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Item 7. Management’s Discussion and Analysis

2021-03-22 compared with 2020-05-01 · 192 added, 254 removed, 80 unchanged (85% of the section changed)

3 unchanged sentences

This discussion is best read in conjunction with our Consolidated Financial Statements, including the notes thereto, set forth in Item 8.

Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Financial Statements and Supplementary Data of this Form 10-K.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under Item 1A.

Risk Factors of this Annual Report on Form 10-K and included elsewhere in this Annual Report on Form 10-K.

Risk Factors of this Form 10-K and included elsewhere in this Form 10-K.

The following discussion includes a comparison of our results of operations and liquidity and capital resources for fiscal 2020 and 2019.

A discussion of a comparison of our results of operations and liquidity and capital resources for fiscal 2018 and 2017 has been omitted from this Form 10-K but may be found in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 , filed with the SEC on March 26, 2019.

Executive Overview

In March 2020, the World Health Organization declared the coronavirus ("COVID-19") outbreak a pandemic, which continues to spread throughout North America and worldwide.

The health and safety of our customers and employees remain our top priority as we continue to make decisions during this rapidly evolving situation.

We have taken decisive actions across our businesses to help protect employees, customers and others in the communities we serve.

As a measure to limit the spread of the virus, effective March 18, 2020, we temporarily closed all of our stores in the U.S.

Our e-commerce business will continue to be available to customers and our stores will be used in the fulfillment of online orders to be shipped to customers or available for curbside pickup.

During this unprecedented period of uncertainty, we have in place business continuity plans involving adjustments to operational plans, inventory disciplines, liquidity management, and reductions to our expense and capital expenditure plans.

Such measures include implementing temporary leaves of absence for over 80% of our workforce without direct pay and pay reductions for nearly all employees not placed on temporary leave.

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

While we cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact, based on our current understanding of governmental mandates and maintaining the health and safety of our customers and employees, we believe our stores will primarily begin re-opening in the second quarter of fiscal 2020 with a gradual return of store traffic through the remainder of fiscal 2020.

As such, the impacts of COVID-19 to our businesses are highly uncertain and we will continue to assess the financial impacts.

The disruption to the global economy and to our business, along with a sustained decline in our stock price, may lead to triggering events that may indicate that the carrying value of certain assets, including inventories, accounts receivables, long-lived assets, intangibles, and goodwill, may not be recoverable.

In support of our long-term vision to become the leading footwear retailer in the U.S., we continue to invest in our differentiators.

These include private labels, exclusive partnerships, our best in class loyalty programs, and customer experiences.

We continually explore new ways to expand our audience and gain market share.

We were pleased with the performance of our Canada Retail segment during fiscal 2019 with continued positive comparable sales and further margin growth, benefiting from moving their digital offering to the platform we use in the U.S.

Following the first full year of operating the Camuto Group business, we remain on track to convert the production of the majority of our DSW private label to the Brand Portfolio segment in fiscal 2020.

At that time, we expect to realize the benefits of having greater exclusivity in product offerings at higher margins.

We were faced with challenges both internally and externally in fiscal 2019, primarily during the second half of the year.

During our fourth quarter, we were focused on stabilizing the business through remedying several issues within our control.

Following the holidays, we instituted a patch for our new POS system that, combined with the discontinued practice of allowing multiple promotions for a single transaction, has positively impacted both net sales and gross profits.

In addition, we adjusted our inventory positions and investments in marketing.

We have omitted discussion of fiscal 2018 results, which may be found in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, filed with the SEC on May 1, 2020 and amended on May 7, 2020.

Executive Overview and Trends in Our Business

During fiscal 2020 and into fiscal 2021, the volatile macro environment and business conditions have required us to be nimble and quickly adapt our business model.

The following are examples of trends in our business and changes we have made in response to the impacts of COVID-19 and the current macroeconomic environment:

• Inventory Management- COVID-1 9 has negatively impacted the U.S.

and global economics, resulting in a drop in demand for our products, specifically in the seasonal and dress categories.

We have implemented inventory management actions that enabled us to decrease total inventory by 25.2% at the end of fiscal 2020 compared to the end of fiscal 2019.

Throughout the fiscal year, we have been more aggressive with our promotional activity to clear through seasonal inventory and drive sales, and this markdown activity has materially impacted margins.

• Changing Consumer Preferences- With our customers staying home, there has been a clear shift in consumer behavior and preferences to athleisure, which includes athletic and casual products, and away from dress and seasonal categories.

We have modified receipts to match these expectations and continue to see opportunity ahead of us given our historic under-penetration in the athletic space.

• Strength in Digital- With the decrease in store traffic during fiscal 2020, our digital fulfillment options, such as Buy Online Pick Up in Store, Buy Online Ship to Store, and Curbside Pickup, coupled with our ability to use our stores for fulfillment, have served us well in mitigating decreased revenues.

We were able to generate strong digital demand during fiscal 2020, well above the digital demand for last year across all segments.

We anticipate that adapting to operating as a digital-focused retailer will have a lasting influence on how we operate moving forward.

In addition, we believe that our increased penetration in the athletic market, coupled with our historical success in dress and seasonal and a fully integrated supply chain supported by our acquisition of Camuto Group, position us well to be a premier footwear retailer for all of the family's needs over the long term.

Impact of COVID-19 on our Results of Operations

In March 2020, the World Health Organization declared the coronavirus disease ("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, associates, and the communities we serve, we temporarily closed all of our stores in the U.S.

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

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.

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.

Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout fiscal 2020, resulting in the elimination of approximately 1,000 associate positions, including over 200 vacant positions that will not be filled.

Following the re-opening of stores, we experienced and have continued to experience significantly reduced customer traffic and net sales, which included subsequent store closures and reduced hours in certain areas, primarily in Canada, where government-imposed restrictions were mandated.

Our retail customers in the Brand Portfolio segment have had and 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.

The COVID-19 pandemic remains challenging and unpredictable.

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, 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 will depend on future developments, including the widespread availability, use and effectiveness of vaccines, which are highly uncertain and cannot be predicted.

We may have additional write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.

Financial Summary and Other Key Metrics

Net sales decreased to $2.2 billion for fiscal 2020 from $3.5 billion for fiscal 2019.

The 36.0% decrease in net sales was primarily driven by the ongoing and prolonged impacts of COVID-19, which contributed to the 34.2% decrease in comparable sales.

During fiscal 2020, we experienced significantly reduced customer traffic and net sales relative to fiscal 2019.

In addition, we had lower Brand Portfolio segment sales in fiscal 2020 due to our retailer customers also experiencing significantly reduced customer traffic and lower demand for our products.

In fiscal 2020, gross profit as a percentage of net sales was 13.9%, as compared to 28.6% last year.

The decrease in the gross profit rate was primarily driven by the impact of the COVID-19 outbreak on our operations, which we addressed with aggressive promotional activity.

The impact of COVID-19 and the actions we took also resulted in increased shipping costs associated with higher digital penetration and the deleveraging of distribution and fulfillment, store occupancy, and royalty expenses on lower sales volume.

Net loss for fiscal 2020 was $488.7 million, or a loss of $6.77 per diluted share, which included net after-tax charges of $207.1 million, or $2.87 per diluted share, primarily related to impairment and restructuring charges, a settlement gain with a vendor, and the valuation allowance established against deferred tax assets.

Net income for fiscal 2019 was $94.5 million, or $1.27 earnings per diluted share, which included net after-tax charges of $15.1 million, or $0.20 per diluted share, primarily related to integration and restructuring expenses associated with the businesses acquired in fiscal 2018 and impairment charges, partially offset by a valuation allowance release related to the net operating loss utilization for our legal entity in Canada.

Comparable Sales Performance Metric

We consider comparable sales to be an important indicator of the performance of our retail and direct-to-consumer businesses, and investors may find it useful as such.

Comparable sales is a primary metric commonly used throughout the retail industry.

A store is considered comparable when in operation for at least 14 months at the beginning of the fiscal year.

Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter they are closed.

The following table presents comparable sales for each segment and in total for the last two fiscal years:

Comparable sales:

Retail segment (34.9) % 0.3 %

Canada Retail segment (26.0) % 7.2 %

Brand Portfolio segment - direct-to-consumer channel 38.2 % 98.8 %

Other (50.4) % 0.3 %

Total comparable sales (34.2) % 0.8 %

We consider comparable sales, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses.

We include stores in our comparable sales metric for those stores in operation for at least 14 months at the beginning of the fiscal year.

Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed.

Comparable sales include stores temporarily closed during fiscal 2020 as a result of the COVID-19 outbreak as management continues to believe that this metric is meaningful to monitor our performance.

Comparable sales include e-commerce sales.

Stores in Canada from the TSL acquisition that were in operation for at least 14 months at the beginning of fiscal 2019, along with its e-commerce sales, were added to the comparable base beginning with the second quarter of fiscal 2019.

Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period in the prior year.

For the Brand Portfolio segment, sales from the direct-to-consumer www.vincecamuto.com e-commerce site were added to the comparable base beginning with the fourth quarter of fiscal 2019.

Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site at www.vincecamuto.com.

Beginning with the third quarter of fiscal 2020, comparable sales no longer include the Other segment due to no longer having activity in the Other segment.

The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

Comparability

There are a number of items that affect comparability when reviewing our results of operations for fiscal 2019 and 2018 .

Significant items to consider include:

During fiscal 2019, we incurred integration and restructuring costs related to our prior year acquisition activity of $17.7 million , which consisted primarily of severance, fees for terminating joint ventures, and professional fees and other integration costs.

Also during fiscal 2019, we recorded impairment charges of $7.8 million , including $4.8 million for operating lease assets and other property and equipment in the Brand Portfolio segment related to the planned consolidation of certain locations as part of our integration efforts and $3.0 million primarily for operating lease assets related to under-performing stores.

During fiscal 2018, we recorded impairment charges of long-lived assets of $19.0 million , primarily for an abandoned corporate internal-use software that was under development and leasehold improvements related to under-performing stores, and as a result of our decision to exit the Town Shoes banner, we closed or re-branded all Town Shoes banner stores and recorded lease exit and other termination costs of $16.4 million .

Also during fiscal 2018, we incurred restructuring costs of $5.6 million in severance, primarily related to changes in our store labor model and the exit of the Town Shoes banner, and we incurred acquisition-related costs and target acquisition costs of $27.9 million .

In addition, fiscal 2018 included the wind-down operations of Ebuys, which included lease exit and other termination costs of $6.6 million and incremental income tax expense of $2.3 million .

On May 10, 2018 , we acquired the remaining interest in TSL that we did not previously own.

TSL results were included in the consolidated results of operations as a wholly owned subsidiary beginning with the second quarter of fiscal 2018.

For the first quarter of fiscal 2018, the loss from our equity investment interest in TSL was included in our consolidated results of operations.

Due to the acquisition of the remaining interest in TSL, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL.

During fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating expenses, net.

Also during fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.

In addition, with the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise.

This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value.

As a result, during fiscal 2018, we recorded a goodwill impairment charge of $41.8 million , which resulted in impairing all of TSL’s goodwill.

On November 5, 2018 , we completed the acquisition of Camuto Group.

Camuto Group's results were included in the consolidated results of operations as a wholly owned subsidiary beginning with the fourth quarter of fiscal 2018.

During fiscal 2018, we recognized $5.3 million of additional cost of sales related to an inventory valuation step-up recorded as part of the acquisition.

Financial Summary

Net sales increased to $3.5 billion for fiscal 2019 from $3.2 billion for fiscal 2018.

The 9.9% increase in net sales was driven by incremental net sales from acquired businesses prior to the anniversary of their acquisitions, a 0.8% increase in comparable sales, and an increase for non-comparable store sales, partially offset by the impact of stores closed, primarily the Town Shoes banner stores, the decrease in Brand Portfolio sales after the anniversary of the acquisition, and the loss of sales from the exit of Ebuys.

In fiscal 2019 , gross profit as a percentage of net sales was 28.6% , a decrease of 90 basis points from 29.5% in the previous year.

The decrease in the gross profit rate was primarily due to the decline in the U.S.

Retail segment primarily driven by higher shipping costs in the current year associated with higher digital penetration and a benefit recognized in fiscal 2018 as a result of adjusting our loyalty programs deferred revenue due to the relaunch of the DSW VIP rewards program.

The Canada Retail segment gross profit margin improved primarily due to lower clearance activity with improvements in the inventory position and improved leverage in occupancy costs with the exit of the Town Shoes banner last year.

Net income for fiscal 2019 was $94.5 million , or $1.27 per diluted share, which included net after-tax charges of $19.8 million , or $0.26 per diluted share, primarily related to integration and restructuring expenses associated with the businesses acquired in fiscal 2018 and impairment charges.

Net loss for fiscal 2018 was $20.5 million , or $0.26 loss per diluted share, which included net after-tax charges of $155.3 million , or $1.92 per diluted share, primarily related to impairment charges, acquisition-related activities, the exit of the Town Shoes banner, other restructuring costs, and the net tax expense impact of finalizing the U.S.

Tax Reform implementation assessment.

We continue making investments in our business that support our long-term growth objectives.

During fiscal 2019 , we invested $77.8 million in capital expenditures compared to $65.4 million during fiscal 2018 .

Our capital expenditures during fiscal 2019 were primarily related to 16 new store openings, store remodels and business infrastructure.

Number of Stores

At the end of the last two fiscal years, we had the following number of stores:

January 30, 2021 February 1, 2020

Retail segment - DSW stores 519 521

Canada Retail segment:

The Shoe Company / Shoe Warehouse stores 117 118

DSW stores 27 27

Total number of stores 663 666

Results of Operations

The following represents selected components of our consolidated results of operations, with associated percentages of net sales:

(dollars in thousands, except per share amounts)

% of Net Sales

2020 2019 Change

(dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount %

Net sales $ 2,234,719 100.0 % $ 3,492,687 100.0 % $ (1,257,968) (36.0) %

2 unchanged sentences

Operating expenses (753,278) (33.7) (874,749) (25.1) 121,471 (13.9) %

Income from equity investment in ABG-Camuto

Income from equity investment 9,329 0.5 10,149 0.3 (820) (8.1) %

Impairment charges (153,606) (6.9) (7,771) (0.2) (145,835) 1,876.7 %

Operating profit

Interest income (expense), net

Non-operating expenses, net

Income before income taxes and loss from equity investment in TSL

Income tax provision

Loss from equity investment in TSL

Net income (loss)

Operating profit (loss) (586,314) (26.2) 127,299 3.6 (713,613) NM

Interest expense, net (23,694) (1.1) (7,355) (0.2) (16,339) 222.1 %

Non-operating income (expenses), net 1,361 0.1 (170) (0.0) 1,531 NM

Income (loss) before income taxes (608,647) (27.2) 119,774 3.4 (728,421) NM

Income tax benefit (provision) 119,928 5.3 (25,277) (0.7) 145,205 NM

Net income (loss) $ (488,719) (21.9) % $ 94,497 2.7 % $ (583,216) NM

Basic and diluted earnings (loss) per share:

Basic earnings (loss) per share

Diluted earnings (loss) per share

Basic earnings (loss) per share $ (6.77) $ 1.28 $ (8.05) NM

Diluted earnings (loss) per share $ (6.77) $ 1.27 $ (8.04) NM

Weighted average shares used in per share calculations:

Basic shares 72,198 73,602 (1,404) (1.9) %

Diluted shares 72,198 74,605 (2,407) (3.2) %

NM - Not meaningful

We changed our presentation of net sales and gross profit for all periods presented to include commission income.

Previously reported other revenue, which primarily included operating sublease income, was reclassified to operating expenses.

The following summarizes the change in consolidated net sales from the previous fiscal year:

(in thousands)

Consolidated net sales for the previous fiscal year

Increase in comparable sales

Net increase from non-comparable store sales and other changes

Loss of net sales from closed stores

Decrease in Brand Portfolio segment net sales after anniversary of acquisition

Incremental external net sales from 2018 acquired businesses prior to the anniversary of their acquisitions

Loss of net sales from the exit of Ebuys and Gordmans

Net sales during the 53 rd week in fiscal 2017

Consolidated net sales

The following summarizes net sales by segment:

(dollars in thousands)

Comparable Sales % (1)

Net Sales- The following summarizes net sales by segment:

Fiscal Change

(dollars in thousands) 2020 2019 Amount % Comparable Sales %

Segment net sales:

Retail $ 1,800,323 $ 2,745,395 $ (945,072) (34.4) % (34.9)%

Canada Retail 182,659 249,017 (66,358) (26.6) % (26.0)%

Brand Portfolio 248,646 448,285 (199,639) (44.5) % 38.2%

Other 62,909 122,090 (59,181) (48.5) % (50.4)%

Total segment net sales 2,294,537 3,564,787 (1,270,250) (35.6) % (34.2)%

1 unchanged sentence

Consolidated net sales $ 2,234,719 $ 3,492,687 $ (1,257,968) (36.0) %

For the Canada Retail segment, stores from the TSL acquisition that were in operation for at least 14 months at the beginning of fiscal 2019, along with its e-commerce sales, were added to the comparable base beginning with the second quarter of fiscal 2019.

For the Brand Portfolio segment, sales from the direct-to-consumer www.vincecamuto.com e-commerce site were added to the comparable base beginning with the fourth quarter of fiscal 2019.

The increase in net sales was driven by incremental net sales from acquired businesses prior to the anniversary of their acquisitions, a 0.8% increase in comparable sales, and an increase for non-comparable store sales, partially offset by the impact of stores closed, primarily the Town Shoes banner stores, the decrease in Brand Portfolio sales after the anniversary of the acquisition, and the loss of sales from the exit of Ebuys.

Within the U.S.

Retail segment, comparable sales increased primarily due to higher comparable transactions driven by an increase in traffic, partially offset by a decline in comparable average dollar sales per transaction.

Within the Canada Retail segment, comparable sales increased due to higher comparable average dollar sales per transaction, primarily as a result of the significant improvements to its digital platform and lower clearance inventory.

The following summarizes gross profit by segment:

The decreases in comparable sales for all segments, except Brand Portfolio, and in total consolidated net sales, were primarily driven by the temporary closure of stores during our peak selling season in response to the COVID-19 outbreak, significantly reduced customer traffic since re-opening, and further temporary closures for certain stores in Canada during the fourth quarter of fiscal 2020.

This decrease was partially offset by strong performance in our e-commerce channels, including www.vincecamuto.com, which is included in comparable sales for the Brand Portfolio segment, as a certain amount of customer demand shifted online.

Brand Portfolio segment net sales were also negatively impacted by the COVID-19 outbreak as our retailer customers temporarily closed stores and canceled orders.

Gross Profit- The following summarizes gross profit by segment:

2020 2019 Change

(dollars in thousands)

% of Segment Net Sales

Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points

Segment gross profit:

Retail $ 242,786 13.5 % $ 786,976 28.7 % $ (544,190) (69.1) % (1,520)

Canada Retail 28,651 15.7 % 79,850 32.1 % $ (51,199) (64.1) % (1,640)

Brand Portfolio 36,393 14.6 % 114,170 25.5 % $ (77,777) (68.1) % (1,090)

Elimination of intersegment gross profit

Consolidated gross profit

Retail segment gross profit margin declined primarily driven by higher shipping costs in the current year associated with higher digital penetration and a benefit recognized in fiscal 2018 as a result of adjusting our loyalty programs deferred revenue due to the relaunch of the DSW VIP rewards program.

The Brand Portfolio segment gross profit for fiscal 2018 includes only the fourth quarter of activity following the acquisition whereas fiscal 2019 includes a full year of activity.

The gross profit margin of the Brand Portfolio segment in fiscal 2018 was negatively impacted by the recognition to cost of sales of $5.3 million of inventory step-up value related to the valuation of inventory at acquisition.

Elimination of intersegment gross profit consisted of the following:

(dollars in thousands)

Other 962 1.5 % 26,065 21.3 % $ (25,103) (96.3) % (1,980)

308,792 1,007,061

Elimination of intersegment gross loss (profit) 2,449 (7,391)

Gross profit $ 311,241 13.9 % $ 999,670 28.6 % $ (688,429) (68.9) % (1,470)

The decrease in gross profit was primarily driven by the impacts of the COVID-19 outbreak on our operations, including the temporary closure of stores and significantly reduced customer traffic since re-opening, which we addressed with aggressive promotional activity.

The impact of COVID-19 and the actions that we took also resulted in increased shipping costs associated with higher digital penetration and the deleveraging of distribution and fulfillment, store occupancy, and royalty expenses on lower sales volume.

Elimination of intersegment gross loss (profit) consisted of the following:

Fiscal Change

(dollars in thousands) 2020 2019 Amount %

Elimination of intersegment activity:

3 unchanged sentences

Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 20,239 13,641 6,598 48.4 %

Operating Expenses

Operating expenses as a percentage of net sales were 25.1% and 25.7% for fiscal 2019 and fiscal 2018 , respectively.

The decrease as a percentage of net sales over the prior year was primarily driven by lower incentive compensation and marketing investments in fiscal 2019, and the impact of lease exit charges and acquisition-related costs in fiscal 2018, partially offset by the impact of including Camuto Group in the consolidated results and higher integration and restructuring charges in fiscal 2019.

Income from equity investment in ABG-Camuto

We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit.

ABG-Camuto is an integral part of the Brand Portfolio segment given the licensing agreement between us and ABG-Camuto, which allows us to sell licensed branded products to wholesale customers.

Income from equity investment in ABG-Camuto for fiscal 2018 includes only the fourth quarter of activity whereas fiscal 2019 includes a full year of activity.

Impairment charges

Gross loss (profit) $ 2,449 $ (7,391) $ 9,840 NM

NM - Not meaningful

Operating Expenses- Operating expenses decreased by $121.5 million over last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees, the reduction of pay for nearly all remaining employees in response to the COVID-19 outbreak for most of the first half of fiscal 2020 and the reduction of our workforce, and reductions in store labor initiated at the end of the second quarter of fiscal 2020, which was partially offset by higher incentive compensation and marketing expense, and incremental costs directly related to COVID-19.

O perating expenses during fiscal 2020 were offset by government subsidies in the form of qualified payroll tax credits of $11.4 million and a gain of $9.0 million f rom a settlement with a vendor.

Income From Equity Investment- We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit.

ABG-Camuto is an integral part of the Brand Portfolio segment given the licensing agreement between us and ABG-Camuto that allows us to sell licensed, branded products to wholesale customers.

Impairment Charges- As a result of the material reduction in net sales and cash flows, we performed our impairment analysis for our U.S.

Retail and Canada Retail segments at the store-level.

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

During fiscal 2020, we recorded impairment charges of $127.1 million ($104.2 million and $22.9 million for the U.S.

Retail and Canada Retail segments, respectively).

Also during fiscal 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible asset resulting in a full impairment due to the lack of projected cash flows over the remaining useful life.

Also as a result of the material reduction in net sales and cash flows 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.

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 fiscal 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.

During fiscal 2019, we recorded impairment charges of $7.8 million, including $4.8 million for operating lease assets and other property and equipment in the Brand Portfolio segment related to the planned consolidation of certain locations as part of our integration efforts, and $3.0 million primarily for operating lease assets related to under-performing stores ($2.3 million and $0.7 million for the U.S.

Retail and Canada Retail segments, respectively).

During fiscal 2018 , we recorded impairment charges of $60.8 million , including $41.8 million for Canada Retail segment goodwill, $13.9 million for an abandoned corporate internal-use software that was under development and $5.1 million primarily for leasehold improvements related to under-performing stores.

With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise.

This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value.

As a result, during fiscal 2018 , we recorded a goodwill impairment charge that resulted in impairing all of the Canada Retail segment’s goodwill.

Non-operating Expenses, net

Due to the acquisition of the remaining interest in TSL during the second quarter of fiscal 2018, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL.

As a result of the remeasurement, we recorded a loss of $34.0 million to non-operating expenses, net.

The effective tax rate for fiscal 2019 was 21.1% compared to 318.5% for fiscal 2018 .

The effective tax rates reflect the impact of federal, state and local, and foreign taxes.

Interest Expense, net - During fiscal 2020, interest expense increased over last year due to additional debt under our new ABL Revolver and Term Loan, which have higher interest rates.

Income Taxes- The effective tax rate for fiscal 2020 was 19.7% co mpared to 21.1% for fiscal 2019.

The effective tax rates reflect the impact of federal, state and local, and foreign taxes and the decrease in the effective tax rate was primarily driven by the recording of an additional valuation allowance of $87.6 million partially offset by the ability to carry back current year losses to a tax year where the U.S.

federal statutory tax rate was 35%.

During fiscal 2019, we had $3.9 million valuation allowance release primarily related to the net operating loss utilization for our legal entity in Canada.

During fiscal 2018 , we had $2.1 million of tax expense due to finalizing the U.S.

Tax Reform implementation and we had additional tax provision expense of approximately $20.0 million due to recording an additional valuation allowance and nondeductible discrete items, primarily related to the charges recorded as a result of the acquisition of TSL.

Liquidity and Capital Resources

Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth.

Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing commitments, other working capital needs, capital expenditures, and debt service.

Our working capital and inventory levels fluctuate seasonally.

We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy and withstand unanticipated business volatility, including the impact of the outbreak of COVID-19.

We believe that cash generated from our operations and the business continuity plans put in place, together with our current levels of cash and investments, as well as the use of our Credit Facility, as subsequently amended, are sufficient over the next 12 months to maintain our ongoing operations, support working capital requirements, and fund capital expenditures.

The cash generated from operations is based on our expectation of re-opening our stores beginning primarily in the second quarter of fiscal 2020 with a gradual return of store traffic throughout the remainder of fiscal 2020.

If additional liquidity is needed, we may take additional actions including adjusting our marketing spend, implement further employee furloughs, reducing the store labor requirements when stores open, and forego additional capital expenditures and other discretionary expenses.

For additional information on our material cash requirements, refer to Note 13, Debt , Note 14, Leases , and Note 15, Commitments and Contingencies - Contractual Obligations , of the Consolidated Financial Statements of this Form 10-K.

We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including the impact of COVID-19.

We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our ABL Revolver, are sufficient to maintain our ongoing operations, fund capital expenditures, and meet our debt service obligations over the next 12 months.

Operating Cash Flows

For fiscal 2019 , our net cash provided by operations was $196.7 million compared to $175.3 million for fiscal 2018 .

The increase in net cash provided by operating activities was driven by distributions received from our equity investment in ABG-Camuto and improved use of working capital over fiscal 2018, as fiscal 2018 had an increased use of cash to fund working capital requirements due to the addition of the acquired businesses.

For fiscal 2020, net cash used in operations was $153.8 million compared to net cash provided by operations of $196.7 million for fiscal 2019.

The change was driven by the net loss incurred during fiscal 2020 as a result of the COVID-19 outbreak after adjusting for non-cash activity, including impairment charges and the change in deferred taxes, which was partially offset by measures that we implemented to manage our working capital to preserve liquidity, including renegotiating vendor and landlord terms, reducing inventory orders, and significantly cutting costs.

Investing Cash Flows

For fiscal 2019 , net cash used in investing activities was $27.4 million , which was due to capital expenditures of $77.8 million , partially offset by the net liquidation of our available-for-sale securities.

For fiscal 2018 , net cash used in investing activities was $282.0 million , which was due to the acquisitions of TSL and Camuto Group, capital expenditures of $65.4 million and $16.0 million of additional borrowings by TSL prior to the acquisition, partially offset by the net liquidation of our available-for-sale securities.

For fiscal 2020, net cash provided by investing activities was $2.6 million, due to the liquidation of our available-for sale-securities and the proceeds from a settlement with a vendor, partially offset by capital expenditures of $31.1 million that were reduced in order to preserve liquidity.

For fiscal 2019, net cash used in investing activities was $27.4 million, primarily due to capital expenditures of $77.8 million exceeding the net liquidation of our available-for-sale securities and the proceeds from a working capital settlement related to the Camuto Group acquisition.

Financing Cash Flows

For fiscal 2019 , net cash used in financing activities was $183.4 million , which was due to the payment of dividends and the repurchase of Class A common shares under the share repurchase program, offset by the additional borrowings on our revolving line of credit, net of payments made, of $30.0 million .

During fiscal 2019 , we repurchased 7.1 million Class A common shares at a cost of $141.6 million .

For fiscal 2018 , net cash provided by financing activities was $30.0 million , which was due to borrowings on our revolving line of credit of $160.0 million , offset primarily by the payment of dividends and the repurchase of Class A common shares under the share repurchase program.

During fiscal 2018 , we repurchased 2.0 million Class A common shares at a cost of $47.5 million .

Credit Facility - Our Credit Facility, with a maturity date of August 25, 2022 , provides a revolving line of credit up to $400 million , with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million , and the issuance of up to $75 million in foreign currency revolving loans and letters of credit.

The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility.

Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.4% as of February 1, 2020 .

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

Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 1.8% as of February 1, 2020 .

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

As of February 1, 2020 and February 2, 2019 , we had $190.0 million and $160.0 million , respectively, outstanding under the Credit Facility.

As of February 1, 2020 , with the amount outstanding under the Credit Facility and $3.0 million in letters of credit issued, we had $207.0 million available for borrowings.

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

Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1 .

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

As of February 1, 2020 , we were in compliance with all financial covenants.

Subsequent Events- Subsequent to February 1, 2020 , we borrowed $205.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in the U.S.

and global markets resulting from COVID-19, resulting in $2.0 million of available for borrowing.

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

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

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

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

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

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

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

For fiscal 2020, net cash provided by financing activities was $123.0 million compared to net cash used in financing activities of $183.4 million for fiscal 2019.

During fiscal 2020, we had net proceeds from borrowings from our ABL Revolver and Term Loan offset by the settlement of borrowings under our senior unsecured revolving credit agreement (the "Credit Facility") and the payment of debt issuance costs associated with the changes we made to our debt structure.

We also significantly reduced the amount of dividends paid during the first quarter of fiscal 2020 and did not pay any dividends subsequently.

During fiscal 2019, net cash used in financing activities was primarily due to the payment of dividends and the repurchase of Class A common shares partially financed using our Credit Facility.

ABL Revolver- On August 7, 2020, we replaced the 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 inv entory 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 January 30, 2021, the ABL Revolver had a borrowing base of $400.0 million, with $100.0 million outstanding and $5.3 million in letters of credit issued, resulting in $294.7 million available for borrowings.

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") (as defined) 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 January 30, 2021.

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 i n 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% (effective interest rate of 11.81% when including the amortization of debt issuance costs) as of January 30, 2021.

Debt Covenants- The ABL Revolver contains a minimum availability covenant in which 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 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.

As of January 30, 2021, we were in compliance with all financial covenants.

Capital Expenditure Plans

We expect to significantly reduce capital expenditures in fiscal 2020 in response to the COVID-19 outbreak.

For fiscal 2020 , we had started working on new stores and we are reevaluating those plans.

Our future investments will depend primarily on the number of stores we will be required to open based on commitments previously made.

Off-Balance Sheet Liabilities and Other Contractual Obligations

We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

The following table presents a summary of our minimum contractual commitments and obligations as of February 1, 2020 :

Payments due by Period

(in thousands)

Operating lease liabilities

Debt, including estimated interest payments (1)

Minimum license commitments (2)

Purchase obligations (3)

Interest payments on our revolving line of credit were estimated using the effective interest rate as of February 1, 2020 and assuming interest payments on $190.0 million outstanding on our revolving line of credit through August 25, 2022 , the maturity date of our Credit Facility.

Minimum license commitments include guaranteed minimum royalties, including amounts due to the ABG-Camuto joint venture, and fixed licensing and other fees due to other parties.

Purchase obligations include commitments where we would not be able to cancel such obligations without payment or penalty, including items to be purchased for projects that were under construction or for which a lease has been signed.

We expect to spend approximately $35.0 million to $45.0 million for capital expenditures in fiscal 2021.

Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and information technology projects that we undertake and the timing of these expenditures.

During fiscal 2021, we plan to open approximately 7 to 12 new stores.

During fiscal 2020, the average investment required to open a new store was approximately $1.4 million prior to any tenant allowances that we might have received, and included fixtures and leasehold improvements, inventory, new store advertising, and other expenses.

Recent Accounting Pronouncements

The information related to recent accounting pronouncements as set forth in Note 1 , Significant Accounting Policies , of the Consolidated Financial Statements included in this Annual Report on Form 10-K is incorporated herein by reference.

The information related to recent accounting pronouncements as set forth in Note 1, Significant Accounting Policies , of the Consolidated Financial Statements included in this Form 10-K is incorporated herein by reference.

Critical Accounting Policies and Estimates

As discussed in Note 1 , Significant Accounting Policies , of the Consolidated Financial Statements included in this Annual Report on Form 10-K, the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S.

("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period.

As discussed in Note 1, Significant Accounting Policies , of the Consolidated Financial Statements included in this Form 10-K, the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S.

requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting period.

We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques.

We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation

of the consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate.

While we believe

that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate.

As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our consolidated financial statements.

We believe the following represent the most significant accounting policies, critical estimates and assumptions, among others, used in the preparation of our consolidated financial statements:

Judgments and Estimates

Effect if Actual Results Differ from Assumptions

Business Combinations.

We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed be recorded at their respective fair values at the date of acquisition.

The determination of fair values of assets and liabilities acquired requires estimates and the use of valuation techniques when market value is not readily available.

Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill.

The fair values for property and equipment were determined using the cost and market approaches.

The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs.

For intangible assets, we generally use an income approach to determine fair value.

The income approach requires management to make significant estimates and assumptions.

These estimates and assumptions may include the use of discount rates, growth rates, customer attrition rates, royalty rates, and forecasts of net sales and operating income.

The discount rates applied to the projections reflect the risk factors associated with those projections.

We determined that goodwill should be allocated to reporting units within the U.S.

Retail and Brand Portfolio segments based on each reporting unit’s estimated benefit from the expected synergies from the Camuto Group acquisition.

We allocated $67.8 million of the goodwill to the U.S.

Retail segment based primarily on a discounted cash flow of the sourcing benefit.

The remaining $20.0 million of goodwill was allocated to the First Cost reporting unit within the Brand Portfolio segment based on the fair value of the reporting unit over the fair value of the net assets allocated to the reporting unit.

Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates.

Changes in assumptions concerning future financial results or other underlying assumptions could result in future impairment charges of long-lived assets and goodwill and other indefinite lived intangible assets, discussed in more detail below.

Policy Judgments and Estimates Effect if Actual Results Differ from Assumptions

Impairment of Goodwill and Other Indefinite Lived Intangible Assets.

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When assessing goodwill and other indefinite lived intangible assets for impairment, our decision to perform a qualitative impairment assessment is influenced by a number of factors, including the significance of the excess of the estimated fair value over carrying value at the last assessment date and the amount of time since the last quantitative fair value assessments.

Our impairment calculations contain uncertainties as we are required to make assumptions and to apply judgment when estimating future cash flows, including projected revenue growth and operating income, as well as selecting an appropriate discount rate and assumed royalty rate.

Estimates of revenue growth and operating income are based on internal projections considering past performance and forecasted growth, strategic initiatives, and the business environment impacting performance.

The discount rate and royalty rate are selected based on market participant assumptions.

Our quantitative impairment calculations contain uncertainties as we are required to make assumptions and to apply judgment when estimating future cash flows, including projected revenue and operating results, as well as selecting appropriate discount rates and an assumed royalty rate.

Estimates of revenue and operating results are based on internal projections considering past performance and forecasted changes, strategic initiatives, and the business environment impacting performance.

Discount rates and a royalty rate are selected based on market participant assumptions.

These estimates are highly subjective, and our ability to realize the future cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions, changes in our operating performance and changes in our business strategies.

As of February 1, 2020, we had $93.7 million in goodwill within the U.S.

Retail segment, which is also the reporting unit, and $20.0 million within the Brand Portfolio segment for the First Cost reporting unit, and $15.5 million in indefinite-lived trademarks and tradenames.

We determined the fair value of the reporting units and of the indefinite-lived intangibles was significantly in excess of their carrying value and a 10% decrease in fair value would not result in an impairment charge.

Accordingly, we did not recognize an impairment charge during fiscal 2019.

However, as we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

Judgments and Estimates

Effect if Actual Results Differ from Assumptions

As of January 30, 2021, we had $93.7 million of goodwill within the U.S.

Retail segment, which is also the reporting unit, and $15.5 million in indefinite-lived trademarks and tradenames within the Canada Retail segment.

We determined the fair values of the reporting unit and of the indefinite-lived intangibles were in excess of their carrying values and a 10% decrease in fair values would not result in a material impairment charge.

As we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

Asset Impairment of Long-Lived Assets.

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Our reviews are conducted at the lowest identifiable level, which typically is at the store level for the majority of our long-lived assets.

Fair value at the store level is typically based on projected discounted cash flows using a discount rate determined by management.

Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term.

We also review construction in progress projects, including internal-use software under development, for recoverability when we have a strategic shift in our plans.

A 10% change in our projected cash flows for our store fleet would not result in a material amount of additional impairment charges.

To the extent these future projections or our strategies change, the conclusion regarding impairment may differ from our current estimates.

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

To the extent that these future projections or our strategies change, the conclusion regarding impairment may differ from our current estimates.

Policy Judgments and Estimates Effect if Actual Results Differ from Assumptions

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 at cost and the resulting gross profits are determined by applying a calculated cost-to-retail ratio to the retail value of inventories.

The cost basis of inventories reflected on the balance sheet is decreased by charges to cost of sales at the time the retail value of the inventory is lowered by markdowns.

The Canada Retail and Brand Portfolio segments account for inventory using the weighted average cost method and is stated at the lower of cost or net realizable value.

We monitor aged inventory for obsolete and slow-moving inventory that may need to be liquidated at amounts below cost.

Reductions to inventory values establish a new cost basis.

Favorable changes in facts or circumstances do not result in an increase in the newly established cost basis.

The cost basis of inventories reflected on the balance sheet is decreased by charges to cost of sales at the time that the retail value of the inventory is lowered by markdowns.

The Canada Retail and Brand Portfolio segments account for inventory using the moving average cost method and is stated at the lower of cost or net realizable value.

For all inventories, we also monitor excess and obsolete inventories that may need to be liquidated at amounts below cost.

We perform physical inventory counts or cycle counts on all inventory on hand throughout the year and adjust the recorded balance to reflect the results.

We record estimated shrinkage between physical inventory counts based on historical experience and recent results.

Inherent in the calculation of inventories are certain significant judgments and estimates, including setting the original merchandise retail value, markdowns, shrinkage, and liquidation values.

Shrinkage is calculated as a percentage of sales from the last physical inventory date based on both historical experience as well as recent physical inventory results.

We record estimated shrink between physical inventory counts, based on historical experience and recent results, less amounts realized.

Inherent in the calculation of inventories are certain significant judgments and estimates, including setting the original merchandise retail value, markdowns, shrink, and liquidation values.

Shrink is calculated as a percentage of sales from the last physical inventory date, based on both historical experience and recent physical inventory results, less amounts realized.

Aged inventory may be written down using estimated liquidation values and cost of disposal based on historical experience.

If the reduction to inventories for markdowns, shrinkage, and aged inventories were to change by 10%, cost of sales would increase by approximately $4.3 million.

Customer Allowances and Discounts.

We reduce net sales by the amount of actual and remaining expected customer allowances and discounts.

Customer allowances are provided to our wholesale customers for margin assistance, co-op advertising support, and various other deductions.

We estimate the reserves needed for margin assistance by reviewing inventory levels held by retailers, expected markdowns, gross margins realized, and other performance indicators.

Other customer deductions are estimated using historical experience and anticipated future trends.

Co-op advertising allowances are estimated based on arrangements with customers.

We continually track the customer allowances and discounts provided to support our estimated reserves and adjust accordingly.

As of February 1, 2020, the reserve for customer allowances and discounts was $11.5 million.

Judgments and Estimates

Effect if Actual Results Differ from Assumptions

If the reduction to inventories for markdowns, shrink, and aged inventories were to increase by 10%, cost of sales would increase by approximately $4.0 million.

We recognize lease liabilities based on the present value of the future fixed lease commitments over the lease term with corresponding lease assets.

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We determine the discount rate for each lease by estimating the rate that we would be required to pay on a secured borrowing for an amount equal to the lease payments over the lease term.

As of February 1, 2020, a change in our discount rate of 100 basis points would have changed the recorded operating lease assets and liabilities by $31.0 million.

Foreign Tax Contingencies .

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

We developed an initial estimate of the range of outcomes related to these obligations and have since refined our estimates with additional analysis.

Our current estimate of the range of outcomes is now $28.1 million to $40.0 million for obligations we are aware of at this time.

We recorded a contingent liability for the low end of the range and an indemnification asset of $24.5 million representing the estimated amount we expect to collect under the terms of the securities purchase agreement with 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.

As of February 1, 2020, our liability for foreign tax contingencies was $28.1 million with an estimated range of outcomes of $28.1 million to $40.0 million for obligations we are aware of at this time.

As of January 30, 2021, a change in our discount rate of 100 basis points would have changed the recorded operating lease assets and liabilities by $23.0 million.

Policy Judgments and Estimates Effect if Actual Results Differ from Assumptions

Income Taxes.

We determine the aggregate amount of income tax expense to accrue and the amount which will be currently payable based upon tax statutes of each jurisdiction we do business in.

Deferred tax assets and liabilities, as a result of these timing differences, are reflected on our balance sheet for temporary differences that will reverse in subsequent years.

We determine the aggregate amount of income tax provision or benefit to accrue and the amount that will be currently receivable or payable based upon tax statutes of each jurisdiction in which we do business.

Deferred tax assets and liabilities, as a result of these timing differences, are reflected on our balance sheet for temporary differences that are expected to reverse in subsequent years.

A valuation allowance is established against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.

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Additionally, uncertain positions may be remeasured as warranted by changes in facts or law.

Tax laws, regulations, and policies in various jurisdictions may be subject to significant change due to economic, political and other conditions, and significant judgment is required in estimating our provision and accruals for taxes.

Our ability to recover 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.

In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable.

In addition, tax laws, regulations, and policies in various jurisdictions may be subject to significant change due to economic, political and other conditions, and significant judgment is required in estimating amounts for income taxes.

There may be transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.

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In addition, state, local or foreign jurisdictions may enact tax laws that could result in further changes to taxation and materially affect our financial position and results of operations.

As of February 1, 2020, we had a valuation allowance of $9.5 million and gross unrecognized tax benefits of $10.8 million.

However, we may be required to make adjustments that may materially impact our provision for income taxes in the period in which the adjustments are made based on additional information, additional guidance or revised interpretations.

As of January 30, 2021, our deferred tax assets were reserved with a valuation allowance of $101.2 million.

We also had gross unrecognized tax benefits of $10.1 million.

However, we may have material adjustments in the future that may impact our income tax amounts based on additional information, additional guidance or revised interpretations.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis