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 July 31, 2021

or

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

For the transition period from						to

Commission file number 001-32545

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

Ohio

31-0746639

(State or other jurisdiction of incorporation or organization)

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

810 DSW Drive,

Columbus,

Ohio

43219

(Address of principal executive offices)

(Zip Code)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults Upon Senior Securities			27
Item 4. Mine Safety Disclosures			27
Item 5. Other Information			27
Item 6. Exhibits			27
Signature			28

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

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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
			July 31, 2021						August 1, 2020						July 31, 2021						August 1, 2020
Net sales			$	817,335					$	489,714					$	1,520,490					$	972,497
Cost of sales			(532,654)						(452,672)						(1,019,698)						(961,915)
Gross profit			284,681						37,042						500,792						10,582
Operating expenses			(224,385)						(168,424)						(425,199)						(355,645)
Income from equity investment			2,290						2,153						3,998						4,423
Impairment charges			(1,174)						(6,735)						(1,174)						(119,282)
Operating profit (loss)			61,412						(135,964)						78,417						(459,922)
Interest expense, net			(8,072)						(3,788)						(16,886)						(5,946)
Non-operating income (expenses), net			(244)						743						562						656
Income (loss) before income taxes			53,096						(139,009)						62,093						(465,212)
Income tax benefit (provision)			(10,236)						40,795						(2,207)						151,140
Net income (loss)			$	42,860					$	(98,214)					$	59,886					$	(314,072)
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share			$	0.59					$	(1.36)					$	0.82					$	(4.36)
Diluted earnings (loss) per share			$	0.55					$	(1.36)					$	0.78					$	(4.36)
Weighted average shares used in per share calculations:
Basic shares			72,932						72,142						72,773						72,028
Diluted shares			77,619						72,142						77,271						72,028

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
			July 31, 2021						August 1, 2020						July 31, 2021						August 1, 2020
Net income (loss)			$	42,860					$	(98,214)					$	59,886					$	(314,072)
Other comprehensive income (loss), net of income taxes:
Foreign currency translation gain (loss)			(298)						1,290						245						(2,251)
Unrealized net gain on debt securities			—						—						—						195
Reclassification adjustment for net gains realized in net loss			—						—						—						(368)
Total other comprehensive income (loss), net of income taxes			(298)						1,290						245						(2,424)
Total comprehensive income (loss)			$	42,562					$	(96,924)					$	60,131					$	(316,496)

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

2

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DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands)

			July 31, 2021						January 30, 2021						August 1, 2020
ASSETS
Cash and cash equivalents			$	46,458					$	59,581					$	206,720
Receivables, net			199,371						196,049						49,240
Inventories			504,316						473,183						445,044
Prepaid expenses and other current assets			53,616						51,772						69,456
Total current assets			803,761						780,585						770,460
Property and equipment, net			271,401						296,469						332,730
Operating lease assets			676,665						700,481						797,413
Goodwill			93,655						93,655						93,655
Intangible assets, net			15,905						15,635						15,663
Deferred tax assets			—						—						182,866
Equity investment			55,149						58,598						56,690
Other assets			29,513						31,172						23,780
Total assets			$	1,946,049					$	1,976,595					$	2,273,257
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable			$	299,322					$	245,071					$	224,693
Accrued expenses			222,055						200,326						202,831
Current maturities of long-term debt			62,500						62,500						—
Current operating lease liabilities			190,853						244,786						241,694
Total current liabilities			774,730						752,683						669,218
Long-term debt			184,569						272,319						393,000
Non-current operating lease liabilities			645,136						677,735						778,826
Other non-current liabilities			30,502						30,841						25,586
Total liabilities			1,634,937						1,733,578						1,866,630
Commitments and contingencies
Shareholders' equity:
Common shares paid-in capital, no par value			998,117						990,153						980,749
Treasury shares, at cost			(515,065)						(515,065)						(515,065)
Retained deficit			(168,899)						(228,785)						(54,138)
Accumulated other comprehensive loss			(3,041)						(3,286)						(4,919)
Total shareholders' equity			311,112						243,017						406,627
Total liabilities and shareholders' equity			$	1,946,049					$	1,976,595					$	2,273,257

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

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 (deficit)						Accumulated other comprehensive loss						Total
Three months ended July 31, 2021
Balance, May 1, 2021			65,134						7,733						22,169						$	992,379					$	(515,065)					$	(211,759)					$	(2,743)					$	262,812
Net income			—						—						—						—						—						42,860						—						42,860
Stock-based compensation activity			102						—						—						5,738						—						—						—						5,738
Foreign currency translation adjustment			—						—						—						—						—						—						(298)						(298)
Balance, July 31, 2021			65,236						7,733						22,169						$	998,117					$	(515,065)					$	(168,899)					$	(3,041)					$	311,112
Three months ended August 1, 2020
Balance, May 2, 2020			64,302						7,733						22,169						$	975,304					$	(515,065)					$	44,076					$	(6,209)					$	498,106
Net loss			—						—						—						—						—						(98,214)						—						(98,214)
Stock-based compensation activity			276						—						—						5,445						—						—						—						5,445
Foreign currency translation adjustment			—						—						—						—						—						—						1,290						1,290
Balance, August 1, 2020			64,578						7,733						22,169						$	980,749					$	(515,065)					$	(54,138)					$	(4,919)					$	406,627
Six months ended July 31, 2021
Balance, January 30, 2021			64,666						7,733						22,169						$	990,153					$	(515,065)					$	(228,785)					$	(3,286)					$	243,017
Net income			—						—						—						—						—						59,886						—						59,886
Stock-based compensation activity			570						—						—						7,964						—						—						—						7,964
Foreign currency translation adjustment			—						—						—						—						—						—						245						245
Balance, July 31, 2021			65,236						7,733						22,169						$	998,117					$	(515,065)					$	(168,899)					$	(3,041)					$	311,112
Six months ended August 1, 2020
Balance, February 1, 2020			64,033						7,733						22,169						$	971,380					$	(515,065)					$	267,094					$	(2,495)					$	720,914
Net loss			—						—						—						—						—						(314,072)						—						(314,072)
Stock-based compensation activity			545						—						—						9,369						—						—						—						9,369
Dividends ($0.10 per share)			—						—						—						—						—						(7,160)						—						(7,160)
Other comprehensive loss			—						—						—						—						—						—						(2,424)						(2,424)
Balance, August 1, 2020			64,578						7,733						22,169						$	980,749					$	(515,065)					$	(54,138)					$	(4,919)					$	406,627

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

4

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DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

			Six months ended
			July 31, 2021						August 1, 2020
Cash flows from operating activities:
Net income (loss)			$	59,886					$	(314,072)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			40,257						44,075
Stock-based compensation expense			13,365						10,596
Deferred income taxes			100						(152,988)
Income from equity investment			(3,998)						(4,423)
Distributions received from equity investment			7,447						5,493
Impairment charges			1,174						119,282
Gain on settlement			—						(8,990)
Other			800						403
Change in operating assets and liabilities:
Accounts receivable			5,859						30,699
Income tax receivable			(9,066)						—
Inventories			(30,114)						186,965
Prepaid expenses and other current assets			(612)						(847)
Accounts payable			53,009						(67,282)
Accrued expenses			21,546						26,693
Operating lease assets and liabilities, net			(63,424)						44,777
Net cash provided by (used in) operating activities			96,229						(79,619)
Cash flows from investing activities:
Cash paid for property and equipment			(13,189)						(22,141)
Sales of available-for-sale investments			—						24,755
Proceeds from settlement			—						4,166
Net cash provided by (used in) investing activities			(13,189)						6,780
Cash flows from financing activities:
Borrowing on revolving line under Credit Facility			—						251,000
Payments on revolving line under Credit Facility			—						(48,000)
Borrowing under ABL Revolver			342,053						—
Payments on borrowings under ABL Revolver			(425,243)						—
Payments on borrowings under Term Loan			(6,251)						—
Dividends paid			—						(7,160)
Other			(5,514)						(2,646)
Net cash provided by (used in) financing activities			(94,955)						193,194
Effect of exchange rate changes on cash balances			338						(199)
Net increase (decrease) in cash, cash equivalents and restricted cash			(11,577)						120,156
Cash, cash equivalents and restricted cash, beginning of period			59,581						86,564
Cash, cash equivalents and restricted cash, end of period			$	48,004					$	206,720
Supplemental disclosures of cash flow information:
Cash paid (received) for income taxes			$	(3,372)					$	165
Cash paid for interest on debt			$	13,437					$	5,606
Cash paid for operating lease liabilities			$	162,602					$	62,262
Non-cash investing and financing activities:
Property and equipment purchases not yet paid			$	2,320					$	1,981
Operating lease liabilities arising from lease asset additions			$	11,109					$	9,408
Net increase to operating lease assets and lease liabilities for modifications			$	45,723					$	23,195

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

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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 one of North America's largest designers, producers and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company, Shoe Warehouse, and DSW banners through its Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels (which we refer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. An integral part of the Brand Portfolio segment is our equity investment in ABG-Camuto, LLC ("ABG-Camuto"), which is a partnership between Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," and Authentic Brands Group LLC, a global brand management and marketing company. Camuto Group has a 40% stake in ABG-Camuto, a joint venture that owns several intellectual property rights, including Vince Camuto, Louise et Cie, and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. Camuto Group has a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands owned by ABG-Camuto, subject to guaranteed minimums. Camuto Group also owns footwear and certain handbag licensing rights of Jessica Simpson, Lucky Brand and, through a joint venture, Jennifer Lopez. Our other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 30, 2021 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2020 Form 10-K.

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

Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 2020 Form 10-K.

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

During the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout fiscal 2020 and into the first quarter of fiscal 2021, resulting in the elimination of approximately 1,000 associate positions. The severance charges recorded as a result of this reorganization are included in our severance discussion below.

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

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Table of Contents     

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As a result of the material reduction in net sales and cash flows during fiscal 2020, we updated our impairment analyses for our U.S. Retail and Canada Retail segments at the store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the three months ended August 1, 2020, we recorded an impairment charge of $6.7 million for the U.S. Retail segment. During the six months ended August 1, 2020, we recorded impairment charges of $92.8 million ($73.1 million and $19.7 million for the U.S. Retail segment and Canada Retail segment, respectively). Also during the six months ended August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).

As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers and the decrease in the Company's market capitalization due to the impact of COVID-19 on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets during the first quarter of fiscal 2020. We calculated the fair value of the reporting units with goodwill primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy). Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the six months ended August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories reflects reductions for merchandise marked down with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using moving average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our fiscal 2020 peak spring selling season and reduced traffic experienced since re-opening stores. During the six months ended August 1, 2020, we recorded $64.0 million of additional inventory reserves over the same period of the previous year.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which, among other things, provided employer payroll tax credits for wages paid to employees who were unable to work over a defined period and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualified for certain employer payroll tax credits, which were treated as government subsidies to offset related operating expenses, as well as the deferral of payroll and other tax payments in the future. Similar credits were also available in Canada and continue to be provided. During the three months ended July 31, 2021 and August 1, 2020, the qualified government credits reduced our operating expenses by $1.0 million and $3.5 million, respectively, on our condensed consolidated statements of operations. During the six months ended July 31, 2021 and August 1, 2020, the qualified government credits reduced our operating expenses by $3.7 million and $7.9 million, respectively, on our condensed consolidated statements of operations. As of July 31, 2021, we had $10.0 million of deferred qualified payroll and other tax obligations, half of which is included in accrued expenses on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2021, with the remaining included in other non-current liabilities on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2022.

We recorded our income tax expense, income tax receivable, and deferred tax assets and related liabilities based on management’s best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. Our ability to recover these deferred tax assets depends on several factors, including our ability to project future taxable income. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in fiscal 2020 due to COVID-19, we are in a three-year cumulative loss position as of July 31, 2021, which is significant objective negative evidence in considering whether deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. A valuation allowance has been recognized as a reserve on the total deferred tax asset balance due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Our effective tax rate changed from 32.5% for the six months ended

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

August 1, 2020 to 3.6% for the six months ended July 31, 2021. The rate for the six months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the six months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.

The impacts from the COVID-19 pandemic remain challenging and unpredictable. While trends improved during the first half of fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by COVID-19 and to what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or if COVID-19 will result in long-term changes in consumer behavior. The ongoing and prolonged nature of the outbreak may lead to further adjustments to our operations. As such, the ultimate impacts of COVID-19 to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the variants of COVID-19, and the global availability and use of vaccines, which are highly uncertain and cannot be predicted. As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.

Severance- During the three months ended July 31, 2021 and August 1, 2020, we incurred severance costs of $1.2 million and $7.3 million, respectively. During the six months ended July 31, 2021 and August 1, 2020, we incurred severance costs of $2.6 million and $9.0 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of July 31, 2021, January 30, 2021 and August 1, 2020, we had accrued severance of $4.9 million, $6.5 million and $8.4 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.

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

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

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

Cash, Cash Equivalents, and Restricted Cash- Cash and cash equivalents represent cash, money market funds and credit card receivables that generally settle within three days. Restricted cash represented cash that is restricted as to withdrawal or usage and consists of a mandatory cash deposit maintained for certain insurance policies.

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

(in thousands)			July 31, 2021						January 30, 2021						August 1, 2020
Cash and cash equivalents			$	46,458					$	59,581					$	206,720
Restricted cash, included in prepaid expenses and other current assets			1,546						—						—
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows			$	48,004					$	59,581					$	206,720

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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 in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:

•Level 1 - Quoted prices in active markets for identical assets or liabilities.

•Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.

•Level 3 - Unobservable inputs in which little or no market activity exists.

The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowing under our ABL Revolver and our previous senior unsecured revolving credit agreement ("Credit Facility") approximated the carrying value. As of July 31, 2021, the fair value of borrowings under our Term Loan was $250.2 million compared to the carrying value of $237.5 million. The fair value of debt borrowings was estimated based on current interest rates offered for similar instruments (categorized as Level 2 under the fair value hierarchy).

Impairment of Long-Lived Assets- Refer to section above, Impact of COVID-19, regarding impairment charges of long-lived assets during fiscal 2020. During the three months ended July 31, 2021, we recorded an impairment charge of $1.2 million in the U.S. Retail segment for abandoned equipment we are replacing.

2.    REVENUE

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

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

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

3.    RELATED PARTY TRANSACTIONS

Schottenstein Affiliates

As of July 31, 2021, the Schottenstein Affiliates consist of entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family. As of July 31, 2021, the Schottenstein Affiliates beneficially owned approximately 17% of the Company's outstanding common shares, representing approximately 52% of the combined voting power, consisting of, in the aggregate, 4.8 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:

Leases- We lease our fulfillment center and certain store locations owned by the Schottenstein Affiliates. During the three months ended July 31, 2021 and August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $2.7 million and $2.6 million, respectively. During the six months ended July 31, 2021 and August 1, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $5.4 million and $5.3 million, respectively. As of July 31, 2021, January 30, 2021 and August 1, 2020, we had related party current operating lease liabilities of $6.4 million, $8.0 million and $7.9 million, respectively, and non-current operating lease liabilities of $21.3 million, $24.6 million and $28.5 million, respectively.

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

Due to Related Parties- Amounts due to Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.

ABG-Camuto

We have a 40% interest in our equity investment in ABG-Camuto. We have a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto, subject to guaranteed minimums. During both the three months ended July 31, 2021 and August 1, 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $4.6 million. During the six months ended July 31, 2021 and August 1, 2020, we recorded royalty expense for amounts paid to ABG-Camuto of $9.2 million and $9.0 million, respectively. Amounts due to ABG-Camuto were immaterial for all periods presented.

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

4.    EARNINGS (LOSS) PER SHARE

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

The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings (loss) per share:

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

For the three months ended July 31, 2021 and August 1, 2020, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 2.9 million and 5.9 million, respectively. For the six months ended July 31, 2021 and August 1, 2020, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 3.0 million and 5.5 million, respectively.

5.    STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:

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

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

			Number of shares
(in thousands)			Time-Based RSUs						Performance-Based RSUs
Outstanding - beginning of period			6,445						540
Granted			1,033						—
Vested			(512)						(359)
Forfeited			(225)						(17)
Outstanding - end of period			6,741						164

6.    SHAREHOLDERS' EQUITY

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

			July 31, 2021												January 30, 2021												August 1, 2020
(in thousands)			Class A						Class B						Class A						Class B						Class A						Class B
Authorized shares			250,000						100,000						250,000						100,000						250,000						100,000
Issued shares			87,405						7,733						86,835						7,733						86,747						7,733
Outstanding shares			65,236						7,733						64,666						7,733						64,578						7,733
Treasury shares			22,169						—						22,169						—						22,169						—

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

Accumulated Other Comprehensive Loss- For the six months ended August 1, 2020, changes for the balances of each component of accumulated other comprehensive loss, net of tax, were as follows (for all other periods presented, the change was due to foreign currency translation adjustments as shown in the condensed consolidated statements of shareholders' equity):

(in thousands)			Foreign Currency Translation						Available-for-Sale Securities						Total
Accumulated other comprehensive income (loss) - beginning of period			$	(2,668)					$	173					$	(2,495)
Other comprehensive income (loss) before reclassifications			(2,251)						195						(2,056)
Amounts reclassified to non-operating income, net			—						(368)						(368)
Other comprehensive loss			(2,251)						(173)						(2,424)
Accumulated other comprehensive loss - end of period			$	(4,919)					$	—					$	(4,919)

7.    RECEIVABLES

Receivables, net, consisted of the following:

(in thousands)			July 31, 2021						January 30, 2021						August 1, 2020
Customer accounts receivables:
Serviced by third-party provider with guaranteed payment			$	27,638					$	29,615					$	20,268
Serviced by third-party provider without guaranteed payment			76						363						739
Serviced in-house			2,665						4,576						6,248
Income tax receivable			158,890						149,824						—
Other receivables			11,295						12,865						23,973
Total receivables			200,564						197,243						51,228
Allowance for doubtful accounts			(1,193)						(1,194)						(1,988)
			$	199,371					$	196,049					$	49,240

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

8.    GOODWILL AND INTANGIBLE ASSETS

Goodwill- The following table presents the changes to goodwill by segment:

			Six months ended
			July 31, 2021																		August 1, 2020
(in thousands)			Goodwill						Accumulated Impairments						Net						Goodwill						Accumulated Impairments						Net
Beginning of period by segment:
U.S. Retail			$	93,655					$	—					$	93,655					$	93,655					$	—					$	93,655
Canada Retail			43,086						(43,086)						—						41,610						(41,610)						—
Brand Portfolio			19,989						(19,989)						—						19,989						—						19,989
			156,730						(63,075)						93,655						155,254						(41,610)						113,644
Activity by segment:
Canada Retail-
Currency translation adjustment			1,098						(1,098)						—						(534)						534						—
Brand Portfolio-
Impairment charge			—						—						—						—						(19,989)						(19,989)
			1,098						(1,098)						—						(534)						(19,455)						(19,989)
End of period by segment:
U.S. Retail			93,655						—						93,655						93,655						—						93,655
Canada Retail			44,184						(44,184)						—						41,076						(41,076)						—
Brand Portfolio			19,989						(19,989)						—						19,989						(19,989)						—
			$	157,828					$	(64,173)					$	93,655					$	154,720					$	(61,065)					$	93,655

Intangible Assets- Intangible assets consisted of the following:

(in thousands)			Cost						Accumulated Amortization						Net
July 31, 2021
Definite-lived customer relationships			$	1,444					$	(1,444)					$	—
Indefinite-lived trademarks and tradenames			15,905						—						15,905
			$	17,349					$	(1,444)					$	15,905
January 30, 2021
Definite-lived customer relationships			$	2,909					$	(2,791)					$	118
Indefinite-lived trademarks and tradenames			15,517						—						15,517
			$	18,426					$	(2,791)					$	15,635
August 1, 2020
Definite-lived customer relationships			$	2,843					$	(2,507)					$	336
Indefinite-lived trademarks and tradenames			15,327						—						15,327
			$	18,170					$	(2,507)					$	15,663

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

9.    ACCRUED EXPENSES

Accrued expenses consisted of the following:

(in thousands)			July 31, 2021						January 30, 2021						August 1, 2020
Gift cards			$	28,691					$	34,442					$	29,919
Accrued compensation and related expenses			49,037						49,864						29,422
Accrued taxes			35,030						24,206						22,624
Loyalty programs deferred revenue			15,255						11,379						14,797
Sales returns			19,204						17,333						20,713
Customer allowances and discounts			2,103						4,579						8,644
Other			72,735						58,523						76,712
			$	222,055					$	200,326					$	202,831

10.    DEBT

Debt consisted of the following:

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

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

Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") (as defined) plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0% as of July 31, 2021. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.

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

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of July 31, 2021.

Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary events of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral. As of July 31, 2021, we were in compliance with all financial covenants.

11.    COMMITMENTS AND CONTINGENCIES

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

Insurance Recoveries- During fiscal 2020, a third-party vendor experienced a shutdown of services to us that impacted our ability to fulfill orders from customers for a limited period of time. This incident was covered under an insurance policy that provides for reimbursement of lost profits and recognized losses as a result of the outage. During the fourth quarter of fiscal 2020, we recognized an insurance recovery receivable of $3.0 million, recorded as an offset to cost of sales, for recognized losses that we believe are probable of being reimbursed through the insurance policy. Reimbursement for lost profits and any additional recoveries in excess of recognized losses are treated as gain contingencies and will be recognized when realized or realizable. We continue to work with the insurance carrier to reach an agreement on the total amount to be recovered.

Guarantee- We provide guarantees for lease obligations that are scheduled to expire in fiscal 2023 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of July 31, 2021, the total future minimum lease payment requirements for these guarantees were approximately $13.3 million.

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Table of Contents     

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

12.    SEGMENT REPORTING

The following provides certain key financial data by segment reconciled to the condensed consolidated financial statements:

(in thousands)			U.S. Retail						Canada Retail						Brand Portfolio						Other						Corporate/Eliminations						Total
Three months ended July 31, 2021
Net sales:
External customer sales			$	723,093					$	57,585					$	36,657					$	—					$	—					$	817,335
Intersegment sales			—						—						13,872						—						(13,872)						—
Total net sales			$	723,093					$	57,585					$	50,529					$	—					$	(13,872)					$	817,335
Gross profit			$	256,893					$	18,768					$	8,533					$	—					$	487					$	284,681
Income from equity investment			$	—					$	—					$	2,290					$	—					$	—					$	2,290
Three months ended August 1, 2020
Net sales:
External customer sales			$	393,977					$	49,582					$	23,889					$	22,266					$	—					$	489,714
Intersegment sales			—						—						6,569						—						(6,569)						—
Total net sales			$	393,977					$	49,582					$	30,458					$	22,266					$	(6,569)					$	489,714
Gross profit (loss)			$	40,097					$	5,650					$	(11,440)					$	118					$	2,617					$	37,042
Income from equity investment			$	—					$	—					$	2,153					$	—					$	—					$	2,153
Six months ended July 31, 2021
Net sales:
External customer sales			$	1,343,751					$	98,189					$	78,550					$	—					$	—					$	1,520,490
Intersegment sales			—						—						29,406						—						(29,406)						—
Total net sales			$	1,343,751					$	98,189					$	107,956					$	—					$	(29,406)					$	1,520,490
Gross profit			$	450,006					$	29,603					$	20,459					$	—					$	724					$	500,792
Income from equity investment			$	—					$	—					$	3,998					$	—					$	—					$	3,998
Six months ended August 1, 2020
Net sales:
External customer sales			$	771,050					$	78,911					$	86,647					$	35,889					$	—					$	972,497
Intersegment sales			—						—						25,924						—						(25,924)						—
Total net sales			$	771,050					$	78,911					$	112,571					$	35,889					$	(25,924)					$	972,497
Gross profit (loss)			$	7,127					$	3,339					$	2,464					$	(5,310)					$	2,962					$	10,582
Income from equity investment			$	—					$	—					$	4,423					$	—					$	—					$	4,423

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

Executive Overview and Trends in our Business

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

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

•Customer- More than ever, our customers have a great desire for products and experiences, and we are adding resources to our digital, IT and analytics teams to understand precisely what they want and what can be improved to provide the best possible experience. Undertaking these actions will enable us to better understand our customers, provide improved service, and target new demographics in targeted and personalized ways that we have never deployed before. We are also developing new ideas for how we can provide more value to our VIP rewards members who continue to be the lifeblood of our business and our largest competitive differentiator.

•Brand- Controlling our own brand destiny is critical for our growth. As we continue to design some of the best brands in the industry, Vince Camuto, Jessica Simpson, Lucky Brand and JLO Jennifer Lopez, we are combining that with our strong direct-to-consumer distribution through our physical footprint in North America and digital infrastructure. We are also partnering with some of the top brands in the industry to offer one of the largest and most broad assortments. We remain focused on investing in some of the top 50 brands in footwear and will continue to prioritize growing our own brands.

•Speed- Moving quickly is of the utmost importance to consumers. We are developing processes to deliver products more quickly. Fulfillment of digital customer orders takes 5 to 7 business days and we are working to improve that to 2 to 3 calendar days while simultaneously finding efficiencies to contain costs. We are optimizing our current infrastructure and expanding our delivery partnerships. We are also working to improve collaboration through technology and processes across our organization and to gain additional efficiencies in our overall development cycle.

We have a proven track record of staying ahead of trends to ensure our success, despite some of the challenges we face, including COVID-19 variants and supply chain disruptions.

Impact of COVID-19

In response to the sudden and significant impacts resulting from the COVID-19 pandemic, we took several actions during the first quarter of fiscal 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as changes to our expense and capital expenditure plans.

Although operating results have improved throughout the first half of fiscal 2021, we continue to experience adverse impacts due to COVID-19, including temporary store closures, reduced hours and other requirements in certain areas where government-imposed restrictions were mandated, and global supply chain challenges. Our retail customers in the Brand Portfolio segment have had and are having similar experiences. The impacts from the COVID-19 pandemic remain challenging and unpredictable. While trends improved during the first half of fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by COVID-19 and to what extent the recent improved trends will continue. For instance, restrictions have recently been reinstated in certain locations within the U.S., and it is unclear whether these restrictions will continue and expand or if COVID-19 will result in long-term changes in consumer behavior. The ongoing and prolonged nature of the outbreak may lead to further adjustments to our operations. As such, the ultimate impacts of COVID-19 to our businesses remain highly uncertain and will depend on future developments, including global supply chain disruptions, the variants of COVID-19, and the global availability and use of vaccines, which are highly uncertain and cannot be predicted. As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.

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

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

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

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

Comparable Sales Performance Metric

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

			Three months ended
			July 31, 2021						August 1, 2020
Comparable sales:
U.S. Retail segment			94.3		%				(44.9)		%
Canada Retail segment			14.6		%				(27.9)		%
Brand Portfolio segment - direct-to-consumer channel			10.6		%				120.5		%
Other			NA						(36.2)		%
Total comparable sales			84.9		%				(42.7)		%

NA - Not applicable

We consider comparable sales, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses. We include stores in our comparable sales metric for those stores in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include stores temporarily closed as a result of COVID-19 as management continues to believe that this metric is meaningful to monitor our performance. Comparable sales include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site, www.vincecamuto.com. Beginning with the third quarter of fiscal 2020, comparable sales no longer include the Other segment due to no longer having activity in the Other segment. The calculation of comparable sales

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varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

Number of Stores

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

			July 31, 2021						August 1, 2020
U.S. Retail segment - DSW stores			515												522
Canada Retail segment:
The Shoe Company / Shoe Warehouse stores			116												117
DSW stores			27												27
			143												144
Total number of stores			658												666

Results of Operations

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

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

NM - Not meaningful

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Net Sales- The following summarizes net sales by segment:

			Three months ended												Change
(dollars in thousands)			July 31, 2021						August 1, 2020						Amount						%						Comparable Sales %
Segment net sales:
U.S. Retail			$	723,093					$	393,977					$	329,116					83.5		%				94.3%
Canada Retail			57,585						49,582						8,003						16.1		%				14.6%
Brand Portfolio			50,529						30,458						20,071						65.9		%				10.6%
Other			—						22,266						(22,266)						NM						NA
Total segment net sales			831,207						496,283						334,924						67.5		%				84.9%
Elimination of intersegment net sales			(13,872)						(6,569)						(7,303)						111.2		%
Consolidated net sales			$	817,335					$	489,714					$	327,621					66.9		%

NA - Not applicable

NM - Not meaningful

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

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

			Three months ended
			July 31, 2021												August 1, 2020
(dollars in thousands)			Amount						% of Segment Net Sales						Amount						% of Segment Net Sales						Change
Segment gross profit (loss):
U.S. Retail			$	256,893					35.5		%				$	40,097					10.2		%				$	216,796
Canada Retail			18,768						32.6		%				5,650						11.4		%				$	13,118
Brand Portfolio			8,533						16.9		%				(11,440)						(37.6)		%				$	19,973
Other			—						—		%				118						0.5		%				$	(118)
			284,194												34,425
Elimination of intersegment gross profit			487												2,617
Gross profit			$	284,681					34.8		%				$	37,042					7.6		%				$	247,639

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

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promotional. Accordingly, gross profit as a percentage of net sales for the second quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 30.5% for the second quarter of fiscal 2019. The Canada Retail and Brand Portfolio segments have significantly improved gross profit as a percentage of net sales during the quarter as compared to the same period last year, but remained below pre-COVID-19 levels when compared to the second quarter of fiscal 2019 due to the deleverage impacts of lower net sales.

Elimination of intersegment gross profit consisted of the following:

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

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

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

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

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

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

NM - Not meaningful

Net Sales- The following summarizes net sales by segment:

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

NA - Not applicable

NM - Not meaningful

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

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

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

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

Elimination of intersegment gross profit consisted of the following:

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

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

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Impairment Charges- During the six months ended July 31, 2021, we recorded an impairment charge of $1.2 million for abandoned equipment we are replacing. As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores during the six months ended August 1, 2020, we performed an impairment analysis at the store-level. In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the six months ended August 1, 2020, we recorded impairment charges of $92.8 million for under-performing stores. Also during the six months ended August 1, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life. Further, as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of COVID-19 on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the six months ended August 1, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.

Income Taxes- Our effective tax rate changed from 32.5% for the six months ended August 1, 2020 to 3.6% for the six months ended July 31, 2021. The rate for the six months ended July 31, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the six months ended August 1, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.

Seasonality

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

Liquidity and Capital Resources

Overview

Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing commitments, other working capital needs, capital expenditures, and debt service. Our working capital and inventory levels fluctuate seasonally. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including the impact of COVID-19. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our ABL Revolver, are sufficient to maintain our ongoing operations, fund capital expenditures, and meet our debt service obligations over the next 12 months.

Operating Cash Flows

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

Investing Cash Flows

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

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Financing Cash Flows

For the six months ended July 31, 2021, our net cash used in financing activities was $95.0 million compared to net cash provided by financing activities of $193.2 million for the six months ended August 1, 2020. During the six months ended July 31, 2021, we had net payments of $83.2 million from the ABL Revolver and payments on the Term Loan of $6.3 million. During the six months ended August 1, 2020, we had net borrowings of $203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering the uncertainty from COVID-19.

Debt

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

Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") (as defined) plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0% as of July 31, 2021. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.

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

Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of July 31, 2021.

Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum EBITDA covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary covenants of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral. As of July 31, 2021, we were in compliance with all financial covenants.

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Capital Expenditure Plans

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

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies disclosed in our 2020 Form 10-K.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 1A.     Risk Factors

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

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

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

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

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not Applicable.

Item 5.    Other Information

None.

Item 6.    Exhibits

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

*    Filed herewith

**    Furnished herewith     

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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 31, 2021

By:

/s/ Jared Poff

Jared Poff

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and duly authorized officer)

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