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 August 3, 2019

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 1-32545

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 August 23, 2019: 64,911,631 Class A Common Shares and 7,732,786 Class B Common Shares.

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DESIGNER BRANDS INC.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations	1
Condensed Consolidated Statements of Comprehensive Income (Loss)	2
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Shareholders' Equity	4
Condensed Consolidated Statements of Cash Flows	5
Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults Upon Senior Securities	34
Item 4. Mine Safety Disclosures	34
Item 5. Other Information	34
Item 6. Exhibits	35
Signature	36

All references to "we," "us," "our," "Designer Brands Inc.," or the "Company" in this Quarterly Report on Form 10-Q mean Designer Brands Inc. and its subsidiaries. References to "DSW" refer to the DSW Designer Shoe Warehouse banner unless otherwise stated.

We own many trademarks and service marks. This Quarterly Report on Form 10-Q may contain trademarks, trade dress, and tradenames of other companies. Use or display of other parties' trademarks, trade dress or tradenames is not intended to and does not imply a relationship with the trademark, trade dress or tradename owner.

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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								Six months ended
	August 3, 2019				August 4, 2018				August 3, 2019				August 4, 2018
Revenue:
Net sales	$	849,640			$	793,735			$	1,719,632			$	1,504,172
Commission, franchise and other revenue	10,558				1,533				19,081				3,198
Total revenue	860,198				795,268				1,738,713				1,507,370
Cost of sales	(594,779		)		(539,240		)		(1,208,735		)		(1,044,452		)
Operating expenses	(226,616		)		(195,319		)		(449,422		)		(363,739		)
Income from equity investment in ABG-Camuto	2,464				—				4,692				—
Impairment charges	—				(36,240		)		—				(36,240		)
Operating profit	41,267				24,469				85,248				62,939
Interest income (expense), net	(1,972		)		805				(3,773		)		1,469
Non-operating income (expenses), net	199				(47,349		)		(143		)		(49,486		)
Income (loss) before income taxes and loss from equity investment in TSL	39,494				(22,075		)		81,332				14,922
Income tax provision	(12,087		)		(16,281		)		(22,731		)		(27,671		)
Loss from equity investment in TSL	—				—				—				(1,310		)
Net income (loss)	$	27,407			$	(38,356	)		$	58,601			$	(14,059	)
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share	$	0.37			$	(0.48	)		$	0.78			$	(0.18	)
Diluted earnings (loss) per share	$	0.37			$	(0.48	)		$	0.77			$	(0.18	)
Weighted average shares used in per share calculations:
Basic shares	73,529				80,265				75,267				80,187
Diluted shares	74,316				80,265				76,281				80,187

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

1

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DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited and in thousands)

	Three months ended								Six months ended
	August 3, 2019				August 4, 2018				August 3, 2019				August 4, 2018
Net income (loss)	$	27,407			$	(38,356	)		$	58,601			$	(14,059	)
Other comprehensive income (loss), net of income taxes:
Foreign currency translation gain (loss)	461				(1,365		)		(253		)		(6,050		)
Unrealized net gain (loss) on debt securities	196				27				438				(317		)
Reclassification adjustment for net losses (gains) realized in net income (loss)	23				12,260				(65		)		14,165
Total other comprehensive income, net of income taxes	680				10,922				120				7,798
Total comprehensive income (loss)	$	28,087			$	(27,434	)		$	58,721			$	(6,261	)

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

2

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DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands)

	August 3, 2019				February 2, 2019				August 4, 2018
ASSETS
Cash and cash equivalents	$	51,762			$	99,369			$	215,996
Investments	25,504				69,718				73,119
Accounts receivable, net	85,162				68,870				17,259
Inventories	706,168				645,317				596,956
Prepaid expenses and other current assets	55,561				71,945				73,763
Total current assets	924,157				955,219				977,093
Property and equipment, net	402,779				409,576				387,621
Operating lease assets	975,963				—				—
Goodwill	116,280				89,513				25,899
Intangible assets	21,112				46,129				20,285
Deferred tax assets	29,515				30,283				14,235
Equity investment in ABG-Camuto	55,033				58,125				—
Other assets	32,407				31,739				19,883
Total assets	$	2,557,246			$	1,620,584			$	1,445,016
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$	289,457			$	261,625			$	229,440
Accrued expenses	173,437				201,535				145,776
Current operating lease liabilities	185,969				—				—
Total current liabilities	648,863				463,160				375,216
Debt	235,000				160,000				—
Non-current operating lease liabilities	905,546				—				—
Other non-current liabilities	38,590				165,047				150,316
Total liabilities	1,827,999				788,207				525,532
Commitments and contingencies
Shareholders' equity:
Common shares paid-in capital, no par value	988,305				978,794				971,653
Treasury shares, at cost	(498,436		)		(373,436		)		(325,906		)
Retained earnings	266,957				254,718				301,006
Basis difference related to acquisition of commonly controlled entity	(24,993		)		(24,993		)		(24,993		)
Accumulated other comprehensive loss	(2,586		)		(2,706		)		(2,276		)
Total shareholders' equity	729,247				832,377				919,484
Total liabilities and shareholders' equity	$	2,557,246			$	1,620,584			$	1,445,016

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

3

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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				Basis difference related to acquisition of commonly controlled entity				Accumulated other comprehensive loss				Total
Three months ended August 3, 2019
Balance, May 4, 2019	67,434			7,733			18,501			$	982,093			$	(448,436	)		$	257,453			$	(24,993	)		$	(3,266	)		$	762,851
Net income	—			—			—			—				—				27,407				—				—				27,407
Stock-based compensation activity	145			—			—			6,212				—				—				—				—				6,212
Repurchase of Class A common shares	(2,668	)		—			2,668			—				(50,000		)		—				—				—				(50,000		)
Dividends ($0.25 per share)	—			—			—			—				—				(17,903		)		—				—				(17,903		)
Other comprehensive income	—			—			—			—				—				—				—				680				680
Balance, August 3, 2019	64,911			7,733			21,169			$	988,305			$	(498,436	)		$	266,957			$	(24,993	)		$	(2,586	)		$	729,247
Three months ended August 4, 2018
Balance, May 5, 2018	72,470			7,733			13,091			$	965,623			$	(325,906	)		$	359,342			$	(24,993	)		$	(13,198	)		$	960,868
Net loss	—			—			—			—				—				(38,356		)		—				—				(38,356		)
Stock-based compensation activity	91			—			—			6,030				—				—				—				—				6,030
Dividends ($0.25 per share)	—			—			—			—				—				(19,980		)		—				—				(19,980		)
Other comprehensive income	—			—			—			—				—				—				—				10,922				10,922
Balance, August 4, 2018	72,561			7,733			13,091			$	971,653			$	(325,906	)		$	301,006			$	(24,993	)		$	(2,276	)		$	919,484
Six months ended August 3, 2019
Balance, February 2, 2019	70,672			7,733			15,091			$	978,794			$	(373,436	)		$	254,718			$	(24,993	)		$	(2,706	)		$	832,377
Cumulative effect of accounting change	—			—			—			—				—				(9,556		)		—				—				(9,556		)
Net income	—			—			—			—				—				58,601				—				—				58,601
Stock-based compensation activity	317			—			—			9,511				—				—				—				—				9,511
Repurchase of Class A common shares	(6,078	)		—			6,078			—				(125,000		)		—				—				—				(125,000		)
Dividends ($0.50 per share)	—			—			—			—				—				(36,806		)		—				—				(36,806		)
Other comprehensive income	—			—			—			—				—				—				—				120				120
Balance, August 3, 2019	64,911			7,733			21,169			$	988,305			$	(498,436	)		$	266,957			$	(24,993	)		$	(2,586	)		$	729,247
Six months ended August 4, 2018
Balance, February 3, 2018	72,294			7,733			13,091			$	961,245			$	(325,906	)		$	354,979			$	(24,993	)		$	(10,074	)		$	955,251
Net loss	—			—			—			—				—				(14,059		)		—				—				(14,059		)
Stock-based compensation activity	267			—			—			10,408				—				—				—				—				10,408
Dividends ($0.50 per share)	—			—			—			—				—				(39,914		)		—				—				(39,914		)
Other comprehensive income	—			—			—			—				—				—				—				7,798				7,798
Balance, August 4, 2018	72,561			7,733			13,091			$	971,653			$	(325,906	)		$	301,006			$	(24,993	)		$	(2,276	)		$	919,484

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

4

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DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

	Six months ended
	August 3, 2019				August 4, 2018
Cash flows from operating activities:
Net income (loss)	$	58,601			$	(14,059	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	42,485				38,429
Stock-based compensation expense	9,731				9,698
Deferred income taxes	1,043				13,526
Loss (income) from equity investments	(4,692		)		1,310
Loss on previously held equity investment in TSL and notes receivable from TSL	—				33,988
Impairment charges	—				36,240
Lease exit non-cash charges	—				3,910
Loss on foreign currency reclassified from accumulated other comprehensive loss	—				13,963
Other	538				8,106
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivable	(14,800		)		3,767
Inventories	(61,748		)		(37,308		)
Prepaid expenses and other current assets	(2,972		)		(23,257		)
Accounts payable	30,683				26,219
Accrued expenses	(24,677		)		(7,960		)
Net cash provided by operating activities	34,192				106,572
Cash flows from investing activities:
Cash paid for property and equipment	(40,259		)		(32,103		)
Purchases of available-for-sale investments	(3,014		)		(16,735		)
Sales of available-for-sale investments	47,764				67,280
Additional borrowings by TSL	—				(15,989		)
Business acquisitions, net of cash acquired	—				(28,152		)
Net cash provided by (used in) investing activities	4,491				(25,699		)
Cash flows from financing activities:
Borrowing on revolving line of credit	320,700				—
Payments on revolving line of credit	(245,700		)		—
Cash paid for treasury shares	(125,000		)		—
Dividends paid	(36,806		)		(39,910		)
Other	(397		)		(1,199		)
Net cash used in financing activities	(87,203		)		(41,109		)
Effect of exchange rate changes on cash balances	(286		)		300
Net increase (decrease) in cash, cash equivalents, and restricted cash	(48,806		)		40,064
Cash, cash equivalents, and restricted cash, beginning of period	100,568				175,932
Cash and cash equivalents, end of period	$	51,762			$	215,996
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	21,796			$	28,135
Cash paid for interest on debt	$	4,052			$	—
Cash paid for operating lease liabilities	$	118,563			$	—
Non-cash investing and financing activities:
Property and equipment purchases not yet paid	$	8,648			$	8,390
Operating lease liabilities arising from lease asset additions (excluding ASU 2016-02 transition adjustments)	$	9,184			$	—
Adjustment to operating lease assets and lease liabilities for modifications	$	48,029			$	—

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

5

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Table of Contents     

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.

On May 10, 2018, we acquired the remaining interest in Town Shoes Limited ("TSL") that we did not previously own. Beginning with our second quarter of fiscal 2018, TSL ceased being accounted for under the equity method of accounting and was accounted for as a consolidated wholly-owned subsidiary. As a result of this acquisition, we operate a Canadian business that is a retailer of branded footwear under The Shoe Company, Shoe Warehouse, and DSW Designer Shoe Warehouse banners, as well as related e-commerce sites. Subsequent to the acquisition, and as a result of our strategic review, we exited the Town Shoes banner in Canada during fiscal 2018.

On November 5, 2018, we completed the acquisition of Camuto LLC, doing business as Camuto Group ("Camuto Group"), a footwear design and brand development organization, from Camuto Group LLC (the "Sellers"). The Camuto Group acquisition provides us a global production, sourcing and design infrastructure, including operations in Brazil and China, a new state-of-the-art distribution center in New Jersey, footwear licenses of brands, including Jessica Simpson and Lucky Brand, and branded e-commerce sites. Camuto Group earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels ("First Cost"), and the sale of branded products on direct-to-consumer e-commerce sites.

Also on November 5, 2018, in partnership with Authentic Brands Group LLC, a global brand management and marketing company, we formed ABG-Camuto, LLC ("ABG-Camuto"), a joint venture in which we have a 40% interest. This joint venture acquired several intellectual property rights from the Sellers, including Vince Camuto, Louise et Cie, Sole Society, CC Corso Como, Enzo Angiolini and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. We have entered into a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands owned by ABG-Camuto.

On March 4, 2016, we acquired Ebuys, Inc. ("Ebuys"), an off-price footwear and accessories retailer operating in digital marketplaces. Due to recurring operating losses incurred by Ebuys since its acquisition, as well as increased competitive pressures in the digital marketplace, we decided to exit the business and ended all operations in the first quarter of fiscal 2018.

On August 2, 2016, we signed an agreement with the Apparel Group as an exclusive franchise partner in the Gulf Coast region of the Middle East. During the fourth quarter of fiscal 2018, we provided our termination notice to the Apparel Group in accordance with the terms of the agreement and we are winding down the franchise operations during fiscal 2019.

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 Designer Shoe Warehouse banner and its related e-commerce site. The Canada Retail segment, which is the result of the TSL acquisition, includes stores operated in Canada under The Shoe Company, Shoe Warehouse, DSW Designer Shoe Warehouse banners and related e-commerce sites. The Brand Portfolio segment, which is the result of the Camuto Group acquisition, includes sales from wholesale, First Cost, and direct-to-consumer branded e-commerce sites. Our other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("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 2, 2019 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 our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 26, 2019.

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.

6

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

Variable Interest Entities- We have certain joint ventures ("JVs") where each joint venture licenses brands and contracts with Camuto Group to provide design, buying and sourcing services. Under the JVs, Camuto Group is responsible for managing all aspects of the brands and the JVs pay royalties, commissions, or consulting fees to the other parties. We are responsible for providing all funding to support the working capital needs of the JVs. As a result, we have determined that we are the primary beneficiary of the JVs and consolidate the JVs within our financial statements. Assets and liabilities of the JVs in the aggregate are immaterial. At the end of the three months ended August 3, 2019, we terminated two JVs along with related licensing and design, buying and sourcing arrangements.

Integration and Restructuring Costs- During the six months ended August 3, 2019, we incurred integration and restructuring costs related to our prior year acquisition activity, which consisted primarily of $3.6 million in severance, a $6.1 million termination fee for terminating two JVs, and $2.4 million of professional fees and other integration costs. During the six months ended August 4, 2018, we incurred restructuring costs of $2.7 million in severance, primarily related to changes to our store staffing model. These costs are included in operating expenses in the condensed consolidated statements of operations. As of August 3, 2019 and August 4, 2018, we had $4.6 million and $1.6 million, respectively, of severance liability included in accrued expenses on the condensed consolidated balance sheets.

Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including the JVs. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in United States 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 revenue and expenses during the reporting period. Significant estimates are required as a part of 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, self-insurance reserves, and valuations used to account for acquisitions. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results could differ from these estimates.

Income Taxes- Our effective tax rate changed from 203.3% for the six months ended August 4, 2018 to 27.9% for the six months ended August 3, 2019. The decrease in the effective tax rate was primarily driven by valuation allowances and the goodwill impairment associated with the TSL acquisition during the six months ended August 4, 2018.

Cash, Cash Equivalents, and Restricted Cash- Cash and cash equivalents represent cash, money market funds and credit card receivables that generally settle within three days. Restricted cash represented cash that was restricted as to withdrawal or usage and consisted of a mandatory cash deposit for certain outstanding letters of credit.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:

(in thousands)	August 3, 2019				February 2, 2019				August 4, 2018
Cash and cash equivalents	$	51,762			$	99,369			$	215,996
Restricted cash, included in prepaid expenses and other current assets	—				1,199				—
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows	$	51,762			$	100,568			$	215,996

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Fair Value- Fair value is defined as the price that would be received to sell 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 are 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.

Prior Period Reclassifications- Certain prior period reclassifications were made to conform to the current period presentation. Franchise costs was reclassified to operating expenses, and accounts payable to related parties was reclassified to accounts payable.

Adoption of ASU 2016-02, Leases- During the first quarter of fiscal 2019, we adopted the new accounting standard for leases, Accounting Standards Update ("ASU") 2016-02 and the related amendments. We elected to initially apply ASU 2016-02 as of February 3, 2019, with the recognition of $1.0 billion of lease assets and $1.1 billion of lease liabilities and a cumulative-effect adjustment that decreased retained earnings by $9.6 million for transition impairments related to previously impaired leased locations. Periods prior to February 3, 2019 were not restated. Upon transition to ASU 2016-02, we recognized lease liabilities based on the present value of the remaining future fixed lease commitments, net of outstanding tenant allowance receivables, with corresponding lease assets. Amounts for prepaid expenses, deferred rent, deferred construction and tenant allowances, the accrual for lease obligations, and favorable and unfavorable leasehold interests were netted against the lease assets. At transition, we elected the package of practical expedients, which allows us to carry forward the historical lease classification and not reassess whether any expired or existing contracts are leases or contain leases. We did not elect the use of hindsight to determine the term of our leases at transition.

A lease liability for new leases is recorded based on the present value of future fixed lease commitments with a corresponding lease asset. For leases classified as operating leases, we recognize a single lease cost on a straight-line basis based on the combined amortization of the lease liability and the lease asset. Other leases will be accounted for as finance arrangements. For real estate leases, we are generally required to pay base rent, real estate taxes, and insurance, which are considered lease components, and maintenance, which is a non-lease component. As provided for under ASU 2016-02, we have elected to not separate non-lease payment components from the associated lease component for all new real estate leases. We determine the discount rate for each lease by estimating the rate that we would be required to pay on a secured borrowing for an amount equal to the lease payments over the lease term.

Prior to the adoption of ASU 2016-02, we recognized rent expense on a straight-line basis over the noncancelable terms of the lease. For leases with fixed increases of the minimum rentals during the noncancelable term, we recorded the difference between the amounts charged to expense and the rent paid as deferred rent and amortized such deferred rent upon the delivery of the lease location by the lessor. In addition, cash allowances received from landlords were deferred and amortized on a straight-line basis over the noncancelable terms of the lease as a reduction of rent expense. Deferred rent and construction and tenant allowances are included in non-current liabilities on the condensed consolidated balance sheets for periods prior to February 3, 2019. Also, we recorded reserves for leased spaces that were abandoned due to closure. Using a credit-adjusted risk-free rate to calculate the present value of the liability, we estimated future lease obligations based on remaining fixed lease payments, estimated or actual sublease income, and any other relevant factors.

Adoption of ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software- Also during the first quarter of fiscal 2019, we early adopted ASU 2018-15 on a prospective basis, which aligned the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or acquire internal-use software. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

2.    ACQUISITIONS AND EQUITY METHOD INVESTMENT

Step Acquisition of TSL- On May 10, 2018, we acquired the remaining interest in TSL for $36.2 million Canadian dollars ("CAD") ($28.2 million USD), net of acquired cash of $8.5 million CAD ($6.6 million USD), by exercising our call option. This was accounted for as a step acquisition whereby we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of the purchase price. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating income (expenses), net, in the consolidated statements of operations. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation adjustments related to the previously held balances from accumulated other comprehensive loss to non-operating income (expenses), net.

The purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired was finalized as of February 2, 2019 and consisted of the following (in USD):

(in thousands)	Final Purchase Price and Allocation
Purchase price:
Cash consideration, net of cash acquired	$	28,152
Replacement stock-based awards attributable to pre-acquisition services	196
Fair value of previously held assets	92,242
	$	120,590
Fair value of assets and liabilities acquired:
Inventories	$	66,072
Other current assets	3,687
Property and equipment	41,008
Goodwill	43,022
Intangible assets	20,689
Accounts payable and accrued expenses	(33,196		)
Non-current liabilities	(20,692		)
	$	120,590

The fair value of previously held assets was determined immediately before the business combination, primarily by considering the income valuation approach (discounted cash flow) and the market valuation approach (precedent comparable transactions). Additionally, other information such as current market, industry and macroeconomic conditions were utilized to assist in developing these fair value measurements. The fair value of intangible assets includes $15.7 million for tradenames, $3.6 million for favorable leasehold interests, and $1.4 million for customer relationships associated with the Canada loyalty program. The fair value of unfavorable leasehold interests, included in non-current liabilities, was $7.6 million. The fair value for tradenames was determined using the relief from royalty method of the income approach, the fair value for leasehold interests was determined based on the market valuation approach, and the fair value for customer relationships related to the loyalty program was determined using the replacement cost method. The fair values for property and equipment were determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs.

The goodwill represents the excess of the purchase price over the fair value of the net assets acquired. With this being a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during fiscal 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of the Canada Retail segment's goodwill. A portion of the goodwill is not expected to be deductible for income tax purposes.

During the three months and six months ended August 4, 2018, our condensed consolidated statements of operations included revenue and net losses for TSL of $72.5 million and $38.5 million, respectively, which included the goodwill impairment charge of $36.2 million. Primarily in fiscal 2018, we incurred $3.1 million of acquisition-related costs as a result of the step

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

acquisition (not included in the TSL net loss disclosed in the previous sentence), which were included in operating expenses in the condensed consolidated statements of operations.

Acquisition of Camuto Group- On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group for $171.3 million, net of acquired cash of $9.7 million. The purchase price of the acquisition, along with the acquired equity investment in ABG-Camuto (discussed below), was funded with available cash and borrowings on the revolving line of credit of $160.0 million.

The following table summarizes the preliminary and revised purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired:

(in thousands)	Preliminary Purchase Price and Allocation as of November 5, 2018				Measurement Period Adjustments				Revised Purchase Price and Allocation as of August 3, 2019
Purchase price -
Cash consideration, net of cash acquired	$	171,251			$	—			$	171,251
Fair value of assets and liabilities acquired:
Accounts receivable	$	83,939			$	3,980			$	87,919
Inventories	74,499				(758		)		73,741
Other current assets	7,197				1,045				8,242
Property and equipment	43,906				960				44,866
Goodwill	63,614				26,767				90,381
Intangible asset	27,000				(21,700		)		5,300
Other assets	13,351				—				13,351
Accounts payable and other liabilities	(122,811		)		(2,195		)		(125,006		)
Non-current liabilities	(19,444		)		(8,099		)		(27,543		)
	$	171,251			$	—			$	171,251

The fair value of the intangible asset relates to customer relationships and was based on the excess earnings method under the income approach. The fair value measurement is based on significant unobservable inputs, including the future cash flows and discount and customer attrition rates. The fair values for property and equipment were determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. The inventory valuation step-up was recognized to cost of goods sold during the fourth quarter of fiscal 2018 based on assumed inventory turns.

The goodwill represents the excess of the purchase price over the fair value of the net assets acquired, and was primarily attributable to acquiring an established design and sourcing process, which provides us the opportunity to expand our exclusive products offering at a lower cost in our retail segments, and an assembled workforce. Goodwill is expected to be deductible for income tax purposes.

Non-current liabilities include $12.7 million of estimated unpaid foreign payroll and other taxes. We recorded an offsetting indemnification asset to other assets, which we expect to collect under the terms of the securities purchase agreement with the Sellers. See Note 16, Commitments and Contingencies, for additional information.

Adjustments made during the three months ended August 3, 2019 are the result of refining preliminary cash flow assumptions relating to certain synergy assumptions to the various reporting units, adjusting accruals and related indemnification receivables based on additional information, and other immaterial adjustments identified as we perform additional analysis of the assets and liabilities acquired. Adjustments to the purchase price and the allocation of the purchase price may be made during a measurement period of up to one year from the acquisition date as additional information that existed at the date of the acquisition is obtained. Measurement period adjustments are recognized on a prospective basis in the period of change. The purchase price is subject to adjustments primarily based upon a working capital provision as provided by the purchase agreement. The allocation of the purchase price is currently based on certain preliminary valuations and analysis that have not been completed as of the date of this filing. In addition, we have not completed the allocation of goodwill to our U.S. Retail and Brand Portfolio segments or the reporting units within the Brand Portfolio segment.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Primarily during fiscal 2018, we incurred $22.2 million of acquisition-related costs as a result of the acquisition, which were included in operating expenses in the condensed consolidated statements of operations.

Equity Investment in ABG-Camuto- On November 5, 2018, we acquired a 40% interest in the newly formed ABG-Camuto joint venture for $56.8 million in partnership with Authentic Brands Group LLC. Also on November 5, 2018, ABG-Camuto acquired several intellectual property rights from the Sellers and entered into a licensing agreement with us, which earns royalties from the net sales of Camuto Group under the brands acquired.

Activity related to our equity investment in ABG-Camuto was as follows:

(in thousands)	Six Months Ended August 3, 2019
Balance at beginning of period	$	58,125
Share of net earnings	4,692
Distributions received	(7,784		)
Balance at end of period	$	55,033

Combined Results- The following table provides the supplemental pro forma total revenue and net loss of the combined entity had the acquisition dates of TSL and Camuto Group and the investment in ABG-Camuto been the first day of our fiscal 2017:

(in thousands)	Three months ended August 4, 2018				Six months ended August 4, 2018
Total revenue	$	886,780			$	1,755,210
Net loss	$	(45,722	)		$	(33,131	)

The amounts in the supplemental pro forma results apply our accounting policies, eliminate intercompany transactions, assume the acquisition-related transaction costs were incurred in fiscal 2017, and reflect adjustments for additional expenses that would have been charged assuming borrowings on the revolving line of credit of $160 million and the same fair value adjustments to inventory, property and equipment, and acquired intangibles had been applied on the first day of our fiscal 2017. Related to the TSL acquisition, the supplemental pro forma results also exclude the loss related to the remeasurement of previously held assets, the net loss of foreign currency translation related to the previously held balances from accumulated other comprehensive loss, and the goodwill impairment charge. Because the ABG-Camuto investment was integral to the Camuto Group acquisition, the supplemental pro forma results include royalty expenses that would be due to ABG-Camuto using the guaranteed minimum royalties per the license agreement and the related earnings from our equity investment in ABG-Camuto had the transactions occurred on the first day of our fiscal 2017. Accordingly, these supplemental pro forma results have been prepared for comparative purposes only and are not intended to be indicative of results of operations that would have occurred had the acquisitions actually occurred in the prior year period or indicative of the results of operations for any future period.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

3.    REVENUE

Disaggregation of Revenue- The following table presents our total revenue disaggregated by segments:

	Three months ended								Six months ended
(in thousands)	August 3, 2019				August 4, 2018				August 3, 2019				August 4, 2018
Segment net sales:
U.S. Retail	$	677,920			$	691,757			$	1,369,760			$	1,361,541
Canada Retail	63,306				72,532				115,122				72,532
Brand Portfolio	95,422				—				196,289				—
Other	29,480				29,446				65,087				70,099
Total net sales	866,128				793,735				1,746,258				1,504,172
Commission, franchise and other revenue	11,771				1,533				20,676				3,198
	877,899				795,268				1,766,934				1,507,370
Elimination of intersegment revenue	(17,701		)		—				(28,221		)		—
Total revenue	$	860,198			$	795,268			$	1,738,713			$	1,507,370

The U.S. Retail and Brand Portfolio segments and Other net sales recognized are primarily based on sales to customers in the U.S., and Canada Retail segment net sales recognized are based on sales to customers in Canada. Revenue realized from geographic markets outside of the U.S. and Canada have collectively been immaterial.

The following table presents total revenue by product and service category:

	Three months ended								Six months ended
(in thousands)	August 3, 2019				August 4, 2018				August 3, 2019				August 4, 2018
Net sales:
U.S. Retail segment:
Women's footwear	$	458,390			$	467,337			$	940,511			$	936,621
Men's footwear	140,895				151,573				269,884				284,732
Accessories, kids and other	78,635				72,847				159,365				140,188
	677,920				691,757				1,369,760				1,361,541
Canada Retail segment:
Women's footwear	35,533				42,067				64,159				42,067
Men's footwear	16,432				19,455				29,440				19,455
Accessories, kids and other	11,341				11,010				21,523				11,010
	63,306				72,532				115,122				72,532
Brand Portfolio segment:
Wholesale	88,577				—				180,331				—
Direct-to-consumer	6,845				—				15,958				—
	95,422				—				196,289				—
Other	29,480				29,446				65,087				70,099
Total net sales	866,128				793,735				1,746,258				1,504,172
Commission, franchise and other revenue	11,771				1,533				20,676				3,198
	877,899				795,268				1,766,934				1,507,370
Elimination of intersegment revenue	(17,701		)		—				(28,221		)		—
Total revenue	$	860,198			$	795,268			$	1,738,713			$	1,507,370

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Deferred Revenue Liabilities- We record deferred revenue liabilities, included in accrued expenses on the condensed consolidated balance sheets, for remaining obligations we have to our customers. The following table presents the changes and total balances for gift cards and our loyalty programs:

	Three months ended								Six months ended
(in thousands)	August 3, 2019				August 4, 2018				August 3, 2019				August 4, 2018
Gift cards:
Beginning of period	$	30,066			$	28,151			$	34,998			$	32,792
Gift cards redeemed and breakage recognized to net sales	(21,843		)		(21,761		)		(44,098		)		(44,034		)
Gift cards issued	20,054				20,401				37,377				38,033
End of period	$	28,277			$	26,791			$	28,277			$	26,791
Loyalty programs:
Beginning of period	$	16,153			$	22,111			$	16,151			$	21,282
Loyalty certificates redeemed and expired and other adjustments recognized to net sales	(9,507		)		(16,750		)		(18,828		)		(23,385		)
Deferred revenue for loyalty points issued	9,388				11,425				18,711				18,889
End of period	$	16,034			$	16,786			$	16,034			$	16,786

4.    RELATED PARTY TRANSACTIONS

Schottenstein Affiliates

As of August 3, 2019, the Schottenstein Affiliates, entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family, beneficially owned approximately 15% of the Company's outstanding common shares, representing approximately 51% of the combined voting power. As of August 3, 2019, the Schottenstein Affiliates beneficially owned 3.4 million Class A common shares and 7.7 million Class B common shares. We had the following related party transactions with Schottenstein Affiliates:

Leases- We lease our fulfillment center and certain store locations owned by Schottenstein Affiliates. See Note 15, Leases, for rent expense and future minimum lease payment requirements associated with the Schottenstein Affiliates.

Other Purchases and Services- During the three months ended August 3, 2019 and August 4, 2018, we had other purchases and services from Schottenstein Affiliates of $1.5 million and $1.7 million, respectively. During the six months ended August 3, 2019 and August 4, 2018, we had other purchases and services from Schottenstein Affiliates of $3.4 million and $3.3 million, respectively.

Due to Related Parties- As of August 3, 2019, February 2, 2019 and August 4, 2018, we had amounts due to related parties of $0.5 million, $1.0 million and $0.5 million, respectively, included in accounts payable on the condensed consolidated balance sheets.

ABG-Camuto

Beginning in the fourth quarter of fiscal 2018, we have a 40% interest in ABG-Camuto. ABG-Camuto entered into a licensing agreement with us whereby we pay royalties on the net sales of the brands owned by ABG-Camuto. During the three and six months ended August 3, 2019, we recorded $3.6 million and $9.3 million of royalty expense payable to ABG-Camuto, respectively. As of February 2, 2019, we had $2.4 million payable to ABG-Camuto, included in accrued expenses on the condensed consolidated balance sheets.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

5.    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 (loss) per share reflects the potential dilution of common shares adjusted for outstanding stock options, restricted stock units ("RSUs"), and performance-based restricted stock units ("PSUs") calculated using the treasury stock method.

The following is a reconciliation of the number of shares used in the calculation of earnings (loss) per share:

	Three months ended						Six months ended
(in thousands)	August 3, 2019			August 4, 2018			August 3, 2019			August 4, 2018
Weighted average basic shares outstanding	73,529			80,265			75,267			80,187
Dilutive effect of stock-based compensation awards	787			—			1,014			—
Weighted average diluted shares outstanding	74,316			80,265			76,281			80,187

For the three months ended August 3, 2019 and August 4, 2018, the number of potential shares that were not included in the computation of diluted earnings (loss) per share due to the anti-dilutive effect was 4.6 million and 3.2 million, respectively. For the six months ended August 3, 2019 and August 4, 2018, the number of potential shares that were not included in the computation of diluted earnings (loss) per share due to the anti-dilutive effect was 2.9 million and 3.2 million, respectively.

6.    STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:

	Three months ended								Six months ended
(in thousands)	August 3, 2019				August 4, 2018				August 3, 2019				August 4, 2018
Stock options	$	563			$	1,343			$	1,386			$	3,138
Restricted and director stock units	4,798				3,841				8,345				6,560
	$	5,361			$	5,184			$	9,731			$	9,698

The following table summarizes the stock-based compensation award activity for the six months ended August 3, 2019:

	Number of shares
(in thousands)	Stock Options			Time-Based RSUs			Performance-Based RSUs
Outstanding - beginning of period	4,001			989			596
Granted	—			841			358
Exercised / vested	(99	)		(111	)		(97	)
Forfeited / expired	(38	)		(56	)		—
Outstanding - end of period	3,864			1,663			857

As of August 3, 2019, 2.7 million shares of Class A common shares remain available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan.

7.    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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table provides additional information for our common shares:

	August 3, 2019						February 2, 2019						August 4, 2018
(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	86,080			7,733			85,763			7,733			85,652			7,733
Outstanding shares	64,911			7,733			70,672			7,733			72,561			7,733
Treasury shares	21,169			—			15,091			—			13,091			—

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

Dividends- On August 29, 2019, the Board of Directors declared a quarterly cash dividend payment of $0.25 per share for both Class A and Class B common shares. The dividend will be paid on October 4, 2019 to shareholders of record at the close of business on September 20, 2019.

Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the six months ended August 3, 2019, we repurchased 6.1 million Class A common shares at a cost of $125.0 million, with $351.6 million of Class A common shares that remain authorized under the program as of August 3, 2019. During the six months ended August 4, 2018, we did not repurchase any Class A common shares. The share 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. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

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
	August 3, 2019												August 4, 2018
(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	$	(3,042	)		$	(224	)		$	(3,266	)		$	(12,218	)		$	(980	)		$	(13,198	)
Other comprehensive income (loss) before reclassifications	461				196				657				(1,365		)		27				(1,338		)
Amounts reclassified to non-operating income (expenses), net	—				23				23				12,218				42				12,260
Other comprehensive income	461				219				680				10,853				69				10,922
Accumulated other comprehensive loss - end of period	$	(2,581	)		$	(5	)		$	(2,586	)		$	(1,365	)		$	(911	)		$	(2,276	)

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

	Six months ended
	August 3, 2019												August 4, 2018
(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	$	(2,328	)		$	(378	)		$	(2,706	)		$	(9,278	)		$	(796	)		$	(10,074	)
Other comprehensive income (loss) before reclassifications	(253		)		438				185				(6,050		)		(317		)		(6,367		)
Amounts reclassified to non-operating expenses, net	—				(65		)		(65		)		13,963				202				14,165
Other comprehensive income (loss)	(253		)		373				120				7,913				(115		)		7,798
Accumulated other comprehensive loss - end of period	$	(2,581	)		$	(5	)		$	(2,586	)		$	(1,365	)		$	(911	)		$	(2,276	)

8.    ACCOUNTS RECEIVABLE

Accounts receivable, net, consisted of the following:

(in thousands)	August 3, 2019				February 2, 2019				August 4, 2018
Customer accounts receivables:
Serviced by third-party provider with guaranteed payment	$	61,494			$	47,599			$	—
Serviced by third-party provider without guaranteed payment	495				280				—
Serviced in-house	10,145				9,892				3,090
Construction and tenant allowance receivables due from landlords(1)	—				4,034				5,201
Other receivables	14,460				8,004				8,968
Accounts receivable	86,594				69,809				17,259
Allowance for doubtful accounts	(1,432		)		(939		)		—
Accounts receivable, net	$	85,162			$	68,870			$	17,259

(1)	Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for construction and tenant allowance receivables due from landlords were netted against the operating lease liabilities.

9.    INVESTMENTS

Investments in available-for-sale securities consisted of the following:

(in thousands)	August 3, 2019				February 2, 2019				August 4, 2018
Carrying value of investments	$	25,510			$	70,195			$	73,978
Unrealized gains included in accumulated other comprehensive loss	18				44				10
Unrealized losses included in accumulated other comprehensive loss	(24		)		(521		)		(869		)
Fair value	$	25,504			$	69,718			$	73,119

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

10.    PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

(in thousands)	August 3, 2019				February 2, 2019				August 4, 2018
Land	$	1,110			$	1,110			$	1,110
Buildings	13,445				12,485				12,485
Building and leasehold improvements	440,425				437,116				425,651
Furniture, fixtures and equipment	489,805				487,494				451,040
Software	183,226				161,226				145,111
Construction in progress(1)	41,454				38,646				46,643
Total property and equipment	1,169,465				1,138,077				1,082,040
Accumulated depreciation and amortization	(766,686		)		(728,501		)		(694,419		)
Property and equipment, net	$	402,779			$	409,576			$	387,621

(1)	Construction in progress is comprised primarily of the construction of leasehold improvements and furniture and fixtures related to unopened stores and internal-use software under development.

11.    GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:

	Six months ended
	August 3, 2019												August 4, 2018
(in thousands)	Goodwill				Accumulated Impairments				Net				Goodwill				Accumulated Impairments				Net
Beginning of period by segment:
U.S. Retail	$	25,899			$	—			$	25,899			$	25,899			$	—			$	25,899
Canada Retail	42,048				(42,048		)		—				—				—				—
Brand Portfolio	63,614				—				63,614				—				—				—
Other	—				—				—				53,790				(53,790		)		—
	131,561				(42,048		)		89,513				79,689				(53,790		)		25,899
Activity by segment:
Canada Retail:
Acquired TSL goodwill	—				—				—				37,044				—				37,044
Impairment charges	—				—				—				—				(36,240		)		(36,240		)
Currency translation adjustment	(416		)		416				—				(580		)		(224		)		(804		)
Brand Portfolio -
Purchase price and allocation adjustments	26,767				—				26,767				—				—				—
Other - Eliminated goodwill from Ebuys exit	—				—				—				(53,790		)		53,790				—
	26,351				416				26,767				(17,326		)		17,326				—
End of period by segment:
U.S. Retail	25,899				—				25,899				25,899				—				25,899
Canada Retail	41,632				(41,632		)		—				36,464				(36,464		)		—
Brand Portfolio	90,381				—				90,381				—				—				—
	$	157,912			$	(41,632	)		$	116,280			$	62,363			$	(36,464	)		$	25,899

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Intangible Assets- Intangible assets consisted of the following:

(in thousands)	Cost				Accumulated Amortization				Net
August 3, 2019
Definite-lived customer relationships	$	6,661			$	(1,064	)		$	5,597
Indefinite-lived trademarks and tradenames	15,515				—				15,515
	$	22,176			$	(1,064	)		$	21,112
February 2, 2019
Definite-lived:
Customer relationships	$	28,375			$	(1,010	)		$	27,365
Favorable leasehold interests	3,513				(295		)		3,218
Indefinite-lived trademarks and tradenames	15,546				—				15,546
	$	47,434			$	(1,305	)		$	46,129
August 4, 2018
Definite-lived:
Customer relationships	$	1,378			$	(114	)		$	1,264
Favorable leasehold interests	3,522				(101		)		3,421
Indefinite-lived trademarks and tradenames	15,600				—				15,600
	$	20,500			$	(215	)		$	20,285

The customer relationships are amortized by the straight-line method over three years associated with the Canada loyalty program and eight years for Brand Portfolio customer relationships. Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for favorable leasehold interests were netted against the operating lease assets.

12.    ACCRUED EXPENSES

Accrued expenses consisted of the following:

(in thousands)	August 3, 2019				February 2, 2019				August 4, 2018
Gift cards and merchandise credits	$	28,277			$	34,998			$	26,791
Accrued compensation and related expenses	38,532				53,577				30,224
Accrued taxes	18,330				16,491				21,029
Loyalty programs deferred revenue	16,034				16,151				16,786
Sales returns	19,332				17,743				14,426
Customer allowances and discounts	9,306				13,094				—
Other(1)	43,626				49,481				36,520
	$	173,437			$	201,535			$	145,776

(1)	Other is comprised of various other accrued expenses that we expect will settle within one year of the applicable period.

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

13.    OTHER NON-CURRENT LIABILITIES

Other non-current liabilities consisted of the following:

(in thousands)	August 3, 2019				February 2, 2019				August 4, 2018
Foreign tax contingent liabilities	$	14,807			$	13,429			$	—
Deferred tax liabilities	3,393				3,260				—
Construction and tenant allowances(1)	—				71,634				75,439
Deferred rent(1)	—				35,934				35,694
Accrual for lease obligations(1)	—				16,483				9,511
Unfavorable leasehold interests(1)	—				5,779				7,000
Other(2)	20,390				18,528				22,672
	$	38,590			$	165,047			$	150,316

(1)	Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for deferred rent, construction and tenant allowances, the accrual for lease obligations, and unfavorable leasehold interests were netted against the operating lease assets.

(2)	Other is comprised of various other accrued expenses that we expect will settle beyond one year from the end of the applicable period.

The following table presents the changes and total balances for the accrual for lease obligations:

	Six months ended
(in thousands)	August 3, 2019				August 4, 2018
Beginning of period	$	16,483			$	6,511
Netted against lease assets upon transition to ASU 2016-02	(16,483		)		—
Additions	—				4,884
Lease obligation payments, net of sublease income	—				(2,004		)
Adjustments	—				120
End of period	$	—			$	9,511

14.    DEBT

Credit Facility- On August 25, 2017, we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. On October 10, 2018, the Credit Facility was amended to include the acquisition of Camuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. On November 5, 2018, following the acquisition of Camuto Group, the amended Credit Facility was increased with no change to the sub-limits. As of August 3, 2019, the Credit Facility provided a revolving line of credit up to $400 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 4.1% as of August 3, 2019. Any loans issued in CAD bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 1.7% as of August 3, 2019. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of August 3, 2019, we had $235.0 million outstanding under the Credit Facility and $1.3 million in letters of credit issued, resulting in $163.7 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. As a result of the acquisition of Camuto Group, we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed 3.50:1 as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of August 3, 2019, we were in compliance with all financial covenants.

15.	LEASES

We lease our stores, fulfillment center and other facilities under operating lease arrangements with unrelated parties and related parties owned by 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 options. We pay variable amounts for certain lease and non-lease components as well as for contingent rentals 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 lease income from unrelated third parties for leasing portions or all of certain owned and leased properties. Operating lease income is included in commission, franchise and other revenue in our condensed consolidated statements of operations.

Lease income and lease expense consisted of the following for the three and six months ended August 3, 2019 (after the adoption of ASU 2016-02) and August 4, 2018 (prior to the adoption of ASU 2016-02):

	Three months ended								Six months ended
(in thousands)	August 3, 2019				August 4, 2018				August 3, 2019				August 4, 2018
Operating lease income	$	2,236			$	1,149			$	4,448			$	2,297
Operating lease expense:
Lease expense to unrelated parties	$	52,707			$	51,263			$	106,061			$	96,748
Lease expense to related parties	2,371				2,303				4,713				4,591
Variable lease expense to unrelated parties	12,981				5,675				26,003				12,498
Variable lease expense to related parties	348				—				650				—
	$	68,407			$	59,241			$	137,427			$	113,837

	August 3, 2019
Other operating lease information:
Weighted-average remaining lease term	6.3 years
Weighted-average discount rate	3.9	%

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As of August 3, 2019, our future fixed minimum lease payments are as follows:

(in thousands)	Unrelated Parties				Related Parties				Total
Remainder of fiscal 2019	$	96,844			$	3,937			$	100,781
Fiscal 2020	233,961				9,364				243,325
Fiscal 2021	216,107				8,697				224,804
Fiscal 2022	182,432				7,418				189,850
Fiscal 2023	142,408				4,573				146,981
Future fiscal years thereafter	314,601				15,493				330,094
	1,186,353				49,482				1,235,835
Less discounting impact on operating leases	(138,305		)		(6,015		)		(144,320		)
Total operating lease liabilities	1,048,048				43,467				1,091,515
Less current operating lease liabilities	(178,091		)		(7,878		)		(185,969		)
Non-current operating lease liabilities	$	869,957			$	35,589			$	905,546

As of August 3, 2019, we have entered into lease commitments for four new store locations and two store relocations where the leases have not yet commenced, and the lease liabilities have not yet been recorded. We expect the lease commencement to begin in the next fiscal quarter for these locations and we will record additional operating lease liabilities of approximately $11.4 million.

As of February 2, 2019, future minimum lease payment requirements, excluding contingent rental payments, maintenance, insurance, real estate taxes, and the amortization of deferred rent and construction and tenant allowances, consisted of the following, as determined prior to the adoption of ASU 2016-02:

(in thousands)	Unrelated Parties				Related Parties				Total
Fiscal 2019	$	233,237			$	9,425			$	242,662
Fiscal 2020	227,001				9,364				236,365
Fiscal 2021	204,803				8,697				213,500
Fiscal 2022	170,030				6,518				176,548
Fiscal 2023	131,594				1,874				133,468
Future fiscal years thereafter	298,437				5,596				304,033
	$	1,265,102			$	41,474			$	1,306,576

16.    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 have developed an estimate of the range of outcomes related to these obligations of $14.8 million to $30.0 million for obligations we are aware of at this time. As of August 3, 2019, we recorded a contingent liability of $14.8 million representing the low end of the range and an indemnification asset of $12.7 million representing the estimated amount as of the acquisition date, which we expect to collect under the terms of the securities purchase agreement with the Sellers. We are continuing to assess the exposure, which may result in material changes to these estimates, and we may identify additional contingent liabilities. We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date. Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.

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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 2024 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 August 3, 2019, the total future minimum lease payment requirements for this guarantee were approximately $15.0 million.

17.    SEGMENT REPORTING

 

Our three reportable segments, which are also operating segments, are the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. All other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes. 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 August 3, 2019
External revenue:
Net sales	$	677,920			$	63,306			$	78,934			$	29,480			$	—			$	849,640
Commission, franchise and other revenue	—				—				6,312				—				4,246				10,558
Total revenue	$	677,920			$	63,306			$	85,246			$	29,480			$	4,246			$	860,198
Intersegment revenue	$	—			$	—			$	17,701			$	—			$	(17,701	)		$	—
Gross profit(1)	$	208,056			$	21,939			$	19,261			$	6,041			$	(436	)		$	254,861
Income from equity investment in ABG-Camuto	$	—			$	—			$	2,464			$	—			$	—			$	2,464
Three months ended August 4, 2018
Revenue:
Net sales	$	691,757			$	72,532			$	—			$	29,446			$	—			$	793,735
Commission, franchise and other revenue	—				—				—				—				1,533				1,533
Total revenue	$	691,757			$	72,532			$	—			$	29,446			$	1,533			$	795,268
Gross profit(1)	$	229,601			$	18,218			$	—			$	6,676			$	—			$	254,495
Six months ended August 3, 2019
External revenue:
Net sales	$	1,369,760			$	115,122			$	169,663			$	65,087			$	—			$	1,719,632
Commission, franchise and other revenue	—				—				9,609				—				9,472				19,081
Total revenue	$	1,369,760			$	115,122			$	179,272			$	65,087			$	9,472			$	1,738,713
Intersegment revenue	$	—			$	—			$	28,221			$	—			$	(28,221	)		$	—
Gross profit(1)	$	417,947			$	37,686			$	41,255			$	15,352			$	(1,343	)		$	510,897
Income from equity investment in ABG-Camuto	$	—			$	—			$	4,692			$	—			$	—			$	4,692
Six months ended August 4, 2018
Revenue:
Net sales	$	1,361,541			$	72,532			$	—			$	70,099			$	—			$	1,504,172
Commission, franchise and other revenue	—				—				—				—				3,198				3,198
Total revenue	$	1,361,541			$	72,532			$	—			$	70,099			$	3,198			$	1,507,370
Gross profit(1)	$	427,945			$	18,218			$	—			$	13,557			$	—			$	459,720

(1)	Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales.

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

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 may constitute forward-looking statements 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 "outlook," "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 Quarterly Report on 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 filed on March 26, 2019, and Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, some important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements include, but are not limited to, the following:

•	our success in growing our store base and digital demand;

•	our ability to successfully integrate the businesses acquired in fiscal 2018 or realize the anticipated benefits of the acquisitions after we complete our integration efforts;

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

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

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

•	risks related to the loss or disruption of our distribution and/or fulfillment operations;

•	continuation of agreements with and our reliance on the financial condition of Stein Mart;

•	our ability to execute our strategies;

•	fluctuation of our comparable sales and quarterly financial performance;

•	risks related to the loss or disruption of our information systems and data;

•	our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data;

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

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

•	risks related to leases of our properties;

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

•	our reliance on foreign sources for merchandise and risks inherent to international trade;

•	the imposition of new tariffs on our products;

•	exposure to foreign tax contingencies;

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

•	uncertain general economic conditions;

•	risks related to holdings of cash and investments and access to liquidity; and

•	fluctuations in foreign currency exchange rates.

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.

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Executive Overview

In the second quarter of fiscal 2019, we saw continued progress toward our previously disclosed strategies with reported sales and earnings that position us well to reaffirm our annual guidance. Our expectations have been exceeded with our newly acquired businesses. The Canada Retail segment delivered increased comparable sales and margin growth, benefiting from moving their digital offering to our platform used in the U.S. and the launch of new loyalty programs for our Canadian customers. The Brand Portfolio segment gives us the capability to design, source and market differentiated product for our customers and better position us to grow private label brands at DSW in the U.S. We remain on track to convert the production of our DSW private label to the Brand Portfolio segment in fiscal 2020. At that time, we expect to realize the benefits of having greater exclusivity in product offerings at higher margins.

In the U.S. Retail segment, we had continued positive results across our seasonal product categories, in particular sandals, and with our Kids line. We believe our efforts to increase the differentiation of our product offering, combined with the advantages of our strong loyalty base and our vast omni-channel capabilities, separate us from competitors, place us in a good position to mitigate any tariff headwinds and contribute to the achievement of our near and long-term goals.

Comparability

There are a number of items that affect comparability when reviewing our results of operations for the periods presented in this Quarterly Report on Form 10-Q. Significant items to consider include:

•

On May 10, 2018, we acquired the remaining interest in TSL that we did not previously own. For the three and six months ended August 3, 2019 and for the three months ended August 4, 2018, TSL results were included in the condensed consolidated results of operations as a wholly-owned subsidiary. For the six months ended August 4, 2018, the loss from our equity investment interest in TSL for the first quarter of fiscal 2018 was included in our condensed consolidated results of operations. Due to the acquisition of the remaining interest in TSL during the second quarter of fiscal 2018, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL. As a result of the remeasurement, we recorded a loss of $34.0 million to non-operating income (expenses), net. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation related to the previously held balances from accumulated other comprehensive loss to non-operating income (expenses), net. In addition, with the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the three months ended August 4, 2018, we recorded a goodwill impairment charge, which resulted in impairing all of TSL’s goodwill.

•	On November 5, 2018, we completed the acquisition of Camuto Group. For the three and six months ended August 3, 2019, Camuto Group's results were included in the condensed consolidated results of operations as a wholly-owned subsidiary with no amounts included for the three and six months ended August 4, 2018.

•

During the six months ended August 3, 2019, we incurred integration and restructuring costs related to our prior year acquisition activity, which consisted primarily of $3.6 million in severance, a $6.1 million termination fee for terminating two JVs, and $2.4 million of professional fees and other integration costs. During the six months ended August 4, 2018, we incurred restructuring costs of $2.7 million in severance, primarily related to changes in our store labor model.

•	The six months ended August 4, 2018 included the wind-down operations of Ebuys during the first quarter of fiscal 2018, which included lease exit and other termination costs and incremental income tax expense.

Financial Summary

Total revenue increased to $860.2 million for the three months ended August 3, 2019 from $795.3 million for the three months ended August 4, 2018. The 8.2% increase in total revenue was primarily driven by incremental revenue from the acquired Camuto Group business, partially offset by the impact of stores closed since the end of the second quarter of fiscal 2018, primarily the Town Shoes banner stores, and a 0.6% decrease in comparable sales.

During the three months ended August 3, 2019, gross profit as a percentage of net sales was 30.0%, a decrease of 210 basis points from 32.1% in the previous year. The decrease in the gross profit rate was primarily driven by a benefit recognized in the second quarter of fiscal 2018 as a result of adjusting our loyalty programs deferred revenue due to the relaunch of the DSW VIP rewards program, the inclusion of Camuto Group, which operates at a lower gross profit rate, and higher shipping costs in the current year associated with higher digital penetration.

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Net income for the three months ended August 3, 2019 was $27.4 million, or $0.37 per diluted share, which included net after-tax charges of $8.3 million, or $0.11 per diluted share, primarily related to integration and restructuring expenses associated with the businesses acquired in fiscal 2018. Net loss for the three months ended August 4, 2018 was $38.4 million, or $0.48 loss per diluted share, which included net after-tax charges of $89.3 million, or $1.11 per diluted share, primarily related to the acquisition of the Canadian retail business.

We have continued making investments in our business that support our long-term growth objectives. During the six months ended August 3, 2019, we invested $40.3 million in capital expenditures compared to $32.1 million during the six months ended August 4, 2018. Our capital expenditures during the first half of fiscal 2019 primarily related to six new store openings, multiple store remodels and investments in business infrastructure.

Results of Operations

Comparison of the Three Months Ended August 3, 2019 with the Three Months Ended August 4, 2018

	Three months ended
	August 3, 2019							August 4, 2018							Change
(dollars in thousands, except per share amounts)	Amount				% of Total Revenue			Amount				% of Total Revenue			Amount				%
Revenue:
Net sales	$	849,640			98.8	%		$	793,735			99.8	%		$	55,905			7.0	%
Commission, franchise and other revenue	10,558				1.2			1,533				0.2			9,025				588.7	%
Total revenue	860,198				100.0			795,268				100.0			64,930				8.2	%
Cost of sales	(594,779		)		(69.1	)		(539,240		)		(67.8	)		(55,539		)		10.3	%
Operating expenses	(226,616		)		(26.3	)		(195,319		)		(24.5	)		(31,297		)		16.0	%
Income from equity investment in ABG-Camuto	2,464				0.2			—				—			2,464				NM
Impairment charges	—				—			(36,240		)		(4.6	)		36,240				NM
Operating profit	41,267				4.8			24,469				3.1			16,798				68.7	%
Interest income (expense), net	(1,972		)		(0.2	)		805				0.1			(2,777		)		NM
Non-operating income (expenses), net	199				0.0			(47,349		)		(6.0	)		47,548				NM
Income (loss) before income taxes	39,494				4.6			(22,075		)		(2.8	)		61,569				NM
Income tax provision	(12,087		)		(1.4	)		(16,281		)		(2.0	)		4,194				(25.8	)%
Net income (loss)	$	27,407			3.2	%		$	(38,356	)		(4.8	)%		$	65,763			NM
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share	$	0.37						$	(0.48	)					$	0.85			NM
Diluted earnings (loss) per share	$	0.37						$	(0.48	)					$	0.85			NM
Weighted average shares used in per share calculations:
Basic shares	73,529							80,265							(6,736		)		(8.4	)%
Diluted shares	74,316							80,265							(5,949		)		(7.4	)%

NM - Not meaningful

25

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Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:

(in thousands)	Three months ended August 3, 2019
Consolidated net sales for the same period last year	$	793,735
Decrease in comparable sales(1)	(4,753		)
Net decrease from non-comparable sales and other changes	(2,124		)
Loss of net sales from closed stores	(16,152		)
Incremental external net sales from Camuto Group	78,934
Consolidated net sales	$	849,640

(1)

A store is considered comparable when in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter they are closed. Comparable sales includes e-commerce sales. Stores in Canada from the TSL acquisition that were in operation for at least 14 months at the beginning of fiscal 2019, along with its e-commerce sales, were added to the comparable base beginning with the second quarter of fiscal 2019. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period in the prior year. 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.

The following summarizes net sales by segment:

	Three months ended								Change
(dollars in thousands)	August 3, 2019				August 4, 2018				Amount				%			Comparable Sales %
Segment net sales:
U.S. Retail	$	677,920			$	691,757			$	(13,837	)		(2.0	)%		(1.5)%
Canada Retail	63,306				72,532				(9,226		)		(12.7	)%		8.1%
Brand Portfolio	95,422				—				95,422				NM			NA
Other	29,480				29,446				34				0.1	%		1.6%
	866,128				793,735				72,393				9.1	%
Elimination of intersegment net sales	(16,488		)		—				(16,488		)		NM
Consolidated net sales	$	849,640			$	793,735			$	55,905			7.0	%		(0.6)%

NM - Not meaningful

NA - Not applicable

Within the U.S. Retail segment, comparable sales decreased due to lower comparable transactions and a decline in comparable average dollar sales per transaction, primarily in the women's and men's categories partially offset by an increase in comparable sales in our seasonal categories and kids. Within the Canada Retail segment, comparable sales increased due to higher comparable average dollar sales per transaction, primarily as a result of the significant improvements to its digital platform and lower clearance inventory.

Commission, Franchise and Other Revenue- Commission, franchise and other revenue consists of commission income for First Cost design and buying services in the Brand Portfolio segment, royalties and other fees paid by franchisees, and rental income on owned and leased properties.

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Gross Profit- Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales, calculated as follows:

	Three months ended
	August 3, 2019							August 4, 2018							Change
(dollars in thousands)	Amount				% of Net Sales			Amount				% of Net Sales			Amount				%			Basis Points
Net sales	$	849,640			100.0	%		$	793,735			100.0	%
Cost of sales	(594,779		)		(70.0	)		(539,240		)		(67.9	)
Gross profit	$	254,861			30.0	%		$	254,495			32.1	%		$	366			0.1	%		(210	)

The following summarizes gross profit by segment:

	Three months ended
	August 3, 2019							August 4, 2018							Change
(dollars in thousands)	Amount				% of Segment Net Sales			Amount				% of Segment Net Sales			Amount				%			Basis Points
Segment gross profit:
U.S. Retail	$	208,056			30.7	%		$	229,601			33.2	%		$	(21,545	)		(9.4	)%		(250	)
Canada Retail	21,939				34.7	%		18,218				25.1	%		$	3,721			20.4	%		960
Brand Portfolio	19,261				20.2	%		—				—	%		$	19,261			NM			NM
Other	6,041				20.5	%		6,676				22.7	%		$	(635	)		(9.5	)%		(220	)
	255,297							254,495
Intercompany eliminations	(436		)					—
Consolidated gross profit	$	254,861						$	254,495

NM - Not meaningful

The U.S. Retail segment gross profit margin decreased primarily driven by a benefit recognized in the second quarter of fiscal 2018 as a result of adjusting our loyalty programs deferred revenue due to the relaunch of the DSW VIP rewards program, the deleverage of store occupancy and distribution and fulfillment expenses, and higher shipping costs in the current year associated with higher online orders. The Canada Retail segment gross profit margin improved due to lower clearance activity with improvements in the inventory position. The inclusion of Camuto Group, which operates at a lower gross profit rate, decreased the consolidated gross profit margin rate.

Operating Expenses- For the three months ended August 3, 2019, operating expenses as a percentage of total revenue increased 180 basis points over the same period last year primarily driven by the impact of including Camuto Group in the consolidated results and integration and restructuring costs.

Income from Equity Investment in ABG-Camuto- We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit. ABG-Camuto is an integral part of the Brand Portfolio segment, given the licensing agreement between us and ABG-Camuto, which allows us to sell licensed branded products to wholesale customers.

Impairment Charges- With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the three months ended August 4, 2018, we recorded a goodwill impairment charge, which resulted in impairing all of TSL’s goodwill.

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Non-operating Income (Expenses), net- Due to the acquisition of the remaining interest in TSL during the second quarter of fiscal 2018, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL. As a result of the remeasurement, we recorded a loss of $34.0 million to non-operating income (expenses), net. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation related to the previously held balances from accumulated other comprehensive loss to non-operating income (expenses), net.

Income Taxes- Our effective tax rate changed from a negative 73.8% for the three months ended August 4, 2018, reflecting a tax provision on net loss, to a positive 30.6% for the three months ended August 3, 2019. The effective tax rate was impacted by valuation allowances and the goodwill impairment associated with the TSL acquisition during the three months ended August 4, 2018.

Comparison of the Six Months Ended August 3, 2019 with the Six Months Ended August 4, 2018

	Six months ended
	August 3, 2019							August 4, 2018							Change
(dollars in thousands, except per share amounts)	Amount				% of Total Revenue			Amount				% of Total Revenue			Amount				%
Revenue:
Net sales	$	1,719,632			98.9	%		$	1,504,172			99.8	%		$	215,460			14.3	%
Commission, franchise and other revenue	19,081				1.1			3,198				0.2			15,883				496.7	%
Total revenue	1,738,713				100.0			1,507,370				100.0			231,343				15.3	%
Cost of sales	(1,208,735		)		(69.5	)		(1,044,452		)		(69.3	)		(164,283		)		15.7	%
Operating expenses	(449,422		)		(25.8	)		(363,739		)		(24.1	)		(85,683		)		23.6	%
Income from equity investment in ABG-Camuto	4,692				0.2			—				—			4,692				NM
Impairment charges	—				—			(36,240		)		(2.4	)		36,240				NM
Operating profit	85,248				4.9			62,939				4.2			22,309				35.4	%
Interest income (expense), net	(3,773		)		(0.2	)		1,469				0.1			(5,242		)		NM
Non-operating expenses, net	(143		)		0.0			(49,486		)		(3.3	)		49,343				(99.7	)%
Income before income taxes and loss from equity investment in TSL	81,332				4.7			14,922				1.0			66,410				445.0	%
Income tax provision	(22,731		)		(1.3	)		(27,671		)		(1.8	)		4,940				(17.9	)%
Loss from equity investment in TSL	—				—			(1,310		)		(0.1	)		1,310				NM
Net income (loss)	$	58,601			3.4	%		$	(14,059	)		(0.9	)%		$	72,660			NM
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share	$	0.78						$	(0.18	)					$	0.96			NM
Diluted earnings (loss) per share	$	0.77						$	(0.18	)					$	0.95			NM
Weighted average shares used in per share calculations:
Basic shares	75,267							80,187							(4,920		)		(6.1	)%
Diluted shares	76,281							80,187							(3,906		)		(4.9	)%

NM - Not meaningful

Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:

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(in thousands)	Six months ended August 3, 2019
Consolidated net sales for the same period last year	$	1,504,172
Increase in comparable sales	16,127
Net increase from non-comparable sales and other changes	3,021
Loss of net sales from closed stores	(19,535		)
Incremental external net sales from 2018 acquired businesses	221,479
Loss of net sales from the exit of Ebuys	(5,632		)
Consolidated net sales	$	1,719,632

The following summarizes net sales by segment:

	Six months ended								Change
(dollars in thousands)	August 3, 2019				August 4, 2018				Amount				%			Comparable Sales %
Segment net sales:
U.S. Retail	$	1,369,760			$	1,361,541			$	8,219			0.6	%		0.7%
Canada Retail	115,122				72,532				42,590				58.7	%		8.1%
Brand Portfolio	196,289				—				196,289				NM			NA
Other	65,087				70,099				(5,012		)		(7.1	)%		2.5%
	1,746,258				1,504,172				242,086				16.1	%
Elimination of intersegment net sales	(26,626		)		—				(26,626		)		NM
Consolidated net sales	$	1,719,632			$	1,504,172			$	215,460			14.3	%		1.1%

NM - Not meaningful

NA - Not applicable

Within the U.S. Retail segment, comparable sales increased due to higher comparable transactions partially offset by a decline in comparable average dollar sales per transaction. The comparable sales for the Canada Retail segment reflect the stores that were added to the comparable base beginning with the second quarter of fiscal 2019.

Commission, Franchise and Other Revenue- Commission, franchise and other revenue consists of commission income for First Cost design and buying services in the Brand Portfolio segment, royalties and other fees paid by franchisees, and rental income on owned and leased properties.

Gross Profit- Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales, calculated as follows:

	Six months ended
	August 3, 2019							August 4, 2018							Change
(dollars in thousands)	Amount				% of Net Sales			Amount				% of Net Sales			Amount				%			Basis Points
Net sales	$	1,719,632			100.0	%		$	1,504,172			100.0	%
Cost of sales	(1,208,735		)		(70.3	)		(1,044,452		)		(69.4	)
Gross profit	$	510,897			29.7	%		$	459,720			30.6	%		$	51,177			11.1	%		(90	)

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The following summarizes gross profit by segment:

	Six months ended
	August 3, 2019							August 4, 2018							Change
(dollars in thousands)	Amount				% of Segment Net Sales			Amount				% of Segment Net Sales			Amount				%			Basis Points
Segment gross profit:
U.S. Retail	$	417,947			30.5	%		$	427,945			31.4	%		$	(9,998	)		(2.3	)%		(90	)
Canada Retail	37,686				32.7	%		18,218				25.1	%		$	19,468			106.9	%		760
Brand Portfolio	41,255				21.0	%		—				—	%		$	41,255			NM			NM
Other	15,352				23.6	%		13,557				19.3	%		$	1,795			13.2	%		430
	512,240							459,720
Intercompany eliminations	(1,343		)					—
Consolidated gross profit	$	510,897						$	459,720

NM - Not meaningful

The U.S. Retail segment gross profit margin declined primarily driven by a benefit recognized in the second quarter of fiscal 2018 as a result of adjusting our loyalty programs deferred revenue due to the relaunch of the DSW VIP rewards program and higher shipping costs in the current year associated with higher digital penetration, partially offset by higher initial markups and lower markdowns. The Canada Retail segment gross profit margin improved due to lower clearance activity. The inclusion of Camuto Group, which operates at a lower gross profit rate, decreased the consolidated gross profit margin rate.

Operating Expenses- For the six months ended August 3, 2019, operating expenses as a percentage of total revenue increased 170 basis points over the same period last year primarily driven by the impact of the acquired businesses, integration and restructuring costs and the change in accounting for previously exited leased space as a result of the transition to ASU 2016-02, partially offset by the exit of Ebuys during the previous year.

Income from Equity Investment in ABG-Camuto- We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit. ABG-Camuto is an integral part of the Brand Portfolio segment, given the licensing agreement between us and ABG-Camuto, which allows us to sell licensed branded products to wholesale customers.

Impairment Charges- With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the six months ended August 4, 2018, we recorded a goodwill impairment charge, which resulted in impairing all of TSL’s goodwill.

Non-operating Expenses, net- Due to the acquisition of the remaining interest in TSL during the second quarter of fiscal 2018, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL. As a result of the remeasurement, we recorded a loss of $34.0 million to non-operating income (expenses), net. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation related to the previously held balances from accumulated other comprehensive loss to non-operating income (expenses), net.

Income Taxes- Our effective tax rate changed from 203.3% for the six months ended August 4, 2018 to 27.9% for the six months ended August 3, 2019. The decrease in the effective tax rate was primarily driven by valuation allowances and the goodwill impairment associated with the TSL acquisition during the six months ended August 4, 2018.

Seasonality

Our business is 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.

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.

During the six months ended August 3, 2019, we repurchased 6.1 million Class A common shares at a cost of $125.0 million, which was partially funded with borrowings on the revolving line of credit, with $351.6 million of Class A common shares that remain authorized under the program as of August 3, 2019. During the six months ended August 4, 2018, we did not repurchase any Class A common shares. The share 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. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

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

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Operating Cash Flows

For the six months ended August 3, 2019, net cash provided by operations was $34.2 million compared to $106.6 million for the six months ended August 4, 2018. The change was driven by a decrease in net income after adjusting for non-cash activity, including depreciation and amortization, stock-based compensation, impairment charges, the loss on previously held assets in TSL, loss on foreign currency reclassified from accumulated other comprehensive loss, the change in deferred income taxes, and lease exit charges, primarily due to including the net loss from Camuto Group during the first half of fiscal 2019. In addition, we had an increased use of cash to fund working capital requirements during the first quarter of fiscal 2019 due to the addition of the acquired businesses, which uses cash for working capital requirements in the first half of the year consistent with our U.S. retail operations.

Investing Cash Flows

For the six months ended August 3, 2019, our net cash provided by investing activities was $4.5 million, which was due to proceeds from the sale of available-for sale-securities exceeding capital expenditures of $40.3 million. During the six months ended August 4, 2018, our net cash used in investing activities was $25.7 million, which was due to the acquisition of TSL, capital expenditures of $32.1 million and $16.0 million of additional borrowings by TSL prior to the acquisition, partially offset by the net liquidation of our available-for sale-securities.

Financing Cash Flows

For the six months ended August 3, 2019, our net cash used in financing activities was $87.2 million compared to $41.1 million for the six months ended August 4, 2018. Net cash used in financing activities was primarily related to the payment of dividends. The repurchase of Class A common shares under the share repurchase program during six months ended August 3, 2019 was partially financed using our revolving line of credit.

Debt

Credit Facility- On August 25, 2017, we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. On October 10, 2018, the Credit Facility was amended to include the acquisition of Camuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. On November 5, 2018, following the acquisition of Camuto Group, the amended Credit Facility was increased with no change to the sub-limits. As of August 3, 2019, the Credit Facility provided a revolving line of credit up to $400 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 4.1% as of August 3, 2019. Any loans issued in CAD bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 1.7% as of August 3, 2019. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of August 3, 2019, we had $235.0 million outstanding under the Credit Facility and $1.3 million in letters of credit issued, resulting in $163.7 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.

Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. As a result of the acquisition of Camuto Group, we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed 3.50:1 as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters. A violation of any of the covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of August 3, 2019, we were in compliance with all financial covenants.

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Capital Expenditure Plans

We expect to spend approximately $75.0 million to $85.0 million for capital expenditures in fiscal 2019. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and information technology projects that we undertake and the timing of these expenditures. During fiscal 2019, we plan to open approximately 17 to 21 new stores.

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.

We have included a summary of our contractual obligations as of February 2, 2019 in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. There have been no material changes in contractual obligations outside the ordinary course of business since February 2, 2019.

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 Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We have market risk exposure related to interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year. We currently do not utilize hedging instruments to mitigate these market risks.

Interest Rate Risk

We hold available-for-sale securities, which are not materially affected by changes in market interest rates. Also, as of August 3, 2019, we had $235.0 million outstanding on our revolving line of credit under our Credit Facility. Borrowings under our Credit Facility are based on a variable rate of interest, which exposes us to interest rate market risks, particularly during a period of rising interest rates. The impact of a hypothetical 100 basis point increase in interest rates on our revolving line of credit would not result in a material amount of additional expense over a 12-month period based on the balance as of August 3, 2019.

Foreign Currency Exchange Risk

We are exposed to the impact of foreign exchange rate risk primarily through our operations in Canada, where the functional currency is the Canadian dollar, as well as foreign denominated cash accounts. A hypothetical 10% movement in the exchange rates could result in a $3.0 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive loss within the condensed consolidated balance sheets, and $2.1 million of foreign currency revaluation, which would be recorded in non-operating income (expenses), net within the condensed consolidated statements of operations.

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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 report, that such disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

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

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

The information set forth in Note 16, Commitments and Contingencies - Legal Proceedings, of the condensed consolidated financial statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A.     Risk Factors

The following risk factors supplement and update our risk factors as set forth in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.

The imposition of new tariffs on our products could have a material adverse effect on our business and financial performance.

The U.S. Government has placed tariffs on certain goods imported from China and may impose new tariffs on goods imported from China and other countries, including footwear and other products that we import. All of the Brand Portfolio segment products are manufactured from third-party manufacturing facilities outside the U.S., whereas our retail merchandise is purchased from both domestic and foreign vendors. Many of our domestic vendors import a large portion of their merchandise from abroad. We believe almost all of our merchandise was manufactured outside the U.S., with the majority manufactured in China. In retaliation, China has responded by imposing tariffs on a wide range of products imported from the U.S. and by adjusting the value of its currency. If additional tariffs or trade restrictions are implemented by the U.S. or other countries in connection with a global trade war, the resulting escalation of trade tensions could have a material adverse effect on world trade and the global economy. While it is too early to predict whether or how the recently enacted tariffs will impact our business, the imposition of tariffs on footwear or other items imported by us from China could require us to increase prices to our customers or, if unable to do so, result in lowering our gross margin on products sold, which could have a material adverse effect on our business and financial performance. Alternatively, we may seek to shift production outside of China, resulting in significant costs and disruption to our business. Even in the absence of further tariffs or trade restrictions, the related uncertainty and the market's fear of an economic slowdown could lead to a decrease in consumer spending and we may experience lower net sales than expected. Reduced net sales may result in reduced operating cash flows if we are not able to appropriately manage inventory levels or leverage expenses.

We are exposed to foreign tax contingencies as a result of the acquisition of Camuto Group, which could have a material adverse effect on our financial performance.

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 have developed an estimate of the range of outcomes related to these obligations of $14.8 million to $30.0 million for obligations we are aware of at this time. 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.

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

Share Repurchase Program

On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. The share repurchase program 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. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

The following table sets forth the Class A common share repurchases during the most recent quarter:

(in thousands, except per share amounts)	(a) Total Number of Shares Purchased			(b) Average Price Paid per Share				(c) Total Number of Shares Purchased as Part of Publicly Announced Programs			(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
May 5, 2019 to June 1, 2019	—			$	—			—			$	401,564
June 2, 2019 to July 6, 2019(1)	2,669			$	18.74			2,668			$	351,564
July 7, 2019 to August 3, 2019	—			$	—			—			$	351,564
Total	2,669			$	18.74			2,668

(1)	The total number of shares repurchased includes the shares repurchased as part of publicly announced programs (the average price paid per share includes any broker commissions) and 856 shares withheld in connection with tax payments due upon vesting of employee restricted stock awards.

Dividends

The payment of any future 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. It is anticipated that dividends will be declared on a quarterly basis. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility. On August 29, 2019, the Board of Directors declared a quarterly cash dividend payment of $0.25 per share for both Class A and Class B common shares. The dividend will be paid on October 4, 2019 to shareholders of record at the close of business on September 20, 2019.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not Applicable.

Item 5.    Other Information

None.

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Item 6.    Exhibits

Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation, dated March 19, 2019. Incorporated by reference to Exhibit 3.1 to Form 10-K (file no. 001-32545) filed March 26, 2019.
3.2		Amended and Restated Code of Regulations. Incorporated by reference to Exhibit 3.2 to Form 10-K (file no. 001-32545) filed April 13, 2006.
4.1		Specimen Class A Common Shares Certificate. Incorporated by reference to Exhibit 4.1 to Form 10-Q (file no. 001-32545) filed June 4, 2019.
31.1*		Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer.
31.2*		Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.
32.1*		Section 1350 Certification - Principal Executive Officer.
32.2*		Section 1350 Certification - Principal Financial Officer.
101*		The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended August 3, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six months ended August 3, 2019 and August 4, 2018; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended August 3, 2019 and August 4, 2018; (iii) Condensed Consolidated Balance Sheets as of August 3, 2019, February 2, 2019 and August 4, 2018; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended August 3, 2019 and August 4, 2018; (v) Condensed Consolidated Statements of Cash Flows for the six months ended August 3, 2019 and August 4, 2018; and (vi) Notes to Condensed Consolidated Financial Statements.
104*		Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

*	Filed herewith

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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:	August 30, 2019		By:	/s/ Jared Poff
				Jared Poff
				Executive Vice President and Chief Financial Officer
				(Principal Financial Officer and duly authorized officer)

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