-Sale Securities Total Foreign Currency Translation Available-for-Sale Securities Total

Accumulated other comprehensive loss - beginning of period $ ( 6,209 ) $ — $ ( 6,209 ) $ ( 3,042 ) $ ( 224 ) $ ( 3,266 )

Other comprehensive income before reclassifications 1,290 — 1,290 461 196 657

Amounts reclassified to non-operating expenses, net — — — — 23 23

Other comprehensive income 1,290 — 1,290 461 219 680

Accumulated other comprehensive loss - end of period $ ( 4,919 ) $ — $ ( 4,919 ) $ ( 2,581 ) $ ( 5 ) $ ( 2,586 )

Six months ended

August 1, 2020 August 3, 2019

(in thousands) Foreign Currency Translation Available-for-Sale Securities Total Foreign Currency Translation Available-for-Sale Securities Total

Accumulated other comprehensive gain (loss) - beginning of period $ ( 2,668 ) $ 173 $ ( 2,495 ) $ ( 2,328 ) $ ( 378 ) $ ( 2,706 )

5 unchanged sentences

Accounts receivable, net, consisted of the following:

(in thousands)

February 1, 2020

(in thousands) August 1, 2020 February 1, 2020 August 3, 2019

Customer accounts receivables:

6 unchanged sentences

Accounts receivable, net $ 49,240 $ 89,151 $ 85,162

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

Investments in available-for-sale securities consisted of the following:

(in thousands)

February 1, 2020

August 1, 2020 February 1, 2020 August 3, 2019

Carrying value of investments

$ — $ 24,831 $ 25,510

Unrealized gains included in accumulated other comprehensive loss

Unrealized losses included in accumulated other comprehensive loss

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

$ — $ 24,974 $ 25,504

PROPERTY AND EQUIPMENT

Property and equipment, net, consisted of the following:

(in thousands)

February 1, 2020

(in thousands) August 1, 2020 February 1, 2020 August 3, 2019

Land $ 1,110 $ 1,110 $ 1,110

Buildings 12,485 12,485 13,445

Building and leasehold improvements 446,870 449,958 440,425

Furniture, fixtures and equipment 481,962 482,573 489,805

Software 188,871 189,291 183,226

Construction in progress 13,798 32,645 41,454

2 unchanged sentences

Property and equipment, net $ 332,730 $ 395,009 $ 402,779

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:

Three months ended

(in thousands)

Accumulated Impairments

Six months ended

August 1, 2020 August 3, 2019

(in thousands) Goodwill Accumulated Impairments Net Goodwill Accumulated Impairments Net

Beginning of period by segment:

Retail $ 93,655 $ — $ 93,655 $ 25,899 $ — $ 25,899

Canada Retail 41,610 ( 41,610 ) — 42,048 ( 42,048 ) —

Brand Portfolio 19,989 — 19,989 63,614 — 63,614

155,254 ( 41,610 ) 113,644 131,561 ( 42,048 ) 89,513

Activity by segment:

4 unchanged sentences

Purchase price and allocation adjustments — — — 26,767 — 26,767

( 534 ) ( 19,455 ) ( 19,989 ) 26,351 416 26,767

End of period by segment:

Retail 93,655 — 93,655 25,899 — 25,899

Canada Retail 41,076 ( 41,076 ) — 41,632 ( 41,632 ) —

Brand Portfolio 19,989 ( 19,989 ) — 90,381 — 90,381

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

$ 154,720 $ ( 61,065 ) $ 93,655 $ 157,912 $ ( 41,632 ) $ 116,280

Intangible Assets- Intangible assets consisted of the following:

(in thousands)

Accumulated Amortization

(in thousands) Cost Accumulated Amortization Net

August 1, 2020

Definite-lived customer relationships $ 2,843 $ ( 2,507 ) $ 336

Indefinite-lived trademarks and tradenames 15,327 — 15,327

$ 18,170 $ ( 2,507 ) $ 15,663

February 1, 2020

1 unchanged sentence

Indefinite-lived trademarks and tradenames 15,530 — 15,530

$ 24,890 $ ( 2,044 ) $ 22,846

August 3, 2019

Definite-lived customer relationships $ 6,661 $ ( 1,064 ) $ 5,597

Indefinite-lived trademarks and tradenames 15,515 — 15,515

$ 22,176 $ ( 1,064 ) $ 21,112

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

ACCRUED EXPENSES

Accrued expenses consisted of the following:

(in thousands)

February 1, 2020

(in thousands) August 1, 2020 February 1, 2020 August 3, 2019

Gift cards and merchandise credits $ 29,919 $ 35,461 $ 28,277

4 unchanged sentences

Customer allowances and discounts 8,644 11,528 9,306

Our Credit Facility, with a maturity date of August 25, 2022 , provides a revolving line of credit with sub-limits for the issuance of up to $ 50 million in letters of credit, swing loan advances of up to $ 15 million , and the issuance of up to $ 75 million in foreign currency revolving loans and letters of credit.

The Credit Facility may be used to provide funds for working capital, capital expenditures, and other expenditures.

Other 76,712 63,562 43,626

$ 202,831 $ 194,264 $ 173,437

During the six months ended August 1, 2020, our Credit Facility provided a revolving line of credit with sub-limits for the issuance of up to $ 50 million in letters of credit, swing loan advances of up to $ 15 million, and the issuance of up to $ 75 million in foreign currency revolving loans and letters of credit.

On April 30, 2020, the Credit Facility was amended, which resulted in various changes, including:

Providing for a lien on all of the Company's assets;

Reducing the borrowing availability from $ 400 million to $ 375.0 million on October 31, 2020, $ 350.0 million on January 30, 2021, $ 325.0 million on May 1, 2021, and $ 300.0 million on July 31, 2021;

Redefining the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19;

Changing the maximum leverage ratio covenant to 3.50 :1 as of May 2, 2020, 4.00 :1 as of August 1, 2020, 3.75 :1 as of October 31, 2020, and 3.50 :1 as of January 30, 2021 and as of the end of each fiscal quarter thereafter;

Changing the minimum fixed charge coverage ratio to 1.25 :1 as of May 2, 2020 and 1.05 :1 as of August 1, 2020 and as of the end of each fiscal quarter thereafter;

Restricting the Company from paying dividends, making share repurchases, and making certain acquisitions.

A violation of any of the financial or other covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

repayment of any outstanding loans under the Credit Facility.

As of May 2, 2020 , we were in compliance with all financial covenants.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.5 % as of May 2, 2020 .

Any loans issued in Canadian dollars bear interest at the alternate base rate plus a margin based on our leverage ratio.

Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.5 % as of May 2, 2020 .

Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio.

As of May 2, 2020 , the Credit Facility provided a revolving line of credit up to $ 400 million and we had $ 393.0 million outstanding under the Credit Facility and $ 5.0 million in letters of credit issued, resulting in $ 2.0 million available for borrowings.

• Provided for a lien on all of the Company's assets;

• Redefined the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19;

• Changed the maximum leverage ratio covenant to 4.00 :1 as of August 1, 2020;

• Changed the minimum fixed charge coverage ratio to 1.05 :1 as of August 1, 2020;

• Restricted the Company from paying dividends and making share repurchases.

Loans issued under the revolving line of credit bore interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.8 % as of August 1, 2020.

Interest on letters of credit issued under the Credit Facility was variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.8 % as of August 1, 2020.

Commitment fees were based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio.

As of August 1, 2020, the Credit Facility provided a revolving line of credit up to $ 400 million and we had $ 393.0 million outstanding under the Credit Facility and $ 5.0 million in letters of credit issued, resulting in $ 2.0 million available for borrowings.

Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization and write-off of debt issuance costs.

We lease our stores, fulfillment center and other facilities under operating lease arrangements with unrelated parties and related parties owned by Schottenstein Affiliates.

We lease our stores, fulfillment center and other facilities under operating lease arrangements with unrelated parties and related parties owned by the Schottenstein Affiliates.

The majority of our real estate leases provide for renewal options, which are typically not included in the lease term used for measuring the lease assets and lease liabilities as it is not reasonably certain we will exercise renewal options.

3 unchanged sentences

Operating sublease income and operating expenses for these properties are included in operating expenses in our condensed consolidated statements of operations.

Lease income and lease expense consisted of the following for the three months ended May 2, 2020 and May 4, 2019 :

Three months ended

(in thousands)

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

Lease income and lease expense consisted of the following for the three and six months ended August 1, 2020 and August 3, 2019:

Three months ended Six months ended

(in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019

Operating lease income $ 3,034 $ 2,236 $ 6,197 $ 4,448

5 unchanged sentences

Total operating lease expense $ 72,401 $ 68,407 $ 141,369 $ 137,427

As of May 2, 2020 , our future fixed minimum lease payments are as follows:

(in thousands)

Unrelated Parties

Related Parties

As of August 1, 2020, our future fixed minimum lease payments are as follows:

(in thousands) Unrelated Parties Related Parties Total

Remainder of fiscal 2020 $ 133,406 $ 4,624 $ 138,030

Fiscal 2021 251,414 8,697 260,111

Fiscal 2022 196,176 7,418 203,594

Fiscal 2023 155,781 4,573 160,354

Fiscal 2024 115,788 4,139 119,927

Future fiscal years thereafter 236,332 11,353 247,685

1,088,897 40,804 1,129,701

Less discounting impact on operating leases ( 104,751 ) ( 4,430 ) ( 109,181 )

2 unchanged sentences

Non-current operating lease liabilities $ 750,312 $ 28,514 $ 778,826

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

COMMITMENTS AND CONTINGENCIES

3 unchanged sentences

Foreign Tax Contingencies- During the due diligence procedures performed related to the acquisition of Camuto Group, we identified probable contingent liabilities associated with unpaid foreign payroll and other taxes that could also result in assessed penalties and interest.

We developed an estimate of the range of outcomes related to these obligations of $ 28.1 million to $ 40.0 million for obligations we are aware of at this time.

We expect to resolve certain obligations with tax authorities over the next twelve months.

As of May 2, 2020 , we recorded a contingent liability of $ 28.1 million , with $ 22.1 million included in accrued expenses and $ 6.0 million included in other non-current liabilities on the condensed consolidated balance sheets, representing the low-end of the range and an indemnification asset of $ 24.5 million , with $ 19.6 million included in accounts receivable and $ 4.9 million included in other assets on the condensed consolidated balance sheets, representing the estimated amount as of the acquisition date, which we expect to collect under the terms of the securities purchase agreement with the sellers of Camuto Group (the "Sellers").

We had previously developed an estimate of the range of outcomes related to these obligations and recorded the low-end of the range.

During the three months ended August 1, 2020, we reduced our contingent liability by $ 5.5 million for payments made to taxing authorities and by $ 12.3 million for changes in estimates due to additional information as a result of negotiations with taxing authorities and we reduced the indemnification asset by $ 15.2 million.

As of August 1, 2020, we have a contingent liability of $ 10.7 million for the remaining estimated obligations, with $ 5.8 million included in accrued expenses and $ 4.9 million included in other non-current liabilities on the condensed consolidated balance sheets, and an indemnification asset of $ 9.6 million, with $ 5.8 million included in accounts receivable and $ 3.8 million included in other assets on the condensed consolidated balance sheets, representing the estimated amount as of the acquisition date, which we expect to collect under the terms of the securities purchase agreement with the sellers of Camuto Group (the "Sellers").

We are continuing to assess the exposure, which may result in material changes to these estimates, and we may identify additional contingent liabilities.

We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date.

Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.

Although a portion of the purchase price is held in escrow and another portion is held

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.

Guarantee- As a result of a previous merger, we provided a guarantee for a lease commitment that is scheduled to expire in fiscal 2023 for a location that has been leased to a third party.

If the third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord.

As of May 2, 2020 , the total future minimum lease payment requirements for this guarantee were approximately $ 12.5 million .

As of August 1, 2020, the total future minimum lease payment requirements for this guarantee were approximately $ 11.7 million.

SEGMENT REPORTING

Our three reportable segments, which are also operating segments, are the U.S.

Retail segment, the Canada Retail segment, and the Brand Portfolio segment.

All other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.

The following provides certain financial data by segment reconciled to the condensed consolidated financial statements:

(in thousands)

Canada Retail

Brand Portfolio

Corporate/Eliminations

Three months ended May 2, 2020

(in thousands) U.S.

Retail Canada Retail Brand Portfolio Other Corporate/Eliminations Total

Three months ended August 1, 2020

External customer sales $ 393,977 $ 49,582 $ 23,889 $ 22,266 $ — $ 489,714

3 unchanged sentences

Income from equity investment $ — $ — $ 2,153 $ — $ — $ 2,153

Three months ended May 4, 2019

Three months ended August 3, 2019

External customer sales $ 677,920 $ 63,306 $ 85,246 $ 29,480 $ — $ 855,952

1 unchanged sentence

Total net sales $ 677,920 $ 63,306 $ 102,947 $ 29,480 $ ( 17,701 ) $ 855,952

Gross profit $ 208,056 $ 21,939 $ 26,786 $ 6,041 $ ( 1,649 ) $ 261,173

Income from equity investment $ — $ — $ 2,464 $ — $ — $ 2,464

Six months ended August 1, 2020

External customer sales $ 771,050 $ 78,911 $ 86,647 $ 35,889 $ — $ 972,497

Intersegment sales — — 25,924 — ( 25,924 ) —

Total net sales $ 771,050 $ 78,911 $ 112,571 $ 35,889 $ ( 25,924 ) $ 972,497

Gross profit (loss) $ 7,127 $ 3,339 $ 2,464 $ ( 5,310 ) $ 2,962 $ 10,582

Income from equity investment $ — $ — $ 4,423 $ — $ — $ 4,423

Six months ended August 3, 2019

External customer sales $ 1,369,760 $ 115,122 $ 179,272 $ 65,087 $ — $ 1,729,241

Intersegment sales — — 28,221 — ( 28,221 ) —

Total net sales $ 1,369,760 $ 115,122 $ 207,493 $ 65,087 $ ( 28,221 ) $ 1,729,241

Gross profit $ 417,947 $ 37,686 $ 52,459 $ 15,352 $ ( 2,938 ) $ 520,506

Income from equity investment $ — $ — $ 4,692 $ — $ — $ 4,692

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

( unaudited )

SUBSEQUENT EVENTS

Termination of Credit Facility- On August 7, 2020 , we replaced our Credit Facility with a five year $ 400.0 million, senior secured asset-based revolving credit facility ("ABL Revolver") and completed a five year , $ 250.0 million senior secured term loan ("Secured Term Loan").

Upon the closing of the transactions, we made an initial borrowing in the amount of $ 150.0 million under the ABL Revolver.

These proceeds, along with the proceeds from the Secured Term Loan, were used to repay in full the outstanding borrowings under the Credit Facility and we terminated the Credit Facility.

ABL Revolver- Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Secured Term Loan.

The ABL Revolver provides a revolving line of credit of up to $ 400.0 million, including a Canadian sub-limit of up to $ 20.0 million, a $ 50.0 million sub-limit for the issuance of letters of credit, a $ 40.0 million sub-limit for swing loan advances for U.S.

borrowing, and a $ 2.0 million sub-limit for swing loan advances for Canadian borrowings.

The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves.

At the closing of the ABL Revolver, the amount available for borrowing was limited to a borrowing base of $ 274.3 million with an initial borrowing of $ 150.0 million and issued letters of credit of $ 5.0 million resulting in $ 119.3 million available for additional borrowings.

Borrowings under the ABL Revolver accrue interest, at our option, at a rate equal to:

(A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5 %, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") plus 1.0 %;

or (B) an adjusted LIBOR per annum (subject to a floor of 0.75 %), plus, in each instance, an applicable rate to be determined based on average availability.

Secured Term Loan- Our Secured Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025.

The Secured Term Loan has limited prepayment requirements under certain conditions.

The Secured Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory.

Borrowings under the Secured Term Loan accrue interest, at our option, at a rate equal to:

(A) a base rate per annum equal to the greater of (i) 2.25 %, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5 %, and (iv) the adjusted one-month LIBOR plus 1.0 %, plus, in each instance, 7.5 %;

or (B) an adjusted LIBOR per annum (subject to a floor of 1.25 %), plus 8.5 %.

Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $ 30.0 million or 10.0 % of the maximum credit amount.

The Secured Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $ 150.0 million.

In addition, the ABL Revolver and the Secured Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes.

There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions.

Both the ABL Revolver and the Secured Term Loan contain customary events of default with cross-default provisions.

Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.

Stein Mart- On August 12, 2020 , Stein Mart, one of our ABG retail partners, filed for relief under Chapter 11 of the United States Bankruptcy Code and announced its plan to liquidate inventory .

The ultimate outcome of the filing and liquidation sale is subject to the oversight and approval of the bankruptcy court.

We are monitoring the status of the filing and are taking appropriate actions to maximize the recovery value of the inventory we own at Stein Mart locations.

As of August 1, 2020, inventory we owned at Stein Mart locations was $ 15.2 million at cost and we had a receivable balance due from Stein Marts of $ 2.1 million.

We do not expect to incur material losses as a result of Stein Mart's actions.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements