UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~May 1,~~July 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from						to

Commission file number 001-32545


DESIGNER BRANDS INC.
(Exact name of registrant as specified in its charter)

Ohio

31-0746639

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

810 DSW Drive,

Columbus,

Ohio

43219

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code: (614) 237-7100


Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Shares, without par value	DBI	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

Number of shares outstanding of each of the registrant's classes of common stock, as of ~~May 21,~~August 24, 2021: ~~65,135,378~~65,266,904 Class A common shares and 7,732,743 Class B common shares.

Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q") may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "could," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to those factors described under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (the "2020 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 22, 2021, and otherwise in our reports and filings with the SEC, there are a number of important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements including, but not limited to, the following:

•risks and uncertainty related to the continued outbreak of the coronavirus ("COVID-19"), any future COVID-19 resurgence, and any other adverse public health developments;

•risks related to losses or disruptions associated with our distribution systems, including our distribution and fulfillment centers and our stores, whether as a result of COVID-19, supply chain disruptions, reliance on third-party providers, cyber-related attacks, or otherwise;

•our ability to protect the health and safety of our associates and our customers, which may be affected by current or future government regulations related to stay-at-home orders and orders related to the operation of non-essential businesses;

•risks related to our international operations, including international trade, our reliance on foreign sources for merchandise and related supply chain disruptions, exposure to political, economic, operational, compliance and other risks, and fluctuations in foreign currency exchange rates;

•maintaining strong relationships with our vendors, manufacturers, licensors, and retailer customers;

•our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;

•risks related to restrictions on our senior secured asset-based revolving credit facility ("ABL Revolver") and senior secured term loan ("Term Loan") that could limit our ability to fund operations;

•our reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty;

•failure to retain our key executives or attract qualified new personnel;

•risks related to the loss or disruption of our information systems and data and our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data;

•our ability to comply with privacy laws and regulations, as well as other legal obligations;

•our ability to protect our reputation and to maintain the brands we license;

•uncertain general economic, political and social conditions and the related impacts to consumer discretionary spending;

•our competitiveness with respect to style, price, brand availability and customer service;

•our ability to provide customers cost-effective shopping platforms; and

•uncertainty related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance or achievements may vary materially from what we have projected. Furthermore, new factors emerge from time to time and it is not possible for management to predict all such factors, nor can management assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

DESIGNER BRANDS INC.

TABLE OF CONTENTS


			Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations			1
Condensed Consolidated Statements of Comprehensive Income (Loss)			2
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Shareholders' Equity			4
Condensed Consolidated Statements of Cash Flows			5
Notes to the Condensed Consolidated Financial Statements			6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			2326
Item 4. Controls and Procedures			2326
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			2426
Item 1A. Risk Factors			2426
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			2427
Item 3. Defaults Upon Senior Securities			2427
Item 4. Mine Safety Disclosures			2427
Item 5. Other Information			2427
Item 6. Exhibits			2427
Signature			2528

All references to "we," "us," "our," "Designer Brands," "Designer Brands Inc.," or the "Company" in this Form 10-Q mean Designer Brands Inc. and its subsidiaries.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)


		Three months ended			Three months ended						Six months ended
			May 1, 2021			May 2, 2020			July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Net sales	Net sales		$	703,155		$	482,783	Net sales	$	817,335	$	489,714	$	1,520,490	$	972,497
Cost of sales	Cost of sales		(487,044)			(509,243)		Cost of sales	(532,654)		(452,672)		(1,019,698)		(961,915)
Gross profit (loss)			216,111			(26,460)
Gross profit								Gross profit	284,681		37,042		500,792		10,582
Operating expenses	Operating expenses		(200,814)			(187,221)		Operating expenses	(224,385)		(168,424)		(425,199)		(355,645)
Income from equity investment	Income from equity investment		1,708			2,270		Income from equity investment	2,290		2,153		3,998		4,423
Impairment charges	Impairment charges		0			(112,547)		Impairment charges	(1,174)		(6,735)		(1,174)		(119,282)
Operating profit (loss)	Operating profit (loss)		17,005			(323,958)		Operating profit (loss)	61,412		(135,964)		78,417		(459,922)
Interest expense, net	Interest expense, net		(8,814)			(2,158)		Interest expense, net	(8,072)		(3,788)		(16,886)		(5,946)
Non-operating income (expenses), net	Non-operating income (expenses), net		806			(87)		Non-operating income (expenses), net	(244)		743		562		656
Income (loss) before income taxes	Income (loss) before income taxes		8,997			(326,203)		Income (loss) before income taxes	53,096		(139,009)		62,093		(465,212)
Income tax benefit			8,029			110,345
Income tax benefit (provision)								Income tax benefit (provision)	(10,236)		40,795		(2,207)		151,140
Net income (loss)	Net income (loss)		$	17,026		$	(215,858)	Net income (loss)	$	42,860	$	(98,214)	$	59,886	$	(314,072)
Basic and diluted earnings (loss) per share:	Basic and diluted earnings (loss) per share:							Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share	Basic earnings (loss) per share		$	0.23		$	(3.00)	Basic earnings (loss) per share	$	0.59	$	(1.36)	$	0.82	$	(4.36)
Diluted earnings (loss) per share	Diluted earnings (loss) per share		$	0.22		$	(3.00)	Diluted earnings (loss) per share	$	0.55	$	(1.36)	$	0.78	$	(4.36)
Weighted average shares used in per share calculations:	Weighted average shares used in per share calculations:							Weighted average shares used in per share calculations:
Basic shares	Basic shares		72,613			71,914		Basic shares	72,932		72,142		72,773		72,028
Diluted shares	Diluted shares		76,976			71,914		Diluted shares	77,619		72,142		77,271		72,028

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited and in thousands)


		Three months ended			Three months ended						Six months ended
			May 1, 2021			May 2, 2020			July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Net income (loss)	Net income (loss)		$	17,026		$	(215,858)	Net income (loss)	$	42,860	$	(98,214)	$	59,886	$	(314,072)
Other comprehensive income (loss), net of income taxes:	Other comprehensive income (loss), net of income taxes:							Other comprehensive income (loss), net of income taxes:
Foreign currency translation gain (loss)	Foreign currency translation gain (loss)		543			(3,541)		Foreign currency translation gain (loss)	(298)		1,290		245		(2,251)
Unrealized net gain on debt securities	Unrealized net gain on debt securities		0			195		Unrealized net gain on debt securities	—		—		—		195
Reclassification adjustment for net gains realized in net loss	Reclassification adjustment for net gains realized in net loss		0			(368)		Reclassification adjustment for net gains realized in net loss	—		—		—		(368)
Total other comprehensive income (loss), net of income taxes	Total other comprehensive income (loss), net of income taxes		543			(3,714)		Total other comprehensive income (loss), net of income taxes	(298)		1,290		245		(2,424)
Total comprehensive income (loss)	Total comprehensive income (loss)		$	17,569		$	(219,572)	Total comprehensive income (loss)	$	42,562	$	(96,924)	$	60,131	$	(316,496)

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands)


		May 1, 2021		January 30, 2021		May 2, 2020			July 31, 2021		January 30, 2021		August 1, 2020
ASSETS	ASSETS							ASSETS
Cash and cash equivalents	Cash and cash equivalents	$	49,301	$	59,581	$	250,874	Cash and cash equivalents	$	46,458	$	59,581	$	206,720

Receivables, net	Receivables, net	213,447		196,049		81,953		Receivables, net	199,371		196,049		49,240
Inventories	Inventories	540,088		473,183		533,638		Inventories	504,316		473,183		445,044
Prepaid expenses and other current assets	Prepaid expenses and other current assets	60,461		51,772		82,742		Prepaid expenses and other current assets	53,616		51,772		69,456
Total current assets	Total current assets	863,297		780,585		949,207		Total current assets	803,761		780,585		770,460
Property and equipment, net	Property and equipment, net	284,823		296,469		359,841		Property and equipment, net	271,401		296,469		332,730
Operating lease assets	Operating lease assets	686,704		700,481		799,482		Operating lease assets	676,665		700,481		797,413
Goodwill	Goodwill	93,655		93,655		93,655		Goodwill	93,655		93,655		93,655
Intangible assets, net	Intangible assets, net	16,131		15,635		13,908		Intangible assets, net	15,905		15,635		15,663
Deferred tax assets	Deferred tax assets	0		0		139,269		Deferred tax assets	—		—		182,866
Equity investment	Equity investment	57,012		58,598		57,538		Equity investment	55,149		58,598		56,690
Other assets	Other assets	30,843		31,172		24,941		Other assets	29,513		31,172		23,780
Total assets	Total assets	$	2,032,465	$	1,976,595	$	2,437,841	Total assets	$	1,946,049	$	1,976,595	$	2,273,257
LIABILITIES AND SHAREHOLDERS' EQUITY	LIABILITIES AND SHAREHOLDERS' EQUITY							LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	Accounts payable	$	341,819	$	245,071	$	283,054	Accounts payable	$	299,322	$	245,071	$	224,693
Accrued expenses	Accrued expenses	195,237		200,326		231,359		Accrued expenses	222,055		200,326		202,831
Current maturities of long-term debt	Current maturities of long-term debt	62,500		62,500		0		Current maturities of long-term debt	62,500		62,500		—
Current operating lease liabilities	Current operating lease liabilities	200,666		244,786		218,313		Current operating lease liabilities	190,853		244,786		241,694
Total current liabilities	Total current liabilities	800,222		752,683		732,726		Total current liabilities	774,730		752,683		669,218
Long-term debt	Long-term debt	274,887		272,319		393,000		Long-term debt	184,569		272,319		393,000
Non-current operating lease liabilities	Non-current operating lease liabilities	663,018		677,735		788,704		Non-current operating lease liabilities	645,136		677,735		778,826
Other non-current liabilities	Other non-current liabilities	31,526		30,841		25,305		Other non-current liabilities	30,502		30,841		25,586
Total liabilities	Total liabilities	1,769,653		1,733,578		1,939,735		Total liabilities	1,634,937		1,733,578		1,866,630
Commitments and contingencies	Commitments and contingencies			0		0		Commitments and contingencies			0		0
0Shareholders' equity:	0Shareholders' equity:							0Shareholders' equity:
Common shares paid-in capital, no par value	Common shares paid-in capital, no par value	992,379		990,153		975,304		Common shares paid-in capital, no par value	998,117		990,153		980,749
Treasury shares, at cost	Treasury shares, at cost	(515,065)		(515,065)		(515,065)		Treasury shares, at cost	(515,065)		(515,065)		(515,065)
Retained earnings (deficit)		(211,759)		(228,785)		44,076
Retained deficit								Retained deficit	(168,899)		(228,785)		(54,138)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(2,743)		(3,286)		(6,209)		Accumulated other comprehensive loss	(3,041)		(3,286)		(4,919)
Total shareholders' equity	Total shareholders' equity	262,812		243,017		498,106		Total shareholders' equity	311,112		243,017		406,627
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	2,032,465	$	1,976,595	$	2,437,841	Total liabilities and shareholders' equity	$	1,946,049	$	1,976,595	$	2,273,257

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited and in thousands, except per share data)


		Number of shares			Amounts											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			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 July 31, 2021															Three months ended July 31, 2021
Balance, May 1, 2021															Balance, May 1, 2021	65,134	7,733	22,169	$	992,379	$	(515,065)	$	(211,759)	$	(2,743)	$	262,812
Net income															Net income	—	—	—	—		—		42,860		—		42,860
Stock-based compensation activity															Stock-based compensation activity	102	—	—	5,738		—		—		—		5,738

Foreign currency translation adjustment															Foreign currency translation adjustment	—	—	—	—		—		—		(298)		(298)
Balance, July 31, 2021															Balance, July 31, 2021	65,236	7,733	22,169	$	998,117	$	(515,065)	$	(168,899)	$	(3,041)	$	311,112
Three months ended August 1, 2020															Three months ended August 1, 2020
Balance, May 2, 2020															Balance, May 2, 2020	64,302	7,733	22,169	$	975,304	$	(515,065)	$	44,076	$	(6,209)	$	498,106
Net loss															Net loss	—	—	—	—		—		(98,214)		—		(98,214)
Stock-based compensation activity															Stock-based compensation activity	276	—	—	5,445		—		—		—		5,445

Three months ended May 1, 2021
Foreign currency translation adjustment															Foreign currency translation adjustment	—	—	—	—		—		—		1,290		1,290
Balance, August 1, 2020															Balance, August 1, 2020	64,578	7,733	22,169	$	980,749	$	(515,065)	$	(54,138)	$	(4,919)	$	406,627
Six months ended July 31, 2021															Six months ended July 31, 2021
Balance, January 30, 2021	Balance, January 30, 2021	64,666	7,733	22,169	$	990,153	$	(515,065)	$	(228,785)	$	(3,286)	$	243,017	Balance, January 30, 2021	64,666	7,733	22,169	$	990,153	$	(515,065)	$	(228,785)	$	(3,286)	$	243,017
Net income	Net income	—	—	—	—		—		17,026		—		17,026		Net income	—	—	—	—		—		59,886		—		59,886
Stock-based compensation activity	Stock-based compensation activity	468	—	—	2,226		—		—		—		2,226		Stock-based compensation activity	570	—	—	7,964		—		—		—		7,964

Other comprehensive income		—	—	—	—		—		—		543		543
Balance, May 1, 2021		65,134	7,733	22,169	$	992,379	$	(515,065)	$	(211,759)	$	(2,743)	$	262,812
Three months ended May 2, 2020
Foreign currency translation adjustment															Foreign currency translation adjustment	—	—	—	—		—		—		245		245
Balance, July 31, 2021															Balance, July 31, 2021	65,236	7,733	22,169	$	998,117	$	(515,065)	$	(168,899)	$	(3,041)	$	311,112
Six months ended August 1, 2020															Six months ended August 1, 2020
Balance, February 1, 2020	Balance, February 1, 2020	64,033	7,733	22,169	$	971,380	$	(515,065)	$	267,094	$	(2,495)	$	720,914	Balance, February 1, 2020	64,033	7,733	22,169	$	971,380	$	(515,065)	$	267,094	$	(2,495)	$	720,914
Net loss	Net loss	—	—	—	—		—		(215,858)		—		(215,858)		Net loss	—	—	—	—		—		(314,072)		—		(314,072)
Stock-based compensation activity	Stock-based compensation activity	269	—	—	3,924		—		—		—		3,924		Stock-based compensation activity	545	—	—	9,369		—		—		—		9,369

Dividends ($0.10 per share)	Dividends ($0.10 per share)	—	—	—	—		—		(7,160)		—		(7,160)		Dividends ($0.10 per share)	—	—	—	—		—		(7,160)		—		(7,160)
Other comprehensive loss	Other comprehensive loss	—	—	—	—		—		—		(3,714)		(3,714)		Other comprehensive loss	—	—	—	—		—		—		(2,424)		(2,424)
Balance, May 2, 2020		64,302	7,733	22,169	$	975,304	$	(515,065)	$	44,076	$	(6,209)	$	498,106
Balance, August 1, 2020															Balance, August 1, 2020	64,578	7,733	22,169	$	980,749	$	(515,065)	$	(54,138)	$	(4,919)	$	406,627

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)


		Three months ended					Six months ended
		May 1, 2021		May 2, 2020			July 31, 2021		August 1, 2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income (loss)	Net income (loss)	$	17,026	$	(215,858)	Net income (loss)	$	59,886	$	(314,072)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:						Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	20,575		23,133		Depreciation and amortization	40,257		44,075
Stock-based compensation expense	Stock-based compensation expense	7,457		4,917		Stock-based compensation expense	13,365		10,596
Deferred income taxes	Deferred income taxes	320		(109,308)		Deferred income taxes	100		(152,988)
Income from equity investment	Income from equity investment	(1,708)		(2,270)		Income from equity investment	(3,998)		(4,423)
Distributions received from equity investment	Distributions received from equity investment	3,294		2,493		Distributions received from equity investment	7,447		5,493
Impairment charges	Impairment charges	0		112,547		Impairment charges	1,174		119,282

Gain on settlement						Gain on settlement	—		(8,990)
Other	Other	(341)		340		Other	800		403
Change in operating assets and liabilities:	Change in operating assets and liabilities:					Change in operating assets and liabilities:
Accounts receivable	Accounts receivable	(8,160)		6,999		Accounts receivable	5,859		30,699
Income tax receivable	Income tax receivable	(9,066)		0		Income tax receivable	(9,066)		—
Inventories	Inventories	(65,215)		96,588		Inventories	(30,114)		186,965
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(8,524)		(15,014)		Prepaid expenses and other current assets	(612)		(847)
Accounts payable	Accounts payable	94,469		(11,816)		Accounts payable	53,009		(67,282)
Accrued expenses	Accrued expenses	(5,439)		37,421		Accrued expenses	21,546		26,693
Operating lease assets and liabilities, net	Operating lease assets and liabilities, net	(46,044)		30,359		Operating lease assets and liabilities, net	(63,424)		44,777
Net cash used in operating activities		(1,356)		(39,469)
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	96,229		(79,619)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Cash paid for property and equipment	Cash paid for property and equipment	(5,641)		(14,625)		Cash paid for property and equipment	(13,189)		(22,141)

Sales of available-for-sale investments	Sales of available-for-sale investments	0		24,612		Sales of available-for-sale investments	—		24,755

Proceeds from settlement						Proceeds from settlement	—		4,166
Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	(5,641)		9,987		Net cash provided by (used in) investing activities	(13,189)		6,780
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Borrowing on revolving line under Credit Facility	Borrowing on revolving line under Credit Facility	0		251,000		Borrowing on revolving line under Credit Facility	—		251,000
Payments on revolving line under Credit Facility	Payments on revolving line under Credit Facility	0		(48,000)		Payments on revolving line under Credit Facility	—		(48,000)
Borrowing under ABL Revolver	Borrowing under ABL Revolver	250,513		0		Borrowing under ABL Revolver	342,053		—
Payments on borrowings under ABL Revolver	Payments on borrowings under ABL Revolver	(245,670)		0		Payments on borrowings under ABL Revolver	(425,243)		—

Payments on borrowings under Term Loan	Payments on borrowings under Term Loan	(3,125)		0		Payments on borrowings under Term Loan	(6,251)		—

Dividends paid	Dividends paid	0		(7,160)		Dividends paid	—		(7,160)
Other	Other	(5,307)		(1,940)		Other	(5,514)		(2,646)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(3,589)		193,900		Net cash provided by (used in) financing activities	(94,955)		193,194
Effect of exchange rate changes on cash balances	Effect of exchange rate changes on cash balances	306		(108)		Effect of exchange rate changes on cash balances	338		(199)
Net increase (decrease) in cash and cash equivalents		(10,280)		164,310
Cash and cash equivalents, beginning of period		59,581		86,564
Cash and cash equivalents, end of period		$	49,301	$	250,874
Net increase (decrease) in cash, cash equivalents and restricted cash						Net increase (decrease) in cash, cash equivalents and restricted cash	(11,577)		120,156
Cash, cash equivalents and restricted cash, beginning of period						Cash, cash equivalents and restricted cash, beginning of period	59,581		86,564
Cash, cash equivalents and restricted cash, end of period						Cash, cash equivalents and restricted cash, end of period	$	48,004	$	206,720
Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash received for income taxes		$	3,926	$	31
Cash paid (received) for income taxes						Cash paid (received) for income taxes	$	(3,372)	$	165
Cash paid for interest on debt	Cash paid for interest on debt	$	7,042	$	2,105	Cash paid for interest on debt	$	13,437	$	5,606
Cash paid for operating lease liabilities	Cash paid for operating lease liabilities	$	95,079	$	24,983	Cash paid for operating lease liabilities	$	162,602	$	62,262
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Property and equipment purchases not yet paid	Property and equipment purchases not yet paid	$	2,875	$	9,478	Property and equipment purchases not yet paid	$	2,320	$	1,981
Operating lease liabilities arising from lease asset additions	Operating lease liabilities arising from lease asset additions	$	7,588	$	9,408	Operating lease liabilities arising from lease asset additions	$	11,109	$	9,408
Net increase (decrease) to operating lease assets and lease liabilities for modifications		$	16,760	$	(15,849)
Net increase to operating lease assets and lease liabilities for modifications						Net increase to operating lease assets and lease liabilities for modifications	$	45,723	$	23,195

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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 3 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 ~~in some cases handbags,~~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. 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~~changes 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 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 ~~restructuring costs discussed~~severance discussion below.

Although operating results have improved throughout the first half of fiscal 2021, we continue to experience adverse impacts due to COVID-19, including temporary store closures, reduced hours and other requirements in certain areas where government-imposed restrictions were mandated, and global supply chain challenges. Our retail customers in the Brand Portfolio segment have had and are having similar experiences.

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Following the re-opening of stores, we experienced and have continued to experience significantly reduced customer traffic and net sales from historic periods prior to COVID-19, 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. 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 and reduced customer traffic resulted in a sharp decline in our net sales and cash flows.

~~During the first quarter of fiscal 2020, as~~As a result of the material reduction in net sales and cash flows during fiscal 2020, we ~~performed~~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 ~~May 2,~~August 1, 2020, we recorded an impairment charge of $6.7 million for the U.S. Retail segment. During the six months ended August 1, 2020, we recorded impairment charges of ~~$84.9~~$92.8 million ($~~65.2~~73.1 million and $19.7 million for the U.S. Retail segment and Canada Retail segment, respectively). Also during the ~~three~~six months ended ~~May 2,~~August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).

As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers and the decrease in the Company's market capitalization due to the impact of ~~the~~ COVID-19 ~~outbreak~~ on macroeconomic conditions, we 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 ~~three~~six months ended ~~May 2,~~August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

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. ~~During the first quarter of fiscal 2020,~~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.~~season and reduced traffic experienced since re-opening stores. During the ~~three~~six months ended ~~May 2,~~August 1, 2020, we recorded ~~$84.0~~$64.0 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 and continue to be provided. During the three months ended ~~May 1,~~July 31, 2021 and ~~May 2,~~August 1, 2020, the qualified government credits reduced our operating expenses by $~~2.7~~1.0 million and $3.5 million, respectively, on our condensed consolidated statements of operations. During the six months ended July 31, 2021 and August 1, 2020, the qualified government credits reduced our operating expenses by $3.7 million and ~~$4.5~~$7.9 million, respectively, on our condensed consolidated statements of operations. As of ~~May 1,~~July 31, 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 included 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 COVID-19, we are in a three-year cumulative loss position as

~~Table of Contents~~

~~DESIGNER BRANDS INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

of ~~May 1,~~July 31, 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 ~~33.8%~~32.5% for the ~~three~~six months ended ~~May 2,~~

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

August 1, 2020 ~~to negative 89.2%~~to 3.6% for the ~~three~~six months ended ~~May 1,~~July 31, 2021. The ~~negative~~ rate for the ~~three~~six months ended ~~May 1,~~July 31, 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. The rate for the ~~three~~six months ended ~~May 2,~~August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.

The impacts from the COVID-19 pandemic ~~remains~~remain challenging and unpredictable. While trends improved during the first half of fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by COVID-19 and to what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or if COVID-19 will result in long-term changes in consumer behavior. 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.~~operations. As such, the ultimate impacts of ~~the~~ COVID-19 ~~outbreak~~ to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the ~~widespread~~variants of COVID-19, and the global availability ~~use~~ and ~~effectiveness~~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.

~~Restructuring Costs-~~Severance- During the three months ended ~~May 1,~~July 31, 2021 and ~~May 2,~~August 1, 2020, we incurred ~~restructuring costs, which consisted primarily~~severance costs of ~~severance of $1.4~~$1.2 million and ~~$1.7~~$7.3 million, respectively. During the six months ended July 31, 2021 and August 1, 2020, we incurred severance costs of $2.6 million and $9.0 million, respectively. These costs are included in operating expenses in the condensed consolidated ~~statements~~statements of operations. As of ~~May 1,~~July 31, 2021, January 30, 2021 and ~~May 2,~~August 1, 2020, we had accrued severance of ~~$5.1~~$4.9 million, $6.5 millionand ~~$2.6~~$8.4 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.

Gain on Settlement- During the three months ended August 1, 2020, we recognized a gain of $9.0 million, recorded to operating expenses in the condensed consolidated statements of operations, due to a settlement with a vendor for costs incurred on internal-use software that was capitalized and impaired in a previous fiscal year. During the three months ended August 1, 2020, we collected $4.2 million, net of legal costs incurred, and recorded a $4.8 million receivable included in receivables, net, on the condensed consolidated balance sheets, which has been subsequently received.

Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands 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 COVID-19. 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 represented 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)	July 31, 2021		January 30, 2021		August 1, 2020
Cash and cash equivalents	$	46,458	$	59,581	$	206,720
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	$	48,004	$	59,581	$	206,720

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 and our previous senior unsecured revolving credit agreement ("Credit Facility") approximated the carrying value. As of ~~May 1,~~July 31, 2021, the fair value of borrowings under our Term Loan was ~~$250.6~~$250.2 million compared to the carrying value of ~~$240.6~~$237.5 million. ~~The~~The fair value of debt borrowings was estimated based on current interest rates offered for similar instruments (categorized as Level 2)2 under the fair value hierarchy).

Impairment of Long-Lived Assets- Refer to section above, Impact of COVID-19, regarding impairment charges of long-lived assets during fiscal 2020. During the three months ended July 31, 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				Six months ended
(in thousands)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Net sales:
U.S. Retail segment:
Women's footwear	$	467,518	$	253,539	$	872,818	$	513,102
Men's footwear	168,218		85,012		300,165		155,367
Kids' footwear	54,112		32,232		108,844		61,415
Accessories and other	33,245		23,194		61,924		41,166
	723,093		393,977		1,343,751		771,050
Canada Retail segment:
Women's footwear	30,230		25,329		50,661		41,301
Men's footwear	15,805		13,970		25,333		20,773
Kids' footwear	9,554		8,231		19,067		13,787
Accessories and other	1,996		2,052		3,128		3,050
	57,585		49,582		98,189		78,911
Brand Portfolio segment:
Wholesale	42,715		15,563		91,358		82,867
Commission income	2,377		5,018		5,708		10,141
Direct-to-consumer	5,437		9,877		10,890		19,563
	50,529		30,458		107,956		112,571
Other	—		22,266		—		35,889
Total segment net sales	831,207		496,283		1,549,896		998,421
Elimination of intersegment sales	(13,872)		(6,569)		(29,406)		(25,924)
Total net sales	$	817,335	$	489,714	$	1,520,490	$	972,497

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~2. REVENUE~~

~~Disaggregation of Net Sales-~~ ~~The following table presents net sales disaggregated by product and service category for each segment:~~

Three months ended
(in thousands) May 1, 2021 May 2, 2020
Net sales:
U.S. Retail segment:
Women's footwear $ 405,300 $ 259,563
Men's footwear 131,947 70,355
Kids' footwear 54,732 29,183
Accessories and other 28,679 17,972
620,658 377,073
Canada Retail segment:
Women's footwear 20,431 15,972
Men's footwear 9,528 6,803
Kids' footwear 9,513 5,556
Accessories and other 1,132 998
40,604 29,329
Brand Portfolio segment:
Wholesale 48,643 67,304
Commission income 3,331 5,123
Direct-to-consumer 5,453 9,686
57,427 82,113
Other 0 13,623
Total segment net sales 718,689 502,138
Elimination of intersegment sales (15,534) (19,355)
Total net sales $ 703,155 $ 482,783

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			Three months ended						Six months ended
(in thousands)	(in thousands)		May 1, 2021			May 2, 2020		(in thousands)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Gift cards:	Gift cards:							Gift cards:
Beginning of period	Beginning of period		$	34,442		$	35,461	Beginning of period	$	30,809	$	30,908	$	34,442	$	35,461
Gift cards redeemed and breakage recognized to net sales	Gift cards redeemed and breakage recognized to net sales		(17,170)			(13,525)		Gift cards redeemed and breakage recognized to net sales	(19,210)		(11,343)		(36,380)		(24,868)
Gift cards issued	Gift cards issued		13,537			8,972		Gift cards issued	17,092		10,354		30,629		19,326
End of period	End of period		$	30,809		$	30,908	End of period	$	28,691	$	29,919	$	28,691	$	29,919
Loyalty programs:	Loyalty programs:							Loyalty programs:
Beginning of period	Beginning of period		$	11,379		$	16,138	Beginning of period	$	12,955	$	14,568	$	11,379	$	16,138
Loyalty certificates redeemed and expired and other adjustments recognized to net sales	Loyalty certificates redeemed and expired and other adjustments recognized to net sales		(4,896)			(6,609)		Loyalty certificates redeemed and expired and other adjustments recognized to net sales	(6,008)		(4,277)		(10,904)		(10,886)
Deferred revenue for loyalty points issued	Deferred revenue for loyalty points issued		6,472			5,039		Deferred revenue for loyalty points issued	8,308		4,506		14,780		9,545
End of period	End of period		$	12,955		$	14,568	End of period	$	15,255	$	14,797	$	15,255	$	14,797

~~Table of Contents~~

~~DESIGNER BRANDS INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

3. RELATED PARTY TRANSACTIONS

Schottenstein Affiliates

As of ~~May 1,~~July 31, 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 ~~May 1,~~July 31, 2021, the Schottenstein Affiliates beneficially owned approximately 17% of the Company's outstanding common shares, representing approximately 52% of the combined voting power, consisting of, in the aggregate, ~~4.7~~4.8 million Class A common shares and 7.7 million Class B ~~common~~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 ~~May 1,~~July 31, 2021 and ~~May 2,~~August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $2.7 million and ~~$2.8~~$2.6 million, respectively. During the six months ended July 31, 2021 and August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $5.4 million and $5.3 million, respectively. As of ~~May 1,~~July 31, 2021, January 30, 2021 and ~~May 2,~~August 1, 2020, we had related party current operating lease liabilities of ~~$6.8~~$6.4 million, $8.0 million and ~~$7.1~~$7.9 million, respectively, and non-current operating lease liabilities of ~~$22.9~~$21.3 million, $24.6 million and ~~$30.5~~$28.5 million, respectively.

Other Purchases and Services- During the three months ended ~~May 1,~~July 31, 2021 and ~~May 2,~~August 1, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.1 million and $1.2 million, respectively. During both the six months ended July 31, 2021 and August 1, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of ~~$1.4 million and $1.3 million, respectively.~~$2.5 million.

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 both the three months ended ~~May 1,~~July 31, 2021 and ~~May 2,~~August 1, 2020, we recorded royalty expense ~~payable~~for amounts paid to ABG-Camuto of ~~$4.6~~$4.6 million. During the six months ended July 31, 2021 and August 1, 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $9.2 million and ~~$4.4~~$9.0 million, respectively. Amounts due to ABG-Camuto were immaterial for all periods presented.

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		Three months ended				Six months ended
(in thousands)	(in thousands)		May 1, 2021		May 2, 2020	(in thousands)	July 31, 2021	August 1, 2020	July 31, 2021	August 1, 2020
Weighted average basic shares outstanding	Weighted average basic shares outstanding		72,613		71,914	Weighted average basic shares outstanding	72,932	72,142	72,773	72,028
Dilutive effect of stock-based compensation awards	Dilutive effect of stock-based compensation awards		4,363		0	Dilutive effect of stock-based compensation awards	4,687	—	4,498	—
Weighted average diluted shares outstanding	Weighted average diluted shares outstanding		76,976		71,914	Weighted average diluted shares outstanding	77,619	72,142	77,271	72,028

For the three months ended ~~May 1,~~July 31, 2021 and ~~May 2,~~August 1, 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 ~~3.6~~2.9 million and ~~5.6~~5.9 million, respectively. For the six months ended July 31, 2021 and August 1, 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 5.5 million, respectively.

~~Table of Contents~~

~~DESIGNER BRANDS INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

5. STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:


		Three months ended			Three months ended						Six months ended
(in thousands)	(in thousands)		May 1, 2021			May 2, 2020		(in thousands)	July 31, 2021		August 1, 2020		July 31, 2021		August 1, 2020
Stock options	Stock options		$	253		$	463	Stock options	$	132	$	407	$	385	$	870
Restricted and director stock units	Restricted and director stock units		7,204			4,454		Restricted and director stock units	5,776		5,272		12,980		9,726
			$	7,457		$	4,917		$	5,908	$	5,679	$	13,365	$	10,596

The following table summarizes the stock-based compensation award activity for RSUs for the ~~three~~six months ended ~~May 1,~~July 31, 2021:


		Number of shares			Number of shares
(in thousands)	(in thousands)	Time-Based RSUs	Performance-Based RSUs	(in thousands)	Time-Based RSUs	Performance-Based RSUs
Outstanding - beginning of period	Outstanding - beginning of period	6,445	540	Outstanding - beginning of period	6,445	540
Granted	Granted	984	0	Granted	1,033	—
Exercised / vested		(461)	(359)
Forfeited / expired		(24)	0
Vested				Vested	(512)	(359)
Forfeited				Forfeited	(225)	(17)
Outstanding - end of period	Outstanding - end of period	6,944	181	Outstanding - end of period	6,741	164

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 1 vote per share and holders of Class B common shares are entitled to 8 votes per share on matters submitted to shareholders for approval.

~~The following table provides additional information for our common shares:~~

May 1, 2021 January 30, 2021 May 2, 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 87,303 7,733 86,835 7,733 86,471 7,733
Outstanding shares 65,134 7,733 64,666 7,733 64,302 7,733
Treasury shares 22,169 0 22,169 0 22,169 0

~~We have authorized 100 million shares of 0 par value preferred shares, with 0 shares issued for any of the periods presented.~~

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table provides additional information for our common shares:


	July 31, 2021		January 30, 2021		August 1, 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	87,405	7,733	86,835	7,733	86,747	7,733
Outstanding shares	65,236	7,733	64,666	7,733	64,578	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- ~~Changes~~For the six months ended August 1, 2020, changes for the balances of each component of accumulated other comprehensive loss, net of tax, were as follows ~~(all amounts are net~~(for all other periods presented, the change was due to foreign currency translation adjustments as shown in the condensed consolidated statements of ~~tax)~~shareholders' equity):


		Three months ended
		May 1, 2021						May 2, 2020
(in thousands)	(in thousands)	Foreign Currency Translation		Available-for-Sale Securities		Total		Foreign Currency Translation		Available-for-Sale Securities		Total		(in thousands)	Foreign Currency Translation		Available-for-Sale Securities		Total
Accumulated other comprehensive income (loss) - beginning of period	Accumulated other comprehensive income (loss) - beginning of period	$	(3,286)	$	0	$	(3,286)	$	(2,668)	$	173	$	(2,495)	Accumulated other comprehensive income (loss) - beginning of period	$	(2,668)	$	173	$	(2,495)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	543		0		543		(3,541)		195		(3,346)		Other comprehensive income (loss) before reclassifications	(2,251)		195		(2,056)
Amounts reclassified to non-operating income (expenses), net		0		0		0		0		(368)		(368)
Other comprehensive income (loss)		543		0		543		(3,541)		(173)		(3,714)
Amounts reclassified to non-operating income, net														Amounts reclassified to non-operating income, net	—		(368)		(368)
Other comprehensive loss														Other comprehensive loss	(2,251)		(173)		(2,424)
Accumulated other comprehensive loss - end of period	Accumulated other comprehensive loss - end of period	$	(2,743)	$	0	$	(2,743)	$	(6,209)	$	0	$	(6,209)	Accumulated other comprehensive loss - end of period	$	(4,919)	$	—	$	(4,919)

7. RECEIVABLES

Receivables, net, consisted of the following:


(in thousands)	(in thousands)	May 1, 2021		January 30, 2021		May 2, 2020		(in thousands)	July 31, 2021		January 30, 2021		August 1, 2020
Customer accounts receivables:	Customer accounts receivables:							Customer accounts receivables:
Serviced by third-party provider with guaranteed payment	Serviced by third-party provider with guaranteed payment	$	38,572	$	29,615	$	46,694	Serviced by third-party provider with guaranteed payment	$	27,638	$	29,615	$	20,268
Serviced by third-party provider without guaranteed payment	Serviced by third-party provider without guaranteed payment	323		363		637		Serviced by third-party provider without guaranteed payment	76		363		739
Serviced in-house	Serviced in-house	3,558		4,576		5,702		Serviced in-house	2,665		4,576		6,248
Income tax receivable	Income tax receivable	158,890		149,824		0		Income tax receivable	158,890		149,824		—
Other receivables	Other receivables	13,305		12,865		31,467		Other receivables	11,295		12,865		23,973
Total receivables	Total receivables	214,648		197,243		84,500		Total receivables	200,564		197,243		51,228
Allowance for doubtful accounts	Allowance for doubtful accounts	(1,201)		(1,194)		(2,547)		Allowance for doubtful accounts	(1,193)		(1,194)		(1,988)
		$	213,447	$	196,049	$	81,953		$	199,371	$	196,049	$	49,240

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill- ~~Activity related~~The following table presents the changes to ~~our~~ goodwill ~~was as follows:~~by segment:


		Three months ended													Six months ended
		May 1, 2021						May 2, 2020							July 31, 2021						August 1, 2020
(in thousands)	(in thousands)	Goodwill		Accumulated Impairments		Net		Goodwill		Accumulated Impairments		Net		(in thousands)	Goodwill		Accumulated Impairments		Net		Goodwill		Accumulated Impairments		Net
Beginning of period by segment:	Beginning of period by segment:													Beginning of period by segment:
U.S. Retail	U.S. Retail	$	93,655	$	0	$	93,655	$	93,655	$	0	$	93,655	U.S. Retail	$	93,655	$	—	$	93,655	$	93,655	$	—	$	93,655
Canada Retail	Canada Retail	43,086		(43,086)		0		41,610		(41,610)		0		Canada Retail	43,086		(43,086)		—		41,610		(41,610)		—
Brand Portfolio	Brand Portfolio	19,989		(19,989)		0		19,989		0		19,989		Brand Portfolio	19,989		(19,989)		—		19,989		—		19,989
		156,730		(63,075)		93,655		155,254		(41,610)		113,644			156,730		(63,075)		93,655		155,254		(41,610)		113,644
Activity by segment:	Activity by segment:													Activity by segment:

Canada Retail-	Canada Retail-													Canada Retail-
Currency translation adjustment	Currency translation adjustment	1,735		(1,735)		0		(2,467)		2,467		0		Currency translation adjustment	1,098		(1,098)		—		(534)		534		—
Brand Portfolio-	Brand Portfolio-													Brand Portfolio-
Impairment charges		—		0		0		—		(19,989)		(19,989)
Impairment charge														Impairment charge	—		—		—		—		(19,989)		(19,989)

		1,735		(1,735)		0		(2,467)		(17,522)		(19,989)			1,098		(1,098)		—		(534)		(19,455)		(19,989)
End of period by segment:	End of period by segment:													End of period by segment:
U.S. Retail	U.S. Retail	93,655		0		93,655		93,655		0		93,655		U.S. Retail	93,655		—		93,655		93,655		—		93,655
Canada Retail	Canada Retail	44,821		(44,821)		0		39,143		(39,143)		0		Canada Retail	44,184		(44,184)		—		41,076		(41,076)		—
Brand Portfolio	Brand Portfolio	19,989		(19,989)		0		19,989		(19,989)		0		Brand Portfolio	19,989		(19,989)		—		19,989		(19,989)		—
		$	158,465	$	(64,810)	$	93,655	$	152,787	$	(59,132)	$	93,655		$	157,828	$	(64,173)	$	93,655	$	154,720	$	(61,065)	$	93,655

Intangible Assets- Intangible assets consisted of the following:


(in thousands)	(in thousands)	Cost		Accumulated Amortization		Net		(in thousands)	Cost		Accumulated Amortization		Net
May 1, 2021
July 31, 2021								July 31, 2021
Definite-lived customer relationships	Definite-lived customer relationships	$	1,465	$	(1,465)	$	0	Definite-lived customer relationships	$	1,444	$	(1,444)	$	—
Indefinite-lived trademarks and tradenames	Indefinite-lived trademarks and tradenames	16,131		—		16,131		Indefinite-lived trademarks and tradenames	15,905		—		15,905
		$	17,596	$	(1,465)	$	16,131		$	17,349	$	(1,444)	$	15,905
January 30, 2021	January 30, 2021							January 30, 2021
Definite-lived customer relationships	Definite-lived customer relationships	$	2,909	$	(2,791)	$	118	Definite-lived customer relationships	$	2,909	$	(2,791)	$	118
Indefinite-lived trademarks and tradenames	Indefinite-lived trademarks and tradenames	15,517		—		15,517		Indefinite-lived trademarks and tradenames	15,517		—		15,517
		$	18,426	$	(2,791)	$	15,635		$	18,426	$	(2,791)	$	15,635
May 2, 2020
August 1, 2020								August 1, 2020
Definite-lived customer relationships	Definite-lived customer relationships	$	2,780	$	(2,353)	$	427	Definite-lived customer relationships	$	2,843	$	(2,507)	$	336
Indefinite-lived trademarks and tradenames	Indefinite-lived trademarks and tradenames	13,481		—		13,481		Indefinite-lived trademarks and tradenames	15,327		—		15,327
		$	16,261	$	(2,353)	$	13,908		$	18,170	$	(2,507)	$	15,663

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)	(in thousands)	May 1, 2021		January 30, 2021		May 2, 2020		(in thousands)	July 31, 2021		January 30, 2021		August 1, 2020
Gift cards	Gift cards	$	30,809	$	34,442	$	30,908	Gift cards	$	28,691	$	34,442	$	29,919
Accrued compensation and related expenses	Accrued compensation and related expenses	29,945		49,864		13,700		Accrued compensation and related expenses	49,037		49,864		29,422
Accrued taxes	Accrued taxes	32,093		24,206		21,628		Accrued taxes	35,030		24,206		22,624
Loyalty programs deferred revenue	Loyalty programs deferred revenue	12,955		11,379		14,568		Loyalty programs deferred revenue	15,255		11,379		14,797
Sales returns	Sales returns	20,422		17,333		47,625		Sales returns	19,204		17,333		20,713
Customer allowances and discounts	Customer allowances and discounts	5,276		4,579		5,600		Customer allowances and discounts	2,103		4,579		8,644
Other	Other	63,737		58,523		97,330		Other	72,735		58,523		76,712
		$	195,237	$	200,326	$	231,359		$	222,055	$	200,326	$	202,831

10. DEBT

Debt consisted of the following:


(in thousands)	(in thousands)	May 1, 2021		January 30, 2021		May 2, 2020		(in thousands)	July 31, 2021		January 30, 2021		August 1, 2020
ABL Revolver	ABL Revolver	$	104,843	$	100,000	$	0	ABL Revolver	$	16,810	$	100,000	$	—
Term Loan	Term Loan	240,625		243,750		0		Term Loan	237,500		243,750		—
Credit Facility	Credit Facility	0		0		393,000		Credit Facility	—		—		393,000
Total debt	Total debt	345,468		343,750		393,000		Total debt	254,310		343,750		393,000
Less unamortized Term Loan debt issuance costs	Less unamortized Term Loan debt issuance costs	(8,081)		(8,931)		0		Less unamortized Term Loan debt issuance costs	(7,241)		(8,931)		—
Less current maturities of long-term debt	Less current maturities of long-term debt	(62,500)		(62,500)		0		Less current maturities of long-term debt	(62,500)		(62,500)		—
Long-term debt	Long-term debt	$	274,887	$	272,319	$	393,000	Long-term debt	$	184,569	$	272,319	$	393,000

ABL Revolver- On August 7, 2020, we replaced our Credit Facility with the ABL Revolver, which provides a revolving line of credit of up to $400.0 million, including a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of letters of credit, a $40.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Term Loan. The amount of credit available is limited to a borrowing base ~~based~~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 ~~May 1,~~July 31, 2021, the ABL Revolver had a borrowing base of ~~$400.0~~$386.1 million, with ~~$104.8~~$16.8 million outstanding and $5.3 million in letters of credit issued, resulting in ~~$289.9~~$364.0 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 ~~May 1,~~July 31, 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 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.

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~Table of Contents~~

~~DESIGNER BRANDS INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

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 ~~May 1,~~July 31, 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. 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 ~~May 1,~~July 31, 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 onan 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 ~~May 1,~~July 31, 2021, the total future minimum lease payment requirements for these guarantees were approximately ~~$14.4~~$13.3 million.

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)	(in thousands)	U.S. Retail		Canada Retail		Brand Portfolio		Other		Corporate/Eliminations		Total		(in thousands)	U.S. Retail		Canada Retail		Brand Portfolio		Other		Corporate/Eliminations		Total

Three months ended May 1, 2021
Three months ended July 31, 2021														Three months ended July 31, 2021
Net sales:	Net sales:													Net sales:
External customer sales	External customer sales	$	620,658	$	40,604	$	41,893	$	0	$	0	$	703,155	External customer sales	$	723,093	$	57,585	$	36,657	$	—	$	—	$	817,335
Intersegment sales	Intersegment sales	—		—		15,534		—		(15,534)		—		Intersegment sales	—		—		13,872		—		(13,872)		—
Total net sales	Total net sales	$	620,658	$	40,604	$	57,427	$	0	$	(15,534)	$	703,155	Total net sales	$	723,093	$	57,585	$	50,529	$	—	$	(13,872)	$	817,335
Gross profit	Gross profit	$	193,113	$	10,835	$	11,926	$	0	$	237	$	216,111	Gross profit	$	256,893	$	18,768	$	8,533	$	—	$	487	$	284,681
Income from equity investment	Income from equity investment	$	0	$	0	$	1,708	$	0	$	0	$	1,708	Income from equity investment	$	—	$	—	$	2,290	$	—	$	—	$	2,290
Three months ended May 2, 2020
Three months ended August 1, 2020														Three months ended August 1, 2020
Net sales:	Net sales:													Net sales:
External customer sales	External customer sales	$	377,073	$	29,329	$	62,758	$	13,623	$	0	$	482,783	External customer sales	$	393,977	$	49,582	$	23,889	$	22,266	$	—	$	489,714
Intersegment sales	Intersegment sales	—		—		19,355		—		(19,355)		—		Intersegment sales	—		—		6,569		—		(6,569)		—
Total net sales	Total net sales	$	377,073	$	29,329	$	82,113	$	13,623	$	(19,355)	$	482,783	Total net sales	$	393,977	$	49,582	$	30,458	$	22,266	$	(6,569)	$	489,714
Gross profit (loss)	Gross profit (loss)	$	(32,970)	$	(2,311)	$	13,904	$	(5,428)	$	345	$	(26,460)	Gross profit (loss)	$	40,097	$	5,650	$	(11,440)	$	118	$	2,617	$	37,042
Income from equity investment	Income from equity investment	$	0	$	0	$	2,270	$	0	$	0	$	2,270	Income from equity investment	$	—	$	—	$	2,153	$	—	$	—	$	2,153
Six months ended July 31, 2021														Six months ended July 31, 2021
Net sales:														Net sales:
External customer sales														External customer sales	$	1,343,751	$	98,189	$	78,550	$	—	$	—	$	1,520,490
Intersegment sales														Intersegment sales	—		—		29,406		—		(29,406)		—
Total net sales														Total net sales	$	1,343,751	$	98,189	$	107,956	$	—	$	(29,406)	$	1,520,490
Gross profit														Gross profit	$	450,006	$	29,603	$	20,459	$	—	$	724	$	500,792
Income from equity investment														Income from equity investment	$	—	$	—	$	3,998	$	—	$	—	$	3,998
Six months ended August 1, 2020														Six months ended August 1, 2020
Net sales:														Net sales:
External customer sales														External customer sales	$	771,050	$	78,911	$	86,647	$	35,889	$	—	$	972,497
Intersegment sales														Intersegment sales	—		—		25,924		—		(25,924)		—
Total net sales														Total net sales	$	771,050	$	78,911	$	112,571	$	35,889	$	(25,924)	$	972,497
Gross profit (loss)														Gross profit (loss)	$	7,127	$	3,339	$	2,464	$	(5,310)	$	2,962	$	10,582
Income from equity investment														Income from equity investment	$	—	$	—	$	4,423	$	—	$	—	$	4,423

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview and Trends in our Business

Operating profit in the second quarter of fiscal 2021 surpassed pre-COVID-19 levels with growth of 49% compared to the second quarter of 2019. This growth came despite the lingering effects of COVID-19, including global supply chain challenges. The volatile macro environment and ~~business conditions~~supply chain disruptions have required us to be nimble and quickly adapt our business model. ~~The business returned~~

As we look ahead to ~~profitability~~our strategic growth, we have organized our efforts around three pillars: Customer, Brand and Speed:

•Customer- More than ever, our customers have a great desire for products and experiences, and we are adding resources to our digital, IT and analytics teams to understand precisely what they want and what can be improved to provide the best possible experience. Undertaking these actions will enable us to better understand our customers, provide improved service, and target new demographics in targeted and personalized ways that we have never deployed before. We are also developing new ideas for how we can provide more value to our VIP rewards members who continue to be the ~~first quarter~~lifeblood of ~~fiscal 2021 for the first time since the onset of COVID-19. 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-19 negatively impacted North America and global economics, resulting in a drop in demand for~~ our products, specifically in the seasonal and dress categories. Although the seasonal and dress categories remain depressed from pre-COVID-19 levels, we are beginning to see strengthened results and we are responding to the increased demand with increased production within our Camuto Group business. We implemented inventory management actions that enabled us to reduce the number of markdowns in the first quarter of fiscal 2021, which has allowed us to invest more in direct marketing.largest competitive differentiator.

•~~Changing Consumer Preferences-~~Brand- 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 andControlling our own brand destiny is critical for our growth. As we continue to ~~see opportunity ahead~~design some of ~~us given our historic under-penetration~~the best brands in the ~~athleisure space. Our business model remains flexible~~industry, Vince Camuto, Jessica Simpson, Lucky Brand and JLO Jennifer Lopez, we ~~were able~~are combining that with our strong direct-to-consumer distribution through our physical footprint in North America and digital infrastructure. We are also partnering with some of the top brands in the industry to ~~increase production~~offer one of the largest and most broad assortments. We remain focused on investing in some of the top 50 brands ~~produced by Camuto Group~~in footwear and will continue to ~~match emerging demand in seasonal and dress categories during the first quarter of fiscal 2021.~~prioritize growing our own brands.

•~~Strength~~Speed- Moving quickly is of the utmost importance to consumers. We are developing processes to deliver products more quickly. Fulfillment of digital customer orders takes 5 to 7 business days and we are working to improve that to 2 to 3 calendar days while simultaneously finding efficiencies to contain costs. We are optimizing our current infrastructure and expanding our delivery partnerships. We are also working to improve collaboration through technology and processes across our organization and to gain additional efficiencies in ~~Digital-~~ ~~With store traffic continuing to trend lower than pre-COVID-19 levels,~~ 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 continued to serve us well as our customers look for convenient ways to shop. We were able to generate strong digital demand during the first quarter of fiscal 2021, well above the digital demand for the same period last year.overall development cycle.

We ~~anticipate that adapting to operating as a digital-focused retailer will~~ have a ~~lasting influence on how~~proven track record of staying ahead of trends to ensure our success, despite some of the challenges we ~~operate moving forward. In addition, we believe that our increased penetration in the athletic market, coupled with our historical success in dress~~face, including COVID-19 variants and ~~seasonal and a fully integrated~~ supply chain ~~supported by Camuto Group, position us well to be a premier footwear retailer for all of the family's needs over the long term.~~disruptions.

Impact of COVID-19 ~~on our Results of Operations~~

In ~~March 2020,~~response to the ~~World Health Organization declared~~sudden and significant impacts resulting from 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,pandemic, we took several actions ~~in late March~~during the first quarter of fiscal 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~~changes 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 takenAlthough operating results have improved throughout ~~fiscal 2020 and into~~ the first ~~quarter~~half of fiscal 2021, ~~resulting in the elimination of approximately 1,000 associate positions.~~

~~Following the re-opening of stores,~~ we ~~experienced and have continued~~continue to experience ~~significantly reduced customer traffic and net sales from historic periods prior~~adverse impacts due to COVID-19, ~~which included subsequent~~including temporary store closures, ~~and~~ reduced hours and other requirements in certain areas ~~primarily in Canada,~~ where government-imposed restrictions were ~~mandated.~~mandated, and global supply chain challenges. Our retail customers in the Brand Portfolio segment have had and are having similar experiences. ~~Customer behavior has been~~The impacts from the COVID-19 pandemic remain challenging and ~~may~~unpredictable. While trends improved during the first half of fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be ~~slow~~affected by COVID-19 and to ~~return to pre-COVID-19 patterns~~what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and ~~levels,~~it is unclear whether these restrictions will continue and expand or 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 and reduced customer traffic resulted~~COVID-19 will result in ~~a sharp decline~~long-term changes in ~~our net sales and cash flows.~~

~~The COVID-19 pandemic remains challenging and unpredictable.~~consumer behavior. 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.~~operations. As such, the ultimate impacts of ~~the~~ COVID-19 ~~outbreak~~ to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the ~~widespread~~variants of COVID-19, and the global availability ~~use~~ and ~~effectiveness~~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.

Financial Summary and Other Key Metrics for the Second Quarter of Fiscal 2021

Net sales increased to ~~$703.2~~$817.3 million for the three months ended ~~May 1,~~July 31, 2021 from ~~$482.8~~$489.7 million for the three months ended ~~May 2,~~August 1, 2020. The ~~45.6%~~66.9% increase in net sales was primarily driven by ~~a 52.2%~~an 84.9% increase in comparable sales during the three months ended ~~May 1,~~July 31, 2021, ~~compared with depressed sales~~due to the fact that during the three months ended ~~May 2,~~August 1, 2020, many of our stores remained closed or, to the extent they reopened, experienced significantly reduced customer traffic since reopening. The higher net sales due to the ~~temporary closure of all stores beginning~~increase in ~~March 2020 and continuing through~~total comparable sales were partially offset by store closures, including those serviced in the ~~rest of~~Other segment. Also, during the first quarter of fiscal ~~2020. During the three months ended May 2,~~ 2020, we ~~also~~ maintained higher sales returns reserves ~~while~~with stores ~~were unavailable~~not being available to accept ~~returns. During~~returns, which resulted in significantly lower net sales. However, sales returns reserves normalized in the ~~three months ended May 1,~~second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 ~~we had lower~~as customer behavior has remained consistent. In addition, the Brand Portfolio segment net sales were higher in the quarter as compared to the second quarter of fiscal 2020 due to ~~reduced~~increased orders as our retailer customers ~~have shifted towards athletic and casual offerings.~~recover, but still below pre-COVID-19 levels.

During the three months ended ~~May 1,~~July 31, 2021, gross profit as a percentage of net sales was ~~30.7%~~34.8% as compared to ~~negative 5.5%~~7.6% for the same period last year. The ~~change to a~~improvement in gross profit ~~from a loss~~ was primarily driven by increased sales ~~during the quarter~~ as compared to the ~~first~~second quarter of fiscal 2020. In the ~~first~~second quarter of fiscal 2020, in response to the impacts of ~~the~~ COVID-19 ~~outbreak~~ on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings, with aggressive promotional ~~activity and significant inventory markdowns.~~activity. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the ~~first~~second quarter of fiscal 2021, tight inventory ~~management~~positions resulted in ~~being less promotional.~~fewer promotions. Accordingly, gross profit as a percentage of net sales for the ~~first~~second quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was ~~29.7%~~30.5% for the ~~first~~second quarter of fiscal 2019.

Net income for the three months ended ~~May 1,~~July 31, 2021 was ~~$17.0~~$42.9 million, or ~~$0.22~~$0.55 earnings per diluted share, which included net after-tax ~~benefits~~charges of ~~$7.6~~ $0.6 million, or ~~$0.10~~$0.01 per diluted share, primarily related to ~~the~~target acquisition costs, restructuring charges, impairment charges, and the change in the valuation allowance on deferred tax assets. Net loss for the three months ended ~~May 2,~~August 1, 2020 was ~~$215.9~~$98.2 million, or a loss of ~~$3.00~~$1.36 per diluted share, which included net after-tax charges of ~~$85.6~~$4.1 million, or ~~$1.19~~$0.05 per diluted share, primarily related to impairment charges and integration and restructuring ~~expenses.~~expenses, offset by a gain from a settlement with a vendor.

Comparable Sales Performance Metric

The following table presents the increase (decrease) in comparable sales for each segment and in total:


		Three months ended					Three months ended
		May 1, 2021		May 2, 2020			July 31, 2021		August 1, 2020
Comparable sales:	Comparable sales:					Comparable sales:
U.S. Retail segment	U.S. Retail segment	56.3	%	(42.4)	%	U.S. Retail segment	94.3	%	(44.9)	%
Canada Retail segment	Canada Retail segment	10.0	%	(32.4)	%	Canada Retail segment	14.6	%	(27.9)	%
Brand Portfolio segment - direct-to-consumer channel	Brand Portfolio segment - direct-to-consumer channel	6.8	%	92.8	%	Brand Portfolio segment - direct-to-consumer channel	10.6	%	120.5	%
Other	Other	NA		(62.0)	%	Other	NA		(36.2)	%
Total comparable sales	Total comparable sales	52.2	%	(42.3)	%	Total comparable sales	84.9	%	(42.7)	%

NA - Not applicable

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 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. 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, 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.

Number of Stores

At the end of the ~~first~~second quarter of fiscal 2021 and 2020, we had the following number of stores:


		May 1, 2021	May 2, 2020	July 31, 2021		August 1, 2020

U.S. Retail segment - DSW stores	U.S. Retail segment - DSW stores	516			521		U.S. Retail segment - DSW stores	515	522
Canada Retail segment:	Canada Retail segment:						Canada Retail segment:
The Shoe Company / Shoe Warehouse stores	The Shoe Company / Shoe Warehouse stores	118			118		The Shoe Company / Shoe Warehouse stores	116	117
DSW stores	DSW stores	27			27		DSW stores	27	27
		145			145			143	144
Total number of stores	Total number of stores	661			666		Total number of stores	658	666

Results of Operations

Comparison of the Three Months Ended ~~May 1,~~July 31, 2021 with the Three Months Ended ~~May 2,~~August 1, 2020

Three months ended
May 1, 2021 May 2, 2020 Change
(dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount %
Net sales $ 703,155 100.0 % $ 482,783 100.0 % $ 220,372 45.6 %
Cost of sales (487,044) (69.3) (509,243) (105.5) 22,199 (4.4) %
Gross profit (loss) 216,111 30.7 (26,460) (5.5) 242,571 NM
Operating expenses (200,814) (28.5) (187,221) (38.8) (13,593) 7.3 %
Income from equity investment 1,708 0.2 2,270 0.5 (562) (24.8) %
Impairment charges — — (112,547) (23.3) 112,547 NM
Operating profit (loss) 17,005 2.4 (323,958) (67.1) 340,963 NM
Interest expense, net (8,814) (1.2) (2,158) (0.5) (6,656) 308.4 %
Non-operating income (expenses), net 806 0.1 (87) (0.0) 893 NM
Income (loss) before income taxes 8,997 1.3 (326,203) (67.6) 335,200 NM
Income tax benefit 8,029 1.1 110,345 22.9 (102,316) (92.7) %
Net income (loss) $ 17,026 2.4 % $ (215,858) (44.7) % $ 232,884 NM
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share $ 0.23 $ (3.00) $ 3.23 NM
Diluted earnings (loss) per share $ 0.22 $ (3.00) $ 3.22 NM
Weighted average shares used in per share calculations:
Basic shares 72,613 71,914 699 1.0 %
Diluted shares 76,976 71,914 5,062 7.0 %


	Three months ended
	July 31, 2021				August 1, 2020				Change
(dollars in thousands, except per share amounts)	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Net sales	$	817,335	100.0	%	$	489,714	100.0	%	$	327,621	66.9	%
Cost of sales	(532,654)		(65.2)		(452,672)		(92.4)		(79,982)		17.7	%
Gross profit	284,681		34.8		37,042		7.6		247,639		668.5%
Operating expenses	(224,385)		(27.5)		(168,424)		(34.4)		(55,961)		33.2	%
Income from equity investment	2,290		0.3		2,153		0.4		137		6.4	%
Impairment charges	(1,174)		(0.1)		(6,735)		(1.4)		5,561		(82.6)%
Operating profit (loss)	61,412		7.5		(135,964)		(27.8)		197,376		NM
Interest expense, net	(8,072)		(1.0)		(3,788)		(0.8)		(4,284)		113.1	%
Non-operating income (expenses), net	(244)		(0.0)		743		0.2		(987)		NM
Income (loss) before income taxes	53,096		6.5		(139,009)		(28.4)		192,105		NM
Income tax benefit (provision)	(10,236)		(1.3)		40,795		8.3		(51,031)		NM
Net income (loss)	$	42,860	5.2	%	$	(98,214)	(20.1)	%	$	141,074	NM
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share	$	0.59			$	(1.36)			$	1.95	NM
Diluted earnings (loss) per share	$	0.55			$	(1.36)			$	1.91	NM
Weighted average shares used in per share calculations:
Basic shares	72,932				72,142				790		1.1	%
Diluted shares	77,619				72,142				5,477		7.6	%

NM - Not meaningful

Net Sales- The following summarizes net sales by segment:


		Three months ended				Change						Three months ended				Change
(dollars in thousands)	(dollars in thousands)	May 1, 2021		May 2, 2020		Amount		%		Comparable Sales %	(dollars in thousands)	July 31, 2021		August 1, 2020		Amount		%		Comparable Sales %
Segment net sales:	Segment net sales:										Segment net sales:
U.S. Retail	U.S. Retail	$	620,658	$	377,073	$	243,585	64.6	%	56.3%	U.S. Retail	$	723,093	$	393,977	$	329,116	83.5	%	94.3%
Canada Retail	Canada Retail	40,604		29,329		11,275		38.4	%	10.0%	Canada Retail	57,585		49,582		8,003		16.1	%	14.6%
Brand Portfolio	Brand Portfolio	57,427		82,113		(24,686)		(30.1)	%	6.8%	Brand Portfolio	50,529		30,458		20,071		65.9	%	10.6%
Other	Other	—		13,623		(13,623)		(100.0)	%	NA	Other	—		22,266		(22,266)		NM		NA
Total segment net sales	Total segment net sales	718,689		502,138		216,551		43.1	%	52.2%	Total segment net sales	831,207		496,283		334,924		67.5	%	84.9%
Elimination of intersegment net sales	Elimination of intersegment net sales	(15,534)		(19,355)		3,821		(19.7)	%		Elimination of intersegment net sales	(13,872)		(6,569)		(7,303)		111.2	%
Consolidated net sales	Consolidated net sales	$	703,155	$	482,783	$	220,372	45.6	%		Consolidated net sales	$	817,335	$	489,714	$	327,621	66.9	%

NA - Not applicable

NM - Not meaningful

The improvement in sales, including increases in comparable sales ~~for all segments~~ and in total consolidated net sales, during the three months ended July 31, 2021 over the same period last year was due to the ~~temporary closure~~fact that during the three months ended August 1, 2020, many of ~~all~~our stores ~~beginning in March 2020 and continuing through~~remained closed or, to the ~~rest~~extent they reopened, experienced significantly reduced customer traffic since re-opening. During a portion of the ~~first~~second quarter of fiscal ~~2020.~~2021, the Canada Retail segment was impacted by ongoing temporary closures and restrictions in certain key markets. The higher net sales due to the increase in total comparable sales was partially offset by store closures, including those serviced in the Other segment. Also, during the first quarter of fiscal 2020, we maintained higher sales returns reserves with stores not being available to accept returns, which resulted in significantly lower net sales. ~~During~~However, sales returns reserves normalized in the second quarter of fiscal 2020 as returns were not as high as expected, resulting in higher net sales. We did not have these significant changes in estimates between the first quarter and second quarter of fiscal 2021 ~~the sales returns rates normalized to pre-COVID-19 rates. The Canada Retail segment continues to be impacted by mandated closures and restrictions in certain key markets.~~as customer behavior has remained consistent. In addition, ~~we had lower~~the Brand Portfolio segment net sales were higher in the quarter as compared to the second quarter of fiscal 2020 due to ~~reduced~~increased orders as our retailer customers ~~have shifted towards athletic and casual offerings.~~recover, but still below pre-COVID-19 levels.

Gross ~~Profit (Loss)-~~Profit- The following summarizes gross profit (loss) by segment:


		Three months ended										Three months ended
		May 1, 2021				May 2, 2020						July 31, 2021		August 1, 2020
(dollars in thousands)	(dollars in thousands)	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Change			(dollars in thousands)	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Change
Segment gross profit (loss):	Segment gross profit (loss):												Segment gross profit (loss):
U.S. Retail	U.S. Retail	$	193,113	31.1	%	$	(32,970)	(8.7)	%	$	226,083		U.S. Retail	$	256,893	35.5	%	$	40,097	10.2	%	$	216,796
Canada Retail	Canada Retail	10,835		26.7	%	(2,311)		(7.9)	%	$	13,146		Canada Retail	18,768		32.6	%	5,650		11.4	%	$	13,118
Brand Portfolio	Brand Portfolio	11,926		20.8	%	13,904		16.9	%	$	(1,978)		Brand Portfolio	8,533		16.9	%	(11,440)		(37.6)	%	$	19,973
Other	Other	—		—	%	(5,428)		(39.8)	%	$	5,428		Other	—		—	%	118		0.5	%	$	(118)
		215,874				(26,805)								284,194				34,425
Elimination of intersegment gross profit	Elimination of intersegment gross profit	237				345							Elimination of intersegment gross profit	487				2,617
Gross profit (loss)		$	216,111	30.7	%	$	(26,460)	(5.5)	%	$	242,571
Gross profit													Gross profit	$	284,681	34.8	%	$	37,042	7.6	%	$	247,639

The ~~change to a~~improvement in gross profit ~~from a loss~~ was primarily driven by increased sales during the quarter as compared to the ~~first quarter of~~three months ended August 1, 2020. In the ~~first~~second quarter of fiscal 2020, in response to the impacts of ~~the~~ COVID-19 ~~outbreak~~ on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings with aggressive promotional ~~activity and significant inventory markdowns.~~activity. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the ~~first~~second quarter of fiscal 2021, tight inventory ~~management~~positions resulted in being less

promotional. Accordingly, gross profit as a percentage of net sales for the ~~first~~second quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was ~~29.7%~~30.5% for the ~~first~~second quarter of fiscal 2019. The Canada Retail ~~segment continues~~and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the quarter as compared to ~~be impacted by mandated closures and restrictions in certain key markets, which resulted in deleverage impacts to gross margin~~the same period last year, but remained below pre-COVID-19 levels when compared to ~~pre-COVID-19 gross margin rates. In addition,~~ the second quarter of fiscal 2019 due to the deleverage impacts of lower ~~Brand Portfolio segment sales also results in deleverage of fixed royalty expenses included within cost of~~net sales.

Elimination of intersegment gross profit consisted of the following:


		Three months ended				Three months ended
(in thousands)	(in thousands)	May 1, 2021		May 2, 2020			(in thousands)	July 31, 2021		August 1, 2020
Elimination of intersegment activity:	Elimination of intersegment activity:						Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment	Net sales recognized by Brand Portfolio segment	$	(15,534)	$	(19,355)		Net sales recognized by Brand Portfolio segment	$	(13,872)	$	(6,569)
Cost of sales:	Cost of sales:						Cost of sales:
Cost of sales recognized by Brand Portfolio segment	Cost of sales recognized by Brand Portfolio segment	10,935		12,134			Cost of sales recognized by Brand Portfolio segment	9,707		4,827
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	4,836		7,566			Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	4,652		4,359
Gross profit	Gross profit	$	237	$	345		Gross profit	$	487	$	2,617

Operating Expenses- For the three months ended ~~May 1,~~July 31, 2021, operating expenses increased by ~~$13.6~~$56.0 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave for most of the second quarter of fiscal 2020. Operating expenses during the second quarter of fiscal 2020 were offset by a gain from a settlement with a vendor of $9.0 million. Operating expenses as a percentage of sales improved to 27.5% compared to 34.4% in the same period last year but were still elevated compared to the pre-COVID-19 rate for the second quarter of fiscal 2019, which was 26.0% as a percentage of sales, primarily due to higher direct marketing and incentive compensation expense and lower sales in the Brand Portfolio segment.

Impairment Charges- During the three months ended July 31, 2021 and August 1, 2020, we evaluated certain long-lived assets based on our intent to use such assets going forward and, as a result, we recorded impairment charges of $1.2 million and $6.7 million, respectively.

Income Taxes- Our effective tax rate changed from 29.3% for the three months ended August 1, 2020 to 19.3% for the three months ended July 31, 2021. The rate for the three months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets. The rate for the three months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.

Comparison of the Six Months Ended July 31, 2021 with the Six Months Ended August 1, 2020


	Six months ended
	July 31, 2021				August 1, 2020				Change
(dollars in thousands, except per share amounts)	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Net sales	$	1,520,490	100.0	%	$	972,497	100.0	%	$	547,993	56.3	%
Cost of sales	(1,019,698)		(67.1)		(961,915)		(98.9)		(57,783)		6.0	%
Gross profit	500,792		32.9		10,582		1.1		490,210		4,632.5%
Operating expenses	(425,199)		(28.0)		(355,645)		(36.6)		(69,554)		19.6	%
Income from equity investment	3,998		0.3		4,423		0.5		(425)		(9.6)	%
Impairment charges	(1,174)		(0.1)		(119,282)		(12.3)		118,108		(99.0)%
Operating profit (loss)	78,417		5.1		(459,922)		(47.3)		538,339		NM
Interest expense, net	(16,886)		(1.1)		(5,946)		(0.6)		(10,940)		184.0	%
Non-operating income, net	562		0.0		656		0.1		(94)		(14.3)%
Income (loss) before income taxes	62,093		4.0		(465,212)		(47.8)		527,305		NM
Income tax benefit (provision)	(2,207)		(0.1)		151,140		15.5		(153,347)		NM
Net income (loss)	$	59,886	3.9	%	$	(314,072)	(32.3)	%	$	373,958	NM
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share	$	0.82			$	(4.36)			$	5.18	NM
Diluted earnings (loss) per share	$	0.78			$	(4.36)			$	5.14	NM
Weighted average shares used in per share calculations:
Basic shares	72,773				72,028				745		1.0	%
Diluted shares	77,271				72,028				5,243		7.3	%

NM - Not meaningful

Net Sales- The following summarizes net sales by segment:


	Six months ended				Change
(dollars in thousands)	July 31, 2021		August 1, 2020		Amount		%		Comparable Sales %
Segment net sales:
U.S. Retail	$	1,343,751	$	771,050	$	572,701	74.3	%	74.5%
Canada Retail	98,189		78,911		19,278		24.4	%	12.6%
Brand Portfolio	107,956		112,571		(4,615)		(4.1)	%	8.6%
Other	—		35,889		(35,889)		NM		NA
Total segment net sales	1,549,896		998,421		551,475		55.2	%	68.1%
Elimination of intersegment net sales	(29,406)		(25,924)		(3,482)		13.4	%
Consolidated net sales	$	1,520,490	$	972,497	$	547,993	56.3	%

NA - Not applicable

NM - Not meaningful

The increases in comparable sales for all segments and in total consolidated net sales was a result of the temporary closure of all stores beginning in March 2020 through much of the second quarter of fiscal 2020 and, since re-opening, we experienced significantly reduced customer traffic and net sales. During a portion of the first half of fiscal 2021, the Canada Retail segment was impacted by ongoing temporary closures and restrictions in certain key markets. The higher net sales due to the increase in total comparable sales was partially offset by store closures, including those serviced in the Other segment.

Gross Profit- The following summarizes gross profit (loss) by segment:


	Six months ended
	July 31, 2021				August 1, 2020
(dollars in thousands)	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Change
Segment gross profit (loss):
U.S. Retail	$	450,006	33.5	%	$	7,127	0.9	%	$	442,879
Canada Retail	29,603		30.1	%	3,339		4.2	%	$	26,264
Brand Portfolio	20,459		19.0	%	2,464		2.2	%	$	17,995
Other	—		—	%	(5,310)		(14.8)	%	$	5,310
	500,068				7,620
Elimination of intersegment gross profit	724				2,962
Gross profit	$	500,792	32.9	%	$	10,582	1.1	%	$	490,210

The improvement in gross profit was primarily driven by increased sales during the six months ended July 31, 2021 as compared to the same period last year. In the second quarter of fiscal 2020, in response to the impacts of COVID-19 on our operations, we addressed the temporary closure of stores and the subsequent reduction in customer traffic upon store re-openings with aggressive promotional activity. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the six months ended July 31, 2021, tight inventory positions resulted in fewer promotions. Accordingly, gross profit as a percentage of net sales for the six months ended July 31, 2021 tracked higher than the pre-COVID-19 rate, which was 30.1% for the same period in fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the six months ended July 31, 2021 as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the same period in fiscal 2019 due to the deleverage impacts of lower net sales.

Elimination of intersegment gross profit consisted of the following:


	Six months ended
(in thousands)	July 31, 2021		August 1, 2020
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment	$	(29,406)	$	(25,924)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment	20,642		16,961
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	9,488		11,925
Gross profit	$	724	$	2,962

Operating Expenses- For the six months ended July 31, 2021, operating expenses increased by $69.6 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to ~~the~~ COVID-19 ~~outbreak~~ for most of the first half of fiscal 2020. Operating expenses as a percentage of sales improved to ~~28.5%~~28.0% compared to ~~38.8%~~36.6% in the same period last year but were still elevated ~~compared~~compared to the pre-COVID-19 rate, ~~for the first quarter of fiscal 2019,~~ which was ~~24.9%~~25.4% as a percentage of ~~sales.~~sales for the same period in fiscal 2019, primarily due to higher direct marketing expense and incentive compensation and lower sales.

Impairment Charges- During the six months ended July 31, 2021, we recorded an impairment charge of $1.2 million for abandoned equipment we are replacing. As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores ~~beginning in~~during the ~~first quarter of fiscal~~six months ended August 1, 2020, we performed an impairment analysis at the store-level. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the ~~three~~six months ended ~~May 2,~~August 1, 2020, we recorded impairment charges of ~~$84.9~~$92.8 million for under-performing stores. ~~In addition,~~Also during the ~~three~~six months ended ~~May 2,~~August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life. ~~Also,~~Further, 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 performed an 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 the ~~three~~six months ended ~~May 2,~~August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

Income Taxes- Our effective tax rate changed from ~~33.8%~~32.5% for the ~~three~~six months ended ~~May 2,~~August 1, 2020 to ~~negative 89.2%~~3.6% for the ~~three~~six months ended ~~May 1,~~July 31, 2021. The ~~negative~~ rate for the ~~three~~six months ended ~~May 1,~~July 31, 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. The rate for the ~~three~~six months ended ~~May 2,~~August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.

Seasonality

Our business is generally subject to seasonal trends driven by the change in weather conditions and our customers' interest in new seasonal styles. New spring styles are primarily introduced in the first quarter and new fall styles are primarily introduced in the third quarter. Since the COVID-19 outbreak, we have not experienced the typical seasonal trends given the changes in customer behavior.

Liquidity and Capital Resources

Overview

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 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 the ~~three~~six months ended ~~May 1,~~July 31, 2021, net cash provided by operations was $96.2 million compared to net cash used in operations ~~was $1.4 million compared to $39.5~~of $79.6 million for the ~~three~~six months ended ~~May 2,~~August 1, 2020. The ~~decrease in cash used in operations~~change was dr~~iven~~driven by the net income recognized in the ~~first quarter of fiscal~~six months ended July 31, 2021 versus a net loss incurred during that same period last year as a result of ~~the~~ COVID-19, ~~outbreak,~~ after adjusting for non-cash activity including impairment charges and the change in deferred income taxes. This was partially offset by higher spend on working capital as business recovers from COVID-19 and the measures we implemented last year to manage our working capital to preserve liquidity, including delaying vendor and landlord payments while we renegotiate terms, reducing inventory orders, and significantly cutting costs.

Investing Cash Flows

For the ~~three~~six months ended ~~May 1,~~July 31, 2021, our net cash used in investing activities was ~~$5.6~~$13.2 million, which was due to capital ~~expenditures.~~ expenditures relating to infrastructure and IT projects and store improvements. During the ~~three~~six months ended ~~May 2,~~August 1, 2020, our net cash provided by investing activities was ~~$10.0~~$6.8 million, which was due to the liquidation of our available-for-sale securities and the proceeds from a settlement from a vendor partially offset by capital expenditures of ~~$14.6~~$22.1 million.

Financing Cash Flows

For the ~~three~~six months ended ~~May 1,~~July 31, 2021, our net cash used in financing activities was ~~$3.6~~$95.0 million compared to net cash provided by financing activities of ~~$193.9~~$193.2 million for the ~~three~~six months ended ~~May 2,~~August 1, 2020. During th~~During the three~~e six months ended ~~May 1,~~July 31, 2021, we had net ~~borrowings~~payments of ~~$4.8~~$83.2 million from the ABL Revolver ~~with~~and payments on the Term Loan of ~~$3.1~~$6.3 million. During the ~~three~~six months ended ~~May 2,~~August 1, 2020, we had net borrowings of $203.0 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~~uncertainty from COVID-19.

Debt

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 inventory and a second priority lien on personal property assets that constitute first priority collateral for the Term Loan. The amount of credit available is limited to a borrowing base ~~based~~formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain ~~reserves.~~reserves. As of ~~May 1,~~July 31, 2021, the ABL Revolver had a borrowing base of ~~$400.0~~$386.1 million, with ~~$104.8~~$16.8 million outstanding and $5.3 million in letters of credit issued, resulting in ~~$289.9~~$364.0 million available for borrowings.

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~~when including the amortization of debt issuance costs) as of ~~May 1,~~July 31, 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 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 covenants 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 ~~May 1,~~July 31, 2021, we were in compliance with all financial covenants.

Capital Expenditure Plans

We expect to spend approximately $35.0 million to $45.0 million for capital expenditures in fiscal 2021, of which we invested ~~$5.6~~$13.2 million during the ~~three~~six months ended ~~May 1,~~July 31, 2021. Our capital expenditures for the remainder of the year will depend primarily on the number of store projects, as well as infrastructure and ~~information technology~~IT projects that we undertake and the timing of these expenditures.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with 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 condensed 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 valuation 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 condensed 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 condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies disclosed in our 2020 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2020 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this Form 10-Q, that such disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

No change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note 11, Commitments and Contingencies - Legal Proceedings, of the Condensed Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

As of the date of the filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in our 2020 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. The share repurchase program is subject to the ABL Revolver and Term Loan restrictions and may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. Any share repurchases will be completed in the open market at times and in amounts considered appropriate based on price and market conditions.

The ABL Revolver and the Term Loan each contain customary covenants restricting our ability to pay dividends or repurchase stock. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. We currently do not anticipate paying dividends or repurchasing additional shares under our share repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.						Description
31.1*						Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer.
31.2*						Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.
32.1**						Section 1350 Certification - Principal Executive Officer.
32.2**						Section 1350 Certification - Principal Financial Officer.
101*						The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended ~~May 1,~~July 31, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.
104*						Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

* Filed herewith

** Furnished herewith

2427

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DESIGNER BRANDS INC.

Date:

~~May 28,~~August 31, 2021

By:

/s/ Jared Poff

Jared Poff

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and duly authorized officer)

2528