Designer Brands Inc. [DBI] Filings

10-Q 1 dsw-20230729.htm 10-Q dsw-20230729

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended July 29, 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 September 5, 2023: 50,399,788 Class A common shares and 7,732,733 Class B common shares.

DESIGNER BRANDS INC.

TABLE OF CONTENTS


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	32
Item 1A	Risk Factors	32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3	Defaults Upon Senior Securities	33
Item 4	Mine Safety Disclosures	33
Item 5	Other Information	33
Item 6	Exhibits	34
	SIGNATURE	35

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 July 29, 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 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;

•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				Six months ended
(unaudited and in thousands, except per share amounts)	July 29, 2023		July 30, 2022		July 29, 2023		July 30, 2022
Net sales	$	792,217	$	859,319	$	1,534,299	$	1,689,862
Cost of sales	(518,830)		(563,649)		(1,023,173)		(1,118,447)
Gross profit	273,387		295,670		511,126		571,415
Operating expenses	(214,530)		(228,690)		(434,649)		(452,116)
Income from equity investments	2,138		2,435		4,469		4,380
Impairment charges	(308)		(1,816)		(649)		(2,888)
Operating profit	60,687		67,599		80,297		120,791
Interest expense, net	(6,932)		(2,752)		(13,529)		(5,704)
Loss on extinguishment of debt and write-off of debt issuance costs	—		—		—		(12,862)
Non-operating income, net	579		37		245		43
Income before income taxes	54,334		64,884		67,013		102,268
Income tax provision	(17,079)		(18,671)		(18,385)		(29,873)
Net income	37,255		46,213		48,628		72,395
Net income attributable to redeemable noncontrolling interest	(51)		—		(9)		—
Net income attributable to Designer Brands Inc.	$	37,204	$	46,213	$	48,619	$	72,395
Earnings per share attributable to Designer Brands Inc.:
Basic earnings per share	$	0.57	$	0.66	$	0.75	$	1.02
Diluted earnings per share	$	0.56	$	0.62	$	0.73	$	0.96
Weighted average shares used in per share calculations:
Basic shares	65,576		69,604		64,973		71,263
Diluted shares	66,997		73,942		66,863		75,369

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				Six months ended
(unaudited and in thousands)	July 29, 2023		July 30, 2022		July 29, 2023		July 30, 2022
Net income	$	37,255	$	46,213	$	48,628	$	72,395
Other comprehensive income (loss)-
Foreign currency translation gain (loss)	1,277		(63)		460		(144)


Comprehensive income	38,532		46,150		49,088		72,251
Comprehensive income attributable to redeemable noncontrolling interest	(51)		—		(9)		—
Comprehensive income attributable to Designer Brands Inc.	$	38,481	$	46,150	$	49,079	$	72,251

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

Table of contents

CONDENSED CONSOLIDATED BALANCE SHEETS


(unaudited and in thousands)	July 29, 2023		January 28, 2023		July 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	46,187	$	58,766	$	50,799
Receivables, net	97,364		77,763		204,880
Inventories	606,841		605,652		694,010
Prepaid expenses and other current assets	50,308		47,750		51,558
Total current assets	800,700		789,931		1,001,247
Property and equipment, net	226,634		235,430		242,147
Operating lease assets	751,637		700,373		646,062
Goodwill	135,259		97,115		93,655
Intangible assets, net	72,640		31,866		20,237
Deferred tax assets	48,100		48,285		—
Equity investments	62,938		63,820		61,957
Other assets	49,430		42,798		37,134
Total assets	$	2,147,338	$	2,009,618	$	2,102,439
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	294,724	$	255,364	$	337,543
Accrued expenses	172,130		190,676		210,469
Current maturities of long-term debt	2,500		—		—
Current operating lease liabilities	181,484		190,086		192,130
Total current liabilities	650,838		636,126		740,142
Long-term debt	328,506		281,035		387,441
Non-current operating lease liabilities	682,248		631,412		588,064
Other non-current liabilities	22,784		24,989		25,844
Total liabilities	1,684,376		1,573,562		1,741,491
Commitments and contingencies
Redeemable noncontrolling interest	3,144		3,155		—
Shareholders' equity:
Common shares paid in-capital, no par value	1,025,662		1,018,872		1,010,181
Treasury shares, at cost	(685,048)		(662,614)		(643,563)
Retained earnings (deficit)	124,094		81,993		(1,909)
Accumulated other comprehensive loss	(4,890)		(5,350)		(3,761)
Total shareholders' equity	459,818		432,901		360,948
Total liabilities, redeemable noncontrolling interest, and shareholders' equity	$	2,147,338	$	2,009,618	$	2,102,439

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

Table of contents

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 July 29, 2023
Balance, April 29, 2023	57,978	7,733	32,882	$	1,018,773	$	(662,614)	$	90,162	$	(6,167)	$	440,154
Net income attributable to Designer Brands Inc.	—	—	—	—		—		37,204		—		37,204
Stock-based compensation activity	278	—	—	6,889		—		—		—		6,889
Repurchase of Class A common shares	(2,113)	—	2,113	—		(22,434)		—		—		(22,434)
Dividends ($0.05 per share)	—	—	—	—		—		(3,272)		—		(3,272)
Foreign currency translation gain	—	—	—	—		—		—		1,277		1,277
Balance, July 29, 2023	56,143	7,733	34,995	$	1,025,662	$	(685,048)	$	124,094	$	(4,890)	$	459,818
Three months ended July 30, 2022
Balance, April 30, 2022	64,450	7,733	23,825	$	1,006,384	$	(537,771)	$	(48,122)	$	(3,698)	$	416,793
Net income attributable to Designer Brands Inc.	—	—	—	—		—		46,213		—		46,213
Stock-based compensation activity	122	—	—	7,302		—		—		—		7,302
Repurchase of Class A common shares	(7,769)	—	7,769	—		(105,792)		—		—		(105,792)
Dividends ($0.05 per share)	—	—	—	(3,505)		—		—		—		(3,505)
Foreign currency translation loss	—	—	—	—		—		—		(63)		(63)
Balance, July 30, 2022	56,803	7,733	31,594	$	1,010,181	$	(643,563)	$	(1,909)	$	(3,761)	$	360,948
Six months ended July 29, 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.	—	—	—	—		—		48,619		—		48,619
Stock-based compensation activity	2,335	—	—	6,790		—		—		—		6,790
Repurchase of Class A Common Shares	(2,113)	—	2,113	—		(22,434)		—		—		(22,434)
Dividends ($0.10 per share)	—	—	—	—		—		(6,518)		—		(6,518)
Foreign currency translation gain	—	—	—	—		—		—		460		460
Balance, July 29, 2023	56,143	7,733	34,995	$	1,025,662	$	(685,048)	$	124,094	$	(4,890)	$	459,818
Six months ended July 30, 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.	—	—	—	—		—		72,395		—		72,395
Stock-based compensation activity	604	—	—	11,896		—		—		—		11,896
Repurchase of Class A common shares	(9,425)	—	9,425	—		(128,498)		—		—		(128,498)
Dividends ($0.10 per share)	—	—	—	(7,097)		—		—		—		(7,097)
Foreign currency translation loss	—	—	—	—		—		—		(144)		(144)
Balance, July 30, 2022	56,803	7,733	31,594	$	1,010,181	$	(643,563)	$	(1,909)	$	(3,761)	$	360,948

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

Table of contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six months ended
(unaudited and in thousands)	July 29, 2023		July 30, 2022
Cash flows from operating activities:
Net income	$	48,628	$	72,395
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	33,134		44,146
Stock-based compensation expense	19,029		15,963
Deferred income taxes	221		(157)
Income from equity investments	(4,469)		(4,380)
Distributions received from equity investments	5,351		6,230
Impairment charges	649		2,888
Loss on extinguishment of debt and write-off of debt issuance costs	—		12,862

Other	(1,337)		3,523
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivables	(12,400)		(3,485)
Income tax receivable	1,533		(1,585)
Inventories	41,788		(107,873)
Prepaid expenses and other current assets	(8,220)		(2,726)
Accounts payable	37,647		(4,848)
Accrued expenses	(18,135)		(5,448)
Operating lease assets and liabilities, net	(9,048)		(16,641)
Net cash provided by operating activities	134,371		10,864
Cash flows from investing activities:
Cash paid for property and equipment	(25,127)		(27,151)


Cash paid for business acquisitions	(127,496)		—


Equity investment in Le Tigre	—		(8,230)
Other	—		(4,853)
Net cash used in investing activities	(152,623)		(40,234)
Cash flows from financing activities:
Borrowing on revolving credit facility	688,411		1,112,794
Payments on revolving credit facility	(684,794)		(725,353)
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	(6,693)		(2,316)
Cash paid for treasury shares	(22,434)		(128,498)
Dividends paid	(6,518)		(7,097)
Cash paid for taxes for stock-based compensation shares withheld	(12,239)		(4,067)
Other	(85)		131
Net cash provided by financing activities	5,648		7,398
Effect of exchange rate changes on cash balances	25		80
Net decrease in cash, cash equivalents, and restricted cash	(12,579)		(21,892)
Cash, cash equivalents, and restricted cash, beginning of period	58,766		74,459
Cash, cash equivalents, and restricted cash, end of period	$	46,187	$	52,567
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	13,230	$	27,971
Cash paid for interest on debt	$	10,786	$	6,020
Cash paid for operating lease liabilities	$	107,056	$	113,308
Non-cash investing and financing activities:
Property and equipment purchases not yet paid	$	8,269	$	6,158
Operating lease liabilities arising from lease asset additions	$	11,521	$	7,903
Net increase to operating lease assets and lease liabilities for modifications	$	121,476	$	77,820

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

Table of contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


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	14
Note 8	Receivables	15
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

Table of contents

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 (www.dsw.com). The Canada Retail segment operates The Shoe Company and DSW banners through its direct-to-consumer Canada stores and e-commerce sites (www.theshoecompany.ca and www.dsw.ca). 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 (www.vincecamuto.com, www.keds.com, www.keds.ca, and www.topoathletic.com). 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 for footwear and handbags of the Lucky Brand.

On February 4, 2023, we completed the acquisition of the Keds business 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.

Table of contents

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 planned 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. As previously disclosed, 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 six months ended July 29, 2023, we recognized $2.9 million of CEO transition costs in operating expenses on the condensed consolidated statements of operations. Since the fourth quarter of 2022, we have recognized $6.6 million of CEO transition costs, with the remaining estimated $1.5 million to be recorded during the remainder of 2023.

Severance- During the six months ended July 29, 2023 and July 30, 2022, we incurred severance costs, excluding the severance related to the CEO transition, of $2.4 million and $1.0 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of July 29, 2023, January 28, 2023, and July 30, 2022, we had $3.0 million, $5.7 million, and $0.9 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)	July 29, 2023		January 28, 2023		July 30, 2022
Cash and cash equivalents	$	46,187	$	58,766	$	50,799
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	$	46,187	$	58,766	$	52,567

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.

Table of contents

The carrying value of cash and cash equivalents, restricted cash, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowings under our senior secured asset-based revolving credit facility ("ABL Revolver") and our new senior secured term loan credit agreement ("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.

Table of contents

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 July 29, 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		489		37,276
Intangible assets	44,800		(2,800)		42,000
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 is subject to adjustments primarily based upon 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. The allocation of the purchase price is based on certain preliminary valuations and analysis that have not been completed as of the date of this filing. Any subsequent changes 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 as soon as practicable, but not later than one year from the acquisition date.

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 $37.3 million of an indefinite lived tradename and $4.7 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. We determined that goodwill should be allocated to reporting units within the U.S. Retail and Brand Portfolio segments based on each reporting unit’s estimated benefit from the expected synergies from the Keds business acquisition. We recorded a preliminary allocation of goodwill of $27.1 million to the U.S. Retail segment based primarily on a discounted cash flow of the sourcing benefit. The remaining $10.2 million of goodwill was allocated to the Brand Portfolio segment. 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 the Keds business, which was included in operating expenses on the consolidated statements of operations.

Combined Results of Acquired Entities- The results of operations for Topo and the Keds business for the six months ended July 29, 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.

Table of contents

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 July 29, 2023
Owned Brands:(1)
Direct-to-consumer	$	115,749	$	—	$	15,776	$	—	$	131,525
External customer wholesale, commission income, and other	—		—		47,633		—		47,633
Intersegment wholesale and commission income	—		—		20,808		(20,808)		—
Total Owned Brands	115,749		—		84,217		(20,808)		179,158
National brands	542,793		—		—		—		542,793
Canada Retail(2)	—		70,266		—		—		70,266
Total net sales	$	658,542	$	70,266	$	84,217	$	(20,808)	$	792,217
Three months ended July 30, 2022
Owned Brands:(1)
Direct-to-consumer	$	147,877	$	—	$	7,793	$	—	$	155,670
External customer wholesale, commission income, and other	—		—		39,179		—		39,179
Intersegment wholesale and commission income	—		—		19,379		(19,379)		—
Total Owned Brands	147,877		—		66,351		(19,379)		194,849
National brands	586,186		—		—		—		586,186
Canada Retail(2)	—		78,284		—		—		78,284
Total net sales	$	734,063	$	78,284	$	66,351	$	(19,379)	$	859,319
Six months ended July 29, 2023
Owned Brands:(1)
Direct-to-consumer	$	238,958	$	—	$	26,400	$	—	$	265,358
External customer wholesale, commission income, and other	—		—		112,250		—		112,250
Intersegment wholesale and commission income	—		—		38,550		(38,550)		—
Total Owned Brands	238,958		—		177,200		(38,550)		377,608
National brands	1,032,470		—		—		—		1,032,470
Canada Retail(2)	—		124,221		—		—		124,221
Total net sales	$	1,271,428	$	124,221	$	177,200	$	(38,550)	$	1,534,299

Table of contents


(in thousands)	U.S. Retail		Canada Retail		Brand Portfolio		Eliminations		Consolidated
Six months ended July 30, 2022
Owned Brands:(1)
Direct-to-consumer	$	287,032	$	—	$	14,320	$	—	$	301,352
External customer wholesale, commission income, and other	—		—		104,135		—		104,135
Intersegment wholesale and commission income	—		—		45,352		(45,352)		—
Total Owned Brands	287,032		—		163,807		(45,352)		405,487
National brands	1,149,776		—		—		—		1,149,776
Canada Retail(2)	—		134,599		—		—		134,599
Total net sales	$	1,436,808	$	134,599	$	163,807	$	(45,352)	$	1,689,862

(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 the Keds business. 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				Six months ended
(in thousands)	July 29, 2023		July 30, 2022		July 29, 2023		July 30, 2022
Net sales:
U.S. Retail segment:
Women's footwear	$	417,552	$	475,079	$	820,733	$	944,210
Men's footwear	145,796		164,122		270,350		309,929
Kids' footwear	45,163		53,185		89,457		106,103
Accessories and other	50,031		41,677		90,888		76,566
	658,542		734,063		1,271,428		1,436,808
Canada Retail segment:
Women's footwear	40,534		43,802		71,048		73,806
Men's footwear	18,880		21,462		32,746		35,890
Kids' footwear	8,089		9,592		15,633		19,409
Accessories and other	2,763		3,428		4,794		5,494
	70,266		78,284		124,221		134,599
Brand Portfolio segment:
Wholesale	64,709		54,136		145,493		141,911
Commission income and other	3,732		4,422		5,307		7,576
Direct-to-consumer	15,776		7,793		26,400		14,320
	84,217		66,351		177,200		163,807
Total segment net sales	813,025		878,698		1,572,849		1,735,214
Elimination of intersegment sales	(20,808)		(19,379)		(38,550)		(45,352)
Total net sales	$	792,217	$	859,319	$	1,534,299	$	1,689,862

Table of contents

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				Six months ended
(in thousands)	July 29, 2023		July 30, 2022		July 29, 2023		July 30, 2022
Gift cards:
Beginning of period	$	30,933	$	32,844	$	35,121	$	36,783
Gift cards redeemed and breakage recognized to net sales	(16,388)		(18,295)		(32,837)		(36,555)
Gift cards issued	13,689		15,569		25,950		29,890
End of period	$	28,234	$	30,118	$	28,234	$	30,118
Loyalty programs:
Beginning of period	$	16,632	$	16,243	$	16,900	$	15,736
Loyalty certificates redeemed and expired and other adjustments recognized to net sales	(7,835)		(8,179)		(15,427)		(16,060)
Deferred revenue for loyalty points issued	7,965		8,724		15,289		17,112
End of period	$	16,762	$	16,788	$	16,762	$	16,788

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 July 29, 2023, the Schottenstein Affiliates beneficially owned 23% of the Company's outstanding common shares, representing 58% 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 July 29, 2023 and July 30, 2022, we recorded rent expense from leases with Schottenstein Affiliates of $2.1 million and $2.5 million, respectively. For the six months ended July 29, 2023 and July 30, 2022, we recorded rent expense from the leases with Schottenstein Affiliates of $4.0 million and $5.0 million, respectively. As of July 29, 2023, January 28, 2023, and July 30, 2022, we had related party current operating lease liabilities of $4.7 million, $5.6 million, and $5.3 million, respectively, and non-current operating lease liabilities of $12.0 million, $14.0 million, and $9.6 million, respectively.

Other Purchases and Services- For the three months ended July 29, 2023 and July 30, 2022, we had other purchases and services we incurred from the Schottenstein Affiliates of $0.6 million and $1.4 million, respectively. For the six months ended July 29, 2023 and July 30, 2022, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.2 million and $2.5 million, respectively.

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

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 both the three months ended July 29, 2023 and July 30, 2022, we recorded royalty expense for amounts paid to ABG-Camuto of $4.6 million. For the six months ended July 29, 2023 and July 30, 2022, we recorded royalty expense for amounts paid to ABG-Camuto of $9.1 million and $9.2 million, respectively.

Table of contents

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 were 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		Six months ended
(in thousands)	July 29, 2023	July 30, 2022	July 29, 2023	July 30, 2022
Weighted average basic shares outstanding	65,576	69,604	64,973	71,263
Dilutive effect of stock-based compensation awards	1,421	4,338	1,890	4,106
Weighted average diluted shares outstanding	66,997	73,942	66,863	75,369

For both the three months ended July 29, 2023 and Jul