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Item 7. Management’s Discussion and Analysis

2024-03-25 compared with 2023-03-16 · 95 added, 113 removed, 171 unchanged (55% of the section changed)

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EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS

For 2022, net sales increased 3.7% and comparable sales increased 4.4% over last year.

During 2022, net sales from our Owned Brands increased 32.1% over last year, with Owned Brands representing 24.4% of consolidated net sales as compared to 19.2% for last year.

The increase in net sales from our Owned Brands demonstrates progress toward our long-term goal of doubling net sales from our Owned Brands by 2026 (using 2021 net sales as a baseline).

Gross profit as a percentage of sales for 2022 was lower when compared to last year's record-setting results.

This decrease is primarily attributable to a more promotional retail environment in 2022, as the industry experienced a shift from tighter inventory positions to excess inventory, resulting in us also being more promotional.

In addition, we strategically increased our clearance assortment in order for us to attract customers who are more value-oriented, and this allowed us to manage our inventory more effectively and proactively.

However, gross profit as a percentage of sales for 2022 was higher than the pre-COVID-19 rate in 2019;

this increase was primarily driven by the increased Owned Brands penetration.

At the beginning of 2023, we completed the acquisition of the Keds business from Wolverine World Wide, Inc.

This expands our Owned Brands' reach into casual and athleisure footwear in the wholesale and direct-to-consumer e-commerce channels, supplementing the additions of Le Tigre and Topo during 2022.

This acquisition also marks our first Owned Brand wholesale business within the kids' footwear segment and supports our Owned Brand strategy.

For 2023, net sales decreased 7.3% and total comparable sales decreased 9.0% over last year.

During 2023, net sales from our Owned Brands decreased 6.2% over last year, with Owned Brands representing 25.8% of consolidated net sales as compared to 25.5% for last year.

At the beginning of 2023, we completed the acquisition of Keds, expanding our Owned Brands' reach into casual and athleisure footwear in the wholesale and direct-to-consumer e-commerce channels and complementing the additions of Le Tigre and Topo during 2022.

We believe these acquisitions represent significant steps taken toward our long-term goal of net sales from our Owned Brands reaching one-third of total sales by 2026.

Gross profit as a percentage of net sales for 2023 was 90 basis points lower when compared to last year, primarily due to promotional pricing and the deleveraging effect of lower sales on fixed store occupancy costs, which more than offset lower logistics costs, including freight, shipping, and distribution.

EFFECTS OF INFLATION AND GLOBAL ECONOMIC CONDITIONS

A downturn in global economic conditions, most notably inflationary pressures, rising interest rates, changes in employment levels, significant foreign currency volatility, and the growing concerns of a potential recession, may adversely impact discretionary consumer income levels and spending.

Throughout 2023, a downturn in global economic conditions, most notably the growing concerns of a potential recession, rising interest rates, inflationary pressures, changes in employment levels, and significant foreign currency volatility, has adversely impacted discretionary consumer income levels and spending for our customers.

Consumer spending on discretionary items, including our products, generally declines during periods of economic uncertainty, when disposable income is reduced, or when there is a reduction in consumer confidence.

Moreover, we are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business.

In 2022, the U.S.

experienced significantly heightened inflationary pressures, which we expect to continue into 2023.

We are subject to inflationary pressures, including increases in the costs of merchandise, transportation, and compensation, which we offset in the first half of 2022 with pricing increases and being less promotional.

However, competitive pricing pressure has been exacerbated by a more promotional retail environment as the industry experienced a shift from tighter inventory positions to excess inventory and as macroeconomic conditions impact discretionary consumer spending.

During the second half of 2022, our net sales and gross profit declined as we became more promotional under this competitive landscape.

These factors could require us to enact mitigating operating efficiency measures that could have a material adverse effect on business, operations, and results of operations.

IMPACT OF COVID-19

The COVID-19 pandemic has had an adverse effect on our results of operations and may continue to impact the global economy, including disrupted supply chain operations globally, temporary factory closures, vessel, container and other transportation shortages, and port congestion.

Such disruptions have at times reduced our availability of inventory while at other times have caused excess inventory as the timing of inventory receipts has been disrupted.

Disruptions may continue especially in geographic locations where government responses may result in mandated quarantines and closures of facilities and operations we depend on.

The COVID-19 pandemic has and is likely to continue to result in social, economic, and labor instability in the markets in which we and our third-party vendors operate.

The long-term economic impact and near-term financial impacts of COVID-19, including, but not limited to, possible impairment, restructuring, or other charges, as well as the overall business on our business and results of operations, cannot be reliably estimated at this time due to the uncertainty of future developments.

We are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business.

As it relates to our business, during the second half of 2022 and continuing into 2023, our net sales declined as we experienced lower traffic and became more promotional under a more competitive landscape.

Competitive pricing pressure has been exacerbated by a more promotional retail environment as macroeconomic conditions continue to impact discretionary consumer spending.

These factors ultimately could require us to enact mitigating operating efficiency measures that could have a material adverse effect on business, operations, and results of operations.

FINANCIAL SUMMARY AND OTHER KEY METRICS

• Net sales increased to $3.3 billion for 2022 from $3.2 billion for 2021 .

• G ross profit as a percentage of net sales was 32.6% for 2022, a decrease from 33.4% in 2021, but an increase from the 2019 pre-COVID-19 rate of 28.6%.

• Net sales decreased to $3.1 billion from $3.3 billion last year.

• Gross profit as a percentage of net sales was 31.7% compared to 32.6% last year.

• Net income attributable to Designer Brands Inc.

for 2022 was $162.7 million, or $2.26 per diluted share, which included net after-tax benefits of $29.0 million, or $0.41 per diluted share, primarily related to the change in valuation allowance on deferred tax assets, partially offset by the loss on extinguishment of debt and write-off of debt issuance costs, restructuring and termination costs, CEO transition costs, impairment charges, and acquisition costs.

Net income for 2021 was $154.5 million, or $2.00 per diluted share, which included net after-tax benefits of $23.2 million, or $0.30 per diluted share, primarily related to the change in valuation allowance on deferred tax assets, partially offset by restructuring charges and target acquisition costs.

was $29.1 million, or $0.46 per diluted share, which included net after-tax charges of $14.0 million, or $0.22 per diluted share, primarily related to restructuring and integration costs, impairment charges, and CEO transition costs, compared to $162.7 million, or $2.26 per diluted share, last year, which included net after-tax benefits of $29.0 million, or $0.41 per diluted share, primarily related to the change in valuation allowance on deferred tax assets, partially offset by the loss on extinguishment of debt and write-off of debt issuance costs, restructuring and termination costs, impairment charges, and CEO transition costs.

Comparable Sales Performance Metric- The following table presents the percent change in comparable sales for each segment and in total:

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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 as a result of the COVID-19 pandemic as management believes that this metric is meaningful to monitor our performance.

Comparable sales also include e-commerce sales.

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 of the prior year.

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

Comparable sales include the e-commerce sales of the U.S.

Retail and Canada Retail segments.

Comparable sales exclude the 53 rd week of sales in 2023 and, specifically for the Canada Retail segment, the impact of foreign currency translation, which is calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year.

Comparable sales include the e-commerce sales of the Brand Portfolio segment from the direct-to-consumer e-commerce site for the Vince Camuto brand.

The e-commerce sales for Topo, Keds, and Hush Puppies will be added to the comparable base for the Brand Portfolio segment beginning with the first quarter of 2024, the second quarter of 2024, and the third quarter of 2024, respectively.

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.

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

January 28, 2023 January 29, 2022

February 3, 2024 January 28, 2023

Retail segment - DSW stores 499 501

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Net income 29,216 1.0 162,666 4.9 (133,450) (82.0) %

Net loss attributable to redeemable noncontrolling interest 10 — — — 10 NM

Net loss (income) attributable to redeemable noncontrolling interest (154) — 10 — (164) NM

Net income attributable to Designer Brands Inc.

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(dollars in thousands) 2023 2022 Change

Amount % of Total Segment Net Sales Amount % of Total Segment Net Sales Amount % Comparable Sales %

Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Comparable Sales %

Segment net sales:

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Consolidated net sales $ 3,074,976 $ 3,315,428 $ (240,452) (7.3) %

The increase in net sales during 2022 over last year was primarily due to the increase in comparable sales across all segments, primarily related to the prolonged COVID-19 pandemic in 2021 that resulted in significantly reduced store traffic in the U.S.

Retail and Canada Retail segments, with the Canada Retail segment also impacted by mandated closures and restrictions in certain key markets.

In addition, wholesale sales in the Brand Portfolio segment were higher during 2022, as compared to last year, due to increased orders as our retailer customers had similar results as our retail segments.

These increases were partially offset by the impact of a shift towards being more promotional in the U.S.

Retail and Brand Portfolio segments during the second half of 2022, net store closures since the end of 2021, and the unfavorable impact from foreign currency translation of the Canada Retail segment net sales.

During 2023, net sales decreased in the U.S.

Retail segment, primarily due to the decrease in comparable sales of $260.3 million, with the additional week of sales during 2023 offset by the impact of net store closures since the end of 2022.

The decrease in comparable sales for the U.S.

Retail segment was largely driven by a decrease in comparable transactions of approximately 5%, driven by lower traffic, and a decrease in the comparable average sales amounts per transaction of approximately 5% as we were more promotional than we were during the same period last year.

Net sales decreased in the Canada Retail segment due to the decrease in comparable sales of $16.6 million, with the majority of the remaining decrease due to the unfavorable impact from foreign currency translation partially offset by the additional week of sales in 2023.

The decrease in comparable sales for the Canada Retail segment was impacted primarily by lower comparable average sales amount per transaction.

Net sales for the Brand Portfolio segment increased due to the net sales added from the acquired Topo and Keds businesses partially offset by lower wholesale sales as retailer customers pulled back on orders.

The following table summarizes gross profit by segment:

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Total segment gross profit 971,605 30.9 % 1,075,710 31.6 % (104,105) (9.7) % (70)

Net recognition (elimination) of intersegment gross profit 3,515 (8,420) 11,935

Net recognition of intersegment gross profit 3,281 3,515 (234)

Consolidated gross profit $ 974,886 31.7 % $ 1,079,225 32.6 % $ (104,339) (9.7) % (90)

The increase in consolidated gross profit was primarily driven by increased sales during 2022 over last year, partially offset by higher freight and distribution costs and a shift towards being more promotional in the U.S.

Retail and Brand Portfolio segments during the second half of 2022.

For the Canada Retail segment, the shift toward being more promotional happened later in 2022 resulting in less of an impact to the full fiscal year.

Higher distribution costs within the U.S.

Retail segment were primarily driven by moving our digital fulfillment activities from our Ohio location to our New Jersey location, which resulted in recognizing approximately $16.0 million of additional distribution costs, including accelerated depreciation and termination costs.

The net recognition (elimination) of intersegment gross profit consisted of the following:

The decrease in consolidated gross profit was primaril y driven by the decrease in consolidated net sales over the same period last year, partially offset by lower freight and shipping costs and lower distribution costs in the U.S.

Retail segment as we realized the benefit of moving our digital fulfillment activities from our Ohio location to our New Jersey location.

Gross profit as a percentage of net sales decreased 110 basis points for the U.S.

Retail segment when compared to the same period last year, primarily due to the deleveraging effect of lower sales on fixed occupancy costs as well as being more promotional, partially offset by lower logistics costs including freight, shipping, and distribution.

Gross profit as a percentage of net sales decreased 290 basis points for the Canada Retail segment when compared to the same period last year, primarily due to a mix shift in sales towards lower margin products and the deleveraging effect of lower sales on fixed occupancy costs.

Gross profit as a percentage of net sales increased 450 basis points for the Brand Portfolio segment when compared to the same period last year, primarily due to the change in mix of products sold, improved inventory positions, lower freight costs, and the leverage of higher sales on royalty expense since the acquired businesses do not have any royalty obligations.

The net recognition of intersegment gross profit consisted of the following:

(in thousands) 2023 2022

Recognition (elimination) of intersegment activity:

Intersegment recognition and elimination activity:

Net sales recognized by Brand Portfolio segment $ (72,078) $ (87,041)

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OPERATING EXPENSES

Operating expenses increased by $25.7 million during 2022 as compared to last year, primarily driven by an increase in store payroll and costs as a result of severance activity, the dissolution of a joint venture, and the CEO transition.

Operating expenses as a percentage of net sales slightly improved to 27.1% in 2022 compared to 27.2% in 2021, due to the improvement in net sales over last year as we leveraged our fixed costs.

Operating expenses increased by $10.7 million during 2023 over last year, primarily driven by an increase in marketing expenses as we invested more in brand awareness, the additional operating expenses from the acquired Topo and Keds businesses, and the additional week during 2023, partially offset by a decrease in incentive compensation in line with lower net sales.

Operating expenses, as a percentage of net sales, increased 240 basis points over the same period last year due to the lower net sales as we deleveraged our increased costs.

IMPAIRMENT CHARGES

During 2023, we recorded impairment charges of $4.8 million, primarily in the Brand Portfolio segment resulting from an abandoned leased space.

During 2022, we recorded impairment charges of $4.3 million, primarily in the Brand Portfolio segment, resulting from subleases of abandoned leased spaces.

During 2021, we recorded impairment charges of $1.7 million, including $1.2 million in the U.S.

Retail segment for abandoned equipment we replaced and $0.5 million in the Brand Portfolio segment for the sublease of an abandoned leased space.

INTEREST EXPENSE, NET

For 2022, interest expense, net, decreased by $17.3 million over last year, primarily due to the termination of the senior secured term loan ("Term Loan") in the first quarter of 2022, which had a higher interest rate than the ABL Revolver.

The decrease was partially offset by a higher average debt balance during 2022 over 2021.

For 2023, interest expense, net, increased by $17.3 million over last year, primarily driven by overall higher interest rates on our debt, with higher rates on the ABL Revolver over last year and the addition of the Term Loan, and a higher average debt balance during 2023.

LOSS ON EXTINGUISHMENT OF DEBT AND WRITE-OFF OF DEBT ISSUANCE COSTS

In connection with the settlement of our Term Loan on February 8, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

In connection with the settlement of our previous senior secured term loan agreement ("Previous Term Loan") on February 8, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

As a result of the replacement of the ABL Revolver during 2022, we also wrote off $0.2 million of debt issuance costs.

The effective tax rate was negative 2.0% for 2022, as compared to a positive 10.7% for 2021.

The rate for 2022 was the result of releasing $55.7 million of the valuation allowance partially offset by the permanent tax adjustments, primarily non-deductible compensation.

The rate for 2021 was 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 2020 return reflecting implemented tax strategies.

The effective tax rate was a positive 27.3% for 2023, as compared to a negative 2.0% for 2022.

The effective tax rate for 2023 differed from the statutory rate primarily due to non-deductible compensation offset by other permanent adjustments.

The effective tax rate for 2022 differed from the statutory rate as a result of releasing $55.7 million of the valuation allowance partially offset by the permanent tax adjustments, primarily non-deductible compensation.

LIQUIDITY AND CAPITAL RESOURCES

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

Our working capital and inventory levels fluctuate seasonally.

During 2022, we repurchased 10.7 million Class A common shares at an aggregate cost of $147.5 million.

As of January 28, 2023, $187.4 million of Class A common shares remained available for repurchase under the share repurchase program.

During 2021 , we did not repurchase any Class A common shares.

In the fourth quarter of 2022, we received $120.3 million of our income tax receivable from the Internal Revenue Service as a result of the Coronavirus Aid, Relief, and Economic Security Act.

We expect to receive the remaining income tax receivable of $44.0 million within the next 12 months.

On December 13, 2022, we acquired a 79.4% ownership interest in Topo for $19.1 million in cash.

We have an exclusive call option to purchase the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of two years following the close of the transaction.

The noncontrolling interest holders also have a put option with respect to the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of three years following the close of the transaction.

The redemption price is defined in the operating agreement and is based primarily on a fixed multiple of Topo's trailing 12 months of adjusted earnings before interest, taxes, depreciation, amortization, and other agreed upon adjustments.

On February 4, 2023, we completed the acquisition of the Keds business from Wolverine World Wide, Inc.

for $123.3 million, funded with available cash and borrowings on the ABL Revolver.

During 2023, the following significant transactions impacted our liquidity:

• On February 4, 2023, we completed the acquisition of Keds for $127.3 million in cash consideration, funded with available cash and borrowings on the ABL Revolver.

• On February 28, 2023, the ABL Revolver was amended to increase the available capacity under the revolving line of credit from $550.0 million to $600.0 million and to add a first-in last-out term loan ("FILO Term Loan") of up to $30.0 million, which was drawn in full, subject to a borrowing base.

• On June 23, 2023, we entered into a Term Loan and borrowed $135.0 million during 2023.

• We repurchased an aggregate of 9.7 million Class A common shares, including open market purchases and purchases under a modified "Dutch Auction" tender offer, at an aggregate cost of $102.2 million, including transaction costs and excise tax.

As of February 3, 2024, $87.7 million of Class A common shares remained available for repurchase under the share repurchase program.

The following table summarizes our material undiscounted cash requirements for 2024 and future fiscal years thereafter, and provides reference for each item to the relevant note of the consolidated financial statements of this Form 10-K:

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Note 14 $ 36,097 $ 143,649 $ 179,746

In addition to the above, we have an exclusive call option and the noncontrolling interest holders have a put option with respect to our purchase of the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of three years following the close of the transaction, which was December 13, 2022.

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 impacts of the global economic conditions on our results of operations.

We believe that cash generated from our operations, together with our current levels of cash, as well as the availability of our ABL Revolver, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund acquisitions and capital expenditures, and repurchase common shares under our share repurchase program over the next 12 months and beyond.

We believe that cash generated from our operations, together with our current levels of cash, as well as the availability under our ABL Revolver and Term Loan, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund acquisitions and capital expenditures, repurchase common shares under our share repurchase program, and meet our debt service obligations over the next 12 months and beyond.

The following table presents the key categories of our consolidated statements of cash flows:

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Net cash used in investing activities (182,493) (88,117) (94,376)

Net cash used in financing activities (128,479) (121,490) (6,989)

Net cash provided by (used in) financing activities 10,479 (128,479) 138,958

Effect of exchange rate changes on cash balances 22 (523) 545

Net increase (decrease) in cash, cash equivalents, and restricted cash $ (15,693) $ 14,878 $ (30,571)

Net decrease in cash, cash equivalents, and restricted cash $ (9,593) $ (15,693) $ 6,100

OPERATING CASH FLOWS

The increase in net cash provided by operations was largely driven by the receipt of $120.3 million of our income tax receivable from the Internal Revenue Service during 2022.

This was partially offset by higher spend on working capital due to earlier receipts with normal vendor payment terms this year compared to last year when we experienced shipping delays and extended vendor payment terms as a result of the impacts of the COVID-19 pandemic.

In addition, net income recognized during 2022 was lower than last year after adjusting for non-cash activity, including changes in deferred income taxes, depreciation and amortization, stock-based compensation expense, and the loss from extinguishment of debt and write-off of debt issuance costs.

The decrease in net cash provided by operations was largely driven by the receipt of $120.3 million of our income tax receivable from the Internal Revenue Service during 2022 and the decrease in net income recognized in 2023 over last year, after adjusting for non-cash activity including depreciation and amortization and the loss on extinguishment of debt and write-off of debt issuance costs.

These were partially offset by lower spend on working capital due to the decreased investment in inventory with the slowdown in net sales, as discussed above in the results of operations, and the timing of payments on current liabilities.

INVESTING CASH FLOWS

For 2022, net cash used in investing activities was primarily due to capital expenditures of $55.0 million relating to infrastructure and IT projects, new stores, store improvements, the acquisition of Topo for $19.1 million, and our investment in Le Tigre for $8.2 million.

For 2021, the net cash used in investing activities was primarily due to capital expenditures of $33.0 million relating to infrastructure and IT projects, new stores, and store improvements.

For 2023, net cash used in investing activities was primarily due to the acquisition of Keds for $127.3 million and capital expenditures of $55.0 million relating to infrastructure and IT projects, new stores, and store improvements.

For 2022, the net cash used in investing activities was primarily due to capital expenditures of $55.0 million relating to infrastructure and IT projects, new stores, store improvements, the acquisition of Topo for $19.1 million, and our investment in Le Tigre for $8.2 million.

FINANCING CASH FLOWS

During 2022, the net cash used in financing activities was due to the payment of $238.2 million for the settlement of the Term Loan, the repurchase of 10.7 million Class A common shares at an aggregate cost of $147.5 million, and the payment of dividends of $13.5 million, partially offset by the net receipts of $281.0 million from our revolving lines of credit.

During 2021, the net cash used in financing activities was due to net payments of $100.0 million from our revolving lines of credit and payments of $12.5 million on the Term Loan.

ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which provides a revolving line of credit of up to $550.0 million, including a Canadian sub-limit of up to $55.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $55.0 million sub-limit for swing-loan advances for U.S.

For 2023, the net cash provided by financing activities was due to proceeds from the issuance of the Term Loan of $135.0 million and the net receipts of $20.0 million from our ABL Revolver, partially offset by the repurchase of 9.7 million Class A common shares at an aggregate cost of $102.2 million, including transaction costs and excise tax, payments of $17.5 million for taxes for stock-based compensation shares withheld, payments of dividends of $12.2 million, and payments of debt issuance costs of $10.7 million.

For 2022, the net cash used in financing activities was due to the payment of $238.2 million for the settlement of the Previous Term Loan, the repurchase of 10.7 million Class A common shares at an aggregate cost of $147.5 million, and the payment of dividends of $13.5 million, partially offset by the net receipts of $281.0 million from our revolving lines of credit.

ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which was subsequently amended on February 28, 2023 and June 23, 2023.

The amended ABL Revolver provides a revolving line of credit of up to $600.0 million, including a Canadian sub-limit of up to $60.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $60.0 million sub-limit for swing-loan advances for U.S.

borrowings, and a $6.0 million sub-limit for swing-loan advances for Canadian borrowings.

Our ABL Revolver matures in March 2027 and is secured by a first-priority lien on substantially all of our personal property assets, including credit card receivables and inventory.

The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement.

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 January 28, 2023, the ABL Revolver had a borrowing base of $529.9 million, with $281.0 million in outstanding borrowings and $5.0 million in letters of credit issued, resulting in $243.9 million available for borrowings.

Debt Covenants- As of January 28, 2023, the ABL Revolver required us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $41.3 million or 10.0% of the maximum borrowing amount.

The ABL Revolver also contains customary covenants restricting certain activities, including limitations on our 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 based on availability.

As of January 28, 2023, we were in compliance with all financial covenants contained in the ABL Revolver.

ABL Revolver Amendment- On February 28, 2023, the ABL Revolver was amended to increase the available capacity under the revolving line of credit from $550.0 million to $600.0 million and to add a first-in last-out term loan (the "FILO Term Loan") of up to $30.0 million, which was drawn in full on the date of the amendment, subject to a borrowing base.

In addition, the ABL Revolver includes a FILO Term Loan of up to $30.0 million, which was drawn in full on February 28, 2023.

The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied.

Once repaid, no portion of the FILO Term Loan may be reborrowed.

The maturity date of the ABL Revolver did not change and is applicable to the FILO Term Loan.

The ABL Revolver was also amended to change the period during which we are required to maintain a fixed charge coverage ratio of not less than 1:1 when availability is less than the greater of $47.3 million or 10% of the maximum borrowing amount .

Termination of Term Loan - On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Term Loan.

In connection with this settlement, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

The ABL Revolver, which matures in 2027, may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement.

As of February 3, 2024, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $437.0 million, with $271.1 million in outstanding borrowings a nd $5.0 million in letters of credit issued, resulting in $160.9 million av ailable for borrowings.

Term Loan - On June 23, 2023, we entered into the Term Loan and have since borrowed the maximum aggregate amount of $135.0 million.

The Term Loan matures at the earliest of the date the ABL Revolver matures (currently March 2027) or five years from closing of the Term Loan (June 2028).

Debt Covenants- The ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $47.3 million or 10.0% of the maximum borrowing amount.

At any time that liquidity is less than $100.0 million, the Term Loan requires a maximum consolidated net leverage ratio as of the last day of each fiscal month, calculated on a trailing twelve-month basis, of (1) 2.25 to 1.00 for any trailing twelve-month period through February 3, 2024, and (2) 2.50 to 1.00 thereafter.

Testing of the consolidated net leverage ratio ends after liquidity has been greater than or equal to $100.0 million for a period of 45 consecutive days.

The ABL Revolver and the Term Loan also contain customary covenants restricting certain activities, including limitations on our 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 based on availability.

As of February 3, 2024, we were in compliance with all financial covenants contained in the ABL Revolver and the Term Loan.

Termination of Previous Term Loan - On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Previous Term Loan.

In connection with this settlement, during 2022 we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

Refer to Note 12, Debt , of the consolidated financial statements of this Form 10-K for further information about our debt arrangements.

CAPITAL EXPENDITURE PLANS

We expect to spend approximately $50.0 million to $70.0 million for capital expenditures in 2023.

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

RECENT ACCOUNTING PRONOUNCEMENTS

There are no recent accounting pronouncements that are expected to have a material impact to our consolidated financial statements when adopted.

CRITICAL ACCOUNTING ESTIMATES

PLANS FOR CAPITALIZED COSTS

During 2024, we expect to spend approximately $65.0 million to $75.0 million that will be capitalized for property and equipment and implementation costs for cloud computing arrangements accounted for as service contracts.

O ur future investments will depend primarily on the number of stores we open and remodel, infrastructure and IT projects that we undertake, and the timing of these expenditures.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The information related to recently issued accounting pronouncements as set forth in Note 1, Description of Business and Significant Accounting Policies - Recently Issued Accounting Pronouncements , 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, Description of Business and 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.

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

The shrink reserve 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.

The shrink reserve is calculated as a percentage of net 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.

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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 January 28, 2023, we had $93.7 million of goodwill within the U.S.

Retail segment, which is also the reporting unit, and $14.9 million in indefinite-lived tradenames within the Canada Retail segment.

In addition, we have an immaterial amount of goodwill as a result of the Topo acquisition in the fourth quarter of 2022 that is based on certain preliminary valuations and analysis.

We performed a qualitative impairment assessment for the goodwill in the U.S.

Retail segment and determined it is not more likely than not that there is an impairment.

In addition, we determined that the fair values 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 of February 3, 2024, we had goodwill of $93.7 million, $25.8 million, and $4.3 million for the U.S.

Retail, Keds, and Topo reporting units, respectively.

As of the fourth quarter measurement date, we determined the fair value of the U.S.

Retail and Topo reporting units were in excess of their carrying value and a 10% decrease in fair value would not result in an impairment charge.

The goodwill for the Keds reporting unit was a result of the acquisition of Keds in 2023 with the final allocation of the total considerations completed in the fourth quarter of 2023, and its fair value was in excess of its carrying value by approximately 9% as of the fourth quarter measurement date.

As of February 3, 2024, we had indefinite-lived tradenames of $46.9 million and $14.8 million within the Brand Portfolio segment and Canada Retail segment, respectively.

The indefinite-lived tradename within the Brand Portfolio segment was a result of the acquisition of Keds with the final allocation of the total considerations completed in the fourth quarter of 2023, and its fair value was in excess of its carrying value by approximately 10% as of the fourth quarter measurement period.

We determined that the fair value of the indefinite-lived tradename within the Canada Retail segment was in excess of the carrying value and a 10% decrease in fair value would not result in an 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.

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

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

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 January 28, 2023, a change in our discount rate of 100 basis points would have changed the recorded operating lease assets and liabilities by approximately $23.0 million.

Policy Judgments and Estimates Effect if Actual Results

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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 January 28, 2023, our deferred tax assets were reserved with a valuation allowance of $14.0 million.

As of February 3, 2024, our deferred tax assets were reserved with a valuation allowance of $12.1 million.

We also had gross unrecognized tax benefits of $16.4 million.

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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