~~DSW~~

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(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
	May 4, 2019			May 5, 2018
Net income	$	31,194		$	24,297
Other comprehensive income (loss), net of income taxes:
Foreign currency translation loss	(714		)	(4,685		)
Unrealized net gain (loss) on debt securities	242			(344		)
Reclassification adjustment for net losses (gains) realized in net income	(88		)	1,905
Total other comprehensive loss, net of income taxes	(560		)	(3,124		)
Total comprehensive income	$	30,634		$	21,173

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

~~DSW~~

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands)


	August 4, 2018			February 3, 2018			July 29, 2017			May 4, 2019			February 2, 2019			May 5, 2018
ASSETS
Cash and cash equivalents	$	215,996		$	175,932		$	89,305		$	70,671		$	99,369		$	197,162
Investments	73,119			124,605			182,062			51,259			69,718			71,708
Accounts receivable	17,259			17,532			16,596
Accounts receivable from related parties	—			1,704			1,146
Accounts receivable, net										78,287			68,870			13,571
Inventories	596,956			501,903			527,305			642,045			645,317			539,700
Prepaid expenses and other current assets	73,763			49,197			45,529			54,463			71,945			56,815
Total current assets	977,093			870,873			861,943			896,725			955,219			878,956
Property and equipment, net	387,621			355,199			364,552			405,156			409,576			352,550
Operating lease assets										993,622			—			—
Goodwill	25,899			25,899			79,689			90,881			89,513			25,899
Intangible assets	20,285			135			33,065			42,298			46,129			135
Deferred income taxes	14,235			27,711			18,792
Equity investment in TSL	—			6,096			10,350
Deferred tax assets										27,909			30,283			28,174
Equity investments										60,193			58,125			2,401
Notes receivable from TSL	—			115,895			60,094			—			—			123,710
Other assets	19,883			19,709			18,144			32,384			31,739			19,793
Total assets	$	1,445,016		$	1,421,517		$	1,446,629		$	2,549,168		$	1,620,584		$	1,431,618
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$	228,921		$	178,449		$	164,659		$	224,576		$	261,625		$	186,038
Accounts payable to related parties	519			859			718
Accrued expenses	145,776			148,226			124,343			186,992			201,535			139,346
Current operating lease liabilities										184,456			—			—
Total current liabilities	375,216			327,534			289,720			596,024			463,160			325,384
Non-current liabilities	150,316			138,732			142,499
Contingent consideration liability	—			—			36,456
Debt										235,000			160,000			—
Non-current operating lease liabilities										921,145			—			—
Other non-current liabilities										34,148			165,047			145,366
Total liabilities	525,532			466,266			468,675			1,786,317			788,207			470,750
Commitments and contingencies
Shareholders' equity:
Common shares paid-in capital, no par value	971,653			961,245			953,868			982,093			978,794			965,623
Treasury shares, at cost	(325,906		)	(325,906		)	(316,531		)	(448,436		)	(373,436		)	(325,906		)
Retained earnings	301,006			354,979			370,874			257,453			254,718			359,342
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		)	(3,266		)	(2,706		)	(13,198		)
Total shareholders' equity	919,484			955,251			977,954			762,851			832,377			960,868
Total liabilities and shareholders' equity	$	1,445,016		$	1,421,517		$	1,446,629		$	2,549,168		$	1,620,584		$	1,431,618

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

~~DSW~~

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(unaudited and in thousands, except per share data)



	Number of shares				Amounts
	Class A common shares		Class B common shares	Treasury shares	Common shares paid in capital		Treasury shares			Retained earnings			Basis difference related to acquisition of commonly controlled entity			Accumulated other comprehensive loss			Total
Three months ended May 4, 2019
Balance, February 2, 2019	70,672		7,733	15,091	$	978,794	$	(373,436	)	$	254,718		$	(24,993	)	$	(2,706	)	$	832,377
Cumulative effect of accounting change	—		—	—	—		—			(9,556		)	—			—			(9,556		)
Net income	—		—	—	—		—			31,194			—			—			31,194
Stock-based compensation activity	172		—	—	3,299		—			—			—			—			3,299
Repurchase of Class A common shares	(3,410	)	—	3,410	—		(75,000		)	—			—			—			(75,000		)
Dividends ($0.25 per share)	—		—	—	—		—			(18,903		)	—			—			(18,903		)
Other comprehensive loss	—		—	—	—		—			—			—			(560		)	(560		)
Balance, May 4, 2019	67,434		7,733	18,501	$	982,093	$	(448,436	)	$	257,453		$	(24,993	)	$	(3,266	)	$	762,851

Three months ended May 5, 2018
Balance, February 3, 2018	72,294		7,733	13,091	$	961,245	$	(325,906	)	$	354,979		$	(24,993	)	$	(10,074	)	$	955,251
Net income	—		—	—	—		—			24,297			—			—			24,297
Stock-based compensation activity	176		—	—	4,378		—			—			—			—			4,378
Dividends ($0.25 per share)	—		—	—	—		—			(19,934		)	—			—			(19,934		)
Other comprehensive loss	—		—	—	—		—			—			—			(3,124		)	(3,124		)
Balance, May 5, 2018	72,470		7,733	13,091	$	965,623	$	(325,906	)	$	359,342		$	(24,993	)	$	(13,198	)	$	960,868

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

DESIGNER BRANDS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)


	Six months ended						Three months ended
	August 4, 2018			July 29, 2017			May 4, 2019			May 5, 2018
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							$	31,194		$	24,297
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	38,429			42,286			21,422			18,011
Stock-based compensation expense	9,698			7,851			4,370			4,514
Deferred income taxes	13,526			(3,838		)	(364		)	(413		)
Loss from equity investment	1,310			1,087
Loss on previously held equity investment in TSL and notes receivable from TSL	33,988			—
Impairment charges	36,240			—
Lease exit charges	3,910			—
Change in fair value of contingent consideration liability	—			2,252
Loss (income) from equity investments							(2,228		)	1,310
Lease exit non-cash charges							—			3,559
Loss on foreign currency reclassified from accumulated other comprehensive loss	13,963			2,161			—			1,745
Other							(3,623		)	6,248
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivable	3,767			1,264			(10,330		)	5,665
Inventories	(37,308		)	(27,310		)	1,235			(37,797		)
Prepaid expenses and other current assets	(23,257		)	(6,730		)	(880		)	(7,361		)
Accounts payable	26,219			(18,949		)	(32,254		)	12,767
Accrued expenses	(7,960		)	(10,269		)	(11,568		)	(7,250		)
Other	8,106			3,337
Net cash provided by operating activities	106,572			44,637
Net cash provided by (used in) operating activities							(3,026		)	25,295
Cash flows from investing activities:
Cash paid for property and equipment	(32,103		)	(28,139		)	(24,879		)	(18,185		)
Purchases of available-for-sale investments	(16,735		)	(83,872		)	—			(8,106		)
Sales of available-for-sale investments	67,280			82,436			18,691			59,915
Additional borrowings by TSL	(15,989		)	(5,689		)	—			(15,989		)
Acquisition of TSL, net of cash acquired	(28,152		)	—
Net cash used in investing activities	(25,699		)	(35,264		)
Net cash provided by (used in) investing activities							(6,188		)	17,635
Cash flows from financing activities:
Proceeds from exercise of stock options	1,492			358
Net change in vendor payment program	(1,671		)	847
Cash paid for income taxes for stock-based compensation shares withheld	(979		)	(692		)
Borrowing on revolving line of credit							215,200			—
Payments on revolving line of credit							(140,200		)	—
Cash paid for treasury shares							(75,000		)	—
Dividends paid	(39,910		)	(31,969		)	(18,903		)	(19,934		)
Other	(41		)	—			(986		)	(1,766		)
Net cash used in financing activities	(41,109		)	(31,456		)	(19,889		)	(21,700		)
Effect of exchange rate changes on cash balances	300			—			839			—
Net increase (decrease) in cash, cash equivalents, and restricted cash	40,064			(22,083		)	(28,264		)	21,230
Cash, cash equivalents, and restricted cash, beginning of period	175,932			115,311			100,568			175,932
Cash, cash equivalents, and restricted cash, end of period	$	215,996		$	93,228		$	72,304		$	197,162
Supplemental disclosures of cash flow information -
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	28,135		$	46,092		$	721		$	2,401
Non-cash investing and financing activities -
Cash paid for interest on debt							$	1,987		$	—
Cash paid for operating lease liabilities							$	59,162		$	—
Non-cash investing and financing activities:
Property and equipment purchases not yet paid	$	8,390		$	5,711		$	6,542		$	7,186
Operating lease liabilities arising from lease asset additions (excluding ASU 2016-02 transition adjustments)							$	4,621		$	—
Adjustment to operating lease assets and lease liabilities for modifications							$	19,147		$	—

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

Table of Contents

~~DSW~~DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES

Business Operations- On March 19, 2019, DSW Inc.~~, together with~~ changed its ~~wholly-owned subsidiaries,~~name to Designer Brands Inc. References to "DSW" refer to the DSW Designer Shoe Warehouse banner unless otherwise stated. The Company is ~~the destination for on-trend~~a leading North American footwear and accessories ~~brands at a great value every single day. We offer a wide assortment of brand name dress, casual~~designer, producer and ~~athletic footwear and accessories for women, men and kids in stores and on e-commerce platforms.~~retailer.

On May 10, 2018, we acquired the remaining interest in Town Shoes Limited ("TSL") that we did not previously own. Beginning with our second quarter of fiscal 2018, TSL ceased being accounted for under the equity method of accounting and was accounted for as a consolidated wholly-owned subsidiary. ~~TSL~~As a result of this acquisition, we now operate a Canadian business that 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~~exited the Town Shoes banner ~~with plans~~in Canada during fiscal 2018.

On November 5, 2018, we completed the acquisition of Camuto LLC, doing business as Camuto Group ("Camuto Group"), a footwear design and brand development organization, from Camuto Group LLC (the "Sellers"). The Camuto Group acquisition provides us a global production, sourcing and design infrastructure, including operations in Brazil and China, a new state-of-the-art distribution center in New Jersey, footwear licenses of brands, including Jessica Simpson and Lucky Brand, and branded e-commerce sites. Camuto Group earns revenue from the sale of wholesale products to ~~close its 38 locations by the end of fiscal 2018 or early fiscal 2019. As a result of this acquisition, we now present two reportable segments: the U.S. Retail segment, which was previously presented~~retailers, commissions for serving retailers as the ~~DSW segment,~~design and buying agent for products under private labels ("First Cost"), and the ~~Canada Retail segment.~~sale of branded products on direct-to-consumer e-commerce sites.

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

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~~services 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~~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, during the fourth quarter of fiscal 2017,~~marketplace, we decided to exit the business and ended all operations in the first quarter of fiscal 2018.

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

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

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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~~2, 2019 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~~).date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February ~~3, 2018,~~2, 2019, filed with the U.S. Securities and Exchange Commission (the "SEC") on March ~~23, 2018.~~26, 2019.

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

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.~~2, 2019.

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

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

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

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

reserves, ~~accrual for lease obligations,~~foreign tax contingent liabilities, 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 sales tax. Customers can purchase products~~Income Taxes- Our effective tax rate changed 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 responsible31.9% for the ~~sale transaction.~~

~~ABG supplies footwear~~three months ended May 5, 2018 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 responsible25.4% 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.~~three months ended May 4, 2019. 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~~decrease 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 purchaseeffective tax rate was primarily driven by additional valuation allowances and the ~~stand alone value~~impact of nondeductible charges associated with the points earned. We maintain a deferred liability for the outstanding points and certificates based on historical conversion and redemption rates. The deferred liability is reduced and sales are recognized when certificates are redeemed or when points and certificates expire.

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

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

~~Income Taxes-~~ On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Reform") was enacted in the U.S., which significantly changes how the U.S. taxes corporations. The U.S. Tax Reform reduced the federal statutory tax rate from 35% to 21% and requires complex computations to be performed that were not previously required in U.S. tax law. The U.S. Treasury Department, the U.S. Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the U.S. Tax Reform will be applied or otherwise administered that is different from our interpretation. We have not completed our determination of the accounting implications of the U.S. Tax Reform and no changes were recordedEbuys exit during the three months ended ~~August 4, 2018 to the provisional amounts recorded as of February 3,~~May 5, 2018. However, we have reasonably estimated the effects and recorded provisional amounts in our consolidated financial statements as of August 4, 2018. As we complete our analysis of the U.S. Tax Reform, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made. Offsetting the favorable impact from the U.S. Tax Reform, during the six months ended August 4, 2018, we had additional tax provision expense of $24.0 million due to recording a valuation allowance associated with deferred tax assets and nondeductible discrete items, primarily related to the charges recorded as a result of the acquisition of TSL. As a result, our effective tax rate changed from 39.8% for the six months ended July 29, 2017 to 203.3% for the six months ended August 4, 2018.

~~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 certain outstanding letters of ~~credit under our previous credit facility.~~credit.

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



(in thousands)	May 4, 2019		February 2, 2019		May 5, 2018
Cash and cash equivalents	$	70,671	$	99,369	$	197,162
Restricted cash, included in prepaid expenses and other current assets	1,633		1,199		—
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows	$	72,304	$	100,568	$	197,162

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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

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

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~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

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

~~Foreign Currency Translation and Transactions-~~ Prior to our acquisition of the remaining interest in TSL, our equity investment in TSL and notes receivable from TSL, along with certain investments, were denominated in Canadian dollars ("CAD") and translated into USD at exchange rates in effect at the balance sheet date. Each quarter, the income or loss from TSL was recorded in USD at the average exchange rate for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive loss. As a result of 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-~~ Reclassifications- Certain prior period reclassifications were made to conform to the current period presentation. ~~Prepaid rent~~Franchise costs was reclassified to operating expenses, accounts receivable from related parties was reclassified to accounts receivable, net, and accounts payable to related parties was reclassified to ~~prepaid expenses and other current assets and long-term prepaid rent to related parties were reclassified to other assets in our consolidated balance sheets.~~accounts payable.

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

A lease liability for new leases is recorded based on the present value of future fixed lease ~~obligations~~commitments with a corresponding ~~right-of-use~~lease asset. ~~Primarily for those~~For 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~~liability and the ~~right-of-use~~lease asset. Other leases will be ~~required to be~~ accounted for as ~~financing arrangements similar~~finance arrangements. For real estate leases, we are generally required to ~~current accounting~~pay base rent, real estate taxes, and insurance, which are considered lease components, and maintenance, which is a non-lease component. As provided for ~~capital~~under ASU 2016-02, we have elected to not separate non-lease payment components from the associated lease component for all new real estate leases. ~~The standard, which will have~~We determine the discount rate for each lease by estimating the rate that we would be required to pay on a ~~material impact~~secured borrowing for an amount equal to ~~our~~the lease payments over the lease term.

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

Adoption of ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software- Also during the first quarter of fiscal ~~2019. In July 2018,~~2019, we early adopted ASU 2018-15 on a prospective basis, which aligned the ~~FASB issued ASU 2018-11,~~ ~~Leases - Targeted Improvements~~,requirements for capitalizing implementation costs incurred in a cloud computing arrangement that ~~provided~~is a ~~practical expedient that removed~~service contract with the ~~requirement~~requirements for capitalizing implementation costs incurred to ~~restate prior period financial statements upon~~develop or acquire internal-use software. The adoption of ~~the standard, which we plan to elect. We are currently evaluating the full~~ASU 2018-15 did not have a material impact ~~of the standard, including other optional practical expedients that we may elect upon adoption, and we are progressing with~~on our implementation plan. Our implementation plan includes identifying our lease population, updating our lease database, assessing the lease system utilized by our third-party lease administrator, and identifying changes to processes and controls.condensed consolidated financial statements.

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

2. ~~ACQUISITION~~ACQUISITIONS AND EQUITY METHOD INVESTMENT

~~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~~Canadian dollars ("CAD") ($28.2 million USD), net of acquired cash of $8.5 million CAD ($6.6 million USD), by exercising our call option. This was accounted for as a step acquisition whereby we remeasured to fair value our previously held assets, which included our equity investment in TSL and notes and accounts receivable from TSL, and included these assets in the determination of the purchase price. During the second quarter of fiscal 2018, as a result of the remeasurement, we recorded a loss of $34.0 million to non-operating 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~~final purchase price and the allocation of the total consideration to the fair values of the assets and liabilities acquired consisted of the ~~following:~~following (in USD):



(in thousands)	Final Purchase Price and Allocation
Purchase price:
Cash consideration, net of cash acquired	$	28,152
Replacement stock-based awards attributable to pre-acquisition services	196
Fair value of previously held assets	92,242
	$	120,590
Fair value of assets and liabilities acquired:
Inventories	$	66,072
Other current assets	3,687
Property and equipment	41,008
Goodwill	43,022
Intangible assets	20,689
Accounts payable and accrued expenses	(33,196		)
Non-current liabilities	(20,692		)
	$	120,590

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

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

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

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

During the ~~six~~three months ended ~~August~~May 4, 2019, our condensed consolidated statements of operations included revenue and net income for TSL of $51.8 million and $0.4 million, respectively. Primarily in fiscal 2018, we incurred $3.1 million of acquisition-related costs as a result of the step acquisition, which were included in operating expenses in the condensed consolidated statements of operations.

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~~DSW~~DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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



(in thousands)	Preliminary Purchase Price and Allocation			Measurement Period Adjustments			Revised Purchase Price and Allocation
Purchase price -
Cash consideration, net of cash acquired	$	171,251		$	—		$	171,251
Fair value of assets and liabilities acquired:
Accounts receivable	$	83,939		$	1,601		$	85,540
Inventories	74,499			(758		)	73,741
Other current assets	7,197			591			7,788
Property and equipment	43,906			—			43,906
Goodwill	63,614			1,368			64,982
Intangible asset	27,000			—			27,000
Other assets	13,351			—			13,351
Accounts payable and other liabilities	(122,811		)	(2,664		)	(125,475		)
Non-current liabilities	(19,444		)	(138		)	(19,582		)
	$	171,251		$	—		$	171,251

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

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

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

Adjustments to the purchase price and the allocation of the purchase price may be made during a measurement period of up to one year from the acquisition date as additional information that existed at the date of the acquisition is obtained. Measurement period adjustments are recognized on a prospective basis in the period of change. The purchase price is subject to adjustments primarily based upon a working capital provision as provided by the purchase agreement. The allocation of the purchase price is currently based on certain preliminary valuations and analysis that have not been completed as of the date of this filing. In addition, we have not completed the allocation of goodwill to our U.S. Retail and Brand Portfolio segments or the reporting units within the Brand Portfolio segment.

During the three months ended May 4, 2019, our condensed consolidated statements of operations included revenue and net losses for Camuto Group of $94.0 million and $7.5 million, respectively. Primarily during fiscal 2018, we incurred $22.2 million of acquisition-related costs as a result of the acquisition, which were included in operating expenses in the condensed consolidated statements of operations.

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Activity related to our equity investment in ABG-Camuto was as follows:



(in thousands)	Three months ended May 4, 2019
Balance at beginning of period	$	58,125
Share of net earnings	2,228
Distributions received	(160		)
Balance at end of period	$	60,193

Combined Results- The following table provides the supplemental ~~unaudited~~ pro forma total revenue and net income of the combined entity had the acquisition ~~date~~dates of TSL and Camuto Group and the investment in ABG-Camuto been the first day of our fiscal 2017:



(in thousands)	Three months ended May 5, 2018
Total revenue	$	868,430
Net income	$	12,055

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

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

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

3. REVENUE

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

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

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

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

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

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

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

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

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

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

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

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

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

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



	Three months ended
(in thousands)	May 4, 2019		May 5, 2018
Segment net sales:
U.S. Retail	$	691,840	$	669,784
Canada Retail	51,816		—
Brand Portfolio	90,729		—
Other	35,607		40,653
Total net sales	869,992		710,437
Commission, franchise and other revenue	8,523		1,665
Total revenue	$	878,515	$	712,102

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

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

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~~DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table presents total revenue by product and service category:



	Three months ended
(in thousands)	May 4, 2019		May 5, 2018
Net sales:
U.S. Retail segment:
Women's footwear	$	482,121	$	469,284
Men's footwear	128,989		133,159
Accessories and other	80,730		67,341
	691,840		669,784
Canada Retail segment:
Women's footwear	28,626		—
Men's footwear	13,008		—
Accessories and other	10,182		—
	51,816		—
Brand Portfolio segment:
Wholesale	81,616		—
Direct-to-consumer	9,113		—
	90,729		—
Other	35,607		40,653
Total net sales	869,992		710,437
Commission, franchise and other revenue	8,523		1,665
Total revenue	$	878,515	$	712,102

The above tables exclude intersegment revenues for the three months ended May 4, 2019 of $10.5 million, which were eliminated in consolidation.

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



	Three months ended
(in thousands)	May 4, 2019			May 5, 2018
Gift cards:
Beginning of period	$	34,998		$	32,792
Gift cards redeemed and breakage recognized to net sales	(22,255		)	(22,273		)
Gift cards issued	17,323			17,632
End of period	$	30,066		$	28,151
Loyalty programs:
Beginning of period	$	16,151		$	21,282
Loyalty certificates redeemed and expired and other adjustments recognized to net sales	(9,321		)	(6,635		)
Deferred revenue for loyalty points issued	9,323			7,464
End of period	$	16,153		$	22,111

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

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

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

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

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DESIGNER BRANDS 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~~May 4, ~~2018,~~2019, 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%~~15% of the Company's outstanding common shares, representing approximately ~~49%~~50% of the combined voting power. As of ~~August~~May 4, ~~2018,~~2019, the Schottenstein Affiliates beneficially owned ~~3.6~~3.4 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. See Note 15, Leases, for rent expense and future minimum lease payment requirements associated with the Schottenstein Affiliates.

Other Purchases and Services- During the three months ended ~~August~~May 4, ~~2018~~2019 and ~~July 29, 2017, we recorded rent expense from leases with Schottenstein Affiliates of $2.3 million and $2.3 million, respectively. During the six months ended August 4,~~May 5, 2018, ~~and July 29, 2017, we recorded rent expense from leases with Schottenstein Affiliates of $4.6 million and $4.6 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, 2018 and July 29, 2017,~~ we had other purchases and services from Schottenstein Affiliates of ~~$1.7~~$1.9 million and ~~$0.4~~$1.5 million, respectively.

Due to Related Parties-As of May 4, 2019, February 2, 2019 and May 5, 2018, we had amounts due to related parties of $0.8 million, $1.0 million and $0.9 million, respectively, included in accounts payable on the condensed consolidated balance sheets.

ABG-Camuto

Beginning in the fourth quarter of fiscal 2018, we have a 40% interest in ABG-Camuto. ABG-Camuto entered into a licensing agreement with us whereby we pay royalties on the net sales of the brands owned by ABG-Camuto. During the ~~six~~three months ended ~~August~~May 4, ~~2018~~2019, we recorded $5.7 million of royalty expense payable to ABG-Camuto. As of May 4, 2019 and ~~July 29, 2017,~~February 2, 2019, we had ~~other purchases and services from Schottenstein Affiliates of $3.3~~$0.8 million and ~~$0.7~~$2.4 million, ~~respectively.~~respectively, payable to ABG-Camuto.

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 it was treated as an equity investment. ~~We had the following related party transactions with~~Our initial investment in TSL ~~during the period it was~~included an ~~equity investment:~~

~~Management Agreement-~~ ~~We had~~unsecured subordinated note from TSL that earned payment-in-kind interest. Effective February 2, 2018, we entered into a ~~management~~secured loan agreement with TSL ~~under which we~~that allowed TSL to borrow up to $100 million CAD at a variable interest rate, as defined in the agreement, paid monthly. Amounts due for the note and loan are shown as notes receivable from TSL on the condensed consolidated balance sheets.

We provided TSL certain information technology and management services. During the three months ended July 29, 2017, we recognized income of $0.3 million. During the six months ended August 4, 2018 and July 29, 2017, we recognized income of $0.3 million and $0.6 million, respectively.

~~License Agreement-~~services under a management 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~~TSL's Canadian DSW stores, ~~which are included~~and we had various other transactions with TSL. All transactions in ~~net sales. The license was exclusive~~the aggregate and ~~non-transferable~~amounts due from TSL, other than the notes receivable from TSL, were immaterial for ~~use in Canada. During~~ the three months ended ~~July 29, 2017, we recognized royalty income~~and as of ~~$0.2 million. During the six months ended August 4, 2018 and July 29, 2017, we recognized royalty income of $0.1 million and $0.3 million, respectively.~~May 5, 2018.

~~Other Purchases and Services-~~ During the three months ended July 29, 2017, TSL had other purchases and services from us of $0.7 million. During the six months ended August 4, 2018 and July 29, 2017, TSL had other purchases and services from us of $0.4 million and $1.6 million, respectively. During the six months ended August 4, 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
(in thousands)	May 4, 2019	May 5, 2018
Weighted average shares outstanding - Basic shares	77,004	80,108
Dilutive effect of stock-based compensation awards	1,259	650
Weighted average shares outstanding - Diluted shares	78,263	80,758

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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~~May 4, ~~2018~~2019 and ~~July 29, 2017,~~May 5, 2018, 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~~2.0 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 4.33.9 million, respectively.

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

6. STOCK-BASED COMPENSATION

Stock-based compensation expense consisted of the following:



	Three months ended
(in thousands)	May 4, 2019		May 5, 2018
Stock options	$	823	$	1,795
Restricted and director stock units	3,547		2,719
	$	4,370	$	4,514

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

The following table summarizes the stock-based compensation award activity for the ~~six~~three months ended ~~August~~May 4, ~~2018:~~2019:



	Number of shares
(in thousands)	Stock Options		Time-Based RSUs		Performance-Based RSUs
Outstanding - beginning of period	4,001		989		596
Granted	—		725		347
Exercised / vested	(29	)	(108	)	(97	)
Forfeited / expired	(29	)	(28	)	—
Outstanding - end of period	3,943		1,578		846

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

As of ~~August~~May 4, ~~2018, 4.1~~2019, 2.8 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"~~"DBI" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be exchanged for the Company's Class A common shares at the election of the holder on a share for share basis. Holders of Class A common shares are entitled to one vote per share and holders of Class B common shares are entitled to eight votes per share on matters submitted to shareholders for approval.

The following table provides additional information for our common shares:



	May 4, 2019		February 2, 2019		May 5, 2018
(in thousands)	Class A	Class B	Class A	Class B	Class A	Class B
Authorized shares	250,000	100,000	250,000	100,000	250,000	100,000
Issued shares	85,935	7,733	85,763	7,733	85,561	7,733
Outstanding shares	67,434	7,733	70,672	7,733	72,470	7,733
Treasury shares	18,501	—	15,091	—	13,091	—

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

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

Dividends- On ~~August 28, 2018,~~May 30, 2019, 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~~July 5, ~~2018~~2019 to shareholders of record at the close of business on ~~September 24, 2018.~~June 19, 2019.

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DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Share Repurchases- On August 17, 2017, the Board of Directors authorized the repurchase of an additional ~~$500.0~~$500 million of ~~DSW~~Class A common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the ~~six~~three months ended ~~August~~May 4, ~~2018 and July 29, 2017,~~2019, we ~~did not repurchase any~~repurchased 3.4 million Class A common shares at a cost of $75.0 million, with ~~$524.1~~$401.6 million of Class A common shares that remain authorized under the program as of ~~August~~May 4, ~~2018.~~2019. During the three months ended May 5, 2018, we did not repurchase any Class A common shares. 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
	May 4, 2019									May 5, 2018
(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	$	(2,328	)	$	(378	)	$	(2,706	)	$	(9,278	)	$	(796	)	$	(10,074	)
Other comprehensive loss before reclassifications	(714		)	242			(472		)	(4,685		)	(344		)	(5,029		)
Amounts reclassified to non-operating expenses, net	—			(88		)	(88		)	1,745			160			1,905
Other comprehensive loss	(714		)	154			(560		)	(2,940		)	(184		)	(3,124		)
Accumulated other comprehensive loss - end of period	$	(3,042	)	$	(224	)	$	(3,266	)	$	(12,218	)	$	(980	)	$	(13,198	)

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

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. ACCOUNTS RECEIVABLE

Accounts receivable, net, consisted of the following:



(in thousands)	May 4, 2019			February 2, 2019			May 5, 2018
Customer accounts receivables:
Serviced by third-party provider with guaranteed payment	$	57,619		$	47,599		$	—
Serviced by third-party provider without guaranteed payment	168			280			—
Serviced in-house	12,169			9,892			2,702
Construction and tenant allowance receivables due from landlords⁽¹⁾	—			4,034			5,118
Accounts receivable due from related parties	—			—			795
Other receivables	10,561			8,004			4,956
Accounts receivable	80,517			69,809			13,571
Allowance for doubtful accounts	(2,230		)	(939		)	—
Accounts receivable, net	$	78,287		$	68,870		$	13,571


(1)	Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for construction and tenant allowance receivables due from landlords were netted against the operating lease liabilities.

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

9. INVESTMENTS

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



(in thousands)	May 4, 2019			February 2, 2019			May 5, 2018
Carrying value of investments	$	51,542		$	70,195		$	72,688
Unrealized gains included in accumulated other comprehensive loss	1			44			6
Unrealized losses included in accumulated other comprehensive loss	(284		)	(521		)	(986		)
Fair value	$	51,259		$	69,718		$	71,708

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

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

9.10. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:



(in thousands)	May 4, 2019			February 2, 2019			May 5, 2018
Land	$	1,110		$	1,110		$	1,110
Buildings	12,485			12,485			12,485
Building and leasehold improvements	439,707			437,116			405,788
Furniture, fixtures and equipment	489,477			487,494			427,026
Software	167,924			161,226			139,712
Construction in progress⁽¹⁾	42,620			38,646			41,594
Total property and equipment	1,153,323			1,138,077			1,027,715
Accumulated depreciation and amortization	(748,167		)	(728,501		)	(675,165		)
Property and equipment, net	$	405,156		$	409,576		$	352,550

(in thousands) August 4, 2018 February 3, 2018 July 29, 2017
Land $ 1,110
$ 1,110
$ 1,110
Buildings 12,485
12,485
12,485
Building and leasehold improvements 425,651
404,852
398,129
Furniture, fixtures and equipment 451,040
423,597
417,226
Software 145,111
137,917
135,844
Construction in progress⁽¹⁾
46,643
39,201
28,008
Total property and equipment 1,082,040
1,019,162
992,802
Accumulated depreciation and amortization (694,419 ) (663,963 ) (628,250 )
Property and equipment, net $ 387,621
$ 355,199
$ 364,552


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

~~10. GOODWILL AND INTANGIBLE ASSETS~~

~~Goodwill-~~ ~~Activity related to our goodwill was as follows:~~

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

Table of Contents

~~DSW~~DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

11. GOODWILL AND INTANGIBLE ASSETS

Goodwill- Activity related to our goodwill was as follows:



	Three months ended
	May 4, 2019								May 5, 2018
(in thousands)	Goodwill			Accumulated Impairments			Net		Goodwill			Accumulated Impairments			Net
Beginning of period by segment:
U.S. Retail	$	25,899		$	—		$	25,899	$	25,899		$	—		$	25,899
Canada Retail	42,048			(42,048		)	—		—			—			—
Brand Portfolio	63,614			—			63,614		—			—			—
Other - Ebuys	—			—			—		53,790			(53,790		)	—
	131,561			(42,048		)	89,513		79,689			(53,790		)	25,899
Activity by segment:
Canada Retail -
Currency translation adjustment	(1,043		)	1,043			—		—			—			—
Brand Portfolio -
Purchase price and allocation adjustments	1,368			—			1,368		—			—			—
Other - Eliminated Ebuys goodwill	—			—			—		(53,790		)	53,790			—
	325			1,043			1,368		(53,790		)	53,790			—
End of period by segment:
U.S. Retail	25,899			—			25,899		25,899			—			25,899
Canada Retail	41,005			(41,005		)	—		—			—			—
Brand Portfolio	64,982			—			64,982		—			—			—
Other - Ebuys	—			—			—		—			—			—
	$	131,886		$	(41,005	)	$	90,881	$	25,899		$	—		$	25,899

Intangible Assets- Intangible assets consisted of the following:



(in thousands)	Cost		Accumulated Amortization			Net
May 4, 2019
Definite-lived customer relationships	$	28,340	$	(1,326	)	$	27,014
Indefinite-lived trademarks and tradenames	15,284		—			15,284
	$	43,624	$	(1,326	)	$	42,298
February 2, 2019
Definite-lived:
Customer relationships	$	28,375	$	(1,010	)	$	27,365
Favorable leasehold interests	3,513		(295		)	3,218
Indefinite-lived trademarks and tradenames	15,546		—			15,546
	$	47,434	$	(1,305	)	$	46,129
May 5, 2018
Indefinite-lived trademarks and tradenames	$	135	$	—		$	135

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

The ~~definite-lived intangible assets~~customer relationships are amortized by the straight-line method ~~using~~over three years ~~for customer relationships~~ associated with ~~TSL's~~the Canada loyalty program and ~~over~~ten years for Brand Portfolio customer relationships. Upon transition to ASU 2016-02 at the ~~remaining lease term~~beginning of fiscal 2019, amounts for favorable leasehold ~~interests.~~interests were netted against the operating lease assets.

~~11.~~12. ACCRUED EXPENSES

Accrued expenses consisted of the following:



(in thousands)	May 4, 2019		February 2, 2019		May 5, 2018
Gift cards and merchandise credits	$	30,066	$	34,998	$	28,151
Accrued compensation and related expenses	25,951		53,577		13,412
Accrued taxes	23,242		16,491		24,150
Loyalty programs deferred revenue	16,153		16,151		22,111
Sales returns	21,692		17,743		16,006
Customer allowances and discounts	14,436		13,094		—
Other⁽¹⁾	55,452		49,481		35,516
	$	186,992	$	201,535	$	139,346

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


(1)	Other is comprised of 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.~~period.

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.

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

~~12.~~13. OTHER NON-CURRENT LIABILITIES

~~Non-current~~Other non-current liabilities consisted of the following:



(in thousands)	May 4, 2019		February 2, 2019		May 5, 2018
Foreign tax contingent liabilities	$	14,118	$	13,429	$	—
Deferred tax liabilities	2,774		3,260		—
Construction and tenant allowances⁽¹⁾	—		71,634		78,202
Deferred rent⁽¹⁾	—		35,934		35,841
Accrual for lease obligations⁽¹⁾	—		16,483		11,063
Unfavorable leasehold interests⁽¹⁾	—		5,779		—
Other⁽²⁾	17,256		18,528		20,260
	$	34,148	$	165,047	$	145,366

(in thousands) August 4, 2018 February 3, 2018 July 29, 2017
Construction and tenant allowances $ 75,439
$ 80,725
$ 84,002
Deferred rent 35,694
37,116
38,187
Accrual for lease obligations 9,511
6,511
7,328
Unfavorable leasehold interests 7,000
—
—
Other⁽¹⁾
22,672
14,380
12,982
$ 150,316
$ 138,732
$ 142,499


(1)	Upon transition to ASU 2016-02 at the beginning of fiscal 2019, amounts for deferred rent, construction and tenant allowances, the accrual for lease obligations, and unfavorable leasehold interests were netted against the operating lease assets.


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

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

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



	Three months ended
(in thousands)	May 4, 2019			May 5, 2018
Beginning of period	$	16,483		$	6,511
Netted against lease assets upon transition to ASU 2016-02	(16,483		)	—
Additions	—			4,533
Lease obligation payments, net of sublease income	—			(28		)
Adjustments	—			47
End of period	$	—		$	11,063

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

~~13.~~

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

14. 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~~On October 10, 2018, the Credit Facility ~~provides~~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 with no change to the sub-limits. As of May 4, 2019, the Credit Facility provided a revolving line of credit up to ~~$300~~$400 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. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our 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~~an interest rate of 4.0% as of May 4, 2019. Any loans issued in CAD ~~bearing~~bear 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.~~credit, with an interest rate of 1.5% as of May 4, 2019. 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~~May 4, ~~2018,~~2019, we had no$235.0 million outstanding ~~borrowings~~ under the Credit

~~Table of Contents~~

~~DSW INC.~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(~~unaudited~~)

Facility and ~~$1.2~~$3.1 million in letters of credit issued, resulting in ~~$298.8~~$161.9 million available for borrowings. Interest expense related to the Credit Facility includes interest on borrowings and letters of credit, ~~interest,~~ commitment fees and the amortization of debt issuance costs.

Debt Covenants- The Credit Facility contains financial and other covenants, including, but not limited to, limitations on indebtedness, liens and investments, as well as the maintenance of a leverage ratio not to exceed 3.25:1 and a fixed charge coverage ratio not to be less than 1.75:1. 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. 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~~May 4, ~~2018,~~2019, we were in compliance with all financial covenants.


15.	LEASES

We lease our stores, fulfillment center and other facilities under operating lease arrangements with unrelated parties and related parties owned by Schottenstein Affiliates. The majority of our real estate leases provide for renewal options, which are typically not included in the lease term used for measuring the lease assets and lease liabilities as it is not reasonably certain we will exercise options. We pay variable amounts for certain lease and non-lease components as well as for contingent rentals based on sales for certain leases where the sales are in excess of specified levels and for leases that have certain contingent triggering events that are in effect. We also lease equipment under operating leases.

We receive operating lease income from unrelated third parties for leasing portions or all of certain owned and leased properties. Operating lease income is included in commission, franchise and other revenue in our condensed consolidated statements of operations.

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Lease income and lease expense consisted of the following for the three months ended May 4, 2019 (after the adoption of ASU 2016-02) and May 5, 2018 (prior to the adoption of ASU 2016-02):



	Three Months Ended
(dollars in thousands)	May 4, 2019			May 5, 2018
Operating lease income	$	2,212		$	1,148
Operating lease expense:
Lease expense to unrelated parties	$	53,354		$	45,485
Lease expense to related parties	2,342			2,288
Variable lease expense to unrelated parties	13,022			6,823
Variable lease expense to related parties	302			—
	$	69,020		$	54,596
Other operating lease information:
Weighted-average remaining lease term	6.3 years
Weighted-average discount rate	3.9		%

As of May 4, 2019, our future fixed minimum lease payments are as follows:



(in thousands)	Unrelated Parties			Related Parties			Total
Remainder of fiscal 2019	$	154,347		$	6,294		$	160,641
Fiscal 2020	232,592			9,364			241,956
Fiscal 2021	211,655			8,697			220,352
Fiscal 2022	177,966			6,518			184,484
Fiscal 2023	137,662			1,875			139,537
Future fiscal years thereafter	300,604			5,596			306,200
	1,214,826			38,344			1,253,170
Less discounting impact on operating leases	(143,900		)	(3,669		)	(147,569		)
Total operating lease liabilities	1,070,926			34,675			1,105,601
Less current operating lease liabilities	(177,020		)	(7,436		)	(184,456		)
Non-current operating lease liabilities	$	893,906		$	27,239		$	921,145

As of May 4, 2019, we have entered into lease commitments for four new store locations and one store relocation where the leases have not yet commenced, and the lease liabilities have not yet been recorded. We expect the lease commencement to begin in the next fiscal quarter for these locations and we will record additional operating lease liabilities of approximately $10.1 million.

As of February 2, 2019, future minimum lease payment requirements, excluding contingent rental payments, maintenance, insurance, real estate taxes, and the amortization of deferred rent and construction and tenant allowances, consisted of the following, as determined prior to the adoption of ASU 2016-02:



(in thousands)	Unrelated Parties		Related Parties		Total
Fiscal 2019	$	233,237	$	9,425	$	242,662
Fiscal 2020	227,001		9,364		236,365
Fiscal 2021	204,803		8,697		213,500
Fiscal 2022	170,030		6,518		176,548
Fiscal 2023	131,594		1,874		133,468
Future fiscal years thereafter	298,437		5,596		304,033
	$	1,265,102	$	41,474	$	1,306,576

~~14.~~

Table of Contents

DESIGNER BRANDS INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

16. 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 months ended July 29, 2017 was as follows:~~

(in thousands)
Contingent consideration liability - beginning of period $ 33,204
Accretion in value 2,252
Other adjustments 1,000
Contingent consideration liability - end of period $ 36,456

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.

Foreign Tax Contingencies- During the due diligence procedures performed related to the acquisition of Camuto Group, we identified probable contingent liabilities associated with unpaid foreign payroll and other taxes that could also result in assessed penalties and interest. We have developed an estimate of the range of outcomes related to these obligations of $14.1 million to $30.0 million for obligations we are aware of at this time. As of May 4, 2019, we recorded a contingent liability of $14.1 million representing the low end of the range and an indemnification asset of $12.7 million representing the estimated amount as of the acquisition date, which we expect to collect under the terms of the securities purchase agreement with the Sellers. We are continuing to assess the exposure, which may result in material changes to these estimates, and we may identify additional contingent liabilities. We believe that the Sellers are obligated to indemnify us for any payments to foreign taxing authorities for the periods up to the acquisition date. Although a portion of the purchase price is held in escrow and another portion is held in a restricted bank account, there can be no assurance that we will successfully collect all amounts that we may be obligated to settle with the foreign taxing authorities.

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~~May 4, ~~2018, we have entered into various construction commitments, including capital items to be purchased~~2019, the total future minimum lease payment requirements for projects that were under construction, or for which a lease has been signed. Our obligations under these commitments were $1.4 million as of August 4, 2018. In addition, we have entered into various noncancelable purchase and service agreements. The obligations under these agreementsthis guarantee were approximately ~~$21.8 million as of August 4, 2018.~~$16.0 million.

~~15.~~17. SEGMENT REPORTING

Our ~~two~~three reportable segments, which are also operating segments, are the U.S. Retail segment, ~~and~~ the Canada Retail segment, and the Brand Portfolio 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. OurAll 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~~

The following provides certain financial data by segment ~~that has now been included in Other due~~reconciled to ~~us no longer~~the condensed consolidated financial statements:



(in thousands)	U.S. Retail		Canada Retail		Brand Portfolio		Other		Corporate/Eliminations			Total
Three months ended May 4, 2019:
External revenue:
Net sales	$	691,840	$	51,816	$	90,729	$	35,607	$	—		$	869,992
Commission, franchise and other revenue	—		—		3,297		—		5,226			8,523
Total revenue	$	691,840	$	51,816	$	94,026	$	35,607	$	5,226		$	878,515
Intersegment revenue	$	—	$	—	$	10,520	$	—	$	(10,520	)	$	—
Gross profit⁽¹⁾	$	209,891	$	15,747	$	21,994	$	9,311	$	(907	)	$	256,036
Income from equity investment in ABG-Camuto	$	—	$	—	$	2,228	$	—	$	—		$	2,228
Three months ended May 5, 2018:
Revenue:
Net sales	$	669,784	$	—	$	—	$	40,653	$	—		$	710,437
Commission, franchise and other revenue	—		—		—		—		1,665			1,665
Total revenue	$	669,784	$	—	$	—	$	40,653	$	1,665		$	712,102
Gross profit⁽¹⁾	$	198,344	$	—	$	—	$	6,881	$	—		$	205,225


(1)	Gross profit is defined as net sales, which excludes commission, franchise and other revenue, less cost of sales.

~~Table of Contents~~

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

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

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

~~Some of the~~Certain statements in this Quarterly Report on Form 10-Q ~~contain~~may constitute 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~~Part I, Item 1A. Risk ~~Factors"~~Factors in our Annual Report on Form 10-K filed on March ~~23, 2018,~~26, 2019, 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~~our ability to successfully integrate our businesses or realize the anticipated benefits of the ~~acquisition are not realized when expected or at all;~~acquisitions after we complete our integration efforts;

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~~programs 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, as well as U.S. laws affecting the importation of goods, such as recent tariffs imposed on Chinese goods imported to the U.S.;

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;~~legislation;

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~~began fiscal ~~year~~2019 with ~~a significant tax benefit resulting from corporate tax reform, which we are reinvesting towards~~positive momentum across our ~~growth initiative by driving higher market share through positive~~business, reporting our sixth consecutive quarter of increased comparable sales, ~~growth. Accordingly, we are investing~~growth across our retail segments and significant progress leveraging the Camuto Group infrastructure for the benefit of the Company. We saw strength across a number of categories, including seasonal sandals and boots. We also continued to experience strong growth in ~~product, marketing, people, and innovation to expand DSW’s category leadership and market share, differentiate~~ our ~~brand, and ultimately strengthen our competitive position.~~

kids business. Our ~~merchandising strategy focuses on increasing key item sourcing, strategic category distortions and~~Canada Retail segment provided positive operating profit for the ~~expansion of DSW kids, which delivered close to a 10% comparable sales increase in the second~~first quarter of fiscal ~~2018.~~2019, marking the first time in five years that the Canada business reached profitability at the start of the year. We ~~completed our kids roll out with 94 new locations and bringing our kids product offering chainwide~~attribute this ~~year. The kids business makes us more competitive during the important back-to-school season.~~

We saw solid returns from our marketing investments, with growth in new customer transactions, average spend per member, rewards redemption and member activation rate. We launched our new redesigned loyalty program, DSW VIP, providing customers a program with 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 campaign contributed~~ability to ~~higher traffic activity during~~transfer successful practices in the ~~quarter.~~U.S. to Canada, including markdown optimization and key item distortions. Our Canada Retail segment also increased its competitive positioning by moving their digital offering to our current U.S. platform. We expect to continue to transfer successful strategies to our Canada Retail segment as we leverage our previously established business disciplines and infrastructure, including the launch of new loyalty programs for our Canadian customers.

~~As part~~Our Brand Portfolio segment, which is made up of our ~~focus~~newly acquired Camuto Group, also made progress. We remain on ~~improving customer engagement, we have updated our processes~~track to ~~more efficiently allocate labor between task-specific~~shift the vast majority of the design, sourcing and ~~customer-facing functions while adding more store labor hours~~production of exclusive brand product that is sold through DSW in the U.S. to ~~provide better customer coverage during peak hours. We implemented this new labor model during~~ the ~~second quarter~~Camuto Group at the start of fiscal ~~2018.~~

~~Under~~2020. As a result, we expect to benefit from the world class sourcing and design expertise that Camuto Group brings to the Company but also to lower our ~~innovation agenda, we also expanded the pilot~~product costs to further our profit growth. The expansion of our ~~new store design~~exclusive brand offering remains a significant growth opportunity for us.

Comparability

There are a number of items that affect comparability when reviewing our results of operations for the periods presented in this Quarterly Report on Form 10-Q. Significant items 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.consider include:

On May 10, 2018, we acquired the remaining interest in TSL that we did not previously own. For the three months ended May 4, 2019, TSL results were included in the condensed consolidated results of operations as a wholly-owned subsidiary, whereas for the three months ended May 5, 2018, the loss from our equity investment interest in TSL was included in our condensed consolidated results of operations.

On November 5, 2018, we completed the acquisition of Camuto Group. For the ~~remaining interest~~three months ended May 4, 2019, Camuto Group's results were included in ~~TSL. After completing~~the condensed consolidated results of operations as a ~~comprehensive review~~wholly-owned subsidiary with no amounts included for the three months ended May 5, 2018.

The three months ended May 5, 2018 included the wind-down operations of ~~our Canadian acquisition, we have decided to focus our efforts on its three largest banners closest to our core competency~~Ebuys, which included lease exit and ~~target customer. These three banners account for approximately 85% of sales with solid growth prospects.~~other termination costs and incremental income tax expense.

As a result, we are exiting 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. business and strengthening inventory and merchandising processes.

Financial Summary

Total revenue increased to ~~$795.3~~$878.5 million for the three months ended ~~August~~May 4, ~~2018~~2019 from ~~$683.0~~$712.1 million for the three months ended ~~July 29, 2017.~~May 5, 2018. The ~~16.4%~~23.4% increase in total revenue was primarily driven by incremental ~~sales~~revenue from ~~TSL,~~acquired businesses, a ~~9.7%~~3.0% increase in comparable sales and an increase from non-comparable store sales, partially offset by the loss of sales ~~of Gordmans stores and~~from the exit of ~~Ebuys.~~Ebuys last year. The comparable sales increase was driven by strong growth in ~~all categories and channels.~~digital demand.

During the three months ended ~~August~~May 4, ~~2018,~~2019, gross profit as a percentage of net sales was ~~32.1%~~29.4%, an increase of ~~290~~50 basis points from ~~29.2%~~28.9% in the previous year. The increase in the gross profit rate was primarily driven by ~~favorable merchandise~~ margin expansion in the U.S. Retail segment and the impact of the exit of Ebuys during the ~~current year.~~previous year, partially offset by lower margins from the wholesale business of the Brand Portfolio segment. Effective inventory management in the U.S. Retail segment delivered better in-stock rates, which resulted in ~~improved conversion and~~an increase in regular price ~~selling that drove higher margins.~~selling.

Net ~~loss~~income for the three months ended ~~August~~May 4, ~~2018~~2019 was ~~$38.4~~$31.2 million, or ~~$0.48 loss~~$0.40 per diluted share, which included net after-tax charges of ~~$89.3~~$2.4 million, or ~~$1.11~~$0.03 per diluted share, primarily related to integration and restructuring expenses associated with the ~~acquisition of the Canadian retail business.~~businesses acquired in fiscal 2018. Net income for the three months ended ~~July 29, 2017~~May 5, 2018 was ~~$28.7~~$24.3 million, or ~~$0.36~~$0.30 per diluted share, which included net after-tax charges of ~~$2.0~~$7.2 million, or ~~$0.02~~$0.09 per diluted share, primarily related to ~~the amortization of intangibles and the change in fair value of the contingent consideration liability~~exit costs associated with ~~the~~Ebuys, acquisition ~~of Ebuys, restructuring~~ costs related to TSL, and foreign exchange net losses.

~~In addition to the acquisition of TSL, we~~We have continued making investments in our business that support our long-term growth objectives. During the three months ended ~~August~~May 4, ~~2018,~~2019, we invested ~~$32.1~~$24.9 million in capital expenditures compared to ~~$28.1~~$18.2 million during the three months ended ~~July 29, 2017.~~May 5, 2018. Our capital expenditures during the first ~~half~~quarter of fiscal ~~2018~~2019 primarily related to six new store openings, 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~~Comparison of ~~our consolidated results of operations,~~the Three Months Ended May 4, 2019 with ~~associated percentages of total revenue:~~the Three Months Ended May 5, 2018

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



	Three months ended
	May 4, 2019					May 5, 2018					Change
(dollars in thousands, except per share amounts)	Amount			% of Total Revenue		Amount			% of Total Revenue		Amount			%
Revenue:
Net sales	$	869,992		99.0	%	$	710,437		99.8	%	$	159,555		22.5	%
Commission, franchise and other revenue	8,523			1.0		1,665			0.2		6,858			411.9	%
Total revenue	878,515			100.0		712,102			100.0		166,413			23.4	%
Cost of sales	(613,956		)	(69.9	)	(505,212		)	(71.0	)	(108,744		)	21.5	%
Operating expenses	(222,806		)	(25.4	)	(168,420		)	(23.6	)	(54,386		)	32.3	%
Income from equity investment in ABG-Camuto	2,228			0.3		—			—		2,228			NM
Operating profit	43,981			5.0		38,470			5.4		5,511			14.3	%
Interest income (expense), net	(1,801		)	(0.2	)	664			0.1		(2,465		)	NM
Non-operating expenses, net	(342		)	—		(2,137		)	(0.3	)	1,795			(84.0	)%
Income before income taxes and loss from equity investment in TSL	41,838			4.8		36,997			5.2		4,841			13.1	%
Income tax provision	(10,644		)	(1.2	)	(11,390		)	(1.6	)	746			(6.5	)%
Loss from equity investment in TSL	—			—		(1,310		)	(0.2	)	1,310			NM
Net income	$	31,194		3.6	%	$	24,297		3.4	%	$	6,897		28.4	%
Basic and diluted earnings per share:
Basic earnings per share	$	0.41				$	0.30				$	0.11		36.7	%
Diluted earnings per share	$	0.40				$	0.30				$	0.10		33.3	%
Weighted average shares used in per share calculations:
Basic shares	77,004					80,108					(3,104		)	(3.9	)%
Diluted shares	78,263					80,758					(2,495		)	(3.1	)%

NM - Not meaningful

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

Net ~~Sales~~

~~Net sales for the three months ended August 4, 2018 increased 16.4% compared to the three months ended July 29, 2017.~~ Sales- The following summarizes the ~~change~~changes in ~~total~~consolidated net sales from the same period last year:

(in thousands) Three months ended August 4, 2018 Six months ended August 4, 2018
Net sales for the same period last year $ 681,721
$ 1,372,540
Increase in comparable sales 60,633
75,371
Net increase from non-comparable store sales and other changes 3,430
36,153
Increase due to TSL sales 72,532
72,532
Loss of sales from Gordmans and Ebuys (24,581 ) (52,424 )
Total net sales $ 793,735
$ 1,504,172



(in thousands)	Three months ended May 4, 2019
Consolidated net sales for the same period last year	$	710,437
Increase in comparable sales⁽¹⁾	20,880
Net increase from non-comparable sales and other changes	1,762
Incremental external net sales from 2018 acquired businesses	142,545
Loss of net sales from the exit of Ebuys	(5,632		)
Consolidated net sales	$	869,992

(1)

A store is considered comparable when in operation for at least 14 months at the beginning of the fiscal year. Stores are added to the comparable base at the beginning of the year and are dropped for comparative purposes in the quarter they are closed. Comparable sales includes e-commerce sales. Stores added due to the TSL acquisition that were in operation for at least 14 months at the beginning of fiscal 2019, along with its e-commerce sales, will be added to the comparable base beginning with the second quarter of fiscal 2019. The calculation of comparable sales varies across the retail industry and, as a result, the calculations of other retail companies may not be consistent with our calculation.

The following summarizes net sales by segment:

Three months ended Six months ended
(in thousands) August 4, 2018 July 29, 2017 Change August 4, 2018 July 29, 2017 Change
U.S. Retail segment $ 691,757
$ 629,691
$ 62,066
$ 1,361,541
$ 1,254,195
$ 107,346
Canada Retail segment 72,532
—
72,532
72,532
—
72,532
Other⁽¹⁾
29,446
52,030
(22,584 ) 70,099
118,345
(48,246 )
Total net sales $ 793,735
$ 681,721
$ 112,014
$ 1,504,172
$ 1,372,540
$ 131,632


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



	Three months ended					Change
(dollars in thousands)	May 4, 2019			May 5, 2018		Amount			%		Comparable Sales %
Segment net sales:
U.S. Retail	$	691,840		$	669,784	$	22,056		3.3	%	3.0%
Canada Retail	51,816			—		51,816			NM		NA
Brand Portfolio	100,867			—		100,867			NM		NA
Other	35,607			40,653		(5,046		)	(12.4	)%	3.2%
	880,130			710,437		169,693			23.9	%
Elimination of intersegment net sales	(10,138		)	—		(10,138		)	NM
Consolidated net sales	$	869,992		$	710,437	$	159,555		22.5	%	3.0%

~~The following summarizes our comparable sales change:~~NM - Not meaningful

NA - Not applicable

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

Our increase in total net sales for the three and six months ended August 4, 2018 over the same period 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 of Gordmans stores and the exit of Ebuys. Within the U.S. Retail segment, comparable sales increased ~~as we had~~due to higher comparable transactions driven by an increase in traffic, partially offset by a decline in comparable average dollar sales per transaction. We continue to have strong growth in digital demand, ~~with a trend of increasing~~including an increase in our store fulfillment of digital ~~orders.~~orders and drop ship orders fulfilled directly by vendors.

~~Franchise~~Commission, franchise and Other ~~Revenue~~

~~Franchise~~Revenue- Commission, franchise and other revenue consists of ~~merchandise sales,~~commission income for First Cost design and buying services in the Brand Portfolio segment, royalties and other fees paid by franchisees, ~~as well as~~and rental income on owned properties.

Gross ~~Profit~~

~~Gross~~Profit- Consolidated gross profit is determined as follows:


	Three months ended						Six months ended						Three months ended
(in thousands)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
													May 4, 2019					May 5, 2018					Change
(dollars in thousands)													Amount			% of Net Sales		Amount			% of Net Sales		Amount		%		Basis Points
Net sales	$	793,735		$	681,721		$	1,504,172		$	1,372,540		$	869,992		100.0	%	$	710,437		100.0	%
Cost of sales	(539,240		)	(482,424		)	(1,044,452		)	(976,158		)	(613,956		)	(70.6	)	(505,212		)	(71.1	)
Gross profit	$	254,495		$	199,297		$	459,720		$	396,382		$	256,036		29.4	%	$	205,225		28.9	%	$	50,811	24.8	%	50
Gross profit as a percentage of net sales	32.1		%	29.2		%	30.6		%	28.9		%

The following ~~presents~~summarizes gross profit ~~and their components as a percentage of net sales:~~by segment:

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



	Three months ended
	May 4, 2019					May 5, 2018				Change
(dollars in thousands)	Amount			% of Segment Net Sales		Amount		% of Segment Net Sales		Amount		%		Basis Points
Segment gross profit:
U.S. Retail	$	209,891		30.3	%	$	198,344	29.6	%	$	11,547	5.8	%	70
Canada Retail	15,747			30.4	%	—		—	%	$	15,747	NM		NM
Brand Portfolio	21,994			21.8	%	—		—	%	$	21,994	NM		NM
Other	9,311			26.1	%	6,881		16.9	%	$	2,430	35.3	%	920
	256,943					205,225
Intercompany eliminations	(907		)			—
Consolidated gross profit	$	256,036				$	205,225

The U.S. Retail segment ~~merchandise~~gross profit margin ~~increased 150 basis points for the three months ended August 4, 2018 and increased 50 basis points for the six months ended August 4, 2018 over the same periods last year primarily~~improved due to higher initial markups and lower markdowns, which were partially offset by higher shipping costs. ~~U.S. Retail segment store occupancy expenses as a percentage of net sales was favorable due to improved leverage.~~ Other gross profit margin increased primarily due to the exit of Ebuys during the ~~current~~previous year.

Operating Expenses

- For the three ~~and six~~ months ended ~~August~~May 4, ~~2018,~~2019, operating expenses as a percentage of total revenue increased ~~220 and 160~~180 basis points ~~respectively,~~ over the same ~~periods~~period last year primarily driven by the impact of the acquired businesses, integration and restructuring costs and the change in accounting for previously exited leased space as a result of the transition to ASU 2016-02, partially offset by the exit of Ebuys during the previous year.

Income from equity investment in ABG-Camuto- We account for our equity investment in ABG-Camuto using the equity method of accounting, with the net earnings attributable to our 40% investment being classified within operating profit. ABG-Camuto is an ~~increase~~integral part of the Brand Portfolio segment, given the licensing agreement between us and ABG-Camuto, which allows us to sell licensed branded products to wholesale customers.

Non-operating Expenses, net- Non-operating expenses, net primarily reflects recognized foreign exchange losses.

Income Taxes- Our effective tax rate changed from 31.9% for the three months ended May 5, 2018 to 25.4% for the three months ended May 4, 2019. The decrease in ~~marketing investments~~the effective tax rate was primarily driven by additional valuation allowances and the impact of ~~lease~~nondeductible charges associated with the Ebuys exit ~~charges, acquisition-related costs, restructuring charges, and consolidating results of TSL during the current period, partially offset by lower store expenses.~~

~~Impairment Charges~~

With the TSL acquisition being accounted for as a step acquisition, the purchase price included the fair value of our previously held assets, which considered the valuation of the TSL enterprise. This valuation identified that the resulting goodwill was not supportable as the value of the acquired net assets exceeded the enterprise fair value. As a result, during the three months ended ~~August 4, 2018, we recorded a goodwill impairment charge, which resulted in impairing all of TSL’s goodwill.~~May 5, 2018.

~~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 months ended August 4, 2018, we had additional tax provision expense of $24.0 million due to recording a valuation allowance associated with deferred tax assets and nondeductible discrete items, primarily related to the charges recorded as a result of the acquisition of TSL. As a result, our effective tax rate changed from 39.8% for the six months ended July 29, 2017 to 203.3% for the six months ended August 4, 2018.

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~~fluctuate seasonally. On

During the three months ended May ~~10,~~4, 2019, we repurchased 3.4 million Class A common shares at a cost of $75.0 million, which was funded with borrowings on the revolving line of credit, with $401.6 million of Class A common shares that remain authorized under the program as of May 4, 2019. During the three months ended May 5, 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).~~

~~As a result~~did not repurchase any Class A common shares. The share repurchase program may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount of our ~~decision to exit~~common shares under the ~~Town Shoes banner by~~program. Shares will be repurchased in 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,~~open market at times and ~~inventory write-downs.~~in amounts considered appropriate based on price and market conditions.

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 repurchase common shares under our share repurchase program.

Operating Cash Flows

For the ~~six~~three months ended ~~August~~May 4, ~~2018,~~2019, net cash used in operations was $3.0 million compared to net cash provided by operations ~~was $106.6 million compared to $44.6~~of $25.3 million for the ~~six~~three months ended ~~July 29, 2017.~~May 5, 2018. The ~~increase~~change was driven by ~~an increase~~a decrease 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, and the ~~change in deferred income taxes, and~~prior year's lease exit ~~charges.~~charges, primarily due to including the net loss from Camuto Group during the first quarter of fiscal 2019. In addition, ~~net~~we had an increased use of cash ~~provided by operations increased~~to fund working capital requirements during the first quarter of fiscal 2019 due to the addition of the acquired businesses, which uses cash for working capital ~~changes as a result~~requirements in the first half of the ~~timing of inventory receipts and payments to merchandise vendors, as well as a reduction in Canada Retail inventory through clearance activity.~~year consistent with our U.S. retail operations.

Investing Cash Flows

For the ~~six~~three months ended ~~August~~May 4, ~~2018,~~2019, our net cash used in investing activities was ~~$25.7~~$6.2 million, which was due to ~~the acquisition of TSL,~~ capital expenditures of ~~$32.1~~$24.9 million, partially offset by the liquidation of our available-for sale-securities. During the three months ended May 5, 2018, our net cash provided by investing activities was $17.6 million, which was due to liquidating our available-

for-sale securities denominated in CAD in preparation for the TSL acquisition, partially offset by $18.2 million for capital expenditures and $16.0 million of additional borrowings by TSL prior to the acquisition, partially offset by the net liquidation of our available-for sale-securities. During the six months ended July 29, 2017, our net cash used in investing activities was $35.3 million, which included the payment of $28.1 million for capital expenditures and $5.7 million of additional borrowings by TSL.

Financing Cash Flows

For the ~~six~~three months ended ~~August~~May 4, ~~2018,~~2019, our net cash used in financing activities was ~~$41.1~~$19.9 million compared to ~~$31.5~~$21.7 million for the ~~six~~three months ended ~~July 29, 2017.~~May 5, 2018. Net cash used in financing activities was primarily related to the payment of ~~dividends, which was increased from $0.20 per share in fiscal 2017 to $0.25 per share in fiscal 2018.~~

~~On August 17, 2017, the Board of Directors authorized the~~dividends. The repurchase of an additional $500.0 million of DSW common shares under our share repurchase program, which was added to the $33.5 million remaining from the previous authorization. During the six months ended August 4, 2018 and July 29, 2017, we did not repurchase any Class A common shares, with $524.1 million of Class A common shares ~~that remain authorized~~ under the ~~program as of August 4, 2018. The~~ share repurchase program ~~may be suspended, modified or discontinued at any time, and we have no obligation to repurchase any amount~~during three months ended May 4, 2019 was financed using our revolving line 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.~~credit.

Debt

Capital Expenditure Plans

We expect to spend approximately ~~$90~~$75.0 million to $85.0 million for capital expenditures in fiscal ~~2018, which now includes our planned capital expenditures related to the Canada Retail segment.~~2019. 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. WeDuring fiscal 2019, we plan to open ~~nine~~approximately 17 to 21 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.stores.

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~~2, 2019 in our Annual Report on Form 10-K for the fiscal year ended February ~~3, 2018. As of August 4, 2018, we have entered into various noncancelable purchase and service agreements resulting in purchase obligations of approximately $21.8 million.~~2, 2019. There have been no ~~other~~ material changes in contractual obligations outside the ordinary course of business since February ~~3, 2018.~~2, 2019.

~~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 condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining

significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and 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 condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. 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:~~2, 2019.



~~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~~securities, which are not materially affected by changes in market interest rates. Also, as of ~~August~~May 4, ~~2018,~~2019, we ~~did not have borrowings~~had $235.0 million outstanding on our revolving line of credit under our Credit Facility. Borrowings under our Credit Facility ~~and, consequently, did not have any material exposure to interest rate market risks during or at the end of this period. However, as any future borrowings under our 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. The impact of a hypothetical 100 basis point increase in interest rates on our revolving line of credit would not result in a material amount of additional expense over a 12-month period based on the balance as of May 4, 2019.

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.~~dollar, as well as foreign denominated cash accounts. A hypothetical 10% movement in the ~~Canadian dollar~~exchange rates could result in a ~~$5.0~~$3.1 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive loss within the condensed consolidated balance sheets, and ~~$4.6~~$2.1 million of foreign currency revaluation, which would be recorded in non-operating expenses, net within the condensed 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~~In connection with our adoption of ASU 2016-02, we have updated our control framework during the ~~following sentence, no~~first quarter of fiscal 2019 for certain new internal controls and changes to certain existing internal controls, including changes to accounting policies, enhanced contract review requirements, changes to our information systems, and other ongoing monitoring activities. No other change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As a result of acquiring the remaining interest in TSL, we have incorporated internal controls over significant processes specific to the acquisition that we believe are appropriate and necessary in consideration of accounting for the acquisition, consolidation, and financial reporting.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth in Note ~~14,~~ 16, Commitments and Contingencies - Legal Proceedings, of the ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

As of the date of the filing, there have been no material changes to the risk factors ~~previously disclosed~~as set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February ~~3, 2018.~~2, 2019.


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

Share Repurchase Program

On August 17, 2017, the Board of Directors authorized the repurchase of an additional $~~500.0~~500 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	(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
February 3, 2019 to March 2, 2019⁽¹⁾	1	$	28.46	—	$	476,564
March 3, 2019 to April 6, 2019⁽²⁾	3,473	$	21.96	3,410	$	401,564
April 7, 2019 to May 4, 2019	—	$	—	—	$	401,564
Total	3,474	$	21.57	3,410


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

(2) The total number of shares repurchased includes the shares repurchased as part of publicly announced programs (the average price paid per share includes any broker commissions) and 63,259 shares withheld in connection with tax payments due upon vesting of employee restricted stock awards.

Dividends

The payment of any future dividends is at the discretion of our Board of Directors and is based on our future earnings, cash flow, financial condition, capital requirements, changes in taxation laws, general economic condition and any other relevant factors. It is anticipated that dividends will be declared on a quarterly basis. Our Credit Facility allows the payments of dividends by us or our subsidiaries, provided that immediately before and after a dividend payment there is no event of default, as defined in our Credit Facility. On May 30, 2019, 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 July 5, 2019 to shareholders of record at the close of business on June 19, 2019.

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
3.1		Amended and Restated Articles of Incorporation, ~~of DSW Inc.~~ dated ~~November 1, 2013.~~March 19, 2019. Incorporated by reference to Exhibit 3.1 to ~~DSW's~~ Form ~~8-K~~10-K (file no. 001-32545) filed ~~November 4, 2013~~March 26, 2019..
3.2		Amended and Restated Code of ~~Regulations of the registrant.~~Regulations. Incorporated by reference to Exhibit 3.2 to Form 10-K (file no. 001-32545) filed April 13, ~~2006~~2006..
~~4.1~~4.1*		Specimen Class A Common Shares Certificate. ~~Incorporated by reference to Exhibit 4.1 to Form 10-K (file no. 001-32545) filed April 13, 2006.~~
31.1*		Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer.
31.2*		Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.
32.1*		Section 1350 Certification - Principal Executive Officer.
32.2*		Section 1350 Certification - Principal Financial Officer.
101101.INS		XBRL Instance ~~Documents~~Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH*		XBRL Taxonomy Extension Schema Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document


*	Filed herewith

SIGNATURE

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

~~DSW~~DESIGNER BRANDS INC.



Date:	~~August 30, 2018~~June 4, 2019	By:	/s/ Jared Poff
			Jared Poff
			~~Senior~~Executive Vice President and Chief Financial Officer
			(Principal Financial ~~and Accounting~~ Officer and duly authorized officer)

3331



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)



Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Shares, without par value	DBI	New York Stock Exchange



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 the definitions of "large accelerated filer," "accelerated filer," "smaller reporting ~~company"~~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



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



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



		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations		1
Condensed Consolidated Statements of Comprehensive Income		2
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of ~~Cash Flows~~Shareholders' Equity		4
Condensed Consolidated Statements of Cash Flows	5
Notes to the Condensed Consolidated Financial Statements		56
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2928
Item 4. Controls and Procedures		3028
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		3029
Item 1A. Risk Factors		3029
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Mine Safety Disclosures	29
Item 5. Other Information	30
Item ~~3. Defaults Upon Senior Securities~~6. Exhibits	30
Signatures	31
~~Item 4. Mine Safety Disclosures~~		31
~~Item 5. Other Information~~		31
~~Item 6. Exhibits~~		32
~~Signature~~		33



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



	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



(in thousands)
Contingent consideration liability - beginning of period	$	33,204
Accretion in value	2,252
Other adjustments	1,000
Contingent consideration liability - end of period	$	36,456



(in thousands)	Three months ended August 4, 2018			Six months ended August 4, 2018
Net sales for the same period last year	$	681,721		$	1,372,540
Increase in comparable sales	60,633			75,371
Net increase from non-comparable store sales and other changes	3,430			36,153
Increase due to TSL sales	72,532			72,532
Loss of sales from Gordmans and Ebuys	(24,581		)	(52,424		)
Total net sales	$	793,735		$	1,504,172



(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	—