0001319947-19-000040.txt : 20190830 0001319947-19-000040.hdr.sgml : 20190830 20190830081601 ACCESSION NUMBER: 0001319947-19-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 81 CONFORMED PERIOD OF REPORT: 20190803 FILED AS OF DATE: 20190830 DATE AS OF CHANGE: 20190830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Designer Brands Inc. CENTRAL INDEX KEY: 0001319947 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 310746639 STATE OF INCORPORATION: OH FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32545 FILM NUMBER: 191067849 BUSINESS ADDRESS: STREET 1: 810 DSW DRIVE CITY: COLUMBUS STATE: OH ZIP: 43219 BUSINESS PHONE: (614) 872-1473 MAIL ADDRESS: STREET 1: 810 DSW DRIVE CITY: COLUMBUS STATE: OH ZIP: 43219 FORMER COMPANY: FORMER CONFORMED NAME: DSW Inc. DATE OF NAME CHANGE: 20050307 10-Q 1 q22019form10-q.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission file number 1-32545
DESIGNER BRANDS INC.
(Exact name of registrant as specified in its charter)
Ohio
 
31-0746639
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
810 DSW Drive,
Columbus,
Ohio

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

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

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

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

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

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

Number of shares outstanding of each of the registrant's classes of common stock, as of August 23, 2019: 64,911,631 Class A Common Shares and 7,732,786 Class B Common Shares.



DESIGNER BRANDS INC.
TABLE OF CONTENTS
 
Page
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
PART II. OTHER INFORMATION
 

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

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




PART I.
FINANCIAL INFORMATION

Item 1.
Financial Statements

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
 
Three months ended
 
Six months ended
 
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Revenue:
 
 
 
 
 
 
 
Net sales
$
849,640

 
$
793,735

 
$
1,719,632

 
$
1,504,172

Commission, franchise and other revenue
10,558

 
1,533

 
19,081

 
3,198

Total revenue
860,198

 
795,268

 
1,738,713

 
1,507,370

Cost of sales
(594,779
)
 
(539,240
)
 
(1,208,735
)
 
(1,044,452
)
Operating expenses
(226,616
)
 
(195,319
)
 
(449,422
)
 
(363,739
)
Income from equity investment in ABG-Camuto
2,464

 

 
4,692

 

Impairment charges

 
(36,240
)
 

 
(36,240
)
Operating profit
41,267

 
24,469

 
85,248

 
62,939

Interest income (expense), net
(1,972
)
 
805

 
(3,773
)
 
1,469

Non-operating income (expenses), net
199

 
(47,349
)
 
(143
)
 
(49,486
)
Income (loss) before income taxes and loss from equity investment in TSL
39,494

 
(22,075
)
 
81,332

 
14,922

Income tax provision
(12,087
)
 
(16,281
)
 
(22,731
)
 
(27,671
)
Loss from equity investment in TSL

 

 

 
(1,310
)
Net income (loss)
$
27,407

 
$
(38,356
)
 
$
58,601

 
$
(14,059
)
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.37

 
$
(0.48
)
 
$
0.78

 
$
(0.18
)
Diluted earnings (loss) per share
$
0.37

 
$
(0.48
)
 
$
0.77

 
$
(0.18
)
Weighted average shares used in per share calculations:
 
 
 
 
 
 
 
Basic shares
73,529

 
80,265

 
75,267

 
80,187

Diluted shares
74,316

 
80,265

 
76,281

 
80,187


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

1


DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
 
Three months ended
 
Six months ended
 
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Net income (loss)
$
27,407

 
$
(38,356
)
 
$
58,601

 
$
(14,059
)
Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
461

 
(1,365
)
 
(253
)
 
(6,050
)
Unrealized net gain (loss) on debt securities
196

 
27

 
438

 
(317
)
Reclassification adjustment for net losses (gains) realized in net income (loss)
23

 
12,260

 
(65
)
 
14,165

Total other comprehensive income, net of income taxes
680

 
10,922

 
120

 
7,798

Total comprehensive income (loss)
$
28,087

 
$
(27,434
)
 
$
58,721

 
$
(6,261
)

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


2


DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
 
August 3, 2019
 
February 2, 2019
 
August 4, 2018
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
51,762

 
$
99,369

 
$
215,996

Investments
25,504

 
69,718

 
73,119

Accounts receivable, net
85,162

 
68,870

 
17,259

Inventories
706,168

 
645,317

 
596,956

Prepaid expenses and other current assets
55,561

 
71,945

 
73,763

Total current assets
924,157

 
955,219

 
977,093

Property and equipment, net
402,779

 
409,576

 
387,621

Operating lease assets
975,963

 

 

Goodwill
116,280

 
89,513

 
25,899

Intangible assets
21,112

 
46,129

 
20,285

Deferred tax assets
29,515

 
30,283

 
14,235

Equity investment in ABG-Camuto
55,033

 
58,125

 

Other assets
32,407

 
31,739

 
19,883

Total assets
$
2,557,246

 
$
1,620,584

 
$
1,445,016

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Accounts payable
$
289,457

 
$
261,625

 
$
229,440

Accrued expenses
173,437

 
201,535

 
145,776

Current operating lease liabilities
185,969

 

 

Total current liabilities
648,863

 
463,160

 
375,216

Debt
235,000

 
160,000

 

Non-current operating lease liabilities
905,546

 

 

Other non-current liabilities
38,590

 
165,047

 
150,316

Total liabilities
1,827,999

 
788,207

 
525,532

Commitments and contingencies


 


 


Shareholders' equity:
 
 
 
 
 
Common shares paid-in capital, no par value
988,305

 
978,794

 
971,653

Treasury shares, at cost
(498,436
)
 
(373,436
)
 
(325,906
)
Retained earnings
266,957

 
254,718

 
301,006

Basis difference related to acquisition of commonly controlled entity
(24,993
)
 
(24,993
)
 
(24,993
)
Accumulated other comprehensive loss
(2,586
)
 
(2,706
)
 
(2,276
)
Total shareholders' equity
729,247

 
832,377

 
919,484

Total liabilities and shareholders' equity
$
2,557,246

 
$
1,620,584

 
$
1,445,016


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

3


DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited and in thousands, except per share data)
 
Number of shares
 
Amounts
 
Class A common shares
 
Class B common shares
 
Treasury shares
 
Common shares paid in capital
 
Treasury shares
 
Retained earnings
 
Basis difference related to acquisition of commonly controlled entity
 
Accumulated other comprehensive loss
 
Total
Three months ended August 3, 2019
Balance, May 4, 2019
67,434

 
7,733

 
18,501

 
$
982,093

 
$
(448,436
)
 
$
257,453

 
$
(24,993
)
 
$
(3,266
)
 
$
762,851

Net income

 

 

 

 

 
27,407

 

 

 
27,407

Stock-based compensation activity
145

 

 

 
6,212

 

 

 

 

 
6,212

Repurchase of Class A common shares
(2,668
)
 

 
2,668

 

 
(50,000
)
 

 

 

 
(50,000
)
Dividends ($0.25 per share)

 

 

 

 

 
(17,903
)
 

 

 
(17,903
)
Other comprehensive income

 

 

 

 

 

 

 
680

 
680

Balance, August 3, 2019
64,911

 
7,733

 
21,169

 
$
988,305

 
$
(498,436
)
 
$
266,957

 
$
(24,993
)
 
$
(2,586
)
 
$
729,247

Three months ended August 4, 2018
Balance, May 5, 2018
72,470

 
7,733

 
13,091

 
$
965,623

 
$
(325,906
)
 
$
359,342

 
$
(24,993
)
 
$
(13,198
)
 
$
960,868

Net loss

 

 

 

 

 
(38,356
)
 

 

 
(38,356
)
Stock-based compensation activity
91

 

 

 
6,030

 

 

 

 

 
6,030

Dividends ($0.25 per share)

 

 

 

 

 
(19,980
)
 

 

 
(19,980
)
Other comprehensive income

 

 

 

 

 

 

 
10,922

 
10,922

Balance, August 4, 2018
72,561

 
7,733

 
13,091

 
$
971,653

 
$
(325,906
)
 
$
301,006

 
$
(24,993
)
 
$
(2,276
)
 
$
919,484

Six months ended August 3, 2019
Balance, February 2, 2019
70,672

 
7,733

 
15,091

 
$
978,794

 
$
(373,436
)
 
$
254,718

 
$
(24,993
)
 
$
(2,706
)
 
$
832,377

Cumulative effect of accounting change

 

 

 

 

 
(9,556
)
 

 

 
(9,556
)
Net income

 

 

 

 

 
58,601

 

 

 
58,601

Stock-based compensation activity
317

 

 

 
9,511

 

 

 

 

 
9,511

Repurchase of Class A common shares
(6,078
)
 

 
6,078

 

 
(125,000
)
 

 

 

 
(125,000
)
Dividends ($0.50 per share)

 

 

 

 

 
(36,806
)
 

 

 
(36,806
)
Other comprehensive income

 

 

 

 

 

 

 
120

 
120

Balance, August 3, 2019
64,911

 
7,733

 
21,169

 
$
988,305

 
$
(498,436
)
 
$
266,957

 
$
(24,993
)
 
$
(2,586
)
 
$
729,247

Six months ended August 4, 2018
Balance, February 3, 2018
72,294

 
7,733

 
13,091

 
$
961,245

 
$
(325,906
)
 
$
354,979

 
$
(24,993
)
 
$
(10,074
)
 
$
955,251

Net loss

 

 

 

 

 
(14,059
)
 

 

 
(14,059
)
Stock-based compensation activity
267

 

 

 
10,408

 

 

 

 

 
10,408

Dividends ($0.50 per share)

 

 

 

 

 
(39,914
)
 

 

 
(39,914
)
Other comprehensive income

 

 

 

 

 

 

 
7,798

 
7,798

Balance, August 4, 2018
72,561

 
7,733

 
13,091

 
$
971,653

 
$
(325,906
)
 
$
301,006

 
$
(24,993
)
 
$
(2,276
)
 
$
919,484



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

4


DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Six months ended
 
August 3, 2019
 
August 4, 2018
Cash flows from operating activities: 
 
 
 
Net income (loss)
$
58,601

 
$
(14,059
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,485

 
38,429

Stock-based compensation expense
9,731

 
9,698

Deferred income taxes
1,043

 
13,526

Loss (income) from equity investments
(4,692
)
 
1,310

Loss on previously held equity investment in TSL and notes receivable from TSL

 
33,988

Impairment charges

 
36,240

Lease exit non-cash charges

 
3,910

Loss on foreign currency reclassified from accumulated other comprehensive loss

 
13,963

Other
538

 
8,106

Change in operating assets and liabilities, net of acquired amounts:
 
 
 
Accounts receivable
(14,800
)
 
3,767

Inventories
(61,748
)
 
(37,308
)
Prepaid expenses and other current assets
(2,972
)
 
(23,257
)
Accounts payable
30,683

 
26,219

Accrued expenses
(24,677
)
 
(7,960
)
Net cash provided by operating activities
34,192

 
106,572

Cash flows from investing activities:
 
 
 
Cash paid for property and equipment
(40,259
)
 
(32,103
)
Purchases of available-for-sale investments
(3,014
)
 
(16,735
)
Sales of available-for-sale investments
47,764

 
67,280

Additional borrowings by TSL

 
(15,989
)
Business acquisitions, net of cash acquired

 
(28,152
)
Net cash provided by (used in) investing activities
4,491

 
(25,699
)
Cash flows from financing activities:
 
 
 
Borrowing on revolving line of credit
320,700

 

Payments on revolving line of credit
(245,700
)
 

Cash paid for treasury shares
(125,000
)
 

Dividends paid
(36,806
)
 
(39,910
)
Other
(397
)
 
(1,199
)
Net cash used in financing activities
(87,203
)
 
(41,109
)
Effect of exchange rate changes on cash balances
(286
)
 
300

Net increase (decrease) in cash, cash equivalents, and restricted cash
(48,806
)
 
40,064

Cash, cash equivalents, and restricted cash, beginning of period
100,568

 
175,932

Cash and cash equivalents, end of period
$
51,762

 
$
215,996

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes
$
21,796

 
$
28,135

Cash paid for interest on debt
$
4,052

 
$

Cash paid for operating lease liabilities
$
118,563

 
$

Non-cash investing and financing activities:
 
 
 
Property and equipment purchases not yet paid
$
8,648

 
$
8,390

Operating lease liabilities arising from lease asset additions (excluding ASU 2016-02 transition adjustments)
$
9,184

 
$

Adjustment to operating lease assets and lease liabilities for modifications
$
48,029

 
$


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

5

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


1.    SIGNIFICANT ACCOUNTING POLICIES

Business Operations- Designer Brands Inc. is a leading North American footwear and accessories designer, producer and retailer.

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

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

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

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

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

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

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at February 2, 2019 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 26, 2019.

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

6

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



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

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

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

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

Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Significant estimates are required as a part of sales returns allowances, customer allowances and discounts, gift card breakage income, deferred revenue associated with loyalty programs, valuation of inventories, depreciation and amortization, impairments of long-lived assets, intangibles and goodwill, lease accounting, legal reserves, foreign tax contingent liabilities, income taxes, self-insurance reserves, and valuations used to account for acquisitions. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results could differ from these estimates.

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

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

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
(in thousands)
August 3, 2019
 
February 2, 2019
 
August 4, 2018
Cash and cash equivalents
$
51,762

 
$
99,369

 
$
215,996

Restricted cash, included in prepaid expenses and other current assets

 
1,199

 

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
51,762

 
$
100,568

 
$
215,996




7

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


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

We measure available-for-sale investments at fair value on a recurring basis. These investments are measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2). The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature.

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

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

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

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

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


8

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


2.    ACQUISITIONS AND EQUITY METHOD INVESTMENT

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

The purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired was finalized as of February 2, 2019 and consisted of the following (in USD):
(in thousands)
Final Purchase Price and Allocation
Purchase price:
 
Cash consideration, net of cash acquired
$
28,152

Replacement stock-based awards attributable to pre-acquisition services
196

Fair value of previously held assets
92,242

 
$
120,590

Fair value of assets and liabilities acquired:
 
Inventories
$
66,072

Other current assets
3,687

Property and equipment
41,008

Goodwill
43,022

Intangible assets
20,689

Accounts payable and accrued expenses
(33,196
)
Non-current liabilities
(20,692
)
 
$
120,590



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

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

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

9

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


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

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

The following table summarizes the preliminary and revised purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired:
(in thousands)
Preliminary Purchase Price and Allocation
as of November 5, 2018
 
Measurement Period Adjustments
 
Revised Purchase Price and Allocation as of August 3, 2019
Purchase price -
 
 
 
 
 
Cash consideration, net of cash acquired
$
171,251

 
$

 
$
171,251

Fair value of assets and liabilities acquired:
 
 
 
 
 
Accounts receivable
$
83,939

 
$
3,980

 
$
87,919

Inventories
74,499

 
(758
)
 
73,741

Other current assets
7,197

 
1,045

 
8,242

Property and equipment
43,906

 
960

 
44,866

Goodwill
63,614

 
26,767

 
90,381

Intangible asset
27,000

 
(21,700
)
 
5,300

Other assets
13,351

 

 
13,351

Accounts payable and other liabilities
(122,811
)
 
(2,195
)
 
(125,006
)
Non-current liabilities
(19,444
)
 
(8,099
)
 
(27,543
)
 
$
171,251

 
$

 
$
171,251



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

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

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

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

10

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



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

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

Activity related to our equity investment in ABG-Camuto was as follows:
(in thousands)
Six Months Ended August 3, 2019
Balance at beginning of period
$
58,125

Share of net earnings
4,692

Distributions received
(7,784
)
Balance at end of period
$
55,033



Combined Results- The following table provides the supplemental pro forma total revenue and net loss of the combined entity had the acquisition dates of TSL and Camuto Group and the investment in ABG-Camuto been the first day of our fiscal 2017:
(in thousands)
Three months ended August 4, 2018
 
Six months ended August 4, 2018
Total revenue
$
886,780

 
$
1,755,210

Net loss
$
(45,722
)
 
$
(33,131
)


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


11

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


3.    REVENUE

Disaggregation of Revenue- The following table presents our total revenue disaggregated by segments:
 
Three months ended
 
Six months ended
(in thousands)
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Segment net sales:
 
 
 
 
 
 
 
U.S. Retail
$
677,920

 
$
691,757

 
$
1,369,760

 
$
1,361,541

Canada Retail
63,306

 
72,532

 
115,122

 
72,532

Brand Portfolio
95,422

 

 
196,289

 

Other
29,480

 
29,446

 
65,087

 
70,099

Total net sales
866,128

 
793,735

 
1,746,258

 
1,504,172

Commission, franchise and other revenue
11,771

 
1,533

 
20,676

 
3,198

 
877,899

 
795,268

 
1,766,934

 
1,507,370

Elimination of intersegment revenue
(17,701
)
 

 
(28,221
)
 

Total revenue
$
860,198

 
$
795,268

 
$
1,738,713

 
$
1,507,370



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

The following table presents total revenue by product and service category:
 
Three months ended
 
Six months ended
(in thousands)
August 3, 2019
 
August 4, 2018
 
August 3, 2019
 
August 4, 2018
Net sales:
 
 
 
 
 
 
 
U.S. Retail segment:
 
 
 
 
 
 

Women's footwear
$
458,390

 
$
467,337

 
$
940,511

 
$
936,621

Men's footwear
140,895

 
151,573

 
269,884

 
284,732

Accessories, kids and other
78,635

 
72,847

 
159,365

 
140,188

 
677,920

 
691,757

 
1,369,760

 
1,361,541

Canada Retail segment:
 
 
 
 
 
 
 
Women's footwear
35,533

 
42,067

 
64,159

 
42,067

Men's footwear
16,432

 
19,455

 
29,440

 
19,455

Accessories, kids and other
11,341

 
11,010

 
21,523

 
11,010

 
63,306

 
72,532