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 Nine months ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Net sales $ 652,870 $ 933,826 $ 1,625,367 $ 2,663,067 Cost of sales ( 487,214 ) ( 660,518 ) ( 1,449,129 ) ( 1,869,253 ) Operating expenses ( 196,067 ) ( 215,038 ) ( 551,712 ) ( 654,988 ) Income from equity investment 1,902 2,662 6,325 7,354 Impairment charges ( 30,081 ) ( 4,824 ) ( 149,363 ) ( 4,824 ) Operating profit (loss) ( 58,590 ) 56,108 ( 518,512 ) 141,356 Interest expense, net ( 9,009 ) ( 2,174 ) ( 14,955 ) ( 5,947 ) Non-operating income (expenses), net 24 15 680 ( 128 ) Income (loss) before income taxes ( 67,575 ) 53,949 ( 532,787 ) 135,281 Income tax benefit (provision) 26,932 ( 10,489 ) 178,072 ( 33,220 ) Net income (loss) $ ( 40,643 ) $ 43,460 $ ( 354,715 ) $ 102,061 Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ ( 0.56 ) $ 0.60 $ ( 4.92 ) $ 1.38 Diluted earnings (loss) per share $ ( 0.56 ) $ 0.60 $ ( 4.92 ) $ 1.36 Weighted average shares used in per share calculations: Basic shares 72,344 72,123 72,134 74,219 Diluted shares 72,344 72,947 72,134 75,149 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 Nine months ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Net income (loss) $ ( 40,643 ) $ 43,460 $ ( 354,715 ) $ 102,061 Other comprehensive income (loss), net of income taxes: Foreign currency translation gain (loss) 161 236 ( 2,090 ) ( 17 ) Unrealized net gain on debt securities — 37 195 475 Reclassification adjustment for net gains realized in net income (loss) — ( 24 ) ( 368 ) ( 89 ) Total other comprehensive income (loss), net of income taxes 161 249 ( 2,263 ) 369 Total comprehensive income (loss) $ ( 40,482 ) $ 43,709 $ ( 356,978 ) $ 102,430 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) October 31, 2020 February 1, 2020 November 2, 2019 ASSETS Cash and cash equivalents $ 114,531 $ 86,564 $ 87,838 Investments — 24,974 25,939 Accounts receivable, net 61,840 89,151 87,313 Inventories 545,954 632,587 677,696 Prepaid expenses and other current assets 54,577 67,534 48,077 Total current assets 776,902 900,810 926,863 Property and equipment, net 313,102 395,009 394,695 Operating lease assets 728,871 918,801 950,514 Goodwill 93,655 113,644 113,644 Intangible assets, net 15,652 22,846 23,297 Deferred tax assets 208,976 31,863 39,452 Equity investment 57,978 57,760 54,964 Other assets 31,585 24,337 33,549 Total assets $ 2,226,721 $ 2,465,070 $ 2,536,978 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 371,382 $ 299,072 $ 266,335 Accrued expenses 171,261 194,264 190,897 Current maturities of long-term debt 62,500 — — Current operating lease liabilities 226,423 186,695 184,598 Total current liabilities 831,566 680,031 641,830 Long-term debt 274,635 190,000 235,000 Non-current operating lease liabilities 721,771 846,584 880,883 Other non-current liabilities 28,228 27,541 36,084 Total liabilities 1,856,200 1,744,156 1,793,797 Commitments and contingencies Shareholders' equity: Common shares paid-in capital, no par value 985,125 971,380 968,093 Treasury shares, at cost ( 515,065 ) ( 515,065 ) ( 515,065 ) Retained earnings (deficit) ( 94,781 ) 267,094 292,490 Accumulated other comprehensive loss ( 4,758 ) ( 2,495 ) ( 2,337 ) Total shareholders' equity 370,521 720,914 743,181 Total liabilities and shareholders' equity $ 2,226,721 $ 2,465,070 $ 2,536,978 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 October 31, 2020 Balance, August 1, 2020 64,578 7,733 22,169 $ 980,749 $ ( 515,065 ) $ ( 54,138 ) $ ( 4,919 ) $ 406,627 Net loss — — — — — ( 40,643 ) — ( 40,643 ) Stock-based compensation activity 68 — — 4,376 — — — 4,376 Other comprehensive income — — — — — — 161 161 Balance, October 31, 2020 64,646 7,733 22,169 $ 985,125 $ ( 515,065 ) $ ( 94,781 ) $ ( 4,758 ) $ 370,521 Three months ended November 2, 2019 Balance, August 3, 2019 64,911 7,733 21,169 $ 963,312 $ ( 498,436 ) $ 266,957 $ ( 2,586 ) $ 729,247 Net income — — — — — 43,460 — 43,460 Stock-based compensation activity 105 — — 4,781 — — — 4,781 Repurchase of Class A common shares ( 1,000 ) — 1,000 — ( 16,629 ) — — ( 16,629 ) Dividends ($ 0.25 per share) — — — — — ( 17,927 ) — ( 17,927 ) Other comprehensive income — — — — — — 249 249 Balance, November 2, 2019 64,016 7,733 22,169 $ 968,093 $ ( 515,065 ) $ 292,490 $ ( 2,337 ) $ 743,181 Nine months ended October 31, 2020 Balance, February 1, 2020 64,033 7,733 22,169 $ 971,380 $ ( 515,065 ) $ 267,094 $ ( 2,495 ) $ 720,914 Net loss — — — — — ( 354,715 ) — ( 354,715 ) Stock-based compensation activity 613 — — 13,745 — — — 13,745 Dividends ($ 0.10 per share) — — — — — ( 7,160 ) — ( 7,160 ) Other comprehensive loss — — — — — — ( 2,263 ) ( 2,263 ) Balance, October 31, 2020 64,646 7,733 22,169 $ 985,125 $ ( 515,065 ) $ ( 94,781 ) $ ( 4,758 ) $ 370,521 Nine months ended November 2, 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 — — — — — 102,061 — 102,061 Stock-based compensation activity 422 — — 14,292 — — — 14,292 Repurchase of Class A common shares ( 7,078 ) — 7,078 — ( 141,629 ) — — ( 141,629 ) Dividends ($ 0.75 per share) — — — — — ( 54,733 ) — ( 54,733 ) Other comprehensive income — — — — — — 369 369 Balance, November 2, 2019 64,016 7,733 22,169 $ 968,093 $ ( 515,065 ) $ 292,490 $ ( 2,337 ) $ 743,181 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) Nine months ended October 31, 2020 November 2, 2019 Cash flows from operating activities: Net income (loss) $ ( 354,715 ) $ 102,061 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 66,139 64,226 Stock-based compensation expense 15,176 13,748 Deferred income taxes ( 179,098 ) ( 11,411 ) Income from equity investment ( 6,325 ) ( 7,354 ) Distributions received from equity investment 6,106 10,515 Impairment charges 149,363 4,824 Gain on settlement ( 8,990 ) — Other 43 1,519 Change in operating assets and liabilities, net of acquired amounts: Accounts receivable 7,519 ( 17,484 ) Inventories 86,229 ( 35,394 ) Prepaid expenses and other current assets 13,785 4,403 Accounts payable 79,642 8,853 Accrued expenses 4,629 ( 7,838 ) Operating lease assets and liabilities, net 14,164 ( 12,595 ) Net cash provided by (used in) operating activities ( 106,333 ) 118,073 Cash flows from investing activities: Cash paid for property and equipment ( 26,925 ) ( 59,574 ) Purchases of available-for-sale investments — ( 19,889 ) Sales of available-for-sale investments 24,755 64,233 Proceeds from settlement 8,990 4,965 Net cash provided by (used in) investing activities 6,820 ( 10,265 ) Cash flows from financing activities: Borrowing on revolving line under Credit Facility 251,000 375,200 Payments on revolving line under Credit Facility ( 441,000 ) ( 300,200 ) Borrowing under ABL Revolver 150,000 — Payments on borrowings under ABL Revolver ( 50,000 ) — Proceeds from issuance of Term Loan 250,000 — Payments on borrowings under Term Loan ( 3,125 ) — Payments of debt issuance costs ( 21,063 ) — Cash paid for treasury shares — ( 141,629 ) Dividends paid ( 7,160 ) ( 54,733 ) Other ( 1,502 ) 733 Net cash provided by (used in) financing activities 127,150 ( 120,629 ) Effect of exchange rate changes on cash balances 330 91 Net increase (decrease) in cash, cash equivalents, and restricted cash 27,967 ( 12,730 ) Cash, cash equivalents, and restricted cash, beginning of period 86,564 100,568 Cash and cash equivalents, end of period $ 114,531 $ 87,838 Supplemental disclosures of cash flow information: Cash paid (received) for income taxes $ ( 12,979 ) $ 31,523 Cash paid for interest on debt $ 12,581 $ 6,577 Cash paid for operating lease liabilities $ 128,683 $ 178,225 Non-cash investing and financing activities: Property and equipment purchases not yet paid $ 1,341 $ 7,442 Operating lease liabilities arising from lease asset additions $ 9,407 $ 17,729 Increase to operating lease assets and lease liabilities for modifications $ 18,660 $ 60,736 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, 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, subject to guaranteed minimums. 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, and 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 a direct-to-consumer e-commerce site. 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. 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, and liquidity management, as well as reductions to our expense and capital expenditure plans. Following the earlier 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 re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. In July 2020, we initiated an internal reorganization and reduction of our workforce, resulting in the elimination of approximately 1,000 associate positions, including over 200 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 ) Although all of our stores were open at the end of the third quarter of fiscal 2020, we experienced during the quarter, and have continued to experience, significantly reduced customer traffic and net sales. Our retail customers in the Brand Portfolio Segment are having similar experiences. 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 primarily during the first half of fiscal 2020 and continuing reduced customer traffic, resulted in a sharp decline in our net sales and cash flows. 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 October 31, 2020, we recorded an impairment charge of $ 30.1 million for the U.S. Retail segment. During the nine months ended October 31, 2020, we recorded impairment charges of $ 122.9 million ($ 103.2 million and $ 19.7 million for the U.S. Retail and Canada Retail segments, respectively). Also during the nine months ended October 31, 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 nine months ended October 31, 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 the 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. A s of October 31, 2020, we had approximately $ 18.0 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 nine months ended October 31, 2020, the qualified payroll tax credits reduced our operating expenses by $ 1.4 million and $ 9.3 million, respectively, on our condensed consolidated statement of operations. A s of October 31, 2020, we had $ 7.8 million of deferred qualified payroll and other tax obligations included in other non-current liabilities on the condensed consolidated balance sheets, 50% of which we expect to pay at the end of fiscal 2021 and the remaining to be paid at the end of fiscal 2022. 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 October 31, 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 as we continue to recognize net operating losses. Our 7 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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. Total deferred tax assets as of October 31, 2020 were $ 209.0 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 24.6 % for the nine months ended November 2, 2019 to 33.4 % for the nine months ended October 31, 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 nine months ended October 31, 2020, we incurred $ 8.5 million 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. The COVID-19 pandemic remains challenging, and with the resurgence of the COVID-19 outbreak and related restrictions imposed by state and local government authorities designed to slow the virus's spread, we may be required to close stores in certain locations that we only recently re-opened. The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences during our peak fall season, including reductions in consumer spending, which may necessitate further shifts in our business model. 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 nine months ended October 31, 2020 and November 2, 2019, we incurred integration and restructuring costs, which consisted primarily of severance of $ 10.0 million and $ 3.8 million, respectively, and professional fees, termination fees and other integration costs of $ 1.0 million and $ 9.8 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of October 31, 2020 and November 2, 2019, we had accrued severance of $ 3.8 million and $ 3.0 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 nine months ended October 31, 2020, we collected $ 9.0 million, net of legal costs incurred, and recorded a gain to operating expenses in the condensed consolidated statements of operations, which was due to a settlement with a vendor related to costs incurred on an internal-use software project that was capitalized and then impaired in a previous fiscal year. Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. 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 fair value of borrowings under our senior secured asset-based revolving credit facility ("ABL Revolver") and our previous senior revolving credit agreement ("Credit Facility") approximated the carrying value. As of October 31, 2020, the fair value of borrowings under our senior secured term loan ("Term Loan") was $ 250.3 million compared to the carrying value of $ 246.9 million. The fair value of debt borrowings was estimated based on current interest rates offered for similar instruments (categorized as Level 2). 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 Nine months ended (in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Net sales: U.S. Retail segment: Women's footwear $ 319,241 $ 492,062 $ 832,343 $ 1,432,573 Men's footwear 105,587 132,158 260,954 402,042 Kids' footwear 48,570 48,207 109,985 120,235 Accessories and other 28,503 44,348 69,669 131,685 501,901 716,775 1,272,951 2,086,535 Canada Retail segment: Women's footwear 28,864 38,887 70,165 103,046 Men's footwear 13,604 17,282 34,377 46,722 Kids' footwear 16,699 16,845 30,486 33,228 Accessories and other 2,431 3,285 5,481 8,425 61,598 76,299 140,509 191,421 Brand Portfolio segment: Wholesale 73,744 117,359 156,611 297,690 Commission income 3,885 6,914 14,026 18,118 Direct-to-consumer 6,276 13,223 25,839 29,181 83,905 137,496 196,476 344,989 Other 27,020 28,848 62,909 93,935 Total segment net sales 674,424 959,418 1,672,845 2,716,880 Elimination of intersegment sales ( 21,554 ) ( 25,592 ) ( 47,478 ) ( 53,813 ) Total net sales $ 652,870 $ 933,826 $ 1,625,367 $ 2,663,067 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 Nine months ended (in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Gift cards: Beginning of period $ 29,919 $ 28,277 $ 35,461 $ 34,998 Gift cards redeemed and breakage recognized to net sales ( 12,615 ) ( 18,027 ) ( 37,483 ) ( 62,125 ) Gift cards issued 10,995 15,848 30,321 53,225 End of period $ 28,299 $ 26,098 $ 28,299 $ 26,098 Loyalty programs: Beginning of period $ 14,797 $ 16,034 $ 16,138 $ 16,151 Loyalty certificates redeemed and expired and other adjustments recognized to net sales ( 7,176 ) ( 9,008 ) ( 18,062 ) ( 27,836 ) Deferred revenue for loyalty points issued 6,774 10,054 16,319 28,765 End of period $ 14,395 $ 17,080 $ 14,395 $ 17,080 10 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 3. RELATED PARTY TRANSACTIONS Schottenstein Affiliates As of October 31, 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 October 31, 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 October 31, 2020 and November 2, 2019, we had other purchases and services we incurred from the Schottenstein Affiliates of $ 1.7 million and $ 1.2 million, respectively. During the nine months ended October 31, 2020 and November 2, 2019, we had other purchases and services we incurred from the Schottenstein Affiliates of $ 4.2 million and $ 4.6 million, respectively. Due to Related Parties- As of October 31, 2020, February 1, 2020 and November 2, 2019, we had amounts due to the Schottenstein Affiliates of $ 1.1 million, $ 0.9 million and $ 0.6 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 October 31, 2020 and November 2, 2019, we recorded $ 4.6 million and $ 4.4 million of royalty expense payable to ABG-Camuto, respectively. During the nine months ended October 31, 2020 and November 2, 2019, we recorded $ 13.6 million and $ 13.7 million of royalty expense payable to ABG-Camuto, respectively. Amounts payable to ABG-Camuto for all periods presented were immaterial. 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 Nine months ended (in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Weighted average basic shares outstanding 72,344 72,123 72,134 74,219 Dilutive effect of stock-based compensation awards — 824 — 930 Weighted average diluted shares outstanding 72,344 72,947 72,134 75,149 For the three months ended October 31, 2020 and November 2, 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 5.4 million and 4.9 million, respectively. For the nine months ended October 31, 2020 and November 2, 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 3.2 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 Nine months ended (in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Stock options $ 338 $ 428 $ 1,208 $ 1,814 Restricted and director stock units 4,242 3,589 13,968 11,934 $ 4,580 $ 4,017 $ 15,176 $ 13,748 The following table summarizes the stock-based compensation award activity for the nine months ended October 31, 2020: Number of shares (in thousands) Stock Options Time-Based RSUs Performance-Based RSUs Outstanding - beginning of period 3,761 1,687 768 Granted — 5,874 11 Exercised / vested — ( 329 ) ( 226 ) Forfeited / expired ( 401 ) ( 682 ) ( 13 ) Outstanding - end of period 3,360 6,550 540 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: October 31, 2020 February 1, 2020 November 2, 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 86,815 7,733 86,202 7,733 86,185 7,733 Outstanding shares 64,646 7,733 64,033 7,733 64,016 7,733 Treasury shares 22,169 — 22,169 — 22,169 — 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 nine months ended October 31, 2020, we did not repurchase any Class A common shares. During the nine months ended November 2, 2019, we repurchased 7.1 million Class A common shares at a cost of $ 141.6 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 October 31, 2020 November 2, 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 $ ( 4,919 ) $ — $ ( 4,919 ) $ ( 2,581 ) $ ( 5 ) $ ( 2,586 ) Other comprehensive income before reclassifications 161 — 161 236 37 273 Amounts reclassified to non-operating expense, net — — — — ( 24 ) ( 24 ) Other comprehensive income 161 — 161 236 13 249 Accumulated other comprehensive income (loss) - end of period $ ( 4,758 ) $ — $ ( 4,758 ) $ ( 2,345 ) $ 8 $ ( 2,337 ) Nine months ended October 31, 2020 November 2, 2019 (in thousands) Foreign Currency Translation Available-for-Sale Securities Total Foreign Currency Translation Available-for-Sale Securities Total Accumulated other comprehensive income (loss) - beginning of period $ ( 2,668 ) $ 173 $ ( 2,495 ) $ ( 2,328 ) $ ( 378 ) $ ( 2,706 ) Other comprehensive income (loss) before reclassifications ( 2,090 ) 195 ( 1,895 ) ( 17 ) 475 458 Amounts reclassified to non-operating expense, net — ( 368 ) ( 368 ) — ( 89 ) ( 89 ) Other comprehensive income (loss) ( 2,090 ) ( 173 ) ( 2,263 ) ( 17 ) 386 369 Accumulated other comprehensive income (loss) - end of period $ ( 4,758 ) $ — $ ( 4,758 ) $ ( 2,345 ) $ 8 $ ( 2,337 ) 7. ACCOUNTS RECEIVABLE Accounts receivable, net, consisted of the following: (in thousands) October 31, 2020 February 1, 2020 November 2, 2019 Customer accounts receivables: Serviced by third-party provider with guaranteed payment $ 43,866 $ 54,209 $ 70,301 Serviced by third-party provider without guaranteed payment 2,219 365 699 Serviced in-house 5,820 7,630 8,094 Other receivables 11,200 28,166 10,854 Accounts receivable 63,105 90,370 89,948 Allowance for doubtful accounts ( 1,265 ) ( 1,219 ) ( 2,635 ) $ 61,840 $ 89,151 $ 87,313 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) October 31, 2020 February 1, 2020 November 2, 2019 Carrying value of investments $ — $ 24,831 $ 25,903 Unrealized gains included in accumulated other comprehensive loss — 143 43 Unrealized losses included in accumulated other comprehensive loss — — ( 7 ) Fair value $ — $ 24,974 $ 25,939 9. PROPERTY AND EQUIPMENT Property and equipment, net, consisted of the following: (in thousands) October 31, 2020 February 1, 2020 November 2, 2019 Land $ 1,110 $ 1,110 $ 1,110 Buildings 12,485 12,485 13,445 Building and leasehold improvements 447,515 449,958 442,609 Furniture, fixtures and equipment 471,670 482,573 478,463 Software 192,337 189,291 174,324 Construction in progress 9,353 32,645 36,489 Total property and equipment 1,134,470 1,168,062 1,146,440 Accumulated depreciation and amortization ( 821,368 ) ( 773,053 ) ( 751,745 ) $ 313,102 $ 395,009 $ 394,695 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: Nine months ended October 31, 2020 November 2, 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: U.S. Retail - Allocation of goodwill from Brand Portfolio — — — 67,756 — 67,756 Canada Retail - Currency translation adjustment ( 264 ) 264 — ( 195 ) 195 — Brand Portfolio: Impairment charges — ( 19,989 ) ( 19,989 ) — — — Purchase price and allocation adjustments — — — 24,131 — 24,131 Allocation of goodwill to U.S. Retail — — — ( 67,756 ) — ( 67,756 ) ( 264 ) ( 19,725 ) ( 19,989 ) 23,936 195 24,131 End of period by segment: U.S. Retail 93,655 — 93,655 93,655 — 93,655 Canada Retail 41,346 ( 41,346 ) — 41,853 ( 41,853 ) — Brand Portfolio 19,989 ( 19,989 ) — 19,989 — 19,989 $ 154,990 $ ( 61,335 ) $ 93,655 $ 155,497 $ ( 41,853 ) $ 113,644 Intangible Assets- Intangible assets consisted of the following: (in thousands) Cost Accumulated Amortization Net October 31, 2020 Definite-lived customer relationships $ 2,851 $ ( 2,626 ) $ 225 Indefinite-lived trademarks and tradenames 15,427 — 15,427 $ 18,278 $ ( 2,626 ) $ 15,652 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 November 2, 2019 Definite-lived customer relationships $ 9,369 $ ( 1,684 ) $ 7,685 Indefinite-lived trademarks and tradenames 15,612 — 15,612 $ 24,981 $ ( 1,684 ) $ 23,297 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) October 31, 2020 February 1, 2020 November 2, 2019 Gift cards and merchandise credits $ 28,299 $ 35,461 $ 26,098 Accrued compensation and related expenses 28,498 26,768 26,023 Accrued taxes 24,123 19,399 29,203 Loyalty programs deferred revenue 14,395 16,138 17,080 Sales returns 14,439 21,408 24,371 Customer allowances and discounts 4,707 11,528 10,326 Other 56,800 63,562 57,796 $ 171,261 $ 194,264 $ 190,897 12. DEBT Debt consisted of the following: (in thousands) October 31, 2020 February 1, 2020 November 2, 2019 ABL Revolver $ 100,000 $ — $ — Term Loan 246,875 — — Credit Facility — 190,000 235,000 Total debt 346,875 190,000 235,000 Less unamortized Term Loan debt issuance costs ( 9,740 ) — — Less current maturities of long-term debt ( 62,500 ) — — Long-term debt $ 274,635 $ 190,000 $ 235,000 As of October 31, 2020, future maturities of debt are as follows: (in thousands) Remainder of fiscal 2020 $ 3,125 Fiscal 2021 62,500 Fiscal 2022 12,500 Fiscal 2023 12,500 Fiscal 2024 12,500 Future fiscal years thereafter 243,750 Total $ 346,875 ABL Revolver- On August 7, 2020, we replaced our Credit Facility with the ABL Revolver, which 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. borrowings, and a $ 2.0 million sub-limit for swing loan advances for Canadian borrowings. 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 Term Loan. 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. As of October 31, 2020, the ABL Revolver had a borrowing base of $ 400.0 million, with $ 100.0 million outstanding and $ 5.0 million in letters of credit issued, resulting in $ 295.0 million available for borrowings. 16 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) Borrowings and letters of credit issued 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, with an interest rate of 3.25 % as of October 31, 2020. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs. Term Loan- On August 7, 2020, we also entered into a $ 250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The 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, that constitute first priority collateral for the ABL Revolver. Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25 %, (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 %, with an interest rate of 9.75 % as of October 31, 2020. 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 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 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. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the 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. 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 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. 17 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 nine months ended October 31, 2020 and November 2, 2019: Three months ended Nine months ended (in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Operating sublease income $ 2,930 $ 2,462 $ 9,127 $ 6,910 Operating lease expense: Lease expense to unrelated parties $ 47,775 $ 53,674 $ 152,165 $ 159,735 Lease expense to related parties 2,266 2,387 6,923 7,100 Variable lease expense to unrelated parties 15,653 13,539 47,306 39,542 Variable lease expense to related parties 348 325 1,017 975 Total operating lease expense $ 66,042 $ 69,925 $ 207,411 $ 207,352 As of October 31, 2020, our future fixed minimum lease payments are as follows: (in thousands) Unrelated Parties Related Parties Total Remainder of fiscal 2020 $ 49,514 $ 1,461 $ 50,975 Fiscal 2021 262,149 8,697 270,846 Fiscal 2022 197,309 7,418 204,727 Fiscal 2023 156,161 4,573 160,734 Fiscal 2024 115,492 4,139 119,631 Future fiscal years thereafter 238,602 11,353 249,955 1,019,227 37,641 1,056,868 Less discounting impact on operating leases ( 104,590 ) ( 4,084 ) ( 108,674 ) Total operating lease liabilities 914,637 33,557 948,194 Less current operating lease liabilities ( 218,704 ) ( 7,719 ) ( 226,423 ) Non-current operating lease liabilities $ 695,933 $ 25,838 $ 721,771 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 nine months ended October 31, 2020, we reduced our contingent liability by $ 11.2 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 $ 21.0 million. As of October 31, 2020, we had a contingent liability of $ 4.9 million for the remaining estimated obligations included in other non-current liabilities on the condensed consolidated balance sheets, and an indemnification asset of $ 3.8 million included in other assets on the condensed consolidated balance sheets, 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. 18 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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 October 31, 2020, the total future minimum lease payment requirements for this guarantee were approximately $ 10.9 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 October 31, 2020 Net sales: External customer sales $ 501,901 $ 61,598 $ 62,351 $ 27,020 $ — $ 652,870 Intersegment sales — — 21,554 — ( 21,554 ) — Total net sales $ 501,901 $ 61,598 $ 83,905 $ 27,020 $ ( 21,554 ) $ 652,870 Gross profit $ 117,679 $ 18,905 $ 22,128 $ 6,272 $ 672 $ 165,656 Income from equity investment $ — $ — $ 1,902 $ — $ — $ 1,902 Three months ended November 2, 2019 Net sales: External customer sales $ 716,775 $ 76,299 $ 111,904 $ 28,848 $ — $ 933,826 Intersegment sales — — 25,592 — ( 25,592 ) — Total net sales $ 716,775 $ 76,299 $ 137,496 $ 28,848 $ ( 25,592 ) $ 933,826 Gross profit $ 201,409 $ 27,485 $ 40,849 $ 6,291 $ ( 2,726 ) $ 273,308 Income from equity investment $ — $ — $ 2,662 $ — $ — $ 2,662 Nine months ended October 31, 2020 Net sales: External customer sales $ 1,272,951 $ 140,509 $ 148,998 $ 62,909 $ — $ 1,625,367 Intersegment sales — — 47,478 — ( 47,478 ) — Total net sales $ 1,272,951 $ 140,509 $ 196,476 $ 62,909 $ ( 47,478 ) $ 1,625,367 Gross profit $ 124,806 $ 22,244 $ 24,592 $ 962 $ 3,634 $ 176,238 Income from equity investment $ — $ — $ 6,325 $ — $ — $ 6,325 Nine months ended November 2, 2019 Net sales: External customer sales $ 2,086,535 $ 191,421 $ 291,176 $ 93,935 $ — $ 2,663,067 Intersegment sales — — 53,813 — ( 53,813 ) — Total net sales $ 2,086,535 $ 191,421 $ 344,989 $ 93,935 $ ( 53,813 ) $ 2,663,067 Gross profit $ 619,356 $ 65,171 $ 93,308 $ 21,643 $ ( 5,664 ) $ 793,814 Income from equity investment $ — $ — $ 7,354 $ — $ — $ 7,354 19