Designer Brands - 10-Q quarterly report FY2023 Q3

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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 October 28, 2023


☐			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 November 28, 2023: 49,124,473 Class A common shares and 7,732,733 Class B common shares.

DESIGNER BRANDS INC.

TABLE OF CONTENTS

All references to "we," "us," "our," "Designer Brands," "Designer Brands Inc.," or the "Company" in this Quarterly Report on Form 10-Q for the quarter ended October 28, 2023 (this "Form 10-Q") mean Designer Brands Inc. and its subsidiaries.

We have included certain website addresses throughout this report as inactive textual references only. The information contained on the websites referenced herein is not incorporated into this Form 10-Q.

Table of contents

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

Certain statements in this Form 10-Q may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of words such as "outlook," "could," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, and liquidity. The inclusion of any forward-looking statements should not be regarded as a representation by us or any other person that the future plans, estimates, or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. In addition to other factors discussed elsewhere in this report, including those factors described under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023 (the "2022 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 16, 2023, and otherwise in our reports and filings with the SEC, there are a number of important factors that could cause actual results, performance, or achievements to differ materially from those discussed in forward-looking statements that include, but are not limited to, the following:

•uncertain general economic conditions, including recession concerns, inflationary pressures and rising interest rates, and the related impacts to consumer discretionary spending;

•supply chain challenges;

•risks related to adverse public health developments;

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

•our ability to maintain strong relationships with our vendors, manufacturers, licensors, and retailer customers;

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

•our ability to retain our existing management team, and continue to attract qualified new personnel;

•risks related to cyber security threats and privacy or data security breaches or the potential loss or disruption of our information technology ("IT") systems;

•risks related to the implementation of an enterprise resource planning system ("ERP") software solution and other IT systems;

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

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

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

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

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

•domestic and global political and social conditions;

•geopolitical tensions, including relating to the ongoing war in Ukraine and the Israel-Hamas war;

•risks associated with climate change and other corporate responsibility issues; and

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

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

Table of contents

PART I

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three months ended				Nine months ended
(unaudited and in thousands, except per share amounts)	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Net sales	$	786,329	$	865,020	$	2,320,628	$	2,554,882
Cost of sales	(529,923)		(579,201)		(1,553,096)		(1,697,648)
Gross profit	256,406		285,819		767,532		857,234
Operating expenses	(230,788)		(222,232)		(665,437)		(674,348)
Income from equity investments	2,503		2,290		6,972		6,670
Impairment charges	—		(1,349)		(649)		(4,237)
Operating profit	28,121		64,528		108,418		185,319
Interest expense, net	(8,767)		(4,826)		(22,296)		(10,530)
Loss on extinguishment of debt and write-off of debt issuance costs	—		—		—		(12,862)
Non-operating income (expense), net	(162)		(152)		83		(109)
Income before income taxes	19,192		59,550		86,205		161,818
Income tax provision	(8,987)		(14,379)		(27,372)		(44,252)
Net income	10,205		45,171		58,833		117,566
Net income attributable to redeemable noncontrolling interest	(64)		—		(73)		—
Net income attributable to Designer Brands Inc.	$	10,141	$	45,171	$	58,760	$	117,566
Earnings per share attributable to Designer Brands Inc.:
Basic earnings per share	$	0.17	$	0.70	$	0.93	$	1.71
Diluted earnings per share	$	0.17	$	0.65	$	0.90	$	1.60
Weighted average shares used in per share calculations:
Basic shares	58,633		64,245		62,860		68,924
Diluted shares	61,405		69,140		65,292		73,287

The accompanying notes are an integral part of the condensed consolidated financial statements.

Table of contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three months ended				Nine months ended
(unaudited and in thousands)	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Net income	$	10,205	$	45,171	$	58,833	$	117,566
Other comprehensive loss-
Foreign currency translation loss	(2,501)		(2,956)		(2,041)		(3,100)


Comprehensive income	7,704		42,215		56,792		114,466
Comprehensive income attributable to redeemable noncontrolling interest	(64)		—		(73)		—
Comprehensive income attributable to Designer Brands Inc.	$	7,640	$	42,215	$	56,719	$	114,466

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS


(unaudited and in thousands)	October 28, 2023		January 28, 2023		October 29, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	54,638	$	58,766	$	62,507
Receivables, net	106,916		77,763		228,746
Inventories	601,470		605,652		681,843
Prepaid expenses and other current assets	36,785		47,750		53,950
Total current assets	799,809		789,931		1,027,046
Property and equipment, net	224,638		235,430		233,515
Operating lease assets	742,384		700,373		691,032
Goodwill	123,759		97,115		93,655
Intangible assets, net	83,032		31,866		19,273
Deferred tax assets	47,199		48,285		—
Equity investments	62,239		63,820		64,246
Other assets	49,518		42,798		42,611
Total assets	$	2,132,578	$	2,009,618	$	2,171,378
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	310,113	$	255,364	$	315,996
Accrued expenses	183,383		190,676		213,905
Current maturities of long-term debt	2,500		—		—
Current operating lease liabilities	182,259		190,086		187,619
Total current liabilities	678,255		636,126		717,520
Long-term debt	372,965		281,035		415,467
Non-current operating lease liabilities	669,494		631,412		628,820
Other non-current liabilities	21,072		24,989		26,059
Total liabilities	1,741,786		1,573,562		1,787,866
Commitments and contingencies
Redeemable noncontrolling interest	3,208		3,155		—
Shareholders' equity:
Common shares paid in-capital, no par value	1,028,307		1,018,872		1,012,794
Treasury shares, at cost	(764,748)		(662,614)		(662,614)
Retained earnings	131,416		81,993		40,049
Accumulated other comprehensive loss	(7,391)		(5,350)		(6,717)
Total shareholders' equity	387,584		432,901		383,512
Total liabilities, redeemable noncontrolling interest, and shareholders' equity	$	2,132,578	$	2,009,618	$	2,171,378

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


	Number of Shares			Amounts
(unaudited and in thousands, except per share amounts)	Class A Common Shares	Class B Common Shares	Treasury Shares	Common Shares Paid in Capital		Treasury Shares		Retained Earnings (Deficit)		Accumulated Other Comprehensive Loss		Total
Three months ended October 28, 2023
Balance, July 29, 2023	56,143	7,733	34,995	$	1,025,662	$	(685,048)	$	124,094	$	(4,890)	$	459,818
Net income attributable to Designer Brands Inc.	—	—	—	—		—		10,141		—		10,141
Stock-based compensation activity	475	—	—	2,645		—		—		—		2,645
Repurchase of Class A common shares	(7,565)	—	7,565	—		(79,700)		—		—		(79,700)
Dividends ($0.05 per share)	—	—	—	—		—		(2,819)		—		(2,819)
Foreign currency translation loss	—	—	—	—		—		—		(2,501)		(2,501)
Balance, October 28, 2023	49,053	7,733	42,560	$	1,028,307	$	(764,748)	$	131,416	$	(7,391)	$	387,584
Three months ended October 29, 2022
Balance, July 30, 2022	56,803	7,733	31,594	$	1,010,181	$	(643,563)	$	(1,909)	$	(3,761)	$	360,948
Net income attributable to Designer Brands Inc.	—	—	—	—		—		45,171		—		45,171
Stock-based compensation activity	373	—	—	2,613		—		—		—		2,613
Repurchase of Class A common shares	(1,288)	—	1,288	—		(19,051)		—		—		(19,051)
Dividends ($0.05 per share)	—	—	—	—		—		(3,213)		—		(3,213)
Foreign currency translation loss	—	—	—	—		—		—		(2,956)		(2,956)
Balance, October 29, 2022	55,888	7,733	32,882	$	1,012,794	$	(662,614)	$	40,049	$	(6,717)	$	383,512
Nine months ended October 28, 2023
Balance, January 28, 2023	55,921	7,733	32,882	$	1,018,872	$	(662,614)	$	81,993	$	(5,350)	$	432,901
Net income attributable to Designer Brands Inc.	—	—	—	—		—		58,760		—		58,760
Stock-based compensation activity	2,810	—	—	9,435		—		—		—		9,435
Repurchase of Class A common shares	(9,678)	—	9,678	—		(102,134)		—		—		(102,134)
Dividends ($0.15 per share)	—	—	—	—		—		(9,337)		—		(9,337)
Foreign currency translation loss	—	—	—	—		—		—		(2,041)		(2,041)
Balance, October 28, 2023	49,053	7,733	42,560	$	1,028,307	$	(764,748)	$	131,416	$	(7,391)	$	387,584
Nine months ended October 29, 2022
Balance, January 29, 2022	65,624	7,733	22,169	$	1,005,382	$	(515,065)	$	(74,304)	$	(3,617)	$	412,396
Net income attributable to Designer Brands Inc.	—	—	—	—		—		117,566		—		117,566
Stock-based compensation activity	977	—	—	14,509		—		—		—		14,509
Repurchase of Class A common shares	(10,713)	—	10,713	—		(147,549)		—		—		(147,549)
Dividends ($0.15 per share)	—	—	—	(7,097)		—		(3,213)		—		(10,310)
Foreign currency translation loss	—	—	—	—		—		—		(3,100)		(3,100)
Balance, October 29, 2022	55,888	7,733	32,882	$	1,012,794	$	(662,614)	$	40,049	$	(6,717)	$	383,512

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended
(unaudited and in thousands)	October 28, 2023		October 29, 2022
Cash flows from operating activities:
Net income	$	58,833	$	117,566
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	47,801		64,754
Stock-based compensation expense	25,167		22,327
Deferred income taxes	875		(260)
Income from equity investments	(6,972)		(6,670)
Distributions received from equity investments	8,552		6,230
Impairment charges	649		4,237
Loss on extinguishment of debt and write-off of debt issuance costs	—		12,862

Other	(1,977)		4,940
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivables	(21,462)		(25,043)
Income tax receivable	997		(2,979)
Inventories	44,782		(98,789)
Prepaid expenses and other current assets	5,998		(9,919)
Accounts payable	57,374		(24,389)
Accrued expenses	(6,926)		(1,221)
Operating lease assets and liabilities, net	(11,170)		(25,706)
Net cash provided by operating activities	202,521		37,940
Cash flows from investing activities:
Cash paid for property and equipment	(42,315)		(41,928)


Cash paid for business acquisitions	(127,496)		—


Equity investment in Le Tigre	—		(8,228)
Other	—		(5,853)
Net cash used in investing activities	(169,811)		(56,009)
Cash flows from financing activities:
Borrowing on revolving credit facility	955,622		1,490,199
Payments on revolving credit facility	(906,087)		(1,074,733)
Proceeds from the issuance of the Term Loan	50,000		—

Payments for borrowings and prepayment premium under Previous Term Loan	—		(238,196)
Payments of debt issuance costs	(8,313)		(2,316)
Cash paid for treasury shares	(102,134)		(147,549)
Dividends paid	(9,337)		(10,310)
Cash paid for taxes for stock-based compensation shares withheld	(15,732)		(7,818)
Other	(117)		(31)
Net cash provided by (used in) financing activities	(36,098)		9,246
Effect of exchange rate changes on cash balances	(740)		(1,361)
Net decrease in cash, cash equivalents, and restricted cash	(4,128)		(10,184)
Cash, cash equivalents, and restricted cash, beginning of period	58,766		74,459
Cash, cash equivalents, and restricted cash, end of period	$	54,638	$	64,275
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	16,515	$	43,027
Cash paid for interest on debt	$	18,536	$	10,355
Cash paid for operating lease liabilities	$	158,240	$	169,328
Non-cash investing and financing activities:
Property and equipment purchases not yet paid	$	5,098	$	6,011
Operating lease liabilities arising from lease asset additions	$	16,217	$	12,014
Net increase to operating lease assets and lease liabilities for modifications	$	150,699	$	164,453

The accompanying notes are an integral part of the condensed consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Business Operations- Designer Brands Inc. is one of the world's largest designers, producers, and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its direct-to-consumer U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company and DSW banners through its direct-to-consumer Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the wholesale of products to retailers and international distributors, commission for serving retailers as the design and buying agent for products under private labels, and the sale of our branded products through direct-to-consumer e-commerce sites for the Vince Camuto, Keds, Hush Puppies, and Topo brands. Our equity investments in ABG-Camuto, LLC ("ABG-Camuto") and Le Tigre 360 Global LLC ("Le Tigre") are an integral part of the Brand Portfolio segment. We have a 40% ownership interest in ABG-Camuto, a joint venture that owns the intellectual property rights of Vince Camuto and other brands. We are party to a licensing agreement with ABG-Camuto, which provides for the exclusive right to design, source, and sell footwear and handbags under the brands that ABG-Camuto owns. In July 2022, we acquired a 33.3% ownership interest in Le Tigre, which manages the Le Tigre brand. We are also party to a license agreement with Le Tigre, which provides for the exclusive right to design, source, and sell Le Tigre-branded footwear. In addition, we own the licensing rights for footwear of the Jessica Simpson brand and, beginning in the third quarter of 2023, the Hush Puppies brand and we own the licensing rights for footwear and handbags of the Lucky Brand.

On February 4, 2023, we completed the acquisition of the Keds business ("Keds") from Wolverine World Wide, Inc. This expanded the reach of our Owned Brands offerings, which refers to those brands that we have rights to sell through ownership or license arrangements, into casual and athleisure footwear in the wholesale and direct-to-consumer e-commerce channels, complementing the additions of Le Tigre and Topo Athletic LLC ("Topo") during 2022.

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal, recurring nature. The condensed consolidated financial position, results of operations, and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet as of January 28, 2023 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2022 Form 10-K.

Fiscal Year- Our fiscal year ends on the Saturday nearest to January 31. References to a fiscal year (e.g., "2023") refer to the calendar year in which the fiscal year begins. This reporting schedule is followed by many national retail companies and typically results in a 52-week fiscal year (including 2022), but occasionally will contain an additional week resulting in a 53-week fiscal year (including 2023).

SIGNIFICANT ACCOUNTING POLICIES

Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our 2022 Form 10-K.

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

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Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and discounts reserve, 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, redeemable noncontrolling interest, income taxes and valuation allowances on deferred tax assets, self-insurance reserves, and acquisitions. Although we believe that these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.

Chief Executive Officer Transition- In January 2023, we announced our succession process relating to the Company's Chief Executive Officer ("CEO") role, whereby our former CEO, Roger Rawlins, stepped down from his role as CEO and as a member of the Company's Board of Directors (the "Board") effective April 1, 2023, at which time, Doug Howe, who previously served as Executive Vice President of the Company and President of DSW, assumed the CEO role and joined the Board. Mr. Rawlins commenced service as a strategic advisor to the Company and the Board effective April 1, 2023 through April 1, 2024 under the terms of a transition and consulting agreement. In conjunction with the CEO transition, we estimate that the CEO transition costs will total $8.1 million, consisting of $2.2 million in severance costs, $2.8 million in accelerated stock-based compensation (net of stock awards forfeited), and $3.1 million in retention stock awards to certain members of our leadership team and other related professional fees. During the three and nine months ended October 28, 2023, we recognized $1.1 million and $4.0 million, respectively, of CEO transition costs in operating expenses on the condensed consolidated statements of operations. Since the fourth quarter of 2022, we have recognized $7.7 million of CEO transition costs, with the remaining estimated $0.4 million to be recorded during the fourth quarter of 2023.

Severance- During the three months ended October 28, 2023 and October 29, 2022, we incurred severance costs, excluding the severance related to the CEO transition, of $1.9 million and $0.2 million, respectively. During the nine months ended October 28, 2023 and October 29, 2022, we incurred severance costs, excluding the severance related to the CEO transition, of $4.3 million and $1.2 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of October 28, 2023, January 28, 2023, and October 29, 2022, we had $4.3 million, $5.7 million, and $0.7 million, respectively, of severance liability, including the severance related to the CEO transition, included in accrued expenses on the condensed consolidated balance sheets.

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 maintained for certain insurance policies and 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 on the condensed consolidated statements of cash flows:


(in thousands)	October 28, 2023		January 28, 2023		October 29, 2022
Cash and cash equivalents	$	54,638	$	58,766	$	62,507
Restricted cash, included in prepaid expenses and other current assets	—		—		1,768
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows	$	54,638	$	58,766	$	64,275

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

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

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

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

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The carrying value of cash and cash equivalents, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowings under our senior secured asset-based revolving credit facility ("ABL Revolver") and our new senior secured term loan credit agreement, as amended ("Term Loan"), approximated fair value based on the terms and variable interest rates.

2. ACQUISITIONS

ACQUISITION OF TOPO

On December 13, 2022, we acquired a 79.4% ownership interest in Topo for $19.3 million in cash. We have an exclusive call option to purchase the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of two years following the close of the transaction. The noncontrolling interest holders also have a put option with respect to the remaining 20.6% ownership interest in Topo upon the occurrence of certain events or after a period of three years following the close of the transaction. The redemption price is defined in the operating agreement and is based primarily on a fixed multiple of Topo's trailing 12 months of adjusted earnings before interest, taxes, depreciation, amortization, and other agreed upon adjustments.

The final purchase price and the allocation of the total consideration to the fair values of the assets, liabilities, and redeemable noncontrolling interest consisted of the following:


(in thousands)	Preliminary Purchase Price and Allocation as of December 13, 2022		Measurement Period Adjustments		Final Purchase Price and Allocation as of April 29, 2023
Purchase price cash consideration	$	19,062	$	193	$	19,255
Fair value of assets and liabilities acquired:
Accounts receivables	$	3,195	$	(150)	$	3,045
Inventories	5,612		(20)		5,592
Goodwill	3,460		868		4,328
Intangible assets	12,500		(500)		12,000
Other assets	1,898		—		1,898
Accounts payable and other liabilities	(4,438)		(5)		(4,443)
Redeemable noncontrolling interest	(3,165)		—		(3,165)
	$	19,062	$	193	$	19,255

The fair value of the intangible assets relates to customer relationships and a tradename, which are amortized over a useful life of 10 and 15 years, respectively, and are based on the excess earnings method under the income approach. The fair value measurements are based on significant unobservable inputs, including discounted future cash flows and customer attrition rates. The fair value measurement of the redeemable noncontrolling interest was calculated by considering the implied fair value of Topo using the purchase price and an estimated amount to redeem the noncontrolling interest. 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 for athletic footwear. Goodwill is expected to be deductible for income tax purposes. During 2022, we incurred $1.3 million of acquisition-related costs in connection with the acquisition of Topo, which was included in operating expenses on the consolidated statements of operations.

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ACQUISITION OF KEDS

On February 4, 2023, we acquired the Keds business, including the Keds brand, inventory, and inventory-related accounts payable, from Wolverine World Wide, Inc. ("Seller"). The cash consideration was funded with available cash and borrowings on the ABL Revolver.

The preliminary purchase price and the allocation of the total consideration to the fair values of the assets and liabilities consisted of the following:


(in thousands)	Preliminary Purchase Price and Allocation as of February 4, 2023		Measurement Period Adjustments		Preliminary Purchase Price and Allocation as of October 28, 2023
Purchase price:
Cash Consideration	$	109,360	$	17,944	$	127,304
Due to Seller	19,040		(19,040)		—
Due from Seller for estimated contingent consideration	(3,500)		(5,399)		(8,899)
	$	124,900	$	(6,495)	$	118,405
Fair value of assets and liabilities acquired:
Inventories	$	46,700	$	(4,184)	$	42,516
Goodwill	36,787		(11,011)		25,776
Intangible assets	44,800		8,700		53,500
Accounts payable	(3,387)		—		(3,387)
	$	124,900	$	(6,495)	$	118,405

We recorded an allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date. The purchase price was subject to adjustments primarily based upon estimated contingent considerations as provided by the purchase agreement, which are based on recognized sales and incurred marketing costs for certain identified aged inventories and may result in the Seller paying us up to $15.0 million by March 2024. We recorded an estimated amount due from Seller at fair value based on our estimated probability of the conditions being met requiring payment. Any subsequent changes to the contingent consideration will be recorded to earnings. The allocation of the purchase price is based on certain preliminary valuations and analysis primarily related to the intangible assets that have not been completed as of the date of this filing. Subsequent changes, if any, in the estimated fair values assumed upon the finalization of more detailed analysis within the measurement period will change the allocation of the purchase price and will be adjusted during the period in which the amounts are determined. We expect to finalize the valuations during the fourth quarter of 2023.

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 fair value of the intangible assets relates to $46.9 million of an indefinite-lived tradename and $6.6 million of customer relationships, which is amortized over a useful life of 10 years, and are based on the excess earnings method under the income approach. The fair value measurements are based on significant unobservable inputs, including discounted future cash flows and customer attrition rates. 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 for casual footwear, including kids' footwear, with international distribution. Goodwill is expected to be deductible for income tax purposes. We incurred $2.9 million of acquisition-related costs in connection with the acquisition of Keds, which was included in operating expenses on the consolidated statements of operations.

COMBINED RESULTS OF ACQUIRED ENTITIES

The results of operations for Topo and Keds for the nine months ended October 28, 2023 were not material and are included in the condensed consolidated statements of operations within the Brand Portfolio segment. Supplemental pro forma results of operations reflecting the acquisitions are not presented as the impact on our consolidated financial results would not have been material.

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3. REVENUE

DISAGGREGATION OF NET SALES

Net Sales by Brand Categories- The following table presents net sales disaggregated by brand categories for each segment:


(in thousands)	U.S. Retail		Canada Retail		Brand Portfolio		Eliminations		Consolidated
Three months ended October 28, 2023
Owned Brands:(1)
Direct-to-consumer	$	123,973	$	—	$	17,204	$	—	$	141,177
External customer wholesale, commission income, and other	—		—		61,905		—		61,905
Intersegment wholesale and commission income	—		—		14,948		(14,948)		—
Total Owned Brands	123,973		—		94,057		(14,948)		203,082
National brands	507,637		—		—		—		507,637
Canada Retail(2)	—		75,610		—		—		75,610
Total net sales	$	631,610	$	75,610	$	94,057	$	(14,948)	$	786,329
Three months ended October 29, 2022
Owned Brands:(1)
Direct-to-consumer	$	153,311	$	—	$	9,810	$	—	$	163,121
External customer wholesale, commission income, and other	—		—		66,530		—		66,530
Intersegment wholesale and commission income	—		—		31,118		(31,118)		—
Total Owned Brands	153,311		—		107,458		(31,118)		229,651
National brands	553,080		—		—		—		553,080
Canada Retail(2)	—		82,289		—		—		82,289
Total net sales	$	706,391	$	82,289	$	107,458	$	(31,118)	$	865,020
Nine months ended October 28, 2023
Owned Brands:(1)
Direct-to-consumer	$	362,931	$	—	$	43,604	$	—	$	406,535
External customer wholesale, commission income, and other	—		—		174,155		—		174,155
Intersegment wholesale and commission income	—		—		53,498		(53,498)		—
Total Owned Brands	362,931		—		271,257		(53,498)		580,690
National brands	1,540,107		—		—		—		1,540,107
Canada Retail(2)	—		199,831		—		—		199,831
Total net sales	$	1,903,038	$	199,831	$	271,257	$	(53,498)	$	2,320,628

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(in thousands)	U.S. Retail		Canada Retail		Brand Portfolio		Eliminations		Consolidated
Nine months ended October 29, 2022
Owned Brands:(1)
Direct-to-consumer	$	440,343	$	—	$	24,130	$	—	$	464,473
External customer wholesale, commission income, and other	—		—		170,665		—		170,665
Intersegment wholesale and commission income	—		—		76,470		(76,470)		—
Total Owned Brands	440,343		—		271,265		(76,470)		635,138
National brands	1,702,856		—		—		—		1,702,856
Canada Retail(2)	—		216,888		—		—		216,888
Total net sales	$	2,143,199	$	216,888	$	271,265	$	(76,470)	$	2,554,882

(1) "Owned Brands" refers to those brands we have rights to sell through ownership or license arrangements. Beginning in the first quarter of 2023, sales of the Keds brand are included in Owned Brands as a result of our acquisition of Keds. Sales of the Keds brand in periods prior to the first quarter of 2023 are not restated, as this brand was considered a national brand during those periods.

(2) We currently do not report the Canada Retail segment net sales by brand categories.

Net Sales by Product and Service Categories- The following table presents net sales disaggregated by product and service

categories for each segment:


	Three months ended				Nine months ended
(in thousands)	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Net sales:
U.S. Retail segment:
Women's footwear	$	406,044	$	450,130	$	1,236,800	$	1,394,340
Men's footwear	136,455		151,106		419,008		461,035
Kids' footwear	54,521		65,638		143,978		171,742
Accessories and other	34,590		39,517		103,252		116,082
	631,610		706,391		1,903,038		2,143,199
Canada Retail segment:
Women's footwear	39,031		41,381		110,079		115,187
Men's footwear	18,526		20,334		51,272		56,224
Kids' footwear	15,145		17,291		30,778		36,700
Accessories and other	2,908		3,283		7,702		8,777
	75,610		82,289		199,831		216,888
Brand Portfolio segment:
Wholesale	74,099		95,837		219,592		237,748
Commission income and other	2,754		1,811		8,061		9,387
Direct-to-consumer	17,204		9,810		43,604		24,130
	94,057		107,458		271,257		271,265
Total segment net sales	801,277		896,138		2,374,126		2,631,352
Elimination of intersegment sales	(14,948)		(31,118)		(53,498)		(76,470)
Total net sales	$	786,329	$	865,020	$	2,320,628	$	2,554,882

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During the three months ended October 28, 2023, we identified an error in the classification of certain net sales categories for the U.S. Retail segment in the Net Sales by Product and Service Categories table within Note 3, Revenue, of our condensed consolidated financial statements for the Quarterly Reports on Forms 10-Q for the first and second quarters of 2023. The above table for the nine months ended October 28, 2023 has been corrected to reflect the reduction of $22.2 million of U.S. Retail segment net sales from accessories and other and increases of $10.0 million and $12.2 million of U.S. Retail segment net sales to women’s footwear and men’s footwear, respectively, representing the impact of the error for the first and second quarters of 2023. This immaterial correction did not impact the condensed consolidated statements of operations, comprehensive income, or balance sheets.

DEFERRED REVENUE LIABILITIES

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


	Three months ended				Nine months ended
(in thousands)	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Gift cards:
Beginning of period	$	28,234	$	30,118	$	35,121	$	36,783
Gift cards redeemed and breakage recognized to net sales	(12,764)		(14,341)		(45,601)		(50,896)
Gift cards issued	10,759		12,312		36,709		42,202
End of period	$	26,229	$	28,089	$	26,229	$	28,089
Loyalty programs:
Beginning of period	$	16,762	$	16,788	$	16,900	$	15,736
Loyalty certificates redeemed and expired and other adjustments recognized to net sales	(7,434)		(7,974)		(22,861)		(24,034)
Deferred revenue for loyalty points issued	7,923		8,795		23,212		25,907
End of period	$	17,251	$	17,609	$	17,251	$	17,609

4. RELATED PARTY TRANSACTIONS

SCHOTTENSTEIN AFFILIATES

We have transactions with entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board, and members of his family (collectively, the "Schottenstein Affiliates"). As of October 28, 2023, the Schottenstein Affiliates beneficially owned 26% of the Company's outstanding common shares, representing 62% of the combined voting power of the Company, consisting of 7.0 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:

Leases- We lease certain store and office locations that are owned by the Schottenstein Affiliates. We also leased a fulfillment

center from a Schottenstein Affiliate through September 2022 that was not renewed. For the three months ended October 28, 2023 and October 29, 2022, we recorded rent expense from leases with Schottenstein Affiliates of $2.0 million and $2.3 million, respectively. For the nine months ended October 28, 2023 and October 29, 2022, we recorded rent expense from the leases with Schottenstein Affiliates of $6.0 million and $7.3 million, respectively. As of October 28, 2023, January 28, 2023, and October 29, 2022, we had related party current operating lease liabilities of $4.6 million, $5.6 million, and $5.4 million, respectively, and non-current operating lease liabilities of $17.7 million, $14.0 million, and $11.5 million, respectively.

Other Purchases and Services- For the three months ended October 28, 2023 and October 29, 2022, we had other purchases and services we incurred from the Schottenstein Affiliates of $0.8 million and $1.2 million, respectively. For the nine months ended October 28, 2023 and October 29, 2022, we had other purchases and services we incurred from the Schottenstein Affiliates of $2.0 million and $3.7 million, respectively.

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

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EQUITY METHOD INVESTMENTS

ABG-Camuto- We have a 40% ownership interest in ABG-Camuto. We are party to a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto, subject to guaranteed minimums. For the three months ended October 28, 2023 and October 29, 2022, we recorded royalty expense for amounts paid to ABG-Camuto of $4.5 million and $4.6 million, respectively. For the nine months ended October 28, 2023 and October 29, 2022, we recorded royalty expense for amounts paid to ABG-Camuto of $13.6 million and $13.7 million, respectively.

Le Tigre- In July 2022, we acquired a 33.3% ownership interest in Le Tigre. We are also party to a license agreement with Le Tigre whereby we pay royalties on our net sales of the Le Tigre brand, subject to guaranteed minimums. Activity with Le Tigre was immaterial for all periods presented.

5. EARNINGS PER SHARE

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

The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings per share attributable to Designer Brands Inc.:


	Three months ended		Nine months ended
(in thousands)	October 28, 2023	October 29, 2022	October 28, 2023	October 29, 2022
Weighted average basic shares outstanding	58,633	64,245	62,860	68,924
Dilutive effect of stock-based compensation awards	2,772	4,895	2,432	4,363
Weighted average diluted shares outstanding	61,405	69,140	65,292	73,287

For the three months ended October 28, 2023 and October 29, 2022, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was 2.4 million and 2.7 million, respectively. For the nine months ended October 28, 2023 and October 29, 2022, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings per share due to their anti-dilutive effect was 3.3 million and 2.8 million, respectively.

6. STOCK-BASED COMPENSATION

Stock-based compensation expense, included in operating expenses on the condensed consolidated statements of operations, consisted of the following:


	Three months ended				Nine months ended
(in thousands)	October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Stock options	$	—	$	—	$	—	$	101
Restricted and director stock units	6,138		6,364		25,167		22,226
	$	6,138	$	6,364	$	25,167	$	22,327

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The following table summarizes the stock-based compensation award share activity for RSUs for the nine months ended October 28, 2023:


(in thousands)	Shares of Time-Based RSUs	Shares of Performance-Based RSUs
Outstanding - beginning of period	6,790	969
Granted	2,586	813
Vested	(4,107)	(249)
Forfeited	(519)	(250)
Outstanding - end of period	4,750	1,283

7. SHAREHOLDERS' EQUITY

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

The following table provides additional information for our common shares:


(in thousands)	October 28, 2023		January 28, 2023		October 29, 2022
	Class A	Class B	Class A	Class B	Class A	Class B
Authorized shares	250,000	100,000	250,000	100,000	250,000	100,000
Issued shares	91,613	7,733	88,803	7,733	88,770	7,733
Outstanding shares	49,053	7,733	55,921	7,733	55,888	7,733
Treasury shares	42,560	—	32,882	—	32,882	—

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

DIVIDENDS

On November 16, 2023, the Board declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on December 14, 2023 to shareholders of record at the close of business on November 30, 2023.

SHARE REPURCHASES

On August 17, 2017, the Board authorized the repurchase of an additional $500.0 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. On June 8, 2023, we commenced a modified "Dutch Auction" tender offer (the "Tender Offer"), to purchase up to $100.0 million of the Company's Class A common shares. The Tender Offer expired on July 7, 2023 and on July 12, 2023, we repurchased 1.5 million Class A common shares under the Tender Offer at a purchase price of $10.00 per share and at an aggregate cost of $15.1 million, including transaction costs. During the nine months ended October 28, 2023, we repurchased an aggregate of 9.7 million Class A common shares, including open market purchases and the 1.5 million Class A common shares purchased under the Tender Offer, at an aggregate cost of $102.1 million, including transaction costs and excise tax. Share repurchases were funded from the proceeds from our Term Loan. As of October 28, 2023, $87.7 million of Class A common shares remained available for repurchase under the share repurchase program. The share repurchase program may be suspended, modified, or discontinued at any time, and we have no obligation to repurchase any amount of our Class A common shares under the program. Under the share repurchase program, shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

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8. RECEIVABLES

Receivables, net, consisted of the following:


(in thousands)	October 28, 2023		January 28, 2023		October 29, 2022
Customer accounts receivables:
Receivables with payment guarantee by third-party provider	$	39,858	$	19,539	$	53,304
Receivables without payment guarantee	8,517		5,241		2,572
Income tax receivable	43,024		44,021		165,218
Other receivables	15,879		9,274		8,729
Total receivables	107,278		78,075		229,823
Allowance for doubtful accounts	(362)		(312)		(1,077)
	$	106,916	$	77,763	$	228,746

9. GOODWILL AND INTANGIBLE ASSETS

GOODWILL

The following table presents the changes to goodwill by segment:


	Nine months ended
(in thousands)	October 28, 2023						October 29, 2022
	Goodwill		Accumulated Impairments		Net		Goodwill		Accumulated Impairments		Net
Beginning of period by segment:
U.S. Retail	$	93,655	$	—	$	93,655	$	93,655	$	—	$	93,655
Canada Retail	41,357		(41,357)		—		43,114		(43,114)		—
Brand Portfolio	23,449		(19,989)		3,460		19,989		(19,989)		—
	158,461		(61,346)		97,115		156,758		(63,103)		93,655
Activity by Segment:


Canada Retail-
Currency translation adjustment	(1,619)		1,619		—		(2,671)		2,671		—
Brand Portfolio:
Purchase price and allocation adjustments for acquisition of Topo	868		—		868		—		—		—
Acquired Keds goodwill	25,776		—		25,776		—		—		—
	25,025		1,619		26,644		(2,671)		2,671		—
End of period by segment:
U.S. Retail	93,655		—		93,655		93,655		—		93,655
Canada Retail	39,738		(39,738)		—		40,443		(40,443)		—
Brand Portfolio	50,093		(19,989)		30,104		19,989		(19,989)		—
	$	183,486	$	(59,727)	$	123,759	$	154,087	$	(60,432)	$	93,655

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INTANGIBLE ASSETS

Intangible assets consisted of the following:


(in thousands)	Cost		Accumulated Amortization		Net
October 28, 2023
Definite-lived customer relationships	$	14,299	$	(3,580)	$	10,719
Definite-lived tradename	11,953		(899)		11,054
Indefinite-lived trademarks and tradenames	61,259		—		61,259
	$	87,511	$	(4,479)	$	83,032
January 28, 2023
Definite-lived customer relationships	$	7,852	$	(1,454)	$	6,398
Definite-lived tradename	10,853		(292)		10,561
Indefinite-lived trademarks and tradenames	14,907		—		14,907
	$	33,612	$	(1,746)	$	31,866
October 29, 2022
Definite-lived customer relationships	$	1,322	$	(1,322)	$	—
Definite-lived tradename	4,853		(162)		4,691
Indefinite-lived trademarks and tradenames	14,582		—		14,582
	$	20,757	$	(1,484)	$	19,273

10. ACCRUED EXPENSES

Accrued expenses consisted of the following:


(in thousands)	October 28, 2023		January 28, 2023		October 29, 2022
Gift cards	$	26,229	$	35,121	$	28,089
Accrued compensation and related expenses	22,863		45,019		38,815
Accrued taxes	30,035		19,419		30,689
Loyalty programs deferred revenue	17,251		16,900		17,609
Sales returns allowances	20,977		18,107		19,722
Customer allowances and discounts	1,883		1,230		1,921
Other	64,145		54,880		77,060
	$	183,383	$	190,676	$	213,905

11. DEBT

Debt consisted of the following:


(in thousands)	October 28, 2023		January 28, 2023		October 29, 2022
ABL Revolver	$	330,571	$	281,035	$	415,467
Term Loan	50,000		—		—
Total debt	380,571		281,035		415,467
Less unamortized Term Loan debt issuance costs	(5,106)		—		—
Less current maturities of long-term debt	(2,500)		—		—
Long-term debt	$	372,965	$	281,035	$	415,467

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As of October 28, 2023, future maturities of debt are as follows:


(in thousands)
Remainder of 2023	$	1,250
2024	2,500
2025	2,500
2026	2,500
2027	371,821

Total	$	380,571

ABL REVOLVER

On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which was subsequently amended on February 28, 2023 and June 23, 2023. The amended ABL Revolver provides a revolving line of credit of up to $600.0 million, including a Canadian sub-limit of up to $60.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $60.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $6.0 million sub-limit for swing-loan advances for Canadian borrowings. In addition, the ABL Revolver includes a first-in last-out term loan ("FILO Term Loan") of up to $30.0 million, which was drawn in full on February 28, 2023. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. Our ABL Revolver matures in March 2027 and is secured by a first-priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 28, 2023, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $518.9 million, with $300.6 million in outstanding borrowings and $5.0 million in letters of credit issued, resulting in $213.3 million available for borrowings.

Borrowings under the revolving line of credit and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate (as defined in the credit facility agreement and subject to a floor of 0%) plus 0.5%, and (iii) Adjusted Term SOFR (as defined in the credit facility agreement) plus 1.0%; or (B) a one-month, three-month, or six-month Adjusted Term SOFR per annum (subject to a floor of 0%), plus, in each instance, an applicable rate to be determined based on average availability. The FILO Term Loan accrues interest, at our option, at a rate equal to: (A) a fluctuating interest rate per annum equal to the greatest of (i) the prime rate, (ii) the Fed Funds Rate plus 0.5%, or (iii) Adjusted Term SOFR plus 1.0%, plus 2.5%; or (B) Adjusted Term SOFR for the interest period in effect for such borrowing plus 3.5%. Commitment fees are based on the unused portion of the ABL Revolver available for borrowings. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, with an interest rate of 7.6% as of October 28, 2023, commitment fees, and the amortization of debt issuance costs.

TERM LOAN

On June 23, 2023, we entered into the Term Loan, which provides for a maximum aggregate principal amount of $135.0 million, consisting of (A) borrowings at closing of a $45.0 million U.S. loan and a $5.0 million Canadian loan (denominated in USD) and (B) delay draw loans available to borrow up to $76.5 million in U.S. loans and $8.5 million in Canadian loans (denominated in USD). The Term Loan was amended on September 21, 2023 to extend the date through which the delay draw loans remain available, and on October 31, 2023, we borrowed $25.0 million of the delay draw loans with any remaining delay draw loans to be taken by January 31, 2024. The Term Loan matures at the earliest of the date the ABL Revolver matures (currently March 2027) or five years from closing of the Term Loan (June 2028). The Term Loan is collateralized by a first priority lien on substantially all of our personal, real, and intellectual property and by a second priority lien on the assets used as collateral for the ABL revolver, primarily credit card receivables, accounts receivable, and inventory.

Borrowings under the Term Loan bear interest at a per annum rate equal to: (A) an adjusted three-month SOFR per annum (subject to a floor of 2.0%), plus 7.0%; or if (A) is not available, then (B) a base rate per annum equal to the greater of (i) 2.0%, (ii) the prime rate, (iii) the Fed Funds Rate plus 0.5%, and (iv) the Adjusted Term SOFR plus 1.0%; plus, in each instance, 6.0%, with an interest rate of 12.5% (effective interest rate of 13.4% when including the amortization of debt issuance costs) as of October 28, 2023.

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DEBT COVENANTS

The ABL Revolver requires us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $47.3 million or 10.0% of the maximum borrowing amount. At any time that liquidity is less than $100.0 million, the Term Loan requires a maximum consolidated net leverage ratio as of the last day of each fiscal month, calculated on a trailing twelve-month basis, of (1) 2.25 to 1.00 for any trailing twelve-month period through February 3, 2024, and (2) 2.50 to 1.00 thereafter. Testing of the consolidated net leverage ratio ends after liquidity has been greater than or equal to $100.0 million for a period of 45 consecutive days. The ABL Revolver and the Term Loan also contain customary covenants restricting certain activities, including limitations on our ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. The ABL Revolver and the Term Loan contain customary events of default, including failure to comply with certain financial and other covenants. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, our obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized, and remedies may be exercised against the collateral. As of October 28, 2023, we were in compliance with all financial covenants contained in the ABL Revolver and the Term Loan.

TERMINATION OF PREVIOUS TERM LOAN

On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our previous senior secured term loan agreement ("Previous Term Loan"). In connection with this settlement, during the nine months ended October 29, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

12. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

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

GUARANTEES

We provide guarantees for lease obligations that are scheduled to expire in 2025 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of October 28, 2023, the total future payment requirements for these guarantees were approximately $5.5 million.

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13. SEGMENT REPORTING

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


(in thousands)	U.S. Retail		Canada Retail		Brand Portfolio		Eliminations		Consolidated
Three months ended October 28, 2023
Net sales:
External customer sales	$	631,610	$	75,610	$	79,109	$	—	$	786,329
Intersegment sales	—		—		14,948		(14,948)		—
Total net sales	$	631,610	$	75,610	$	94,057	$	(14,948)	$	786,329
Gross profit	$	200,268	$	26,606	$	28,654	$	878	$	256,406
Income from equity investments	$	—	$	—	$	2,503	$	—	$	2,503
Three months ended October 29, 2022
Net sales:
External customer sales	$	706,391	$	82,289	$	76,340	$	—	$	865,020
Intersegment sales	—		—		31,118		(31,118)		—
Total net sales	$	706,391	$	82,289	$	107,458	$	(31,118)	$	865,020
Gross profit	$	232,058	$	31,298	$	23,839	$	(1,376)	$	285,819
Income from equity investments	$	—	$	—	$	2,290	$	—	$	2,290
Nine months ended October 28, 2023
Net sales:
External customer sales	$	1,903,038	$	199,831	$	217,759	$	—	$	2,320,628
Intersegment sales	—		—		53,498		(53,498)		—
Total net sales	$	1,903,038	$	199,831	$	271,257	$	(53,498)	$	2,320,628
Gross profit	$	622,850	$	67,591	$	75,037	$	2,054	$	767,532
Income from equity investments	$	—	$	—	$	6,972	$	—	$	6,972
Nine months ended October 29, 2022
Net sales:
External customer sales	$	2,143,199	$	216,888	$	194,795	$	—	$	2,554,882
Intersegment sales	—		—		76,470		(76,470)		—
Total net sales	$	2,143,199	$	216,888	$	271,265	$	(76,470)	$	2,554,882
Gross profit	$	716,268	$	81,145	$	59,975	$	(154)	$	857,234
Income from equity investments	$	—	$	—	$	6,670	$	—	$	6,670

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW AND TRENDS IN OUR BUSINESS

For the third quarter of 2023, net sales decreased 9.1% and total comparable sales decreased 9.3% compared to the same period last year. Net sales during the third quarter of 2023 from our Owned Brands decreased 11.6% compared to the same period last year, with Owned Brands representing 25.8% of consolidated net sales, down from 26.5% for the same period last year. At the beginning of 2023, we completed the acquisition of Keds, expanding our Owned Brands' reach into casual and athleisure footwear in the wholesale and direct-to-consumer e-commerce channels and complementing the additions of Le Tigre and Topo during 2022. We believe these acquisitions represent significant steps taken toward our long-term goal of net sales from our Owned Brands reaching one-third of total sales by 2026. Gross profit as a percentage of net sales for the third quarter of 2023 was 40 basis points lower when compared to the same period last year, primarily due to promotional pricing and the deleveraging effect of lower sales on fixed occupancy costs, which more than offset lower logistics costs including freight, shipping, and distribution.

EFFECTS OF GLOBAL ECONOMIC CONDITIONS

Throughout 2023, a downturn in global economic conditions, most notably the growing concerns of a potential recession, rising interest rates, inflationary pressures, changes in employment levels, and significant foreign currency volatility, has adversely impacted discretionary consumer income levels and spending for our customers. Consumer spending on discretionary items, including our products, generally declines during periods of economic uncertainty, when disposable income is reduced, or when there is a reduction in consumer confidence. We are unable to predict the severity of macroeconomic uncertainty, whether or when such circumstances may improve or worsen, or the full impact such circumstances could have on our business.

During the second half of 2022 and continuing into 2023, our net sales declined as we experienced lower traffic and became more promotional under a more competitive landscape. Competitive pricing pressure has been exacerbated by a more promotional retail environment as the industry experienced a shift from tighter inventory positions to excess inventory and as macroeconomic conditions continue to impact discretionary consumer spending. These factors ultimately could require us to enact mitigating operating efficiency measures that could have a material adverse effect on business, operations, and results of operations.

FINANCIAL SUMMARY AND OTHER KEY METRICS

For the three months ended October 28, 2023:

•Net sales decreased to $786.3 million from $865.0 million for the same period last year.

•Gross profit as a percentage of net sales was 32.6% compared to 33.0% for the same period last year.

•Net income attributable to Designer Brands Inc. was $10.1 million, or $0.17 per diluted share, compared to $45.2 million, or $0.65 per diluted share, for the same period last year.

Comparable Sales Performance Metric- The following table presents the percent change in comparable sales for each segment and in total:


	Three months ended
	October 28, 2023		October 29, 2022
Change in comparable sales:
U.S. Retail segment	(9.8)	%	1.1	%
Canada Retail segment	(7.7)	%	18.8	%
Brand Portfolio segment - direct-to-consumer channel	7.0	%	27.0	%
Total	(9.3)	%	3.0	%

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We consider the percent change in comparable sales from the same previous year period, a primary metric commonly used throughout the retail industry, to be an important measurement for management and investors of the performance of our direct-to-consumer businesses. We include in our comparable sales metric sales from stores in operation for at least 14 months at the beginning of the applicable year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter in which they are closed. Comparable sales include the e-commerce sales of the U.S. Retail and Canada Retail segments. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales include the e-commerce sales of the Brand Portfolio segment from the direct-to-consumer e-commerce site for the Vince Camuto brand. The e-commerce sales for Topo, Keds, and Hush Puppies will be added to the comparable base for the Brand Portfolio segment beginning with the first quarter of 2024, the second quarter of 2024, and the third quarter of 2024, respectively. The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

Number of Stores- As of October 28, 2023 and October 29, 2022, we had the following number of stores:


	October 28, 2023	October 29, 2022
U.S. Retail segment - DSW stores	499	504
Canada Retail segment:
The Shoe Company stores	119	113
DSW stores	25	25
	144	138
Total number of stores	643	642

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RESULTS OF OPERATIONS

THIRD QUARTER OF 2023 COMPARED WITH THIRD QUARTER OF 2022


(amounts in thousands, except per share amounts)	Three months ended
	October 28, 2023				October 29, 2022				Change
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Net sales	$	786,329	100.0	%	$	865,020	100.0	%	$	(78,691)	(9.1)	%
Cost of sales	(529,923)		(67.4)		(579,201)		(67.0)		49,278		(8.5)	%
Gross profit	256,406		32.6		285,819		33.0		(29,413)		(10.3)	%
Operating expenses	(230,788)		(29.4)		(222,232)		(25.7)		(8,556)		3.9	%
Income from equity investments	2,503		0.3		2,290		0.3		213		9.3	%
Impairment charges	—		—		(1,349)		(0.2)		1,349		NM
Operating profit	28,121		3.5		64,528		7.4		(36,407)		(56.4)	%
Interest expense, net	(8,767)		(1.1)		(4,826)		(0.5)		(3,941)		81.7	%

Non-operating expense, net	(162)		—		(152)		—		(10)		6.6	%
Income before income taxes	19,192		2.4		59,550		6.9		(40,358)		(67.8)	%
Income tax provision	(8,987)		(1.1)		(14,379)		(1.7)		5,392		(37.5)	%
Net income	10,205		1.3		45,171		5.2		(34,966)		(77.4)	%
Net income attributable to redeemable noncontrolling interest	(64)		—		—		—		(64)		NM
Net income attributable to Designer Brands Inc.	$	10,141	1.3	%	$	45,171	5.2	%	$	(35,030)	(77.5)	%
Earnings per share attributable to Designer Brands Inc.:
Basic earnings per share	$	0.17			$	0.70			$	(0.53)	(75.7)	%
Diluted earnings per share	$	0.17			$	0.65			$	(0.48)	(73.8)	%
Weighted average shares used in per share calculations:
Basic shares	58,633				64,245				(5,612)		(8.7)	%
Diluted shares	61,405				69,140				(7,735)		(11.2)	%

NM - Not meaningful

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NET SALES

The following table summarizes net sales by segment:


	Three months ended
(dollars in thousands)	October 28, 2023				October 29, 2022				Change
	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Amount		%		Comparable Sales
Segment net sales:
U.S. Retail	$	631,610	78.8	%	$	706,391	78.8	%	$	(74,781)	(10.6)	%	(9.8)	%
Canada Retail	75,610		9.5		82,289		9.2		(6,679)		(8.1)	%	(7.7)	%
Brand Portfolio	94,057		11.7		107,458		12.0		(13,401)		(12.5)	%	7.0	%
Total segment net sales	801,277		100.0	%	896,138		100.0	%	(94,861)		(10.6)	%	(9.3)	%
Elimination of intersegment net sales	(14,948)				(31,118)				16,170		(52.0)	%
Consolidated net sales	$	786,329			$	865,020			$	(78,691)	(9.1)	%

For the three months ended October 28, 2023, net sales decreased in the U.S. Retail segment with $68.0 million of the decline due to the decrease in comparable sales and the majority of the remaining decrease due to the impact of store closures since the end of the third quarter of 2022. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable transactions of approximately 6%, driven by lower traffic, and a decrease in the comparable average sales amounts per transaction of approximately 4% as we were more promotional than we were during the same period last year. Net sales decreased in the Canada Retail segment primarily due to lower comparable sales. The decrease in comparable sales for the Canada Retail segment was primarily driven by lower comparable average sales amount per transaction. Net sales for the Brand Portfolio segment decreased with approximately $34.0 million of the decline due to lower wholesale sales as retailer customers continued to pull back on orders, partially offset primarily from the net sales added from acquired Topo and Keds businesses.

GROSS PROFIT

The following table summarizes gross profit by segment:


	Three months ended
(dollars in thousands)	October 28, 2023				October 29, 2022				Change
	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Amount		%		Basis Points
Segment gross profit:
U.S. Retail	$	200,268	31.7	%	$	232,058	32.9	%	$	(31,790)	(13.7)	%	(120)
Canada Retail	26,606		35.2	%	31,298		38.0	%	(4,692)		(15.0)	%	(280)
Brand Portfolio	28,654		30.5	%	23,839		22.2	%	4,815		20.2	%	830
Total segment gross profit	255,528		31.9	%	287,195		32.0	%	(31,667)		(11.0)	%	(10)
Net recognition (elimination) of intersegment gross profit	878				(1,376)				2,254
Consolidated gross profit	$	256,406	32.6	%	$	285,819	33.0	%	$	(29,413)	(10.3)	%	(40)

The decrease in consolidated gross profit was primarily driven by the decrease in consolidated net sales during the three months ended October 28, 2023 over the same period last year, partially offset by lower freight and shipping costs for all segments and lower distribution costs in the U.S. Retail segment as we realized the benefit of moving our digital fulfillment activities from our Ohio location to our New Jersey location. Gross profit as a percentage of net sales decreased by 120 basis points for the U.S. Retail segment when compared to the same period last year, primarily due to promotional pricing and the deleveraging effect of lower sales on fixed store occupancy costs, which more than offset lower logistics costs including freight, shipping and distribution. Gross profit as a percentage of net sales decreased 280 basis points for the Canada Retail segment when compared to the same period last year, primarily due to a mix shift in sales towards lower margin products and the deleveraging effect of lower sales on fixed store occupancy costs. Gross profit as a percentage of net sales increased 830 basis points for the Brand

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Portfolio segment when compared to the same period last year, primarily due to the change in mix of products sold, improved inventory positions, and lower freight costs.

The net recognition (elimination) of intersegment gross profit consisted of the following:


	Three months ended
(in thousands)	October 28, 2023		October 29, 2022
Intersegment recognition and elimination activity:
Net sales recognized by Brand Portfolio segment	$	(14,948)	$	(31,118)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment	9,857		21,426
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	5,969		8,316
	$	878	$	(1,376)

OPERATING EXPENSES

For the three months ended October 28, 2023, operating expenses increased by $8.6 million over the same period last year, primarily driven by an increase in marketing expenses and the additional operating expenses from the acquired businesses, partially offset by lower store payroll in line with lower sales. Operating expenses, as a percentage of net sales, increased 370 basis points over the same period last year, due to higher marketing expenses and the deleveraging of costs on lower sales.

INTEREST EXPENSE, NET

For the three months ended October 28, 2023, interest expense, net, increased by $3.9 million over the same period last year, primarily driven by overall higher interest rates on our debt, with higher rates on the ABL Revolver over the same period last year and the addition of the Term Loan.

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NINE MONTHS OF 2023 COMPARED WITH NINE MONTHS OF 2022


(amounts in thousands, except per share amounts)	Nine months ended
	October 28, 2023				October 29, 2022				Change
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Net sales	$	2,320,628	100.0	%	$	2,554,882	100.0	%	$	(234,254)	(9.2)	%
Cost of sales	(1,553,096)		(66.9)		(1,697,648)		(66.4)		144,552		(8.5)	%
Gross profit	767,532		33.1		857,234		33.6		(89,702)		(10.5)	%
Operating expenses	(665,437)		(28.7)		(674,348)		(26.4)		8,911		(1.3)	%
Income from equity investments	6,972		0.3		6,670		0.3		302		4.5	%
Impairment charges	(649)		—		(4,237)		(0.2)		3,588		(84.7)	%
Operating profit	108,418		4.7		185,319		7.3		(76,901)		(41.5)	%
Interest expense, net	(22,296)		(1.0)		(10,530)		(0.4)		(11,766)		111.7	%
Loss on extinguishment of debt and write-off of debt issuance costs	—		—		(12,862)		(0.5)		12,862		NM
Non-operating income (expense), net	83		—		(109)		—		192		NM
Income before income taxes	86,205		3.7		161,818		6.4		(75,613)		(46.7)	%
Income tax provision	(27,372)		(1.2)		(44,252)		(1.7)		16,880		(38.1)	%
Net income	58,833		2.5		117,566		4.7		(58,733)		(50.0)	%
Net income attributable to redeemable noncontrolling interest	(73)		—		—		—		(73)		NM
Net income attributable to Designer Brands Inc.	$	58,760	2.5	%	$	117,566	4.7	%	$	(58,806)	(50.0)	%
Earnings per share attributable to Designer Brands Inc.:
Basic earnings per share	$	0.93			$	1.71			$	(0.78)	(45.6)	%
Diluted earnings per share	$	0.90			$	1.60			$	(0.70)	(43.8)	%
Weighted average shares used in per share calculations:
Basic shares	62,860				68,924				(6,064)		(8.8)	%
Diluted shares	65,292				73,287				(7,995)		(10.9)	%

NM - Not meaningful

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NET SALES

The following table summarizes net sales by segment:


	Nine months ended
(dollars in thousands)	October 28, 2023				October 29, 2022				Change
	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Amount		%		Comparable Sales
Segment net sales:
U.S. Retail	$	1,903,038	80.2	%	$	2,143,199	81.5	%	$	(240,161)	(11.2)	%	(10.2)	%
Canada Retail	199,831		8.4		216,888		8.2		(17,057)		(7.9)	%	(4.8)	%
Brand Portfolio	271,257		11.4		271,265		10.3		(8)		—	%	6.0	%
Total segment net sales	2,374,126		100.0	%	2,631,352		100.0	%	(257,226)		(9.8)	%	(9.5)	%
Elimination of intersegment net sales	(53,498)				(76,470)				22,972		(30.0)	%
Consolidated net sales	$	2,320,628			$	2,554,882			$	(234,254)	(9.2)	%

For the nine months ended October 28, 2023, net sales decreased in the U.S. Retail segment with $214.0 million of the decline due to the decrease in comparable sales and the majority of the remaining decrease due to the impact of store closures since the end of the third quarter of 2022. The decrease in comparable sales for the U.S. Retail segment was largely driven by a decrease in comparable transactions of approximately 7%, driven by lower traffic, and a decrease in the comparable average sales amounts per transaction of approximately 3% as we were more promotional than we were during the same period last year. Net sales decreased in the Canada Retail segment with $10.5 million of the decline due to the decrease in comparable sales and the majority of the remaining decrease due to the unfavorable impact from foreign currency translation. The decrease in the comparable sales for the Canada Retail segment was impacted primarily by lower comparable average sales amount per transaction. Net sales for the Brand Portfolio segment were flat to last year with the net sales added from the acquired Topo and Keds businesses offset by lower wholesale sales as retailer customers pulled back on orders.

GROSS PROFIT

The following table summarizes gross profit by segment:


	Nine months ended
(dollars in thousands)	October 28, 2023				October 29, 2022				Change
	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales		Amount		%		Basis Points
Segment gross profit:
U.S. Retail	$	622,850	32.7	%	$	716,268	33.4	%	$	(93,418)	(13.0)	%	(70)
Canada Retail	67,591		33.8	%	81,145		37.4	%	(13,554)		(16.7)	%	(360)
Brand Portfolio	75,037		27.7	%	59,975		22.1	%	15,062		25.1	%	560
Total segment gross profit	765,478		32.2	%	857,388		32.6	%	(91,910)		(10.7)	%	(40)
Net recognition (elimination) of intersegment gross profit	2,054				(154)				2,208
Consolidated gross profit	$	767,532	33.1	%	$	857,234	33.6	%	$	(89,702)	(10.5)	%	(50)

The decrease in consolidated gross profit was primarily driven by the decrease in consolidated net sales during the nine months ended October 28, 2023 over the same period last year, partially offset by lower freight and shipping costs for all segments and lower distribution costs in the U.S. Retail segment as we realized the benefit of moving our digital fulfillment activities from our Ohio location to our New Jersey location. Gross profit as a percentage of net sales decreased 70 basis points for the U.S. Retail segment when compared to the same period last year, primarily due to the deleveraging effect of lower sales on fixed store occupancy costs, as well as being more promotional, partially offset by lower logistics costs including freight, shipping, and distribution. Gross profit as a percentage of net sales decreased 360 basis points for the Canada Retail segment when compared to the same period last year, primarily due to a mix shift in sales towards lower margin products and the deleveraging

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effect of lower sales on fixed store occupancy costs. Gross profit as a percentage of net sales increased 560 basis points for the Brand Portfolio segment when compared to the same period last year, primarily due to the change in mix of products sold, improved inventory positions, and lower freight costs.

The net recognition (elimination) of intersegment gross profit consisted of the following:


	Nine months ended
(in thousands)	October 28, 2023		October 29, 2022
Intersegment recognition and elimination activity:
Net sales recognized by Brand Portfolio segment	$	(53,498)	$	(76,470)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment	38,134		52,149
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period	17,418		24,167
	$	2,054	$	(154)

OPERATING EXPENSES

For the nine months ended October 28, 2023, operating expenses decreased by $8.9 million over the same period last year, primarily driven by a decrease in incentive compensation and store payroll in line with lower net sales, partially offset by an increase in CEO transition, restructuring, integration, and acquisition costs, as well as the additional operating expenses from the acquired businesses. Operating expenses, as a percentage of net sales, increased 230 basis points over the same period last year, due to the lower net sales as we deleveraged our costs.

INTEREST EXPENSE, NET

For the nine months ended October 28, 2023, interest expense, net, increased by $11.8 million over the same period last year, primarily driven by overall higher interest rates on our debt, with higher rates on the ABL Revolver over the same period last year and the addition of the Term Loan.

LOSS ON EXTINGUISHMENT OF DEBT AND WRITE-OFF OF DEBT ISSUANCE COSTS

In connection with the settlement of our Term Loan on February 8, 2022, during the nine months ended October 29, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs. As a result of the replacement of the ABL Revolver during 2023, we also wrote off $0.2 million of debt issuance costs.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing royalty commitments, other working capital needs, capital expenditures, and debt service. Our working capital and inventory levels fluctuate seasonally.

During 2023, we had the following significant transactions that impacted our liquidity:

•On February 4, 2023, we completed the acquisition of Keds with $127.3 million in cash consideration, funded with available cash and borrowings on the ABL Revolver.

•On February 28, 2023, the ABL Revolver was amended to increase the available capacity under the revolving line of credit from $550.0 million to $600.0 million and to add a FILO Term Loan of up to $30.0 million, which was drawn in full, subject to a borrowing base.

•On June 23, 2023, we entered into a Term Loan that provides for a maximum aggregate principal amount of $135.0 million, which is made up of $50.0 million in loans taken during the second quarter of 2023 and delay draw loans available to borrow up to $85.0 million.

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•The Term Loan was amended on September 21, 2023 to extend the date through which the delay draw loans remain available and on October 31, 2023, we borrowed $25.0 million of the delay draw loans with any remaining delay draw loans to be taken by January 31, 2024.

•We repurchased an aggregate 9.7 million Class A common shares, including open market purchases and purchases under the Tender Offer, at an aggregate cost of $102.1 million, including transaction costs and excise tax, under our share repurchase program. As of October 28, 2023, $87.7 million of Class A common shares remained available for repurchase under the share repurchase program.

We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business, pursue our growth strategy, and withstand unanticipated business volatility, including the impacts of the global economic conditions on our results of operations. We believe that cash generated from our operations, together with our current levels of cash, as well as the availability under our ABL Revolver and Term Loan, are sufficient to maintain our ongoing operations, support seasonal working capital requirements, fund acquisitions and capital expenditures, repurchase common shares under our share repurchase program, and meet our debt service obligations over the next 12 months and beyond.

The following table presents the key categories of our condensed consolidated statements of cash flows:


	Nine months ended
(in thousands)	October 28, 2023		October 29, 2022		Change
Net cash provided by operating activities	$	202,521	$	37,940	$	164,581
Net cash used in investing activities	(169,811)		(56,009)		(113,802)
Net cash provided by (used in) financing activities	(36,098)		9,246		(45,344)
Effect of exchange rate changes on cash balances	(740)		(1,361)		621
Net decrease in cash, cash equivalents and restricted cash	$	(4,128)	$	(10,184)	$	6,056

OPERATING CASH FLOWS

The increase in net cash provided by operations was largely driven by lower spend on working capital during the nine months ended October 28, 2023 over the same period last year, due to the decreased investment in inventory with the slowdown in sales, as discussed above in the results of operations, and the timing of payments on liabilities, which was partially offset by the decrease in net income recognized in the nine months ended October 28, 2023 over the same period last year, after adjusting for non-cash activity including depreciation and amortization and the loss on extinguishment of debt and write-off of debt issuance costs.

INVESTING CASH FLOWS

For the nine months ended October 28, 2023, net cash used in investing activities was primarily due to the acquisition of Keds for $127.3 million and capital expenditures of $42.3 million relating to infrastructure and IT projects, new stores, and store improvements. For the nine months ended October 29, 2022, net cash used in investing activities was primarily due to capital expenditures of $41.9 million relating to infrastructure and IT projects and store improvements as well as our $8.2 million investment in Le Tigre.

FINANCING CASH FLOWS

For the nine months ended October 28, 2023, net cash used in financing activities was primarily due to the repurchase of 9.7 million Class A common shares at an aggregate cost of $102.1 million, payments of $15.7 million for taxes for stock-based compensation shares withheld, and payments of dividends of $9.3 million, partially offset by proceeds from the issuance of the Term Loan of $50.0 million and net receipts of $49.5 million from our ABL Revolver. For the nine months ended October 29, 2022, net cash provided by financing activities was primarily due to net receipts of $415.5 million from our revolving lines of credit, partially offset by payments of $238.2 million for the settlement of the Previous Term Loan, the repurchase of 10.7 million Class A common shares at an aggregate cost of $147.5 million, and the payments of dividends of $10.3 million.

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DEBT

ABL Revolver- On March 30, 2022, we replaced our previous senior secured asset-based revolving credit facility with our current ABL Revolver, which was subsequently amended on February 28, 2023 and June 23, 2023. The amended ABL Revolver provides a revolving line of credit of up to $600.0 million, including a Canadian sub-limit of up to $60.0 million, a $75.0 million sub-limit for the issuance of letters of credit, a $60.0 million sub-limit for swing-loan advances for U.S. borrowings, and a $6.0 million sub-limit for swing-loan advances for Canadian borrowings. In addition, the ABL Revolver includes a FILO Term Loan of up to $30.0 million, which was drawn in full on February 28, 2023. The FILO Term Loan may be repaid in full, but not in part, so long as certain payment conditions are satisfied. Once repaid, no portion of the FILO Term Loan may be reborrowed. Our ABL Revolver matures in March 2027 and is secured by a first-priority lien on substantially all of our personal property assets, including credit card receivables and inventory. The ABL Revolver may be used to provide funds for working capital, capital expenditures, share repurchases, other expenditures, and permitted acquisitions as defined by the credit facility agreement. The amount of credit available is limited to a borrowing base formulated on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of October 28, 2023, the revolving line of credit (excluding the FILO Term Loan) had a borrowing base of $518.9 million, with $300.6 million in outstanding borrowings and $5.0 million in letters of credit issued, resulting in $213.3 million available for borrowings.

Term Loan- On June 23, 2023, we entered into a Term Loan that provides for a maximum aggregate principal amount of $135.0 million, which is made up of (a) borrowings at closing of a $45.0 million U.S. loan and a $5.0 million Canadian loan (denominated in USD) and (b) delay draw loans available to borrow up to $76.5 million in U.S. loans and $8.5 million in Canadian loans (denominated in USD). The Term Loan was amended on September 21, 2023 to extend the date through which the delay draw loans remain available, and on October 31, 2023, we borrowed $25.0 million of the delay draw loans with any remaining delay draw loans to be taken by January 31, 2024. The Term Loan matures at the earliest of the date the ABL Revolver matures (currently March 2027) or five years from closing of the Term Loan (June 2028). The Term Loan is collateralized by a first priority lien on substantially all of our personal, real, and intellectual property and by a second priority lien on the assets used as collateral for the ABL revolver, primarily credit card receivables, accounts receivable, and inventory.

Debt Covenants- The ABL Revolver required us to maintain a fixed charge coverage ratio covenant of not less than 1:1 when availability is less than the greater of $47.3 million or 10.0% of the maximum borrowing amount. At any time that liquidity is less than $100.0 million, the Term Loan requires a maximum consolidated net leverage ratio as of the last day of each fiscal month, calculated on a trailing twelve-month basis, of (1) 2.25 to 1.00 for any trailing twelve-month period through February 3, 2024, and (2) 2.50 to 1.00 thereafter. Testing of the consolidated net leverage ratio ends after liquidity has been greater than or equal to $100.0 million for a period of 45 consecutive days. The ABL Revolver and the Term Loan also contain customary covenants restricting certain activities, including limitations on our ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability. As of October 28, 2023, we were in compliance with all financial covenants contained in the ABL Revolver and the Term Loan.

Termination of Previous Term Loan- On February 8, 2022, we settled in full the $231.3 million principal amount outstanding on that date under our Previous Term Loan. In connection with this settlement, during the nine months ended October 29, 2022, we incurred a $12.7 million loss on extinguishment of debt, composed of a $6.9 million prepayment premium and a $5.7 million write-off of unamortized debt issuance costs.

Refer to Note 11, Debt, of the condensed consolidated financial statements of this Form 10-Q for further information about our debt arrangements.

CAPITAL EXPENDITURE PLANS

We expect to spend approximately $55.0 million to $60.0 million for capital expenditures in 2023, $42.3 million of which was spent during the nine months ended October 28, 2023. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and IT projects that we undertake, and the timing of these expenditures.

RECENT ACCOUNTING PRONOUNCEMENTS

There are no recent accounting pronouncements that are expected to have a material impact to our consolidated financial statements when adopted.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies and estimates disclosed in our 2022 Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2022 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)

and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal

control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 12, Commitments and Contingencies - Legal Proceedings, of the condensed consolidated financial statements of this Form 10-Q is incorporated herein by reference.


ITEM 1A. RISK FACTORS

As of the date of this filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in our 2022 Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

SHARE REPURCHASE PROGRAM

On August 17, 2017, the Board authorized the repurchase of an additional $500.0 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. The share repurchase program may be suspended, modified, or discontinued at any time, and we have no obligation to repurchase any amount of our Class A common shares under the program. Under this share repurchase program, shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

The following table sets forth the Class A common shares repurchased during the three months ended October 28, 2023:


(in thousands, except per share amounts)	(a) Total Number of Shares Purchased (1)	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Programs	(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
July 30, 2023 to August 26, 2023	4,457	$	10.11	4,454	$	121,415
August 27, 2023 to September 30, 2023	3,380	$	10.99	3,111	$	87,677
October 1, 2023 to October 28, 2023	6	$	11.86	—	$	87,677
	7,843	$	10.49	7,565

(1) The total number of shares repurchased includes shares repurchased as part of publicly announced programs and 278,015 shares withheld in connection with tax payments due upon vesting of stock-based compensation awards.

DIVIDENDS

The payment of any future dividends is at the discretion of our Board and is based on our future earnings, cash flow, financial condition, capital requirements, changes in taxation laws, general economic condition and any other relevant factors. We anticipate declaring dividends on a quarterly basis. On November 16, 2023, the Board of Directors declared a quarterly cash dividend payment of $0.05 per share for both Class A and Class B common shares. The dividend will be paid on December 14, 2023 to shareholders of record at the close of business on November 30, 2023.

RESTRICTIONS

The ABL Revolver and the Term Loan contain customary covenants restricting our activities, including limitations on the ability to pay dividends or repurchase stock. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions based on availability.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

RULE 10B5-1 TRADING PLANS

During the three months ended October 28, 2023, none of our directors or executive officers adopted or terminated any contract, instruction, or written plan for the purchase or sale of the Company’s securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K).


ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Date of Filing

Exhibit Number

10.1*

First Amendment dated as of September 21, 2023, to Term Credit Agreement dated as of June 23, 2023 among Designer Brands Inc., Designer Brands Canada Inc., certain of domestic subsidiaries as guarantors, the lenders party thereto, and PLC Agent LLC, as Administrative Agent and Lead Arranger.

31.1*

Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer.

31.2*

Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.

32.1**

Section 1350 Certification - Principal Executive Officer.

32.2**

Section 1350 Certification - Principal Financial Officer.

101*

The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended October 28, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to the Condensed Consolidated Financial Statements.

104*

Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

* Filed herewith

** Furnished herewith

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DESIGNER BRANDS INC.

Date:

December 5, 2023

By:

/s/ Jared A. Poff

Jared A. Poff

Executive Vice President, Chief Financial Officer and Chief Administrative Officer

(Principal Financial Officer and duly authorized officer)

Designer Brands - 10-Q quarterly report FY2023 Q3

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DISCLAIMER

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PART I
Item 1	Financial Statements	1
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Income	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Shareholders' Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to the Condensed Consolidated Financial Statements	6
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4	Controls and Procedures	31
PART II
Item 1	Legal Proceedings	31
Item 1A	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	32
Item 3	Defaults Upon Senior Securities	32
Item 4	Mine Safety Disclosures	32
Item 5	Other Information	33
Item 6	Exhibits	33
	S ignature	34


Note 1	Description of Business and Significant Accounting Policies	7
Note 2	Acquisitions	9
Note 3	Revenue	11
Note 4	Related Party Transactions	13
Note 5	Earnings Per Share	14
Note 6	Stock-Based Compensation	14
Note 7	Shareholders' Equity	15
Note 8	Receivables	16
Note 9	Goodwill and Intangible Assets	16
Note 10	Accrued Expenses	17
Note 11	Debt	17
Note 12	Commitments and Contingencies	19
Note 13	Segment Reporting	20