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 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Net sales $ 853,467 $ 652,870 $ 2,373,957 $ 1,625,367 Cost of sales ( 539,850 ) ( 487,214 ) ( 1,559,548 ) ( 1,449,129 ) Gross profit 313,617 165,656 814,409 176,238 Operating expenses ( 211,909 ) ( 196,067 ) ( 637,108 ) ( 551,712 ) Income from equity investment 2,600 1,902 6,598 6,325 Impairment charges — ( 30,081 ) ( 1,174 ) ( 149,363 ) Operating profit (loss) 104,308 ( 58,590 ) 182,725 ( 518,512 ) Interest expense, net ( 7,706 ) ( 9,009 ) ( 24,592 ) ( 14,955 ) Non-operating income, net 172 24 734 680 Income (loss) before income taxes 96,774 ( 67,575 ) 158,867 ( 532,787 ) Income tax benefit (provision) ( 16,590 ) 26,932 ( 18,797 ) 178,072 Net income (loss) $ 80,184 $ ( 40,643 ) $ 140,070 $ ( 354,715 ) Basic and diluted earnings (loss) per share: Basic earnings (loss) per share $ 1.10 $ ( 0.56 ) $ 1.92 $ ( 4.92 ) Diluted earnings (loss) per share $ 1.04 $ ( 0.56 ) $ 1.81 $ ( 4.92 ) Weighted average shares used in per share calculations: Basic shares 73,191 72,344 72,911 72,134 Diluted shares 77,135 72,344 77,216 72,134 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 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Net income (loss) $ 80,184 $ ( 40,643 ) $ 140,070 $ ( 354,715 ) Other comprehensive income (loss), net of income taxes: Foreign currency translation gain (loss) 302 161 547 ( 2,090 ) Unrealized net gain on debt securities — — — 195 Reclassification adjustment for net gains realized in net loss — — — ( 368 ) Total other comprehensive income (loss), net of income taxes 302 161 547 ( 2,263 ) Total comprehensive income (loss) $ 80,486 $ ( 40,482 ) $ 140,617 $ ( 356,978 ) 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 30, 2021 January 30, 2021 October 31, 2020 ASSETS Cash and cash equivalents $ 83,069 $ 59,581 $ 114,531 Receivables, net 231,391 196,049 61,840 Inventories 602,101 473,183 545,954 Prepaid expenses and other current assets 53,756 51,772 54,577 Total current assets 970,317 780,585 776,902 Property and equipment, net 263,581 296,469 313,102 Operating lease assets 664,646 700,481 728,871 Goodwill 93,655 93,655 93,655 Intangible assets, net 16,005 15,635 15,652 Deferred tax assets — — 208,976 Equity investment 56,623 58,598 57,978 Other assets 29,117 31,172 31,585 Total assets $ 2,093,944 $ 1,976,595 $ 2,226,721 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 401,280 $ 245,071 $ 371,382 Accrued expenses 211,017 200,326 171,261 Current maturities of long-term debt 62,500 62,500 62,500 Current operating lease liabilities 206,065 244,786 226,423 Total current liabilities 880,862 752,683 831,566 Long-term debt 165,422 272,319 274,635 Non-current operating lease liabilities 622,273 677,735 721,771 Other non-current liabilities 31,726 30,841 28,228 Total liabilities 1,700,283 1,733,578 1,856,200 Commitments and contingencies Shareholders' equity: Common shares paid-in capital, no par value 1,000,180 990,153 985,125 Treasury shares, at cost ( 515,065 ) ( 515,065 ) ( 515,065 ) Retained deficit ( 88,715 ) ( 228,785 ) ( 94,781 ) Accumulated other comprehensive loss ( 2,739 ) ( 3,286 ) ( 4,758 ) Total shareholders' equity 393,661 243,017 370,521 Total liabilities and shareholders' equity $ 2,093,944 $ 1,976,595 $ 2,226,721 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 30, 2021 Balance, July 31, 2021 65,236 7,733 22,169 $ 998,117 $ ( 515,065 ) $ ( 168,899 ) $ ( 3,041 ) $ 311,112 Net income — — — — — 80,184 — 80,184 Stock-based compensation activity 375 — — 2,063 — — — 2,063 Foreign currency translation adjustment — — — — — — 302 302 Balance, October 30, 2021 65,611 7,733 22,169 $ 1,000,180 $ ( 515,065 ) $ ( 88,715 ) $ ( 2,739 ) $ 393,661 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 Foreign currency translation adjustment — — — — — — 161 161 Balance, October 31, 2020 64,646 7,733 22,169 $ 985,125 $ ( 515,065 ) $ ( 94,781 ) $ ( 4,758 ) $ 370,521 Nine months ended October 30, 2021 Balance, January 30, 2021 64,666 7,733 22,169 $ 990,153 $ ( 515,065 ) $ ( 228,785 ) $ ( 3,286 ) $ 243,017 Net income — — — — — 140,070 — 140,070 Stock-based compensation activity 945 — — 10,027 — — — 10,027 Foreign currency translation adjustment — — — — — — 547 547 Balance, October 30, 2021 65,611 7,733 22,169 $ 1,000,180 $ ( 515,065 ) $ ( 88,715 ) $ ( 2,739 ) $ 393,661 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 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 30, 2021 October 31, 2020 Cash flows from operating activities: Net income (loss) $ 140,070 $ ( 354,715 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 59,178 66,139 Stock-based compensation expense 18,646 15,176 Deferred income taxes 822 ( 179,098 ) Income from equity investment ( 6,598 ) ( 6,325 ) Distributions received from equity investment 8,573 6,106 Impairment charges 1,174 149,363 Gain on settlement — ( 8,990 ) Other 1,598 43 Change in operating assets and liabilities: Accounts receivable ( 18,121 ) 7,519 Income tax receivable ( 17,110 ) — Inventories ( 127,513 ) 86,229 Prepaid expenses and other current assets ( 988 ) 13,785 Accounts payable 153,511 79,642 Accrued expenses 10,204 4,629 Operating lease assets and liabilities, net ( 59,152 ) 14,164 Net cash provided by (used in) operating activities 164,294 ( 106,333 ) Cash flows from investing activities: Cash paid for property and equipment ( 22,061 ) ( 26,925 ) Sales of available-for-sale investments — 24,755 Proceeds from settlement — 8,990 Net cash provided by (used in) investing activities ( 22,061 ) 6,820 Cash flows from financing activities: Borrowing on revolving line under Credit Facility — 251,000 Payments on revolving line under Credit Facility — ( 441,000 ) Borrowing under ABL Revolver 349,653 150,000 Payments on borrowings under ABL Revolver ( 449,653 ) ( 50,000 ) Proceeds from issuance of Term Loan — 250,000 Payments on borrowings under Term Loan ( 9,376 ) ( 3,125 ) Payments of debt issuance costs — ( 21,063 ) Dividends paid — ( 7,160 ) Other ( 8,487 ) ( 1,502 ) Net cash provided by (used in) financing activities ( 117,863 ) 127,150 Effect of exchange rate changes on cash balances 664 330 Net increase in cash, cash equivalents and restricted cash 25,034 27,967 Cash, cash equivalents and restricted cash, beginning of period 59,581 86,564 Cash, cash equivalents and restricted cash, end of period $ 84,615 $ 114,531 Supplemental disclosures of cash flow information: Cash paid (received) for income taxes $ 13,228 $ ( 12,979 ) Cash paid for interest on debt $ 19,339 $ 12,581 Cash paid for operating lease liabilities $ 209,045 $ 128,683 Non-cash investing and financing activities: Property and equipment purchases not yet paid $ 3,250 $ 1,341 Operating lease liabilities arising from lease asset additions $ 13,379 $ 9,407 Net increase to operating lease assets and lease liabilities for modifications $ 72,698 $ 18,660 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 one of North America's largest designers, producers, and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company, Shoe Warehouse, and DSW banners through its Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels (which we refer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. An integral part of the Brand Portfolio segment is our equity investment in ABG-Camuto, LLC ("ABG-Camuto"), which is a partnership between Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," and Authentic Brands Group LLC, a global brand management and marketing company. Camuto Group has a 40 % stake in ABG-Camuto, a joint venture that owns 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. Camuto Group has 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. Camuto Group also owns footwear and certain handbag licensing rights of Jessica Simpson, Lucky Brand and, through a joint venture, Jennifer Lopez. Our 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 January 30, 2021 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 2020 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 2020 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. 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 and into the first quarter of fiscal 2021, resulting in the elimination of approximately 1,000 associate positions. The severance charges recorded as a result of this reorganization are included in our severance discussion below. 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 changes to our expense and capital expenditure plans. 6 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) As a result of the material reduction in net sales and cash flows during fiscal 2020, we updated our impairment analyses 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. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. 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 segment and Canada Retail segment, 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). 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 pandemic on macroeconomic conditions, we performed an 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. 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 moving 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 fiscal 2020 peak spring selling season and reduced traffic experienced since re-opening stores. During the nine months ended October 31, 2020, we recorded $ 18.0 million of additional inventory reserves over the same period of the previous year. On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which, among other things, provided employer payroll tax credits for wages paid to employees who were unable to work over a defined period and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualified for certain employer payroll tax credits, which were 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 were also available in Canada. During the three months ended October 30, 2021 and October 31, 2020, the qualified government credits reduced our operating expenses b y $ 0.3 million and $ 1.4 million, respectively, on our condensed consolidated statements of operations. During the nine months ended October 30, 2021 and October 31, 2020, the qualified government credits reduced our operating expenses by $ 4.0 million and $ 9.3 million , respectively, on our condensed consolidated statements of operations. A s of October 30, 2021, we had $ 10.0 million of deferred qualified payroll and other tax obligations, half of which is included in accrued expenses on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2021, with the remaining incl uded in other non-current liabilities on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2022. We recorded our income tax expense, income tax receivable, and 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. Our ability to recover these deferred tax assets depends on several factors, including our ability to project future taxable income. 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%. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in fiscal 2020 due to the impacts of the COVID-19 pandemic, we are in a three-year cumulative loss position as of October 30, 2021, which is significant objective negative evidence in considering whether deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. A valuation allowance has been recognized as a reserve on the total deferred tax asset balance due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Our effective tax rate changed from 33.4 % for the nine months ended October 31, 2020 t o 11.8 % for the nine months ended October 30, 2021. The 7 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) rate for the nine months ended October 30, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. T he rate for the nine months ended October 31, 2020 is the result of the carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%. While trends improved during fiscal 2021 compared to fiscal 2020, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and to what extent the recent improved trends will continue. For instance, we have continued to experience reduced customer traffic and net sales when compared to pre-COVID-19 periods, and it is unclear whether customer behavior may continue to be slow to return to pre-COVID-19 patterns, if at all. The ongoing and prolonged nature of the outbreak may lead to further adjustments to our operations. As such, the ultimate impacts of the COVID-19 pandemic on our businesses will depend on future developments, including the availability of labor, global supply chain disruptions, the variants of COVID-19, and the global availability and use of vaccines, which are highly uncertain and cannot be predicted. As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets. Severance- During the nine months ended October 30, 2021 and October 31, 2020, we incurred severance costs of $ 2.6 million and $ 10.0 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of October 30, 2021, January 30, 2021, and October 31, 2020, we had accrued severance of $ 2.5 million, $ 6.5 million, and $ 3.8 million, respectively, included in accrued expenses on the condensed consolidated balance sheets. 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 for costs incurred on internal-use software 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. 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 dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us, along with the estimated, but uncertain, future impacts of the COVID-19 pandemic. 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, 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 we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates. Cash, Cash Equivalents, and Restricted Cash - Cash and cash equivalents represent cash, money market funds, and credit card receivables that generally settle within three days. Restricted cash represents cash that is restricted as to withdrawal or usage and consists of a mandatory cash deposit maintained for certain insurance policies. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows: (in thousands) October 30, 2021 January 30, 2021 October 31, 2020 Cash and cash equivalents $ 83,069 $ 59,581 $ 114,531 Restricted cash, included in prepaid expenses and other current assets 1,546 — — Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows $ 84,615 $ 59,581 $ 114,531 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. The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowing under our ABL Revolver approximated the fair value. As of October 30, 2021, the fair value of borrowings under our Term Loan was $ 244.1 million compared to the carrying value of $ 234.4 million. T he fair value of debt borrowings was estimated based on current interest rates offered for similar instruments (categorized as Level 2 under the fair value hierarchy). Impairment of Long-Lived Assets- Refer to section above, Impact of COVID-1 9, regarding impairment charges of long-lived assets during fiscal 2020. During the nine months ended October 30, 2021, we recorded an impairment charge of $ 1.2 million in the U.S. Retail segment for abandoned equipment we are replacing. 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 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Net sales: U.S. Retail segment: Women's footwear $ 448,879 $ 319,241 $ 1,321,697 $ 832,343 Men's footwear 154,523 105,587 454,688 260,954 Kids' footwear 69,159 48,570 178,003 109,985 Accessories and other 37,047 28,503 98,971 69,669 709,608 501,901 2,053,359 1,272,951 Canada Retail segment: Women's footwear 34,495 28,864 85,156 70,165 Men's footwear 17,963 13,604 43,296 34,377 Kids' footwear 19,607 16,699 38,674 30,486 Accessories and other 2,727 2,431 5,855 5,481 74,792 61,598 172,981 140,509 Brand Portfolio segment: Wholesale 90,558 73,744 181,916 156,611 Commission income 5,635 3,885 11,343 14,026 Direct-to-consumer 7,726 6,276 18,616 25,839 103,919 83,905 211,875 196,476 Other — 27,020 — 62,909 Total segment net sales 888,319 674,424 2,438,215 1,672,845 Elimination of intersegment sales ( 34,852 ) ( 21,554 ) ( 64,258 ) ( 47,478 ) Total net sales $ 853,467 $ 652,870 $ 2,373,957 $ 1,625,367 9 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) Deferred Revenue Liabilities- We record deferred revenue liabilities, included in accrued expenses on the condensed consolidated balance sheets, for remaining obligations we have to our customers. The following table presents the changes and total balances for gift cards and our loyalty programs: Three months ended Nine months ended (in thousands) October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Gift cards: Beginning of period $ 28,691 $ 29,919 $ 34,442 $ 35,461 Gift cards redeemed and breakage recognized to net sales ( 14,483 ) ( 12,615 ) ( 50,863 ) ( 37,483 ) Gift cards issued 12,966 10,995 43,595 30,321 End of period $ 27,174 $ 28,299 $ 27,174 $ 28,299 Loyalty programs: Beginning of period $ 15,255 $ 14,797 $ 11,379 $ 16,138 Loyalty certificates redeemed and expired and other adjustments recognized to net sales ( 9,025 ) ( 7,176 ) ( 19,929 ) ( 18,062 ) Deferred revenue for loyalty points issued 10,365 6,774 25,145 16,319 End of period $ 16,595 $ 14,395 $ 16,595 $ 14,395 3. RELATED PARTY TRANSACTIONS Schottenstein Affiliates As of October 30, 2021, the Schottenstein Affiliates consist 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 30, 2021, the Schottenstein Affiliates beneficially owned approximately 20 % of the Company's outstanding common shares, representing approximately 54 % of the combined voting power, consisting of, in the aggregate, 6.6 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. During the three months ended October 30, 2021 and October 31, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $ 2.7 million and $ 2.6 million, respectively. During the nine months ended October 30, 2021 and October 31, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $ 8.1 million and $ 7.9 million, respectively. As of October 30, 2021, January 30, 2021, and October 31, 2020, we had related party current operating lease liabilities of $ 7.1 million, $ 8.0 million, and $ 7.7 million, respectively, and non-current operating lease liabilities of $ 19.3 million, $ 24.6 million, and $ 25.8 million , respectively. Other Purchases and Services- During the three months ended October 30, 2021 and October 31, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $ 1.2 million and $ 1.7 million, respectively. During the nine months ended October 30, 2021 and October 31, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $ 3.7 million and $ 4.2 million, respectively. Due to Related Parties- Amounts due to Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented. ABG-Camuto We have a 40 % interest in our equity investment in ABG-Camuto. We have a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto, subject to guaranteed minimums. During the three months ended October 30, 2021 and October 31, 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $ 4.4 million and $ 4.6 million, respectively. During both the nine months ended October 30, 2021 and October 31, 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $ 13.6 million. Amounts due to ABG-Camuto were immaterial for all periods presented. 10 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Weighted average basic shares outstanding 73,191 72,344 72,911 72,134 Dilutive effect of stock-based compensation awards 3,944 — 4,305 — Weighted average diluted shares outstanding 77,135 72,344 77,216 72,134 For the three months ended October 30, 2021 and October 31, 2020, the number of shares relating to potentially dilutive stock-based compensati on awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 3.6 million and 5.4 million, respectively. For the nine months ended October 30, 2021 and October 31, 2020, 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 3.0 million and 5.9 million , respectively. 5. STOCK-BASED COMPENSATION Stock-based compensation expense consisted of the following: Three months ended Nine months ended (in thousands) October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Stock options $ 130 $ 338 $ 515 $ 1,208 Restricted and director stock units 5,151 4,242 18,131 13,968 $ 5,281 $ 4,580 $ 18,646 $ 15,176 The following table summarizes the stock-based compensation award activity for RSUs for the nine months ended October 30, 2021: Number of shares (in thousands) Time-Based RSUs Performance-Based RSUs Outstanding - beginning of period 6,445 540 Granted 1,055 595 Vested ( 1,141 ) ( 366 ) Forfeited ( 348 ) ( 25 ) Outstanding - end of period 6,011 744 11 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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 30, 2021 January 30, 2021 October 31, 2020 (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 87,780 7,733 86,835 7,733 86,815 7,733 Outstanding shares 65,611 7,733 64,666 7,733 64,646 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. Accumulated Other Comprehensive Loss- For the nine months ended October 31, 2020, changes for the balances of each component of accumulated other comprehensive loss, net of tax, were as follows (for all other periods presented, the change was due to foreign currency translation adjustments as shown in the condensed consolidated statements of shareholders' equity): (in thousands) Foreign Currency Translation Available-for-Sale Securities Total Accumulated other comprehensive income (loss) - beginning of period $ ( 2,668 ) $ 173 $ ( 2,495 ) Other comprehensive income (loss) before reclassifications ( 2,090 ) 195 ( 1,895 ) Amounts reclassified to non-operating income, net — ( 368 ) ( 368 ) Other comprehensive loss ( 2,090 ) ( 173 ) ( 2,263 ) Accumulated other comprehensive loss - end of period $ ( 4,758 ) $ — $ ( 4,758 ) 7. RECEIVABLES Receivables, net, consisted of the following: (in thousands) October 30, 2021 January 30, 2021 October 31, 2020 Customer accounts receivables: Serviced by third-party provider with guaranteed payment $ 51,574 $ 29,615 $ 43,866 Serviced by third-party provider without guaranteed payment 960 363 2,219 Serviced in-house 3,113 4,576 5,820 Income tax receivable 166,934 149,824 — Other receivables 10,043 12,865 11,200 Total receivables 232,624 197,243 63,105 Allowance for doubtful accounts ( 1,233 ) ( 1,194 ) ( 1,265 ) $ 231,391 $ 196,049 $ 61,840 12 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 8. GOODWILL AND INTANGIBLE ASSETS Goodwill- The following table presents the changes to goodwill by segment: Nine months ended October 30, 2021 October 31, 2020 (in thousands) Goodwill Accumulated Impairments Net Goodwill Accumulated Impairments Net Beginning of period by segment: U.S. Retail $ 93,655 $ — $ 93,655 $ 93,655 $ — $ 93,655 Canada Retail 43,086 ( 43,086 ) — 41,610 ( 41,610 ) — Brand Portfolio 19,989 ( 19,989 ) — 19,989 — 19,989 156,730 ( 63,075 ) 93,655 155,254 ( 41,610 ) 113,644 Activity by segment: Canada Retail- Currency translation adjustment 1,377 ( 1,377 ) — ( 264 ) 264 — Brand Portfolio- Impairment charge — — — — ( 19,989 ) ( 19,989 ) 1,377 ( 1,377 ) — ( 264 ) ( 19,725 ) ( 19,989 ) End of period by segment: U.S. Retail 93,655 — 93,655 93,655 — 93,655 Canada Retail 44,463 ( 44,463 ) — 41,346 ( 41,346 ) — Brand Portfolio 19,989 ( 19,989 ) — 19,989 ( 19,989 ) — $ 158,107 $ ( 64,452 ) $ 93,655 $ 154,990 $ ( 61,335 ) $ 93,655 Intangible Assets- Intangible assets consisted of the following: (in thousands) Cost Accumulated Amortization Net October 30, 2021 Definite-lived customer relationships $ 1,444 $ ( 1,444 ) $ — Indefinite-lived trademarks and tradenames 16,005 — 16,005 $ 17,449 $ ( 1,444 ) $ 16,005 January 30, 2021 Definite-lived customer relationships $ 2,909 $ ( 2,791 ) $ 118 Indefinite-lived trademarks and tradenames 15,517 — 15,517 $ 18,426 $ ( 2,791 ) $ 15,635 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 13 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 9. ACCRUED EXPENSES Accrued expenses consisted of the following: (in thousands) October 30, 2021 January 30, 2021 October 31, 2020 Gift cards $ 27,174 $ 34,442 $ 28,299 Accrued compensation and related expenses 29,874 49,864 28,498 Accrued taxes 43,677 24,206 24,123 Loyalty programs deferred revenue 16,595 11,379 14,395 Sales returns 20,068 17,333 14,439 Customer allowances and discounts 2,540 4,579 4,707 Other 71,089 58,523 56,800 $ 211,017 $ 200,326 $ 171,261 10. DEBT Debt consisted of the following: (in thousands) October 30, 2021 January 30, 2021 October 31, 2020 ABL Revolver $ — $ 100,000 $ 100,000 Term Loan 234,375 243,750 246,875 Total debt 234,375 343,750 346,875 Less unamortized Term Loan debt issuance costs ( 6,453 ) ( 8,931 ) ( 9,740 ) Less current maturities of long-term debt ( 62,500 ) ( 62,500 ) ( 62,500 ) Long-term debt $ 165,422 $ 272,319 $ 274,635 ABL Revolver- On August 7, 2020, we replaced our previous senior unsecured revolving credit agreement ("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 formulated 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 30, 2021, the ABL Revolver had a borrowing base of $ 400.0 million, with no outstanding borrowings and $ 5.3 million in letters of credit issued, resulting in $ 394.7 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 3.0 % as of October 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. 14 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 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 9.8 % (effective interest rate of 11.8 % when including the amortization of debt issuance costs) as of October 30, 2021. 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. As of October 30, 2021, we are limited in our ability to pay dividends, repurchase stock, and make certain restricted payments above a maximum of $ 10.0 million over the term of the Term Loan. 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 October 30, 2021, we were in compliance with all financial covenants. 11. 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. Insurance Recoveries- During fiscal 2020, a third-party vendor experienced a shutdown of services to us that impacted our ability to fulfill orders from customers for a limited period of time. This incident was covered under an insurance policy that provides for reimbursement of lost profits and recognized losses as a result of the outage. During the fourth quarter of fiscal 2020, we recognized an insurance recovery receivable of $ 3.0 million, recorded as an offset to cost of sales, for recognized losses that we believe are probable of being reimbursed through the insurance policy. Reimbursement for lost profits and any additional recoveries in excess of recognized losses are treated as gain contingencies and will be recognized when realized or realizable. We continue to work with the insurance carrier to reach an agreement on the total amount to be recovered. Guarantee- We provide guarantees for lease obligations that are scheduled to expire in fiscal 2023 for locations that have been leased to third parties. If a 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 30, 2021, the total future minimum lease payment requirements under these guarantees were approximately $ 14.6 million . 15 Table of Contents DESIGNER BRANDS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ( unaudited ) 12. SEGMENT REPORTING The following provides certain key 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 30, 2021 Net sales: External customer sales $ 709,608 $ 74,792 $ 69,067 $ — $ — $ 853,467 Intersegment sales — — 34,852 — ( 34,852 ) — Total net sales $ 709,608 $ 74,792 $ 103,919 $ — $ ( 34,852 ) $ 853,467 Gross profit $ 258,059 $ 28,588 $ 32,329 $ — $ ( 5,359 ) $ 313,617 Income from equity investment $ — $ — $ 2,600 $ — $ — $ 2,600 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 Nine months ended October 30, 2021 Net sales: External customer sales $ 2,053,359 $ 172,981 $ 147,617 $ — $ — $ 2,373,957 Intersegment sales — — 64,258 — ( 64,258 ) — Total net sales $ 2,053,359 $ 172,981 $ 211,875 $ — $ ( 64,258 ) $ 2,373,957 Gross profit $ 708,065 $ 58,191 $ 52,788 $ — $ ( 4,635 ) $ 814,409 Income from equity investment $ — $ — $ 6,598 $ — $ — $ 6,598 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 16