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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission file number 001-32545
DESIGNER BRANDS INC.
(Exact name of registrant as specified in its charter)
Ohio
 
31-0746639
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
810 DSW Drive,
Columbus,
Ohio

 
43219
(Address of principal executive offices)
 
 
(Zip Code)
Registrant's telephone number, including area code: (614) 237-7100
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Shares, without par value
DBI
New York Stock Exchange

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Number of shares outstanding of each of the registrant's classes of common stock, as of June 12, 2020: 64,374,547 Class A common shares and 7,732,786 Class B common shares.


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

Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q") may constitute forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to those factors described under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, as amended, filed on May 1, 2020, and Part II, Item 1A. Risk Factors in this Form 10-Q, and otherwise in our reports and filings with the Securities and Exchange Commission (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. These factors include, but are not limited to, the following:
•
risks related to the outbreak of the coronavirus ("COVID-19") and other adverse public health developments;
•
risks related to holdings of cash and investments and access to liquidity;
•
risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to foreign tax contingencies, and fluctuations in foreign currency exchange rates;
•
maintaining strong relationships with our vendors, manufacturers, licensors, and retailer customers;
•
our ability to successfully integrate acquired businesses or realize the anticipated benefits of the acquisitions after we complete our integration efforts;
•
risks related to the loss or disruption of any of our distribution or fulfillment centers;
•
our reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty;
•
our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
•
failure to retain our key executives or attract qualified new personnel;
•
risks related to the loss or disruption of our information systems and data and our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data;
•
our ability to comply with privacy laws and regulations, as well as other legal obligations;
•
continuation of agreements with and our reliance on the financial condition of Stein Mart;
•
our success in growing our store base and digital demand;
•
our ability to protect our reputation and to maintain the brands we license;
•
our ability to execute our strategies;
•
fluctuation of our comparable sales and quarterly financial performance;
•
uncertain general economic conditions;
•
our competitiveness with respect to style, price, brand availability and customer service;
•
the imposition of increased or new tariffs on our products; 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.



EXPLANATORY NOTE

Designer Brands Inc. (the "Company") relied on the SEC's order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies, dated March 25, 2020 (Release No. 34-88465) (the "Order") to delay the filing of this Form 10-Q due to circumstances related to COVID-19. The original due date for filing of this Form 10-Q was June 11, 2020. On May 15, 2020, the Company filed a Current Report on Form 8-K to indicate its intention to rely on the Order for such extension. Consistent with the Company’s statements made in the Current Report on Form 8-K, the Company was unable to file this Form 10-Q until June 19, 2020 because the Company’s operations and business have experienced significant disruptions due to the unprecedented conditions surrounding the COVID-19 outbreak. These disruptions include, but are not limited to, the temporary leaves of absence of a significant number of our employees, the temporary closure of all of our offices and North American retail locations, and other financial and operational concerns associated with or caused by COVID-19. Moreover, the Company relied on the Order due to the limited availability of our key personnel required to update the Company's impairment and reserve analysis for the quarter, which was necessary to finalize this Form 10-Q, and the need for management to focus on addressing emergent business and operational issues resulting from COVID-19.



DESIGNER BRANDS INC.
TABLE OF CONTENTS
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
1
2
3
4
5
6
16
22
22
PART II. OTHER INFORMATION
 
22
22
23
23
23
23
24
25

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



PART I.
FINANCIAL INFORMATION

Item 1.
Financial Statements

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
 
Three months ended
 
May 2, 2020
 
May 4, 2019
Net sales
$
482,783

 
$
873,289

Cost of sales
(509,243
)
 
(613,956
)
Operating expenses
(187,221
)
 
(217,580
)
Income from equity investment
2,270

 
2,228

Impairment charges
(112,547
)
 
—

Operating profit (loss)
(323,958
)
 
43,981

Interest expense, net
(2,158
)
 
(1,801
)
Non-operating expenses, net
(87
)
 
(342
)
Income (loss) before income taxes
(326,203
)
 
41,838

Income tax benefit (provision)
110,345

 
(10,644
)
Net income (loss)
$
(215,858
)
 
$
31,194

Basic and diluted earnings (loss) per share:
 
 
 
Basic earnings (loss) per share
$
(3.00
)
 
$
0.41

Diluted earnings (loss) per share
$
(3.00
)
 
$
0.40

Weighted average shares used in per share calculations:
 
 
 
Basic shares
71,914

 
77,004

Diluted shares
71,914

 
78,263


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

1

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
 
Three months ended
 
May 2, 2020
 
May 4, 2019
Net income (loss)
$
(215,858
)
 
$
31,194

Other comprehensive income (loss), net of income taxes:
 
 
 
Foreign currency translation loss
(3,541
)
 
(714
)
Unrealized net gain on debt securities
195

 
242

Reclassification adjustment for net gains realized in net income
(368
)
 
(88
)
Total other comprehensive loss, net of income taxes
(3,714
)
 
(560
)
Total comprehensive income (loss)
$
(219,572
)
 
$
30,634


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


2

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
 
May 2, 2020
 
February 1, 2020
 
May 4, 2019
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
250,874

 
$
86,564

 
$
70,671

Investments
—

 
24,974

 
51,259

Accounts receivable, net
81,953

 
89,151

 
78,287

Inventories
533,638

 
632,587

 
642,045

Prepaid expenses and other current assets
82,742

 
67,534

 
54,463

Total current assets
949,207

 
900,810

 
896,725

Property and equipment, net
359,841

 
395,009

 
405,156

Operating lease assets
799,482

 
918,801

 
993,622

Goodwill
93,655

 
113,644

 
90,881

Intangible assets
13,908

 
22,846

 
42,298

Deferred tax assets
139,269

 
31,863

 
27,909

Equity investment
57,538

 
57,760

 
60,193

Other assets
24,941

 
24,337

 
32,384

Total assets
$
2,437,841

 
$
2,465,070

 
$
2,549,168

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Accounts payable
$
283,054

 
$
299,072

 
$
224,576

Accrued expenses
231,359

 
194,264

 
186,992

Current operating lease liabilities
218,313

 
186,695

 
184,456

Total current liabilities
732,726

 
680,031

 
596,024

Debt
393,000

 
190,000

 
235,000

Non-current operating lease liabilities
788,704

 
846,584

 
921,145

Other non-current liabilities
25,305

 
27,541

 
34,148

Total liabilities
1,939,735

 
1,744,156

 
1,786,317

Commitments and contingencies


 


 


Shareholders' equity:
 
 
 
 
 
Common shares paid-in capital, no par value
975,304

 
971,380

 
957,100

Treasury shares, at cost
(515,065
)
 
(515,065
)
 
(448,436
)
Retained earnings
44,076

 
267,094

 
257,453

Accumulated other comprehensive loss
(6,209
)
 
(2,495
)
 
(3,266
)
Total shareholders' equity
498,106

 
720,914

 
762,851

Total liabilities and shareholders' equity
$
2,437,841

 
$
2,465,070

 
$
2,549,168


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

3

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited and in thousands, except per share data)
 
Number of shares
 
Amounts
 
Class A common shares
 
Class B common shares
 
Treasury shares
 
Common shares paid in capital
 
Treasury shares
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total
Three months ended May 2, 2020
Balance, February 1, 2020
64,033

 
7,733

 
22,169

 
$
971,380

 
$
(515,065
)
 
$
267,094

 
$
(2,495
)
 
$
720,914

Net loss
—

 
—

 
—

 
—

 
—

 
(215,858
)
 
—

 
(215,858
)
Stock-based compensation activity
269

 
—

 
—

 
3,924

 
—

 
—

 
—

 
3,924

Dividends ($0.10 per share)
—

 
—

 
—

 
—

 
—

 
(7,160
)
 
—

 
(7,160
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(3,714
)
 
(3,714
)
Balance, May 2, 2020
64,302

 
7,733

 
22,169

 
$
975,304

 
$
(515,065
)
 
$
44,076

 
$
(6,209
)
 
$
498,106

Three months ended May 4, 2019
Balance, February 2, 2019
70,672

 
7,733

 
15,091

 
$
953,801

 
$
(373,436
)
 
$
254,718

 
$
(2,706
)
 
$
832,377

Cumulative effect of accounting change
—

 
—

 
—

 
—

 
—

 
(9,556
)
 
—

 
(9,556
)
Net income
—

 
—

 
—

 
—

 
—

 
31,194

 
—

 
31,194

Stock-based compensation activity
172

 
—

 
—

 
3,299

 
—

 
—

 
—

 
3,299

Repurchase of Class A Common Shares
(3,410
)
 
—

 
3,410

 
—

 
(75,000
)
 
—

 
—

 
(75,000
)
Dividends ($0.25 per share)
—

 
—

 
—

 
—

 
—

 
(18,903
)
 
—

 
(18,903
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
(560
)
 
(560
)
Balance, May 4, 2019
67,434

 
7,733

 
18,501

 
$
957,100

 
$
(448,436
)
 
$
257,453

 
$
(3,266
)
 
$
762,851


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

4

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Three months ended
 
May 2, 2020
 
May 4, 2019
Cash flows from operating activities: 
 
 
 
Net income (loss)
$
(215,858
)
 
$
31,194

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
23,133

 
21,422

Stock-based compensation expense
4,917

 
4,370

Deferred income taxes
(109,308
)
 
(364
)
Income from equity investment
(2,270
)
 
(2,228
)
Distributions received from equity investment
2,493

 
160

Impairment charges
112,547

 
—

Other
340

 
544

Change in operating assets and liabilities, net of acquired amounts:
 
 
 
Accounts receivable
6,999

 
(10,330
)
Inventories
96,588

 
1,235

Prepaid expenses and other current assets
(15,014
)
 
(880
)
Accounts payable
(11,816
)
 
(32,254
)
Accrued expenses
37,421

 
(11,568
)
Operating lease assets and liabilities, net
30,359

 
(4,327
)
Net cash used in operating activities
(39,469
)
 
(3,026
)
Cash flows from investing activities:
 
 
 
Cash paid for property and equipment
(14,625
)
 
(24,879
)
Sales of available-for-sale investments
24,612

 
18,691

Net cash provided by (used in) investing activities
9,987

 
(6,188
)
Cash flows from financing activities:
 
 
 
Borrowing on revolving line of credit
251,000

 
215,200

Payments on revolving line of credit
(48,000
)
 
(140,200
)
Cash paid for treasury shares
—

 
(75,000
)
Dividends paid
(7,160
)
 
(18,903
)
Other
(1,940
)
 
(986
)
Net cash provided by (used in) financing activities
193,900

 
(19,889
)
Effect of exchange rate changes on cash balances
(108
)
 
839

Net increase (decrease) in cash, cash equivalents, and restricted cash
164,310

 
(28,264
)
Cash, cash equivalents, and restricted cash, beginning of period
86,564

 
100,568

Cash and cash equivalents, end of period
$
250,874

 
$
72,304

Supplemental disclosures of cash flow information:
 
 
 
Cash paid (received) for income taxes
$
(31
)
 
$
721

Cash paid for interest on debt
$
2,105

 
$
1,987

Cash paid for operating lease liabilities
$
24,983

 
$
59,162

Non-cash investing and financing activities:
 
 
 
Property and equipment purchases not yet paid
$
9,478

 
$
6,542

Operating lease liabilities arising from lease asset additions
$
9,408

 
$
4,621

Increase (decrease) to operating lease assets and lease liabilities for modifications
$
(15,849
)
 
$
19,147


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

5
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1.    SIGNIFICANT ACCOUNTING POLICIES

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

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

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at February 1, 2020 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, as amended, (the "2019 Form 10-K") filed with the SEC on May 1, 2020 and amended on May 7, 2020.

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

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

Impact of COVID-19- In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. 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, effective March 18, 2020. Our e-commerce businesses have continued to be available to customers, with our fulfillment center and stores utilized for the fulfillment of online orders to be shipped to customers or available for curbside pickup. The impact of the COVID-19 outbreak, including the temporary closure of all of our stores, has had a material adverse effect on our business, liquidity, financial condition, and results of operations. During the three months ended May 2, 2020, we made, and may continue to make, adjustments to our operational plans, inventory controls, liquidity management by delaying lease and vendor payments, and reductions to our expense and capital expenditure plans. We have already taken a number of actions including implementing 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. We are taking a phased approach as we reopen stores and we expect to have nearly all North American stores open by the end of June 2020.

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 three months ended May 2, 2020, we updated our impairment analysis for our U.S. Retail and Canada Retail segments at the

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


store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group (categorized as Level 3 under the fair value hierarchy). During the three months ended May 2, 2020, we recorded impairment charges of $84.9 million for under-performing stores ($65.2 million and $19.7 million for the U.S. Retail and Canada Retail segments, respectively). Also during the three months ended May 2, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).

We evaluate goodwill and other indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets during the three months ended May 2, 2020. We calculated the fair value of the reporting units with goodwill and for The Shoe Company tradename primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy). Our analysis concluded that the fair values of the First Cost reporting unit within the Brand Portfolio segment and The Shoe Company tradename within the Canada Retail segment did not exceed their respective carrying values. Accordingly, during the three months ended May 2, 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, and $1.1 million for The Shoe Company tradename included in the Canada Retail segment. For goodwill within the U.S. Retail segment, which is also the reporting unit, the fair value was in excess of the carrying value.

The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories reflects reductions for merchandise that was marked down prior to the end of the first quarter of fiscal 2020 with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored slow-moving and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores. For the three months ended May 2, 2020, we recorded $84.0 million of additional reserves over the same period last year.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualify for certain employer payroll tax credits, which are treated as government subsidies to offset related operating expenses, as well as the deferral of payroll and other tax payments in the future. Similar credits and deferrals were also available in Canada. During the three months ended May 2, 2020, the qualified payroll tax credits reduced our operating expenses by $4.5 million on our condensed consolidated statements of operations. We expect to record additional payroll tax credits from government agencies in second quarter of fiscal 2020 to offset qualified wages paid to our employees and we intend to defer qualified payroll and other tax payments where permitted.

We recorded our income tax expense, deferred tax assets and related liabilities based on management’s best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. As of May 2, 2020, we did not significantly adjust the valuation allowance on deferred tax assets based on available evidence. However, we will continue to monitor the realizability of our deferred tax assets, particularly in certain jurisdictions where the outbreak has created significant net operating losses. Our ability to recover these deferred tax assets depends on several factors, including the amount of net operating losses we can carry back and our ability to project future taxable income. Net deferred tax assets as of May 2, 2020 were $139.3 million, which are all related to jurisdictions where we expect to incur significant net operating losses in the near term, although the risks of failing to realize these benefits vary across the jurisdictions. Our effective tax rate changed from 25.4% for the three months ended May 4, 2019 to 33.8% for the three months ended May 2, 2020. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S. federal statutory tax rate was 35%.

In addition, during the three months ended May 2, 2020, we incurred $1.7 million of incremental costs directly related to instituting COVID-19 safety precautions, including pre-open cleaning services, signs used to encourage customers in social

7
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items. We expect to record additional similar costs during the remainder of fiscal 2020 as we serve our customers in the safest way possible and in compliance with applicable government mandates.

The COVID-19 pandemic remains a rapidly evolving situation. The continuation of the outbreak or a new surge in cases may cause new or prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors, including a potential reduction in consumer spending. As such, the ultimate impacts of the COVID-19 outbreak to our businesses are highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Integration and Restructuring Costs- During the three months ended May 2, 2020 and May 4, 2019, we incurred integration and restructuring costs, which consisted primarily of severance of $1.7 million and $1.3 million, respectively, and professional fees and other integration costs of $0.1 million and $1.2 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of May 2, 2020 and May 4, 2019, we had accrued severance of $2.6 million and $3.4 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.

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

Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Certain estimates and assumptions use forecasted financial information using information reasonably available to us along with the estimated, but uncertain, future impacts of the COVID-19 outbreak. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, legal reserves, foreign tax contingent liabilities, income taxes, and self-insurance reserves. Although these estimates and assumptions are based on management's knowledge of current events and actions it 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 was restricted as to withdrawal or usage and consisted of a mandatory cash deposit for certain outstanding letters of credit.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:
(in thousands)
May 2, 2020
 
February 1, 2020
 
May 4, 2019
Cash and cash equivalents
$
250,874

 
$
86,564

 
$
70,671

Restricted cash, included in prepaid expenses and other current assets
—

 
—

 
1,633

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
250,874

 
$
86,564

 
$
72,304



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

We measure available-for-sale investments at fair value on a recurring basis. These investments were measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2). The carrying value of

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


cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowing under the Credit Facility approximates its fair value based on its term and variable interest rate.

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

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

2.    REVENUE

Disaggregation of Net Sales- The following table presents net sales disaggregated by product and service category for each segment:
 
Three months ended
(in thousands)
May 2, 2020
 
May 4, 2019
Net sales:
 
 
 
U.S. Retail segment:
 
 
 
Women's footwear
$
259,563

 
$
482,121

Men's footwear
70,355

 
128,989

Kids' footwear
29,183

 
37,204

Accessories and other
17,972

 
43,526

 
377,073

 
691,840

Canada Retail segment:
 
 
 
Women's footwear
15,972

 
28,626

Men's footwear
6,803

 
13,008

Kids' footwear
5,556

 
7,827

Accessories and other
998

 
2,355

 
29,329

 
51,816

Brand Portfolio segment:
 
 
 
Wholesale
67,304

 
91,754

Commission income
5,123

 
3,680

Direct-to-consumer
9,686

 
9,112

 
82,113

 
104,546

Other
13,623

 
35,607

Total segment net sales
502,138

 
883,809

Elimination of intersegment sales
(19,355
)
 
(10,520
)
Total net sales
$
482,783

 
$
873,289




9
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
(in thousands)
May 2, 2020
 
May 4, 2019
Gift cards:
 
 
 
Beginning of period
$
35,461

 
$
34,998

Gift cards redeemed and breakage recognized to net sales
(13,525
)
 
(22,255
)
Gift cards issued
8,972

 
17,323

End of period
$
30,908

 
$
30,066

Loyalty programs:
 
 
 
Beginning of period
$
16,138

 
$
16,151

Loyalty certificates redeemed and expired and other adjustments recognized to net sales
(6,609
)
 
(9,321
)
Deferred revenue for loyalty points issued
5,039

 
9,323

End of period
$
14,568

 
$
16,153



3.    RELATED PARTY TRANSACTIONS

Schottenstein Affiliates

As of May 2, 2020, the Schottenstein Affiliates consisted of entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family. As of May 2, 2020, the Schottenstein Affiliates beneficially owned approximately 16% of the Company's outstanding common shares, representing approximately 52% of the combined voting power, consisting of, in the aggregate, 3.7 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with Schottenstein Affiliates for the relevant periods:

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

Other Purchases and Services- During the three months ended May 2, 2020 and May 4, 2019, we had other purchases and services we incurred from Schottenstein Affiliates of $1.3 million and $1.9 million, respectively.

Due to Related Parties- As of May 2, 2020, February 1, 2020 and May 4, 2019, we had amounts due to related parties of $0.9 million, $0.9 million and $0.8 million, respectively, included in accounts payable on the condensed consolidated balance sheets.

ABG-Camuto

We have a 40% interest in our equity investment in ABG-Camuto. We entered into a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto. During the three months ended May 2, 2020 and May 4, 2019, we recorded $4.4 million and $5.7 million of royalty expense payable to ABG-Camuto, respectively. As of May 2, 2020, February 1, 2020 and May 4, 2019, we had $0.1 million, $0.3 million and $0.8 million payable to ABG-Camuto, respectively, included in accrued expenses on the condensed consolidated balance sheets.

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
(in thousands)
May 2, 2020
 
May 4, 2019
Weighted average basic shares outstanding
71,914

 
77,004

Dilutive effect of stock-based compensation awards
—

 
1,259

Weighted average diluted shares outstanding
71,914

 
78,263



For the three months ended May 2, 2020 and May 4, 2019, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 5.6 million and 2.0 million, respectively.

5.    STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:
 
Three months ended
(in thousands)
May 2, 2020
 
May 4, 2019
Stock options
$
463

 
$
823

Restricted and director stock units
4,454

 
3,547

 
$
4,917

 
$
4,370



The following table summarizes the stock-based compensation award activity for the three months ended May 2, 2020:
 
Number of shares
(in thousands)
Stock Options
 
Time-Based RSUs
 
Performance-Based RSUs
Outstanding - beginning of period
3,761

 
1,687

 
768

Granted
—

 
3,360

 
21

Exercised / vested
—

 
(172
)
 
(177
)
Forfeited / expired
(125
)
 
(17
)
 
—

Outstanding - end of period
3,636

 
4,858

 
612



6.    SHAREHOLDERS' EQUITY

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

The following table provides additional information for our common shares:
 
May 2, 2020
 
February 1, 2020
 
May 4, 2019
(in thousands)
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Authorized shares
250,000

 
100,000

 
250,000

 
100,000

 
250,000

 
100,000

Issued shares
86,471

 
7,733

 
86,202

 
7,733

 
85,935

 
7,733

Outstanding shares
64,302

 
7,733

 
64,033

 
7,733

 
67,434

 
7,733

Treasury shares
22,169

 
—

 
22,169

 
—

 
18,501

 
—



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


10
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Share Repurchases- During the three months ended May 2, 2020, we did not repurchase any Class A common shares. During the three months ended May 4, 2019, we repurchased 3.4 million Class A common shares at a cost of $75.0 million. Effective April 30, 2020, our Credit Facility no longer permits share repurchases.

Accumulated Other Comprehensive Loss- Changes for the balances of each component of accumulated other comprehensive loss were as follows (all amounts are net of tax):
 
Three months ended
 
May 2, 2020
 
May 4, 2019
(in thousands)
Foreign Currency Translation
 
Available-for-Sale Securities
 
Total
 
Foreign Currency Translation
 
Available-for-Sale Securities
 
Total
Accumulated other comprehensive gain (loss) - beginning of period
$
(2,668
)
 
$
173

 
$
(2,495
)
 
$
(2,328
)
 
$
(378
)
 
$
(2,706
)
Other comprehensive income (loss) before reclassifications
(3,541
)
 
195

 
(3,346
)
 
(714
)
 
242

 
(472
)
Amounts reclassified to non-operating expenses, net
—

 
(368
)
 
(368
)
 
—

 
(88
)
 
(88
)
Other comprehensive income (loss)
(3,541
)
 
(173
)
 
(3,714
)
 
(714
)
 
154

 
(560
)
Accumulated other comprehensive loss - end of period
$
(6,209
)
 
$
—

 
$
(6,209
)
 
$
(3,042
)
 
$
(224
)
 
$
(3,266
)


7.    ACCOUNTS RECEIVABLE

Accounts receivable, net, consisted of the following:
(in thousands)
May 2, 2020
 
February 1, 2020
 
May 4, 2019
Customer accounts receivables:
 
 
 
 
 
Serviced by third-party provider with guaranteed payment
$
46,694

 
$
54,209

 
$
57,619

Serviced by third-party provider without guaranteed payment
637

 
365

 
168

Serviced in-house
5,702

 
7,630

 
12,169

Other receivables
31,467

 
28,166

 
10,561

Accounts receivable
84,500

 
90,370

 
80,517

Allowance for doubtful accounts
(2,547
)
 
(1,219
)
 
(2,230
)
Accounts receivable, net
$
81,953

 
$
89,151

 
$
78,287



8.    INVESTMENTS

Investments in available-for-sale securities consisted of the following:
(in thousands)
May 2, 2020
 
February 1, 2020
 
May 4, 2019
Carrying value of investments
$
—

 
$
24,831

 
$
51,542

Unrealized gains included in accumulated other comprehensive loss
—

 
143

 
1

Unrealized losses included in accumulated other comprehensive loss
—

 
—

 
(284
)
Fair value
$
—

 
$
24,974

 
$
51,259




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


9.    PROPERTY AND EQUIPMENT

Property and equipment, net, consisted of the following:
(in thousands)
May 2, 2020
 
February 1, 2020
 
May 4, 2019
Land
$
1,110

 
$
1,110

 
$
1,110

Buildings
12,485

 
12,485

 
12,485

Building and leasehold improvements
442,222

 
449,958

 
439,707

Furniture, fixtures and equipment
479,534

 
482,573

 
489,477

Software
196,127

 
189,291

 
167,924

Construction in progress
20,315

 
32,645

 
42,620

Total property and equipment
1,151,793

 
1,168,062

 
1,153,323

Accumulated depreciation and amortization
(791,952
)
 
(773,053
)
 
(748,167
)
Property and equipment, net
$
359,841

 
$
395,009

 
$
405,156



10.    GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:
 
Three months ended
 
May 2, 2020
 
May 4, 2019
(in thousands)
Goodwill
 
Accumulated Impairments
 
Net
 
Goodwill
 
Accumulated Impairments
 
Net
Beginning of period by segment:
 
 
 
 
 
 
 
 
 
 
 
U.S. Retail
$
93,655

 
$
—

 
$
93,655

 
$
25,899

 
$
—

 
$
25,899

Canada Retail
41,610

 
(41,610
)
 
—

 
42,048

 
(42,048
)
 
—

Brand Portfolio
19,989

 
—

 
19,989

 
63,614

 
—

 
63,614

 
155,254

 
(41,610
)
 
113,644

 
131,561

 
(42,048
)
 
89,513

Activity by segment:
 
 
 
 
 
 
 
 
 
 
 
Canada Retail -
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment
(2,467
)
 
2,467

 
—

 
(1,043
)
 
1,043

 
—

Brand Portfolio:
 
 
 
 
 
 
 
 
 
 
 
Impairment charges
—

 
(19,989
)
 
(19,989
)
 
—

 
—

 
—

Purchase price and allocation adjustments
—

 
—

 
—

 
1,368

 
—

 
1,368

 
(2,467
)
 
(17,522
)
 
(19,989
)
 
325

 
1,043

 
1,368

End of period by segment:
 
 
 
 
 
 
 
 
 
 
 
U.S. Retail
93,655

 
—

 
93,655

 
25,899

 
—

 
25,899

Canada Retail
39,143

 
(39,143
)
 
—

 
41,005

 
(41,005
)
 
—

Brand Portfolio
19,989

 
(19,989
)
 
—

 
64,982

 
—

 
64,982

 
$
152,787

 
$
(59,132
)
 
$
93,655

 
$
131,886

 
$
(41,005
)
 
$
90,881




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


Intangible Assets- Intangible assets consisted of the following:
(in thousands)
Cost
 
Accumulated Amortization
 
Net
May 2, 2020
 
 
 
 
 
Definite-lived customer relationships
$
2,780

 
$
(2,353
)
 
$
427

Indefinite-lived trademarks and tradenames
13,481

 
—

 
13,481

 
$
16,261

 
$
(2,353
)
 
$
13,908

February 1, 2020
 
 
 
 
 
Definite-lived customer relationships
$
9,360

 
$
(2,044
)
 
$
7,316

Indefinite-lived trademarks and tradenames
15,530

 
—

 
15,530

 
$
24,890

 
$
(2,044
)
 
$
22,846

May 4, 2019
 
 
 
 
 
Definite-lived customer relationships
$
28,340

 
$
(1,326
)
 
$
27,014

Indefinite-lived trademarks and tradenames
15,284

 
—

 
15,284

 
$
43,624

 
$
(1,326
)
 
$
42,298



11.    ACCRUED EXPENSES

Accrued expenses consisted of the following:
(in thousands)
May 2, 2020
 
February 1, 2020
 
May 4, 2019
Gift cards and merchandise credits
$
30,908

 
$
35,461

 
$
30,066

Accrued compensation and related expenses
13,700

 
26,768

 
25,951

Accrued taxes
21,628

 
19,399

 
23,242

Loyalty programs deferred revenue
14,568

 
16,138

 
16,153

Sales returns
47,625

 
21,408

 
21,692

Customer allowances and discounts
5,600

 
11,528

 
14,436

Other
97,330

 
63,562

 
55,452

 
$
231,359

 
$
194,264

 
$
186,992



12.    DEBT

Our Credit Facility, with a maturity date of August 25, 2022, provides a revolving line of credit with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, and other expenditures. On April 30, 2020, the Credit Facility was amended, which resulted in various changes including:
•
Providing for a lien on all of the Company's assets;
•
Reducing the borrowing availability from $400 million to $375.0 million on October 31, 2020, $350.0 million on January 30, 2021, $325.0 million on May 1, 2021, and $300.0 million on July 31, 2021;
•
Redefining the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19;
•
Changing the maximum leverage ratio covenant to 3.50:1 as of May 2, 2020, 4.00:1 as of August 1, 2020, 3.75:1 as of October 31, 2020, and 3.50:1 as of January 30, 2021 and as of the end of each fiscal quarter thereafter;
•
Changing the minimum fixed charge coverage ratio to 1.25:1 as of May 2, 2020 and 1.05:1 as of August 1, 2020 and as of the end of each fiscal quarter thereafter; and
•
Restricting the Company from paying dividends, making share repurchases, and making certain acquisitions.

A violation of any of the financial or other covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate

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


repayment of any outstanding loans under the Credit Facility. As of May 2, 2020, we were in compliance with all financial covenants.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.5% as of May 2, 2020. Any loans issued in Canadian dollars bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.5% as of May 2, 2020. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of May 2, 2020, the Credit Facility provided a revolving line of credit up to $400 million and we had $393.0 million outstanding under the Credit Facility and $5.0 million in letters of credit issued, resulting in $2.0 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization and write-off of debt issuance costs.

13.
LEASES

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

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

Lease income and lease expense consisted of the following for the three months ended May 2, 2020 and May 4, 2019:
 
Three months ended
(in thousands)
May 2, 2020
 
May 4, 2019
Operating lease income
$
3,163

 
$
2,212

Operating lease expense:
 
 
 
Lease expense to unrelated parties
$
53,228

 
$
53,354

Lease expense to related parties
2,387

 
2,342

Variable lease expense to unrelated parties
12,986

 
13,022

Variable lease expense to related parties
367

 
302

Total operating lease expense
$
68,968

 
$
69,020



As of May 2, 2020, our future fixed minimum lease payments are as follows:
(in thousands)
Unrelated Parties
 
Related Parties
 
Total
Remainder of fiscal 2020
$
187,639

 
$
6,203

 
$
193,842

Fiscal 2021
222,551

 
8,697

 
231,248

Fiscal 2022
188,403

 
7,417

 
195,820

Fiscal 2023
148,960

 
4,574

 
153,534

Fiscal 2024
110,649

 
4,139

 
114,788

Future fiscal years thereafter
225,594

 
11,352

 
236,946

 
1,083,796

 
42,382

 
1,126,178

Less discounting impact on operating leases
(114,364
)
 
(4,797
)
 
(119,161
)
Total operating lease liabilities
969,432

 
37,585

 
1,007,017

Less current operating lease liabilities
(211,204
)
 
(7,109
)
 
(218,313
)
Non-current operating lease liabilities
$
758,228

 
$
30,476

 
$
788,704



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



14.    COMMITMENTS AND CONTINGENCIES

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

Foreign Tax Contingencies- During the due diligence procedures performed related to the acquisition of Camuto Group, we identified probable contingent liabilities associated with unpaid foreign payroll and other taxes that could also result in assessed penalties and interest. We developed an estimate of the range of outcomes related to these obligations of $28.1 million to $40.0 million for obligations we are aware of at this time. We expect to resolve certain obligations with tax authorities over the next twelve months. As of May 2, 2020, we recorded a contingent liability of $28.1 million, with $22.1 million included in accrued expenses and $6.0 million included in other non-current liabilities on the condensed consolidated balance sheets, representing the low-end of the range and an indemnification asset of $24.5 million, with $19.6 million included in accounts receivable and $4.9 million included in other assets on the condensed consolidated balance sheets, representing the estimated amount as of the acquisition date, which we expect to collect under the terms of the securities purchase agreement with the sellers of Camuto Group (the "Sellers"). We are continuing to assess the exposure, which may result in material changes to these estimates, and we may identify additional contingent liabilities. We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date. Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.

Guarantee- As a result of a previous merger, we provided a guarantee for a lease commitment that is scheduled to expire in fiscal 2023 for a location that has been leased to a third party. If the third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of May 2, 2020, the total future minimum lease payment requirements for this guarantee were approximately $12.5 million.

15.    SEGMENT REPORTING
 
Our three reportable segments, which are also operating segments, are the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. All other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.

The following provides certain financial data by segment reconciled to the condensed consolidated financial statements:
(in thousands)
U.S. Retail
 
Canada Retail
 
Brand Portfolio
 
Other
 
Corporate/Eliminations
 
Total
Three months ended May 2, 2020
 
 
 
 
 
 
 
 
 
 
 
Net sales:
 
 
 
 
 
 
 
 
 
 
 
External customer sales
$
377,073

 
$
29,329

 
$
62,758

 
$
13,623

 
$
—

 
$
482,783

Intersegment sales
—

 
—

 
19,355

 
—

 
(19,355
)
 
—

Total net sales
$
377,073

 
$
29,329

 
$
82,113

 
$
13,623

 
$
(19,355
)
 
$
482,783

Gross profit (loss)
$
(32,970
)
 
$
(2,311
)
 
$
13,904

 
$
(5,428
)
 
$
345

 
$
(26,460
)
Income from equity investment
$
—

 
$
—

 
$
2,270

 
$
—

 
$
—

 
$
2,270

Three months ended May 4, 2019
 
 
 
 
 
 
 
 
 
 
 
Net sales:
 
 
 
 
 
 
 
 
 
 
 
External customer sales
$
691,840

 
$
51,816

 
$
94,026

 
$
35,607

 
$
—

 
$
873,289

Intersegment sales
—

 
—

 
10,520

 
—

 
(10,520
)
 
—

Total net sales
$
691,840

 
$
51,816

 
$
104,546

 
$
35,607

 
$
(10,520
)
 
$
873,289

Gross profit
$
209,891

 
$
15,747

 
$
25,673

 
$
9,311

 
$
(1,289
)
 
$
259,333

Income from equity investment
$
—

 
$
—

 
$
2,228

 
$
—

 
$
—

 
$
2,228




15

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

Executive Overview

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. 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, effective March 18, 2020. Our e-commerce businesses have continued to be available to customers, with our fulfillment center and stores utilized for the fulfillment of online orders to be shipped to customers or available for curbside pickup. The impact of the COVID-19 outbreak, including the temporary closure of all of our stores, has had a material adverse effect on our business, liquidity, financial condition, and results of operations. During the three months ended May 2, 2020, we made, and may continue to make, adjustments to our operational plans, inventory controls, liquidity management by delaying lease and vendor payments, and reductions to our expense and capital expenditure plans. We have already taken a number of actions including implementing 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. We are taking a phased approach as we reopen stores and we expect to have nearly all North American stores open by the end of June 2020. Reopened stores initially are generating significantly lower sales than they did in prior periods, with trends improving as more of the economy reopens and as consumer behavior adapts to the changing landscape. Additionally, we have instituted new health and safety protocols for our customers and employees using industry best practices. In connection with reopening stores, we expect to spend approximately $8.0 million in pre-open cleaning services, signs used to encourage customers in social distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items to help control the spread of the virus and protect the health and safety of our customers and employees.

Prior to the COVID-19 outbreak, we were on track to achieve growth in fiscal 2020, with positive comparable sales year-to-date through March 5, 2020. The impact of the COVID-19 outbreak on store traffic, beginning on March 6, 2020, and the subsequent closure of all our North American stores, materially altered this trajectory. We implemented inventory control actions that resulted in inventory units on hand flat at the end of the first quarter of fiscal 2020 compared to the same period last year. We have been more aggressive with our promotional activity to drive sales, and this markdown activity has materially impacted margins.

Over the past several years, we have made significant investments in our digital infrastructure and, as a result, we were able to generate robust digital sales during the first quarter of fiscal 2020, well above digital sales for the same period last year across all segments. Our unique digital experiences and our ability to use our stores for fulfillment have served us well while our stores have been closed to the public. We anticipate that adapting to operating as a digital-focused retailer during this time will have a lasting influence on how we operate moving forward. Continuing to function as a digital-focused retailer coupled with our strategic pillars of delivering differentiated products, offering differentiated experiences in-store and online, and focusing on new growth opportunities to increase market share, will guide our decisions as we adjust for the future. We remain one of the largest designers, producers and retailers of footwear and accessories in the market and have the advantage of a fully integrated supply chain supported by our acquisition of Camuto Group.

The COVID-19 pandemic remains a rapidly evolving situation. The continuation of the outbreak or a new surge in cases may cause new or prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors, including a potential reduction in consumer spending. As such, the ultimate impacts of the COVID-19 outbreak to our businesses are highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Comparable Sales Performance Metric

We consider comparable sales to be an important indicator of the performance of our retail and direct-to-consumer businesses, and investors may find it useful as such. Comparable sales is a primary metric commonly used throughout the retail industry. We include stores in our comparable sales metric for those stores in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter they are closed. Comparable sales include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period in the prior year. Comparable sales for the Brand Portfolio segment includes the direct-to-consumer www.vincecamuto.com e-commerce site. Comparable sales also includes stores temporarily closed as a result of the COVID-19 outbreak as management continues to believe this metric is meaningful to monitor the performance through the temporary closure period and to measure progress as stores re-open. The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

16


Financial Summary

Net sales decreased to $482.8 million for the three months ended May 2, 2020 from $873.3 million for the three months ended May 4, 2019. The 44.7% decrease in net sales was primarily driven by the COVID-19 outbreak with a 42.3% decrease in comparable sales due to the temporary closure of all stores effective March 18, 2020, during our peak selling season, the lower Brand Portfolio segment sales due to orders canceled by our retailer customers, shelter-in-place orders impacting many of our customers, and changes in consumer spending as a result of the economic uncertainty.

During the three months ended May 2, 2020, gross loss as a percentage of net sales was 5.5% as compared to a gross profit of 29.7% for the same period last year. The change from a gross profit to a loss was primarily driven by the impacts of the COVID-19 outbreak on our operations and the closure of stores, which we addressed with aggressive promotional activity, significant inventory markdowns resulting in an increase in inventory reserves of $84.0 million over the same period last year, increased shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume.

Net loss for the three months ended May 2, 2020 was $215.9 million, or a loss of $3.00 per diluted share, which included net after-tax charges of $84.1 million, or $1.17 per diluted share, primarily related to impairment charges, integration and restructuring expenses and incremental costs related to the COVID-19 outbreak, offset by governmental credits we claimed. Net income for the three months ended May 4, 2019 was $31.2 million, or $0.40 earnings per diluted share, which included net after-tax charges of $2.4 million, or $0.03 per diluted share, primarily related to integration and restructuring expenses.

Results of Operations
 
Three months ended
 
 
 
 
 
May 2, 2020
 
May 4, 2019
 
Change
(dollars in thousands, except per share amounts)
Amount
 
% of Net Sales
 
Amount
 
% of Net Sales
 
Amount
 
%
Net sales(1)
$
482,783

 
100.0
 %
 
$
873,289

 
100.0
 %
 
$
(390,506
)
 
(44.7
)%
Cost of sales
(509,243
)
 
(105.5
)
 
(613,956
)
 
(70.3
)
 
104,713

 
(17.1
)%
Gross profit (loss)(1)
(26,460
)
 
(5.5
)
 
259,333

 
29.7

 
(285,793
)
 
NM
Operating expenses(1)
(187,221
)
 
(38.8
)
 
(217,580
)
 
(24.9
)
 
30,359

 
(14.0
)%
Income from equity investment
2,270

 
0.5

 
2,228

 
0.2

 
42

 
1.9
 %
Impairment charges
(112,547
)
 
(23.3
)
 
—

 
—

 
(112,547
)
 
NM
Operating profit (loss)
(323,958
)
 
(67.1
)
 
43,981

 
5.0

 
(367,939
)
 
NM
Interest expense, net
(2,158
)
 
(0.5
)
 
(1,801
)
 
(0.2
)
 
(357
)
 
19.8
 %
Non-operating expenses, net
(87
)
 
(0.0
)
 
(342
)
 
(0.0
)
 
255

 
(74.6)%
Income (loss) before income taxes
(326,203
)
 
(67.6
)
 
41,838

 
4.8

 
(368,041
)
 
NM
Income tax benefit (provision)
110,345

 
22.9

 
(10,644
)
 
(1.2
)
 
120,989

 
NM
Net income (loss)
$
(215,858
)
 
(44.7
)%
 
$
31,194

 
3.6
 %
 
$
(247,052
)
 
NM
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
(3.00
)
 
 
 
$
0.41

 
 
 
$
(3.41
)
 
NM
Diluted earnings (loss) per share
$
(3.00
)
 
 
 
$
0.40

 
 
 
$
(3.40
)
 
NM
Weighted average shares used in per share calculations:
 
 
 
 
 
 
 
 
 
 
 
Basic shares
71,914

 
 
 
77,004

 
 
 
(5,090
)
 
(6.6
)%
Diluted shares
71,914

 
 
 
78,263

 
 
 
(6,349
)
 
(8.1
)%
NM - Not meaningful
(1)
We changed our presentation of net sales and gross profit (loss) for all periods presented to include commission income. Previously reported other revenue, which primarily included operating sublease income, was reclassified to operating expenses.


17

Net Sales- The following summarizes the changes in consolidated net sales from the same period last year:
(in thousands)
Three months ended May 2, 2020
Consolidated net sales for the same period last year
$
873,289

Decrease in comparable sales
(328,789
)
Net decrease from non-comparable sales and other changes
(34,310
)
Loss of net sales from closed stores
(4,400
)
Decrease in wholesale net sales from Brand Portfolio segment
(24,450
)
Increase in commission income from Brand Portfolio segment
1,443

Consolidated net sales
$
482,783


The following summarizes net sales by segment:
 
Three months ended
 
Change
(dollars in thousands)
May 2, 2020
 
May 4, 2019
 
Amount
 
%
 
Comparable Sales %
Segment net sales:
 
 
 
 
 
 
 
 
 
U.S. Retail
$
377,073

 
$
691,840

 
$
(314,767
)
 
(45.5
)%
 
(42.4)%
Canada Retail
29,329

 
51,816

 
(22,487
)
 
(43.4
)%
 
(32.4)%
Brand Portfolio
82,113

 
104,546

 
(22,433
)
 
(21.5
)%
 
92.8%
Other
13,623

 
35,607

 
(21,984
)
 
(61.7
)%
 
(62.0)%
Total segment net sales
502,138

 
883,809

 
(381,671
)
 
(43.2
)%
 
(42.3)%
Elimination of intersegment net sales
(19,355
)
 
(10,520
)
 
(8,835
)
 
84.0
 %
 
 
Consolidated net sales
$
482,783

 
$
873,289

 
$
(390,506
)
 
(44.7
)%
 
 

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

Gross Profit (Loss)- The following summarizes gross profit (loss) by segment:
 
Three months ended
 
 
 
May 2, 2020
 
May 4, 2019
 
 
(dollars in thousands)
Amount
 
% of Segment Net Sales
 
Amount
 
% of Segment Net Sales
 
Change
Segment gross profit (loss):
 
 
 
 
 
 
 
 
 
U.S. Retail
$
(32,970
)
 
(8.7
)%
 
$
209,891

 
30.3
%
 
$
(242,861
)
Canada Retail
(2,311
)
 
(7.9
)%
 
15,747

 
30.4
%
 
$
(18,058
)
Brand Portfolio
13,904

 
16.9
 %
 
25,673

 
24.6
%
 
$
(11,769
)
Other
(5,428
)
 
(39.8
)%
 
9,311

 
26.1
%
 
$
(14,739
)
 
(26,805
)
 
 
 
260,622

 
 
 
 
Elimination of intersegment gross profit
345

 
 
 
(1,289
)
 
 
 
 
Gross profit (loss)
$
(26,460
)
 
(5.5
)%
 
$
259,333

 
29.7
%
 
$
(285,793
)

The change from a gross profit to a loss was primarily driven by the impacts of the COVID-19 outbreak on our operations and the closure of stores, which we responded to with aggressive promotional activity, significant inventory markdowns, higher shipping costs in the current quarter associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume. The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of

18

inventories reflects reductions for merchandise that was marked down prior to the end of the first quarter of fiscal 2020 with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using the weighted average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored slow-moving and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores. For the three months ended May 2, 2020, we recorded $84.0 million of additional reserves over the same period last year.

Elimination of intersegment gross profit (loss) consisted of the following:
 
Three months ended
(in thousands)
May 2, 2020
 
May 4, 2019
Elimination of intersegment activity:
 
 
 
Net sales recognized by Brand Portfolio segment
$
(19,355
)
 
$
(10,520
)
Cost of sales:
 
 
 
Cost of sales recognized by Brand Portfolio segment
12,134

 
7,607

Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period
7,566

 
1,624

Gross profit (loss)
$
345

 
$
(1,289
)

Operating Expenses- For the three months ended May 2, 2020, operating expenses decreased by $30.4 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 outbreak. Operating expenses during the three months ended May 2, 2020 were offset by government subsidies in the form of qualified payroll tax credits of $4.5 million.

Impairment Charges- As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, we updated our impairment analysis at the store-level. During the three months ended May 2, 2020, we recorded impairment charges of $84.9 million for under-performing stores ($65.2 million and $19.7 million for the U.S. Retail and Canada Retail segments, respectively). Also during the three months ended May 2, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life.

Also as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we updated our impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair values of the First Cost reporting unit within the Brand Portfolio segment and The Shoe Company tradename within the Canada Retail segment did not exceed their respective carrying values. Accordingly, during the three months ended May 2, 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, and $1.1 million for The Shoe Company tradename included in the Canada Retail segment.

Income Taxes- Our effective tax rate changed from 25.4% for the three months ended May 4, 2019 to 33.8% for the three months ended May 2, 2020. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S. federal statutory tax rate was 35%.

Seasonality

Our business has historically been subject to seasonal merchandise trends driven by the change in weather conditions and our customers' interest in new seasonal styles. New spring styles are primarily introduced in the first quarter and new fall styles are primarily introduced in the third quarter. The COVID-19 outbreak has negatively impacted our spring peak selling season and the trends that we have experienced historically may change for the remainder of fiscal 2020.


19

Liquidity and Capital Resources

Overview

Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. Our working capital and inventory levels fluctuate seasonally. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy and withstand unanticipated business volatility, including the impact of the outbreak of COVID-19. We believe that cash generated from our operations and the business continuity plans put in place, together with our current levels of cash, as well as the use of our Credit Facility, are sufficient over the next 12 months to maintain our ongoing operations, support working capital requirements, and fund capital expenditures. The cash generated from operations is based on our expectation of re-opening nearly all of our North American stores by the end of June 2020 with a gradual return of store traffic throughout the remainder of fiscal 2020.

During the three months ended May 2, 2020, we took certain measures to preserve liquidity, including reducing inventory orders, significantly cutting costs, and delaying vendor and landlord payments, after providing notice, while we renegotiate to extend payment terms. We have engaged a national lease firm to assist us in the negotiating of lease deferrals and concessions. We have also extended nearly all payables to at least 90 days. On March 17, 2020, the Board of Directors reduced the quarterly cash dividend by 60% from the previous quarter and declared a quarterly cash dividend payment of $0.10 per share for both Class A and Class B common shares. The dividend was paid on April 10, 2020 to shareholders of record at the close of business on March 30, 2020. As a result of our amended Credit Facility discussed below, we have suspended subsequent dividend payments and share repurchases. During the three months ended May 2, 2020, we took immediate actions to cancel orders and have reduced orders for the remainder of this fiscal year, while maintaining flexibility to increase orders as we monitor the business recovery. In addition to the temporary leaves of absence without pay for a significant number of our employees, effective March 29, 2020, the base salaries for our executive officers were reduced by 20%, wages were reduced by 5% to 20% for nearly all of the remaining associates, depending on title, and annual cash retainers for all non-employee directors serving on the Board of Directors were reduced by 20%.

One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. As a result, we expect to receive a refund in fiscal 2021 of approximately $140.0 million related to these net operating losses. Our ability to recover deferred tax assets depends on several factors, including the amount of net operating losses we can carry back and our ability to project future taxable income, although the risks of failing to realize these benefits vary across the jurisdictions.

We are actively pursuing further options to increase financial flexibility. While there is no immediate need to raise capital, we intend to evaluate assessing the financing markets and may look to raise capital, when and if we deem it prudent, to further strengthen our balance sheet. There can be no assurance that we will raise additional capital, or as to the timing or terms of any such additional capital. If additional liquidity is needed, we may take additional actions including adjusting our marketing spend, implementing further employee furloughs, reducing the store labor requirements, and forgoing additional capital expenditures and other discretionary expenses.

Operating Cash Flows

For the three months ended May 2, 2020, net cash used in operations was $39.5 million compared to $3.0 million for the three months ended May 4, 2019. The increase in cash used in operations was driven by the net loss incurred for the quarter as a result of the COVID-19 outbreak, after adjusting for non-cash activity including depreciation and amortization, stock-based compensation, impairment charges, and the change in deferred income taxes, primarily due to the impact of the COVID-19 outbreak on our business. This was partially offset by measures we implemented to manage our working capital to preserve liquidity, including reducing inventory orders, significantly cutting costs, and delaying vendor and landlord payments.

Investing Cash Flows

For the three months ended May 2, 2020, our net cash provided by investing activities was $10.0 million, which was due to the liquidation of our available-for sale-securities and reductions of capital expenditures to $14.6 million in order to preserve liquidity. During the three months ended May 4, 2019, our net cash used in investing activities was $6.2 million, which was due to capital expenditures of $24.9 million, partially offset by the net liquidation of our available-for sale-securities.


20

Financing Cash Flows

For the three months ended May 2, 2020, our net cash provided by financing activities was $193.9 million compared to net cash used in financing activities of $19.9 million for the three months ended May 4, 2019. During three months ended May 2, 2020, we had net borrowings of $203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in the U.S. and global markets resulting from COVID-19. We also significantly reduced the amount of dividends paid. During the three months ended May 4, 2019, net cash used in financing activities was primarily related to the payment of dividends as the repurchase of Class A common shares was financed from borrowings from the Credit Facility.

Debt

Our Credit Facility, with a maturity date of August 25, 2022, provides a revolving line of credit with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be used to provide funds for working capital, capital expenditures, and other expenditures. On April 30, 2020, the Credit Facility was amended, which resulted in various changes including:
•
Providing for a lien on all of the Company's assets;
•
Reducing the borrowing availability from $400 million to $375.0 million on October 31, 2020, $350.0 million on January 30, 2021, $325.0 million on May 1, 2021, and $300.0 million on July 31, 2021;
•
Redefining the components for calculating the leverage ratio and fixed charge coverage ratio to adjust for certain temporary impacts due to COVID-19;
•
Changing the maximum leverage ratio covenant to 3.50:1 as of May 2, 2020, 4.00:1 as of August 1, 2020, 3.75:1 as of October 31, 2020, and 3.50:1 as of January 30, 2021 and as of the end of each fiscal quarter thereafter;
•
Changing the minimum fixed charge coverage ratio to 1.25:1 as of May 2, 2020 and 1.05:1 as of August 1, 2020 and as of the end of each fiscal quarter thereafter; and
•
Restricting the Company from paying dividends, making share repurchases, and making certain acquisitions.

A violation of any of the financial or other covenants could result in a default under the Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of May 2, 2020, we were in compliance with all financial covenants.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with an interest rate of 3.5% as of May 2, 2020. Any loans issued in Canadian dollars bear interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit, with an interest rate of 2.5% as of May 2, 2020. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of May 2, 2020, the Credit Facility provided a revolving line of credit up to $400 million and we had $393.0 million outstanding under the Credit Facility and $5.0 million in letters of credit issued, resulting in $2.0 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, commitment fees and the amortization and write-off of debt issuance costs.

Capital Expenditure Plans

We expect to spend approximately $25.0 million to $35.0 million for capital expenditures in fiscal 2020, of which we invested $14.6 million during the three months ended May 2, 2020. Our capital expenditures for the remainder of the year will depend primarily on the number of store projects as well as infrastructure and information technology projects that we undertake and the timing of these expenditures.

Off-Balance Sheet Liabilities and Other Contractual Obligations

We do not have any material off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

We have included a summary of our contractual obligations as of February 1, 2020 in our 2019 Form 10-K. There have been no material changes in contractual obligations outside the ordinary course of business since February 1, 2020, except for the increased amount borrowed under the Credit Facility.

21


Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation
of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies disclosed in our 2019 Form 10-K.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2019 Form 10-K.

Item 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 1A.     Risk Factors

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

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

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, have led to an economic downturn in many of our markets.

Although our e-commerce businesses continues to be available to customers, we temporarily closed all of our stores in the U.S. and Canada, effective as of March 18, 2020, with our fulfillment center and stores to be utilized for the fulfillment of online orders to be shipped to customers or made available for curbside pickup. During this unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory disciplines, liquidity management, and reductions to our expense and capital expenditure plans. Such measures include, but are not limited to, implementing temporary leaves of absence for a significant number of our employees without direct pay and pay reductions for nearly all employees not placed on temporary leave. The impact of the COVID-19 outbreak, including the temporary closure of all of our stores, has had and will continue to have a material adverse effect on our business, liquidity, financial condition, and results of operations. Additionally, a more promotional retail environment or our ability to move existing inventory, may cause us to lower our prices, sell existing inventory at larger discounts than in the past, or write-down the value of inventory, and increase the costs and expenses of updating and replacing inventory, and we may continue to see pressure on our sales and our margins.

The COVID-19 pandemic remains a rapidly evolving situation. The continuation of the outbreak or a new surge in cases may further prolong store closures, require additional adjustments to store operations, and cause changes in customer behaviors, including a potential reduction in consumer spending. We are unable to accurately predict the severity of impact that COVID-19 will have on our operations going forward due to uncertainties that will be dictated by the length of time that such disruptions continue, which will, in turn, depend on the currently unknowable duration of the COVID-19 outbreak and the impact of governmental regulations that might be imposed in response to COVID-19, which could, among other things, require that we close our distribution and fulfillment centers or otherwise make it difficult or impossible to operate our e-commerce

22

business, regarding the length of time that COVID-19 disruptions will continue. Numerous state and local jurisdictions have imposed, and others in the future may impose, shelter-in-place orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions, have resulted in temporary store closures, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our sales and operations. In addition, we expect to be impacted by the deterioration in the economic conditions in North America, which potentially could have an impact on discretionary consumer spending. To the extent that our target customer demographic is disproportionately impacted by unemployment or otherwise as a result of the COVID-19 outbreak, our business may be further adversely affected. To the extent the COVID-19 outbreak adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the "Risk Factors" section of our 2019 Form 10-K, including risks relating to change in consumer preferences, our ability to generate sufficient cash flows, our ability to comply with the covenants contained in the agreements that govern our indebtedness, availability of adequate capital and disruptions to our supply chain and in the manufacture, shipment, and sale of our products.

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

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

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

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

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

Effective April 30, 2020, our Credit Facility prohibits us from paying dividends. Refer to Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not Applicable.

Item 5.    Other Information

None.


23

Item 6.    Exhibits
Exhibit No.
 
Description
10.1
 
10.2
 
10.3
 
10.4
 
10.5*
 
31.1*

31.2*
 
32.1**
 
32.2**
 
101*
 
The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended May 2, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.
104*
 
Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.
*
Filed herewith
** Furnished herewith     



24

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:
June 19, 2020
 
By:
 /s/ Jared Poff
 
 
 
 
Jared Poff
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer and duly authorized officer)


25


EXHIBIT 10.5

SEVENTH AMENDMENT TO AMENDED AND RESTATED SUPPLY AGREEMENT
THIS SEVENTH AMENDMENT TO AMENDED AND RESTATED SUPPLY AGREEMENT (this “Amendment”), is made as of May 13, 2020 (the “Effective Date”) by and between DSW Leased Business Division LLC aka Affiliated Business Group, an Ohio limited liability company (“Supplier”), successor by assignment of Designer Brands Inc., an Ohio corporation f/k/a DSW Inc. (“DSW”), each having a business address of 810 DSW Drive, Columbus, Ohio 43219, and Stein Mart, Inc., a Florida corporation (“Stein Mart”) with a business address of 1200 Riverplace Boulevard, Jacksonville, Florida 32207.

Background

A.    DSW and Stein Mart entered into an Amended and Restated Supply Agreement, dated as of May 30, 2006 (the “Supply Agreement”), whereby DSW agreed to supply Merchandise to Stein Mart.

B.    DSW and Stein Mart entered into a First Amendment to the Supply Agreement, dated August 26, 2008, whereby the parties agreed to extend the term of the Supply Agreement (the “First Amendment”).

C.    DSW assigned to Supplier, its wholly-owned subsidiary, all of its right title and interest under the Supply Agreement, effective as of January 27, 2012 (the “Assignment”).

D.    Supplier and Stein Mart entered into a Second Amendment to the Supply Agreement, dated February 23, 2012, whereby the parties agreed to extend the term of the Supply Agreement (the “Second Amendment”).

E.    Supplier and Stein Mart entered into a Third Amendment to the Supply Agreement, dated September 10, 2013, whereby the parties agreed to amend the terms of the Supply Agreement, specifically addressing internet sales (the “Third Amendment”).

F.    Supplier and Stein Mart entered into a Fourth Amendment to the Supply Agreement, dated July 31, 2014, whereby the parties agreed to amend the terms of the Supply Agreement, specifically addressing the net revenue split (the “Fourth Amendment”).

G.    Supplier and Stein Mart entered into a Fifth Amendment to the Supply Agreement, dated March 14, 2017, whereby the parties agreed to amend the terms of the Supply Agreement, specifically addressing fulfillment and shipping of internet sales and net revenue split (the “Fifth Amendment”).

H.    Supplier and Stein Mart entered into a Sixth Amendment to the Supply Agreement, dated December 6, 2017, whereby the parties agreed to amend the terms of the Supply Agreement, specifically addressing, among other things, net revenue split upon an accelerated closing or closing event, extension of the term of the Supply Agreement, advertising support, and shortage and damages (the “Sixth Amendment”). The Supply Agreement, the First Amendment, the Assignment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment and the Sixth Amendment are referred to hereinafter collectively as the “Agreement.”
    
I.    The parties desire to further amend the Agreement on the terms set forth in this Amendment.

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in this Amendment, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, each intending to be legally bound, agree as follows:

1.
Definitions. Defined terms used in this Amendment shall have the meaning ascribed to them in the Agreement.

2.
Supplier Exclusivity. Section 2.4 of the Agreement shall be deleted in its entirety.

3.
Merchandise Supplied. The first sentence of Section 4.1 shall be deleted in its entirety and replaced with the following in lieu thereof:





Subject to Stein Mart’s reasonable approval the Supplier shall determine the quantity and mix of the Merchandise to be sold at the Covered Stores, which shall include kids Merchandise.
4.
Space. Section 4.6 of the Agreement shall be deleted in its entirety and replaced with the following in lieu thereof:

4.6    Space. Stein Mart and Supplier acknowledge that, prior to the date of this Amendment, Stein Mart has relocated several Shoe Departments to the front of certain Covered Stores, which has resulted in improved Merchandise sales in those Covered Stores. The parties desire to relocate certain additional Shoe Departments to the front of the Covered Stores (each a “Relocated Shoe Department”) as set forth below:

(a)
Relocated Shoe Departments. Subject to Section 4.6(b) below, Stein Mart will relocate to the front of the Covered Stores 15 Shoe Departments on or before the end of Supplier’s fiscal first quarter of 2021 as mutually agreed upon by the parties.

(b)
Space. Supplier shall determine, subject to Stein Mart’s reasonable approval, the specific Covered Stores and build-out schedule for the construction of the Relocated Shoe Departments. The parties will endeavor to allocate approximately 2,400 square feet to each Relocated Shoe Department, but in no event shall the Relocated Shoe Department be less than the space devoted to the existing Shoe Department in such Covered Store.

(c)
Cost of Relocation. Supplier shall, at its sole cost and expense, construct and build-out each Relocated Shoe Department using site plans and specifications mutually agreed upon by the parties. Supplier may, but shall have no obligation to, fund the construction and build-out of additional Shoe Departments on a case-by-case basis, and any such Shoe Departments shall be considered a Relocated Shoe Department under this Agreement.

(d)
Fixtures. Supplier will supply, at its expense, any new fixtures or equipment the parties determine may be necessary to accommodate additional Merchandise in the Relocated Shoe Departments. Any such fixtures or equipment shall be governed by Section 4.8 of the Agreement.

5.
Net Revenue Split. Section 5.1 shall be deleted in its entirety and replaced with the following in lieu thereof:

5.1    Net Revenue Split. Effective as of June 1, 2020, Net Revenue shall be split between the parties as follows:
(a) In-Store Sales: All in-store sales of Merchandise shall be made through Stein Market’s normal point of sale system and will be identified as a Shoe Department sale. Except as otherwise set forth in the Agreement or this Amendment, (i) the Net Revenue from each sale of Supplier’s Merchandise in an existing Shoe Department shall be split 79% to Supplier and 21% to Stein Mart and (ii) the Net Revenue from each sale of Supplier’s Merchandise in a Relocated Shoe Department shall be split 78% to Supplier and 22% to Stein Mart. For the avoidance of doubt, the Net Revenue split applicable to Relocated Shoe Departments shall only apply to Shoe Departments relocated to the front of the Covered Stores after the Effective Date. Such rate also applies to any and all stores that have already been relocated to the front of the store.
(b) Internet Merchandise: The Net Revenue from the sale of Internet Merchandise sold from the Website and shipped from the Fulfillment Center shall be split 90.5% to Supplier




and 9.5% to Stein Mart. Stein Mart retains all shipping revenue generated from Internet Merchandise sold through the Website, including footwear only orders. Stein Mart in its sole discretion may charge shipping and/or return shipping costs to its Internet Merchandise customers. In the event that customer-paid shipping charges exceed fifty percent (50%) of total orders shipped in any quarterly period, then a recalculation of the Net Revenue Split will be mutually determined by the parties to incorporate an equitable adjustment based on customer-paid shipping charges.
(c) Dropship: The parties will use reasonable efforts to implement a “Dropship” option by the end of fiscal year 2021, for certain Merchandise vendors to be determined by Supplier. Dropship shall mean sales of Internet Merchandise on the Website that are fulfilled directly from Merchandise vendors and/or Supplier’s Fulfillment Center. The parties acknowledge that both Supplier and Stein Mart will be required to incur technology-related costs associated with Dropship prior to such time. Supplier will agree to incur the technology-related costs related to the implementation of Dropship. The Net Revenue for Dropship sales shall be split 90.5% to Supplier and 9.5% to Stein Mart. Supplier shall be responsible for all shipping costs associated with Dropship transactions.
(d) Ship From Store: The parties will use reasonable efforts to implement a “Ship From Store” option during the first half of 2020 as directed by Stein Mart. Ship From Store shall mean sales of digital merchandise, including Buy Online Pick up In Store, to be fulfilled from the Covered Stores rather than the Fulfillment Center. The Net Revenue from the Ship From Store sales shall be split 70% to Supplier and 30% to Stein Mart. Stein Mart shall promptly execute the transaction and ship the Merchandise at its sole expense. In the event that Ship From Store orders exceed fifty percent (50%) of total orders shipped in any quarterly period, then a recalculation of the Net Revenue Split will be mutually determined by the parties to incorporate an equitable adjustment based on shipping charges incurred by Stein Mart.
6.
Sales Revenue Sharing; Accounting Procedures. Section 5.5 of the Agreement shall be amended by adding the following to the end of Section 5.5:
In the event of an Accelerated Closing or Closing Event, Net Revenue split from each sale of Supplier’s Merchandise sold (i) pursuant to Sections 5.1(b) and 5.1(c) shall remain unchanged at 90.5% to Supplier and 9.5% to Stein Mart, and (ii) pursuant to 5.1(d) shall be 80% to Supplier and 20% to Stein Mart.
7.
Term and Termination. Section 7 of the Agreement shall be amended as follows:

a.
Section 7.1 shall be hereby deleted in its entirety and replaced with the following in lieu thereof:

7.1.1 Basic Term and Renewals. The parties agree that the current term of this Agreement shall be extended to January 29, 2023 (the “Amended Term”). Upon the expiration of the Amended Term, this Agreement shall automatically be extended for additional periods of one (1) year each (each such period shall be referred to as a “Renewal Period”) unless either party gives the other written notice of its intent not to renew the Agreement at least two hundred and seventy (270) days prior to the expiration of the Amended Term or applicable Renewal Period.

b.
The following provision shall be hereby incorporated into the Agreement as Section 7.1.2:

7.1.2. Advertising Support. Section 7.1.2. shall be deleted and replaced with the following:

Supplier agrees to participate in all of Stein Mart’s storewide promotional events.  In addition to such participation and commencing as of the Effective Date of this Agreement, Supplier shall provide Stein Mart an amount of 2.5% of Net Revenue of Supplier’s Merchandise sold in all Covered Stores, to be used exclusively for “Permitted Marketing.”  Permitted Marketing shall mean up to four (4) Gift With Purchase (“GWP”) campaigns per year, unless otherwise agreed upon by the parties in writing.  Specific GWP items shall be approved by Stein Mart in advance of purchase.  Supplier shall disclose the cost of GWP items to Stein Mart when requesting approval of the same.  The total expense allocated to GWP items will be included




at cost in the marketing budget but shall not exceed 0.5% of Net Revenue of Supplier’s Merchandise sold in all Covered Stores.  The remaining 2.0% of Net Revenue shall be used for permitted customer facing marketing including digital, broadcast and print.  Out-of-pocket costs incurred by Stein Mart for pre-approved customer-facing marketing materials created to advertise Supplier’s Merchandise shall expressly exclude any internal overhead costs of Stein Mart.  Costs of photography and any television and radio production expenses will be billed at cost to Supplier.  Proposed marketing plans for Supplier as discussed herein shall be submitted to Stein Mart no later than the second week of April for the Fall period and no later than the second week of September for the Spring period.
8.
Agreement in Effect. Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.

[Signatures Appear on Following Page]



























IN WITNESS WHEREOF, the parties have executed and delivered this Amendment by their duly authorized officers as of the date first above written.

Supplier:                    
            
DSW LEASED BUSINESS DIVISION LLC


By:    /s/ William Jordan        

Title:    EVP                

Date: _May 13, 2020______________


Stein Mart:

STEIN MART, INC.


By:    /s/ MaryAnne Morin        

Title:    President            

Date: __May 12, 2020_____________






EXHIBIT 31.1

CERTIFICATIONS

I, Roger Rawlins, certify that:
1.      I have reviewed this quarterly report on Form 10-Q of Designer Brands Inc.;
2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.      The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.      The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
June 19, 2020
By:
/s/ Roger Rawlins
 
 
Roger Rawlins
 
 
Chief Executive Officer





EXHIBIT 31.2

CERTIFICATIONS

I, Jared Poff, certify that:
1.      I have reviewed this quarterly report on Form 10-Q of Designer Brands Inc.;
2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.      The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)    Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)    Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.      The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
June 19, 2020
By:
/s/ Jared Poff
 
 
Jared Poff
 
 
Executive Vice President and Chief Financial Officer





EXHIBIT 32.1

SECTION 1350 CERTIFICATION*

In connection with the Quarterly Report of Designer Brands Inc. (the "Company") on Form 10-Q for the period ended May 2, 2020 as filed with the Securities and Exchange Commission (the "SEC") on the date hereof (the "Report"), I, Roger Rawlins, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

June 19, 2020
By:
/s/ Roger Rawlins
 
 
Roger Rawlins
 
 
Chief Executive Officer
*
This Certification is being furnished as required by Rule 13a-14(b) under the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This Certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.

A signed original of this written statement required by 18 U.S.C. § 1350 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.





EXHIBIT 32.2

SECTION 1350 CERTIFICATION*

In connection with the Quarterly Report of Designer Brands Inc. (the "Company") on Form 10-Q for the period ended May 2, 2020 as filed with the Securities and Exchange Commission (the "SEC") on the date hereof (the "Report"), I, Jared Poff, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

June 19, 2020
By:
/s/ Jared Poff
 
 
Jared Poff
 
 
Executive Vice President and Chief Financial Officer
*
This Certification is being furnished as required by Rule 13a-14(b) under the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. This Certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.

A signed original of this written statement required by 18 U.S.C. § 1350 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.