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 ~~August 4,~~November 3, 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 24,~~December 7, 2018: ~~72,561,022~~72,616,543 Class A Common Shares and 7,732,786 Class B Common Shares.

DSW INC.

TABLE OF CONTENTS

All references to "we," "us," "our," "DSW," or the "Company" in this Quarterly Report on Form 10-Q mean DSW Inc. and its ~~wholly-owned~~ subsidiaries. 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						Nine months ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017			November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Revenue:
Net sales	$	793,735		$	681,721		$	1,504,172		$	1,372,540		$	831,669		$	709,651		$	2,335,841		$	2,082,191
Franchise and other revenue	1,533			1,291			3,198			2,510			1,334			1,341			4,532			3,851
Total revenue	795,268			683,012			1,507,370			1,375,050			833,003			710,992			2,340,373			2,086,042
Cost of sales	(539,240		)	(482,424		)	(1,044,452		)	(976,158		)	(560,586		)	(500,924		)	(1,605,038		)	(1,477,082		)
Franchise costs	(293		)	—			(573		)	—			(98		)	—			(671		)	—
Operating expenses	(195,026		)	(152,554		)	(363,166		)	(309,122		)	(226,393		)	(155,175		)	(589,559		)	(464,297		)
Impairment charges	(36,240		)	—			(36,240		)	—
Impairment adjustments (charges)													7,163			(82,701		)	(29,077		)	(82,701		)
Change in fair value of contingent consideration liability	—			(1,168		)	—			(2,252		)	—			31,178			—			28,926
Operating profit	24,469			46,866			62,939			87,518			53,089			3,370			116,028			90,888
Interest income, net	805			661			1,469			1,222			870			602			2,339			1,824
Non-operating expenses, net	(47,349		)	(679		)	(49,486		)	(2,183		)	(108		)	(121		)	(49,594		)	(2,304		)
Income (loss) before income taxes and income (loss) from equity investment	(22,075		)	46,848			14,922			86,557
Income before income taxes and income (loss) from equity investment in TSL													53,851			3,851			68,773			90,408
Income tax provision	(16,281		)	(18,390		)	(27,671		)	(33,975		)	(14,532		)	(1,476		)	(42,203		)	(35,451		)
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
Income (loss) from equity investment in TSL													—			1,630			(1,310		)	543
Net income													$	39,319		$	4,005		$	25,260		$	55,500
Basic and diluted earnings per share:
Basic earnings per share													$	0.49		$	0.05		$	0.31		$	0.69
Diluted earnings per share													$	0.48		$	0.05		$	0.31		$	0.69
Weighted average shares used in per share calculations:
Basic shares	80,265			80,317			80,187			80,267			80,321			80,112			80,231			80,215
Diluted shares	80,265			80,714			80,187			80,729			82,287			80,647			81,686			80,699

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

DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited and in thousands)

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



	Three months ended						Nine months ended
	November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Net income	$	39,319		$	4,005		$	25,260		$	55,500
Other comprehensive income (loss), net of income taxes:
Foreign currency translation loss	(271		)	(7,343		)	(6,321		)	(806		)
Unrealized net loss on debt securities	(133		)	(182		)	(450		)	(149		)
Reclassification adjustment for net losses (gains) realized in net income	14			(26		)	14,179			2,081
Total other comprehensive income (loss), net of income taxes	(390		)	(7,551		)	7,408			1,126
Total comprehensive income (loss)	$	38,929		$	(3,546	)	$	32,668		$	56,626

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

DSW INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands)


	August 4, 2018			February 3, 2018			July 29, 2017			November 3, 2018			February 3, 2018			October 28, 2017
ASSETS
Cash and cash equivalents	$	215,996		$	175,932		$	89,305		$	222,419		$	175,932		$	149,485
Investments	73,119			124,605			182,062			71,848			124,605			180,066
Accounts receivable	17,259			17,532			16,596			14,902			17,532			19,102
Accounts receivable from related parties	—			1,704			1,146			—			1,704			1,315
Inventories	596,956			501,903			527,305			624,167			501,903			546,553
Prepaid expenses and other current assets	73,763			49,197			45,529			49,924			49,197			34,220
Total current assets	977,093			870,873			861,943			983,260			870,873			930,741
Property and equipment, net	387,621			355,199			364,552			383,110			355,199			358,154
Goodwill	25,899			25,899			79,689			25,899			25,899			25,899
Intangible assets	20,285			135			33,065			20,000			135			3,135
Deferred income taxes	14,235			27,711			18,792			42,966			27,711			35,316
Equity investment in TSL	—			6,096			10,350			—			6,096			7,180
Notes receivable from TSL	—			115,895			60,094			—			115,895			60,249
Other assets	19,883			19,709			18,144			19,394			19,709			19,711
Total assets	$	1,445,016		$	1,421,517		$	1,446,629		$	1,474,629		$	1,421,517		$	1,440,385
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$	228,921		$	178,449		$	164,659		$	197,792		$	178,449		$	193,607
Accounts payable to related parties	519			859			718			707			859			706
Accrued expenses	145,776			148,226			124,343			182,964			148,226			146,155
Total current liabilities	375,216			327,534			289,720			381,463			327,534			340,468
Non-current liabilities	150,316			138,732			142,499			150,730			138,732			141,752
Contingent consideration liability	—			—			36,456			—			—			4,962
Total liabilities	525,532			466,266			468,675			532,193			466,266			487,182
Commitments and contingencies
Shareholders' equity:
Common shares paid-in capital, no par value	971,653			961,245			953,868			975,658			961,245			957,960
Treasury shares, at cost	(325,906		)	(325,906		)	(316,531		)	(325,906		)	(325,906		)	(325,906		)
Retained earnings	301,006			354,979			370,874			320,343			354,979			358,957
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	(2,276		)	(10,074		)	(5,264		)	(2,666		)	(10,074		)	(12,815		)
Total shareholders' equity	919,484			955,251			977,954			942,436			955,251			953,203
Total liabilities and shareholders' equity	$	1,445,016		$	1,421,517		$	1,446,629		$	1,474,629		$	1,421,517		$	1,440,385

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						Nine months ended
	August 4, 2018			July 29, 2017			November 3, 2018			October 28, 2017
Cash flows from operating activities:
Net income (loss)	$	(14,059	)	$	51,495
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income							$	25,260		$	55,500
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	38,429			42,286			57,679			61,925
Stock-based compensation expense	9,698			7,851			13,633			11,339
Deferred income taxes	13,526			(3,838		)	(15,205		)	(20,392		)
Loss from equity investment	1,310			1,087
Loss (income) from equity investment in TSL							1,310			(543		)
Loss on previously held equity investment in TSL and notes receivable from TSL	33,988			—			33,988			—
Impairment charges	36,240			—			29,077			82,701
Lease exit charges	3,910			—
Lease exit non-cash charges							7,105			—
Change in fair value of contingent consideration liability	—			2,252			—			(28,926		)
Loss on foreign currency reclassified from accumulated other comprehensive loss	13,963			2,161			13,963			2,186
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivable	3,767			1,264			6,171			(1,411		)
Inventories	(37,308		)	(27,310		)	(57,679		)	(46,558		)
Prepaid expenses and other current assets	(23,257		)	(6,730		)	951			591
Accounts payable	26,219			(18,949		)	(3,646		)	8,790
Accrued expenses	(7,960		)	(10,269		)	28,849			11,100
Other	8,106			3,337			5,879			2,274
Net cash provided by operating activities	106,572			44,637			147,335			138,576
Cash flows from investing activities:
Cash paid for property and equipment	(32,103		)	(28,139		)	(48,545		)	(39,552		)
Purchases of available-for-sale investments	(16,735		)	(83,872		)	(16,735		)	(98,855		)
Sales of available-for-sale investments	67,280			82,436			68,468			96,649
Additional borrowings by TSL	(15,989		)	(5,689		)	(15,989		)	(5,689		)
Acquisition of TSL, net of cash acquired	(28,152		)	—			(28,152		)	—
Net cash used in investing activities	(25,699		)	(35,264		)	(40,953		)	(47,447		)
Cash flows from financing activities:
Proceeds from exercise of stock options	1,492			358			2,048			1,133
Net change in vendor payment program	(1,671		)	847			(1,284		)	1,058
Payment of credit facility costs							—			(1,018		)
Cash paid for income taxes for stock-based compensation shares withheld	(979		)	(692		)	(1,465		)	(863		)
Cash paid for treasury shares							—			(9,375		)
Dividends paid	(39,910		)	(31,969		)	(59,894		)	(47,890		)
Other	(41		)	—			(50		)	—
Net cash used in financing activities	(41,109		)	(31,456		)	(60,645		)	(56,955		)
Effect of exchange rate changes on cash balances	300			—			750			—
Net increase (decrease) in cash, cash equivalents, and restricted cash	40,064			(22,083		)
Net increase in cash, cash equivalents, and restricted cash							46,487			34,174
Cash, cash equivalents, and restricted cash, beginning of period	175,932			115,311			175,932			115,311
Cash, cash equivalents, and restricted cash, end of period	$	215,996		$	93,228		$	222,419		$	149,485
Supplemental disclosures of cash flow information -
Cash paid for income taxes	$	28,135		$	46,092		$	40,366		$	64,441
Non-cash investing and financing activities -
Property and equipment purchases not yet paid	$	8,390		$	5,711		$	7,405		$	7,138

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. SIGNIFICANT ACCOUNTING POLICIES

Business Operations- DSW Inc., together with its ~~wholly-owned~~ subsidiaries, is ~~the destination for on-trend~~a leading North American footwear and accessories designer, producer and retailer.

On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto LLC, dba Camuto Group ("Camuto Group"), a footwear design and brand development organization, from Camuto Group LLC (the "Sellers"). The Camuto Group acquisition provides us a global production, sourcing and design infrastructure, including operations in Brazil and China, a new state-of-the-art distribution center in New Jersey, footwear licenses of brands, atincluding Jessica Simpson® and Lucky Brand®, branded e-commerce sites, and joint venture participation in the ED Ellen DeGeneres® and Mercedes Castillo® brands managed by Camuto Group. Additionally, in partnership with Authentic Brands Group LLC, a ~~great value every single day. We offer~~global brand management and marketing company, we formed ABG-Camuto, LLC ("ABG-Camuto"), a ~~wide assortment~~joint venture in which we have a 40% interest. This joint venture acquired several intellectual property rights from the Sellers, including Vince Camuto®, Louise et Cie®, Sole Society®, CC Corso Como®, Enzo Angiolini® and others, and will focus on licensing and developing new category extensions to support the global growth of ~~brand name dress, casual and athletic footwear and accessories for women, men and kids in stores and on e-commerce platforms.~~these brands. ABG-Camuto has entered into a licensing agreement with us, which will earn royalties from the net sales of Camuto Group under the brands acquired.

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 anrelated e-commerce ~~site.~~sites. Subsequent to the acquisition, and as ~~part~~a result 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.~~2018. 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, and the Canada Retail segment.

Our Affiliated Business Group ("ABG") partners with other retailers to help build and optimize their in-store and online footwear businesses by leveraging our sourcing network to produce a merchandise assortment that meets their needs. ABG currently provides service to Stein Mart stores, Steinmart.com, and a Frugal 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 a plan to close its stores. Stage Stores, Inc. acquired 58 Gordmans' stores and we provided services for these stores through the end of fiscal 2017 to support their transition.

On March 4, 2016, we acquired Ebuys, Inc. ("Ebuys"), an off price footwear and accessories retailer operating in digital marketplaces. Due to recurring operating losses incurred by Ebuys since its acquisition, as well as increased competitive pressures in the digital ~~marketplaces,~~marketplace, during the fourth quarter of fiscal 2017, we decided to exit the business and ended all operations in the first quarter of fiscal 2018.

On August 2, 2016, we signed an agreement with the Apparel Group as an exclusive franchise partner in the Gulf Coast region of the Middle East. Under this franchise agreement, three franchise stores 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 February 3, 2018 has been derived from the audited financial statements at that 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 February 3, 2018, filed with the U.S. Securities and Exchange Commission (the "SEC") on March 23, 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.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Accounting Policies- The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended February 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 United States dollars ("USD"), unless otherwise noted.

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

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

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

Revenue Recognition- Sales are recognized upon customer receipt of merchandise, net of estimated returns and ~~excludes~~exclude 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~~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~~related 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~~changed 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.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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~~nine months ended ~~August 4,~~November 3, 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,~~November 3, 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. We expect this analysis to be complete during the fourth quarter of fiscal 2018. Offsetting the favorable impact from the U.S. Tax Reform, during the ~~six~~nine months ended ~~August 4,~~November 3, 2018, we had additional tax provision expense of ~~$24.0~~$25.1 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%~~39.0% for the ~~six~~nine months ended ~~July 29,~~October 28, 2017 to ~~203.3%~~62.6% for the ~~six~~nine months ended ~~August 4,~~November 3, 2018.

~~Table of Contents~~

~~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 consisted of a mandatory cash deposit for outstanding letters of 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:

(in thousands) August 4, 2018 February 3, 2018 July 29, 2017
Cash and cash equivalents $ 215,996
$ 175,932
$ 89,305
Restricted cash, included in prepaid expenses and other current assets —
—
3,923
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows $ 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~~Acquisitions, we acquired the remaining interest in TSL, which resulted in recording ~~$37.0~~$29.8 million of ~~goodwill.~~goodwill, after adjustments. 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~~nine months ended ~~August 4,~~November 3, 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of 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)

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,~~October 28, 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 the acquisition, 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.

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 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 component of accumulated other comprehensive loss. Transaction gains and losses are included in the consolidated statements of operations.

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~~was reclassified to other assets in our consolidated balance sheets.

Recent Accounting Pronouncements- In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases, which will change how 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. The standard ~~which will have a material impact to our consolidated balance sheets,~~ is effective for us in the first quarter of fiscal 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 of the standard, which we plan to elect. The standard also provides a practical expedient, by class of underlying assets, to not separate non-lease components from the associated lease component. We plan to elect this practical expedient for all real estate leases and we are ~~currently~~ evaluating this expedient for other classes of underlying assets. At transition, we plan to elect the ~~full impact~~package of ~~the standard, including other optional~~ practical expedients, ~~that we may~~which allows us to carry forward the historical lease classification and not reassess whether any expired or existing contracts are or contain leases. We do not plan to elect ~~upon adoption, and we~~the use of hindsight to determine the term of our leases at transition. We are progressing with our implementation ~~plan. Our implementation~~ plan, ~~includes identifying~~with remaining tasks primarily relating to updating our ~~lease population, updating~~processes and controls and maintaining our lease database ~~assessing~~for changes through the implementation date. We estimate approximately $0.9 billion of lease ~~system utilized by~~assets and $1.0 billion of lease liabilities will be added to our ~~third-party lease administrator,~~consolidated balance sheets at the beginning of the first quarter of fiscal 2019, excluding any additional leases as a result of the acquisition of Camuto Group, and ~~identifying changes~~we are not anticipating an adjustment to ~~processes and controls.~~retained earnings.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal - Use Software, which aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or acquire internal-use software. This update is effective for us in the first quarter of fiscal 2020 and early adoption is permitted. We plan to adopt this guidance using a prospective approach at the beginning of the first quarter of fiscal 2019. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

2. ~~ACQUISITION~~ACQUISITIONS

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 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.

Step Acquisition of TSL- On May 10, 2018, we acquired the remaining interest in TSL for $36.2 million CAD ($28.2 million USD), net of acquired cash of $8.5 million CAD ($6.6 million USD), by exercising our call option. This was accounted for as a step acquisition whereby we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of the purchase price. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating expenses, net, in the consolidated statements of operations. Also during the second quarter of fiscal 2018, we reclassified a net loss of $12.2 million of foreign currency translation adjustments related to the previously held balances from accumulated other comprehensive loss to non-operating 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			Preliminary Purchase Price and Allocation as of May 10, 2018			Adjustments			Preliminary Purchase Price and Allocation as of November 3, 2018
Purchase price:
Cash consideration, net of cash acquired	$	28,152		$	28,152		$	—		$	28,152
Replacement stock-based awards attributable to pre-acquisition services	196			196			—			196
Fair value of previously held assets	92,242			92,242			—			92,242
	$	120,590		$	120,590		$	—		$	120,590
Fair value of assets and liabilities acquired:
Inventories	$	58,822		$	58,822		$	7,250		$	66,072
Other current assets	3,608			3,608			79			3,687
Property and equipment	41,601			41,601			(144		)	41,457
Goodwill	37,044			37,044			(7,237		)	29,807
Intangible assets	20,689			20,689			—			20,689
Accounts payable and accrued expenses	(33,248		)	(33,248		)	52			(33,196		)
Non-current liabilities	(7,926		)	(7,926		)	—			(7,926		)
	$	120,590		$	120,590		$	—		$	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 on the market valuation approach, and the fair value for customer relationships related to the loyalty program was determined using the replacement cost method. The fair values for property and equipment ~~was~~were determined using the cost and market approaches. The fair value of inventories, which is made up of finished goods, was determined based on market assumptions for realizing a reasonable profit after selling ~~costs.~~costs, which was updated during the three months ended November 3, 2018 to reflect changes to assumptions regarding sell through of certain identified aged inventory. 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.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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~~nine months ended ~~August 4,~~November 3, 2018, we recorded a goodwill impairment charge, net of adjustments as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of 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 inventories and deferred tax assets and liabilities, and these preliminary estimates could change. ~~Since~~During the three months ended November 3, 2018, since all of the goodwill associated with TSL was written off ~~any~~during the second quarter of fiscal 2018, the $7.2 million change to the purchase price allocation of goodwill resulted in an adjustment to the impairment charge. Any additional changes to the purchase price allocation may result in ~~an adjustment~~further adjustments to the impairment charge.

~~During the six months ended August 4, 2018, we~~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				Three months ended				Nine months ended
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017		November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Total revenue	$	795,268	$	748,298	$	1,563,985	$	1,496,544	$	833,003	$	789,520	$	2,396,987	$	2,284,441
Net income	$	45,456	$	28,583	$	67,493	$	49,654	$	34,144	$	6,195	$	101,637	$	55,318
Basic and diluted earnings per share:
Basic earnings per share	$	0.57	$	0.36	$	0.84	$	0.62	$	0.43	$	0.08	$	1.27	$	0.69
Diluted earnings per share	$	0.56	$	0.35	$	0.83	$	0.62	$	0.41	$	0.08	$	1.24	$	0.69

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,~~November 3, 2018, our consolidated statements of operations included sales and net losses for TSL of ~~$72.5~~$80.1 million and ~~$38.5~~$0.6 million, respectively, which includes the goodwill impairment adjustment of $7.2 million. During the nine months ended November 3, 2018, our consolidated statements of operations included sales and net losses for TSL of $152.6 million and $39.1 million, respectively, which includes the goodwill impairment charge of ~~$36.2~~$29.1 million.

Acquisition of Camuto Group- On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group for $170.8 million, net of acquired cash of $10.2 million. The purchase price of the acquisition, along with the acquired equity investment in ABG-Camuto (discussed below), was funded with available cash and borrowings on the revolving line of credit of $160.0 million. The purchase price is subject to adjustment primarily based upon a working capital provision as provided by the purchase agreement. We will account for the acquisition and we will include Camuto Group as a consolidated wholly-owned subsidiary beginning with our fourth quarter of fiscal 2018. Given the acquisition date, we are in the process of developing our fair value assumptions for the assets and liabilities acquired.

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

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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)~~income (loss)) 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



	Three months ended October 28, 2017								Nine months ended October 28, 2017
(in thousands, except per share amounts)	As Reported			Adjustments		As Adjusted			As Reported			Adjustments		As Adjusted
Net sales	$	708,308		1,343		$	709,651		$	2,079,819		2,372		$	2,082,191
Franchise and other revenue	$	—		1,341		$	1,341		$	—		3,851		$	3,851
Total revenue	$	—		710,992		$	710,992		$	—		2,086,042		$	2,086,042
Cost of sales	$	(501,591	)	667		$	(500,924	)	$	(1,480,901	)	3,819		$	(1,477,082	)
Operating expenses	$	(151,772	)	(3,403	)	$	(155,175	)	$	(454,093	)	(10,204	)	$	(464,297	)
Operating profit	$	3,422		(52	)	$	3,370		$	91,050		(162	)	$	90,888
Income before income taxes and income (loss) from equity investment in TSL	$	3,903		(52	)	$	3,851		$	90,570		(162	)	$	90,408
Income tax provision	$	(1,496	)	20		$	(1,476	)	$	(35,510	)	59		$	(35,451	)
Net income	$	4,037		(32	)	$	4,005		$	55,603		(103	)	$	55,500
Total comprehensive income (loss)	$	(3,514	)	(32	)	$	(3,546	)	$	56,729		(103	)	$	56,626

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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 balance sheets on a retrospective basis as follows:



	February 3, 2018					October 28, 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	$	25,445	8,775	$	34,220
Total current assets	$	863,009	7,864	$	870,873	$	921,966	8,775	$	930,741
Deferred income taxes	$	27,671	40	$	27,711	$	35,284	32	$	35,316
Total assets	$	1,413,613	7,904	$	1,421,517	$	1,431,578	8,807	$	1,440,385
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses	$	145,218	3,008	$	148,226	$	141,990	4,165	$	146,155
Total current liabilities	$	324,526	3,008	$	327,534	$	336,303	4,165	$	340,468
Total liabilities	$	463,258	3,008	$	466,266	$	483,017	4,165	$	487,182
Retained earnings	$	350,083	4,896	$	354,979	$	354,315	4,642	$	358,957
Total shareholders' equity	$	950,355	4,896	$	955,251	$	948,561	4,642	$	953,203
Total liabilities and shareholders' equity	$	1,413,613	7,904	$	1,421,517	$	1,431,578	8,807	$	1,440,385

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								Nine months ended October 28, 2017
(in thousands)	As Reported			Adjustments		As Adjusted			As Reported			Adjustments		As Adjusted
Cash flows from operating activities:
Net income	$	51,566		(71	)	$	51,495		$	55,603		(103	)	$	55,500
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	$	(3,831	)	(7	)	$	(3,838	)	$	(20,381	)	(11	)	$	(20,392	)
Prepaid expenses and other current assets	$	(8,061	)	1,331		$	(6,730	)	$	979		(388	)	$	591
Accrued expenses	$	(9,016	)	(1,253	)	$	(10,269	)	$	10,598		502		$	11,100

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


	Three months ended				Six months ended				Three months ended				Nine months ended
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017		November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Net sales:
U.S. Retail segment	$	691,757	$	629,691	$	1,361,541	$	1,254,195	$	721,746	$	655,930	$	2,083,287	$	1,910,125
Canada Retail segment	72,532		—		72,532		—		80,072		—		152,604		—
Other:
ABG	29,446		31,330		64,466		75,318		29,851		31,059		94,317		106,377
Ebuys	—		20,700		5,633		43,027		—		22,662		5,633		65,689
Total Other	29,446		52,030		70,099		118,345		29,851		53,721		99,950		172,066
Total net sales	793,735		681,721		1,504,172		1,372,540		831,669		709,651		2,335,841		2,082,191
Franchise and other revenue	1,533		1,291		3,198		2,510		1,334		1,341		4,532		3,851
Total revenue	$	795,268	$	683,012	$	1,507,370	$	1,375,050	$	833,003	$	710,992	$	2,340,373	$	2,086,042

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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~~)



	Three months ended				Nine months ended
(in thousands)	November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Retail net sales by category:
Women's footwear	$	539,126	$	457,745	$	1,517,814	$	1,324,508
Men's footwear	155,338		134,128		459,525		405,331
Accessories and other	107,354		64,057		258,552		180,286
Other - ABG and Ebuys	29,851		53,721		99,950		172,066
Total net sales	$	831,669	$	709,651	$	2,335,841	$	2,082,191

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						Three months ended						Nine months ended
(in thousands)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017			November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Gift cards:
Beginning of period	$	28,151		$	27,802		$	32,792		$	30,829		$	26,791		$	24,806		$	32,792		$	30,829
Gift cards redeemed and breakage recognized to net sales	(21,761		)	(25,132		)	(44,034		)	(44,440		)	(17,390		)	(16,174		)	(61,424		)	(60,615		)
Gift cards issued	20,401			22,136			38,033			38,417			15,507			14,042			53,540			52,460
End of period	$	26,791		$	24,806		$	26,791		$	24,806		$	24,908		$	22,674		$	24,908		$	22,674
Loyalty programs:
Beginning of period	$	22,111		$	21,287		$	21,282		$	19,889		$	16,786		$	21,606		$	21,282		$	19,889
Loyalty certificates redeemed and expired and other adjustments recognized to net sales	(16,750		)	(7,529		)	(23,385		)	(14,185		)	(6,465		)	(7,678		)	(29,850		)	(21,863		)
Deferred revenue for loyalty points issued	11,425			7,848			18,889			15,902			7,669			8,223			26,558			24,125
End of period	$	16,786		$	21,606		$	16,786		$	21,606		$	17,990		$	22,151		$	17,990		$	22,151

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						Three months ended						Nine months ended
(in thousands)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017			November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Sales returns liability:
Beginning of period	$	16,006		$	14,952		$	14,130		$	14,149		$	14,426		$	12,763		$	14,130		$	14,149
Net sales reduced for estimated returns	98,563			81,484			183,616			159,420			101,192			85,363			284,808			244,783
Actual returns during the period	(100,143		)	(83,673		)	(183,320		)	(160,806		)	(98,332		)	(82,038		)	(281,652		)	(242,844		)
End of period	$	14,426		$	12,763		$	14,426		$	12,763		$	17,286		$	16,088		$	17,286		$	16,088

As of ~~August 4,~~November 3, 2018, February 3, 2018, and ~~July 29,~~October 28, 2017, the asset for recovery of merchandise returns was ~~$7.6~~$8.9 million, $7.9 million, and ~~$7.1~~$8.8 million, respectively.

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

4. RELATED PARTY TRANSACTIONS

Accounts receivable and accounts payable 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 ~~August 4,~~November 3, 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 14% of the Company's outstanding common shares, representing approximately 49% of the combined voting power. As of ~~August 4,~~November 3, 2018, the Schottenstein Affiliates beneficially owned 3.6 million Class A common shares and 7.7 million Class B common shares. We had the following related party transactions with Schottenstein Affiliates:

Leases- We lease our fulfillment center and certain store locations owned by Schottenstein Affiliates. During the three months ended ~~August 4,~~November 3, 2018 and ~~July 29,~~October 28, 2017, we recorded rent expense from leases with Schottenstein Affiliates of $2.3 million and ~~$2.3~~$2.2 million, respectively. During the ~~six~~nine months ended ~~August 4,~~November 3, 2018 and ~~July 29,~~October 28, 2017, we recorded rent expense from leases with Schottenstein Affiliates of ~~$4.6~~$6.9 million and ~~$4.6~~$6.8 million, respectively.

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

Other Purchases and Services- During the three months ended ~~August 4,~~November 3, 2018 and ~~July 29,~~October 28, 2017, we had other purchases and services from Schottenstein Affiliates of ~~$1.7~~$1.3 million and ~~$0.4~~$0.3 million, respectively. During the ~~six~~nine months ended ~~August 4,~~November 3, 2018 and ~~July 29,~~October 28, 2017, we had other purchases and services from Schottenstein Affiliates of ~~$3.3~~$4.5 million and ~~$0.7~~$0.9 million, respectively.

TSL

Prior to our acquisition of the remaining interest in TSL on May 10, 2018, our ownership interest in TSL provided us a 50% voting control and board representation equal to the co-investor, and was 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 had a management agreement with TSL under which we provided certain information technology and management services. During the three months ended ~~July 29,~~October 28, 2017, we recognized income of $0.3 million. During the ~~six~~nine months ended ~~August 4,~~November 3, 2018 and ~~July 29,~~October 28, 2017, we recognized income of $0.3 million and ~~$0.6~~$0.9 million, respectively.

License Agreement- We licensed the use of our tradename and trademark, DSW Designer Shoe Warehouse, to 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 was exclusive and non-transferable for use in Canada. During the three months ended ~~July 29,~~October 28, 2017, we recognized royalty income of $0.2 million. During the ~~six~~nine months ended ~~August 4,~~November 3, 2018 and ~~July 29,~~October 28, 2017, we recognized royalty income of $0.1 million and ~~$0.3~~$0.5 million, respectively.

Other Purchases and Services- During the three months ended ~~July 29,~~October 28, 2017, TSL had other purchases and services from us of ~~$0.7~~$0.3 million. During the ~~six~~nine months ended ~~August 4,~~November 3, 2018 and ~~July 29,~~October 28, 2017, TSL had other purchases and services from us of $0.4 million and ~~$1.6~~$1.9 million, respectively. During the ~~six~~nine months ended ~~August 4,~~November 3, 2018, we purchased inventory from TSL for $1.3 million.

5. EARNINGS ~~(LOSS)~~ PER SHARE

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"), and performance-based restricted stock units ("PSUs") calculated using the treasury stock method.

~~The following is a reconciliation of the 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 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 4.6 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)

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



	Three months ended		Nine months ended
(in thousands)	November 3, 2018	October 28, 2017	November 3, 2018	October 28, 2017
Weighted average shares outstanding - Basic shares	80,321	80,112	80,231	80,215
Dilutive effect of stock-based compensation awards	1,966	535	1,455	484
Weighted average shares outstanding - Diluted shares	82,287	80,647	81,686	80,699

For the three months ended November 3, 2018 and October 28, 2017, the number of potential shares that were not included in the computation of diluted earnings per share because the effect would be anti-dilutive was 1.3 million and 4.5 million, respectively. For the nine months ended November 3, 2018 and October 28, 2017, the number of potential shares that were not included in the computation of diluted earnings per share because the effect would be anti-dilutive was 2.0 million and 4.4 million, respectively.

6. STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:


	Three months ended				Six months ended				Three months ended				Nine months ended
(in thousands)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017		November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
Stock options	$	1,343	$	1,586	$	3,138	$	3,337	$	960	$	1,467	$	4,098	$	4,804
Restricted and director stock units	3,841		2,656		6,560		4,514		2,975		2,021		9,535		6,535
	$	5,184	$	4,242	$	9,698	$	7,851	$	3,935	$	3,488	$	13,633	$	11,339

The following table summarizes the stock-based compensation award activity for the ~~six~~nine months ended ~~August 4,~~November 3, 2018:


	Number of shares						Number of shares
(in thousands)	Stock Options		Time-Based RSUs		Performance-Based RSUs		Stock Options		Time-Based RSUs		Performance-Based RSUs
Outstanding - beginning of period	4,333		436		457		4,333		436		457
Granted	—		663		250		—		737		255
Exercised / vested	(158	)	(58	)	(49	)	(183	)	(87	)	(60	)
Forfeited / expired	(111	)	(50	)	(4	)	(132	)	(76	)	(4	)
Outstanding - end of period	4,064		991		654		4,018		1,010		648

As of ~~August 4,~~November 3, 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.

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table provides additional information for our common shares:


	August 4, 2018		February 3, 2018		July 29, 2017		November 3, 2018		February 3, 2018		October 28, 2017
(in thousands)	Class A	Class B	Class A	Class B	Class A	Class B	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	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	85,706	7,733	85,385	7,733	85,346	7,733
Outstanding shares	72,561	7,733	72,294	7,733	72,610	7,733	72,615	7,733	72,294	7,733	72,255	7,733
Treasury shares	13,091	—	13,091	—	12,591	—	13,091	—	13,091	—	13,091	—

We have authorized ~~100.0~~100 million shares of no par value preferred shares with no shares issued for any of the periods presented.

Dividends- During each of the quarters for fiscal 2018 and 2017, we paid a quarterly cash dividend of $0.25 per share and $0.20 per share, respectively, for both Class A and Class B common shares. On ~~August 28,~~December 11, 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~~January 4, 2019 to shareholders of record at the close of business on ~~September 24,~~December 21, 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~~nine months ended ~~August 4,~~November 3, 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,~~November 3, 2018. During the nine months ended October 28, 2017, we repurchased 0.5 million Class A common shares at a cost of $9.4 million. 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~~)

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):


	Three months ended																		Three months ended
	August 4, 2018									July 29, 2017									November 3, 2018									October 28, 2017
(in thousands)	Foreign Currency Translation			Available-for-Sale Securities			Total			Foreign Currency Translation			Available-for-Sale Securities			Total			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	)	$	(1,365	)	$	(911	)	$	(2,276	)	$	(5,001	)	$	(263	)	$	(5,264	)
Other comprehensive income (loss) before reclassifications	(1,365		)	27			(1,338		)	10,657			(23		)	10,634
Other comprehensive loss before reclassifications																			(271		)	(133		)	(404		)	(7,343		)	(182		)	(7,525		)
Amounts reclassified to non-operating expenses, net	12,218			42			12,260			699			(172		)	527			—			14			14			25			(51		)	(26		)
Other comprehensive income (loss)	10,853			69			10,922			11,356			(195		)	11,161
Other comprehensive loss																			(271		)	(119		)	(390		)	(7,318		)	(233		)	(7,551		)
Accumulated other comprehensive loss - end of period	$	(1,365	)	$	(911	)	$	(2,276	)	$	(5,001	)	$	(263	)	$	(5,264	)	$	(1,636	)	$	(1,030	)	$	(2,666	)	$	(12,319	)	$	(496	)	$	(12,815	)

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 )

~~8. INVESTMENTS~~

~~Investments in available-for-sale securities consisted of the following:~~

(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)



	Nine months ended
	November 3, 2018									October 28, 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 loss before reclassifications	(6,321		)	(450		)	(6,771		)	(806		)	(149		)	(955		)
Amounts reclassified to non-operating expenses, net	13,963			216			14,179			2,186			(105		)	2,081
Other comprehensive income (loss)	7,642			(234		)	7,408			1,380			(254		)	1,126
Accumulated other comprehensive loss - end of period	$	(1,636	)	$	(1,030	)	$	(2,666	)	$	(12,319	)	$	(496	)	$	(12,815	)

8. INVESTMENTS

Investments in available-for-sale securities consisted of the following:



(in thousands)	November 3, 2018			February 3, 2018			October 28, 2017
Carrying value of investments	$	72,827		$	125,349		$	180,531
Unrealized gains included in accumulated other comprehensive loss	3			23			47
Unrealized losses included in accumulated other comprehensive loss	(982		)	(767		)	(512		)
Fair value	$	71,848		$	124,605		$	180,066

9. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


(in thousands)	August 4, 2018			February 3, 2018			July 29, 2017			November 3, 2018			February 3, 2018			October 28, 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	425,651			404,852			398,129			432,367			404,852			399,905
Furniture, fixtures and equipment	451,040			423,597			417,226			455,263			423,597			418,432
Software	145,111			137,917			135,844			152,793			137,917			136,295
Construction in progress⁽¹⁾	46,643			39,201			28,008			41,908			39,201			33,169
Total property and equipment	1,082,040			1,019,162			992,802			1,095,926			1,019,162			1,001,396
Accumulated depreciation and amortization	(694,419		)	(663,963		)	(628,250		)	(712,816		)	(663,963		)	(643,242		)
Property and equipment, net	$	387,621		$	355,199		$	364,552		$	383,110		$	355,199		$	358,154


(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.

Table of Contents

DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

10. GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:


	Six months ended															Nine months ended
	August 4, 2018									July 29, 2017						November 3, 2018									October 28, 2017
(in thousands)	Goodwill			Accumulated Impairments			Net			Goodwill		Accumulated Impairments		Net		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	$	25,899		$	—		$	25,899		$	25,899	$	—		$	25,899
Other - Ebuys	53,790			(53,790		)	—			53,790		—		53,790		53,790			(53,790		)	—			53,790		—			53,790
	79,689			(53,790		)	25,899			79,689		—		79,689		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			—		—		—		29,807			—			29,807			—		—			—
Impairment charges	—			(36,240		)	(36,240		)	—		—		—		—			(29,077		)	(29,077		)	—		—			—
Currency translation adjustment	(580		)	(224		)	(804		)	—		—		—		(762		)	32			(730		)	—		—			—
Other - eliminated Ebuys goodwill	(53,790		)	53,790			—			—		—		—
Other:
Impairment charges																—			—			—			—		(53,790		)	(53,790		)
Eliminated Ebuys goodwill																(53,790		)	53,790			—			—		—			—
	(17,326		)	17,326			—			—		—		—		(24,745		)	24,745			—			—		(53,790		)	(53,790		)
End of period by segment:
U.S. Retail segment	25,899			—			25,899			25,899		—		25,899		25,899			—			25,899			25,899		—			25,899
Canada Retail segment	36,464			(36,464		)	—			—		—		—		29,045			(29,045		)	—			—		—			—
Other - Ebuys	—			—			—			53,790		—		53,790		—			—			—			53,790		(53,790		)	—
	$	62,363		$	(36,464	)	$	25,899		$	79,689	$	—	$	79,689	$	54,944		$	(29,045	)	$	25,899		$	79,689	$	(53,790	)	$	25,899

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		Cost		Accumulated Amortization			Net
August 4, 2018
November 3, 2018
Definite-lived:
Customer relationships	$	1,378	$	(114	)	$	1,264	$	1,373	$	(229	)	$	1,144
Favorable leasehold interests	3,522		(101		)	3,421		3,510		(200		)	3,310
Indefinite-lived trademarks and tradenames	15,600		—			15,600		15,546		—			15,546
	$	20,500	$	(215	)	$	20,285	$	20,429	$	(429	)	$	20,000
February 3, 2018
Definite-lived:
Online retailer and customer relationships	$	3,767	$	(3,767	)	$	—	$	3,767	$	(3,767	)	$	—
Tradenames	1,260		(1,260		)	—		1,260		(1,260		)	—
Non-compete agreements	1,800		(1,800		)	—		1,800		(1,800		)	—
Indefinite-lived trademarks and tradenames	135		—			135		135		—			135
	$	6,962	$	(6,827	)	$	135	$	6,962	$	(6,827	)	$	135
July 29, 2017
October 28, 2017
Definite-lived:
Online retailer and customer relationships	$	22,300	$	(3,202	)	$	19,098	$	3,767	$	(3,767	)	$	—
Tradenames	11,000		(1,039		)	9,961		4,222		(1,222		)	3,000
Non-compete agreements	5,400		(1,529		)	3,871		1,800		(1,800		)	—
Indefinite-lived trademarks and tradenames	135		—			135		135		—			135
	$	38,835	$	(5,770	)	$	33,065	$	9,924	$	(6,789	)	$	3,135

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:


(in thousands)	August 4, 2018		February 3, 2018		July 29, 2017		November 3, 2018		February 3, 2018		October 28, 2017
Gift cards and merchandise credits	$	26,791	$	32,792	$	24,806	$	24,908	$	32,792	$	22,674
Accrued compensation and related expenses	30,224		25,082		14,830		37,317		25,082		22,390
Accrued taxes	21,029		20,757		20,126		30,321		20,757		23,289
Loyalty programs deferred revenue	16,786		21,282		21,606		17,990		21,282		22,151
Sales returns	14,426		14,130		12,763		17,286		14,130		16,088
Other⁽¹⁾	36,520		34,183		30,212		55,142		34,183		39,563
	$	145,776	$	148,226	$	124,343	$	182,964	$	148,226	$	146,155


(1)	Other is comprised of 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.

We offer our vendors a payment program where a payment processing 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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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

12. NON-CURRENT LIABILITIES

Non-current liabilities consisted of the following:


(in thousands)	August 4, 2018		February 3, 2018		July 29, 2017		November 3, 2018		February 3, 2018		October 28, 2017
Construction and tenant allowances	$	75,439	$	80,725	$	84,002	$	73,531	$	80,725	$	82,135
Deferred rent	35,694		37,116		38,187		35,644		37,116		37,820
Accrual for lease obligations	9,511		6,511		7,328		12,348		6,511		8,310
Unfavorable leasehold interests	7,000		—		—		6,310		—		—
Other⁽¹⁾	22,672		14,380		12,982		22,897		14,380		13,487
	$	150,316	$	138,732	$	142,499	$	150,730	$	138,732	$	141,752


(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~~nine months ended ~~August 4,~~November 3, 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~~$7.2 million. Also during the ~~six~~nine months ended ~~August 4,~~November 3, 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~~$13.8 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						Nine months ended
(in thousands)	August 4, 2018			July 29, 2017			November 3, 2018			October 28, 2017
Beginning of period	$	6,511		$	7,283		$	6,511		$	7,283
Additions	4,884			—			21,008			—
Lease obligation payments, net of sublease income received	(2,004		)	(120		)
Net sublease income received (lease obligation payments)							(15,244		)	781
Adjustments	120			165			73			246
End of period	$	9,511		$	7,328		$	12,348		$	8,310

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~~As of November 3, 2018, the Credit Facility ~~provides~~provided 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,~~November 3, 2018, we had no outstanding borrowings under the ~~Credit~~

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Credit Facility and ~~$1.2~~$6.2 million in letters of credit issued, resulting in ~~$298.8~~$293.8 million available for borrowings. Interest expense related to the Credit Facility includes letters of credit interest, commitment fees and the amortization of debt issuance costs.

On October 10, 2018, the Credit Facility was amended to include the acquisition of Camuto Group as a permitted acquisition and, following the acquisition, to utilize an accordion feature that provided for an increase to the revolving line of credit. On November 5, 2018, following the acquisition of Camuto Group, the amended Credit Facility was increased to provide a revolving line of credit up to $400 million with no change to the sub-limits.

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 Credit Facility that would permit the lenders to restrict our ability to further access the Credit Facility for loans and letters of credit and require the immediate repayment of any outstanding loans under the Credit Facility. As of ~~August 4,~~November 3, 2018, we were in compliance with all financial covenants. As a result of the acquisition of Camuto Group, we have elected to increase the leverage ratio whereby we must maintain a leverage ratio not to exceed 3.50:1 as of the end of the fourth quarter of fiscal 2018 and for the subsequent three quarters.

14. COMMITMENTS AND CONTINGENCIES

Contingent Consideration Liability- The contingent consideration liability resulted from the acquisition of Ebuys and was based on a defined earnings performance measure. The contingent consideration liability was measured at fair value with any differences between the final acquisition-date fair value and revised estimated 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~~nine months ended ~~July 29,~~October 28, 2017 was as follows:


(in thousands)
Contingent consideration liability - beginning of period	$	33,204	$	33,204
Accretion in value	2,252		3,506
Fair value adjustment			(32,432		)
Other adjustments	1,000		684
Contingent consideration liability - end of period	$	36,456	$	4,962

During the fourth quarter of 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 for 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 ~~August 4,~~November 3, 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 ~~$1.4~~$0.3 million as of ~~August 4,~~November 3, 2018. In addition, we have entered into various noncancelable purchase and service agreements. The obligations under these agreements were approximately ~~$21.8~~$17.3 million as of ~~August 4,~~November 3, 2018.

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DSW INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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, includes stores operated in the U.S. under the DSW banner and its related e-commerce site. The Canada Retail segment, which is the result of the TSL Acquisition on May 10, 2018, includes stores operated in Canada under The 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 no longer

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~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

providing services to Gordmans after fiscal 2017. Prior periods presented have been restated to present the DSW segment as the U.S. Retail segment and to include ABG in Other for comparative purposes.

The performance of each segment is based on net sales and gross profit, which is defined as net sales less cost of sales, as follows:


(in thousands)	U.S. Retail		Canada Retail	Other	Total		U.S. Retail		Canada Retail	Other	Total
Three months ended August 4, 2018
Three months ended November 3, 2018
Net sales	$	691,757	72,532	29,446	$	793,735	$	721,746	80,072	29,851	$	831,669
Gross profit	$	229,601	18,218	6,676	$	254,495	$	239,650	25,364	6,069	$	271,083
Three months ended July 29, 2017
Three months ended October 28, 2017
Net sales	$	629,691	—	52,030	$	681,721	$	655,930	—	53,721	$	709,651
Gross profit	$	194,863	—	4,434	$	199,297	$	204,277	—	4,450	$	208,727
Six months ended August 4, 2018
Nine months ended November 3, 2018
Net sales	$	1,361,541	72,532	70,099	$	1,504,172	$	2,083,287	152,604	99,950	$	2,335,841
Gross profit	$	427,945	18,218	13,557	$	459,720	$	667,595	43,582	19,626	$	730,803
Six months ended July 29, 2017
Nine months ended October 28, 2017
Net sales	$	1,254,195	—	118,345	$	1,372,540	$	1,910,125	—	172,066	$	2,082,191
Gross profit	$	381,369	—	15,013	$	396,382	$	585,646	—	19,463	$	605,109

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. Examples of such forward-looking statements include references to our future expansion and our acquisitions. You can 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," 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, 2018, and "Part II, Item 1A. Risk Factors" in this Quarterly Report, 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~~acquisitions of Camuto Group and TSL, including the possibility that the anticipated benefits of the ~~acquisition~~acquisitions are not realized when expected or at all;

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

maintaining strong relationships with our ~~vendors;~~vendors, manufacturers and wholesale customers;

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 Stein Mart;

our ability to 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 foreign sources for merchandise and risks inherent to international ~~trade;~~trade, including escalating trade tensions between the U.S. and other countries;

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

uncertain general economic conditions;

risks related to holdings of cash and investments and access to 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

We started the fiscal year with a ~~significant tax benefit resulting from corporate tax reform, which we are reinvesting towards our growth initiative by driving higher~~goal of growing market share ~~through positive comparable sales growth. Accordingly, we are~~by investing in people, 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~~innovation. We have been pleased with the results year-to-date. Increased key item sourcing, strategic category distortions and the expansion of DSW kids ~~which~~ delivered ~~close to~~ a ~~10%~~7.3% increase in comparable sales ~~increase~~ in the ~~second~~third quarter of fiscal ~~2018. We completed our kids roll out with 94 new locations and~~2018, 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~~year-to-date increase in comparable sales to 6.3%. Our inventory distortion successfully drove growth across all categories. Marketing investments ~~with~~resulted in growth in transactions with both new and existing customers across all channels. The launch of DSW's VIP Rewards program increased customer ~~transactions,~~engagement and continues to drive growth in average spend per ~~member, rewards redemption~~member. Strong sales of regular priced merchandise and member activation rate. We launched our new redesigned loyalty program, DSW VIP, providing customers a program with a simpler points structure, enhanced shipping options and 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 campaignfavorable sourcing contributed to ~~higher traffic activity during the quarter.~~gains in gross margin.

~~As part of~~In addition, our newly integrated Canadian business delivered strong sales and profit expansion, driven by our efforts to focus on ~~improving customer engagement,~~DSW Canada, Shoe Warehouse and The Shoe Company. The significant level of freshness and excitement we ~~have updated~~delivered to customers, coupled with effective direct marketing, drove earnings accretion. We are taking steps to upgrade our ~~processes~~Canadian online platform and launch new loyalty programs next year, which we expect 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.accelerate top line growth.

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 drive traffic. Based on favorable customer response, we are in the process of identifying new locations to pilot this format.

~~On May 10, 2018,~~Lastly, we completed a significant milestone with the acquisition of Camuto Group at the ~~remaining interest in TSL. After completing~~beginning of the fourth quarter. The acquisition brings a ~~comprehensive review of~~product and design infrastructure in-house that is expected to increase our ~~Canadian acquisition,~~competitive differentiation over the long-term through the ability to develop exclusive and proprietary brands. Furthermore, Camuto Group will leverage our financial strength and expertise as 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 approximately 85% of sales with solid growth prospects.

~~As a result, we are exiting~~grow the ~~smallest banner, which has experienced a decline in profitability in recent years. We are focused on aligning the DSW Canada banner closer with our U.S.~~direct-to-consumer business and ~~strengthening inventory~~pursue wholesale growth opportunities. The ABG-Camuto partnership is intended to open new revenue streams while expanding the addressable market for our Company in the long-term through new licensing and ~~merchandising processes.~~distribution opportunities.

Financial Summary

Total revenue increased to ~~$795.3~~$833.0 million for the three months ended ~~August 4,~~November 3, 2018 from ~~$683.0~~$711.0 million for the three months ended ~~July 29,~~October 28, 2017. The ~~16.4%~~17.2% increase in total revenue was primarily driven by incremental sales from TSL, a ~~9.7%~~7.3% increase in comparable sales, and an increase from non-comparable store sales, partially offset by the loss of sales of Gordmans stores and the exit of Ebuys. The comparable sales increase was driven by growth in all categories and channels.

During the three months ended ~~August 4,~~November 3, 2018, gross profit as a percentage of net sales was ~~32.1%~~32.6%, an increase of ~~290~~320 basis points from ~~29.2%~~29.4% in the previous year. The increase in the gross profit rate was primarily driven by 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~~income for the three months ended ~~August 4,~~November 3, 2018 was ~~$38.4~~$39.3 million, or $0.48 ~~loss~~ per diluted share, which included net after-tax charges of ~~$89.3~~$18.6 million, or ~~$1.11~~$0.22 per diluted share, primarily related to acquisition activity and the ~~acquisition~~exit of the ~~Canadian retail business.~~Town Shoes banner. Net income for the three months ended ~~July 29,~~October 28, 2017 was ~~$28.7~~$4.0 million, or ~~$0.36~~$0.05 per diluted share, which included net after-tax charges of ~~$2.0~~$31.9 million, or ~~$0.02~~$0.40 per diluted share, primarily related to ~~the~~impairment charges, 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.~~Ebuys.

In addition to the ~~acquisition~~acquisitions of TSL and Camuto Group, we have continued making investments in our business that support our long-term growth objectives. During the ~~three~~nine months ended ~~August 4,~~November 3, 2018, we invested ~~$32.1~~$48.5 million in capital expenditures compared to ~~$28.1~~$39.6 million during the ~~three~~nine months ended ~~July 29,~~October 28, 2017. Our capital expenditures during ~~the first half of~~ fiscal 2018 primarily related to ~~six~~nine new store openings in the U.S., store remodels and business infrastructure. ~~We plan to open nine new DSW stores in the U.S., with no planned openings in Canada post-acquisition, in fiscal 2018.~~

Results of Operations

The following represents components of our consolidated results of operations, with associated percentages of total revenue:


	Three months ended										Six months ended										Three months ended										Nine months ended
(dollars in thousands)	August 4, 2018					July 29, 2017					August 4, 2018					July 29, 2017					November 3, 2018					October 28, 2017					November 3, 2018					October 28, 2017
Revenue:
Net sales	$	793,735		99.8	%	$	681,721		99.8	%	$	1,504,172		99.8	%	$	1,372,540		99.8	%	$	831,669		99.8	%	$	709,651		99.8	%	$	2,335,841		99.8	%	$	2,082,191		99.8	%
Franchise and other revenue	1,533			0.2		1,291			0.2		3,198			0.2		2,510			0.2		1,334			0.2		1,341			0.2		4,532			0.2		3,851			0.2
Total revenue	795,268			100.0		683,012			100.0		1,507,370			100.0		1,375,050			100.0		833,003			100.0		710,992			100.0		2,340,373			100.0		2,086,042			100.0
Cost of sales	(539,240		)	(67.8	)	(482,424		)	(70.6	)	(1,044,452		)	(69.3	)	(976,158		)	(71.0	)	(560,586		)	(67.3	)	(500,924		)	(70.5	)	(1,605,038		)	(68.6	)	(1,477,082		)	(70.8	)
Franchise costs	(293		)	—		—			—		(573		)	—		—			—		(98		)	—		—			—		(671		)	—		—			—
Operating expenses	(195,026		)	(24.5	)	(152,554		)	(22.3	)	(363,166		)	(24.1	)	(309,122		)	(22.5	)	(226,393		)	(27.2	)	(155,175		)	(21.8	)	(589,559		)	(25.2	)	(464,297		)	(22.3	)
Impairment charges	(36,240		)	(4.6	)	—			—		(36,240		)	(2.4	)	—			—
Impairment adjustments (charges)																					7,163			0.9		(82,701		)	(11.6	)	(29,077		)	(1.2	)	(82,701		)	(4.0	)
Change in fair value of contingent consideration liability	—			—		(1,168		)	(0.2	)	—			—		(2,252		)	(0.2	)	—			—		31,178			4.4		—			—		28,926			1.4
Operating profit	24,469			3.1		46,866			6.9		62,939			4.2		87,518			6.4		53,089			6.4		3,370			0.5		116,028			5.0		90,888			4.3
Interest income, net	805			0.1		661			0.1		1,469			0.1		1,222			0.1		870			0.1		602			0.1		2,339			0.1		1,824			0.1
Non-operating expenses, net	(47,349		)	(6.0	)	(679		)	(0.1	)	(49,486		)	(3.3	)	(2,183		)	(0.2	)	(108		)	—		(121		)	—		(49,594		)	(2.1	)	(2,304		)	(0.1	)
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 before income taxes and income (loss) from equity investment in TSL																					53,851			6.5		3,851			0.6		68,773			3.0		90,408			4.3
Income tax provision	(16,281		)	(2.0	)	(18,390		)	(2.7	)	(27,671		)	(1.8	)	(33,975		)	(2.5	)	(14,532		)	(1.7	)	(1,476		)	(0.2	)	(42,203		)	(1.8	)	(35,451		)	(1.7	)
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	%
Income (loss) from equity investment in TSL																					—			—		1,630			0.2		(1,310		)	(0.1	)	543			—
Net income																					$	39,319		4.8	%	$	4,005		0.6	%	$	25,260		1.1	%	$	55,500		2.6	%

Three and ~~Six~~Nine Months Ended ~~August 4,~~November 3, 2018 Compared to Three and ~~Six~~Nine Months Ended ~~July 29,~~October 28, 2017

Net Sales

Net sales for the three months ended ~~August 4,~~November 3, 2018 increased ~~16.4%~~17.2% compared to the three months ended ~~July 29,~~October 28, 2017. The following summarizes the change in total net sales from the same period last year:


(in thousands)	Three months ended August 4, 2018			Six months ended August 4, 2018			Three months ended November 3, 2018			Nine months ended November 3, 2018
Net sales for the same period last year	$	681,721		$	1,372,540		$	709,651		$	2,082,191
Increase in comparable sales	60,633			75,371			49,538			124,909
Net increase from non-comparable store sales and other changes	3,430			36,153			18,375			54,528
Increase due to TSL sales	72,532			72,532			80,072			152,604
Loss of sales from Gordmans and Ebuys	(24,581		)	(52,424		)	(25,967		)	(78,391		)
Total net sales	$	793,735		$	1,504,172		$	831,669		$	2,335,841

The following summarizes net sales by segment:


	Three months ended							Six months ended							Three months ended							Nine months ended
(in thousands)	August 4, 2018		July 29, 2017		Change			August 4, 2018		July 29, 2017		Change			November 3, 2018		October 28, 2017		Change			November 3, 2018		October 28, 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
Segment:
U.S. Retail															$	721,746	$	655,930	$	65,816		$	2,083,287	$	1,910,125	$	173,162
Canada Retail															80,072		—		80,072			152,604		—		152,604
Other⁽¹⁾	29,446		52,030		(22,584		)	70,099		118,345		(48,246		)	29,851		53,721		(23,870		)	99,950		172,066		(72,116		)
Total net sales	$	793,735	$	681,721	$	112,014		$	1,504,172	$	1,372,540	$	131,632		$	831,669	$	709,651	$	122,018		$	2,335,841	$	2,082,191	$	253,650


(1)	Other represents net sales for ABG and Ebuys.

The following summarizes our comparable sales change:


	Three months ended				Six months ended				Three months ended				Nine months ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017		November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
U.S. Retail segment	9.6	%	0.6	%	5.7	%	(1.3	)%	7.3	%	(0.4	)%	6.2	%	(1.0	)%
Other - ABG	12.2	%	(0.1	)%	8.2	%	(1.0	)%	6.5	%	0.5	%	7.6	%	(0.5	)%
Total Company	9.7	%	0.6	%	5.8	%	(1.3	)%	7.3	%	(0.4	)%	6.3	%	(1.0	)%

Our increase in total net sales for the three and ~~six~~nine months ended ~~August 4,~~November 3, 2018 over the same ~~period~~periods last year was

primarily driven by ~~the~~ incremental sales from TSL and the increase in comparable and non-comparable store sales, partially offset by the ~~loss of sales~~exits of Gordmans ~~stores~~ and ~~the exit of~~ Ebuys. Within the U.S. Retail segment, comparable sales increased ~~as we had~~due to an increase in transactions driven by higher ~~comparable transactions partially offset by a decline in comparable~~traffic with relatively flat average dollar sales per transaction. We continue to have strong growth in demand on our digital ~~demand with a trend of~~platforms and increasing ~~our~~ store fulfillment of ~~digital~~online orders.

Franchise and Other Revenue

Franchise and other revenue consists of merchandise sales, royalties and other fees paid by franchisees, as well as rental income on owned properties.

Gross Profit

Gross profit is determined as follows:


	Three months ended						Six months ended						Three months ended						Nine months ended
(in thousands)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017			November 3, 2018			October 28, 2017			November 3, 2018			October 28, 2017
Net sales	$	793,735		$	681,721		$	1,504,172		$	1,372,540		$	831,669		$	709,651		$	2,335,841		$	2,082,191
Cost of sales	(539,240		)	(482,424		)	(1,044,452		)	(976,158		)	(560,586		)	(500,924		)	(1,605,038		)	(1,477,082		)
Gross profit	$	254,495		$	199,297		$	459,720		$	396,382		$	271,083		$	208,727		$	730,803		$	605,109
Gross profit as a percentage of net sales	32.1		%	29.2		%	30.6		%	28.9		%	32.6		%	29.4		%	31.3		%	29.1		%

The following presents gross profit and their components as a percentage of net sales:


	Three months ended				Six months ended				Three months ended				Nine months ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017		November 3, 2018		October 28, 2017		November 3, 2018		October 28, 2017
U.S. Retail segment:
Merchandise margin	45.9	%	44.4	%	44.3	%	43.8	%	45.6	%	44.1	%	44.7	%	44.0	%
Store occupancy expenses	(10.6	)	(11.4	)	(10.6	)	(11.2	)	(10.2	)	(10.8	)	(10.5	)	(11.1	)
Distribution and fulfillment expenses	(2.1	)	(2.1	)	(2.3	)	(2.2	)	(2.2	)	(2.2	)	(2.2	)	(2.2	)
Gross profit	33.2		30.9		31.4		30.4		33.2		31.1		32.0		30.7
Canada Retail segment:
Merchandise margin	41.2		—		41.2		—		46.3		—		43.9		—
Store occupancy expenses	(14.9	)	—		(14.9	)	—		(13.4	)	—		(14.1	)	—
Distribution and fulfillment expenses	(1.2	)	—		(1.2	)	—
Distribution expenses									(1.2	)	—		(1.2	)	—
Gross profit	25.1		—		25.1		—		31.7		—		28.6		—
Other - gross profit	22.7		8.5		19.3		12.7		20.3		8.3		19.6		11.3
Total Company gross profit	32.1	%	29.2	%	30.6	%	28.9	%	32.6	%	29.4	%	31.3	%	29.1	%

The U.S. Retail segment merchandise margin increased 150 basis points for the three months ended ~~August 4,~~November 3, 2018 and increased 5070 basis points for the ~~six~~nine months ended ~~August 4,~~November 3, 2018 over the same periods last year primarily due to higher initial markups and lower ~~markdowns, partially offset by higher shipping costs.~~markdowns. 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 exit of Ebuys during the current year.

Operating Expenses

For the three and ~~six~~nine months ended ~~August 4,~~November 3, 2018, operating expenses as a percentage of total revenue increased ~~220~~540 and ~~160~~290 basis points, respectively, over the same periods last year driven by an increase in marketing investments, incentive compensation and the impact of lease exit charges, acquisition-related costs, restructuring charges, and ~~consolidating results~~the consolidation of TSL results during the current ~~period, partially offset by lower store expenses.~~period.

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~~nine months ended ~~August 4,~~November 3, 2018, we recorded a goodwill impairment charge, net of adjustments, as a result of recording adjustments to the preliminary purchase allocations, which resulted in impairing all of TSL’s goodwill.

Non-operating Expenses, net

Due to the acquisition of 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 U.S., which included the reduction in the federal statutory tax rate from 35% to 21%. Offsetting the favorable impact from the U.S. Tax Reform, during the ~~six~~nine months ended ~~August 4,~~November 3, 2018, we had additional tax provision expense of ~~$24.0~~$25.1 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%~~39.0% for the ~~six~~nine months ended ~~July 29,~~October 28, 2017 to ~~203.3%~~62.6% for the ~~six~~nine months ended ~~August 4,~~November 3, 2018.

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.

On May 10, 2018, we 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).

On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group for $170.8 million, net of acquired cash of $10.2 million. Also on November 5, 2018, we acquired a 40% interest in the newly formed ABG-Camuto joint venture for $56.8 million in partnership with Authentic Brands Group LLC. The purchase price of the acquisition, along with the acquired equity investment in ABG-Camuto, was funded with available cash and borrowings on the revolving line of credit of $160.0 million. The purchase price is subject to adjustment primarily based upon a working capital provision as provided by the purchase agreement.

As a result of our decision to exit the Town 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 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 the acquisition of Camuto Group, and repurchase common shares under our share repurchase program.

Operating Cash Flows

For the ~~six~~nine months ended ~~August 4,~~November 3, 2018, net cash provided by operations was ~~$106.6~~$147.3 million compared to ~~$44.6~~$138.6 million for the ~~six~~nine months ended ~~July 29,~~October 28, 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 ~~the timing~~higher accrued expenses related to incentive compensation, acquisition related costs and taxes, partially offset by higher levels of inventory ~~receipts and payments to merchandise vendors, as well as a~~on hand, net of reduction in Canada Retail inventory through clearance ~~activity.~~activity, and the timing of payments to merchandise vendors.

Investing Cash Flows

For the ~~six~~nine months ended ~~August 4,~~November 3, 2018, our net cash used in investing activities was ~~$25.7~~$41.0 million, which was due to the acquisition of TSL, capital expenditures of ~~$32.1~~$48.5 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~~nine months ended ~~July 29,~~October 28, 2017, our net cash used in investing activities was ~~$35.3~~$47.4 million, which included the payment of ~~$28.1~~$39.6 million for capital expenditures and $5.7 million of additional borrowings by TSL.

Financing Cash Flows

For the ~~six~~nine months ended ~~August 4,~~November 3, 2018, our net cash used in financing activities was ~~$41.1~~$60.6 million compared to ~~$31.5~~$57.0 million for the ~~six~~nine months ended ~~July 29,~~October 28, 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. In addition, during the nine months ended October 28, 2017, we purchased treasury shares under our share repurchase program.

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~~nine months ended ~~August 4,~~November 3, 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,~~November 3, 2018. During the nine months ended October 28, 2017, we repurchased 0.5 million Class A common shares at a cost of $9.4 million. 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.

Debt

Capital Expenditure Plans

We expect to spend approximately ~~$90~~$80 million for capital expenditures in fiscal 2018, which now includes our planned capital expenditures related to the 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. We plan to open 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 February 3, 2018 in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018. As of ~~August 4,~~November 3, 2018, we have entered into various noncancelable purchase and service agreements resulting in purchase obligations of approximately ~~$21.8~~$17.3 million. There have been no other material changes in contractual obligations outside the ordinary course of business since February 3, 2018.

Recent Accounting Pronouncements

The information related to recent accounting pronouncements as set forth in Note 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 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. 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 disclosed in our Annual Report on Form 10-K for the fiscal year ended 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 ~~August 4,~~November 3, 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~~the purchase price of the Camuto Group acquisition, along with the acquired equity investment in ABG-Camuto, was funded with available cash and borrowings on the revolving line of credit of $160.0 million. Borrowings under our Credit Facility ~~will be at~~are based on a variable rate of interest, ~~we could potentially be impacted should we require significant borrowings in the future,~~which exposes us to interest rate market risks, particularly during a period of rising interest rates.

Foreign Currency Exchange Risk

We are primarily exposed to the impact of foreign exchange rate risk primarily through our TSL operations in Canada where the functional currency is the Canadian dollar. A hypothetical 10% movement in the Canadian dollar could result in a ~~$5.0~~$7.2 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive loss within the consolidated balance sheets, and ~~$4.6~~$1.9 million of foreign currency revaluation, which would be recorded in non-operating expenses, net within the consolidated statements of operations.

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 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

Except 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. In addition, on November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group. Management's assessment of internal control over financial reporting for fiscal 2018 is expected to exclude the internal controls of ~~TSL.~~TSL and Camuto Group.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note 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~~The following risk factors ~~previously disclosed~~supplement and update our risk factors as set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended February 3, ~~2018.~~2018:

Our recent acquisitions of Camuto Group and TSL could disrupt our ongoing business and adversely impact our results of operations.

On November 5, 2018, we completed the acquisition of all of the outstanding securities of Camuto Group. On May 10, 2018, we also acquired the remaining interest in TSL. Such acquisitions may disrupt our business or divert the attention of our management. Achieving the expected benefits depends in large part on our successful integration of any newly acquired operations, systems and personnel with our own in a timely and efficient manner. We cannot ensure that all of our integration efforts will be completed on a timely basis or as planned. Our operating results or financial condition may be adversely impacted by pre-existing claims or liabilities, both known and unknown. In addition, the integration process may strain our financial and managerial controls and reporting systems and procedures and may also result in the diversion of management and financial resources from core business objectives. Our ability to successfully operate Town Shoes in Canada may be adversely affected by political, economic and social conditions beyond our control, local laws and customs, and legal and regulatory constraints, including compliance with applicable anti-corruption and currency laws and regulations. Risks inherent in our existing and future operations also include, among others, the costs and difficulties of managing operations outside of the United States, suffering possible adverse tax consequences from changes in tax laws or the unfavorable resolution of tax assessments or audits, and greater difficulty in enforcing intellectual property rights. Additionally, foreign currency exchange rates and fluctuations thereof may have an adverse effect on our financial results. There can be no assurance that we will successfully integrate our businesses or that we will realize the anticipated benefits of the acquisitions after we complete our integration efforts.

The success of the acquired Camuto Group business is dependent on our third-party manufacturers and other business partners.

The success of the acquired Camuto Group business depends on our ability to obtain products from our manufacturers on a timely basis and on acceptable terms. We do not exert direct control over the manufacturers' operations and cannot guarantee that any third-party manufacturer will have sufficient production capacity, meet our production deadlines or meet our quality standards. We typically do not have long-term supply contracts with our manufacturers, and the loss of any of our major manufacturers could disrupt our operations and adversely affect our business. In addition, our manufacturers operate outside the U.S. and are subject to additional risks associated with international trade and negative trends in global economic conditions. If these third parties do not perform their obligations or are unable to provide us with the materials and services we need at prices and terms that are acceptable to us, such disruptions may negatively impact our ability to deliver quality products to our customers on a timely basis. This would jeopardize our ability to properly merchandise and service our wholesale customers, which may, in turn, have a negative impact on our customer relationships and result in lower net sales and profits.

The success of the acquired Camuto Group business is also dependent on the strength of our relationships with our wholesale customers, and reductions in or loss of sales to such customers could have an adverse effect on our business.

The Camuto Group business is dependent on sales of branded, licensed and private-label footwear and accessories to wholesale customers, primarily department stores and other specialty retailers. We typically do not have long-term contracts with our wholesale customers. Sales to these customers are generally on an order-by-order basis and are subject to the rights of cancellation and rescheduling by the customer. Failure to fill wholesale customers’ orders in a timely manner could harm our relationships with such customers.

If any of our major wholesale customers experiences a significant downturn in its business, or fails to remain committed to our products or brands, such customers may reduce or discontinue purchases from us. In addition, increased promotional activity by our wholesale customers could negatively impact the image of our brands and or lead to reduced pricing or purchases of our products, which could have an adverse effect on our business.

We are constantly exploring new business opportunities and implementing initiatives. The failure to successfully execute our strategies may have a material adverse effect on our business, results of operations or financial condition.

We have expanded our products and markets in part through strategic acquisitions and we may continue to do so in the future. For example, in fiscal 2018, we acquired Camuto Group and the remaining equity interest in TSL. The continued development and implementation of new business opportunities and strategies involve numerous risks, including risks inherent in entering

new markets in which we may not have prior experience, and could distract management from our core business. In the event that we lose focus on our core business or are unsuccessful in the execution of our concept, it may have a material adverse effect on our business, results of operations or financial condition.

We rely on foreign sources for our merchandise, and our business is therefore subject to risks associated with international trade.

All of the Camuto Group products are manufactured outside the U.S., whereas our retail merchandise is purchased from both domestic and foreign vendors. However, many of our domestic vendors import a large portion of their merchandise from abroad. We believe almost all of our merchandise was manufactured outside the U.S., with the majority manufactured in China. For this reason, we face risks inherent in purchasing from foreign suppliers, such as: economic and political instability in countries where these suppliers are located; international hostilities or acts of war or terrorism affecting the U.S. or foreign countries from which our merchandise is sourced; increases in shipping costs; transportation delays and interruptions, including increased inspections of import shipments by domestic authorities; work stoppages; expropriation or nationalization; changes in foreign government administration and governmental policies; changes in import duties or quotas; compliance with trade and foreign tax laws; and local business practices, including compliance with foreign laws and with domestic and international labor standards. We also face risks and uncertainty relating to escalating trade tensions between the U.S. and other countries, as well as U.S. laws affecting the importation of goods, such as recent tariffs imposed on Chinese goods imported to the U.S. Such events may increase our costs and disrupt our operations, which could have a material adverse effect on us.

We require our business partners to operate in compliance with applicable laws and regulations and our internal requirements. However, we do not control such third parties or their labor and business practices. The violation of labor or other laws by one of our vendors could have a material adverse effect on our business.

The reputation and competitive position for the acquired Camuto Group business are dependent on our ability to maintain the brands we license.

In partnership with Authentic Brands Group LLC, a global brand management and marketing company, we formed ABG-Camuto, a joint venture in which we have a 40% interest. This joint venture acquired several intellectual property rights from the Sellers, including Vince Camuto®, Louise et Cie®, Sole Society®, CC Corso Como®, Enzo Angiolini® and others, and will focus on licensing and developing new category extensions to support the global growth of these brands. ABG-Camuto has entered into a licensing agreement with us, which will earn royalties from the net sales of Camuto Group under the brands acquired. In addition, we hold footwear licenses of Jessica Simpson® and Lucky Brand® and, through joint ventures, participate in the ED Ellen DeGeneres® and Mercedes Castillo® brands.

We rely on our ability to retain and maintain good relationships with the licensors and their ability to maintain strong, well-recognized brands and trademarks. The terms of our license agreements vary and are subject to renewal with various termination provisions. There can be no assurance that we will be able to renew these licenses. Even our longer-term or renewable licenses are typically dependent upon our ability to market and sell the licensed products at specified levels, and the failure to meet such levels may result in the termination or non-renewal of such licenses. Furthermore, many of our license agreements require minimum royalty payments, and if we are unable to generate sufficient sales and profitability to cover these minimum royalty requirements, we may be required to make additional payments to the licensors that could have a material adverse effect on our business and results of operations.


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

On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500.0 million of Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our 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.

The following table sets forth the Class A common share repurchases during the most recent quarter:

(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
—



(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
August 5, 2018 to September 1, 2018	11	$	27.35	—	$	524,094
September 2, 2018 to October 6, 2018	6	$	31.61	—	$	524,094
October 7, 2018 to November 3, 2018	—	$	—	—	$	524,094
	17	$	28.78	—


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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit No.		Description
2.1#		Securities Purchase Agreement, dated as of October 10, 2018, by and among DSW Shoe Warehouse, Inc., ABG-Camuto, LLC, Camuto Group LLC, Camuto Consulting, Inc., Camuto Owners (as defined therein), Clear Thinking Group LLC, in the person of Stuart H. Kessler, solely in its capacity as Sellers’ Representative (as defined therein) and Buyer Parents (as defined therein), solely with respect to the Parent Specified Sections. Incorporated by reference to Exhibit 2.1 to Form 8-K (file no. 001-32545) filed October 11, 2018.
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.
10.1		Second Amendment to Credit Agreement, dated as of October 10, 2018, by and among DSW Inc., the guarantors party thereto, the lenders party thereto and PNC Bank, National Association, as administrative agent. Incorporated by reference to Exhibit 10.1 to Form 8-K (file no. 001-32545) filed October 11, 2018.
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

# Schedules and exhibits attached to the Securities Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish the omitted schedules and exhibits to the U.S. Securities and Exchange Commission upon request.

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,~~December 11, 2018	By:	/s/ Jared Poff
			Jared Poff
			~~Senior~~Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer and duly authorized officer)

3335



		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations		1
Condensed Consolidated Statements of Comprehensive Income (Loss)		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		2223
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2930
Item 4. Controls and Procedures		3031
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		3031
Item 1A. Risk Factors		3032
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		3033
Item 3. Defaults Upon Senior Securities		3134
Item 4. Mine Safety Disclosures		3134
Item 5. Other Information		3134
Item 6. Exhibits		3234
Signature		3335