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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 October 31, 2020
or
☐ 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 November 30, 2020: 64,660,091 Class A common shares and 7,732,786 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. Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can identify these forward-looking statements by the use of forward-looking words such as "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 February 1, 2020 (the "2019 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on May 1, 2020 and amended on May 7, 2020, and Part II, Item 1A. Risk Factors in our Forms 10-Q for the fiscal quarter ended May 2, 2020, filed with the SEC on June 19, 2020, and for the fiscal quarter ended August 1, 2020, filed with the SEC on September 4, 2020, and herein, 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 disease ("COVID-19"), any future COVID-19 resurgence, and any other adverse public health developments;
•our ability to protect the health and safety of our employees 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 holdings of cash and investments and access to liquidity and the financial markets on terms that are favorable to us, if at all;
•risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to foreign tax contingencies, and fluctuations in foreign currency exchange rates;
•maintaining strong relationships with our vendors, manufacturers, licensors, and retailer customers;
•our ability to successfully integrate acquired businesses or realize the anticipated benefits of the acquisitions after we complete our integration efforts;
•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, reliance on third-party providers, or otherwise;
•our reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty;
•our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
•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;
•risks associated with remote working arrangements;
•our ability to comply with privacy laws and regulations, as well as other legal obligations;
•the effect of Stein Mart Inc. ("Stein Mart") filing for relief under Chapter 11 of the United States Bankruptcy Code;
•our success in growing our store base and digital demand;
•our ability to protect our reputation and to maintain the brands we license;
•our ability to execute our strategies;
•seasonality of our business and fluctuation of our comparable sales and quarterly financial performance;
•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;
•the imposition of increased or new tariffs on our products;


•risks related to our qualification under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") for payroll tax credits and deferral of payroll taxes in the U.S., as well as other similar regulations in Canada; 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
1
2
3
4
5
6
20
30
30
PART II. OTHER INFORMATION
30
31
33
34
34
34
34
35

All references to "we," "us," "our," "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 Nine months ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Net sales $ 652,870  $ 933,826  $ 1,625,367  $ 2,663,067 
Cost of sales (487,214) (660,518) (1,449,129) (1,869,253)
Operating expenses (196,067) (215,038) (551,712) (654,988)
Income from equity investment 1,902  2,662  6,325  7,354 
Impairment charges (30,081) (4,824) (149,363) (4,824)
Operating profit (loss) (58,590) 56,108  (518,512) 141,356 
Interest expense, net (9,009) (2,174) (14,955) (5,947)
Non-operating income (expenses), net 24  15  680  (128)
Income (loss) before income taxes (67,575) 53,949  (532,787) 135,281 
Income tax benefit (provision) 26,932  (10,489) 178,072  (33,220)
Net income (loss) $ (40,643) $ 43,460  $ (354,715) $ 102,061 
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share $ (0.56) $ 0.60  $ (4.92) $ 1.38 
Diluted earnings (loss) per share $ (0.56) $ 0.60  $ (4.92) $ 1.36 
Weighted average shares used in per share calculations:
Basic shares 72,344  72,123  72,134  74,219 
Diluted shares 72,344  72,947  72,134  75,149 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
1

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
Three months ended Nine months ended
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Net income (loss) $ (40,643) $ 43,460  $ (354,715) $ 102,061 
Other comprehensive income (loss), net of income taxes:
Foreign currency translation gain (loss) 161  236  (2,090) (17)
Unrealized net gain on debt securities —  37  195  475 
Reclassification adjustment for net gains realized in net income (loss) —  (24) (368) (89)
Total other comprehensive income (loss), net of income taxes 161  249  (2,263) 369 
Total comprehensive income (loss) $ (40,482) $ 43,709  $ (356,978) $ 102,430 

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

2

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
October 31, 2020 February 1, 2020 November 2, 2019
ASSETS
Cash and cash equivalents
$ 114,531  $ 86,564  $ 87,838 
Investments
—  24,974  25,939 
Accounts receivable, net
61,840  89,151  87,313 
Inventories
545,954  632,587  677,696 
Prepaid expenses and other current assets
54,577  67,534  48,077 
Total current assets
776,902  900,810  926,863 
Property and equipment, net
313,102  395,009  394,695 
Operating lease assets
728,871  918,801  950,514 
Goodwill
93,655  113,644  113,644 
Intangible assets, net
15,652  22,846  23,297 
Deferred tax assets
208,976  31,863  39,452 
Equity investment
57,978  57,760  54,964 
Other assets
31,585  24,337  33,549 
Total assets
$ 2,226,721  $ 2,465,070  $ 2,536,978 
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable
$ 371,382  $ 299,072  $ 266,335 
Accrued expenses
171,261  194,264  190,897 
Current maturities of long-term debt 62,500  —  — 
Current operating lease liabilities
226,423  186,695  184,598 
Total current liabilities
831,566  680,031  641,830 
Long-term debt
274,635  190,000  235,000 
Non-current operating lease liabilities
721,771  846,584  880,883 
Other non-current liabilities
28,228  27,541  36,084 
Total liabilities
1,856,200  1,744,156  1,793,797 
Commitments and contingencies



Shareholders' equity:
Common shares paid-in capital, no par value
985,125  971,380  968,093 
Treasury shares, at cost
(515,065) (515,065) (515,065)
Retained earnings (deficit)
(94,781) 267,094  292,490 
Accumulated other comprehensive loss
(4,758) (2,495) (2,337)
Total shareholders' equity
370,521  720,914  743,181 
Total liabilities and shareholders' equity
$ 2,226,721  $ 2,465,070  $ 2,536,978 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited and in thousands, except per share data)
Number of shares Amounts
Class A common shares Class B common shares Treasury shares Common shares paid in capital Treasury shares Retained earnings (deficit) Accumulated other comprehensive loss Total
Three months ended October 31, 2020
Balance, August 1, 2020 64,578  7,733  22,169  $ 980,749  $ (515,065) $ (54,138) $ (4,919) $ 406,627 
Net loss
—  —  —  —  —  (40,643) —  (40,643)
Stock-based compensation activity 68  —  —  4,376  —  —  —  4,376 
Other comprehensive income —  —  —  —  —  —  161  161 
Balance, October 31, 2020 64,646  7,733  22,169  $ 985,125  $ (515,065) $ (94,781) $ (4,758) $ 370,521 
Three months ended November 2, 2019
Balance, August 3, 2019 64,911  7,733  21,169  $ 963,312  $ (498,436) $ 266,957  $ (2,586) $ 729,247 
Net income —  —  —  —  —  43,460  —  43,460 
Stock-based compensation activity 105  —  —  4,781  —  —  —  4,781 
Repurchase of Class A common shares (1,000) —  1,000  —  (16,629) —  —  (16,629)
Dividends ($0.25 per share)
—  —  —  —  —  (17,927) —  (17,927)
Other comprehensive income —  —  —  —  —  —  249  249 
Balance, November 2, 2019 64,016  7,733  22,169  $ 968,093  $ (515,065) $ 292,490  $ (2,337) $ 743,181 
Nine months ended October 31, 2020
Balance, February 1, 2020 64,033  7,733  22,169  $ 971,380  $ (515,065) $ 267,094  $ (2,495) $ 720,914 
Net loss
—  —  —  —  —  (354,715) —  (354,715)
Stock-based compensation activity 613  —  —  13,745  —  —  —  13,745 
Dividends ($0.10 per share)
—  —  —  —  —  (7,160) —  (7,160)
Other comprehensive loss —  —  —  —  —  —  (2,263) (2,263)
Balance, October 31, 2020 64,646  7,733  22,169  $ 985,125  $ (515,065) $ (94,781) $ (4,758) $ 370,521 
Nine months ended November 2, 2019
Balance, February 2, 2019 70,672  7,733  15,091  $ 953,801  $ (373,436) $ 254,718  $ (2,706) $ 832,377 
Cumulative effect of accounting change —  —  —  —  —  (9,556) —  (9,556)
Net income —  —  —  —  —  102,061  —  102,061 
Stock-based compensation activity 422  —  —  14,292  —  —  —  14,292 
Repurchase of Class A common shares (7,078) —  7,078  —  (141,629) —  —  (141,629)
Dividends ($0.75 per share)
—  —  —  —  —  (54,733) —  (54,733)
Other comprehensive income —  —  —  —  —  —  369  369 
Balance, November 2, 2019 64,016  7,733  22,169  $ 968,093  $ (515,065) $ 292,490  $ (2,337) $ 743,181 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Nine months ended
October 31, 2020 November 2, 2019
Cash flows from operating activities:
Net income (loss) $ (354,715) $ 102,061 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 66,139  64,226 
Stock-based compensation expense 15,176  13,748 
Deferred income taxes (179,098) (11,411)
Income from equity investment (6,325) (7,354)
Distributions received from equity investment 6,106  10,515 
Impairment charges 149,363  4,824 
Gain on settlement (8,990) — 
Other 43  1,519 
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivable 7,519  (17,484)
Inventories 86,229  (35,394)
Prepaid expenses and other current assets 13,785  4,403 
Accounts payable 79,642  8,853 
Accrued expenses 4,629  (7,838)
Operating lease assets and liabilities, net 14,164  (12,595)
Net cash provided by (used in) operating activities (106,333) 118,073 
Cash flows from investing activities:
Cash paid for property and equipment (26,925) (59,574)
Purchases of available-for-sale investments —  (19,889)
Sales of available-for-sale investments 24,755  64,233 
Proceeds from settlement 8,990  4,965 
Net cash provided by (used in) investing activities 6,820  (10,265)
Cash flows from financing activities:
Borrowing on revolving line under Credit Facility 251,000  375,200 
Payments on revolving line under Credit Facility (441,000) (300,200)
Borrowing under ABL Revolver 150,000  — 
Payments on borrowings under ABL Revolver (50,000) — 
Proceeds from issuance of Term Loan 250,000  — 
Payments on borrowings under Term Loan (3,125) — 
Payments of debt issuance costs (21,063) — 
Cash paid for treasury shares —  (141,629)
Dividends paid (7,160) (54,733)
Other (1,502) 733 
Net cash provided by (used in) financing activities 127,150  (120,629)
Effect of exchange rate changes on cash balances 330  91 
Net increase (decrease) in cash, cash equivalents, and restricted cash 27,967  (12,730)
Cash, cash equivalents, and restricted cash, beginning of period 86,564  100,568 
Cash and cash equivalents, end of period $ 114,531  $ 87,838 
Supplemental disclosures of cash flow information:
Cash paid (received) for income taxes $ (12,979) $ 31,523 
Cash paid for interest on debt $ 12,581  $ 6,577 
Cash paid for operating lease liabilities $ 128,683  $ 178,225 
Non-cash investing and financing activities:
Property and equipment purchases not yet paid $ 1,341  $ 7,442 
Operating lease liabilities arising from lease asset additions $ 9,407  $ 17,729 
Increase to operating lease assets and lease liabilities for modifications $ 18,660  $ 60,736 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
5
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    SIGNIFICANT ACCOUNTING POLICIES

Business Operations- Designer Brands Inc. is a leading North American footwear and accessories designer, producer and retailer. We operate a portfolio of retail concepts in the U.S. and Canada under the DSW Designer Shoe Warehouse ("DSW"), The Shoe Company and Shoe Warehouse banners. Through Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," we design and produce footwear and accessories. We also own licensing rights for the Jessica Simpson footwear business and footwear and handbag licenses for Lucky Brand and Max Studio. In partnership with Authentic Brands Group LLC, a global brand management and marketing company, we have a 40% stake in ABG-Camuto, LLC ("ABG-Camuto"), a joint venture that acquired several intellectual property rights, including Vince Camuto, Louise et Cie, and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. We have a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands owned by ABG-Camuto, subject to guaranteed minimums.

We present three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment includes stores operated in the U.S. under the DSW banner and its related e-commerce site. The Canada Retail segment includes stores operated in Canada under The Shoe Company, Shoe Warehouse, and DSW banners and related e-commerce sites. The Brand Portfolio segment includes the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels ("First Cost"), and the sale of branded products on a direct-to-consumer e-commerce site. Other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at February 1, 2020 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2019 Form 10-K.

Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year refer to the calendar year in which the fiscal year begins.

Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 2019 Form 10-K.

Impact of COVID-19- In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as reductions to our expense and capital expenditure plans.

Following the earlier easing of stay-at-home orders and other state-imposed restrictions on non-essential businesses during the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. In July 2020, we initiated an internal reorganization and reduction of our workforce, resulting in the elimination of approximately 1,000 associate positions, including over 200 vacant positions that will not be filled. The charges recorded as a result of this reorganization are included in our integration and restructuring costs discussed below.

6
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Although all of our stores were open at the end of the third quarter of fiscal 2020, we experienced during the quarter, and have continued to experience, significantly reduced customer traffic and net sales. Our retail customers in the Brand Portfolio Segment are having similar experiences. Given the continuation of overall depressed consumer sentiment, customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all. We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures primarily during the first half of fiscal 2020 and continuing reduced customer traffic, resulted in a sharp decline in our net sales and cash flows.

As a result of the material reduction in net sales and cash flows during fiscal 2020, we updated our impairment analysis for our U.S. Retail and Canada Retail segments at the store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group (categorized as Level 3 under the fair value hierarchy). In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the three months ended October 31, 2020, we recorded an impairment charge of $30.1 million for the U.S. Retail segment. During the nine months ended October 31, 2020, we recorded impairment charges of $122.9 million ($103.2 million and $19.7 million for the U.S. Retail and Canada Retail segments, respectively). Also during the nine months ended October 31, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).

We evaluate goodwill and other indefinite lived intangible assets for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets during the first quarter of fiscal 2020. We calculated the fair value of the reporting units with goodwill primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy). Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the nine months ended October 31, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment. For goodwill within the U.S. Retail segment, which is also the reporting unit, the fair value was in excess of the carrying value.

The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories reflects reductions for merchandise marked down with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores. As of October 31, 2020, we had approximately $18.0 million of additional inventory reserves over the same period last year.

On March 27, 2020, the U.S. government enacted the CARES Act, which, among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualify for certain employer payroll tax credits, which are treated as government subsidies to offset related operating expenses, as well as the deferral of payroll and other tax payments in the future. Similar credits and deferrals were also available in Canada. During the three and nine months ended October 31, 2020, the qualified payroll tax credits reduced our operating expenses by $1.4 million and $9.3 million, respectively, on our condensed consolidated statement of operations. As of October 31, 2020, we had $7.8 million of deferred qualified payroll and other tax obligations included in other non-current liabilities on the condensed consolidated balance sheets, 50% of which we expect to pay at the end of fiscal 2021 and the remaining to be paid at the end of fiscal 2022.

We recorded our income tax expense, deferred tax assets and related liabilities based on management’s best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. As of October 31, 2020, we did not significantly adjust the valuation allowance on deferred tax assets based on available evidence. However, we will continue to monitor the realizability of our deferred tax assets, particularly as we continue to recognize net operating losses. Our
7
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

ability to recover these deferred tax assets depends on several factors, including the amount of net operating losses we can carry back and our ability to project future taxable income. Total deferred tax assets as of October 31, 2020 were $209.0 million, which are all related to jurisdictions where we expect to incur significant net operating losses in the near term, although the risks of failing to realize these benefits vary across the jurisdictions. Our effective tax rate changed from 24.6% for the nine months ended November 2, 2019 to 33.4% for the nine months ended October 31, 2020. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S. federal statutory tax rate was 35%.

In addition, during the nine months ended October 31, 2020, we incurred $8.5 million of incremental costs directly related to COVID-19, including termination fees, pre-open cleaning services, signs used to encourage customers in social distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items.

The COVID-19 pandemic remains challenging, and with the resurgence of the COVID-19 outbreak and related restrictions imposed by state and local government authorities designed to slow the virus's spread, we may be required to close stores in certain locations that we only recently re-opened. The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences during our peak fall season, including reductions in consumer spending, which may necessitate further shifts in our business model. As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Integration and Restructuring Costs- During the nine months ended October 31, 2020 and November 2, 2019, we incurred integration and restructuring costs, which consisted primarily of severance of $10.0 million and $3.8 million, respectively, and professional fees, termination fees and other integration costs of $1.0 million and $9.8 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of October 31, 2020 and November 2, 2019, we had accrued severance of $3.8 million and $3.0 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.

Lease Modifications- In response to the COVID-19 outbreak, we negotiated deferrals of lease payments to be repaid over various time periods, with no substantive changes to the total consideration. For these deferrals, we have elected to treat the changes as modifications to our leases, which resulted in remeasuring the related lease assets and liabilities and including non-lease components per our policy.

Gain on Settlement- During the nine months ended October 31, 2020, we collected $9.0 million, net of legal costs incurred, and recorded a gain to operating expenses in the condensed consolidated statements of operations, which was due to a settlement with a vendor related to costs incurred on an internal-use software project that was capitalized and then impaired in a previous fiscal year.

Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. dollars ("USD"), unless otherwise noted.

Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of net sales and expenses during the reporting period. Certain estimates and assumptions use forecasted financial information using information reasonably available to us, along with the estimated, but uncertain, future impacts of the COVID-19 outbreak. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, legal reserves, foreign tax contingent liabilities, income taxes, and self-insurance reserves. Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions it may undertake in the future, and changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.

8
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Fair Value- Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
•Level 3 - Unobservable inputs in which little or no market activity exists.

We measure available-for-sale investments at fair value on a recurring basis. These investments were measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2). The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature. The fair value of borrowings under our senior secured asset-based revolving credit facility ("ABL Revolver") and our previous senior revolving credit agreement ("Credit Facility") approximated the carrying value. As of October 31, 2020, the fair value of borrowings under our senior secured term loan ("Term Loan") was $250.3 million compared to the carrying value of $246.9 million. The fair value of debt borrowings was estimated based on current interest rates offered for similar instruments (categorized as Level 2).

Prior Period Reclassifications- Certain prior period reclassifications were made to conform to the current period presentation, consistent with the changes made during the fourth quarter of fiscal 2019. Commission income previously presented in commission, franchise and other revenue was reclassified to net sales. Other revenue, which primarily included operating sublease income, also previously presented in commission, franchise and other revenue, was reclassified to operating expenses. In addition, we reclassified a previously presented basis difference related to acquisition of commonly controlled entity to common shares paid in-capital within shareholders' equity for all periods presented. The basis difference related to the acquisition of a commonly controlled entity related to a legal entity acquisition in fiscal 2012 from certain Schottenstein Affiliates (as defined below), which legal entity owned property that was previously leased by us. As this was a transaction between entities under common control, the difference between the historical cost carrying amounts and the consideration transferred is reflected as an equity transaction within common shares paid in-capital.

Adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments- During the first quarter of fiscal 2020, we adopted Accounting Standards Update ("ASU") 2016-13, which replaces the previous incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements.

9
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

2.    REVENUE

Disaggregation of Net Sales- The following table presents net sales disaggregated by product and service category for each segment:
Three months ended Nine months ended
(in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Net sales:
U.S. Retail segment:
Women's footwear $ 319,241  $ 492,062  $ 832,343  $ 1,432,573 
Men's footwear 105,587  132,158  260,954  402,042 
Kids' footwear 48,570  48,207  109,985  120,235 
Accessories and other 28,503  44,348  69,669  131,685 
501,901  716,775  1,272,951  2,086,535 
Canada Retail segment:
Women's footwear 28,864  38,887  70,165  103,046 
Men's footwear 13,604  17,282  34,377  46,722 
Kids' footwear 16,699  16,845  30,486  33,228 
Accessories and other 2,431  3,285  5,481  8,425 
61,598  76,299  140,509  191,421 
Brand Portfolio segment:
Wholesale 73,744  117,359  156,611  297,690 
Commission income 3,885  6,914  14,026  18,118 
Direct-to-consumer 6,276  13,223  25,839  29,181 
83,905  137,496  196,476  344,989 
Other 27,020  28,848  62,909  93,935 
Total segment net sales 674,424  959,418  1,672,845  2,716,880 
Elimination of intersegment sales (21,554) (25,592) (47,478) (53,813)
Total net sales $ 652,870  $ 933,826  $ 1,625,367  $ 2,663,067 

Deferred Revenue Liabilities- We record deferred revenue liabilities, included in accrued expenses on the condensed consolidated balance sheets, for remaining obligations we have to our customers. The following table presents the changes and total balances for gift cards and our loyalty programs:
Three months ended Nine months ended
(in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Gift cards:
Beginning of period $ 29,919  $ 28,277  $ 35,461  $ 34,998 
Gift cards redeemed and breakage recognized to net sales (12,615) (18,027) (37,483) (62,125)
Gift cards issued 10,995  15,848  30,321  53,225 
End of period $ 28,299  $ 26,098  $ 28,299  $ 26,098 
Loyalty programs:
Beginning of period $ 14,797  $ 16,034  $ 16,138  $ 16,151 
Loyalty certificates redeemed and expired and other adjustments recognized to net sales (7,176) (9,008) (18,062) (27,836)
Deferred revenue for loyalty points issued 6,774  10,054  16,319  28,765 
End of period $ 14,395  $ 17,080  $ 14,395  $ 17,080 
10
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


3.    RELATED PARTY TRANSACTIONS

Schottenstein Affiliates

As of October 31, 2020, the Schottenstein Affiliates consisted of entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family. As of October 31, 2020, the Schottenstein Affiliates beneficially owned approximately 16% of the Company's outstanding common shares, representing approximately 52% of the combined voting power, consisting of, in the aggregate, 3.7 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:

Leases- We lease our fulfillment center and certain store locations owned by the Schottenstein Affiliates. See Note 13, Leases, for rent expense and future minimum lease payment requirements associated with the Schottenstein Affiliates.

Other Purchases and Services- During the three months ended October 31, 2020 and November 2, 2019, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.7 million and $1.2 million, respectively. During the nine months ended October 31, 2020 and November 2, 2019, we had other purchases and services we incurred from the Schottenstein Affiliates of $4.2 million and $4.6 million, respectively.

Due to Related Parties- As of October 31, 2020, February 1, 2020 and November 2, 2019, we had amounts due to the Schottenstein Affiliates of $1.1 million, $0.9 million and $0.6 million, respectively, included in accounts payable on the condensed consolidated balance sheets.

ABG-Camuto

We have a 40% interest in our equity investment in ABG-Camuto. We entered into a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto. During the three months ended October 31, 2020 and November 2, 2019, we recorded $4.6 million and $4.4 million of royalty expense payable to ABG-Camuto, respectively. During the nine months ended October 31, 2020 and November 2, 2019, we recorded $13.6 million and $13.7 million of royalty expense payable to ABG-Camuto, respectively. Amounts payable to ABG-Camuto for all periods presented were immaterial.

4.    EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is based on net income (loss) and the weighted average of Class A and Class B common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options and restricted stock units ("RSUs") calculated using the treasury stock method.

The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings (loss) per share:
Three months ended Nine months ended
(in thousands)
October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Weighted average basic shares outstanding
72,344  72,123  72,134  74,219 
Dilutive effect of stock-based compensation awards
—  824  —  930 
Weighted average diluted shares outstanding
72,344  72,947  72,134  75,149 

For the three months ended October 31, 2020 and November 2, 2019, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 5.4 million and 4.9 million, respectively. For the nine months ended October 31, 2020 and November 2, 2019, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 5.9 million and 3.2 million, respectively.

11
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

5.    STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:
Three months ended Nine months ended
(in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Stock options $ 338  $ 428  $ 1,208  $ 1,814 
Restricted and director stock units 4,242  3,589  13,968  11,934 
$ 4,580  $ 4,017  $ 15,176  $ 13,748 

The following table summarizes the stock-based compensation award activity for the nine months ended October 31, 2020:
Number of shares
(in thousands) Stock Options Time-Based RSUs Performance-Based RSUs
Outstanding - beginning of period 3,761  1,687  768 
Granted —  5,874  11 
Exercised / vested —  (329) (226)
Forfeited / expired (401) (682) (13)
Outstanding - end of period 3,360  6,550  540 

6.    SHAREHOLDERS' EQUITY

Shares- Our Class A common shares are listed for trading under the ticker symbol "DBI" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be exchanged for the Company's Class A common shares at the election of the holder on a share for share basis. Holders of Class A common shares are entitled to one vote per share and holders of Class B common shares are entitled to eight votes per share on matters submitted to shareholders for approval.

The following table provides additional information for our common shares:
October 31, 2020 February 1, 2020 November 2, 2019
(in thousands) Class A Class B Class A Class B Class A Class B
Authorized shares 250,000  100,000  250,000  100,000  250,000  100,000 
Issued shares 86,815  7,733  86,202  7,733  86,185  7,733 
Outstanding shares 64,646  7,733  64,033  7,733  64,016  7,733 
Treasury shares 22,169  —  22,169  —  22,169  — 

We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.

Share Repurchases- During the nine months ended October 31, 2020, we did not repurchase any Class A common shares. During the nine months ended November 2, 2019, we repurchased 7.1 million Class A common shares at a cost of $141.6 million.

12
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Accumulated Other Comprehensive Loss- Changes for the balances of each component of accumulated other comprehensive loss were as follows (all amounts are net of tax):
Three months ended
October 31, 2020 November 2, 2019
(in thousands) Foreign Currency Translation Available-for-Sale Securities Total Foreign Currency Translation Available-for-Sale Securities Total
Accumulated other comprehensive loss - beginning of period $ (4,919) $ —  $ (4,919) $ (2,581) $ (5) $ (2,586)
Other comprehensive income before reclassifications 161  —  161  236  37  273 
Amounts reclassified to non-operating expense, net —  —  —  —  (24) (24)
Other comprehensive income 161  —  161  236  13  249 
Accumulated other comprehensive income (loss) - end of period $ (4,758) $ —  $ (4,758) $ (2,345) $ 8  $ (2,337)

Nine months ended
October 31, 2020 November 2, 2019
(in thousands) Foreign Currency Translation Available-for-Sale Securities Total Foreign Currency Translation Available-for-Sale Securities Total
Accumulated other comprehensive income (loss) - beginning of period $ (2,668) $ 173  $ (2,495) $ (2,328) $ (378) $ (2,706)
Other comprehensive income (loss) before reclassifications (2,090) 195  (1,895) (17) 475  458 
Amounts reclassified to non-operating expense, net —  (368) (368) —  (89) (89)
Other comprehensive income (loss) (2,090) (173) (2,263) (17) 386  369 
Accumulated other comprehensive income (loss) - end of period $ (4,758) $ —  $ (4,758) $ (2,345) $ 8  $ (2,337)

7.    ACCOUNTS RECEIVABLE

Accounts receivable, net, consisted of the following:
(in thousands) October 31, 2020 February 1, 2020 November 2, 2019
Customer accounts receivables:
Serviced by third-party provider with guaranteed payment $ 43,866  $ 54,209  $ 70,301 
Serviced by third-party provider without guaranteed payment 2,219  365  699 
Serviced in-house 5,820  7,630  8,094 
Other receivables 11,200  28,166  10,854 
Accounts receivable 63,105  90,370  89,948 
Allowance for doubtful accounts (1,265) (1,219) (2,635)
$ 61,840  $ 89,151  $ 87,313 

13
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8.    INVESTMENTS

Investments in available-for-sale securities consisted of the following:
(in thousands)
October 31, 2020 February 1, 2020 November 2, 2019
Carrying value of investments
$ —  $ 24,831  $ 25,903 
Unrealized gains included in accumulated other comprehensive loss
—  143  43 
Unrealized losses included in accumulated other comprehensive loss
—  —  (7)
Fair value
$ —  $ 24,974  $ 25,939 

9.    PROPERTY AND EQUIPMENT

Property and equipment, net, consisted of the following:
(in thousands) October 31, 2020 February 1, 2020 November 2, 2019
Land $ 1,110  $ 1,110  $ 1,110 
Buildings 12,485  12,485  13,445 
Building and leasehold improvements 447,515  449,958  442,609 
Furniture, fixtures and equipment 471,670  482,573  478,463 
Software 192,337  189,291  174,324 
Construction in progress 9,353  32,645  36,489 
Total property and equipment 1,134,470  1,168,062  1,146,440 
Accumulated depreciation and amortization (821,368) (773,053) (751,745)
$ 313,102  $ 395,009  $ 394,695 

14
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

10.    GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:
Nine months ended
October 31, 2020 November 2, 2019
(in thousands) Goodwill Accumulated Impairments Net Goodwill Accumulated Impairments Net
Beginning of period by segment:
U.S. Retail $ 93,655  $ —  $ 93,655  $ 25,899  $ —  $ 25,899 
Canada Retail 41,610  (41,610) —  42,048  (42,048) — 
Brand Portfolio 19,989  —  19,989  63,614  —  63,614 
155,254  (41,610) 113,644  131,561  (42,048) 89,513 
Activity by segment:
U.S. Retail -
Allocation of goodwill from Brand Portfolio —  —  —  67,756  —  67,756 
Canada Retail -
Currency translation adjustment (264) 264  —  (195) 195  — 
Brand Portfolio:
Impairment charges —  (19,989) (19,989) —  —  — 
Purchase price and allocation adjustments —  —  —  24,131  —  24,131 
Allocation of goodwill to U.S. Retail —  —  —  (67,756) —  (67,756)
(264) (19,725) (19,989) 23,936  195  24,131 
End of period by segment:
U.S. Retail 93,655  —  93,655  93,655  —  93,655 
Canada Retail 41,346  (41,346) —  41,853  (41,853) — 
Brand Portfolio 19,989  (19,989) —  19,989  —  19,989 
$ 154,990  $ (61,335) $ 93,655  $ 155,497  $ (41,853) $ 113,644 

Intangible Assets- Intangible assets consisted of the following:
(in thousands) Cost Accumulated Amortization Net
October 31, 2020
Definite-lived customer relationships $ 2,851  $ (2,626) $ 225 
Indefinite-lived trademarks and tradenames 15,427  —  15,427 
$ 18,278  $ (2,626) $ 15,652 
February 1, 2020
Definite-lived customer relationships $ 9,360  $ (2,044) $ 7,316 
Indefinite-lived trademarks and tradenames 15,530  —  15,530 
$ 24,890  $ (2,044) $ 22,846 
November 2, 2019
Definite-lived customer relationships $ 9,369  $ (1,684) $ 7,685 
Indefinite-lived trademarks and tradenames 15,612  —  15,612 
$ 24,981  $ (1,684) $ 23,297 

15
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

11.    ACCRUED EXPENSES

Accrued expenses consisted of the following:
(in thousands) October 31, 2020 February 1, 2020 November 2, 2019
Gift cards and merchandise credits $ 28,299  $ 35,461  $ 26,098 
Accrued compensation and related expenses 28,498  26,768  26,023 
Accrued taxes 24,123  19,399  29,203 
Loyalty programs deferred revenue 14,395  16,138  17,080 
Sales returns 14,439  21,408  24,371 
Customer allowances and discounts 4,707  11,528  10,326 
Other 56,800  63,562  57,796 
$ 171,261  $ 194,264  $ 190,897 

12.    DEBT

Debt consisted of the following:
(in thousands) October 31, 2020 February 1, 2020 November 2, 2019
ABL Revolver $ 100,000  $ —  $ — 
Term Loan 246,875  —  — 
Credit Facility —  190,000  235,000 
Total debt 346,875  190,000  235,000 
Less unamortized Term Loan debt issuance costs (9,740) —  — 
Less current maturities of long-term debt (62,500) —  — 
Long-term debt $ 274,635  $ 190,000  $ 235,000 

As of October 31, 2020, future maturities of debt are as follows:
(in thousands)
Remainder of fiscal 2020 $ 3,125 
Fiscal 2021 62,500 
Fiscal 2022 12,500 
Fiscal 2023 12,500 
Fiscal 2024 12,500 
Future fiscal years thereafter 243,750 
Total $ 346,875 

ABL Revolver- On August 7, 2020, we replaced our Credit Facility with the ABL Revolver, which provides a revolving line of credit of up to $400.0 million, including a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of letters of credit, a $40.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Term Loan. The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 31, 2020, the ABL Revolver had a borrowing base of $400.0 million, with $100.0 million outstanding and $5.0 million in letters of credit issued, resulting in $295.0 million available for borrowings.

16
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.25% as of October 31, 2020. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.

Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the ABL Revolver.

Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.75% as of October 31, 2020.

Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary events of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.

13.    LEASES

We lease our stores, fulfillment center and other facilities under operating lease arrangements with unrelated parties and related parties owned by the Schottenstein Affiliates. The majority of our real estate leases provide for renewal options, which are typically not included in the lease term used for measuring the lease assets and lease liabilities as it is not reasonably certain we will exercise renewal options. We pay variable amounts for certain lease and non-lease components as well as for contingent rent based on sales for certain leases where the sales are in excess of specified levels and for leases that have certain contingent triggering events that are in effect. We also lease equipment under operating leases.

We receive operating sublease income from unrelated third parties for leasing portions or all of certain properties. Operating sublease income and operating expenses for these properties are included in operating expenses in our condensed consolidated statements of operations.

17
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Lease income and lease expense consisted of the following for the three and nine months ended October 31, 2020 and November 2, 2019:
Three months ended Nine months ended
(in thousands) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019
Operating sublease income $ 2,930  $ 2,462  $ 9,127  $ 6,910 
Operating lease expense:
Lease expense to unrelated parties $ 47,775  $ 53,674  $ 152,165  $ 159,735 
Lease expense to related parties 2,266  2,387  6,923  7,100 
Variable lease expense to unrelated parties 15,653  13,539  47,306  39,542 
Variable lease expense to related parties 348  325  1,017  975 
Total operating lease expense $ 66,042  $ 69,925  $ 207,411  $ 207,352 

As of October 31, 2020, our future fixed minimum lease payments are as follows:
(in thousands) Unrelated Parties Related Parties Total
Remainder of fiscal 2020 $ 49,514  $ 1,461  $ 50,975 
Fiscal 2021 262,149  8,697  270,846 
Fiscal 2022 197,309  7,418  204,727 
Fiscal 2023 156,161  4,573  160,734 
Fiscal 2024 115,492  4,139  119,631 
Future fiscal years thereafter 238,602  11,353  249,955 
1,019,227  37,641  1,056,868 
Less discounting impact on operating leases (104,590) (4,084) (108,674)
Total operating lease liabilities 914,637  33,557  948,194 
Less current operating lease liabilities (218,704) (7,719) (226,423)
Non-current operating lease liabilities $ 695,933  $ 25,838  $ 721,771 

14.    COMMITMENTS AND CONTINGENCIES

Legal Proceedings- We are involved in various legal proceedings that are incidental to the conduct of our business. Although it is not possible to predict with certainty the eventual outcome of any litigation, we believe the amount of any potential liability with respect to current legal proceedings will not be material to the results of operations or financial condition. As additional information becomes available, we will assess any potential liability related to pending litigation and revise the estimates as needed.

Foreign Tax Contingencies- During the due diligence procedures performed related to the acquisition of Camuto Group, we identified probable contingent liabilities associated with unpaid foreign payroll and other taxes that could also result in assessed penalties and interest. We had previously developed an estimate of the range of outcomes related to these obligations and recorded the low-end of the range. During the nine months ended October 31, 2020, we reduced our contingent liability by $11.2 million for payments made to taxing authorities and by $12.3 million for changes in estimates due to additional information as a result of negotiations with taxing authorities and we reduced the indemnification asset by $21.0 million. As of October 31, 2020, we had a contingent liability of $4.9 million for the remaining estimated obligations included in other non-current liabilities on the condensed consolidated balance sheets, and an indemnification asset of $3.8 million included in other assets on the condensed consolidated balance sheets, which we expect to collect under the terms of the securities purchase agreement with the sellers of Camuto Group (the "Sellers"). We are continuing to assess the exposure, which may result in material changes to these estimates, and we may identify additional contingent liabilities. We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date. Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.
18
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Guarantee- As a result of a previous merger, we provided a guarantee for a lease commitment that is scheduled to expire in fiscal 2023 for a location that has been leased to a third party. If the third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of October 31, 2020, the total future minimum lease payment requirements for this guarantee were approximately $10.9 million.

15.    SEGMENT REPORTING
The following provides certain financial data by segment reconciled to the condensed consolidated financial statements:
(in thousands) U.S. Retail Canada Retail Brand Portfolio Other Corporate/Eliminations Total
Three months ended October 31, 2020
Net sales:
External customer sales $ 501,901  $ 61,598  $ 62,351  $ 27,020  $ —  $ 652,870 
Intersegment sales —  —  21,554  —  (21,554) — 
Total net sales $ 501,901  $ 61,598  $ 83,905  $ 27,020  $ (21,554) $ 652,870 
Gross profit $ 117,679  $ 18,905  $ 22,128  $ 6,272  $ 672  $ 165,656 
Income from equity investment $ —  $ —  $ 1,902  $ —  $ —  $ 1,902 
Three months ended November 2, 2019
Net sales:
External customer sales $ 716,775  $ 76,299  $ 111,904  $ 28,848  $ —  $ 933,826 
Intersegment sales —  —  25,592  —  (25,592) — 
Total net sales $ 716,775  $ 76,299  $ 137,496  $ 28,848  $ (25,592) $ 933,826 
Gross profit $ 201,409  $ 27,485  $ 40,849  $ 6,291  $ (2,726) $ 273,308 
Income from equity investment $ —  $ —  $ 2,662  $ —  $ —  $ 2,662 
Nine months ended October 31, 2020
Net sales:
External customer sales $ 1,272,951  $ 140,509  $ 148,998  $ 62,909  $ —  $ 1,625,367 
Intersegment sales —  —  47,478  —  (47,478) — 
Total net sales $ 1,272,951  $ 140,509  $ 196,476  $ 62,909  $ (47,478) $ 1,625,367 
Gross profit $ 124,806  $ 22,244  $ 24,592  $ 962  $ 3,634  $ 176,238 
Income from equity investment $ —  $ —  $ 6,325  $ —  $ —  $ 6,325 
Nine months ended November 2, 2019
Net sales:
External customer sales $ 2,086,535  $ 191,421  $ 291,176  $ 93,935  $ —  $ 2,663,067 
Intersegment sales —  —  53,813  —  (53,813) — 
Total net sales $ 2,086,535  $ 191,421  $ 344,989  $ 93,935  $ (53,813) $ 2,663,067 
Gross profit $ 619,356  $ 65,171  $ 93,308  $ 21,643  $ (5,664) $ 793,814 
Income from equity investment $ —  $ —  $ 7,354  $ —  $ —  $ 7,354 

19

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

Executive Overview

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as reductions to our expense and capital expenditure plans.

Following the earlier easing of stay-at-home orders and other state-imposed restrictions on non-essential businesses during the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. In July 2020, we implemented an internal reorganization and reduction of our workforce, resulting in the elimination of approximately 1,000 associate positions, including over 200 vacant positions that will not be filled.

Although all of our stores were open at the end of the third quarter of fiscal 2020, we experienced during the quarter, and have continued to experience, significantly reduced customer traffic and net sales. Our retail customers in the Brand Portfolio Segment are having similar experiences. Given the continuation of overall depressed consumer sentiment, customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all. We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures primarily during the first half of fiscal 2020 and continuing reduced customer traffic, resulted in a sharp decline in our net sales and cash flows.

Our flexible business model has afforded us the opportunity to quickly adapt to the volatile macro environment and business conditions. We implemented inventory control actions that enabled us to decrease total inventory by 19% at the end of the third quarter of fiscal 2020 compared to the same period last year. We have been more aggressive with our promotional activity to clear through seasonal inventory and drive sales, and this markdown activity, along with additional inventory reserves, has materially impacted margins. With our customers staying home, there has been a clear shift in consumer behavior and preferences to athleisure, which includes athletic, and casual products and away from dress and seasonal categories. We have modified receipts to match these expectations and continue to see opportunity ahead of us given our under-penetration in this business.

Over the past several years, we have made significant investments in our digital infrastructure and, as a result, we were able to generate strong digital sales during the first three quarters of fiscal 2020, well above digital sales for the same period last year across all segments. Our digital fulfillment options, such as Buy Online Pick Up in Store and Curbside Pickup, and our ability to use our stores for fulfillment served us well while our stores were closed and continue to see strength even as stores have fully reopened. We anticipate that adapting to operating as a digital-focused retailer during this time will have a lasting influence on how we operate moving forward. We were voted the #1 omni-channel retailer for the third year in a row and remain one of the largest designers, producers and retailers of footwear and accessories in the market. Our increased penetration in the athletic market coupled with our historical success in dress and seasonal and a fully integrated supply chain supported by our acquisition of Camuto Group, position us well to be the premier footwear retailer for all of the family's needs over the long-term.

The COVID-19 pandemic remains challenging, and with the resurgence of the COVID-19 outbreak and related restrictions imposed by state and local government authorities designed to slow the virus's spread, we may be required to close stores in certain locations that we only recently re-opened. The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences during our peak fall season, including reductions in consumer spending, which may necessitate further shifts in our business model. As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

20

Comparable Sales Performance Metric

We consider comparable sales to be an important indicator of the performance of our retail and direct-to-consumer businesses, and investors may find it useful as such. Comparable sales is a primary metric commonly used throughout the retail industry. 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 they are closed. 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 in the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer www.vincecamuto.com e-commerce site. While all stores were open as of the end of the third quarter of fiscal 2020, comparable sales also include stores temporarily closed during fiscal 2020 as a result of the COVID-19 outbreak as management continues to believe this metric is meaningful to monitor our performance. Comparable sales no longer include the Other segment beginning with the third quarter of fiscal 2020 due to the liquidation of Stein Mart. 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.

Financial Summary

Net sales decreased to $652.9 million for the three months ended October 31, 2020 from $933.8 million for the three months ended November 2, 2019. The 30.1% decrease in net sales was primarily driven by the ongoing and prolonged COVID-19 outbreak that contributed to the 30.4% decrease in comparable sales, as we are experiencing significantly reduced customer traffic and net sales relative to the same period last year. In addition, we had lower Brand Portfolio segment sales due to our retailer customers also experiencing significantly reduced customer traffic and lower demand for dress products.

During the three months ended October 31, 2020, gross profit as a percentage of net sales was 25.4% as compared to 29.3% for the same period last year. The decrease in gross profit was primarily driven by the impact of the COVID-19 outbreak on our operations, which, in addition to the reduced sales volume, resulted in increased shipping costs associated with higher digital penetration and the deleveraging of distribution and fulfillment, store occupancy and royalty expenses on lower sales volume.

Net loss for the three months ended October 31, 2020 was $40.6 million, or a loss of $0.56 per diluted share, which included net after-tax charges of $21.6 million, or $0.30 per diluted share, primarily related to impairment charges, integration and restructuring expenses and incremental costs related to the COVID-19 outbreak, offset by governmental credits we claimed. Net income for the three months ended November 2, 2019 was $43.5 million, or $0.60 earnings per diluted share, which included net after-tax charges of $5.1 million, or $0.07 per diluted share, primarily related to impairment charges and integration and restructuring expenses associated with the businesses acquired in fiscal 2018.

21

Results of Operations

Comparison of the Three Months Ended October 31, 2020 with the Three Months Ended November 2, 2019
Three months ended
October 31, 2020 November 2, 2019 Change
(dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount %
Net sales(1)
$ 652,870  100.0  % $ 933,826  100.0  % $ (280,956) (30.1) %
Cost of sales (487,214) (74.6) (660,518) (70.7) 173,304  (26.2) %
Gross profit(1)
165,656  25.4  273,308  29.3  (107,652) (39.4) %
Operating expenses(1)
(196,067) (30.1) (215,038) (23.1) 18,971  (8.8) %
Income from equity investment 1,902  0.3  2,662  0.3  (760) (28.5) %
Impairment charges (30,081) (4.6) (4,824) (0.5) (25,257) 523.6  %
Operating profit (loss) (58,590) (9.0) 56,108  6.0  (114,698) NM
Interest expense, net (9,009) (1.3) (2,174) (0.2) (6,835) 314.4  %
Non-operating income, net 24  0.0  15  0.0  9  60.0  %
Income (loss) before income taxes (67,575) (10.3) 53,949  5.8  (121,524) NM
Income tax benefit (provision) 26,932  4.1  (10,489) (1.1) 37,421  NM
Net income (loss) $ (40,643) (6.2) % $ 43,460  4.7  % $ (84,103) NM
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share $ (0.56) $ 0.60  $ (1.16) NM
Diluted earnings (loss) per share $ (0.56) $ 0.60  $ (1.16) NM
Weighted average shares used in per share calculations:
Basic shares 72,344  72,123  221  0.3  %
Diluted shares 72,344  72,947  (603) (0.8) %
NM - Not meaningful
(1)    We changed our presentation of net sales and gross profit (loss) for all periods presented to include commission income. Previously reported other revenue, which primarily included operating sublease income, was reclassified to operating expenses.

Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:
(in thousands) Three months ended October 31, 2020
Consolidated net sales for the same period last year $ 933,826 
Decrease in comparable sales (242,387)
Net increase from non-comparable sales and other changes 10,860 
Loss of net sales from closed stores (2,785)
Decrease in wholesale net sales from Brand Portfolio segment (43,615)
Decrease in commission income from Brand Portfolio segment (3,029)
Consolidated net sales $ 652,870 

22

The following summarizes net sales by segment:
Three months ended Change
(dollars in thousands) October 31, 2020 November 2, 2019 Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 501,901  $ 716,775  $ (214,874) (30.0) % (31.9)%
Canada Retail 61,598  76,299  (14,701) (19.3) % (18.7)%
Brand Portfolio 83,905  137,496  (53,591) (39.0) % 13.4%
Other 27,020  28,848  (1,828) (6.3) % NA
Total segment net sales 674,424  959,418  (284,994) (29.7) % (30.4)%
Elimination of intersegment net sales (21,554) (25,592) 4,038  (15.8) %
Consolidated net sales $ 652,870  $ 933,826  $ (280,956) (30.1) %
NA - Not applicable

The decreases in comparable sales for the U.S. Retail and Canada Retail segments and in total consolidated net sales were driven primarily by significantly reduced customer traffic as a result of COVID-19. Net sales during the quarter were also impacted by an incident at a third-party vendor that provides fulfillment and e-commerce services to the Company. The vendor experienced a ransomware attack that resulted in a shutdown of some of its U.S. operations, which temporarily impacted fulfillment services to us and led us to temporarily reduce product availability on our U.S. e-commerce sites. Brand Portfolio segment net sales were also negatively impacted by COVID-19 as retailer customers also continued to experience significantly reduced customer traffic and lower demand for dress product. Notwithstanding the temporary third-party vendor incident previously discussed, the overall decrease in net sales was partially offset by strong performance in our e-commerce channels, including www.vincecamuto.com, which is included in comparable sales for the Brand Portfolio segment, as a certain amount of customer demand shifted online.

Gross Profit- The following summarizes gross profit by segment:
Three months ended
October 31, 2020 November 2, 2019 Change
(dollars in thousands)
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment gross profit:
U.S. Retail $ 117,679  23.4  % $ 201,409  28.1  % $ (83,730) (41.6) % (470)
Canada Retail 18,905  30.7  % 27,485  36.0  % $ (8,580) (31.2) % (530)
Brand Portfolio 22,128  26.4  % 40,849  29.7  % $ (18,721) (45.8) % (330)
Other 6,272  23.2  % 6,291  21.8  % $ (19) (0.3) % 140 
164,984  276,034 
Elimination of intersegment gross loss (profit) 672  (2,726)
Gross profit $ 165,656  25.4  % $ 273,308  29.3  % $ (107,652) (39.4) % (390)

The decrease in gross profit was primarily driven by significantly reduced customer traffic, increased shipping costs associated with higher digital penetration, and the deleveraging of distribution and fulfillment, store occupancy, and royalty expenses on lower sales volume.

23

Elimination of intersegment gross profit (loss) consisted of the following:
Three months ended
(in thousands) October 31, 2020 November 2, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (21,554) $ (25,592)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 17,155  17,363 
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 5,071  5,503 
Gross loss (profit) $ 672  $ (2,726)

Operating Expenses- For the three months ended October 31, 2020, operating expenses decreased by $19.0 million over the same period last year, primarily driven by the reduction of our workforce initiated at the end of the second quarter of fiscal 2020 and reductions in store labor. Operating expenses during the three months ended October 31, 2020 were offset by government subsidies in the form of qualified payroll tax credits of $1.4 million.

Impairment Charges- During the three months ended October 31, 2020, we updated our impairment analysis at the store-level and, as a result, we recorded store impairment charges of $30.1 million, primarily related to certain U.S. Retail stores located in urban areas that are experiencing significantly lower traffic than the rest of the store fleet as a result of the continuing COVID-19 outbreak.

Interest Expense, net- For the three months ended October 31, 2020, interest expense increased over the same period last year due to additional debt under our new ABL Revolver and Term Loan, which have higher interest rates.

Income Taxes- Our effective tax rate changed from 19.4% for the three months ended November 2, 2019 to 39.9% for the three months ended October 31, 2020. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S. federal statutory tax rate was 35% pursuant to the CARES Act.

24

Comparison of the Nine Months Ended October 31, 2020 with the Nine Months Ended November 2, 2019
Nine months ended
October 31, 2020 November 2, 2019 Change
(dollars in thousands, except per share amounts) Amount % of Net Sales Amount % of Net Sales Amount %
Net sales(1)
$ 1,625,367  100.0  % $ 2,663,067  100.0  % $ (1,037,700) (39.0) %
Cost of sales (1,449,129) (89.2) (1,869,253) (70.2) 420,124  (22.5) %
Gross profit(1)
176,238  10.8  793,814  29.8  (617,576) (77.8) %
Operating expenses(1)
(551,712) (33.9) (654,988) (24.6) 103,276  (15.8) %
Income from equity investment 6,325  0.4  7,354  0.3  (1,029) (14.0) %
Impairment charges (149,363) (9.2) (4,824) (0.2) (144,539) 2,996.2  %
Operating profit (loss) (518,512) (31.9) 141,356  5.3  (659,868) NM
Interest expense, net (14,955) (0.9) (5,947) (0.3) (9,008) 151.5  %
Non-operating income (expenses), net 680  0.0  (128) (0.0) 808  NM
Income (loss) before income taxes (532,787) (32.8) 135,281  5.0  (668,068) NM
Income tax benefit (provision) 178,072  11.0  (33,220) (1.2) 211,292  NM
Net income (loss) $ (354,715) (21.8) % $ 102,061  3.8  % $ (456,776) NM
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share $ (4.92) $ 1.38  $ (6.30) NM
Diluted earnings (loss) per share $ (4.92) $ 1.36  $ (6.28) NM
Weighted average shares used in per share calculations:
Basic shares 72,134  74,219  (2,085) (2.8) %
Diluted shares 72,134  75,149  (3,015) (4.0) %
NM - Not meaningful
(1)    We changed our presentation of net sales and gross profit (loss) for all periods presented to include commission income. Previously reported other revenue, which primarily included operating sublease income, was reclassified to operating expenses.

Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:
(in thousands) Nine months ended October 31, 2020
Consolidated net sales for the same period last year $ 2,663,067 
Decrease in comparable sales (894,684)
Net increase from non-comparable sales and other changes 13,048 
Loss of net sales from closed stores (10,893)
Decrease in wholesale net sales from Brand Portfolio segment (141,079)
Decrease in commission income from Brand Portfolio segment (4,092)
Consolidated net sales $ 1,625,367 
25

The following summarizes net sales by segment:
Nine months ended Change
(dollars in thousands) October 31, 2020 November 2, 2019 Amount % Comparable Sales %
Segment net sales:
U.S. Retail $ 1,272,951  $ 2,086,535  $ (813,584) (39.0) % (39.6)%
Canada Retail 140,509  191,421  (50,912) (26.6) % (25.5)%
Brand Portfolio 196,476  344,989  (148,513) (43.0) % 61.4%
Other 62,909  93,935  (31,026) (33.0) % (50.4)%
Total segment net sales 1,672,845  2,716,880  (1,044,035) (38.4) % (38.4)%
Elimination of intersegment net sales (47,478) (53,813) 6,335  (11.8) %
Consolidated net sales $ 1,625,367  $ 2,663,067  $ (1,037,700) (39.0) %

The decreases in comparable sales for all segments, except Brand Portfolio, and in total consolidated net sales, were primarily driven by the temporary closure of stores during our peak selling season in response to the COVID-19 outbreak and significantly reduced customer traffic since re-opening. This was partially offset by strong performance in our e-commerce channels, including www.vincecamuto.com, which is included in comparable sales for the Brand Portfolio segment, as a certain amount of customer demand shifted online. Brand Portfolio segment net sales was also negatively impacted by the COVID-19 outbreak as our retailer customers temporarily closed stores and canceled orders.

Gross Profit- The following summarizes gross profit by segment:
Nine months ended
October 31, 2020 November 2, 2019 Change
(dollars in thousands)
Amount % of Segment Net Sales Amount % of Segment Net Sales Amount % Basis Points
Segment gross profit:
U.S. Retail $ 124,806  9.8  % $ 619,356  29.7  % $ (494,550) (79.8) % (1,990)
Canada Retail 22,244  15.8  % 65,171  34.0  % $ (42,927) (65.9) % (1,820)
Brand Portfolio 24,592  12.5  % 93,308  27.0  % $ (68,716) (73.6) % (1,450)
Other 962  1.5  % 21,643  23.0  % $ (20,681) (95.6) % (2,150)
172,604  799,478 
Elimination of intersegment gross loss (profit) 3,634  (5,664)
Gross profit $ 176,238  10.8  % $ 793,814  29.8  % $ (617,576) (77.8) % (1,900)

The decrease in gross profit was primarily driven by the impacts of the COVID-19 outbreak on our operations and the temporary closure of stores and significantly reduced customer traffic since re-opening, which we addressed with aggressive promotional activity. The impact of COVID-19 and the actions we took also resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleveraging of distribution and fulfillment, store occupancy, and royalty expenses on lower sales volume. The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores. As of October 31, 2020, we had approximately $18.0 million of additional inventory reserves over the same period last year.

26

Elimination of intersegment gross profit (loss) consisted of the following:
Nine months ended
(in thousands) October 31, 2020 November 2, 2019
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment $ (47,478) $ (53,813)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment 34,116  39,281 
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period 16,996  8,868 
Gross loss (profit) $ 3,634  $ (5,664)

Operating Expenses- For the nine months ended October 31, 2020, operating expenses decreased by $103.3 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 and the reduction of our workforce and reductions in store labor initiated at the end of the second quarter of fiscal 2020. Operating expenses during the nine months ended October 31, 2020 were offset by a gain from a settlement with a vendor of $9.0 million and government subsidies in the form of qualified payroll tax credits of $9.3 million.

Impairment Charges- As a result of the material reduction in net sales and cash flows, we updated our 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 nine months ended October 31, 2020, we recorded impairment charges of $122.9 million. Also, during the nine months ended October 31, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible, resulting in a full impairment due to the lack of projected cash flows over the remaining useful life.

Also as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the nine months ended October 31, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

Interest Expense, net- For the nine months ended October 31, 2020, interest expense increased over the same period last year due to additional debt under our new ABL Revolver and Term Loan, which have higher interest rates.

Income Taxes- Our effective tax rate changed from 24.6% for the nine months ended November 2, 2019 to 33.4% for the nine months ended October 31, 2020. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S. federal statutory tax rate was 35% pursuant to the CARES Act.

Seasonality

Our business has historically been subject to seasonal merchandise 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. The COVID-19 outbreak negatively impacted our peak spring and fall selling seasons and we expect that the trends that we have experienced historically may change for the remainder of fiscal 2020. With our customers staying home, there has been a clear shift in consumer behavior and preferences to increased demand for athleisure and casual products and away from dress and seasonal categories, which may result in changes in seasonal cadence. In addition, the recent resurgence of COVID-19 may further adversely impact our results of operations.

27

Liquidity and Capital Resources

Overview

Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. Our working capital and inventory levels fluctuate seasonally. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy and withstand unanticipated business volatility, including the impact of the outbreak of COVID-19. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our ABL Revolver, are sufficient to maintain our ongoing operations, support working capital requirements, and fund capital expenditures over the next 12 months.

Operating Cash Flows

For the nine months ended October 31, 2020, net cash used in operations was $106.3 million compared to net cash provided by operations of $118.1 million for the nine months ended November 2, 2019. The change was driven by the net loss incurred during fiscal 2020 as a result of the COVID-19 outbreak, which was partially offset by measures we implemented to manage our working capital to preserve liquidity, including renegotiating vendor and landlord terms, reducing inventory orders, and significantly cutting costs.

Investing Cash Flows

For the nine months ended October 31, 2020, our net cash provided by investing activities was $6.8 million, which was due to the liquidation of our available-for sale-securities, the proceeds from a settlement from a vendor, and capital expenditures of $26.9 million, which were reduced in order to preserve liquidity. During the nine months ended November 2, 2019, our net cash used in investing activities was $10.3 million, which was due to capital expenditures of $59.6 million exceeding the net liquidation of our available-for-sale securities and the proceeds from a working capital settlement related to our Camuto Group acquisition.

Financing Cash Flows

For the nine months ended October 31, 2020, our net cash provided by financing activities was $127.2 million compared to net cash used in financing activities of $120.6 million for the nine months ended November 2, 2019. During the nine months ended October 31, 2020, we had net proceeds from borrowings from our ABL Revolver and Term Loan offset by the settlement of borrowings under the Credit Facility and the payment of debt issuance costs associated with the changes we made to our debt structure. We also significantly reduced the amount of dividends paid as we reduced the dividends paid during the first quarter of fiscal 2020 and did not pay any dividends during the second and third quarters of fiscal 2020. During the nine months ended November 2, 2019, net cash used in financing activities was primarily related to the payment of dividends and the repurchase of Class A common shares partially financed using our Credit Facility.

Debt

ABL Revolver- On August 7, 2020, we replaced our Credit Facility with the ABL Revolver, which provides a revolving line of credit of up to $400.0 million, including a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of letters of credit, a $40.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Term Loan. The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 31, 2020, the ABL Revolver had a borrowing base of $400.0 million, with $100.0 million outstanding and $5.0 million in letters of credit issued, resulting in $295.0 million available for borrowings.

Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.25% as of October 31, 2020. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
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Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the ABL Revolver.

Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.75% as of October 31, 2020.

Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary events of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral.

Capital Expenditure Plans

We expect to spend approximately $30.0 million to $35.0 million for capital expenditures in fiscal 2020, of which we invested $26.9 million during the nine months ended October 31, 2020. 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 projects that we undertake and the timing of these expenditures.

Off-Balance Sheet Liabilities and Other Contractual Obligations

We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. The following table presents a summary of our minimum contractual commitments and obligations as of October 31, 2020:
Payments due by Period
(in thousands) Total Less Than
1 Year 		1 - 3
Years 		3 - 5
Years 		More Than
5 Years
Operating lease liabilities $ 1,056,867  $ 259,702  $ 389,097  $ 224,418  $ 183,650 
Debt, including estimated interest payments (1)
447,030  89,662  65,768  291,600  — 
Minimum license commitments(2)
253,095  34,556  69,304  62,674  86,561 
Purchase obligations(3)
8,064  6,989  1,075  —  — 
Total $ 1,765,056  $ 390,909  $ 525,244  $ 578,692  $ 270,211 

(1)    Interest payments on our ABL Revolver and Term Loan were estimated using their respective interest rate as of October 31, 2020 and assuming interest payments on $100.0 million outstanding on our ABL Revolver through the maturity date of August 2025.
(2)    Minimum license commitments include guaranteed minimum royalties, including amounts due to ABG-Camuto, and fixed licensing and other fees due to other parties.
(3)    Purchase obligations include commitments where we would not be able to cancel such obligations without payment or penalty, including items to be purchased for projects that were under construction or for which a lease has been signed.

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

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation
of the 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 2019 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 2019 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 the Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). 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

We are involved, from time to time, in various legal claims and proceedings incidental to our business. Although it is not possible to predict with certainty the ultimate outcome of such claims and proceedings, we believe the amount of any potential liability with respect to current legal proceedings will not be material to our financial condition, results of operations or liquidity. We accrue legal and other direct costs related to loss contingencies when actually incurred. We established reserves we believe to be appropriate for pending matters and, after consultation with counsel and giving appropriate consideration to available insurance, we believe that the ultimate outcome of any matter currently pending against us will not materially affect our financial condition, results of operations or liquidity.
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Item 1A.     Risk Factors

The following risk factors supplement and update our risk factors as set forth in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, as amended.

The COVID-19 outbreak has had, and may continue to have, a material adverse impact on our business, operations, liquidity, financial condition, and results of operations.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as reductions to our expense and capital expenditure plans.

Following the earlier easing of stay-at-home orders and other state-imposed restrictions on non-essential businesses during the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. In July 2020, we implemented an internal reorganization and reduction of our workforce, resulting in the elimination of approximately 1,000 associate positions, including over 200 vacant positions that will not be filled.

Although all of our stores were open at the end of the third quarter of fiscal 2020, we experienced during the quarter, and have continued to experience, significantly reduced customer traffic and net sales. Our retail customers in the Brand Portfolio Segment are having similar experiences. Given the continuation of overall depressed consumer sentiment, customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all. We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures primarily during the first half of fiscal 2020 and continuing reduced customer traffic, resulted in a sharp decline in our net sales and cash flows.

The COVID-19 pandemic remains challenging, and with the resurgence of the COVID-19 outbreak and related restrictions imposed by state and local government authorities designed to slow the virus's spread, we may be required to close stores in certain locations that we only recently re-opened. The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences during our peak fall season, including reductions in consumer spending, which may necessitate further shifts in our business model. As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Losses or disruptions associated with our distribution systems, including our distribution and fulfillment centers and our stores, could have a material adverse effect on our business and operations.

For our U.S. Retail segment operations, the majority of our inventory is shipped directly from suppliers to our distribution center in Columbus, Ohio and a West Coast facility operated by a third party, where the inventory is then processed, sorted and shipped to one of our pool locations located throughout the country and then on to the stores. Our inventory can also be shipped directly from our fulfillment center, also located in Columbus, Ohio, and supported by a third-party service provider, to our customers. For our Canada Retail segment, we engage a logistics service provider to receive purchases and distribute to our stores. Through our ship from store capability, both in the U.S. and in Canada, inventory is shipped directly from our stores to customers. Through our drop ship program, inventory is shipped from the vendor's warehouse directly to the customer. For our Brand Portfolio segment, the majority of our inventory is shipped directly from factories to our distribution center in Westampton, New Jersey, where our wholesale inventory is then processed, sorted and provided to our customers' shipping carriers.

Our operating results depend on the orderly operation of our receiving, distribution, and fulfillment processes, which in turn depends on vendors' adherence to shipping schedules and our effective management of our facilities. We may not anticipate all the changing demands that our expanding operations will impose on our receiving, distribution, and fulfillment system, and events beyond our control, such as disruptions in operations due to public health threats, such as the COVID-19 outbreak, integration of new stores or customers, catastrophic events, labor disagreements, or shipping problems, that may result in delays
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in the delivery of merchandise to our stores and customers. While we maintain business interruption and property insurance, in the event any of our distribution and fulfillment centers shut down for any reason or if we were to incur higher costs and longer lead times in connection with a disruption at our distribution and fulfillment centers, our insurance may not be sufficient to cover the impact to the business.

Our distribution system is dependent on the timely performance of services by third parties. Our third-party vendors may be the victim of cyber-related attacks that could lead to operational disruptions that could have an adverse effect on our ability to fulfill customer orders. The COVID-19 pandemic could also impact our ability to timely meet our customers’ needs for fulfillment due to disruptions with third-party vendors, carriers, and other service providers, as well as increased freight and logistics costs. We are also subject to risk of damage or loss during delivery by our shipping vendors. If our merchandise is not delivered in a timely fashion or is damaged or lost during the delivery process, our customers could become dissatisfied and cease shopping on our sites, which would adversely affect our business and operating results. If we encounter problems with our ability to timely and satisfactorily fulfill customer orders, our ability to meet customer expectations, manage inventory, complete sales and achieve operating efficiencies could have a material adverse effect on our business.

Measures intended to prevent the spread of COVID-19 may negatively impact our operations.

In response to the COVID-19 outbreak and the government mandates implemented to control its spread, most of our corporate office associates are working remotely. If our employees are unable to work effectively as a result of the COVID-19 outbreak, including because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurity incidents, data breaches or cyber-attacks, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of proprietary data, interruptions or delays in the operation of our business, damage to our reputation and any government-imposed penalty.

COVID-19 may negatively impact our international operations, including, but not limited to, our foreign sources of merchandise.

We have international operations in China, Canada, and Brazil. Our international operations may be adversely affected by the COVID-19 outbreak. For example, all of the products we manufacture in the Brand Portfolio segment come from third-party facilities outside of the U.S., with 83% sourced from China during fiscal 2019, whereas our U.S. Retail and Canada Retail merchandise is purchased from both domestic and foreign vendors. Many of our domestic vendors import a large portion of their merchandise from abroad, with the majority manufactured in China. The COVID-19 outbreak has led to work and travel restrictions within, to, and out of mainland China, which in turn may affect our manufacturers as well as our vendors’ manufacturers. The COVID-19 outbreak also may make it difficult for our suppliers and our vendors’ suppliers to source raw materials from, manufacture goods in, and export products from China and other countries. If the severity and reach of the COVID-19 outbreak continues or worsens, there may be significant and material disruptions to our supply chain and operations, which could have a material adverse effect on our financial position, results of operations, and cash flows.

The success of our business is dependent on the strength of our relationships with our retailer customers, and reductions in or loss of sales to such customers as a result of the COVID-19 outbreak could have a material adverse effect on our business and financial performance.

Our major retailer customers have experienced and may continue to experience a significant downturn in their businesses as a result of the COVID-19 outbreak and, in turn, these customers have and may continue to reduce their purchases from us, which has had and may continue to have a material adverse effect on the Brand Portfolio segment.

We may be unable to anticipate and respond to fashion trends, consumer preferences and changing customer expectations, which could have a material adverse effect on our business.

With our customers staying home more as a result of COVID-19, we believe that there will continue to be a clear shift in consumer behavior and corresponding preferences to increased demand for athleisure and casual products and away from dress and seasonal categories. This requires us to anticipate and respond to numerous and fluctuating variables in fashion trends and other conditions in the markets in which our customers are situated. A variety of factors will affect our ability to maintain the proper mix of products, including: local economic conditions impacting customers' discretionary spending; unanticipated fashion trends; our ability to provide timely access to popular brands at attractive prices; our success in distributing merchandise to our stores and our wholesale retailer customers in an efficient manner; and changes in weather patterns, which, in turn, may affect consumer preferences. If we are unable to anticipate trends and fulfill the merchandise needs of our
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customers, we may experience decreases in our net sales and may be forced to increase markdowns in relation to slow-moving merchandise, either of which could have a material adverse effect on our business.

Being an omni-channel retailer is a business necessity to meet customer experience expectations. In the event that our omni-channel strategy does not meet customer expectations or is not differentiated from our competitors, it may have a material adverse effect on our business.

We rely on our strong relationships with vendors to purchase products. If these relationships were to be impaired, we may be unable to obtain a sufficient assortment of merchandise at attractive prices or respond promptly to changing fashion trends, either of which could have a material adverse effect on our business and financial performance.

Our success depends, to a significant extent, on the willingness and ability of our vendors to supply us with merchandise that meets our changing customer expectations, especially as we concentrate our receipts to fewer branded vendors. If we fail to maintain strong relationships with these vendors or if they fail to ensure the quality of merchandise they supply us, our ability to provide our customers with merchandise they want at favorable prices may be limited, which could have a negative impact on our business. Decisions by vendors to not sell to us or to limit the availability of their products to us could have a negative impact on our business. In addition, our inability to stock our sales channels with desired merchandise at attractive prices could result in lower net sales and decreased customer interest in our sales channels, which could have a material adverse effect on our business. Further, if our merchandise costs increase due to increases incurred by our vendors in raw materials, energy, labor, or duties and taxes on imports, or other reasons, our ability to respond or the effect of our response could adversely affect our net sales or gross profit. During fiscal 2019, three key third-party vendors together supplied approximately 21% of our retail merchandise. For fiscal 2020, we expect these and other high-volume vendors to become more concentrated for our total purchases. The loss of, or a reduction in, the amount and quality of merchandise supplied by any one of these vendors could have an adverse effect on our business. In addition, any negative brand image, wide-spread product defects, or negative publicity related to these key vendors, or other vendors, could have a material adverse effect on our reputation and on our business.

We rely on consumer discretionary spending, which may be adversely affected by economic downturns and other macroeconomic conditions or trends and/or exacerbated as a result of the COVID-19 pandemic.

Our business and operating results are subject to global economic conditions and their impact on consumer discretionary spending. Many factors that may negatively influence consumer spending are becoming increasingly present as a result of COVID-19 and political instability, including high levels of unemployment, higher consumer debt levels, reductions in net worth, declines in asset values and related market uncertainty, fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, general uncertainty regarding the overall future political and economic environment, and recent large-scale social unrest across much of the U.S. Consumer purchases of discretionary items, including our products, generally decline during periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. Additionally, any of these adverse economic, political or social conditions may have the effect of directly or indirectly impacting our operating results in a negative manner. Moreover, we are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business.

Stein Mart filing for relief under Chapter 11 of the United States Bankruptcy Code could have a material adverse effect on our business and financial performance.

On August 12, 2020, Stein Mart, the primary customer within the Other segment, filed for relief under Chapter 11 of the United States Bankruptcy Code and announced its plan to liquidate inventory. The ultimate outcome of the filing and liquidation sale is subject to the oversight and approval of the bankruptcy court. As of the end of the third quarter of fiscal 2020, all stores have been closed with no remaining inventory on hand and only an immaterial amount of receivables to collect.

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 (the "Repurchase Program"), which was added to the $33.5 million remaining from the previous authorization. The Repurchase Program 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 payment of dividends is at the discretion of our Board of Directors and is based on our future earnings, cash flow, financial condition, capital requirements, changes in taxation laws, general economic condition and any other relevant factors.

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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. Refer to Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt. We currently do not anticipate paying dividends or repurchasing additional shares under the 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
1.1
10.1
10.2
10.3*
31.1*
31.2*
32.1**
32.2**
101* The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended October 31, 2020, 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

34

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: December 9, 2020 By:  /s/ Jared Poff
Jared Poff
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized officer)

35
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