UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~July 29, 2017~~August 4, 2018



o	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

DSW 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)



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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). þ Yes o 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 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	þ		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o
			Emerging growth company	o

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. o

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

Number of shares outstanding of each of the registrant's classes of common stock, as of August ~~18, 2017: 72,616,519~~24, 2018: 72,561,022 Class A Common Shares and 7,732,786 Class B Common Shares.

DSW INC.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations		1
Condensed Consolidated Statements of Comprehensive Income		2
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Cash Flows		4
Notes to the Condensed Consolidated Financial Statements		5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		1822
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2429
Item 4. Controls and Procedures		2530
~~Part~~PART II. OTHER INFORMATION
Item 1. Legal Proceedings		2530
Item 1A. Risk Factors		2530
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		2530
Item 3. Defaults Upon Senior Securities		2631
Item 4. Mine Safety Disclosures		2631
Item 5. Other Information		2631
Item 6. Exhibits		2632
Signature		27
~~Index to Exhibits~~		2833

All references to "we," "us," "our," "DSW, ~~Inc.,~~" or the "Company" in this Quarterly Report on Form 10-Q mean DSW Inc. and its wholly-owned subsidiaries. ~~DSW refers to the DSW segment, which includes DSW stores and dsw.com.~~ We own many trademarks and service marks. This Quarterly Report on Form 10-Q may contain trademarks, trade dress, and tradenames of other companies. Use or display of other parties' trademarks, trade dress or tradenames is not intended to and does not imply a relationship with the trademark, trade dress or tradename owner.


PART I.	FINANCIAL INFORMATION


Item 1.	Financial Statements

DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share amounts)


	Three months ended						Six months ended						Three months ended						Six months ended
	July 29, 2017			July 30, 2016			July 29, 2017			July 30, 2016			August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Revenue:
Net sales	$	680,409		$	658,944		$	1,371,511		$	1,340,211		$	793,735		$	681,721		$	1,504,172		$	1,372,540
Franchise and other revenue													1,533			1,291			3,198			2,510
Total revenue													795,268			683,012			1,507,370			1,375,050
Cost of sales	(483,437		)	(472,083		)	(979,310		)	(948,993		)	(539,240		)	(482,424		)	(1,044,452		)	(976,158		)
Franchise costs													(293		)	—			(573		)	—
Operating expenses	(149,057		)	(145,088		)	(302,321		)	(299,284		)	(195,026		)	(152,554		)	(363,166		)	(309,122		)
Impairment charges													(36,240		)	—			(36,240		)	—
Change in fair value of contingent consideration liability	(1,168		)	(2,166		)	(2,252		)	(3,611		)	—			(1,168		)	—			(2,252		)
Operating profit	46,747			39,607			87,628			88,323			24,469			46,866			62,939			87,518
Interest expense	(47		)	(50		)	(94		)	(99		)
Interest income	708			673			1,316			1,243
Interest income, net	661			623			1,222			1,144			805			661			1,469			1,222
Non-operating income (expense)	(679		)	100			(2,183		)	264
Income before income taxes and income (loss) from Town Shoes	46,729			40,330			86,667			89,731
Non-operating expenses, net													(47,349		)	(679		)	(49,486		)	(2,183		)
Income (loss) before income taxes and income (loss) from equity investment													(22,075		)	46,848			14,922			86,557
Income tax provision	(18,349		)	(15,716		)	(34,014		)	(34,794		)	(16,281		)	(18,390		)	(27,671		)	(33,975		)
Income (loss) from Town Shoes	219			418			(1,087		)	109
Net income	$	28,599		$	25,032		$	51,566		$	55,046
Basic and diluted earnings per share:
Basic earnings per share	$	0.36		$	0.31		$	0.64		$	0.67
Diluted earnings per share	$	0.35		$	0.30		$	0.64		$	0.67
Income (loss) from equity investment													—			219			(1,310		)	(1,087		)
Net income (loss)													$	(38,356	)	$	28,677		$	(14,059	)	$	51,495
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share													$	(0.48	)	$	0.36		$	(0.18	)	$	0.64
Diluted earnings (loss) per share													$	(0.48	)	$	0.36		$	(0.18	)	$	0.64
Weighted average shares used in per share calculations:
Basic shares	80,317			82,053			80,267			82,003			80,265			80,317			80,187			80,267
Diluted shares	80,714			82,655			80,729			82,691			80,265			80,714			80,187			80,729

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

DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)

Three months ended Six months ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
Net income $ 28,599
$ 25,032
$ 51,566
$ 55,046
Other comprehensive income (loss), net of income taxes:
Foreign currency translation gain (loss) 10,657
(4,903 ) 6,537
7,246
Unrealized net gain on available-for-sale securities (net of tax expense of $55, $14, $0 and $130, respectively) (23 ) 150
33
276
Reclassification adjustment for net losses realized in net income (net of tax expense of $65, $0, $0 and $0, respectively) 527
—
2,107
—
Total other comprehensive income (loss), net of income taxes 11,161
(4,753 ) 8,677
7,522
Total comprehensive income $ 39,760
$ 20,279
$ 60,243
$ 62,568



	Three months ended						Six months ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Net income (loss)	$	(38,356	)	$	28,677		$	(14,059	)	$	51,495
Other comprehensive income (loss), net of income taxes:
Foreign currency translation gain (loss)	(1,365		)	10,657			(6,050		)	6,537
Unrealized net gain (loss) on debt securities	27			(23		)	(317		)	33
Reclassification adjustment for net losses realized in net income (loss)	12,260			527			14,165			2,107
Total other comprehensive income, net of income taxes	10,922			11,161			7,798			8,677
Total comprehensive income (loss)	$	(27,434	)	$	39,838		$	(6,261	)	$	60,172

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

DSW INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands)


	July 29, 2017			January 28, 2017			July 30, 2016			August 4, 2018			February 3, 2018			July 29, 2017
ASSETS
Cash and cash equivalents	$	89,305		$	110,657		$	62,324		$	215,996		$	175,932		$	89,305
Short-term investments	182,062			98,530			103,467
Investments										73,119			124,605			182,062
Accounts receivable	16,596			18,456			18,848			17,259			17,532			16,596
Accounts receivable from related parties	1,146			550			81			—			1,704			1,146
Inventories	527,305			499,995			556,183			596,956			501,903			527,305
Prepaid expenses and other current assets	38,469			31,074			30,040			73,763			49,197			45,529
Prepaid rent to related parties	3			4			12
Total current assets	854,886			759,266			770,955			977,093			870,873			861,943
Property and equipment, net	364,552			375,251			379,643			387,621			355,199			364,552
Long-term investments	—			77,904			77,901
Goodwill	79,689			79,689			81,043			25,899			25,899			79,689
Intangible assets										20,285			135			33,065
Deferred income taxes	18,765			14,934			20,690			14,235			27,711			18,792
Long-term prepaid rent to related parties	715			768			821
Equity investment in Town Shoes	10,350			15,830			17,261
Note receivable from Town Shoes	60,094			53,121			50,200
Intangible assets	33,065			35,108			39,316
Equity investment in TSL										—			6,096			10,350
Notes receivable from TSL										—			115,895			60,094
Other assets	17,429			16,605			21,145			19,883			19,709			18,144
Total assets	$	1,439,545		$	1,428,476		$	1,458,975		$	1,445,016		$	1,421,517		$	1,446,629
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$	164,659		$	185,497		$	198,584		$	228,921		$	178,449		$	164,659
Accounts payable to related parties	718			774			656			519			859			718
Accrued expenses	121,934			130,334			115,192			145,776			148,226			124,343
Total current liabilities	287,311			316,605			314,432			375,216			327,534			289,720
Non-current liabilities	142,499			141,179			143,562			150,316			138,732			142,499
Contingent consideration liability	36,456			33,204			59,611			—			—			36,456
Total liabilities	466,266			490,988			517,605			525,532			466,266			468,675
Commitments and contingencies	—			—			—
Shareholders' equity:
Common shares paid-in capital, no par value; 250,000 Class A Common Shares authorized; 85,201, 85,038 and 84,570 issued, respectively; 72,610, 72,447 and 74,359 outstanding, respectively; 100,000 Class B Common Shares authorized, 7,733 issued and outstanding	953,868			946,351			936,572
Preferred shares, no par value; 100,000 authorized; no shares issued or outstanding	—			—			—
Treasury shares, at cost, 12,591, 12,591 and 10,211 outstanding, respectively	(316,531		)	(316,531		)	(266,531		)
Common shares paid-in capital, no par value										971,653			961,245			953,868
Treasury shares, at cost										(325,906		)	(325,906		)	(316,531		)
Retained earnings	366,199			346,602			309,503			301,006			354,979			370,874
Basis difference related to acquisition of commonly controlled entity	(24,993		)	(24,993		)	(24,993		)	(24,993		)	(24,993		)	(24,993		)
Accumulated other comprehensive loss	(5,264		)	(13,941		)	(13,181		)	(2,276		)	(10,074		)	(5,264		)
Total shareholders' equity	973,279			937,488			941,370			919,484			955,251			977,954
Total liabilities and shareholders' equity	$	1,439,545		$	1,428,476		$	1,458,975		$	1,445,016		$	1,421,517		$	1,446,629

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

DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)


	Six months ended						Six months ended
	July 29, 2017			July 30, 2016			August 4, 2018			July 29, 2017
Cash flows from operating activities:
Net income	$	51,566		$	55,046
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)							$	(14,059	)	$	51,495
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	41,972			40,389			38,429			42,286
Stock-based compensation expense	7,851			7,316			9,698			7,851
Deferred income taxes	(3,831		)	1,125			13,526			(3,838		)
Loss (income) from Town Shoes	1,087			(109		)
Loss from equity investment							1,310			1,087
Loss on previously held equity investment in TSL and notes receivable from TSL							33,988			—
Impairment charges							36,240			—
Lease exit charges							3,910			—
Change in fair value of contingent consideration liability	2,252			3,611			—			2,252
Loss on disposal of long-lived assets	217			702
Loss on foreign currency transactions	2,161			—
Amortization of investment discounts and premiums	314			759
Change in operating assets and liabilities:
Loss on foreign currency reclassified from accumulated other comprehensive loss							13,963			2,161
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivable	1,264			(1,842		)	3,767			1,264
Inventories	(27,310		)	(41,795		)	(37,308		)	(27,310		)
Prepaid expenses and other current assets	(8,061		)	7,946			(23,257		)	(6,730		)
Accounts payable	(18,949		)	(17,059		)	26,219			(18,949		)
Accrued expenses	(9,016		)	3,256			(7,960		)	(10,269		)
Other	3,120			1,799			8,106			3,337
Net cash provided by operating activities	44,637			61,144			106,572			44,637
Cash flows from investing activities:
Cash paid for property and equipment	(28,139		)	(51,934		)	(32,103		)	(28,139		)
Purchases of available-for-sale investments	(83,872		)	(57,484		)	(16,735		)	(83,872		)
Sales of available-for-sale investments	82,436			178,980			67,280			82,436
Additional borrowings by Town Shoes	(5,689		)	(6,641		)
Acquisition of Ebuys	—			(60,411		)
Net cash provided by (used in) investing activities	(35,264		)	2,510
Additional borrowings by TSL							(15,989		)	(5,689		)
Acquisition of TSL, net of cash acquired							(28,152		)	—
Net cash used in investing activities							(25,699		)	(35,264		)
Cash flows from financing activities:
Proceeds from exercise of stock options	358			429			1,492			358
Net change in vendor payment program	847			—			(1,671		)	847
Cash paid for income taxes for stock-based compensation shares withheld	(692		)	(1,104		)	(979		)	(692		)
Dividends paid	(31,969		)	(32,683		)	(39,910		)	(31,969		)
Other							(41		)	—
Net cash used in financing activities	(31,456		)	(33,358		)	(41,109		)	(31,456		)
Effect of exchange rate changes on cash balances							300			—
Net increase (decrease) in cash, cash equivalents, and restricted cash	(22,083		)	30,296			40,064			(22,083		)
Cash, cash equivalents, and restricted cash, beginning of period	115,311			40,171			175,932			115,311
Cash, cash equivalents, and restricted cash, end of period	$	93,228		$	70,467		$	215,996		$	93,228
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes	$	46,092		$	25,685
Non-cash investing and financing activities:
Supplemental disclosures of cash flow information -
Cash paid for income taxes							$	28,135		$	46,092
Non-cash investing and financing activities -
Property and equipment purchases not yet paid	$	5,711		$	4,944		$	8,390		$	5,711
Ebuys contingent purchase price	$	—		$	56,000

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

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. ~~BUSINESS OPERATIONS AND BASIS OF PRESENTATION~~SIGNIFICANT ACCOUNTING POLICIES

Business Operations- DSW Inc., ~~an Ohio corporation,~~ together with its wholly-owned subsidiaries, is the destination for ~~fabulous~~on-trend footwear ~~brands~~ and accessories brands at a great value every single day. We offer a wide assortment of brand name dress, casual and athletic footwear and accessories for women, men and ~~kids. We conduct business~~kids in stores and on e-commerce platforms.

On May 10, 2018, we acquired the remaining interest in Town Shoes Limited ("TSL") that we did not previously own. Beginning with our second quarter of fiscal 2018, TSL ceased being accounted for under the equity method of accounting and was accounted for as a consolidated wholly-owned subsidiary. TSL is a retailer of branded footwear in Canada, primarily under The Shoe Company, Shoe Warehouse, and DSW Designer Shoe Warehouse banners, as well as an e-commerce site. Subsequent to the acquisition, as part of our strategic review, we decided to exit TSL's Town Shoes banner with plans to close its 38 locations by the end of fiscal 2018 or early fiscal 2019. As a result of this acquisition, we now present two reportable segments: the U.S. Retail segment, which was previously presented as the DSW segment, ~~("DSW"), which includes DSW stores and dsw.com,~~ and the Canada Retail segment.

Our Affiliated Business Group ("ABG") ~~segment.~~

~~The ABG segment~~ partners with ~~three~~ other retailers to help build and optimize their in-store and online footwear ~~businesses.~~businesses by leveraging our sourcing network to produce a merchandise assortment that meets their needs. ABG ~~supplies merchandise for the shoe departments of~~currently provides service to Stein Mart ~~Gordmans,~~stores, Steinmart.com, and a Frugal ~~Fannie's. On March 13,~~Fannie's store through ongoing supply arrangements. During fiscal 2017, Gordmans (a previous ABG partner) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and announced ~~its~~a plan to ~~liquidate inventory and other assets.~~close its stores. Stage Stores, Inc. acquired 58 ~~of the~~ Gordmans' stores and we ~~have signed an agreement to provide~~provided services for these stores through the end of fiscal ~~2017.~~2017 to support their transition.

We also have an equity investment in Town Shoes Limited ("Town Shoes"). Town Shoes is the market leader in Canada for the sale of branded footwear offered in stores and on e-commerce sites under the banners of The Shoe Company, Shoe Warehouse, Town Shoes and DSW.

~~During fiscal 2016, we completed several transactions that supported our efforts to grow market share within footwear and accessories domestically and internationally.~~ On March 4, 2016, we acquired Ebuys, Inc. ("Ebuys"), ~~a leading~~an off price footwear and accessories retailer operating in digital marketplaces. Due to recurring operating losses incurred by Ebuys ~~sells products~~since its acquisition, as well as increased competitive pressures in the digital marketplaces, during the fourth quarter of fiscal 2017, we decided to ~~customers located~~exit the business and ended all operations in ~~North America, Europe, Australia and Asia.~~ the first quarter of fiscal 2018.

On August 2, 2016, we signed an agreement with the Apparel Group as an exclusive franchise partner in the Gulf Coast region of the Middle East. Under this franchise agreement, ~~the first~~three franchise ~~store opened during the second quarter of fiscal 2017, and we plan to expand the DSW banner by up to 40~~ stores ~~across the territory.~~in this region are in operation.

Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at ~~January 28, 2017~~February 3, 2018 has been derived from the audited financial statements at that ~~date.~~date, as restated for the adoption of the new accounting standard for revenue recognition (refer to Note 3, Revenue). The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended ~~January 28, 2017,~~February 3, 2018, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 23, ~~2017.~~2018.

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

~~2. ACQUISITION AND EQUITY INVESTMENT~~

~~Acquisition of Ebuys-~~ On March 4, 2016, we acquired 100% ownership of Ebuys for cash and future amounts to be paid to the sellers of Ebuys contingent upon achievement of certain milestones. During fiscal 2016, we had purchase price adjustments based on working capital adjustments and measurement period adjustments of the contingent consideration liability, based on additional information about facts and circumstances that existed at the acquisition date that were obtained after that date. We also made various measurement period adjustments for the assets and liabilities acquired.

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

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

Preliminary
Purchase Price
as of March 4, 2016
Adjustments
Final
Purchase Price
as of January 28, 2017
(in thousands)
Purchase price:
Cash consideration $ 60,411
$ (635 ) $ 59,776
Contingent consideration 56,000
(2,645 ) 53,355
$ 116,411
$ (3,280 ) $ 113,131
Fair value of assets and liabilities acquired:
Accounts and other receivables $ 1,623
$ (287 ) $ 1,336
Inventory 30,152
18
30,170
Other current assets 191
335
526
Property and equipment 1,221
22
1,243
Goodwill 54,785
(995 ) 53,790
Intangible assets 41,301
(2,600 ) 38,701
Accounts payable and other long-term liabilities (12,862 ) 227
(12,635 )
$ 116,411
$ (3,280 ) $ 113,131

The final fair value of intangible assets includes $22.3 million for online retailer and customer relationships based on using the excess earnings method, $11.0 million for tradenames based on using the relief from royalty method, and $5.4 million for non-compete agreements based on using the with-and-without method. The categorization of the fair value framework used for these methods are considered Level 3 due to the subjective nature of the unobservable inputs used to determine the fair value.

The goodwill represents the intangible assets that do not qualify for separate recognition and is primarily the result of expected synergies, vertical integration as a market for selling aged inventory, online presence, and the acquired workforce. Goodwill related to this acquisition is deductible for income tax purposes.

During fiscal 2016 and 2017, we also made adjustments to the contingent consideration liability based on Ebuys' results of operations and revised projections for the contingent periods and accretion in value. These adjustments were not considered measurement period adjustments and were recognized as an adjustment to income from operations.

~~Equity Investment in Town Shoes-~~ In May 2014, we acquired a 49.2% interest in Town Shoes for $75.1 million Canadian dollars ("CAD") ($68.9 million United States dollars ("USD")), which included the purchase of an unsecured subordinated note from Town Shoes issued on February 14, 2012 that earns payment-in-kind interest at 12% and matures on February 14, 2022. As of July 29, 2017, our ownership percentage was 46.3%. The dilution of our ownership is due to Town Shoes' employee exercise of stock options. Our ownership stake provides 50% voting control and board representation equal to the co-investor.

Additionally, the Town Shoes co-investor holds a put option to sell the remaining interest in Town Shoes in fiscal 2017 to the Company and for the subsequent two years. We hold a call option to purchase the remaining interest in Town Shoes in fiscal 2018, and for the subsequent two years, if the Town Shoe co-investor has not exercised their put option. During fiscal 2015, we invested $100 million CAD in available-for-sale securities denominated in CAD in anticipation of funding the future purchase of the remaining interest in Town Shoes. As of July 29, 2017, these available-for-sale securities are classified as short-term investments based on management's intent to exercise the call option to purchase the remaining interest in Town Shoes in the first half of fiscal 2018.

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

~~3. 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 Annual Report on Form 10-K for the fiscal year ended ~~January 28, 2017.~~February 3, 2018.

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

Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of ~~revenues~~revenue and expenses during the reporting period. Significant estimates are required as a part of sales returns, depreciation and amortization, ~~inventory~~ valuation ~~contingent consideration liability, customer~~of inventories, gift card breakage income, deferred revenue associated with loyalty ~~program reserve, recoverability~~programs, impairments of long-lived assets, intangibles and ~~intangible assets,~~goodwill, legal

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

reserves, accrual for lease obligations, income taxes, self-insurance reserves, and ~~establishing reserves~~valuations used to account for ~~self-insurance.~~our acquisition. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results could differ from these estimates.

Revenue Recognition- Sales are recognized upon customer receipt of merchandise, net of estimated returns and excludes sales tax. Customers can purchase products from us at one of our stores, online or from our mobile application. For products shipped directly to our customers, we recognize the sale upon the estimated customer receipt date based on historical delivery transit times. Revenue from shipping and handling is recorded in net sales while the related costs are included in cost of sales. For products shipped directly to our customers from our suppliers (referred to as “drop ship”), we record gross sales upon delivery based on the price paid by the customers as we have determined that we are the principal party responsible for the sale transaction.

ABG supplies footwear to other retailers under supply arrangements. We maintain ownership of the merchandise we supply under these arrangements, including risk of loss, returns, shrink up to a certain percentage and loss of inventory value, until customer receipt. Furthermore, we are responsible for the footwear assortment, inventory fulfillment, and pricing at all locations and online. As a result, sales are recognized upon receipt by the end customer, net of estimated returns and exclude sales tax. The affiliated retailers provide the sales associates and retail space. We pay a percentage of net sales as rent, which is included in cost of sales as occupancy expense.

Gift Cards- Amounts received from the sale of gift cards are recorded as a liability and are recognized as sales when the cards are redeemed for merchandise. Based on historical information, the likelihood of a gift card remaining unredeemed (referred to as “breakage”) can be reasonably estimated at the time of gift card issuance. Breakage income is recognized over the estimated average redemption period of redeemed gift cards.

Loyalty Programs- We offer a loyalty program to our customers in the U.S. and a loyalty program to our customers in Canada. Members under both programs earn points based on their level of spending, as well as for various other activities. Upon reaching a specified point threshold, members receive reward certificates that may be redeemed for purchases made within the stated expiration date. We record a reduction of net sales when points are awarded based on an allocation of the initial customer purchase and the stand alone value of the points earned. We maintain a deferred liability for the outstanding points and certificates based on historical conversion and redemption rates. The deferred liability is reduced and sales are recognized when certificates are redeemed or when points and certificates expire.

Franchise Revenue and Costs- Franchise revenue consists of royalties and other fees paid by franchisees, as well as merchandise sales to franchisees, and is included in franchise and other revenue in the consolidated statements of operations. Royalties are earned based upon a percentage of reported franchise sales and are recognized on a monthly basis when earned. Merchandise sales and any relating shipping charges are recognized as franchise revenue upon receipt of goods by the franchisee. The cost of goods sold to franchisees and related shipping costs are recognized as franchise costs at the same time franchise revenue is recognized.

Other Revenue- Other revenue consists of rental income on owned properties and is included in franchise and other revenue in the consolidated statements of operations.

Income Taxes- On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Reform") was enacted in the U.S., which significantly changes how the U.S. taxes corporations. The U.S. Tax Reform reduced the federal statutory tax rate from 35% to 21% and requires complex computations to be performed that were not previously required in U.S. tax law. The U.S. Treasury Department, the U.S. Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the U.S. Tax Reform will be applied or otherwise administered that is different from our interpretation. We have not completed our determination of the accounting implications of the U.S. Tax Reform and no changes were recorded during the three months ended August 4, 2018 to the provisional amounts recorded as of February 3, 2018. However, we have reasonably estimated the effects and recorded provisional amounts in our consolidated financial statements as of August 4, 2018. As we complete our analysis of the U.S. Tax Reform, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made. Offsetting the favorable impact from the U.S. Tax Reform, during the six months ended August 4, 2018, we had additional tax provision expense of $24.0 million due to recording a valuation allowance associated with deferred tax assets and nondeductible discrete items, primarily related to the charges recorded as a result of the acquisition of TSL. As a result, our effective tax rate changed from 39.8% for the six months ended July 29, 2017 to 203.3% for the six months ended August 4, 2018.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 represents cash that is restricted as to withdrawal or usage and ~~consists~~consisted of a mandatory cash deposit ~~with the lender~~ for outstanding letters of ~~credit.~~credit under our previous credit facility.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:


	July 29, 2017		January 28, 2017		July 30, 2016
	(in thousands)
(in thousands)							August 4, 2018		February 3, 2018		July 29, 2017
Cash and cash equivalents	$	89,305	$	110,657	$	62,324	$	215,996	$	175,932	$	89,305
Restricted cash, included in prepaid expenses and other current assets	3,923		4,654		8,143		—		—		3,923
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows	$	93,228	$	115,311	$	70,467	$	215,996	$	175,932	$	93,228

Inventories- All of our inventory is made up of finished goods. The U.S. Retail segment inventory is accounted for using the retail inventory method and is stated at the lower of cost or market. Under the retail inventory method, the valuation of inventories at cost and the resulting gross profits are determined by applying a calculated cost-to-retail ratio to the retail value of inventories. The cost basis of inventories reflected on the balance sheet is decreased by charges to cost of sales at the time the retail value of the inventory is lowered by markdowns. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. The Canada Retail segment inventory is accounted for using the weighted average cost method and is stated at the lower of cost or net realizable value. We monitor aged inventory for obsolete and slow moving inventory that may need to be liquidated in the future at amounts below cost. Reductions to inventory values establish a new cost basis. Favorable changes in facts or circumstances do not result in an increase in the newly established cost basis.

We perform physical inventory counts or cycle counts on all inventory on hand throughout the year and adjust the recorded balance to reflect the results. We record estimated shrinkage between physical inventory counts based on historical experience and recent results.

Inherent in the calculation of inventories are certain significant judgments and estimates, including setting the original merchandise retail value, markdowns, shrinkage, and liquidation values. The ultimate amount realized from the sale of inventory and write offs from counts could differ from management estimates.

Goodwill- We evaluate goodwill for impairment annually during our fourth quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating goodwill for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, we will calculate the estimated fair value of the reporting unit. Fair value is the price a willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow analysis. For certain reporting units, where deemed appropriate, we may also utilize a market approach for estimating fair value. Goodwill impairment charges are calculated as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill.

On May 10, 2018, as discussed in more detail in Note 2, Acquisition, we acquired the remaining interest in TSL, which resulted in recording $37.0 million of goodwill. Based on the fair value of TSL using a discounted cash flow model (categorized as Level 3 under the fair value hierarchy defined below), we determined that the value of the acquired net assets exceeded its fair value. As a result, during the three months ended August 4, 2018, we recorded a goodwill impairment charge, which resulted in impairing all of TSL’s goodwill.

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

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

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

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

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~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

~~Accumulated Other Comprehensive Income (Loss)-~~ ~~Changes for the balances of each component of accumulated other comprehensive loss were as follows (all amounts are net of tax):~~

Six months ended
July 29, 2017 July 30, 2016
Foreign Currency Translation Available-for-Sale Securities Total Foreign Currency Translation Available-for-Sale Securities Total
(in thousands)
Accumulated other comprehensive loss - beginning of period $ (13,699 ) $ (242 ) $ (13,941 ) $ (20,530 ) $ (173 ) $ (20,703 )
Other comprehensive income (loss) before reclassifications 6,537
33
6,570
7,246
276
7,522
Amounts reclassified to non-operating income 2,161
(54 ) 2,107
—
—
—
Other comprehensive income (loss) 8,698
(21 ) 8,677
7,246
276
7,522
Accumulated other comprehensive income (loss) - end of period $ (5,001 ) $ (263 ) $ (5,264 ) $ (13,284 ) $ 103
$ (13,181 )

~~Adopted Accounting Standards-~~ ~~In the first quarter of fiscal 2017, we adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~, which eliminated the requirement to recognize excess tax benefits in common shares paid-in capital and the requirement to evaluate tax deficiencies for common shares paid-in capital or income tax expense classification, and provides for these benefits or deficiencies to be recorded as an income tax expense or benefit on a prospective basis. For the consolidated statements of cash flows, excess tax benefits related to stock-based compensation is no longer presented, on a retroactive basis, as a financing activity cash inflow and as an operating activity cash outflow. As we did not have any excess tax benefits related to stock-based compensation during the six months ended July 30, 2016, the adoption of ASU 2016-09 did not result in a change in the activity presented in the statements of cash flows.

~~In the first quarter of fiscal 2017, we early adopted ASU 2016-18,~~ ~~Statement of Cash Flows - Restricted Cash,~~ which requires that the consolidated statements of cash flows provides the change in the total of cash, cash equivalents, and restricted cash. As a result of this adoption, we no longer show the changes in restricted cash balances as a component of cash flows from investing activities but instead include the balances of restricted cash together with cash and cash equivalents for the beginning and end of the periods presented.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

We measure available-for-sale investments at fair value on a recurring basis. These investments are measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2), except for an immaterial amount of investments measured based on quoted market prices in active markets (categorized as Level 1) as of July 29, 2017. The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature.

Foreign Currency Translation and Transactions- Prior to our acquisition of the remaining interest in TSL, our equity investment in TSL and notes receivable from TSL, along with certain investments, were denominated in Canadian dollars ("CAD") and translated into USD at exchange rates in effect at the balance sheet date. Each quarter, the income or loss from TSL was recorded in USD at the average exchange rate for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive loss. As a result of ~~adopting ASU 2016-18,~~the acquisition, we ~~adjusted~~reclassified a net loss of $12.2 million of foreign currency translation related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.

Beginning with the second quarter of fiscal 2018, TSL is a wholly-owned subsidiary with CAD as their functional currency. Assets and liabilities of TSL are translated into USD at exchange rates in effect at the balance sheet date or historical rates as appropriate. Each quarter, amounts from TSL included in our consolidated statements of ~~cash flows on~~operations are translated at the average exchange rate for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a ~~retroactive basis as follows:~~component of accumulated other comprehensive loss. Transaction gains and losses are included in the consolidated statements of operations.

Six Months Ended
July 30, 2016
(in thousands)
Net cash provided by investing activities, as previously reported $ 2,043
Eliminated the impact of the increase in restricted cash 467
Net cash provided by investing activities, as adjusted $ 2,510
Net increase in cash and cash equivalents, as previously reported $ 29,829
Eliminated the impact of the increase in restricted cash 467
Net increase in cash, cash equivalents, and restricted cash, as adjusted $ 30,296
Cash and cash equivalents, beginning of period, as previously reported $ 32,495
Included restricted cash 7,676
Cash, cash equivalents, and restricted cash, beginning of period, as adjusted $ 40,171
Cash and cash equivalents, end of period, as previously reported $ 62,324
Included restricted cash 8,143
Cash, cash equivalents, and restricted cash, end of period, as adjusted $ 70,467
Prior Period Reclassification- Certain prior period reclassifications were made to conform to the current period presentation. Prepaid rent to related parties was reclassified to prepaid expenses and other current assets and long-term prepaid rent to related parties were reclassified to other assets in our consolidated balance sheets.

Recent Accounting Pronouncements- In ~~May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Under ASU 2014-09, companies will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The standard also will require enhanced disclosures and provide more comprehensive guidance for transactions such as service revenue and contract modifications. The standard is effective for us in the first quarter of fiscal 2018, which we plan to adopt using the full retrospective method where each prior period presented is restated. We have completed an assessment identifying areas of impact to our financial statements, including sales returns, licensing arrangements, gift cards, and our loyalty and co-branded credit card programs. The adoption of the new standard will result in changes in classification between net sales, other revenues, cost of sales, and operating expenses. For income from breakage of gift cards, which is currently recognized as a reduction to operating expenses when the redemption of the gift card is deemed remote, the new standard will require classification within net sales recognized proportionately over the expected redemption period. Also upon adoption of the standard, we will no longer use the incremental cost method and record to cost of sales for our loyalty program, rather we will use a deferred revenue model. We do not expect the adoption of ASU 2014-09 will have a material impact to our reported net sales, operating profit, net income, shareholders’ equity or cash flows, with the primary impacts of adopting the new standard relating to changes in classification of amounts shown on the consolidated financial statements and additional disclosures.

In February 2016, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting Standards Update ("ASU") 2016-02, Leases, which will change how ~~lessees~~we account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. Primarily for those leases currently classified by us as operating leases, we will recognize a single lease cost on a ~~straight-line~~straight line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be required to be accounted for as financing arrangements similar to current accounting for capital leases. ~~Upon transition, we~~The standard, which will ~~recognize and measure leases at the beginning of the earliest period presented using~~have a ~~modified retrospective approach. The standard~~material impact to our consolidated balance sheets, is effective for us in the first quarter of fiscal ~~2019 with early~~2019. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, that provided a practical expedient that removed the requirement to restate prior period financial statements upon adoption ~~permitted. We will not early adopt ASU 2016-02 and we expect~~of the standard, ~~will have a material impact~~which we plan to ~~our consolidated balance sheets.~~elect. We are ~~continuing to assess and evaluate~~currently evaluating the full impact of the standard, ~~on our financial statements~~including other optional practical expedients that we may elect upon adoption, and we are ~~developing~~progressing with our implementation plan. Our implementation plan includes identifying our lease population, updating our lease database, assessing the lease system utilized by our third-party lease administrator, and identifying changes to processes and controls.

2. ACQUISITION

Equity Investment in TSL- In fiscal 2014, we acquired a 49.2% interest in TSL for $75.1 million CAD ($68.9 million USD), which included an ~~implementation plan.~~unsecured subordinated note from TSL that earned payment-in-kind interest at 12%. Our ownership stake provided 50% voting control and board representation equal to the co-investor. The co-investor held a put option to sell the remaining interest in TSL to us and we held a call option to purchase the remaining interest in TSL.

~~In January 2017,~~Step Acquisition of TSL- On May 10, 2018, we acquired the ~~FASB issued ASU 2017-04,~~ ~~Simplifying the Accounting~~remaining interest in TSL for ~~Goodwill Impairment~~$36.2 million CAD ($28.2 million USD), ~~which simplifies the subsequent measurement~~net of ~~goodwill~~acquired cash of $8.5 million CAD ($6.6 million USD), by ~~eliminating the requirement~~exercising our call option. This was accounted for as a step acquisition whereby we remeasured to ~~determine the implied~~ fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of ~~goodwill~~the purchase price. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to ~~measure an impairment~~non-operating expenses, net, in the consolidated statements of ~~goodwill. Rather, goodwill impairment charges will be calculated as~~operations. Also during the ~~amount by which~~second quarter of fiscal 2018, we reclassified a reporting unit's carrying amount exceeds its fair value. The standard is effective for us for our annual or any interim goodwill impairment tests during fiscal 2020 and early adoption is permitted. We intendnet loss of $12.2 million of foreign currency translation adjustments related to ~~early adopt ASU 2017-04 for our annual or any interim goodwill impairment tests during fiscal 2017.~~the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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



(in USD and in thousands)	Preliminary Purchase Price and Allocation as of May 10, 2018
Purchase price:
Cash consideration, net of cash acquired	$	28,152
Replacement stock-based awards attributable to pre-acquisition services	196
Fair value of previously held assets	92,242
	$	120,590
Fair value of assets and liabilities acquired:
Inventories	$	58,822
Other current assets	3,608
Property and equipment	41,601
Goodwill	37,044
Intangible assets	20,689
Accounts payable and accrued expenses	(33,248		)
Non-current liabilities	(7,926		)
	$	120,590

The fair value of previously held assets was determined immediately before the business combination, primarily by considering the income valuation approach (discounted cash flow) and the market valuation approach (precedent comparable transactions). Additionally, other information such as current market, industry and macroeconomic conditions were utilized to assist in developing these fair value measurements. The fair value of intangible assets includes $15.7 million for tradenames, $3.6 million for favorable leasehold interests, and $1.4 million for customer relationships associated with TSL's loyalty program. The fair value of unfavorable leasehold interests, included in non-current liabilities, was $7.6 million. The fair value for tradenames was determined using the relief from royalty method of the income approach, the fair value for leasehold interests was determined based the market valuation approach, and the fair value for customer relationships related to the loyalty program was determined using the replacement cost method. The fair values for property and equipment was determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. The categorization of the fair value framework used for these methods are considered Level 3 due to the subjective nature of the unobservable inputs used to determine the fair value.

The goodwill represents the excess of the purchase price over the fair value of the net assets acquired. With this being a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the three months ended August 4, 2018, we recorded a goodwill impairment charge, which resulted in impairing all of TSL’s goodwill. A portion of the goodwill is not expected to be deductible for income tax purposes.

We are continuing to evaluate the fair value assumptions of the purchase price allocations, including deferred tax assets and liabilities, and these preliminary estimates could change. Since all of the goodwill associated with TSL was written off, any changes to the purchase price allocation may result in an adjustment to the impairment charge.

During the six months ended August 4, 2018, we incurred $3.1 million of acquisition-related costs as a result of the step acquisition, which were included in operating expenses in the consolidated statements of operations.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table provides the supplemental unaudited pro forma total revenue and net income of the combined entity had the acquisition date of TSL been the first day of our fiscal 2017:



	Three months ended				Six months ended
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Total revenue	$	795,268	$	748,298	$	1,563,985	$	1,496,544
Net income	$	45,456	$	28,583	$	67,493	$	49,654
Basic and diluted earnings per share:
Basic earnings per share	$	0.57	$	0.36	$	0.84	$	0.62
Diluted earnings per share	$	0.56	$	0.35	$	0.83	$	0.62

The amounts in the supplemental pro forma results apply our accounting policies and reflect adjustments for additional depreciation and amortization that would have been charged assuming the same fair value adjustments to property and equipment and acquired intangibles had been applied on the first day of our fiscal 2017. The supplemental pro forma results also exclude the loss related to the remeasurement of previously held assets, the net loss of foreign currency translation related to the previously held balances from accumulated other comprehensive loss, the goodwill impairment charge, and transaction costs. Accordingly, these pro forma results have been prepared for comparative purposes only and are not intended to be indicative of results of operations that would have occurred had the acquisition actually occurred in the prior year period or indicative of the results of operations for any future period.

During the three months ended August 4, 2018, our consolidated statements of operations included sales and net losses for TSL of $72.5 million and $38.5 million, respectively, which includes the goodwill impairment charge of $36.2 million.

3. REVENUE

Adoption of ASU 2014-09, Revenue from Contracts with Customers- During the first quarter of fiscal 2018, we adopted the new accounting standard for revenue recognition, ASU 2014-09 and the related amendments, using the full retrospective method where each prior period presented is restated. We recorded an increase to retained earnings as of January 31, 2016 (opening balance for fiscal 2016) of $4.9 million. The adoption of ASU 2014-09 had the following impacts:

Income from the breakage of gift cards is classified within net sales and recognized proportionately over the expected redemption period, which was previously recognized as a reduction to operating expenses when the redemption of the gift card was deemed remote.

The loyalty program is being treated as deferred revenue, which was previously treated using the incremental cost method and recognized to cost of sales.

We changed other classifications between net sales, franchise and other revenue, cost of sales and operating expenses for various revenue-related transactions.

We present our estimated returns allowance on a gross basis with returns liability recorded to accrued expenses and an asset for recovery to prepaid expenses and other current assets, which were previously presented on a net basis in accrued expenses.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As a result of adopting ASU 2014-09, we adjusted our condensed consolidated statements of operations (including total comprehensive income) on a retrospective basis as follows:



	Three months ended July 29, 2017								Six months ended July 29, 2017
(in thousands, except per share amounts)	As Reported			Adjustments		As Adjusted			As Reported			Adjustments		As Adjusted
Net sales	$	680,409		1,312		$	681,721		$	1,371,511		1,029		$	1,372,540
Franchise and other revenue	$	—		1,291		$	1,291		$	—		2,510		$	2,510
Total revenue	$	—		683,012		$	683,012		$	—		1,375,050		$	1,375,050
Cost of sales	$	(483,437	)	1,013		$	(482,424	)	$	(979,310	)	3,152		$	(976,158	)
Operating expenses	$	(149,057	)	(3,497	)	$	(152,554	)	$	(302,321	)	(6,801	)	$	(309,122	)
Operating profit	$	46,747		119		$	46,866		$	87,628		(110	)	$	87,518
Income before income taxes and income (loss) from equity investment	$	46,729		119		$	46,848		$	86,667		(110	)	$	86,557
Income tax provision	$	(18,349	)	(41	)	$	(18,390	)	$	(34,014	)	39		$	(33,975	)
Net income	$	28,599		78		$	28,677		$	51,566		(71	)	$	51,495
Total comprehensive income	$	39,760		78		$	39,838		$	60,243		(71	)	$	60,172
Diluted earnings per share	$	0.35		0.01		$	0.36		$	0.64		—		$	0.64

As a result of adopting ASU 2014-09, we adjusted our condensed consolidated balance sheets on a retrospective basis as follows:



	February 3, 2018					July 29, 2017
(in thousands)	As Reported		Adjustments	As Adjusted		As Reported		Adjustments	As Adjusted
ASSETS
Prepaid expenses and other current assets	$	41,333	7,864	$	49,197	$	38,472	7,057	$	45,529
Total current assets	$	863,009	7,864	$	870,873	$	854,886	7,057	$	861,943
Deferred income taxes	$	27,671	40	$	27,711	$	18,765	27	$	18,792
Total assets	$	1,413,613	7,904	$	1,421,517	$	1,439,545	7,084	$	1,446,629
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses	$	145,218	3,008	$	148,226	$	121,934	2,409	$	124,343
Total current liabilities	$	324,526	3,008	$	327,534	$	287,311	2,409	$	289,720
Total liabilities	$	463,258	3,008	$	466,266	$	466,266	2,409	$	468,675
Retained earnings	$	350,083	4,896	$	354,979	$	366,199	4,675	$	370,874
Total shareholders' equity	$	950,355	4,896	$	955,251	$	973,279	4,675	$	977,954
Total liabilities and shareholders' equity	$	1,413,613	7,904	$	1,421,517	$	1,439,545	7,084	$	1,446,629

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As a result of adopting ASU 2014-09, we adjusted our condensed consolidated statements of cash flows on a retrospective basis as follows:



	Six months ended July 29, 2017
(in thousands)	As Reported			Adjustments		As Adjusted
Cash flows from operating activities:
Net income	$	51,566		(71	)	$	51,495
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	$	(3,831	)	(7	)	$	(3,838	)
Prepaid expenses and other current assets	$	(8,061	)	1,331		$	(6,730	)
Accrued expenses	$	(9,016	)	(1,253	)	$	(10,269	)

Disaggregation of Revenue- The following table presents our revenue disaggregated by operating segments:



	Three months ended				Six months ended
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Net sales:
U.S. Retail segment	$	691,757	$	629,691	$	1,361,541	$	1,254,195
Canada Retail segment	72,532		—		72,532		—
Other:
ABG	29,446		31,330		64,466		75,318
Ebuys	—		20,700		5,633		43,027
Total Other	29,446		52,030		70,099		118,345
Total net sales	793,735		681,721		1,504,172		1,372,540
Franchise and other revenue	1,533		1,291		3,198		2,510
Total revenue	$	795,268	$	683,012	$	1,507,370	$	1,375,050

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

For the U.S. Retail and Canada Retail segments, we separate our merchandise into three primary categories: women’s footwear, men’s footwear, and accessories and other (which includes kids’ footwear). The following table presents the retail net sales by category as reconciled to total net sales:



	Three months ended				Six months ended
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Retail net sales by category:
Women's footwear	$	509,404	$	428,833	$	978,688	$	866,764
Men's footwear	171,028		143,090		304,187		271,203
Accessories and other	83,857		57,768		151,198		116,228
Other - ABG and Ebuys	29,446		52,030		70,099		118,345
Total net sales	$	793,735	$	681,721	$	1,504,172	$	1,372,540

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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



	Three months ended						Six months ended
(in thousands)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Gift cards:
Beginning of period	$	28,151		$	27,802		$	32,792		$	30,829
Gift cards redeemed and breakage recognized to net sales	(21,761		)	(25,132		)	(44,034		)	(44,440		)
Gift cards issued	20,401			22,136			38,033			38,417
End of period	$	26,791		$	24,806		$	26,791		$	24,806
Loyalty programs:
Beginning of period	$	22,111		$	21,287		$	21,282		$	19,889
Loyalty certificates redeemed and expired and other adjustments recognized to net sales	(16,750		)	(7,529		)	(23,385		)	(14,185		)
Deferred revenue for loyalty points issued	11,425			7,848			18,889			15,902
End of period	$	16,786		$	21,606		$	16,786		$	21,606

Sales Returns- We reduce net sales by the amount of expected returns and cost of sales by the amount of merchandise we expect to recover, which are estimated based on historical experience. The following table presents the changes and total balances for the returns liability:



	Three months ended						Six months ended
(in thousands)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Sales returns liability:
Beginning of period	$	16,006		$	14,952		$	14,130		$	14,149
Net sales reduced for estimated returns	98,563			81,484			183,616			159,420
Actual returns during the period	(100,143		)	(83,673		)	(183,320		)	(160,806		)
End of period	$	14,426		$	12,763		$	14,426		$	12,763

As of August 4, 2018, February 3, 2018, and July 29, 2017, the asset for recovery of merchandise returns was $7.6 million, $7.9 million, and $7.1 million, respectively.

4. RELATED PARTY TRANSACTIONS

Accounts receivable and accounts payable ~~and prepaid expenses~~ associated with related parties are separately presented on the consolidated balance sheets. Accounts receivable from and payables to related parties normally settle in the form of cash in 30 to 60 days.

Schottenstein Affiliates

As of ~~July 29, 2017,~~August 4, 2018, the Schottenstein Affiliates, entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family, beneficially owned approximately ~~19%~~14% of the Company's outstanding ~~Common Shares,~~common shares, representing approximately ~~51%~~49% of the combined voting power. As of ~~July 29, 2017,~~August 4, 2018, the Schottenstein Affiliates beneficially owned ~~7.3~~3.6 million Class A ~~Common Shares~~common shares and 7.7 million Class B ~~Common Shares.~~common shares. We had the following related party transactions with Schottenstein Affiliates:

~~Leases with Related Parties-~~Leases- We lease our fulfillment center and certain store locations owned by Schottenstein Affiliates. During the three months ended August 4, 2018 and July 29, 2017, ~~and July 30, 2016,~~ we recorded rent expense from leases with Schottenstein Affiliates of $2.3 million and ~~$2.0~~$2.3 million, respectively. During the six months ended August 4, 2018 and July 29, 2017, ~~and July 30, 2016,~~ we recorded rent expense from leases with Schottenstein Affiliates of $4.6 million and ~~$4.1~~$4.6 million, respectively.

~~Basis Difference Related to Acquisition~~

Table of ~~Commonly Controlled Entity-~~ Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(The basis difference related to acquisition of commonly controlled entity balance, as shown on our consolidated balance sheets, relates to a legal entity acquisition in fiscal 2012 from certain Schottenstein Affiliates. The legal entity owned property that was previously leased by us. As this was a transaction between entities under common control, there was no adjustment to the historical cost carrying amounts of assets transferred to the Company. The difference between the historical cost carrying amounts and the consideration transferred was reflected as an equity transaction.unaudited)

Other Purchases and Services- During the three months ended August 4, 2018 and July 29, 2017, ~~and July 30, 2016,~~ we had other purchases and services from Schottenstein Affiliates of ~~$0.4~~$1.7 million and ~~$0.3~~$0.4 million, respectively. During the six months ended August 4, 2018 and July 29, 2017, ~~and July 30, 2016,~~ we had other purchases and services from Schottenstein Affiliates of ~~$0.7~~$3.3 million and ~~$0.6~~$0.7 million, respectively.

~~Town Shoes~~TSL

~~Our~~Prior to our acquisition of the remaining interest in TSL on May 10, 2018, our ownership ~~percentage~~interest in ~~Town Shoes is 46.3%, which provides~~TSL provided us a 50% voting control and board representation equal to the co-investor, and iswas treated as an equity investment. We had the following related party transactions with TSL during the period it was an equity investment:

Management Agreement- We ~~have~~had a management agreement with ~~Town Shoes~~TSL under which we ~~provide~~provided certain information technology and management services. During the three ~~and~~months ended July 29, 2017, we recognized income of $0.3 million. During the six months ended August 4, 2018 and July 29, 2017, we recognized income of $0.3 million and $0.6 million, respectively. ~~During the three and six months ended July 30, 2016, no services were provided.~~

License Agreement- We ~~license~~licensed the use of our tradename and trademark, DSW Designer Shoe Warehouse, to ~~Town Shoes~~TSL for a royalty fee based on a percentage of net sales from its Canadian DSW stores, which are included in net sales. The license iswas exclusive and non-transferable for use in Canada. During the three months ended July 29, 2017, ~~and July 30, 2016,~~ we recognized royalty income of $0.2 ~~million and $0.1 million, respectively.~~million. During the six months ended August 4, 2018 and July 29, 2017, ~~and July 30, 2016,~~ we recognized royalty income of ~~$0.3~~$0.1 million and ~~$0.2~~$0.3 million, respectively.

Other Purchases and Services- During the three ~~and six~~ months ended July 29, 2017, ~~Town~~TSL had other purchases and services from us of $0.7 million. During the six months ended August 4, 2018 and July 29, 2017, TSL had other purchases and services from us of $0.4 million and $1.6 million, respectively. During the ~~three and~~ six months ended ~~July 30, 2016, no other purchases and services were provided.~~August 4, 2018, we purchased inventory from TSL for $1.3 million.

~~David Duong, CEO of Ebuys~~

5. EARNINGS (LOSS) PER SHARE

On ~~March 4, 2016~~Basic earnings (loss) per share is based on net income (loss) and the weighted average of Class A and Class B common shares outstanding. Diluted earnings per share reflects the potential dilution of common shares adjusted for outstanding stock options, restricted stock units ("RSUs"), ~~we acquired 100% ownership of Ebuys from its co-founders, including David Duong, who continues to serve on~~and performance-based restricted stock units ("PSUs") calculated using the ~~board of directors of Ebuys, for cash and future amounts to be paid to the co-founders contingent upon achievement of certain milestones. See Note 13,~~ ~~Commitments and Contingencies, for the estimated fair value~~treasury stock method.

The following is a reconciliation of the ~~contingent consideration liability~~number of shares used in the calculation of earnings (loss) per share:



	Three months ended		Six months ended
(in thousands)	August 4, 2018	July 29, 2017	August 4, 2018	July 29, 2017
Weighted average shares outstanding - Basic shares	80,265	80,317	80,187	80,267
Dilutive effect of stock-based compensation awards	—	397	—	462
Weighted average shares outstanding - Diluted shares	80,265	80,714	80,187	80,729

For the three months ended August 4, 2018 and ~~changes recognized. Mr. Duong will receive 50%~~July 29, 2017, the number of ~~any future payments~~potential shares that were not included in the computation of diluted earnings (loss) per share because the ~~contingent consideration.~~effect would be anti-dilutive was 3.2 million and 4.6 million, respectively. For the six months ended August 4, 2018 and July 29, 2017, the number of potential shares that were not included in the computation of diluted earnings (loss) per share because the effect would be anti-dilutive was 3.2 million and 4.3 million, respectively.

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~5. EARNINGS PER SHARE~~

Basic earnings per share is based on net income 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, restricted stock units ("RSUs"), performance-based restricted stock units ("PSUs"), and director stock units ("DSUs") calculated using the treasury stock method.

~~The following is a reconciliation of the number of shares used in the calculation of earnings per share:~~

Three months ended Six months ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
(in thousands)
Weighted average shares outstanding - Basic shares 80,317
82,053
80,267
82,003
Dilutive effect of stock-based compensation awards 397
602
462
688
Weighted average shares outstanding - Diluted shares 80,714
82,655
80,729
82,691

For the three months ended July 29, 2017 and July 30, 2016, the number of potential shares that were not included in the computation of dilutive earnings per share because the effect would be anti-dilutive was approximately 4.6 million and 3.6 million, respectively. For the six months ended July 29, 2017 and July 30, 2016, the number of potential shares that were not included in the computation of dilutive earnings per share because the effect would be anti-dilutive was approximately 4.3 million and 3.3 million, respectively.

6. STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:

Three months ended Six months ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
(in thousands)
Stock options $ 1,586
$ 1,547
$ 3,337
$ 3,224
Restricted stock units 655
640
1,485
1,870
Performance-based restricted stock units 970
550
1,947
1,232
Director stock units 1,031
922
1,082
990
$ 4,242
$ 3,659
$ 7,851
$ 7,316



	Three months ended				Six months ended
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Stock options	$	1,343	$	1,586	$	3,138	$	3,337
Restricted and director stock units	3,841		2,656		6,560		4,514
	$	5,184	$	4,242	$	9,698	$	7,851

The ~~fair value for stock option awards was estimated at~~following table summarizes the ~~grant date using the Black-Scholes pricing model with the following weighted average assumptions~~stock-based compensation award activity for the ~~options granted:~~six months ended August 4, 2018:

Six months ended
July 29, 2017 July 30, 2016
Assumptions:
Risk-free interest rate 1.9% 1.5%
Expected volatility 34.4% 36.0%
Expected option term 5.5 years 5.4 years
Dividend yield 3.9% 3.0%
Other data:
Weighted average grant date fair value $4.17 $6.59



	Number of shares
(in thousands)	Stock Options		Time-Based RSUs		Performance-Based RSUs
Outstanding - beginning of period	4,333		436		457
Granted	—		663		250
Exercised / vested	(158	)	(58	)	(49	)
Forfeited / expired	(111	)	(50	)	(4	)
Outstanding - end of period	4,064		991		654

As of August 4, 2018, 4.1 million shares of Class A common shares remain available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan.

7. SHAREHOLDERS' EQUITY

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

The following table provides additional information for our common shares:



	August 4, 2018		February 3, 2018		July 29, 2017
(in thousands)	Class A	Class B	Class A	Class B	Class A	Class B
Authorized shares	250,000	100,000	250,000	100,000	250,000	100,000
Issued shares	85,652	7,733	85,385	7,733	85,201	7,733
Outstanding shares	72,561	7,733	72,294	7,733	72,610	7,733
Treasury shares	13,091	—	13,091	—	12,591	—

We have authorized 100.0 million shares of no par value preferred shares with no shares issued for any of the periods presented.

Dividends- On August 28, 2018, the Board of Directors declared a quarterly cash dividend payment of $0.25 per share for both Class A and Class B common shares. The dividend will be paid on October 5, 2018 to shareholders of record at the close of business on September 24, 2018.

Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500.0 million of DSW common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the six months ended August 4, 2018 and July 29, 2017, we did not repurchase any Class A common shares, with $524.1 million of Class A common shares that remain authorized under the program as of August 4, 2018. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~The following table summarizes~~Accumulated Other Comprehensive Income (Loss)- Changes for the ~~stock-based compensation award activity:~~balances of each component of accumulated other comprehensive loss were as follows (all amounts are net of tax):

Six months ended July 29, 2017
Stock Options RSUs PSUs DSUs
(in thousands)
Outstanding - beginning of period 3,799
351
250
311
Granted 1,756
285
258
71
Exercised / vested (35 ) (58 ) (34 ) (45 )
Forfeited / expired (327 ) (63 ) (3 ) —
Outstanding - end of period 5,193
515
471
337



	Three months ended
	August 4, 2018									July 29, 2017
(in thousands)	Foreign Currency Translation			Available-for-Sale Securities			Total			Foreign Currency Translation			Available-for-Sale Securities			Total
Accumulated other comprehensive loss - beginning of period	$	(12,218	)	$	(980	)	$	(13,198	)	$	(16,357	)	$	(68	)	$	(16,425	)
Other comprehensive income (loss) before reclassifications	(1,365		)	27			(1,338		)	10,657			(23		)	10,634
Amounts reclassified to non-operating expenses, net	12,218			42			12,260			699			(172		)	527
Other comprehensive income (loss)	10,853			69			10,922			11,356			(195		)	11,161
Accumulated other comprehensive loss - end of period	$	(1,365	)	$	(911	)	$	(2,276	)	$	(5,001	)	$	(263	)	$	(5,264	)

~~As of July 29, 2017, 4.7 million shares of Class A Common Shares remain available for future stock-based compensation grants under the 2014 Long-Term Incentive Plan.~~



	Six months ended
	August 4, 2018									July 29, 2017
(in thousands)	Foreign Currency Translation			Available-for-Sale Securities			Total			Foreign Currency Translation			Available-for-Sale Securities			Total
Accumulated other comprehensive loss - beginning of period	$	(9,278	)	$	(796	)	$	(10,074	)	$	(13,699	)	$	(242	)	$	(13,941	)
Other comprehensive income (loss) before reclassifications	(6,050		)	(317		)	(6,367		)	6,537			33			6,570
Amounts reclassified to non-operating expenses, net	13,963			202			14,165			2,161			(54		)	2,107
Other comprehensive income (loss)	7,913			(115		)	7,798			8,698			(21		)	8,677
Accumulated other comprehensive loss - end of period	$	(1,365	)	$	(911	)	$	(2,276	)	$	(5,001	)	$	(263	)	$	(5,264	)

7.8. INVESTMENTS

~~We hold~~Investments in available-for-sale ~~investments primarily in bonds and term notes. Investments~~securities consisted of the following:

Short-term Investments Long-term Investments
July 29, 2017 January 28, 2017 July 30, 2016 July 29, 2017 January 28, 2017 July 30, 2016
(in thousands)
Available-for-sale investments:
Carrying value $ 182,325
$ 98,793
$ 103,051
$ —
$ 77,882
$ 78,068
Unrealized gains included in accumulated other comprehensive loss 99
101
455
—
133
33
Unrealized losses included in accumulated other comprehensive loss (362 ) (364 ) (39 ) —
(111 ) (200 )
Total investments $ 182,062
$ 98,530
$ 103,467
$ —
$ 77,904
$ 77,901

~~8. FAIR VALUE MEASUREMENTS~~

~~Financial Assets and Liabilities-Financial assets and liabilities measured at fair value on a recurring basis consisted of the following:~~

July 29, 2017
Total Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and cash equivalents $ 89,305
$ 89,305
—
—
Short-term investments 182,062
2,265
$ 179,797
—
$ 271,367
$ 91,570
$ 179,797
$ —
Financial liabilities -
Contingent consideration liability $ 36,456
—
—
$ 36,456
$ 36,456
$ —
$ —
$ 36,456

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

January 28, 2017
Total Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and cash equivalents $ 110,657
$ 110,657
—
—
Short-term investments 98,530
2,446
$ 96,084
—
Long-term investments 77,904
431
77,473
—
$ 287,091
$ 113,534
$ 173,557
$ —
Financial liabilities -
Contingent consideration liability $ 33,204
—
—
$ 33,204
$ 33,204
$ —
$ —
$ 33,204

July 30, 2016
Total Level 1 Level 2 Level 3
(in thousands)
Financial assets:
Cash and cash equivalents $ 62,324
$ 62,324
—

Short-term investments 103,467
120
$ 103,347

Long-term investments 77,901
314
77,587

$ 243,692
$ 62,758
$ 180,934
$ —
Financial liabilities -
Contingent consideration liability $ 59,611
—
—
$ 59,611
$ 59,611
$ —
$ —
$ 59,611

~~The short-term and long-term investments categorized as Level 2 were valued using a market-based approach using inputs such as prices of similar assets in active markets. See Note 13,~~ ~~Commitments and Contingencies, for the estimated fair value (categorized as Level 3) of the contingent consideration liability and changes recognized.~~

We have financial assets and liabilities not required to be measured at fair value on a recurring basis, which primarily consist of accounts receivables, note receivable from Town Shoes, and accounts payables. The carrying value of accounts receivables and accounts payables approximated their fair values due to their short-term nature. As of July 29, 2017, January 28, 2017 and July 30, 2016, the fair value of the note receivable from Town Shoes was $52.5 million, $45.7 million and $43.6 million, respectively, compared to the carrying value of $60.1 million, $53.1 million and $50.2 million, respectively. We estimated the fair value of the note receivable based upon current interest rates offered on similar instruments. The change in fair value is based on the change in comparable rates on similar instruments. Based on our intention and ability to hold the note until maturity or the exercise of the put/call option, the carrying value is not other-than-temporarily impaired.



(in thousands)	August 4, 2018			February 3, 2018			July 29, 2017
Carrying value of investments	$	73,978		$	125,349		$	182,325
Unrealized gains included in accumulated other comprehensive loss	10			23			99
Unrealized losses included in accumulated other comprehensive loss	(869		)	(767		)	(362		)
Fair value	$	73,119		$	124,605		$	182,062

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

9. PROPERTY AND EQUIPMENT ~~NET~~

Property and equipment consisted of the following:


	July 29, 2017			January 28, 2017			July 30, 2016
	(in thousands)
(in thousands)										August 4, 2018			February 3, 2018			July 29, 2017
Land	$	1,110		$	1,110		$	1,110		$	1,110		$	1,110		$	1,110
Buildings	12,485			12,485			12,485			12,485			12,485			12,485
Building and leasehold improvements	398,129			393,505			378,355			425,651			404,852			398,129
Furniture, fixtures and equipment	417,226			408,653			382,687			451,040			423,597			417,226
Software	135,844			123,460			121,848			145,111			137,917			135,844
Construction in progress⁽¹⁾	28,008			27,456			35,628			46,643			39,201			28,008
Total property and equipment	992,802			966,669			932,113			1,082,040			1,019,162			992,802
Accumulated depreciation and amortization	(628,250		)	(591,418		)	(552,470		)	(694,419		)	(663,963		)	(628,250		)
Property and equipment, net	$	364,552		$	375,251		$	379,643		$	387,621		$	355,199		$	364,552


(1)	Construction in progress is comprised primarily of the construction of leasehold improvements and furniture and fixtures related to unopened stores and internal-use software under development.

10. GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:



	Six months ended
	August 4, 2018									July 29, 2017
(in thousands)	Goodwill			Accumulated Impairments			Net			Goodwill		Accumulated Impairments		Net
Beginning of period by segment:
U.S. Retail segment	$	25,899		$	—		$	25,899		$	25,899	$	—	$	25,899
Other - Ebuys	53,790			(53,790		)	—			53,790		—		53,790
	79,689			(53,790		)	25,899			79,689		—		79,689
Activity during the period by segment:
Canada Retail segment:
Acquired TSL goodwill	37,044			—			37,044			—		—		—
Impairment charges	—			(36,240		)	(36,240		)	—		—		—
Currency translation adjustment	(580		)	(224		)	(804		)	—		—		—
Other - eliminated Ebuys goodwill	(53,790		)	53,790			—			—		—		—
	(17,326		)	17,326			—			—		—		—
End of period by segment:
U.S. Retail segment	25,899			—			25,899			25,899		—		25,899
Canada Retail segment	36,464			(36,464		)	—			—		—		—
Other - Ebuys	—			—			—			53,790		—		53,790
	$	62,363		$	(36,464	)	$	25,899		$	79,689	$	—	$	79,689

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Intangible Assets- Intangible assets consisted of the following:



(in thousands)	Cost		Accumulated Amortization			Net
August 4, 2018
Definite-lived:
Customer relationships	$	1,378	$	(114	)	$	1,264
Favorable leasehold interests	3,522		(101		)	3,421
Indefinite-lived trademarks and tradenames	15,600		—			15,600
	$	20,500	$	(215	)	$	20,285
February 3, 2018
Definite-lived:
Online retailer and customer relationships	$	3,767	$	(3,767	)	$	—
Tradenames	1,260		(1,260		)	—
Non-compete agreements	1,800		(1,800		)	—
Indefinite-lived trademarks and tradenames	135		—			135
	$	6,962	$	(6,827	)	$	135
July 29, 2017
Definite-lived:
Online retailer and customer relationships	$	22,300	$	(3,202	)	$	19,098
Tradenames	11,000		(1,039		)	9,961
Non-compete agreements	5,400		(1,529		)	3,871
Indefinite-lived trademarks and tradenames	135		—			135
	$	38,835	$	(5,770	)	$	33,065

The definite-lived intangible assets are amortized by the straight-line method using three years for customer relationships associated with TSL's loyalty program and over the remaining lease term for favorable leasehold interests.

11. ACCRUED EXPENSES

Accrued expenses consisted of the following:

July 29, 2017 January 28, 2017 July 30, 2016
(in thousands)
Gift cards and merchandise credits $ 40,327
$ 45,743
$ 38,062
Compensation 14,830
17,132
15,184
Taxes 17,182
21,764
18,887
Customer loyalty program 12,410
11,502
11,401
Other⁽¹⁾
37,185
34,193
31,658
$ 121,934
$ 130,334
$ 115,192



(in thousands)	August 4, 2018		February 3, 2018		July 29, 2017
Gift cards and merchandise credits	$	26,791	$	32,792	$	24,806
Accrued compensation and related expenses	30,224		25,082		14,830
Accrued taxes	21,029		20,757		20,126
Loyalty programs deferred revenue	16,786		21,282		21,606
Sales returns	14,426		14,130		12,763
Other⁽¹⁾	36,520		34,183		30,212
	$	145,776	$	148,226	$	124,343


(1)	Other is comprised of ~~deferred revenue, sales return allowance, and~~ various other accrued expenses that we expect will settle within one year of the applicable period, including amounts owed under our vendor payment program described below.

~~To better facilitate the processing efficiency of certain vendor payments, during fiscal 2016 we entered into~~We offer our vendors a ~~vendor~~ payment program ~~with~~where a payment processing ~~intermediary. Under the vendor payment program, the~~ intermediary makes regularly-scheduled payments to participating vendors and we, in turn, settle monthly with the intermediary. The net change in the outstanding balance is reflected as a financing activity in the consolidated statements of cash flows.

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~~11.~~DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

12. NON-CURRENT LIABILITIES

Non-current liabilities consisted of the following:


	July 29, 2017		January 28, 2017		July 30, 2016
	(in thousands)
(in thousands)							August 4, 2018		February 3, 2018		July 29, 2017
Construction and tenant allowances	$	84,002	$	87,886	$	89,460	$	75,439	$	80,725	$	84,002
Deferred rent	38,187		37,779		37,814		35,694		37,116		38,187
Accrual for lease obligations	7,328		7,283		8,584		9,511		6,511		7,328
Unfavorable leasehold interests							7,000		—		—
Other⁽¹⁾	12,982		8,231		7,704		22,672		14,380		12,982
	$	142,499	$	141,179	$	143,562	$	150,316	$	138,732	$	142,499


(1)	Other is comprised of various other accrued expenses that we expect will settle beyond one year from the end of the applicable period.

The accrual for lease obligations includes an office space we lease that expires in 2024. We sublease the entire office space to an unrelated third party at an annual rent that is lower than our total annual lease obligation. The sublease was renewed for a two-year term in June 2017, which can be terminated by the tenant at any time with 60 days' notice. As a result of our decision to exit the Ebuys business, which is included in our Other segment, during the six months ended August 4, 2018, we exited a leased office space that expires in 2020 and a fulfillment center that expires in 2023 and recorded a lease exit charge of $4.5 million. Also during the six months ended August 4, 2018, as a result of our decision to exit the Town Shoes banner by the end of fiscal 2018 or early fiscal 2019, which is included in our Canada Retail segment, we closed certain Town Shoes banner stores with remaining lease terms and recorded a lease exit charge of $0.4 million. The lease exit charges were recorded to operating expenses in the consolidated statements of operations with a related addition to the accrual for lease obligations that included the reserves for these leases based on the remaining lease payments and estimated sublease income. We estimate total cost of approximately $20.0 million to $25.0 million to exit the Town Shoes banner representing lease exit charges, severance, and inventory write-downs.

The following table presents the changes and total balances for the accrual for lease obligations:



	Six months ended
(in thousands)	August 4, 2018			July 29, 2017
Beginning of period	$	6,511		$	7,283
Additions	4,884			—
Lease obligation payments, net of sublease income received	(2,004		)	(120		)
Adjustments	120			165
End of period	$	9,511		$	7,328

13. DEBT

Credit Facility- On August 25, 2017, we entered into a senior unsecured revolving credit agreement (the "Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. The Credit Facility provides a revolving line of credit up to $300 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The Credit Facility may be further increased by up to $100 million subject to agreed-upon terms and conditions. The Credit Facility may be used to provide funds for working capital, capital expenditures, dividends and share repurchases, other expenditures, and permitted acquisitions as defined by the Credit Facility.

Loans issued under the revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility plus a margin based on our leverage ratio, with any loans issued in CAD bearing interest at the alternate base rate plus a margin based on our leverage ratio. Interest on letters of credit issued under the Credit Facility is variable based on our leverage ratio and the type of letters of credit. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of August 4, 2018, we had no outstanding borrowings under the Credit

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~12. DEBT~~

~~Credit Facility- On August 2, 2013, we entered into a secured revolving credit agreement (the "Credit Facility") that provides revolving credit up to $100 million. The Credit~~ Facility ~~together with the Letter of Credit Agreement (defined below), amended~~ and restated the prior credit facility, dated June 30, 2010. The Credit Facility is secured by a lien on substantially all of DSW Inc.'s personal property assets and its subsidiaries, with certain exclusions, and may be used to provide funds for general corporate purposes, to provide for ongoing working capital requirements and to make permitted acquisitions. Revolving credit loans bear interest under the Credit Facility at our option under: (a) a base rate option at a rate per annum equal to the highest of (i) the Federal Funds Open Rate (as defined in the Credit Facility), plus 0.5%, (ii) the Lender's prime rate, and (iii) the Daily LIBOR Rate (as defined in the Credit Facility) plus 1.0%, plus in each instance an applicable margin, which is between 1.00 and 1.25, based upon revolving credit availability; or (b) a LIBOR option at a rate equal to the LIBOR Rate (as defined in the Credit Facility), plus an applicable margin based upon our revolving credit availability. In addition, the Credit Facility contains restrictive covenants relating to the management and operation of our business. These covenants, among other things, limit or restrict our ability to grant liens on our assets, limit our ability to incur additional indebtedness, limit our ability to enter into transactions with affiliates and limit our ability to merge or consolidate with another entity. Our Credit Facility allows the payment of dividends by us or our subsidiaries, provided that we meet the minimum cash and investments requirement of $125 million, as defined in the Credit Facility. An additional covenant limits payments for capital expenditures to $200$1.2 million in ~~any fiscal year. As~~letters of ~~July 29, 2017, we had no outstanding borrowings under the Credit Facility with availability of $100~~credit issued, resulting in $298.8 million ~~and we were in compliance with all covenants.~~available for borrowings. Interest expense related to the Credit Facility includes ~~fees, such as commitment and line~~letters of credit ~~fees.~~interest, commitment fees and the amortization of debt issuance costs.

~~Letter~~Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of ~~Credit Agreement-~~ ~~Also on August 2, 2013, we entered into~~ a ~~letter~~leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. A violation of credit agreement (the "Letter of Credit Agreement"). The Letter of Credit Agreement provides for the issuance of letters of credit up to $50 million. The facility for the issuance of letters of credit is secured by a cash collateral account containing cash in an amount equal to 103%any of the ~~face amount of any letter of credit extension (105% for extensions denominated~~covenants could result in ~~foreign currency) and is used for general corporate purposes. The Letter of~~a default under the Credit ~~Agreement requires compliance with conditions precedent~~Facility that ~~must be satisfied prior~~would permit the lenders to issuing any letter of credit or extension. In addition, the Letter of Credit Agreement contains restrictive covenants relating to the management and operation of our business. These covenants, among other things, limit or restrict our ability to ~~grant liens on our assets, limit our ability to incur additional indebtedness, limit our ability to enter into transactions with affiliates~~further access the Credit Facility for loans and ~~limit our ability to merge or consolidate with another entity. An event~~letters of ~~default may cause~~credit and require the ~~applicable interest rate and fees to increase by 2% per annum.~~immediate repayment of any outstanding loans under the Credit Facility. As of ~~July 29, 2017,~~August 4, 2018, we were in compliance with all financial covenants. ~~As of July 29, 2017, January 28, 2017 and July 30, 2016, we had outstanding letters of credit under the Letter of Credit Agreement of $3.6 million, $3.8 million, and $7.9 million, respectively.~~

~~13.~~14. COMMITMENTS AND CONTINGENCIES

Contingent Consideration Liability- The contingent consideration liability resulted from the acquisition of Ebuys and iswas based on a defined earnings performance ~~measure for fiscal years 2017, 2018 and 2019 with no defined maximum earn-out.~~measure. The contingent consideration liability ~~is based on our estimated~~was measured at fair value with any differences between the final acquisition-date fair value and ~~the~~revised estimated ~~settlement of the obligation,~~fair value, as remeasured each reporting period, being recognized as an adjustment to income from operations. Fair value was determined using an income valuation approach, primarily based on discounted cash flows related to the projected earnings performance measure with a discount rate of approximately 13.0%. The categorization of the fair value framework used to price the liability is considered Level 3 due to the subjective nature of the unobservable inputs used to determine fair value.

Activity for the contingent consideration liability for the six months ended July 29, 2017 was as follows:


	Six months ended
	July 29, 2017		July 30, 2016
	(in thousands)
(in thousands)
Contingent consideration liability - beginning of period	$	33,204	$	—	$	33,204
Preliminary purchase price	—		56,000
Accretion in value	2,252		3,611		2,252
Other adjustments	1,000		—		1,000
Contingent consideration liability - end of period	$	36,456	$	59,611	$	36,456

~~Table~~During the fourth quarter of ~~Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

fiscal 2017, as a result of recurring operating losses incurred by Ebuys since its acquisition, which led to our decision to exit the business, we eliminated the contingent consideration liability.

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

Guarantee- As a result of a previous merger, we provided a guarantee for a lease commitment that is scheduled to expire in 2024 offor a location that has been leased to a third party. If the third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord.

Contractual Obligations- As of ~~July 29, 2017,~~August 4, 2018, we have entered into various construction commitments, including capital items to be purchased for projects that were under construction, or for which a lease has been signed. Our obligations under these commitments were ~~$0.7~~$1.4 million as of ~~July 29, 2017.~~August 4, 2018. In addition, we have entered into various noncancelable purchase and service agreements. The obligations under these agreements were approximately ~~$13.0~~$21.8 million as of ~~July 29, 2017.~~August 4, 2018.

~~14.~~15. SEGMENT REPORTING

Our two reportable segments, which are also operating segments, are the U.S. Retail segment and the Canada Retail segment. The U.S. Retail segment, which was previously presented as the DSW segment, ~~which~~ includes ~~DSW~~ stores ~~and dsw.com, and~~operated in the ~~ABG segment. Other includes Ebuys and franchise activity with the Apparel Group. The following provides certain financial data by segment reconciled to the consolidated financial statements:~~

DSW segment ABG segment Other Total
(in thousands)
Three months ended July 29, 2017
Net sales $ 628,379
31,330
20,700
$ 680,409
Gross profit $ 192,538
6,438
(2,004 ) $ 196,972
Three months ended July 30, 2016
Net sales $ 603,927
35,446
19,571
$ 658,944
Gross profit $ 177,885
7,217
1,759
$ 186,861
Six months ended July 29, 2017
Net sales $ 1,253,166
75,318
43,027
$ 1,371,511
Gross profit $ 377,188
16,936
(1,923 ) $ 392,201
Six months ended July 30, 2016
Net sales $ 1,226,959
78,585
34,667
$ 1,340,211
Gross profit $ 369,304
18,030
3,884
$ 391,218

~~15. SUBSEQUENT EVENTS~~

On ~~August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 million of DSW Common Shares under our share repurchase program.~~

On August 22, 2017, the Board of Directors declared a quarterly cash dividend payment of $0.20 per share for both Class A and Class B Common Shares. The dividend will be paid on September 29, 2017 to shareholders of record at the close of business on September 19, 2017.

On August 25, 2017, we entered into a new senior unsecured revolving credit agreement (the "New Credit Facility") with a maturity date of August 25, 2022 that provides a revolving line of credit up to $300 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The New Credit Facility replaces the Credit Facility and the Letter of Credit Agreement dated August 2, 2013. The New Credit Facility may be further increased by up to $100 million subject to agreed upon terms and conditions. The New Credit Facility may be used to provide funds for ongoing and seasonal working capital, capital expenditures, dividends and share repurchases, other expenditures, and permitted acquisitions (as defined). The interest rates and feesU.S. under the ~~New Credit Facility fluctuate based~~DSW banner and its related e-commerce site. The Canada Retail segment, which is the result of the TSL Acquisition on ~~our leverage ratio.~~May 10, 2018, includes stores operated in Canada under The ~~New Credit Facility allows~~Shoe Company, Shoe Warehouse, Town Shoes, DSW Designer Shoe Warehouse banners and related e-commerce sites. Our other operating segments, ABG and Ebuys, are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes. ABG was previously presented as a separate reportable segment that has now been included in Other due to us ~~to select our interest rate for each borrowing from multiple interest rate options that are generally derived from the prime rate or LIBOR.~~no longer

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~In addition,~~providing services to Gordmans after fiscal 2017. Prior periods presented have been restated to present the ~~New Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well~~DSW segment as the ~~maintenance~~U.S. Retail segment and to include ABG in Other for comparative purposes.

The performance of ~~a leverage ratio not to exceed 3.25:1~~each segment is based on net sales and ~~a fixed charge coverage ratio not to be~~gross profit, which is defined as net sales less ~~than 1.75:1. A violation~~cost of any of the covenants could result in a default under the New Credit Facility that would permit the lenders to restrict our ability to further access the New Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the New Credit Facility. As of August 25, 2017, we were in compliance with the covenants of the New Credit Facility.sales, as follows:



(in thousands)	U.S. Retail		Canada Retail	Other	Total
Three months ended August 4, 2018
Net sales	$	691,757	72,532	29,446	$	793,735
Gross profit	$	229,601	18,218	6,676	$	254,495
Three months ended July 29, 2017
Net sales	$	629,691	—	52,030	$	681,721
Gross profit	$	194,863	—	4,434	$	199,297
Six months ended August 4, 2018
Net sales	$	1,361,541	72,532	70,099	$	1,504,172
Gross profit	$	427,945	18,218	13,557	$	459,720
Six months ended July 29, 2017
Net sales	$	1,254,195	—	118,345	$	1,372,540
Gross profit	$	381,369	—	15,013	$	396,382

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

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

Some of the statements in this Quarterly Report on Form 10-Q contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. ~~Such~~Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can ~~be identified~~identify these forward-looking statements by the use of forward-looking words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," ~~"anticipates"~~"anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to those factors described under "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K filed on March 23, ~~2017,~~2018, some important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements include, but are not limited to, the following:

our success in growing our store base and digital demand;

risks related to our acquisition of TSL, including the possibility that the anticipated benefits of the acquisition are not realized when expected or at all;

our ability to protect our reputation;

maintaining strong relationships with our vendors;

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

risks related to the loss or disruption of our distribution and/or fulfillment operations;

continuation of agreements with and our reliance on the financial condition of ~~our affiliated business and international partners;~~Stein Mart;

our ability to ~~successfully integrate Ebuys, Inc.;~~execute our strategies;

risks related to international franchisees failing to perform under their obligations and/or not operating the franchised stores according to our standards;

fluctuation of our comparable sales and quarterly financial performance;

risks related to the loss or disruption of our information systems and data;

our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data;

failure to retain our key executives or attract qualified new personnel;

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

risks related to leases of our properties;

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

our reliance on ~~our DSW Rewards program and marketing to drive traffic, sales and customer loyalty;~~

~~uncertain general economic conditions;~~

~~our reliance on~~ foreign sources for merchandise and risks inherent to international trade;

~~risks related to leases of our properties;~~

~~risks related to prior and current acquisitions;~~

~~risks~~uncertainty related to future legislation, regulatory reform, policy changes, or ~~policy changes;~~interpretive guidance on existing legislation, including the impact of the Tax Cuts and Jobs Act;

~~foreign currency exchange risk; and~~uncertain general economic conditions;

risks related to holdings of cash and investments and access to ~~liquidity.~~liquidity; and

fluctuations in foreign currency exchange rates.

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.

Executive Overview

~~With our mission to inspire self-expression,~~We started the fiscal year with a significant tax benefit resulting from corporate tax reform, which we are ~~deepening~~reinvesting towards our growth initiative by driving higher market share through positive comparable sales growth. Accordingly, we are investing in product, marketing, people, and innovation to expand DSW’s category leadership and market share, differentiate our brand, and ultimately strengthen our competitive position.

Our merchandising strategy focuses on increasing key item sourcing, strategic category distortions and the expansion of DSW kids, which delivered close to a 10% comparable sales increase in the second quarter of fiscal 2018. We completed our kids roll out with 94 new locations and bringing our kids product offering chainwide this year. The kids business makes us more competitive during the important back-to-school season.

We saw solid returns from our marketing investments, with growth in new customer ~~connection~~transactions, average spend per member, rewards redemption and member activation rate. We launched our new redesigned loyalty program, DSW VIP, providing customers a program with ~~unique products~~a simpler points structure, enhanced shipping options and ~~meaningful experiences~~new benefits for engaging with the DSW brand. This marks an important milestone in our strategy to elevate our brand with new customer experiences. The strong customer response to our marketing campaign contributed to higher traffic activity during the quarter.

As part of our focus on improving customer engagement, we have updated our processes to more efficiently allocate labor between task-specific and customer-facing functions while adding more store labor hours to provide better customer coverage during peak hours. We implemented this new labor model during the second quarter of fiscal 2018.

Under our innovation agenda, we also expanded the pilot of our new store design to additional locations this quarter. This format enables us to increase physical capacity to showcase more product choices and carry more product. Furthermore, we continue to develop new service offerings that ~~will define us as~~drive traffic. Based on favorable customer response, we are in the ~~trusted authority~~process of identifying new locations to pilot this format.

On May 10, 2018, we completed the acquisition of the remaining interest in TSL. After completing a comprehensive review of our Canadian acquisition, we have decided to focus our efforts on its three largest banners closest to our core competency and target customer. These three banners account for ~~all things footwear.~~approximately 85% of sales with solid growth prospects.

As a result, we are exiting the smallest banner, which has experienced a decline in profitability in recent years. We are focused on ~~differentiating~~aligning the DSW Canada banner closer with our ~~assortment by growing relevant brands~~U.S. business and improving consistency and localization across our fleet. Furthermore, we are putting more product closer to the customer and co-developing technology that will empower associates to better serve our customers.

We are focused on leveraging our warehouse network and accelerating digital demand. With our brick and mortar locations within 20 miles from approximately 70% of our target population, we aim to provide a seamless shopping experience across all channels, with capabilities such as buy online, pickup in store and buy online, ship to store. We are mobilizing inventory across our channels, which increases our assortment breadth and enables us to effectively manage inventory within the enterprise. With our acquisition of Ebuys, we have expanded our presence in the fast-growing digital marketplaces and have started building the infrastructure that will better leverage Ebuys' platform in the coming years.

As of July 29, 2017, we operated 510 DSW stores, dsw.com and shoe departments in 291 Stein Mart stores and Steinmart.com, 57 Gordmans stores, and one Frugal Fannie's store. On March 13, 2017, Gordmans filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code and announced its plan to liquidatestrengthening inventory and other assets. Stage Stores, Inc. acquired 58 of the Gordmans' stores, including one closed store that will be reopened, and we have signed an agreement to provide services for these stores through the end of fiscal 2017. During the six months ended July 29, 2017, Gordmans closed 49 stores.

merchandising processes.

Financial Summary

Total ~~net sales~~revenue increased to ~~$680.4~~$795.3 million for the three months ended August 4, 2018 from $683.0 million for the three months ended July 29, ~~2017 from $658.9 million for the three months ended July 30, 2016.~~2017. The ~~3.3%~~16.4% increase in total ~~net sales~~revenue was primarily driven by ~~new store~~incremental sales ~~and the 0.6%~~from TSL, a 9.7% increase in comparable sales,⁽¹⁾, and an increase from non-comparable store sales, partially offset by the ~~decrease~~loss of sales of Gordmans stores and the exit of Ebuys. The comparable sales increase was driven by growth in ~~net sales due to the closure of 49 Gordmans stores.~~all categories and channels.

During the three months ended ~~July 29, 2017,~~August 4, 2018, gross profit as a percentage of net sales was ~~28.9%~~32.1%, an increase of 50290 basis points from ~~28.4%~~29.2% in the previous year. The increase in the gross profit rate was primarily driven by ~~lower markdowns.~~favorable merchandise margin and the impact of the exit of Ebuys during the current year. Effective inventory management delivered better in-stock rates, which resulted in improved conversion and regular price selling that drove higher margins.

Net loss for the three months ended August 4, 2018 was $38.4 million, or $0.48 loss per diluted share, which included net after-tax charges of $89.3 million, or $1.11 per diluted share, primarily related to the acquisition of the Canadian retail business. Net income for the three months ended July 29, 2017 was ~~$28.6~~$28.7 million, or ~~$0.35~~$0.36 per diluted share, which included ~~pre-tax~~net after-tax charges of ~~$3.2~~$2.0 million, or ~~$0.03~~$0.02 per share, related to the amortization of intangibles and the change in fair value of the contingent consideration liability associated with the acquisition of Ebuys, restructuring costs and foreign exchange net losses. ~~Net income for the three months ended July 30, 2016 was $25.0 million, or $0.30 per diluted share, which included pre-tax charges of $6.7 million, or $0.05 per share, related~~

In addition to ~~transaction costs, purchase accounting impacts, change in fair value of the contingent consideration liability associated with~~ the acquisition of ~~Ebuys and restructuring costs.~~

WeTSL, we have continued making investments in our business that support our long-term growth objectives. ~~On March 4, 2016, we acquired Ebuys, a leading off price footwear and accessories retailer operating in digital marketplaces, for a total purchase price of $113.1 million.~~ During the ~~six~~three months ended ~~July 29, 2017,~~August 4, 2018, we invested ~~$28.1~~$32.1 million in capital expenditures compared to ~~$51.9~~$28.1 million during the ~~six~~three months ended July ~~30, 2016.~~29, 2017. Our capital expenditures during the first half of fiscal ~~2017~~2018 primarily related to ~~nine~~six new store openings, store remodels and business infrastructure. ~~During fiscal 2017, we~~We plan to open ~~a total of 15~~nine new DSW stores ~~and close two to four stores.~~in the U.S., with no planned openings in Canada post-acquisition, in fiscal 2018.

~~(1)~~

A store or affiliated shoe department is considered comparable when in operation for at least 14 months at the beginning of the fiscal year. Stores or affiliated business departments, as the case may be, are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter they are closed. Comparable sales includes sales from dsw.com and currently excludes sales from Gordmans and Ebuys. 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.

Results of Operations

The following represents components of our consolidated results of operations, ~~expressed as~~with associated percentages of ~~net sales:~~total revenue:


	Three months ended		Six months ended		Three months ended										Six months ended
	July 29, 2017	July 30, 2016	July 29, 2017	July 30, 2016
(dollars in thousands)					August 4, 2018					July 29, 2017					August 4, 2018					July 29, 2017
Revenue:
Net sales	100.0%	100.0%	100.0%	100.0%	$	793,735		99.8	%	$	681,721		99.8	%	$	1,504,172		99.8	%	$	1,372,540		99.8	%
Franchise and other revenue					1,533			0.2		1,291			0.2		3,198			0.2		2,510			0.2
Total revenue					795,268			100.0		683,012			100.0		1,507,370			100.0		1,375,050			100.0
Cost of sales	(71.1)	(71.6)	(71.4)	(70.8)	(539,240		)	(67.8	)	(482,424		)	(70.6	)	(1,044,452		)	(69.3	)	(976,158		)	(71.0	)
Gross profit	28.9	28.4	28.6	29.2
Franchise costs					(293		)	—		—			—		(573		)	—		—			—
Operating expenses	(21.9)	(22.0)	(22.0)	(22.3)	(195,026		)	(24.5	)	(152,554		)	(22.3	)	(363,166		)	(24.1	)	(309,122		)	(22.5	)
Impairment charges					(36,240		)	(4.6	)	—			—		(36,240		)	(2.4	)	—			—
Change in fair value of contingent consideration liability	(0.1)	(0.4)	(0.2)	(0.3)	—			—		(1,168		)	(0.2	)	—			—		(2,252		)	(0.2	)
Operating profit	6.9	6.0	6.4	6.6	24,469			3.1		46,866			6.9		62,939			4.2		87,518			6.4
Interest income, net	0.1	0.1	0.1	0.1	805			0.1		661			0.1		1,469			0.1		1,222			0.1
Non-operating income (expense)	(0.1)	0.0	(0.2)	0.0
Income before income taxes and income (loss) from Town Shoes	6.9	6.1	6.3	6.7
Non-operating expenses, net					(47,349		)	(6.0	)	(679		)	(0.1	)	(49,486		)	(3.3	)	(2,183		)	(0.2	)
Income (loss) before income taxes and income (loss) from equity investment					(22,075		)	(2.8	)	46,848			6.9		14,922			1.0		86,557			6.3
Income tax provision	(2.7)	(2.4)	(2.4)	(2.6)	(16,281		)	(2.0	)	(18,390		)	(2.7	)	(27,671		)	(1.8	)	(33,975		)	(2.5	)
Income (loss) from Town Shoes	0.0	0.1	(0.1)	0.0
Net income	4.2%	3.8%	3.8%	4.1%
Income (loss) from equity investment					—			—		219			—		(1,310		)	(0.1	)	(1,087		)	(0.1	)
Net income (loss)					$	(38,356	)	(4.8	)%	$	28,677		4.2	%	$	(14,059	)	(0.9	)%	$	51,495		3.7	%

Three and Six Months Ended ~~July 29, 2017~~August 4, 2018 Compared to Three and Six Months Ended July ~~30, 2016~~29, 2017

Net Sales

Net sales for the three months ended ~~July 29, 2017~~August 4, 2018 increased ~~3.3%~~16.4% compared to the three months ended July ~~30, 2016. Net sales for the six months ended July~~ 29, ~~2017 increased 2.3% compared to the six months ended July 30, 2016.~~2017. The following summarizes the change in total net sales from the same period last year:


	Three months ended July 29, 2017		Six months ended July 29, 2017
	(in thousands)
(in thousands)						Three months ended August 4, 2018			Six months ended August 4, 2018
Net sales for the same period last year	$	658,944	$	1,340,211		$	681,721		$	1,372,540
Increase (decrease) in comparable sales	3,590		(15,872		)
Net increase from non-comparable store sales, Gordmans, Ebuys and other changes	17,875		47,172
Increase in comparable sales						60,633			75,371
Net increase from non-comparable store sales and other changes						3,430			36,153
Increase due to TSL sales						72,532			72,532
Loss of sales from Gordmans and Ebuys						(24,581		)	(52,424		)
Total net sales	$	680,409	$	1,371,511		$	793,735		$	1,504,172

The following summarizes net sales by segment:


	Three months ended							Six months ended							Three months ended							Six months ended
	July 29, 2017		July 30, 2016		Change			July 29, 2017		July 30, 2016		Change
	(in thousands)
DSW segment	$	628,379	$	603,927	$	24,452		$	1,253,166	$	1,226,959	$	26,207
ABG segment	31,330		35,446		(4,116		)	75,318		78,585		(3,267		)
(in thousands)															August 4, 2018		July 29, 2017		Change			August 4, 2018		July 29, 2017		Change
U.S. Retail segment															$	691,757	$	629,691	$	62,066		$	1,361,541	$	1,254,195	$	107,346
Canada Retail segment															72,532		—		72,532			72,532		—		72,532
Other⁽¹⁾	20,700		19,571		1,129			43,027		34,667		8,360			29,446		52,030		(22,584		)	70,099		118,345		(48,246		)
Total net sales	$	680,409	$	658,944	$	21,465		$	1,371,511	$	1,340,211	$	31,300		$	793,735	$	681,721	$	112,014		$	1,504,172	$	1,372,540	$	131,632


(1)	Other represents net sales for ~~Ebuys~~ABG and ~~franchise activity with the Apparel Group.~~Ebuys.

The following summarizes our comparable sales ~~change by reportable segment and in total:~~change:

Three months ended Six months ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
DSW segment 0.6% (1.2)% (1.3)% (1.3)%
ABG segment (0.1)% (1.0)% (1.0)% (2.3)%
Total Company 0.6% (1.2)% (1.3)% (1.4)%



	Three months ended				Six months ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
U.S. Retail segment	9.6	%	0.6	%	5.7	%	(1.3	)%
Other - ABG	12.2	%	(0.1	)%	8.2	%	(1.0	)%
Total Company	9.7	%	0.6	%	5.8	%	(1.3	)%

Our increase in total net sales for the three and six months ended ~~July 29, 2017~~August 4, 2018 over the same period last year was primarily driven by ~~new store~~the incremental sales from TSL and the ~~0.6%~~ increase in comparable and non-comparable store sales, partially offset by the ~~decrease in net~~loss of sales ~~due to~~of Gordmans stores and the ~~closure~~exit of ~~49 Gordmans stores.~~Ebuys. Within the ~~DSW~~U.S. Retail segment, comparable sales increased as we had higher comparable transactions ~~led by an increase in traffic,~~ partially offset by ~~declines~~a decline in comparable ~~units~~average dollar sales per transaction. We ~~had~~continue to have strong growth in digital demand with ~~an increase in~~a trend of increasing our store fulfillment of digital orders.

~~Our increase in total net~~Franchise and Other Revenue

Franchise and other revenue consists of merchandise sales, ~~for the six months ended July 29, 2017 was primarily driven~~royalties and other fees paid by ~~new store sales, partially offset by the 1.3% decrease in comparable sales and the decrease due to the closure of 49 Gordmans stores. Within the DSW segment, comparable sales decreased~~franchisees, as comparable average unit retail and units per transaction declined, partially offset by the increase in comparable transactions led by higher traffic. We had growth in digital demand with an increase in our store fulfillment of digital orders.well as rental income on owned properties.

Gross Profit

Gross profit ~~increased~~is determined as a percentage of net sales to 28.9% for the three months ended July 29, 2017 from 28.4% for the three months ended July 30, 2016. Gross profit decreased as a percentage of net sales to 28.6% for the six months ended July 29, 2017 from 29.2% for the six months ended July 30, 2016. follows:



	Three months ended						Six months ended
(in thousands)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Net sales	$	793,735		$	681,721		$	1,504,172		$	1,372,540
Cost of sales	(539,240		)	(482,424		)	(1,044,452		)	(976,158		)
Gross profit	$	254,495		$	199,297		$	459,720		$	396,382
Gross profit as a percentage of net sales	32.1		%	29.2		%	30.6		%	28.9		%

The following presents ~~each segment's~~ gross profit and their components ~~and the total Company gross profit,~~ as a percentage of net sales:

Three months ended Six months ended
July 29, 2017 July 30, 2016 July 29, 2017 July 30, 2016
DSW segment merchandise margin 44.1 % 43.1 % 43.5 % 43.5 %
Store occupancy expenses (11.4 ) (11.5 ) (11.2 ) (11.2 )
Distribution and fulfillment expenses (2.1 ) (2.1 ) (2.2 ) (2.2 )
DSW segment gross profit 30.6 % 29.5 % 30.1 % 30.1 %
ABG segment merchandise margin 42.3 % 41.7 % 44.3 % 44.3 %
Occupancy expenses (20.6 ) (20.2 ) (20.7 ) (20.3 )
Distribution and fulfillment expenses (1.1 ) (1.1 ) (1.1 ) (1.1 )
ABG segment gross profit 20.6 % 20.4 % 22.5 % 22.9 %
Other segment merchandise margin - Ebuys 19.8 % 34.0 % 25.1 % 34.2 %
Marketplace fees (11.2 ) (12.0 ) (11.8 ) (11.5 )
Fulfillment expenses (18.3 ) (13.0 ) (17.8 ) (11.5 )
Other segment gross profit - Ebuys (9.7 )% 9.0 % (4.5 )% 11.2 %
Total Company gross profit 28.9 % 28.4 % 28.6 % 29.2 %



	Three months ended				Six months ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
U.S. Retail segment:
Merchandise margin	45.9	%	44.4	%	44.3	%	43.8	%
Store occupancy expenses	(10.6	)	(11.4	)	(10.6	)	(11.2	)
Distribution and fulfillment expenses	(2.1	)	(2.1	)	(2.3	)	(2.2	)
Gross profit	33.2		30.9		31.4		30.4
Canada Retail segment:
Merchandise margin	41.2		—		41.2		—
Store occupancy expenses	(14.9	)	—		(14.9	)	—
Distribution and fulfillment expenses	(1.2	)	—		(1.2	)	—
Gross profit	25.1		—		25.1		—
Other - gross profit	22.7		8.5		19.3		12.7
Total Company gross profit	32.1	%	29.2	%	30.6	%	28.9	%

~~DSW~~The U.S. Retail segment ~~gross profit~~merchandise margin increased ~~110~~150 basis points for the three months ended ~~July 29, 2017 due to higher initial markups~~August 4, 2018 and ~~lower markdowns, while occupancy expenses and distribution and fulfillment expenses remained relatively flat. ABG segment gross profit~~ increased 20 basis points for the three months ended July 29, 2017 due to higher initial markups, partially offset by higher markdowns and the impact of the closures of Gordmans stores. During the three months ended July 29, 2017, Ebuys' merchandise margin was negatively impacted by higher markdowns and additional inventory reserves, as well as higher fulfillment expenses as Ebuys transitions to a single fulfillment center.

For the six months ended July 29, 2017, DSW segment gross profit was flat to last year. Improvements during the second quarter of fiscal 2017 were offset by the impact of adding a rotation to the first quarter. ABG segment gross profit decreased 4050 basis points for the six months ended ~~July 29, 2017~~August 4, 2018 over the same periods last year primarily due to lower markdowns, partially offset by higher shipping costs. U.S. Retail segment store occupancy expenses as a percentage of net sales was favorable due to improved leverage. Other gross profit margin increased primarily due to the ~~impact~~exit of Ebuys during the ~~closures of Gordmans stores partially offset by higher initial markups. During the six months ended July 29, 2017, Ebuys' merchandise margin was negatively impacted by higher~~

~~markdowns and additional inventory reserves, as well as higher fulfillment expenses as Ebuys transitions to a single fulfillment center.~~current year.

Operating Expenses

For the three and six months ended ~~July 29, 2017,~~August 4, 2018, operating expenses as a percentage of ~~net sales decreased 10~~total revenue increased 220 and 30160 basis points, respectively, ~~due~~over the same periods last year driven by an increase in marketing investments and the impact of lease exit charges, acquisition-related costs, restructuring charges, and consolidating results of TSL during the current period, partially offset by lower store expenses.

Impairment Charges

With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the three months ended August 4, 2018, we recorded a goodwill impairment charge, which resulted in impairing all of TSL’s goodwill.

Non-operating Expenses, net

Due to ~~lower corporate and store expenses and higher transaction costs associated with~~ the acquisition of ~~Ebuys~~the remaining interest in TSL during the second quarter of fiscal 2018, we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL. As a result of the remeasurement, we recorded a loss of $34.0 million to non-operating expenses, net. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.

Income Taxes

On December 22, 2017, the U.S. Tax Reform was enacted in the ~~same period last year.~~

~~Non-operating Income (Expense)~~

~~During~~U.S., which included the ~~three~~reduction in the federal statutory tax rate from 35% to 21%. Offsetting the favorable impact from the U.S. Tax Reform, during the six months ended August 4, 2018, we had additional tax provision expense of $24.0 million due to recording a valuation allowance associated with deferred tax assets and nondeductible discrete items, primarily related to the charges recorded as a result of the acquisition of TSL. As a result, our effective tax rate changed from 39.8% for the six months ended July 29, 2017 ~~we recognized foreign exchange losses of $0.7 million and $2.2 million, respectively, in the process of reinvesting Canadian instruments related~~ to ~~the pre-funding of our remaining stake in Town Shoes.~~

~~Income Taxes~~

~~Our effective tax rate~~203.3% for the ~~three and~~ six months ended July 29, 2017 was 39.1% and 39.7%, respectively. Our effective tax rate for the three and six months ended July 30, 2016 was 38.6% and 38.7%, respectively. The increase in the income tax rate was primarily driven by net unfavorable discrete tax items in the first half of fiscal 2017.August 4, 2018.

~~Income (Loss) from Town Shoes~~

~~Income (Loss) from Town Shoes includes our portion of the income (loss) in Town Shoes' operations, offset by the interest income on the note receivable from Town Shoes.~~

Seasonality

Our business is subject to seasonal merchandise trends driven by the change in weather conditions and our customers' interest in new seasonal styles. New spring styles are primarily introduced in the first quarter, and new fall styles are primarily introduced in the third quarter.

Liquidity and Capital Resources

Overview

Our primary ongoing operating cash flow requirements are for inventory purchases, capital expenditures for new stores, improving our information technology systems and infrastructure growth. Our working capital and inventory levels typically build seasonally. ~~During the first half of fiscal~~On May 10, 2018, we ~~intend to exercise the call option to purchase~~acquired the remaining interest in TSL using cash on hand for $36.2 million CAD ($28.2 million USD), net of acquired cash of $8.5 million CAD ($6.6 million USD).

As a result of our decision to exit the Town ~~Shoes.~~Shoes banner by the end of fiscal 2018 or early fiscal 2019, we estimate the total cost of approximately $20.0 million to $25.0 million to exit the Town Shoes banner representing lease exit charges, severance, and inventory write-downs.

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. We believe that cash generated from our operations, together with our current levels of cash and investments, as well as availability under our ~~New~~ Credit Facility, are sufficient over the next 12 months and the foreseeable future to maintain our ongoing operations, support seasonal working capital requirements, fund capital expenditures, and ~~complete the Town Shoes acquisition over the next 12 months and the foreseeable future.~~repurchase common shares under our share repurchase program.

~~On November 2, 2015,~~Operating Cash Flows

For the ~~Board~~six months ended August 4, 2018, net cash provided by operations was $106.6 million compared to $44.6 million for the six months ended July 29, 2017. The increase was driven by an increase in net income after adjusting for non-cash activity, including depreciation and amortization, impairment charges, the loss on previously held assets in TSL, loss on foreign currency reclassified from accumulated other comprehensive loss, stock-based compensation, the change in deferred income taxes, and lease exit charges. In addition, net cash provided by operations increased due to working capital changes as a result of ~~Directors approved~~the timing of inventory receipts and payments to merchandise vendors, as well as a ~~$200~~reduction in Canada Retail inventory through clearance activity.

Investing Cash Flows

For the six months ended August 4, 2018, our net cash used in investing activities was $25.7 million, ~~share repurchase program. As~~which was due to the acquisition of TSL, capital expenditures of $32.1 million and $16.0 million of additional borrowings by TSL prior to the acquisition, partially offset by the net liquidation of our available-for sale-securities. During the six months ended July 29, 2017, ~~we had $33.5~~our net cash used in investing activities was $35.3 million, ~~remaining.~~ which included the payment of $28.1 million for capital expenditures and $5.7 million of additional borrowings by TSL.

Financing Cash Flows

For the six months ended August 4, 2018, our net cash used in financing activities was $41.1 million compared to $31.5 million for the six months ended July 29, 2017. Net cash used in financing activities was primarily related to the payment of dividends, which was increased from $0.20 per share in fiscal 2017 to $0.25 per share in fiscal 2018.

On August 17, 2017, the Board of Directors ~~approved~~authorized the repurchase of an additional ~~$500~~$500.0 million of DSW common shares under our share repurchase ~~program.~~program, which was added to the $33.5 million remaining from the previous authorization. During the six months ended August 4, 2018 and July 29, 2017, we did not repurchase any Class A common shares, with $524.1 million of Class A common shares that remain authorized under the program as of August 4, 2018. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our common shares under the program. We will determine the amount of shares to repurchase based on generated and expected cash flow and cash usage needs, past and anticipated business performance and available alternative investment opportunities. Shares will be repurchased in the open market at times and in amounts considered appropriate based on price and market conditions.

~~Operating Cash Flows~~

For the six months ended July 29, 2017, net cash provided by operations was $44.6 million compared to $61.1 million for the six months ended July 30, 2016. The decrease was primarily driven by the timing of certain payments related to our working capital, as well as lower net income adjusted for non-cash activity.

~~Investing Cash Flows~~

For the six months ended July 29, 2017, our net cash used in investing activities was $35.3 million compared to net cash provided by investing activities of $2.5 million for the six months ended July 30, 2016. During the six months ended July 29, 2017, we paid $28.1 million for capital expenditures, of which approximately $12.0 million related to stores, $11.0 million related to technology and the remaining related to other business projects. During the six months ended July 30, 2016, we paid $51.9 million for capital expenditures, of which $20.7 million related to new stores, $23.0 million related to technology and the remaining related to other business projects. During the six months ended July 29, 2017, we had net purchases of investments of $1.4 million compared to net sales of investments of $121.5 million during the six months ended July 30, 2016, which was partially used to fund the $60.4 million acquisition of Ebuys.

~~Financing Cash Flows~~

For the six months ended July 29, 2017, our net cash used in financing activities was $31.5 million compared to $33.4 million for the six months ended July 30, 2016. Net cash used in financing activities for both periods was primarily related to the payment of dividends.

Debt

Credit Facility- On August 2, 2013, we entered into a secured revolving credit agreement (the "Credit Facility") that provides revolving credit up to $100 million. The Credit Facility, together with the Letter of Credit Agreement (defined below), amended and restated the prior credit facility, dated June 30, 2010. The Credit Facility is secured by a lien on substantially all of DSW Inc.'s personal property assets and its subsidiaries, with certain exclusions, and may be used to provide funds for general corporate purposes, to provide for ongoing working capital requirements and to make permitted acquisitions. Revolving credit loans bear interest under the Credit Facility at our option under: (a) a base rate option at a rate per annum equal to the highest of (i) the Federal Funds Open Rate (as defined in the Credit Facility), plus 0.5%, (ii) the Lender's prime rate, and (iii) the Daily LIBOR Rate (as defined in the Credit Facility) plus 1.0%, plus in each instance an applicable margin, which is between 1.00 and 1.25, based upon revolving credit availability; or (b) a LIBOR option at a rate equal to the LIBOR Rate (as defined in the Credit Facility), plus an applicable margin based upon our revolving credit availability. In addition, the Credit Facility contains restrictive covenants relating to the management and operation of our business. These covenants, among other things, limit or restrict our ability to grant liens on our assets, limit our ability to incur additional indebtedness, limit our ability to enter into transactions with affiliates and limit our ability to merge or consolidate with another entity. Our Credit Facility allows the payment of dividends by us or our subsidiaries, provided that we meet the minimum cash and investments requirement of $125 million, as defined in the Credit Facility. An additional covenant limits payments for capital expenditures to $200 million in any fiscal year. As of July 29, 2017, we had no outstanding borrowings under the Credit Facility with availability of $100 million and we were in compliance with all covenants. Interest expense related to the Credit Facility includes fees, such as commitment and line of credit fees.

~~Letter of Credit Agreement-~~ Also on August 2, 2013, we entered into a letter of credit agreement (the "Letter of Credit Agreement"). The Letter of Credit Agreement provides for the issuance of letters of credit up to $50 million. The facility for the issuance of letters of credit is secured by a cash collateral account containing cash in an amount equal to 103% of the face amount of any letter of credit extension (105% for extensions denominated in foreign currency) and is used for general corporate purposes. The Letter of Credit Agreement requires compliance with conditions precedent that must be satisfied prior to issuing any letter of credit or extension. In addition, the Letter of Credit Agreement contains restrictive covenants relating to the management and operation of our business. These covenants, among other things, limit or restrict our ability to grant liens on our assets, limit our ability to incur additional indebtedness, limit our ability to enter into transactions with affiliates and limit our ability to merge or consolidate with another entity. An event of default may cause the applicable interest rate and fees to increase by 2% per annum. As of July 29, 2017, we were in compliance with all covenants. As of July 29, 2017, January 28, 2017 and July 30, 2016, we had outstanding letters of credit under the Letter of Credit Agreement of $3.6 million, $3.8 million, and $7.9 million, respectively.

~~New Credit Facility- On August~~ 25, 2017, we entered into a ~~new~~ senior unsecured revolving credit agreement (the ~~"New Credit~~"Credit Facility") with a maturity date of August 25, 2022 that replaced our previous secured revolving credit agreement and letter of credit agreement. The Credit Facility provides a revolving line of credit up to $300 million, with sub-limits for the issuance of up to $50 million in letters of credit, swing loan advances of up to $15 million, and the issuance of up to $75 million in foreign currency revolving loans and letters of credit. The ~~New Credit Facility replaces the Credit Facility and the Letter of Credit Agreement dated August 2, 2013. The New~~ Credit Facility may be further increased by up to $100 million subject to ~~agreed upon~~agreed-upon terms and conditions. The ~~New~~ Credit Facility may be used to provide funds for ~~ongoing and seasonal~~ working capital, capital expenditures, dividends and share repurchases, other expenditures, and permitted acquisitions ~~(as defined). The interest rates and fees~~as defined by the Credit Facility.

Loans issued under the ~~New~~revolving line of credit bear interest, at our option, at a base rate or an alternate base rate as defined in the Credit Facility ~~fluctuate~~plus a margin based on our leverage ratio, with any loans issued in CAD bearing interest at the alternate base rate plus a margin based on our leverage ratio. ~~The New~~Interest on letters of credit issued under the Credit Facility ~~allows us~~is variable based on our leverage ratio and the type of letters of credit. Commitment fees are based on the average unused portion of the Credit Facility at a variable rate based on our leverage ratio. As of August 4, 2018, we had no outstanding borrowings under the Credit Facility and $1.2 million in letters of credit issued resulting in $298.8 million available for borrowings. Interest expense related to ~~select our~~the Credit Facility includes letters of credit interest, ~~rate for each borrowing from multiple interest rate options that are generally derived from~~commitment fees and the ~~prime rate or LIBOR. In addition, the New~~amortization of debt issuance costs.

Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on

indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. A violation of any of the covenants could result in a default under the ~~New~~ Credit Facility that would permit the lenders to restrict our ability to further access the ~~New~~ Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the ~~New~~ Credit Facility. As of August ~~25, 2017,~~4, 2018, we were in compliance with ~~the covenants of the New Credit Facility.~~all financial covenants.

Capital Expenditure Plans

We expect to spend approximately ~~$70~~$90 million for capital expenditures in fiscal ~~2017, with approximately a third going into new stores and store remodels and~~2018, which now includes our planned capital expenditures related to the ~~remaining going into technology investments, including digital investments, and other business projects.~~Canada Retail segment. Our future investments will depend primarily on the number of stores we open and remodel, infrastructure and information technology projects that we undertake and the timing of these expenditures. ~~During fiscal 2017, we~~We plan to open ~~15 stores.~~nine new DSW stores in the U.S. in fiscal 2018 with no planned openings in Canada post-acquisition. The average investment required to open a new DSW store in the U.S. is approximately $1.4 million prior to construction and tenant allowances, which average $0.4 million. Of this amount, gross inventory typically accounts for $0.5 million, fixtures and leasehold improvements typically account for $0.7 million, and new store advertising and other new store expenses typically account for $0.2 million.

Off-Balance Sheet Liabilities and Other Contractual Obligations

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

We have included a summary of our contractual obligations as of ~~January 28, 2017~~February 3, 2018 in our Annual Report on Form 10-K for the fiscal year ended ~~January 28, 2017.~~February 3, 2018. As of July 29, 2017, we have entered into various construction commitments, including capital items to be purchased for projects that were under construction, or for which a lease has been signed. Our obligations under these commitments were $0.7 million as of July 29, 2017. In addition,August 4, 2018, we have entered into various noncancelable purchase and service ~~agreements. The~~agreements resulting in purchase obligations ~~under these agreements were~~of approximately ~~$13.0 million as of July 29, 2017.~~$21.8 million. There have been no other material changes in contractual obligations outside the ordinary course of business since ~~January 28, 2017.~~February 3, 2018.

Recent Accounting Pronouncements

The information related to recent accounting pronouncements as set forth in Note 3,1, Significant Accounting Policies, of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.

Critical Accounting Policies and Estimates

The preparation of our 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 consolidated financial statements and reported amounts of ~~revenues~~revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining

significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation

of the 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 consolidated financial statements. ~~The description~~During the first quarter of fiscal 2018, we adopted the new accounting standard for revenue recognition, ASU 2014-09 and the related amendments, using the full retrospective method, as disclosed in more detail in Note 3, Revenue, of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. There have been no other material changes to the application of critical accounting policies ~~is included~~disclosed in our Annual Report on Form 10-K for the fiscal year ended ~~January 28, 2017.~~February 3, 2018, except for the following additional policy:



Policy	Judgments and Estimates	Effect if Actual Results Differ from Assumptions
Business combinations. We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed be recorded at their respective fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires estimates and the use of valuation techniques when market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill.	The fair value for property and equipment was determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling costs. For intangible assets, we generally use the income approach to determine fair value. The income approach requires management to make significant estimates and assumptions. These estimates and assumptions primarily include the use of discount rates, growth rates, royalty rates, and forecasts of revenue and operating income. The discount rates applied to the projections reflect the risk factors associated with those projections.	Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. The final determination of the fair value of certain assets and liabilities is completed within a one-year measurement period from the acquisition date. Changes in assumptions concerning future financial results or other underlying assumptions after the final determination of the fair value could result in impairment charges to long lived assets and/or intangible assets acquired.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have market risk exposure related to interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year.

We currently do not utilize hedging instruments to mitigate these market risks.

Interest Rate Risk

We hold available-for-sale investments. Our results of operations are not materially affected by changes in market interest rates. Also, as of ~~July 29, 2017,~~August 4, 2018, we did not have borrowings under our Credit Facility and, consequently, did not have any material exposure to interest rate market risks during or at the end of this period. However, as any future borrowings under our ~~New~~ Credit Facility will be at a variable rate of interest, we could potentially be impacted should we require significant borrowings in the future, particularly during a period of rising interest rates.

Foreign Currency Exchange Risk

~~The note receivable from Town Shoes is denominated~~We are primarily exposed to the impact of foreign exchange rate risk primarily through our TSL operations in ~~CAD. The~~Canada where the functional currency ~~of Town Shoes~~ is ~~CAD. As USD is our reporting currency, we are required to translate~~ the investment in and note receivable from Town Shoes into USD balances. Each quarter, the income or loss from Town Shoes is recorded in USD at the average exchange rate for the period. The note receivable from Town Shoes is translated in USD at the exchange rate prevailing at the balance sheet date. As we have designated the note receivable from Town Shoes as an investment of a long-term investment nature, we record the translation gains and losses arising from changes in exchange rates in other comprehensive income. In anticipation of funding the future purchase of the remaining interest in Town Shoes, we hold $100 million CAD in available-for-sale securities denominated in CAD, with any foreign currency exchange gains or losses recorded within other comprehensive income.Canadian dollar. A hypothetical 10% movement in the ~~CAD exchange rate~~Canadian dollar could result in a ~~$15.3~~$5.0 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive ~~income.~~loss within the consolidated balance sheets, and $4.6 million of foreign currency revaluation, which would be recorded in non-operating expenses, net within the consolidated statements of operations.

~~We currently do not utilize hedging instruments to mitigate~~During the second quarter of fiscal 2018, as a result of acquiring the remaining interest in TSL, we reclassified a net loss of $12.2 million of foreign currency ~~exchange risks.~~translation related to the previously held balances from accumulated other comprehensive loss to non-operating expenses, net.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

NoExcept as noted in the following sentence, 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. As a result of acquiring the remaining interest in TSL, we have incorporated internal controls over significant processes specific to the acquisition that we believe are appropriate and necessary in consideration of accounting for the acquisition, consolidation, and financial reporting.

In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting during the year of the acquisition while integrating the acquired operations. As a result of acquiring the remaining interest in TSL on May 10, 2018, TSL became a consolidated subsidiary and ceased being accounted for under the equity method. Management's assessment of internal control over financial reporting is expected to exclude the internal controls of TSL.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note ~~13,~~14, Commitments and Contingencies - Legal Proceedings, of the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

As of the date of the filing, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended ~~January 28, 2017.~~February 3, 2018.


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

~~On November 2, 2015, the Board of Directors approved a $200 million share repurchase program. As of July 29, 2017, we had $33.5 million remaining.~~ On August 17, 2017, ~~the~~the Board of Directors ~~approved~~authorized the repurchase of an additional ~~$500~~$500.0 million of Class A common shares under our share repurchase ~~program.~~ 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 common shares under the program. We will determine the amount of shares to repurchase based on generated and expected cash flow and cash usage needs, past and anticipated business performance and available alternative investment opportunities. 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 Share~~common share repurchases during the most recent quarter:

(a)
Total Number of Shares Purchased

(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
(in thousands, except per share amounts)
April 30, 2017 to May 27, 2017 —
$ —
—
$ 33,469
May 28, 2017 to July 1, 2017⁽¹⁾
2
$ 16.80
—
$ 33,469
July 2, 2017 to July 29, 2017 —
$ —
—
$ 33,469
2
$ 16.80
—



(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
May 6, 2018 to June 2, 2018	2	$	25.16	—	$	524,094
June 3, 2018 to July 7, 2018	1	$	24.73	—	$	524,094
July 8, 2018 to August 4, 2018	—	$	—	—	$	524,094
	3	$	24.96	—


(1)	The total number of shares repurchased ~~relates to~~includes shares withheld in connection with tax payments due upon vesting of employee ~~restricted~~ stock awards.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.


~~Item 6.~~	Item 6. Exhibits

~~The Index to Exhibits filed herewith is incorporated herein by reference.~~

~~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.~~

~~DSW INC.~~



~~Date:~~	~~August 25, 2017~~	~~By:~~	~~/s/ Jared Poff~~
			~~Jared Poff~~
			~~Senior Vice President and Chief Financial Officer~~
			~~(Principal Financial and Accounting Officer and duly authorized officer)~~

~~INDEX TO EXHIBITS~~



Exhibit No.		Description
3.1		Amended and Restated Articles of Incorporation of DSW Inc. dated November 1, 2013. Incorporated by reference to Exhibit 3.1 to DSW's Form 8-K (file no. 001-32545) filed November 4, 2013.
3.2		Amended and Restated Code of Regulations of the registrant. Incorporated by reference to Exhibit 3.2 to Form 10-K (file no. 001-32545) filed April 13, 2006.
4.1		Specimen Class A Common Shares Certificate. Incorporated by reference to Exhibit 4.1 to Form 10-K (file no. 001-32545) filed April 13, 2006.
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*		XBRL Instance Documents

* Filed herewith

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.

DSW INC.



Date:	August 30, 2018	By:	/s/ Jared Poff
			Jared Poff
			Senior Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer and duly authorized officer)



	Preliminary Purchase Price as of March 4, 2016			Adjustments			Final Purchase Price as of January 28, 2017
	(in thousands)
Purchase price:
Cash consideration	$	60,411		$	(635	)	$	59,776
Contingent consideration	56,000			(2,645		)	53,355
	$	116,411		$	(3,280	)	$	113,131
Fair value of assets and liabilities acquired:
Accounts and other receivables	$	1,623		$	(287	)	$	1,336
Inventory	30,152			18			30,170
Other current assets	191			335			526
Property and equipment	1,221			22			1,243
Goodwill	54,785			(995		)	53,790
Intangible assets	41,301			(2,600		)	38,701
Accounts payable and other long-term liabilities	(12,862		)	227			(12,635		)
	$	116,411		$	(3,280	)	$	113,131



	Six Months Ended July 30, 2016
	(in thousands)
Net cash provided by investing activities, as previously reported	$	2,043
Eliminated the impact of the increase in restricted cash	467
Net cash provided by investing activities, as adjusted	$	2,510
Net increase in cash and cash equivalents, as previously reported	$	29,829
Eliminated the impact of the increase in restricted cash	467
Net increase in cash, cash equivalents, and restricted cash, as adjusted	$	30,296
Cash and cash equivalents, beginning of period, as previously reported	$	32,495
Included restricted cash	7,676
Cash, cash equivalents, and restricted cash, beginning of period, as adjusted	$	40,171
Cash and cash equivalents, end of period, as previously reported	$	62,324
Included restricted cash	8,143
Cash, cash equivalents, and restricted cash, end of period, as adjusted	$	70,467



	Six months ended July 29, 2017
	Stock Options		RSUs		PSUs		DSUs
	(in thousands)
Outstanding - beginning of period	3,799		351		250		311
Granted	1,756		285		258		71
Exercised / vested	(35	)	(58	)	(34	)	(45	)
Forfeited / expired	(327	)	(63	)	(3	)	—
Outstanding - end of period	5,193		515		471		337



	July 29, 2017
	Total		Level 1		Level 2		Level 3
	(in thousands)
Financial assets:
Cash and cash equivalents	$	89,305	$	89,305	—		—
Short-term investments	182,062		2,265		$	179,797	—
	$	271,367	$	91,570	$	179,797	$	—
Financial liabilities -
Contingent consideration liability	$	36,456	—		—		$	36,456
	$	36,456	$	—	$	—	$	36,456



	(a) Total Number of Shares Purchased	(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
	(in thousands, except per share amounts)
April 30, 2017 to May 27, 2017	—	$	—	—	$	33,469
May 28, 2017 to July 1, 2017⁽¹⁾	2	$	16.80	—	$	33,469
July 2, 2017 to July 29, 2017	—	$	—	—	$	33,469
	2	$	16.80	—