Designer Brands Inc. 10-Q

Item 1. Financial Statements DESIGNER BRANDS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited and in thousands, except per share amounts) 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 ) Operating expenses ( 168,424 ) ( 222,370 ) ( 355,645 ) ( 439,950 ) Income from equity investment 2,153 2,464 4,423 4,692 Impairment charges ( 6,735 ) — ( 119,282 ) — Operating profit (loss) ( 135,964 ) 41,267 ( 459,922 ) 85,248 Interest expense, net ( 3,788 ) ( 1,972 ) ( 5,946 ) ( 3,773 ) Non-operating income (expenses), net 743 199 656 ( 143 ) Income (loss) before income taxes ( 139,009 ) 39,494 ( 465,212 ) 81,332 Income tax benefit (provision) 40,795 ( 12,087 ) 151,140 ( 22,731 ) Net income (loss) $ ( 98,214 ) $ 27,407 $ ( 314,072 ) $ 58,601 Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ ( 1.36 ) $ 0.37 $ ( 4.36 ) $ 0.78 Diluted earnings (loss) per share $ ( 1.36 ) $ 0.37 $ ( 4.36 ) $ 0.77 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 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 1 DESIGNER BRANDS INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited and in thousands) 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 gain (loss) 1,290 461 ( 2,251 ) ( 253 ) Unrealized net gain on debt securities — 196 195 438 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 The accompanying notes are an integral part of the Condensed Consolidated Financial Statements. 2 DESIGNER BRANDS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands) August 1, 2020 February 1, 2020 August 3, 2019 ASSETS Cash and cash equivalents $ 206,720 $ 86,564 $ 51,762 Investments — 24,974 25,504 Accounts receivable, net 49,240 89,151 85,162 Inventories 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 Goodwill 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 Other assets 23,780 24,337 32,407 Total assets $ 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 Debt 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 Shareholders' equity: Common shares paid-in capital, no par value 980,749 971,380 963,312 Treasury shares, at cost ( 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. 3 DESIGNER BRANDS INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited and in thousands, except per share data) 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 Net loss — — — — — ( 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 Net loss — — — — — ( 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, 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 Repurchase of Class A common shares ( 6,078 ) — 6,078 — ( 125,000 ) — — ( 125,000 ) Dividends ($ 0.50 per share) — — — — — ( 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. 4 DESIGNER BRANDS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) 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 (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 44,075 42,485 Stock-based compensation expense 10,596 9,731 Deferred income taxes ( 152,988 ) 1,043 Income from equity investment ( 4,423 ) ( 4,692 ) Distributions received from equity investment 5,493 7,784 Impairment charges 119,282 — Gain on settlement ( 8,990 ) — Other 403 1,689 Change in operating assets and liabilities, net of acquired amounts: Accounts receivable 30,699 ( 14,800 ) Inventories 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 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 6,780 4,491 Cash flows from financing activities: 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 ) Other ( 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 $ 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. 5 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 1. SIGNIFICANT ACCOUNTING POLICIES Business Operations- Designer Brands Inc. is a leading North American footwear and accessories designer, producer and retailer. We operate a portfolio of retail concepts in the U.S. and Canada under the DSW Designer Shoe Warehouse ("DSW"), The Shoe Company and Shoe Warehouse banners. Through Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," we design and produce footwear and accessories. We also own licensing rights for the Jessica Simpson footwear business and footwear and handbag licenses for Lucky Brand and Max Studio. In partnership with Authentic Brands Group LLC, a global brand management and marketing company, we have a 40 % stake in ABG-Camuto, LLC ("ABG-Camuto"), a joint venture that acquired several intellectual property rights, including Vince Camuto, Louise et Cie, Sole Society, CC Corso Como, and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. We have a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands owned by ABG-Camuto. Our Affiliated Business Group ("ABG") partners with other retailers to help build and optimize their in-store and online footwear businesses by leveraging our sourcing network to produce a merchandise assortment that meets their needs. We present three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment includes stores operated in the U.S. 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. Other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes. Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. 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 the 2019 Form 10-K. Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year refer to the calendar year in which the fiscal year begins. Accounting Policies - The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 2019 Form 10-K. Impact of COVID-19- In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. 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. and Canada. 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. 6 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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). 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 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, 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. Retail segment, which is also the reporting unit, the fair value was in excess of the carrying value. The U.S. 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 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 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 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 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. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. 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 7 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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 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. All amounts are in U.S. 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 net sales 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 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. 8 Table of Contents 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. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows: • Level 1 - Quoted prices in active markets for identical assets or liabilities. • Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable. • Level 3 - Unobservable inputs in which little or no market activity exists. We measure available-for-sale investments at fair value on a recurring basis. 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 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. Commission income previously presented in commission, franchise and other revenue was reclassified to net sales. Other revenue, which primarily included operating sublease income, also previously presented in commission, franchise and other revenue, was reclassified to operating expenses. In addition, we reclassified a previously presented basis difference related to acquisition of commonly controlled entity to common shares paid in-capital within shareholders' equity for all periods presented. The basis difference related to the acquisition of a commonly controlled entity related to a legal entity acquisition in fiscal 2012 from certain Schottenstein Affiliates (as defined below), which legal entity owned property that was previously leased by us. As this was a transaction between entities under common control, the difference between the historical cost carrying amounts and the consideration transferred is reflected as an equity transaction within common shares paid in-capital. Adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments - During the first quarter of fiscal 2020, we adopted Accounting Standards Update ("ASU") 2016-13, which replaces the previous incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements. 9 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 2. REVENUE Disaggregation of Net Sales- The following table presents net sales disaggregated by product and service category for each segment: Three months ended Six months ended (in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Net sales: U.S. Retail segment: Women's footwear $ 253,539 $ 458,390 $ 513,102 $ 940,511 Men's footwear 85,012 140,895 155,367 269,884 Kids' footwear 32,232 34,824 61,415 72,028 Accessories and other 23,194 43,811 41,166 87,337 393,977 677,920 771,050 1,369,760 Canada Retail segment: Women's footwear 25,329 35,533 41,301 64,159 Men's footwear 13,970 16,432 20,773 29,440 Kids' footwear 8,231 8,556 13,787 16,383 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 Elimination of intersegment sales ( 6,569 ) ( 17,701 ) ( 25,924 ) ( 28,221 ) Total net sales $ 489,714 $ 855,952 $ 972,497 $ 1,729,241 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 Six months ended (in thousands) August 1, 2020 August 3, 2019 August 1, 2020 August 3, 2019 Gift cards: Beginning of period $ 30,908 $ 30,066 $ 35,461 $ 34,998 Gift cards redeemed and breakage recognized to net sales ( 11,343 ) ( 21,843 ) ( 24,868 ) ( 44,098 ) Gift cards issued 10,354 20,054 19,326 37,377 End of period $ 29,919 $ 28,277 $ 29,919 $ 28,277 Loyalty programs: Beginning of period $ 14,568 $ 16,153 $ 16,138 $ 16,151 Loyalty certificates redeemed and expired and other adjustments recognized to net sales ( 4,277 ) ( 9,507 ) ( 10,886 ) ( 18,828 ) Deferred revenue for loyalty points issued 4,506 9,388 9,545 18,711 End of period $ 14,797 $ 16,034 $ 14,797 $ 16,034 10 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 3. RELATED PARTY TRANSACTIONS Schottenstein Affiliates 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 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 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. ABG-Camuto 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 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. 4. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is based on net income (loss) and the weighted average of Class A and Class B common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options and restricted stock units ("RSUs") calculated using the treasury stock method. 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 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 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. 11 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 5. STOCK-BASED COMPENSATION Stock-based compensation expense consisted of the following: 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 $ 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 Outstanding - beginning of period 3,761 1,687 768 Granted — 3,423 11 Exercised / vested — ( 259 ) ( 204 ) Forfeited / expired ( 165 ) ( 392 ) — Outstanding - end of period 3,596 4,459 575 6. SHAREHOLDERS' EQUITY Shares- Our Class A common shares are listed for trading under the ticker symbol "DBI" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be exchanged for the Company's Class A common shares at the election of the holder on a share for share basis. Holders of Class A common shares are entitled to one vote per share and holders of Class B common shares are entitled to eight votes per share on matters submitted to shareholders for approval. The following table provides additional information for our common shares: 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 Issued shares 86,747 7,733 86,202 7,733 86,080 7,733 Outstanding shares 64,578 7,733 64,033 7,733 64,911 7,733 Treasury shares 22,169 — 22,169 — 21,169 — 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. 12 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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 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 ) Other comprehensive income (loss) before reclassifications ( 2,251 ) 195 ( 2,056 ) ( 253 ) 438 185 Amounts reclassified to non-operating expenses, net — ( 368 ) ( 368 ) — ( 65 ) ( 65 ) Other comprehensive income (loss) ( 2,251 ) ( 173 ) ( 2,424 ) ( 253 ) 373 120 Accumulated other comprehensive loss - end of period $ ( 4,919 ) $ — $ ( 4,919 ) $ ( 2,581 ) $ ( 5 ) $ ( 2,586 ) 7. ACCOUNTS RECEIVABLE Accounts receivable, net, consisted of the following: (in thousands) August 1, 2020 February 1, 2020 August 3, 2019 Customer accounts receivables: Serviced by third-party provider with guaranteed payment $ 20,268 $ 54,209 $ 61,494 Serviced by third-party provider without guaranteed payment 739 365 495 Serviced in-house 6,248 7,630 10,145 Other receivables 23,973 28,166 14,460 Accounts receivable 51,228 90,370 86,594 Allowance for doubtful accounts ( 1,988 ) ( 1,219 ) ( 1,432 ) Accounts receivable, net $ 49,240 $ 89,151 $ 85,162 13 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 8. INVESTMENTS Investments in available-for-sale securities consisted of the following: (in thousands) 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 — 143 18 Unrealized losses included in accumulated other comprehensive loss — — ( 24 ) Fair value $ — $ 24,974 $ 25,504 9. PROPERTY AND EQUIPMENT Property and equipment, net, consisted of the following: (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 Total property and equipment 1,145,096 1,168,062 1,169,465 Accumulated depreciation and amortization ( 812,366 ) ( 773,053 ) ( 766,686 ) Property and equipment, net $ 332,730 $ 395,009 $ 402,779 14 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 10. GOODWILL AND INTANGIBLE ASSETS Goodwill- Activity related to our goodwill was as follows: Six months ended August 1, 2020 August 3, 2019 (in thousands) Goodwill Accumulated Impairments Net Goodwill Accumulated Impairments Net Beginning of period by segment: U.S. 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: Canada Retail - Currency translation adjustment ( 534 ) 534 — ( 416 ) 416 — Brand Portfolio: Impairment charges — ( 19,989 ) ( 19,989 ) — — — Purchase price and allocation adjustments — — — 26,767 — 26,767 ( 534 ) ( 19,455 ) ( 19,989 ) 26,351 416 26,767 End of period by segment: U.S. 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 $ 154,720 $ ( 61,065 ) $ 93,655 $ 157,912 $ ( 41,632 ) $ 116,280 Intangible Assets- Intangible assets consisted of the following: (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 Definite-lived customer relationships $ 9,360 $ ( 2,044 ) $ 7,316 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 15 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 11. ACCRUED EXPENSES Accrued expenses consisted of the following: (in thousands) August 1, 2020 February 1, 2020 August 3, 2019 Gift cards and merchandise credits $ 29,919 $ 35,461 $ 28,277 Accrued compensation and related expenses 29,422 26,768 38,532 Accrued taxes 22,624 19,399 18,330 Loyalty programs deferred revenue 14,797 16,138 16,034 Sales returns 20,713 21,408 19,332 Customer allowances and discounts 8,644 11,528 9,306 Other 76,712 63,562 43,626 $ 202,831 $ 194,264 $ 173,437 12. DEBT 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: • 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; and • 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. 13. LEASES 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. We pay variable amounts for certain lease and non-lease components as well as for contingent rent based on sales for certain leases where the sales are in excess of specified levels and for leases that have certain contingent triggering events that are in effect. We also lease equipment under operating leases. We receive operating sublease lease income from unrelated third parties for leasing portions or all of certain properties. Operating sublease income and operating expenses for these properties are included in operating expenses in our condensed consolidated statements of operations. 16 Table of Contents 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 Operating lease expense: Lease expense to unrelated parties $ 51,162 $ 52,707 $ 104,390 $ 106,061 Lease expense to related parties 2,270 2,371 4,657 4,713 Variable lease expense to unrelated parties 18,667 12,981 31,653 26,003 Variable lease expense to related parties 302 348 669 650 Total operating lease expense $ 72,401 $ 68,407 $ 141,369 $ 137,427 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 ) Total operating lease liabilities 984,146 36,374 1,020,520 Less current operating lease liabilities ( 233,834 ) ( 7,860 ) ( 241,694 ) Non-current operating lease liabilities $ 750,312 $ 28,514 $ 778,826 14. COMMITMENTS AND CONTINGENCIES Legal Proceedings- We are involved in various legal proceedings that are incidental to the conduct of our business. Although it is not possible to predict with certainty the eventual outcome of any litigation, we believe the amount of any potential liability with respect to current legal proceedings will not be material to the results of operations or financial condition. As additional information becomes available, we will assess any potential liability related to pending litigation and revise the estimates as needed. 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 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 17 Table of Contents 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 August 1, 2020, the total future minimum lease payment requirements for this guarantee were approximately $ 11.7 million. 15. SEGMENT REPORTING The following provides certain financial data by segment reconciled to the condensed consolidated financial statements: (in thousands) U.S. Retail Canada Retail Brand Portfolio Other Corporate/Eliminations Total Three months ended August 1, 2020 Net sales: External customer sales $ 393,977 $ 49,582 $ 23,889 $ 22,266 $ — $ 489,714 Intersegment sales — — 6,569 — ( 6,569 ) — Total net sales $ 393,977 $ 49,582 $ 30,458 $ 22,266 $ ( 6,569 ) $ 489,714 Gross profit (loss) $ 40,097 $ 5,650 $ ( 11,440 ) $ 118 $ 2,617 $ 37,042 Income from equity investment $ — $ — $ 2,153 $ — $ — $ 2,153 Three months ended August 3, 2019 Net sales: External customer sales $ 677,920 $ 63,306 $ 85,246 $ 29,480 $ — $ 855,952 Intersegment sales — — 17,701 — ( 17,701 ) — 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 Net sales: 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 Net sales: 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 18 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 16. 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. 19