Designer Brands Inc. (NYSE:DBI) Q2 2020 Earnings Conference Call September 3, 2020 8:30 AM ET Company Participants Stacy Turnof - IR, Edelman Roger Rawlins - CEO Jared Poff - CFO Conference Call Participants Rick Patel - Needham Tom Nikic - Wells Fargo Gabby Carbone - Deutsche Bank Chris Svezia - Wedbush Operator Good day and welcome to the Designer Brands, Inc. Second Quarter 2020 Conference Call. All participants will be in listen‑only mode. [Operator Instructions] After today’s presentation, there will b ...

[PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part contains the company's unaudited financial statements and management's analysis of its financial condition and results of operations [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, which reflect a significant net loss and impairment charges due to the COVID-19 pandemic [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company's operations resulted in a significant net loss, driven by a sharp decline in sales and substantial impairment charges Condensed Consolidated Statements of Operations | Metric (in thousands) | Three months ended May 2, 2020 | Three months ended May 4, 2019 | | :-------------------- | :----------------------------- | :----------------------------- | | Net sales | $482,783 | $873,289 | | Cost of sales | $(509,243) | $(613,956) | | Operating expenses | $(187,221) | $(217,580) | | Impairment charges | $(112,547) | — | | Operating profit (loss)| $(323,958) | $43,981 | | Net income (loss) | $(215,858) | $31,194 | | Basic EPS | $(3.00) | $0.41 | | Diluted EPS | $(3.00) | $0.40 | - Net sales decreased by **44.7%** year-over-year[12](index=12&type=chunk) - The company reported a **significant operating loss and net loss**, compared to profits in the prior year, largely due to impairment charges[12](index=12&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) The company experienced a substantial comprehensive loss, primarily driven by the net loss recorded during the period Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric (in thousands) | Three months ended May 2, 2020 | Three months ended May 4, 2019 | | :-------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(215,858) | $31,194 | | 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) | $30,634 | - Total comprehensive loss for the three months ended May 2, 2020, was **$(219,572) thousand**, a significant decline from a comprehensive income of $30,634 thousand in the prior year, primarily driven by the net loss[13](index=13&type=chunk) [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a significant increase in cash and debt, alongside a decrease in inventories and shareholders' equity Condensed Consolidated Balance Sheets | Metric (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 | | Inventories | $533,638 | $632,587 | $642,045 | | Total current assets | $949,207 | $900,810 | $896,725 | | Goodwill | $93,655 | $113,644 | $90,881 | | Total assets | $2,437,841 | $2,465,070 | $2,549,168 | | **Liabilities & Equity**| | | | | Accounts payable | $283,054 | $299,072 | $224,576 | | Accrued expenses | $231,359 | $194,264 | $186,992 | | Total current liabilities | $732,726 | $680,031 | $596,024 | | Debt | $393,000 | $190,000 | $235,000 | | Total liabilities | $1,939,735 | $1,744,156 | $1,786,317 | | Total shareholders' equity | $498,106 | $720,914 | $762,851 | - Cash and cash equivalents significantly increased to **$250.9 million** as of May 2, 2020, from $86.6 million at February 1, 2020[16](index=16&type=chunk) - Inventories decreased to **$533.6 million** as of May 2, 2020, from $632.6 million at February 1, 2020[16](index=16&type=chunk) - Total debt increased to **$393.0 million** as of May 2, 2020, from $190.0 million at February 1, 2020[18](index=18&type=chunk) - Total shareholders' equity decreased to **$498.1 million** as of May 2, 2020, from $720.9 million at February 1, 2020[18](index=18&type=chunk) [Condensed Consolidated Statements of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) Shareholders' equity declined substantially due to a significant net loss and dividend payments during the quarter Condensed Consolidated Statements of Shareholders' Equity | Item (in thousands) | Balance, Feb 1, 2020 | Net Loss | Stock-based Comp. | Dividends | Other Comp. Loss | Balance, May 2, 2020 | | :------------------ | :------------------- | :------- | :---------------- | :-------- | :--------------- | :------------------- | | Common shares paid-in capital | $971,380 | — | $3,924 | — | — | $975,304 | | Treasury shares | $(515,065) | — | — | — | — | $(515,065) | | Retained earnings | $267,094 | $(215,858)| — | $(7,160) | — | $44,076 | | Accumulated other comprehensive loss | $(2,495) | — | — | — | $(3,714) | $(6,209) | | Total | $720,914 | $(215,858)| $3,924 | $(7,160) | $(3,714) | $498,106 | - Shareholders' equity decreased significantly from **$720.9 million to $498.1 million** during the three months ended May 2, 2020, primarily due to a net loss of $215.9 million and dividend payments of $7.2 million[21](index=21&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The company's cash position improved due to significant financing activities, which offset cash used in operations Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | Three months ended May 2, 2020 | Three months ended May 4, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(39,469) | $(3,026) | | Net cash provided by (used in) investing activities | $9,987 | $(6,188) | | Net cash provided by (used in) financing activities | $193,900 | $(19,889) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $164,310 | $(28,264) | | Cash and cash equivalents, end of period | $250,874 | $72,304 | - Operating activities used **$39.5 million** in cash, a significant increase from $3.0 million in the prior year, driven by the net loss[25](index=25&type=chunk) - Investing activities provided **$10.0 million**, primarily from sales of available-for-sale investments and reduced capital expenditures[25](index=25&type=chunk) - Financing activities provided **$193.9 million**, mainly due to net borrowings of $203.0 million from the Credit Facility as a precautionary measure[25](index=25&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations of accounting policies and specific financial statement items [1. SIGNIFICANT ACCOUNTING POLICIES](index=10&type=section&id=1.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines the company's business structure, reporting segments, and the significant financial impacts of the COVID-19 pandemic - Designer Brands Inc operates as a leading North American footwear and accessories designer, producer, and retailer, with retail concepts under DSW, The Shoe Company, and Shoe Warehouse banners, and a Brand Portfolio segment through Camuto Group[27](index=27&type=chunk) - The company reports three segments: **U.S. Retail, Canada Retail, and Brand Portfolio**, which includes wholesale products, commissions, and direct-to-consumer e-commerce[28](index=28&type=chunk) - The COVID-19 outbreak led to temporary store closures, material adverse effects on business, and operational adjustments including employee leaves, pay reductions, and delayed payments[31](index=31&type=chunk) - Impairment charges of **$84.9 million** were recorded for under-performing stores in U.S. Retail ($65.2M) and Canada Retail ($19.7M), and **$6.5 million** for the Brand Portfolio customer relationship intangible[33](index=33&type=chunk) - Additional impairment charges of **$20.0 million** for the First Cost reporting unit (Brand Portfolio) and **$1.1 million** for The Shoe Company tradename (Canada Retail) were recorded due to reduced cash flows and market capitalization[34](index=34&type=chunk) - The company recorded **$84.0 million** of additional inventory reserves due to slow-moving and obsolete inventories caused by store closures during the peak spring selling season[35](index=35&type=chunk) - Qualified payroll tax credits from the CARES Act reduced operating expenses by **$4.5 million**[36](index=36&type=chunk) - The effective tax rate increased to **33.8% from 25.4%** due to the ability to carry back current year losses to a tax year with a higher U.S. federal statutory tax rate (35%)[37](index=37&type=chunk) - Incurred **$1.7 million** in incremental costs for COVID-19 safety precautions[38](index=38&type=chunk) [2. REVENUE](index=13&type=section&id=2.%20REVENUE) This note details the breakdown of net sales by segment, showing significant declines across all business units Revenue by Segment | Segment (in thousands) | May 2, 2020 | May 4, 2019 | | :--------------------- | :---------- | :---------- | | U.S. Retail segment | $377,073 | $691,840 | | Canada Retail segment | $29,329 | $51,816 | | Brand Portfolio segment| $82,113 | $104,546 | | Other | $13,623 | $35,607 | | Total net sales | $482,783 | $873,289 | - All segments experienced significant declines in net sales, with U.S. Retail decreasing by **45.5%** and Canada Retail by **43.4%**[51](index=51&type=chunk) Deferred Revenue | Deferred Revenue (in thousands) | May 2, 2020 | May 4, 2019 | | :------------------------------ | :---------- | :---------- | | Gift cards, end of period | $30,908 | $30,066 | | Loyalty programs, end of period | $14,568 | $16,153 | [3. RELATED PARTY TRANSACTIONS](index=14&type=section&id=3.%20RELATED%20PARTY%20TRANSACTIONS) This note discloses transactions with affiliated entities, primarily concerning lease agreements and royalty expenses - The company leases its fulfillment center and certain store locations from Schottenstein Affiliates, who beneficially own approximately **16% of outstanding common shares** and **52% of combined voting power**[54](index=54&type=chunk) - Other purchases and services from Schottenstein Affiliates were **$1.3 million** for the three months ended May 2, 2020, down from $1.9 million in the prior year[55](index=55&type=chunk) - Royalty expense payable to ABG-Camuto (a 40% equity investment) was **$4.4 million** for the three months ended May 2, 2020, down from $5.7 million in the prior year[56](index=56&type=chunk) [4. EARNINGS (LOSS) PER SHARE](index=14&type=section&id=4.%20EARNINGS%20(LOSS)%20PER%20SHARE) This note provides the calculation details for basic and diluted earnings per share, including the number of shares used Weighted Average Shares Outstanding | Metric (in thousands) | Three months ended May 2, 2020 | Three months ended May 4, 2019 | | :-------------------- | :----------------------------- | :----------------------------- | | Weighted average basic shares outstanding | 71,914 | 77,004 | | Weighted average diluted shares outstanding | 71,914 | 78,263 | - **5.6 million** potentially dilutive stock-based compensation awards were excluded from diluted EPS calculation for the three months ended May 2, 2020, due to their anti-dilutive effect, compared to 2.0 million in the prior year[59](index=59&type=chunk) [5. STOCK-BASED COMPENSATION](index=15&type=section&id=5.%20STOCK-BASED%20COMPENSATION) This note details the stock-based compensation expenses recognized during the period Stock-Based Compensation Expense | Compensation Type (in thousands) | Three months ended May 2, 2020 | Three months ended May 4, 2019 | | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $463 | $823 | | Restricted and director stock units | $4,454 | $3,547 | | Total stock-based compensation expense | $4,917 | $4,370 | - Total stock-based compensation expense increased to **$4.9 million** for the three months ended May 2, 2020, from $4.4 million in the prior year[60](index=60&type=chunk) [6. SHAREHOLDERS' EQUITY](index=15&type=section&id=6.%20SHAREHOLDERS'%20EQUITY) This note provides details on the company's share structure, repurchase activity, and components of accumulated other comprehensive loss Share Structure | Share Type (in thousands) | May 2, 2020 (Class A) | May 2, 2020 (Class B) | Feb 1, 2020 (Class A) | Feb 1, 2020 (Class B) | May 4, 2019 (Class A) | May 4, 2019 (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 | — | - **No Class A common shares were repurchased** during the three months ended May 2, 2020, compared to $75.0 million in the prior year[64](index=64&type=chunk) - The Credit Facility amendment effective April 30, 2020, **no longer permits share repurchases**[64](index=64&type=chunk) Accumulated Other Comprehensive Loss | Accumulated Other Comprehensive Loss (in thousands) | Beginning of period (Feb 1, 2020) | Other comprehensive income (loss) before reclassifications | Amounts reclassified to non-operating expenses, net | End of period (May 2, 2020) | | :-------------------------------------------------- | :-------------------------------- | :--------------------------------------------------------- | :-------------------------------------------------- | :-------------------------- | | Foreign Currency Translation | $(2,668) | $(3,541) | — | $(6,209) | | Available-for-Sale Securities | $173 | $195 | $(368) | — | | Total | $(2,495) | $(3,346) | $(368) | $(6,209) | [7. ACCOUNTS RECEIVABLE](index=16&type=section&id=7.%20ACCOUNTS%20RECEIVABLE) This note presents the components of accounts receivable, showing a slight decrease in the net balance Accounts Receivable Breakdown | Accounts Receivable (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 in-house | $5,702 | $7,630 | $12,169 | | Other receivables | $31,467 | $28,166 | $10,561 | | Allowance for doubtful accounts | $(2,547) | $(1,219) | $(2,230) | | Accounts receivable, net | $81,953 | $89,151 | $78,287 | - Net accounts receivable decreased to **$81.9 million** as of May 2, 2020, from $89.2 million at February 1, 2020, with a notable increase in the allowance for doubtful accounts[66](index=66&type=chunk) [8. INVESTMENTS](index=16&type=section&id=8.%20INVESTMENTS) This note indicates the company liquidated its available-for-sale investments during the period Available-for-Sale Investments | Investments (in thousands) | May 2, 2020 | February 1, 2020 | May 4, 2019 | | :------------------------- | :---------- | :--------------- | :---------- | | Carrying value of investments | — | $24,831 | $51,542 | | Fair value | — | $24,974 | $51,259 | - The company had **no available-for-sale investments** as of May 2, 2020, indicating liquidation of previous holdings[67](index=67&type=chunk) [9. PROPERTY AND EQUIPMENT](index=18&type=section&id=9.%20PROPERTY%20AND%20EQUIPMENT) This note details the carrying value of the company's property and equipment Property and Equipment, Net | Property and Equipment (in thousands) | May 2, 2020 | February 1, 2020 | May 4, 2019 | | :------------------------------------ | :---------- | :--------------- | :---------- | | 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 | - Net property and equipment decreased to **$359.8 million** as of May 2, 2020, from $395.0 million at February 1, 2020[69](index=69&type=chunk) [10. GOODWILL AND INTANGIBLE ASSETS](index=18&type=section&id=10.%20GOODWILL%20AND%20INTANGIBLE%20ASSETS) This note details significant impairment charges that fully wrote off goodwill in the Brand Portfolio segment Goodwill by Segment | Goodwill (in thousands) | Beginning of period (Feb 1, 2020) | Impairment charges | Currency translation adjustment | End of period (May 2, 2020) | | :---------------------- | :-------------------------------- | :----------------- | :------------------------------ | :-------------------------- | | U.S. Retail | $93,655 | — | — | $93,655 | | Canada Retail | — | — | — | — | | Brand Portfolio | $19,989 | $(19,989) | — | — | | Total Net Goodwill | $113,644 | $(19,989) | — | $93,655 | - Goodwill for the Brand Portfolio segment was **fully impaired** with a $19.989 million charge during the three months ended May 2, 2020[70](index=70&type=chunk) Intangible Assets, Net | Intangible Assets (in thousands) | May 2, 2020 (Net) | February 1, 2020 (Net) | May 4, 2019 (Net) | | :------------------------------- | :---------------- | :--------------------- | :---------------- | | Definite-lived customer relationships | $427 | $7,316 | $27,014 | | Indefinite-lived trademarks and tradenames | $13,481 | $15,530 | $15,284 | | Total Net Intangible Assets | $13,908 | $22,846 | $42,298 | - Net intangible assets decreased significantly to **$13.9 million** as of May 2, 2020, from $22.8 million at February 1, 2020, primarily due to impairment of customer relationships and tradenames[72](index=72&type=chunk) [11. ACCRUED EXPENSES](index=19&type=section&id=11.%20ACCRUED%20EXPENSES) This note provides a breakdown of accrued expenses, which increased primarily due to higher provisions for sales returns Accrued Expenses Breakdown | Accrued Expenses (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 | | Total Accrued Expenses | $231,359 | $194,264 | $186,992 | - Total accrued expenses increased to **$231.4 million** as of May 2, 2020, from $194.3 million at February 1, 2020, driven by increases in sales returns and other accrued expenses[73](index=73&type=chunk) [12. DEBT](index=19&type=section&id=12.%20DEBT) This note describes amendments to the company's Credit Facility, including new restrictions and adjusted covenants - The Credit Facility was amended on April 30, 2020, to include a lien on all company assets and reduced borrowing availability from **$400 million to $375 million** by October 31, 2020, further decreasing to $300 million by July 31, 2021[74](index=74&type=chunk) - Covenants were adjusted, changing the maximum leverage ratio to **3.50:1** as of May 2, 2020, and the minimum fixed charge coverage ratio to **1.25:1** as of May 2, 2020[74](index=74&type=chunk) - The amended Credit Facility **restricts the company from paying dividends, making share repurchases, and certain acquisitions**[74](index=74&type=chunk) - As of May 2, 2020, **$393.0 million was outstanding** under the Credit Facility, with an interest rate of 3.5%, leaving $2.0 million available for borrowings[77](index=77&type=chunk) [13. LEASES](index=21&type=section&id=13.%20LEASES) This note details the company's lease expenses and future minimum lease payment obligations Lease Expense | Lease Expense (in thousands) | Three months ended May 2, 2020 | Three months ended May 4, 2019 | | :--------------------------- | :----------------------------- | :----------------------------- | | Operating lease income | $3,163 | $2,212 | | Total operating lease expense | $68,968 | $69,020 | Future Fixed Minimum Lease Payments | Future Fixed Minimum Lease Payments (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 | | Total operating lease liabilities | $969,432 | $37,585 | $1,007,017 | [14. COMMITMENTS AND CONTINGENCIES](index=22&type=section&id=14.%20COMMITMENTS%20AND%20CONTINGENCIES) This note discloses potential liabilities from legal proceedings and other commitments, which are not expected to be material - The company is involved in various legal proceedings, but believes potential liability will **not be material**[82](index=82&type=chunk) - A contingent liability of **$28.1 million** was recorded for unpaid foreign payroll and other taxes related to the Camuto Group acquisition, with an indemnification asset of $24.5 million expected from sellers[83](index=83&type=chunk) - The company has a guarantee for a lease commitment expiring in fiscal 2023, with total future minimum lease payments of approximately **$12.5 million**[84](index=84&type=chunk) [15. SEGMENT REPORTING](index=22&type=section&id=15.%20SEGMENT%20REPORTING) This note provides a performance breakdown by business segment, highlighting gross losses in the retail segments Segment Performance | Segment (in thousands) | Net Sales (May 2, 2020) | Gross Profit (Loss) (May 2, 2020) | Net Sales (May 4, 2019) | Gross Profit (May 4, 2019) | | :--------------------- | :---------------------- | :-------------------------------- | :---------------------- | :------------------------- | | U.S. Retail | $377,073 | $(32,970) | $691,840 | $209,891 | | Canada Retail | $29,329 | $(2,311) | $51,816 | $15,747 | | Brand Portfolio | $82,113 | $13,904 | $104,546 | $25,673 | | Other | $13,623 | $(5,428) | $35,607 | $9,311 | | Total | $482,783 | $(26,460) | $873,289 | $259,333 | - All retail segments (U.S. and Canada) reported **gross losses** for the three months ended May 2, 2020, a significant reversal from gross profits in the prior year, primarily due to COVID-19 impacts[86](index=86&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the severe impact of COVID-19 on operations and details measures taken to preserve liquidity and adapt the business model [Executive Overview](index=23&type=section&id=Executive%20Overview) The company's business was materially impacted by COVID-19, leading to store closures and significant operational adjustments - All U.S. and Canada stores were temporarily closed effective March 18, 2020, due to COVID-19, **materially impacting business, liquidity, and results**[88](index=88&type=chunk) - Operational adjustments include temporary employee leaves, pay reductions, delayed lease/vendor payments, and reduced capital expenditures[88](index=88&type=chunk) - Despite store closures, **robust digital sales** were generated, and the company expects to operate as a digital-focused retailer moving forward[90](index=90&type=chunk) - The company expects to spend approximately **$8.0 million** on health and safety protocols for store reopenings[88](index=88&type=chunk) - Aggressive promotional activity and significant inventory markdowns were implemented, impacting margins[89](index=89&type=chunk) [Comparable Sales Performance Metric](index=23&type=section&id=Comparable%20Sales%20Performance%20Metric) This section defines the comparable sales metric, which includes temporarily closed stores due to the pandemic - Comparable sales include stores in operation for at least 14 months, e-commerce sales, and temporarily closed stores due to COVID-19[92](index=92&type=chunk) - Canada Retail segment comparable sales exclude foreign currency translation impact[92](index=92&type=chunk) [Financial Summary](index=24&type=section&id=Financial%20Summary) The financial summary highlights a steep decline in net sales and a shift from gross profit to a gross loss - Net sales decreased by **44.7% to $482.8 million**, primarily due to a 42.3% decrease in comparable sales caused by COVID-19 store closures[95](index=95&type=chunk) - Gross loss as a percentage of net sales was **5.5%**, compared to a gross profit of 29.7% in the prior year, due to aggressive promotions, $84.0 million in increased inventory reserves, and higher shipping costs[96](index=96&type=chunk) - Net loss was **$215.9 million**, or $3.00 per diluted share, including $84.1 million in after-tax charges for impairments and COVID-19 related costs[97](index=97&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of the significant changes in the company's operational results compared to the prior year Comparison of Three Months Ended May 2, 2020 and May 4, 2019 | Metric (in thousands) | May 2, 2020 | May 4, 2019 | Change Amount | Change % | | :-------------------- | :---------- | :---------- | :------------ | :------- | | Net sales | $482,783 | $873,289 | $(390,506) | (44.7)% | | Gross profit (loss) | $(26,460) | $259,333 | $(285,793) | NM | | Operating expenses | $(187,221) | $(217,580) | $30,359 | (14.0)% | | Impairment charges | $(112,547) | — | $(112,547) | NM | | Net income (loss) | $(215,858) | $31,194 | $(247,052) | NM | - Consolidated net sales decreased by **$390.5 million (44.7%)**, primarily due to a $328.8 million decrease in comparable sales and $24.5 million decrease in wholesale net sales from the Brand Portfolio segment[100](index=100&type=chunk) - Operating expenses decreased by **$30.4 million (14.0%)** due to temporary employee leaves and pay reductions, offset by $4.5 million in government payroll tax credits[104](index=104&type=chunk) - Total impairment charges of **$112.5 million** were recorded, including $84.9 million for under-performing stores and $27.6 million for Brand Portfolio customer relationship intangible, First Cost reporting unit goodwill, and The Shoe Company tradename[105](index=105&type=chunk)[106](index=106&type=chunk) - The effective tax rate increased to **33.8% from 25.4%** due to the ability to carry back current year losses to a tax year with a higher U.S. federal statutory tax rate[107](index=107&type=chunk) [Seasonality](index=26&type=section&id=Seasonality) The COVID-19 pandemic has disrupted the company's typical seasonal sales patterns, particularly impacting the spring selling season - The business is historically seasonal, with new spring styles in Q1 and fall styles in Q3; however, COVID-19 has negatively impacted the spring peak selling season, potentially altering historical trends for fiscal 2020[108](index=108&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) The company has taken significant measures to preserve liquidity, including drawing on its credit facility and implementing cost-cutting initiatives - The company believes current cash, operating cash flows, and the Credit Facility are sufficient for the next 12 months, assuming a gradual return of store traffic by end of June 2020[110](index=110&type=chunk) - Liquidity preservation measures include reducing inventory orders, cutting costs, delaying vendor/landlord payments, reducing quarterly cash dividend by 60% (now suspended), and executive/employee pay reductions[111](index=111&type=chunk) - The company expects a **$140.0 million tax refund** in fiscal 2021 due to CARES Act provisions allowing net operating loss carrybacks[112](index=112&type=chunk) - Net cash used in operations increased to **$39.5 million** from $3.0 million YoY, driven by the net loss, partially offset by working capital management[114](index=114&type=chunk) - Net cash provided by investing activities was **$10.0 million**, resulting from liquidating available-for-sale securities and reducing capital expenditures to $14.6 million[115](index=115&type=chunk) - Net cash provided by financing activities was **$193.9 million**, primarily from $203.0 million in net borrowings from the Credit Facility as a precautionary measure[117](index=117&type=chunk) - The Credit Facility was amended to provide a lien on all assets, reduce borrowing availability, adjust covenants, and restrict dividends and share repurchases[118](index=118&type=chunk) - Expected capital expenditures for fiscal 2020 are **$25.0 million to $35.0 million**, with $14.6 million already invested[121](index=121&type=chunk) [Critical Accounting Policies and Estimates](index=29&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's financial statements rely on significant estimates, with no material changes to critical policies from the 2019 annual report - The preparation of financial statements requires significant estimates and assumptions, particularly concerning sales returns, inventory valuation, impairments, and income taxes, with no material changes to critical accounting policies disclosed in the 2019 Form 10-K[124](index=124&type=chunk)[125](index=125&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's market risk exposure from interest rates and foreign currency has not materially changed since the last annual report - Primary market risk exposures are related to **interest rates and foreign currency exchange rates**[126](index=126&type=chunk) - **No material changes** in market risk exposures or management since the 2019 Form 10-K[126](index=126&type=chunk) [Item 4. Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal controls - Disclosure controls and procedures were evaluated and deemed **effective** by the CEO and CFO as of the end of the reporting period[127](index=127&type=chunk) - **No material changes** in internal control over financial reporting occurred during the last fiscal quarter[128](index=128&type=chunk) [PART II. OTHER INFORMATION](index=29&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part provides details on legal proceedings, risk factors, equity sales, and other required disclosures [Item 1. Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal claims but does not expect the outcomes to have a material financial impact - The company is involved in various legal claims and proceedings incidental to its business[129](index=129&type=chunk) - Management believes the amount of any potential liability from current legal proceedings will **not be material** to financial condition, results of operations, or liquidity[129](index=129&type=chunk) [Item 1A. Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) This section highlights the material adverse impact of the COVID-19 pandemic as a primary risk factor for the company's business - The COVID-19 outbreak has had, and may continue to have, a **material adverse impact** on the company's business, operations, liquidity, financial condition, and results of operations[130](index=130&type=chunk) - Temporary closure of all U.S. and Canada stores, along with decreased consumer spending, has led to an economic downturn[132](index=132&type=chunk) - Risks include a more promotional retail environment, potential inventory write-downs, and increased costs for updating inventory[133](index=133&type=chunk) - The pandemic may cause new or prolonged store closures, further operational adjustments, and changes in customer behaviors, including reduced consumer spending[134](index=134&type=chunk) - International operations and supply chain, particularly reliance on China for merchandise, are vulnerable to COVID-19 disruptions[137](index=137&type=chunk) - Reductions in sales to retailer customers due to their own business downturns from COVID-19 could materially affect the Brand Portfolio segment[139](index=139&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company's amended Credit Facility now prohibits the payment of dividends - The Credit Facility **prohibits the company from paying dividends**, effective April 30, 2020[140](index=140&type=chunk) [Item 3. Defaults Upon Senior Securities](index=31&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon its senior securities - No defaults upon senior securities[141](index=141&type=chunk) [Item 4. Mine Safety Disclosures](index=31&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not Applicable[142](index=142&type=chunk) [Item 5. Other Information](index=31&type=section&id=Item%205.%20Other%20Information) There is no other information to report for this period - None[143](index=143&type=chunk) [Item 6. Exhibits](index=32&type=section&id=Item%206.%20Exhibits) This section lists the various legal and financial agreements filed as exhibits with this report - Exhibits include the Third and Fourth Amendments to the Credit Agreement, a Pledge and Security Agreement, a Standard Executive Severance Agreement, and the Seventh Amendment to the Amended and Restated Supply Agreement with Stein Mart, Inc[145](index=145&type=chunk) - Certifications from the Principal Executive Officer and Principal Financial Officer (Rule 13a-14(a)/15d-14(a) and Section 1350) are also filed[145](index=145&type=chunk)

Designer Brands Inc. (NYSE:DBI) Q1 2020 Earnings Conference Call June 18, 2020 8:30 AM ET Company Participants Stacy Turnof - IR, Edelman Roger Rawlins - CEO Jared Poff - CFO Conference Call Participants Sam Poser - Susquehanna Rick Patel - Needham & Company Tom Nikic - Wells Fargo Steven Marotta - C.L. King & Associates Gabriella Carbone - Deutsche Bank Dana Telsey - Telsey Advisory Group Operator Good morning and welcome to the Designer Brands Inc. First Quarter 2020 Earnings Conference Call. All particip ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended February 1, 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 1-32545 DESIGNER BRANDS INC. (Exact name of registrant as specified in its charter) Ohio 31-0746639 (State or other jurisdiction of incorp ...

Financial Data and Key Metrics Changes - For the full year, net sales increased by 11.2% to $3.5 billion, excluding net sales of exited businesses from fiscal 2018 [22] - Fourth quarter net sales were $829.6 million, flat compared to the prior year after excluding net sales of exited businesses [22] - Total comps for the full year were up 0.8%, while fourth quarter comps were up 0.7%, bringing the two-year comp to 6.1% [23] Business Line Data and Key Metrics Changes - The kids' category reported a robust performance with comps up 27%, which is a strategic priority for the company [24] - Camuto's total net sales for the full year were $448.3 million, flat compared to last year, while fourth quarter sales were $103.3 million, up 3.5% [28][29] - Exclusive brands sales grew by 19% in the quarter, representing $102 million in sales [32] Market Data and Key Metrics Changes - In Canada, comps were up 7.2% for the full year and 10.1% for the quarter, driven by strong digital growth and loyalty member increases [25][26] - The U.S. retail segment saw comps up 0.3% for the full year, but down 0.3% in the fourth quarter [24] Company Strategy and Development Direction - The company aims to become the leading footwear and accessories company in North America by focusing on differentiated products and experiences [10] - The integration of Camuto is progressing as planned, with a focus on exclusive products and partnerships, such as with Jennifer Lopez [11] - The company is committed to enhancing its technological capabilities and omni-channel retailing [11] Management's Comments on Operating Environment and Future Outlook - Management expressed disappointment with 2019 performance but noted stabilization and improvement in key areas [9] - The impact of COVID-19 has led to temporary store closures and a focus on preserving long-term business health [5][7] - The company refrained from providing 2020 guidance due to uncertainties surrounding the coronavirus [16] Other Important Information - The company has reduced its quarterly dividend to $0.10 and significantly cut planned capital expenditures [7] - The tariff impact is now expected to be between $10 million to $15 million, down from previous estimates [15] Q&A Session Summary Question: What happens if store closures extend beyond two weeks? - Management emphasized the priority of employee health and long-term business viability, stating they will pay scheduled employees during the initial closure period [45] Question: How is inventory being managed with store closures? - The company plans to utilize stores as fulfillment centers and will cut future orders while managing existing inventory diligently [46] Question: What is the status of ABG stores? - Some Stein Mart locations have shut down, but there has not been a full chain shutdown [48] Question: How are expenses split between fixed and variable? - Store expenses are relatively flexible, allowing for adjustments in labor models, while home office expenses are more fixed [51] Question: What actions are being taken to support the balance sheet? - The company is reducing inventories, cutting back future orders, and evaluating SG&A expenses to manage long-term health [55] Question: Update on Camuto's integration and performance? - The integration is progressing well, with strong growth in direct-to-consumer capabilities and exclusive brands [64][67]

PART I. FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents Designer Brands Inc.'s unaudited condensed consolidated financial statements, detailing operations, balance sheets, cash flows, and notes on accounting policies and key events [Condensed Consolidated Statements of Operations](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported increased total revenue and net income for both the third quarter and the nine-month period ended November 2, 2019, compared to the prior year Consolidated Statements of Operations Highlights ($ in thousands, except per share data) | Metric | Three Months Ended Nov 2, 2019 ($) | Three Months Ended Nov 3, 2018 ($) | Nine Months Ended Nov 2, 2019 ($) | Nine Months Ended Nov 3, 2018 ($) | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | 936,264 | 833,003 | 2,674,977 | 2,340,373 | | **Operating Profit** | 56,108 | 53,089 | 141,356 | 116,028 | | **Net Income** | 43,460 | 39,319 | 102,061 | 25,260 | | **Diluted EPS** | $0.60 | $0.48 | $1.36 | $0.31 | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of November 2, 2019, total assets and liabilities significantly increased due to the adoption of a new lease accounting standard, while cash and cash equivalents decreased Balance Sheet Highlights ($ in thousands) | Metric | Nov 2, 2019 ($) | Feb 2, 2019 ($) | Nov 3, 2018 ($) | | :--- | :--- | :--- | :--- | | **Cash and cash equivalents** | 87,838 | 99,369 | 222,419 | | **Inventories** | 677,696 | 645,317 | 624,167 | | **Operating lease assets** | 950,514 | — | — | | **Total assets** | 2,536,978 | 1,620,584 | 1,474,629 | | **Debt** | 235,000 | 160,000 | — | | **Total liabilities** | 1,793,797 | 788,207 | 532,193 | | **Total shareholders' equity** | 743,181 | 832,377 | 942,436 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended November 2, 2019, net cash from operations decreased, while cash used in investing and financing activities increased, primarily due to capital expenditures and share repurchases Cash Flow Summary ($ in thousands) | Activity | Nine Months Ended Nov 2, 2019 ($) | Nine Months Ended Nov 3, 2018 ($) | | :--- | :--- | :--- | | **Net cash provided by operating activities** | 118,073 | 147,335 | | **Net cash used in investing activities** | (10,265) | (40,953) | | **Net cash used in financing activities** | (120,629) | (60,645) | | **Net (decrease) increase in cash** | (12,730) | 46,487 | [Notes to the Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) These notes detail the company's accounting policies, recent acquisitions, and the impact of new accounting standards, particularly regarding lease recognition and segment reporting - The company now operates under three reportable segments: U.S. Retail, Canada Retail (from the TSL acquisition), and Brand Portfolio (from the Camuto Group acquisition)[31](index=31&type=chunk) - In fiscal 2019, the company adopted ASU 2016-02 (Leases), recognizing **$1.0 billion** of lease assets and **$1.1 billion** of lease liabilities upon transition[48](index=48&type=chunk) - The acquisition of Camuto Group in November 2018 for **$166.3 million** was funded with cash and borrowings[58](index=58&type=chunk)[59](index=59&type=chunk) Goodwill of **$87.7 million** was recorded, primarily allocated to the U.S. Retail and Brand Portfolio segments[60](index=60&type=chunk) - During the nine months ended November 2, 2019, the company repurchased **7.1 million** Class A common shares for **$141.6 million**[85](index=85&type=chunk) - As a result of the Camuto Group acquisition, the company identified probable contingent liabilities for unpaid foreign taxes estimated between **$15.5 million** and **$30.0 million**, for which it expects to be indemnified by the sellers[114](index=114&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance, highlighting revenue growth driven by acquisitions and comparable sales, while addressing challenges impacting gross margins and outlining liquidity and capital resources - Q3 results were impacted by several challenges including weather, tariff impacts, and system implementation issues[123](index=123&type=chunk) - The Canada Retail segment showed positive comparable sales and margin growth, benefiting from a new digital platform and loyalty programs[123](index=123&type=chunk) - The company remains on track to convert the production of the majority of its DSW private label to the Brand Portfolio segment in fiscal 2020, expecting higher margins and product exclusivity[123](index=123&type=chunk) - For the nine months ended Nov 2, 2019, the company repurchased **7.1 million** Class A common shares for **$141.6 million**[160](index=160&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) Consolidated net sales increased in Q3 2019 and for the nine-month period, driven by acquisitions and comparable sales growth, though gross profit margins saw a decline due to various factors Q3 2019 Net Sales by Segment ($ in thousands) | Segment | Net Sales ($) | Change (%) | Comparable Sales (%) | | :--- | :--- | :--- | :--- | | U.S. Retail | 716,775 | (0.7)% | 0.0% | | Canada Retail | 76,299 | (4.7)% | 4.4% | | Brand Portfolio | 130,582 | NM | NA | | **Total Segment Net Sales** | **952,504** | **14.5%** | **0.3%** | Q3 2019 Gross Profit by Segment ($ in thousands) | Segment | Gross Profit ($) | Margin (%) | Basis Point Change | | :--- | :--- | :--- | :--- | | U.S. Retail | 201,409 | 28.1% | (510) bps | | Canada Retail | 27,485 | 36.0% | 430 bps | | Brand Portfolio | 33,936 | 26.0% | NM | | **Consolidated Gross Profit** | **268,090** | **28.9%** | **(370) bps** | - The U.S. Retail gross margin decrease was driven by increased promotions and higher shipping costs from online orders[138](index=138&type=chunk) - The Canada Retail gross margin improvement was due to lower clearance activity and better leverage of occupancy costs following the exit of the Town Shoes banner[138](index=138&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) The company's cash requirements primarily fund inventory, capital expenditures, and growth, with sufficient liquidity from operations and its credit facility to support future strategies - The company believes cash from operations, current cash levels, and availability under its Credit Facility are sufficient to fund operations and growth strategies for the next 12 months[161](index=161&type=chunk) - As of November 2, 2019, the company had **$235.0 million** outstanding on its **$400 million** Credit Facility and was in compliance with all financial covenants[103](index=103&type=chunk)[106](index=106&type=chunk) - Fiscal 2019 capital expenditures are planned to be approximately **$80.0 million**, with **$59.6 million** invested in the first nine months[170](index=170&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from interest rates on its variable-rate debt and foreign currency exchange rates, primarily impacting its Canadian operations - The company's primary market risks are related to interest rates on its variable-rate debt and foreign currency exchange rates from its Canadian operations[174](index=174&type=chunk) - A hypothetical **10%** change in foreign exchange rates could lead to a **$7.3 million** fluctuation in accumulated other comprehensive loss and a **$1.0 million** impact on net non-operating income[176](index=176&type=chunk) [Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the last fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of November 2, 2019[178](index=178&type=chunk) - No material changes were made to the company's internal control over financial reporting during the third quarter[179](index=179&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings, but management does not expect them to materially impact financial condition or results of operations - The company does not expect current legal proceedings to have a material impact on its financial results[113](index=113&type=chunk)[180](index=180&type=chunk) [Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) This section updates key risk factors, including the potential adverse effects of new U.S. tariffs on Chinese imports and foreign tax contingencies from the Camuto Group acquisition - The imposition of new tariffs on products imported from China poses a material risk, potentially forcing price increases or reducing gross margins[182](index=182&type=chunk)[183](index=183&type=chunk) - The company faces probable contingent liabilities for unpaid foreign taxes from the Camuto Group acquisition, estimated at **$15.5 million** to **$30.0 million**, with uncertainty regarding full recovery through indemnification[184](index=184&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's share repurchase activities and dividend declarations, including the remaining authorization under the repurchase program Q3 2019 Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Aug 4 - Aug 31, 2019 | 1 | $14.92 | | Sep 1 - Oct 5, 2019 | 1,004 (in thousands) | $16.63 | | Oct 6 - Nov 2, 2019 | 2 (in thousands) | $16.60 | | **Total** | **1,007 (in thousands)** | **$16.63** | - As of November 2, 2019, **$334.9 million** remained available for repurchase under the authorized program[85](index=85&type=chunk)[187](index=187&type=chunk) - On December 10, 2019, the Board declared a quarterly cash dividend of **$0.25 per share**[188](index=188&type=chunk) [Defaults Upon Senior Securities](index=42&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities during the reported period - None[189](index=189&type=chunk) [Mine Safety Disclosures](index=42&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not Applicable[190](index=190&type=chunk) [Other Information](index=42&type=section&id=Item%205.%20Other%20Information) No other material information is reported in this section - None[191](index=191&type=chunk) [Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including governance documents, executive agreements, officer certifications, and iXBRL formatted financial statements - Exhibits filed include officer certifications (Rule 13a-14(a)/15d-14(a) and Section 1350) and financial data formatted in iXBRL[193](index=193&type=chunk)

Designer Brands Inc. (NYSE:DBI) Q3 2019 Earnings Conference Call December 10, 2019 8:30 AM ET Company Participants Roger Rawlins - Chief Executive Officer Jared Poff - Executive Vice President, Chief Financial Officer Stacy Turnof - Investor Relations Conference Call Participants Sam Poser - Susquehanna Rick Patel - Needham & Company Paul Trussell - Deutsche Bank Chris Svezia - Wedbush Tom Nikic - Wells Fargo Steve Marotta - CL King and Associates Operator Good day and welcome to the Designer Brands Third Q ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Designer Brands Inc., including statements of operations, comprehensive income (loss), balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, acquisitions, revenue disaggregation, related party transactions, and other financial details for the periods ended August 3, 2019, and August 4, 2018 [Condensed Consolidated Statements of Operations](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Condensed Consolidated Statements of Operations (Three Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------------- | :---------------------------- | :---------------------------- | | Total Revenue | $860,198 | $795,268 | | Cost of Sales | $(594,779) | $(539,240) | | Operating Profit | $41,267 | $24,469 | | Net Income (Loss) | $27,407 | $(38,356) | | Basic EPS | $0.37 | $(0.48) | | Diluted EPS | $0.37 | $(0.48) | Condensed Consolidated Statements of Operations (Six Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------------- | :---------------------------- | :---------------------------- | | Total Revenue | $1,738,713 | $1,507,370 | | Cost of Sales | $(1,208,735) | $(1,044,452) | | Operating Profit | $85,248 | $62,939 | | Net Income (Loss) | $58,601 | $(14,059) | | Basic EPS | $0.78 | $(0.18) | | Diluted EPS | $0.77 | $(0.18) | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Condensed Consolidated Statements of Comprehensive Income (Loss, in thousands) | Metric | Three Months Ended August 3, 2019 (in thousands) | Three Months Ended August 4, 2018 (in thousands) | Six Months Ended August 3, 2019 (in thousands) | Six Months Ended August 4, 2018 (in thousands) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | :--------------------------------------------- | :----------------------------------------------- | | Net income (loss) | $27,407 | $(38,356) | $58,601 | $(14,059) | | Total other comprehensive income | $680 | $10,922 | $120 | $7,798 | | Total comprehensive income (loss) | $28,087 | $(27,434) | $58,721 | $(6,261) | [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (in thousands) | Metric | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :-------------------------- | :------------- | :--------------- | :------------- | | Total Current Assets | $924,157 | $955,219 | $977,093 | | Total Assets | $2,557,246 | $1,620,584 | $1,445,016 | | Total Current Liabilities | $648,863 | $463,160 | $375,216 | | Total Liabilities | $1,827,999 | $788,207 | $525,532 | | Total Shareholders' Equity | $729,247 | $832,377 | $919,484 | [Condensed Consolidated Statements of Shareholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity) Shareholders' Equity Changes (Three Months Ended August 3, 2019, in thousands) | Item | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Balance, May 4, 2019 | $762,851 | | Net income | $27,407 | | Stock-based compensation activity | $6,212 | | Repurchase of Class A common shares | $(50,000) | | Dividends ($0.25 per share) | $(17,903) | | Other comprehensive income | $680 | | Balance, August 3, 2019 | $729,247 | Shareholders' Equity Changes (Six Months Ended August 3, 2019, in thousands) | Item | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Balance, February 2, 2019 | $832,377 | | Cumulative effect of accounting change | $(9,556) | | Net income | $58,601 | | Stock-based compensation activity | $9,511 | | Repurchase of Class A common shares | $(125,000) | | Dividends ($0.50 per share) | $(36,806) | | Other comprehensive income | $120 | | Balance, August 3, 2019 | $729,247 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (Six Months Ended, in thousands) | Cash Flow Activity | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :------------------------------ | :---------------------------- | :---------------------------- | | Net cash provided by operating activities | $34,192 | $106,572 | | Net cash provided by (used in) investing activities | $4,491 | $(25,699) | | Net cash used in financing activities | $(87,203) | $(41,109) | | Net increase (decrease) in cash | $(48,806) | $40,064 | | Cash and cash equivalents, end of period | $51,762 | $215,996 | [Notes to the Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) [1. SIGNIFICANT ACCOUNTING POLICIES](index=9&type=section&id=1.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) * **Designer Brands Inc.** is a leading North American footwear and accessories designer, producer, and retailer, operating three reportable segments: **U.S. Retail**, **Canada Retail** (acquired TSL), and **Brand Portfolio** (acquired Camuto Group)[22](index=22&type=chunk)[28](index=28&type=chunk) * The company adopted ASU 2016-02, Leases, in Q1 fiscal 2019, recognizing **$1.0 billion** in lease assets and **$1.1 billion** in lease liabilities, with a **$9.6 million** decrease in retained earnings due to transition impairments[44](index=44&type=chunk) * The effective tax rate decreased significantly from **203.3%** for the six months ended August 4, 2018, to **27.9%** for the six months ended August 3, 2019, primarily due to valuation allowances and goodwill impairment related to the TSL acquisition in the prior year[37](index=37&type=chunk) [2. ACQUISITIONS AND EQUITY METHOD INVESTMENT](index=12&type=section&id=2.%20ACQUISITIONS%20AND%20EQUITY%20METHOD%20INVESTMENT) * On May 10, 2018, the company acquired the remaining interest in Town Shoes Limited (TSL) for **$28.2 million USD**, leading to a **$34.0 million** loss from remeasurement of previously held assets and a goodwill impairment charge for the Canada Retail segment in fiscal 2018[49](index=49&type=chunk)[51](index=51&type=chunk) * On November 5, 2018, the company acquired Camuto Group for **$171.3 million**, enhancing its global production, sourcing, and design infrastructure, and forming a joint venture, ABG-Camuto, in which it holds a **40%** interest[24](index=24&type=chunk)[54](index=54&type=chunk)[61](index=61&type=chunk) Equity Investment in ABG-Camuto Activity (Six Months Ended August 3, 2019, in thousands) | Metric | Amount (in thousands) | | :------------------------- | :-------------------- | | Balance at beginning of period | $58,125 | | Share of net earnings | $4,692 | | Distributions received | $(7,784) | | Balance at end of period | $55,033 | [3. REVENUE](index=15&type=section&id=3.%20REVENUE) Total Revenue Disaggregated by Segment (Three Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :------------------------ | :---------------------------- | :---------------------------- | | U.S. Retail | $677,920 | $691,757 | | Canada Retail | $63,306 | $72,532 | | Brand Portfolio | $95,422 | — | | Other | $29,480 | $29,446 | | Elimination of intersegment revenue | $(17,701) | — | | Total Revenue | $860,198 | $795,268 | Total Revenue Disaggregated by Segment (Six Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :------------------------ | :---------------------------- | :---------------------------- | | U.S. Retail | $1,369,760 | $1,361,541 | | Canada Retail | $115,122 | $72,532 | | Brand Portfolio | $196,289 | — | | Other | $65,087 | $70,099 | | Elimination of intersegment revenue | $(28,221) | — | | Total Revenue | $1,738,713 | $1,507,370 | * The Brand Portfolio segment, resulting from the Camuto Group acquisition, generated **$95.4 million** in net sales for the three months ended August 3, 2019, and **$196.3 million** for the six months ended August 3, 2019, primarily from wholesale and direct-to-consumer channels[65](index=65&type=chunk) [4. RELATED PARTY TRANSACTIONS](index=17&type=section&id=4.%20RELATED%20PARTY%20TRANSACTIONS) * Schottenstein Affiliates, controlled by the executive chairman's family, beneficially owned approximately **15%** of outstanding common shares and **51%** of combined voting power as of August 3, 2019[68](index=68&type=chunk) Related Party Transactions (in thousands) | Item | Three Months Ended August 3, 2019 | Three Months Ended August 4, 2018 | Six Months Ended August 3, 2019 | Six Months Ended August 4, 2018 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Other purchases and services from Schottenstein Affiliates | $1,500 | $1,700 | $3,400 | $3,300 | | Royalty expense payable to ABG-Camuto | $3,600 | — | $9,300 | — | [5. EARNINGS (LOSS) PER SHARE](index=18&type=section&id=5.%20EARNINGS%20(LOSS)%20PER%20SHARE) Weighted Average Shares Used in EPS Calculation (in thousands) | Metric | Three Months Ended August 3, 2019 | Three Months Ended August 4, 2018 | Six Months Ended August 3, 2019 | Six Months Ended August 4, 2018 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Weighted average basic shares outstanding | 73,529 | 80,265 | 75,267 | 80,187 | | Dilutive effect of stock-based compensation awards | 787 | — | 1,014 | — | | Weighted average diluted shares outstanding | 74,316 | 80,265 | 76,281 | 80,187 | * Potential shares not included in diluted EPS due to anti-dilutive effect were **4.6 million** for the three months ended August 3, 2019, and **2.9 million** for the six months ended August 3, 2019[74](index=74&type=chunk) [6. STOCK-BASED COMPENSATION](index=18&type=section&id=6.%20STOCK-BASED%20COMPENSATION) Stock-Based Compensation Expense (in thousands) | Type of Award | Three Months Ended August 3, 2019 | Three Months Ended August 4, 2018 | Six Months Ended August 3, 2019 | Six Months Ended August 4, 2018 | | :-------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Stock options | $563 | $1,343 | $1,386 | $3,138 | | Restricted and director stock units | $4,798 | $3,841 | $8,345 | $6,560 | | Total | $5,361 | $5,184 | $9,731 | $9,698 | * As of August 3, 2019, **2.7 million** Class A common shares remained available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan[75](index=75&type=chunk) [7. SHAREHOLDERS' EQUITY](index=18&type=section&id=7.%20SHAREHOLDERS'%20EQUITY) * The Board of Directors declared a quarterly cash dividend of **$0.25** per share for both Class A and Class B common shares on August 29, 2019, payable October 4, 2019[79](index=79&type=chunk) * During the six months ended August 3, 2019, the company repurchased **6.1 million** Class A common shares at a cost of **$125.0 million**, with **$351.6 million** remaining authorized under the share repurchase program[80](index=80&type=chunk) Accumulated Other Comprehensive Loss (Three Months Ended August 3, 2019, in thousands) | Component | Beginning of Period (in thousands) | Other Comprehensive Income (Loss) before Reclassifications (in thousands) | Amounts Reclassified to Non-operating Income (Expenses), net (in thousands) | Other Comprehensive Income (in thousands) | End of Period (in thousands) | | :-------------------------------------- | :--------------------------------- | :------------------------------------------------------------------------ | :-------------------------------------------------------------------------- | :---------------------------------------- | :--------------------------- | | Foreign Currency Translation | $(3,042) | $461 | — | $461 | $(2,581) | | Available-for-Sale Securities | $(224) | $196 | $23 | $219 | $(5) | | Total | $(3,266) | $657 | $23 | $680 | $(2,586) | [8. ACCOUNTS RECEIVABLE](index=21&type=section&id=8.%20ACCOUNTS%20RECEIVABLE) Accounts Receivable, Net (in thousands) | Metric | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :------------------------------------ | :------------- | :--------------- | :------------- | | Customer accounts receivables | $72,134 | $57,771 | $3,090 | | Other receivables | $14,460 | $8,004 | $8,968 | | Accounts receivable | $86,594 | $69,809 | $17,259 | | Allowance for doubtful accounts | $(1,432) | $(939) | — | | Accounts receivable, net | $85,162 | $68,870 | $17,259 | * Upon transition to ASU 2016-02 at the beginning of fiscal 2019, construction and tenant allowance receivables due from landlords were netted against operating lease liabilities[84](index=84&type=chunk) [9. INVESTMENTS](index=21&type=section&id=9.%20INVESTMENTS) Investments in Available-for-Sale Securities (in thousands) | Metric | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :------------------------------------ | :------------- | :--------------- | :------------- | | Carrying value of investments | $25,510 | $70,195 | $73,978 | | Unrealized gains included in accumulated other comprehensive loss | $18 | $44 | $10 | | Unrealized losses included in accumulated other comprehensive loss | $(24) | $(521) | $(869) | | Fair value | $25,504 | $69,718 | $73,119 | [10. PROPERTY AND EQUIPMENT](index=22&type=section&id=10.%20PROPERTY%20AND%20EQUIPMENT) Property and Equipment, Net (in thousands) | Asset Category | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :---------------------------------- | :------------- | :--------------- | :------------- | | Total property and equipment | $1,169,465 | $1,138,077 | $1,082,040 | | Accumulated depreciation and amortization | $(766,686) | $(728,501) | $(694,419) | | Property and equipment, net | $402,779 | $409,576 | $387,621 | * Construction in progress primarily includes leasehold improvements, furniture and fixtures for new stores, and internal-use software under development[87](index=87&type=chunk) [11. GOODWILL AND INTANGIBLE ASSETS](index=22&type=section&id=11.%20GOODWILL%20AND%20INTANGIBLE%20ASSETS) Goodwill by Segment (in thousands) | Segment | Beginning of Period (February 2, 2019) | Activity (Six Months Ended August 3, 2019) | End of Period (August 3, 2019) | | :---------------- | :------------------------------------- | :----------------------------------------- | :----------------------------- | | U.S. Retail | $25,899 | — | $25,899 | | Canada Retail | $42,048 (net of impairment) | $(416) (currency adjustment) | $41,632 (net of impairment) | | Brand Portfolio | $63,614 | $26,767 (purchase price adjustments) | $90,381 | | Total Net Goodwill | $89,513 | $26,767 | $116,280 | Intangible Assets (in thousands) | Asset Category | Cost (August 3, 2019) | Accumulated Amortization (August 3, 2019) | Net (August 3, 2019) | | :---------------------------------- | :-------------------- | :---------------------------------------- | :------------------- | | Definite-lived customer relationships | $6,661 | $(1,064) | $5,597 | | Indefinite-lived trademarks and tradenames | $15,515 | — | $15,515 | | Total | $22,176 | $(1,064) | $21,112 | * Customer relationships are amortized over three years for the Canada loyalty program and eight years for Brand Portfolio customer relationships. Favorable leasehold interests were netted against operating lease assets upon ASU 2016-02 transition[90](index=90&type=chunk) [12. ACCRUED EXPENSES](index=24&type=section&id=12.%20ACCURUED%20EXPENSES) Accrued Expenses (in thousands) | Accrued Expense Category | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :---------------------------------- | :------------- | :--------------- | :------------- | | Gift cards and merchandise credits | $28,277 | $34,998 | $26,791 | | Accrued compensation and related expenses | $38,532 | $53,577 | $30,224 | | Accrued taxes | $18,330 | $16,491 | $21,029 | | Loyalty programs deferred revenue | $16,034 | $16,151 | $16,786 | | Sales returns | $19,332 | $17,743 | $14,426 | | Customer allowances and discounts | $9,306 | $13,094 | — | | Other | $43,626 | $49,481 | $36,520 | | Total | $173,437 | $201,535 | $145,776 | [13. OTHER NON-CURRENT LIABILITIES](index=25&type=section&id=13.%20OTHER%20NON-CURRENT%20LIABILITIES) Other Non-Current Liabilities (in thousands) | Liability Category | August 3, 2019 | February 2, 2019 | August 4, 2018 | | :---------------------------------- | :------------- | :--------------- | :------------- | | Foreign tax contingent liabilities | $14,807 | $13,429 | — | | Deferred tax liabilities | $3,393 | $3,260 | — | | Other | $20,390 | $18,528 | $22,672 | | Total | $38,590 | $165,047 | $150,316 | * Upon transition to ASU 2016-02, deferred rent, construction and tenant allowances, accrual for lease obligations, and unfavorable leasehold interests were netted against operating lease assets[93](index=93&type=chunk) [14. DEBT](index=25&type=section&id=14.%20DEBT) * The company's Credit Facility provides a revolving line of credit up to **$400 million**, with **$235.0 million** outstanding and **$163.7 million** available for borrowings as of August 3, 2019[96](index=96&type=chunk) * The Credit Facility's interest rate on borrowings was **4.1%** as of August 3, 2019, and **1.7%** on letters of credit. The facility allows dividend payments provided no event of default occurs[96](index=96&type=chunk)[95](index=95&type=chunk) * The company was in compliance with all financial covenants as of August 3, 2019, including a leverage ratio not to exceed **3.50:1** (temporarily increased due to Camuto Group acquisition) and a fixed charge coverage ratio not less than **1.75:1**[98](index=98&type=chunk) [15. LEASES](index=26&type=section&id=15.%20LEASES) Operating Lease Expense (in thousands) | Lease Expense Category | Three Months Ended August 3, 2019 | Six Months Ended August 3, 2019 | | :-------------------------------- | :-------------------------------- | :------------------------------ | | Lease expense to unrelated parties | $52,707 | $106,061 | | Lease expense to related parties | $2,371 | $4,713 | | Variable lease expense to unrelated parties | $12,981 | $26,003 | | Variable lease expense to related parties | $348 | $650 | | Total | $68,407 | $137,427 | * As of August 3, 2019, the weighted-average remaining lease term was **6.3 years**, and the weighted-average discount rate was **3.9%**[100](index=100&type=chunk) Future Fixed Minimum Lease Payments (in thousands) | Fiscal Year | Unrelated Parties | Related Parties | Total | | :-------------------------- | :---------------- | :-------------- | :---- | | Remainder of fiscal 2019 | $96,844 | $3,937 | $100,781 | | Fiscal 2020 | $233,961 | $9,364 | $243,325 | | Fiscal 2021 | $216,107 | $8,697 | $224,804 | | Fiscal 2022 | $182,432 | $7,418 | $189,850 | | Fiscal 2023 | $142,408 | $4,573 | $146,981 | | Future fiscal years thereafter | $314,601 | $15,493 | $330,094 | | Total operating lease liabilities (undiscounted) | $1,186,353 | $49,482 | $1,235,835 | | Less discounting impact | $(138,305) | $(6,015) | $(144,320) | | Total operating lease liabilities | $1,048,048 | $43,467 | $1,091,515 | | Less current operating lease liabilities | $(178,091) | $(7,878) | $(185,969) | | Non-current operating lease liabilities | $869,957 | $35,589 | $905,546 | [16. COMMITMENTS AND CONTINGENCIES](index=27&type=section&id=16.%20COMMITMENTS%20AND%20CONTINGENCIES) * The company is involved in various legal proceedings, but believes potential liability will not be material to financial condition[105](index=105&type=chunk) * Identified probable contingent liabilities for unpaid foreign payroll and other taxes from the Camuto Group acquisition range from **$14.8 million** to **$30.0 million**. A liability of **$14.8 million** and an indemnification asset of **$12.7 million** were recorded[106](index=106&type=chunk) * The company has a guarantee for a lease commitment expiring in 2024, with total future minimum lease payment requirements of approximately **$15.0 million** as of August 3, 2019[108](index=108&type=chunk) [17. SEGMENT REPORTING](index=28&type=section&id=17.%20SEGMENT%20REPORTING) Segment Gross Profit (Three Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------- | :---------------------------- | :---------------------------- | | U.S. Retail | $208,056 | $229,601 | | Canada Retail | $21,939 | $18,218 | | Brand Portfolio | $19,261 | — | | Other | $6,041 | $6,676 | | Intercompany eliminations | $(436) | — | | Consolidated Gross Profit | $254,861 | $254,495 | Segment Gross Profit (Six Months Ended, in thousands) | Segment | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | | :---------------- | :---------------------------- | :---------------------------- | | U.S. Retail | $417,947 | $427,945 | | Canada Retail | $37,686 | $18,218 | | Brand Portfolio | $41,255 | — | | Other | $15,352 | $13,557 | | Intercompany eliminations | $(1,343) | — | | Consolidated Gross Profit | $510,897 | $459,720 | * The Brand Portfolio segment contributed **$78.9 million** in net sales for the three months and **$169.7 million** for the six months ended August 3, 2019, with a gross profit of **$19.3 million** and **$41.3 million**, respectively[109](index=109&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance drivers, the impact of recent acquisitions (TSL and Camuto Group), and factors affecting comparability. It also discusses the company's liquidity, capital resources, and critical accounting policies [Cautionary Statement Regarding Forward-Looking Information](index=30&type=section&id=Cautionary%20Statement%20Regarding%20Forward-Looking%20Information%20for%20Purposes%20of%20the%20%22Safe%20Harbor%22%20Provisions%20of%20the%20Private%20Securities%20Litigation%20Reform%20Act%20of%201995) * The report contains forward-looking statements regarding future events and financial performance, subject to risks and uncertainties that could cause actual results to differ materially[112](index=112&type=chunk) * Key risk factors include success in store growth and digital demand, integration of acquired businesses, reputation protection, vendor relationships, ability to respond to fashion trends, and risks related to distribution, information systems, and tariffs[112](index=112&type=chunk) [Executive Overview](index=31&type=section&id=Executive%20Overview) * The company made continued progress on strategies in Q2 fiscal 2019, reaffirming annual guidance due to strong performance from newly acquired businesses[114](index=114&type=chunk) * Canada Retail segment showed increased comparable sales and margin growth, benefiting from digital platform migration and new loyalty programs. The Brand Portfolio segment is on track to convert DSW private label production by fiscal 2020, aiming for greater exclusivity and higher margins[114](index=114&type=chunk) * U.S. Retail segment saw positive results in seasonal product categories (sandals) and Kids line, attributing success to product differentiation, strong loyalty base, and omni-channel capabilities[115](index=115&type=chunk) [Comparability](index=31&type=section&id=Comparability) * Comparability of results is significantly affected by the acquisition of TSL (May 2018) and Camuto Group (November 2018), which are included as wholly-owned subsidiaries in current period results but not fully in prior periods[116](index=116&type=chunk) * Integration and restructuring costs related to prior year acquisitions, totaling **$3.6 million** in severance, **$6.1 million** in JV termination fees, and **$2.4 million** in professional fees, impacted the six months ended August 3, 2019[116](index=116&type=chunk) * Prior period results (six months ended August 4, 2018) included a **$34.0 million** loss from TSL asset remeasurement, a **$12.2 million** foreign currency translation loss reclassification, and a goodwill impairment charge for TSL[116](index=116&type=chunk) [Financial Summary](index=31&type=section&id=Financial%20Summary) Financial Summary (Three Months Ended, in millions) | Metric | August 3, 2019 (in millions) | August 4, 2018 (in millions) | Change (%) | | :---------------------- | :--------------------------- | :--------------------------- | :--------- | | Total Revenue | $860.2 | $795.3 | 8.2% | | Gross Profit % of Net Sales | 30.0% | 32.1% | (210 bps) | | Net Income (Loss) | $27.4 | $(38.4) | NM | | Diluted EPS | $0.37 | $(0.48) | NM | * The decrease in gross profit rate was primarily due to a prior-year benefit from loyalty program adjustments, the inclusion of Camuto Group (lower gross profit rate), and higher shipping costs from increased digital penetration[118](index=118&type=chunk) * Capital expenditures for the six months ended August 3, 2019, were **$40.3 million**, up from **$32.1 million** in the prior year, focused on new store openings, remodels, and business infrastructure[121](index=121&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) [Comparison of the Three Months Ended August 3, 2019 with the Three Months Ended August 4, 2018](index=32&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20August%203%2C%202019%20with%20the%20Three%20Months%20Ended%20August%204%2C%202018) Consolidated Financial Performance (Three Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | Change (Amount) | Change (%) | | :---------------------- | :---------------------------- | :---------------------------- | :-------------- | :--------- | | Net Sales | $849,640 | $793,735 | $55,905 | 7.0% | | Commission, franchise and other revenue | $10,558 | $1,533 | $9,025 | 588.7% | | Total Revenue | $860,198 | $795,268 | $64,930 | 8.2% | | Operating Profit | $41,267 | $24,469 | $16,798 | 68.7% | | Net Income (Loss) | $27,407 | $(38,356) | $65,763 | NM | | Diluted EPS | $0.37 | $(0.48) | $0.85 | NM | Segment Net Sales and Comparable Sales (Three Months Ended August 3, 2019, in thousands) | Segment | Net Sales (in thousands) | Change (%) | Comparable Sales (%) | | :---------------- | :----------------------- | :--------- | :------------------- | | U.S. Retail | $677,920 | (2.0)% | (1.5)% | | Canada Retail | $63,306 | (12.7)% | 8.1% | | Brand Portfolio | $95,422 | NM | NA | | Other | $29,480 | 0.1% | 1.6% | | Consolidated Net Sales | $849,640 | 7.0% | (0.6)% | * Consolidated net sales increased by **7.0%**, primarily driven by incremental revenue from Camuto Group, partially offset by a **0.6%** decrease in comparable sales and store closures[124](index=124&type=chunk) * Canada Retail segment's comparable sales increased by **8.1%** due to improvements in its digital platform and lower clearance inventory, while U.S. Retail comparable sales decreased by **1.5%** due to lower transactions and average dollar sales in women's and men's categories[125](index=125&type=chunk) [Comparison of the Six Months Ended August 3, 2019 with the Six Months Ended August 4, 2018](index=35&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended%20August%203%2C%202019%20with%20the%20Six%20Months%20Ended%20August%204%2C%202018) Consolidated Financial Performance (Six Months Ended, in thousands) | Metric | August 3, 2019 (in thousands) | August 4, 2018 (in thousands) | Change (Amount) | Change (%) | | :---------------------- | :---------------------------- | :---------------------------- | :-------------- | :--------- | | Net Sales | $1,719,632 | $1,504,172 | $215,460 | 14.3% | | Total Revenue | $1,738,713 | $1,507,370 | $231,343 | 15.3% | | Operating Profit | $85,248 | $62,939 | $22,309 | 35.4% | | Net Income (Loss) | $58,601 | $(14,059) | $72,660 | NM | | Diluted EPS | $0.77 | $(0.18) | $0.95 | NM | Segment Net Sales and Comparable Sales (Six Months Ended August 3, 2019, in thousands) | Segment | Net Sales (in thousands) | Change (%) | Comparable Sales (%) | | :---------------- | :----------------------- | :--------- | :------------------- | | U.S. Retail | $1,369,760 | 0.6% | 0.7% | | Canada Retail | $115,122 | 58.7% | 8.1% | | Brand Portfolio | $196,289 | NM | NA | | Other | $65,087 | (7.1)% | 2.5% | | Consolidated Net Sales | $1,719,632 | 14.3% | 1.1% | * Consolidated net sales increased by **14.3%**, driven by incremental sales from 2018 acquired businesses, with comparable sales increasing by **1.1%**[138](index=138&type=chunk) * The consolidated gross profit margin decreased by **90 basis points** to **29.7%** for the six months ended August 3, 2019, primarily due to higher shipping costs and the inclusion of Camuto Group, partially offset by improved initial markups and lower markdowns in U.S. Retail[139](index=139&type=chunk)[142](index=142&type=chunk) [Seasonality](index=37&type=section&id=Seasonality) * The company's business is subject to seasonal merchandise trends, with new spring styles introduced in the first quarter and new fall styles in the third quarter[148](index=148&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) [Overview](index=37&type=section&id=Overview) * Primary operating cash flow requirements include inventory purchases, capital expenditures for new stores, and IT system improvements. Working capital and inventory levels fluctuate seasonally[149](index=149&type=chunk) * The company repurchased **6.1 million** Class A common shares for **$125.0 million** during the six months ended August 3, 2019, partially funded by borrowings on the revolving line of credit[150](index=150&type=chunk) * Management believes current cash, investments, and Credit Facility availability are sufficient to support operations, working capital, capital expenditures, and share repurchases for the foreseeable future[151](index=151&type=chunk) [Operating Cash Flows](index=39&type=section&id=Operating%20Cash%20Flows) * Net cash provided by operations decreased to **$34.2 million** for the six months ended August 3, 2019, from **$106.6 million** in the prior year, primarily due to decreased net income (after non-cash adjustments) and increased working capital use from acquired businesses[153](index=153&type=chunk) [Investing Cash Flows](index=39&type=section&id=Investing%20Cash%20Flows) * Net cash provided by investing activities was **$4.5 million** for the six months ended August 3, 2019, driven by proceeds from available-for-sale securities exceeding **$40.3 million** in capital expenditures[154](index=154&type=chunk) * In the prior year, net cash used in investing activities was **$25.7 million**, primarily due to the TSL acquisition, **$32.1 million** in capital expenditures, and TSL borrowings, partially offset by liquidation of available-for-sale securities[154](index=154&type=chunk) [Financing Cash Flows](index=39&type=section&id=Financing%20Cash%20Flows) * Net cash used in financing activities increased to **$87.2 million** for the six months ended August 3, 2019, from **$41.1 million** in the prior year, mainly due to dividend payments and share repurchases partially financed by the revolving line of credit[155](index=155&type=chunk) [Debt](index=39&type=section&id=Debt) * The Credit Facility provides a revolving line of credit up to **$400 million**, with **$235.0 million** outstanding and **$163.7 million** available as of August 3, 2019. Interest rates are variable, at **4.1%** for borrowings and **1.7%** for letters of credit[156](index=156&type=chunk)[157](index=157&type=chunk) * The company was in compliance with all debt covenants as of August 3, 2019, including a leverage ratio not exceeding **3.50:1** and a fixed charge coverage ratio not less than **1.75:1**[158](index=158&type=chunk) [Capital Expenditure Plans](index=40&type=section&id=Capital%20Expenditure%20Plans) * Expected capital expenditures for fiscal 2019 are **$75.0 million** to **$85.0 million**, primarily for opening **17 to 21** new stores, remodels, and IT projects[160](index=160&type=chunk) [Off-Balance Sheet Liabilities and Other Contractual Obligations](index=40&type=section&id=Off-Balance%20Sheet%20Liabilities%20and%20Other%20Contractual%20Obligations) * The company has no material off-balance sheet arrangements and no material changes to contractual obligations since February 2, 2019[161](index=161&type=chunk) [Critical Accounting Policies and Estimates](index=40&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) * The preparation of financial statements requires significant estimates and assumptions, including sales returns, loyalty programs, inventory valuation, depreciation, impairments, and lease accounting. Actual results may differ from these estimates[162](index=162&type=chunk)[163](index=163&type=chunk) * No material changes to critical accounting policies have occurred since the Annual Report on Form 10-K for fiscal year ended February 2, 2019[163](index=163&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=40&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section outlines the company's exposure to market risks, specifically interest rate risk and foreign currency exchange rate risk, and notes that hedging instruments are not currently utilized to mitigate these risks [Interest Rate Risk](index=40&type=section&id=Interest%20Rate%20Risk) * The company is exposed to interest rate risk due to **$235.0 million** outstanding on its variable-rate revolving line of credit. A hypothetical **100 basis point** increase in interest rates would not result in a material additional expense over 12 months[165](index=165&type=chunk) [Foreign Currency Exchange Risk](index=40&type=section&id=Foreign%20Currency%20Exchange%20Risk) * The company is exposed to foreign currency exchange rate risk primarily through its Canadian operations (functional currency: **CAD**) and foreign-denominated cash accounts[166](index=166&type=chunk) * A hypothetical **10%** movement in exchange rates could result in a **$3.0 million** foreign currency translation fluctuation (recorded in accumulated other comprehensive loss) and **$2.1 million** foreign currency revaluation (recorded in non-operating income/expenses, net)[166](index=166&type=chunk) [Item 4. Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the last fiscal quarter [Evaluation of Disclosure Controls and Procedures](index=41&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) * Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the reporting period[168](index=168&type=chunk) [Changes in Internal Control Over Financial Reporting](index=41&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) * No material changes were made in internal control over financial reporting during the last fiscal quarter[169](index=169&type=chunk) [PART II. OTHER INFORMATION](index=41&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to the legal proceedings information detailed in Note 16 of the condensed consolidated financial statements, indicating that the company is involved in various legal matters incidental to its business * Information on legal proceedings is incorporated by reference from Note 16, Commitments and Contingencies, of the financial statements[170](index=170&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) This section supplements and updates the risk factors previously disclosed, focusing on new or evolving risks such as the impact of tariffs on products and foreign tax contingencies arising from the Camuto Group acquisition * New tariffs on imported products, particularly from China, could materially adversely affect business and financial performance by requiring price increases or lowering gross margins. Shifting production outside China could also incur significant costs[172](index=172&type=chunk)[173](index=173&type=chunk) * The company is exposed to foreign tax contingencies from the Camuto Group acquisition, with estimated obligations ranging from **$14.8 million** to **$30.0 million**. While indemnification is expected from sellers, collection is not assured[174](index=174&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's share repurchase program and dividend declarations, including the number of shares repurchased and the remaining authorization, as well as the latest quarterly cash dividend [Share Repurchase Program](index=42&type=section&id=Share%20Repurchase%20Program) * The Board authorized an additional **$500 million** for Class A common share repurchases on August 17, 2017, with **$33.5 million** remaining from previous authorization[176](index=176&type=chunk) Class A Common Share Repurchases (Most Recent Quarter, in thousands) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (in thousands) | | :-------------------------- | :------------------------------- | :--------------------------- | :-------------------------------------------------------------------- | :------------------------------------------------------------------------------------------- | | May 5, 2019 to June 1, 2019 | — | $— | — | $401,564 | | June 2, 2019 to July 6, 2019 | 2,669 | $18.74 | 2,668 | $351,564 | | July 7, 2019 to August 3, 2019 | — | $— | — | $351,564 | | Total | 2,669 | $18.74 | 2,668 | | [Dividends](index=42&type=section&id=Dividends) * On August 29, 2019, the Board declared a quarterly cash dividend of **$0.25** per share for both Class A and Class B common shares, payable October 4, 2019[178](index=178&type=chunk) * Future dividend payments are at the discretion of the Board and subject to financial conditions and compliance with the Credit Facility covenants[178](index=178&type=chunk) [Item 3. Defaults Upon Senior Securities](index=42&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities * No defaults upon senior securities were reported[179](index=179&type=chunk) [Item 4. Mine Safety Disclosures](index=42&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company * Mine safety disclosures are not applicable[180](index=180&type=chunk) [Item 5. Other Information](index=42&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report * No other information was reported[181](index=181&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications, articles of incorporation, code of regulations, specimen share certificates, and iXBRL formatted financial statements * Exhibits include **Rule 13a-14(a)/15d-14(a) Certifications (31.1, 31.2)**, **Section 1350 Certifications (32.1, 32.2)**, and **iXBRL formatted financial statements (101, 104)**[183](index=183&type=chunk) [Signature](index=44&type=section&id=Signature) This section contains the signature of the authorized officer, Jared Poff, Executive Vice President and Chief Financial Officer, confirming the filing of the report * The report was signed by **Jared Poff**, Executive Vice President and Chief Financial Officer, on August 30, 2019[188](index=188&type=chunk)

Financial Data and Key Metrics Changes - Net income for Q2 2019 was $27.4 million or $0.37 per diluted share, including net after-tax charges of $8.3 million or $0.11 per diluted share related to integration and restructuring expenses [16] - Adjusted EPS was $0.48 per diluted share, compared to an adjusted EPS of $0.63 per diluted share in Q2 2018 [17][16] - Operating income decreased by $20.1 million compared to last year, aligning with expectations due to the previous year's sales boom from the VIP rewards re-launch [18] Business Line Data and Key Metrics Changes - U.S. retail segment comp sales declined by 1.5%, contrasting with last year's comp growth of 9.6%, resulting in a two-year comp of 8.1% [19] - Canadian retail segment achieved 8.1% comp sales growth, building on a 7.1% growth last year, driven by improved average unit retails (AURs) [23] - Digital demand grew by 22%, with significant engagement from customers across all channels [22] Market Data and Key Metrics Changes - Canadian operations saw a digital demand increase of 84% compared to last year, indicating substantial growth potential in this channel [24] - The Camuto segment reported $95.4 million in sales for the quarter, with wholesale sales up in the low single digits [25][26] Company Strategy and Development Direction - The company aims to become the dominant footwear retailer in North America by growing market share and enhancing negotiating leverage [9] - The integration of the Camuto Group is ahead of schedule, with expectations to significantly increase exclusive brand penetration over the next few years [41] - The company is focusing on leveraging its omni-channel infrastructure to improve cost transparency and mitigate external factors like tariffs [15][30] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the consumer's response, noting a 4% increase in loyalty program sign-ups [68] - The company is cautious about guidance due to uncertainties surrounding tariffs but believes it has strategies to mitigate their impact [52][54] - Management reaffirmed EPS guidance of $1.87 to $1.97 for the full year, despite higher-than-expected intercompany eliminations [47][50] Other Important Information - The company ended the quarter with $77.3 million in cash and investments, down from $289.1 million last year due to acquisition activities and share repurchases [43] - Inventory per square foot across all retail segments remained flat compared to last year, with new inventory from Camuto totaling $110.7 million [44] Q&A Session Summary Question: What is the outlook for full-year comps? - Management reaffirmed guidance for low single-digit comps for the full year [64] Question: How is the overall health of the consumer? - Management noted positive signs in their business, including growth in loyalty program sign-ups and wholesale sales [66][68] Question: What is the expected contribution of Camuto to private label products? - Management indicated that the majority of private label products will be produced by Camuto starting in 2020, with a target of 30% annual growth [71][74] Question: What are the expectations for Camuto's profitability this year? - Management expects Camuto to potentially perform better than the previously projected $10 million loss, with positive contributions anticipated in Q3 [82] Question: What are the gross margin opportunities for the second half? - Management anticipates flat to slightly better gross margin rates for the fall, despite challenges in occupancy leverage [90]

Financial Performance - Total revenue increased to $878.5 million for the three months ended May 4, 2019, up 23.4% from $712.1 million for the same period last year[113]. - Comparable sales increased by 3.0%, driven by strong growth in digital demand[113]. - Net income for the three months ended May 4, 2019, was $31.2 million, or $0.40 per diluted share, representing a 28.4% increase from $24.3 million, or $0.30 per diluted share, for the same period last year[115]. - Operating profit for the three months ended May 4, 2019, was $43.98 million, a 14.3% increase from $38.47 million for the same period last year[118]. - Consolidated net sales for the three months ended May 4, 2019, were $869,992 thousand, representing a 22.5% increase from $710,437 thousand in the same period last year[120]. - Gross profit for the three months ended May 4, 2019, was $256,036 thousand, a 24.8% increase from $205,225 thousand, with a gross profit margin of 29.4% compared to 28.9% in the prior year[123]. Capital Expenditures and Investments - Capital expenditures during the three months ended May 4, 2019, were $24.9 million, compared to $18.2 million for the same period last year[116]. - The company plans to spend approximately $75,000 thousand to $85,000 thousand on capital expenditures in fiscal 2019, with plans to open 17 to 21 new stores[139]. - Capital expenditures for the three months ended May 4, 2019, were $24,900 thousand, contributing to a net cash used in investing activities of $6,200 thousand[133]. Profitability and Cost Management - Gross profit as a percentage of net sales was 29.4%, an increase of 50 basis points from 28.9% in the previous year[114]. - The Brand Portfolio segment, including the newly acquired Camuto Group, is expected to lower product costs and enhance profit growth starting fiscal 2020[111]. - Operating expenses as a percentage of total revenue increased by 180 basis points year-over-year, primarily due to acquired businesses and restructuring costs[125]. Tax and Cash Flow - The effective tax rate decreased from 31.9% to 25.4% for the three months ended May 4, 2019, mainly due to additional valuation allowances[127]. - Net cash used in operations was $3,000 thousand for the three months ended May 4, 2019, compared to net cash provided by operations of $25,300 thousand in the same period last year[132]. Segment Performance - The Canada Retail segment achieved positive operating profit for the first quarter of fiscal 2019, marking the first time in five years that it reached profitability at the start of the year[110]. - U.S. Retail segment net sales increased by $22,056 thousand, or 3.3%, with comparable sales growth of 3.0% driven by higher transactions despite a decline in average dollar sales per transaction[120][121]. Financial Position and Risk Management - As of May 4, 2019, the company had $235,000 thousand outstanding under its Credit Facility, with $161,900 thousand available for borrowings[137]. - The company remains in compliance with all financial covenants of its Credit Facility as of May 4, 2019[138]. - The company has market risk exposure related to interest rates and foreign currency exchange rates, with no hedging instruments currently utilized to mitigate these risks[144]. - As of May 4, 2019, the company had $235.0 million outstanding on its revolving line of credit, which is based on a variable interest rate, exposing it to interest rate market risks[145]. - A hypothetical 100 basis point increase in interest rates would not result in a material additional expense over a 12-month period based on the current balance[145]. - The company is exposed to foreign exchange rate risk primarily through operations in Canada, where the functional currency is the Canadian dollar[146]. - A hypothetical 10% movement in exchange rates could result in a $3.1 million foreign currency translation fluctuation recorded in accumulated other comprehensive loss[146]. - The same 10% movement in exchange rates could also lead to $2.1 million of foreign currency revaluation recorded in nonoperating expenses[146].