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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

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

For the quarterly period ended May 1, 2021
or

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

For the transition period from |  | to |

Commission file number 001-32545

DESIGNER BRANDS INC.
(Exact name of registrant as specified in its charter)

Ohio |  | 31-0746639
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
810 DSW Drive, | Columbus, | Ohio |  |  | 43219
(Address of principal executive offices) |  |  | (Zip Code)

Registrant's telephone number, including area code: (614) 237-7100

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☑
Non-accelerated filer | ☐ | Smaller reporting company | ☐
|  | Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Number of shares outstanding of each of the registrant's classes of common stock, as of May 21, 2021: 65,135,378 Class A common shares and 7,732,743 Class B common shares.

Cautionary Statement Regarding Forward-Looking Information for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q") may constitute forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as "outlook," "could," "believes," "expects," "potential," "continues," "may," "will," "should," "would," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," or the negative version of those words or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon current plans, estimates, expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to those factors described under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 (the "2020 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on March 22, 2021, and otherwise in our reports and filings with the SEC, there are a number of important factors that could cause actual results, performance or achievements to differ materially from those discussed in forward-looking statements including, but not limited to, the following:
•risks and uncertainty related to the continued outbreak of the coronavirus ("COVID-19"), any future COVID-19 resurgence, and any other adverse public health developments;
•risks related to losses or disruptions associated with our distribution systems, including our distribution and fulfillment centers and our stores, whether as a result of COVID-19, reliance on third-party providers, cyber-related attacks, or otherwise;
•our ability to protect the health and safety of our associates and our customers, which may be affected by current or future government regulations related to stay-at-home orders and orders related to the operation of non-essential businesses;
•risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to political, economic, operational, compliance and other risks, and fluctuations in foreign currency exchange rates;
•maintaining strong relationships with our vendors, manufacturers, licensors, and retailer customers;
•our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
•risks related to restrictions on our senior secured asset-based revolving credit facility ("ABL Revolver") and senior secured term loan ("Term Loan") that could limit our ability to fund operations;
•our reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty;
•failure to retain our key executives or attract qualified new personnel;
•risks related to the loss or disruption of our information systems and data and our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data;
•our ability to comply with privacy laws and regulations, as well as other legal obligations;
•our ability to protect our reputation and to maintain the brands we license;
•uncertain general economic, political and social conditions and the related impacts to consumer discretionary spending;
•our competitiveness with respect to style, price, brand availability and customer service;
•our ability to provide customers cost-effective shopping platforms; and
•uncertainty related to future legislation, regulatory reform, policy changes, or interpretive guidance on existing legislation.
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance or achievements may vary materially from what we have projected. Furthermore, new factors emerge from time to time and it is not possible for management to predict all such factors, nor can management assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

DESIGNER BRANDS INC.
TABLE OF CONTENTS

| Page
PART I. FINANCIAL INFORMATION |
Item 1. Financial Statements |
Condensed Consolidated Statements of Operations | 1
Condensed Consolidated Statements of Comprehensive Income (Loss) | 2
Condensed Consolidated Balance Sheets | 3
Condensed Consolidated Statements of Shareholders' Equity | 4
Condensed Consolidated Statements of Cash Flows | 5
Notes to the Condensed Consolidated Financial Statements | 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 23
Item 4. Controls and Procedures | 23
PART II. OTHER INFORMATION |
Item 1. Legal Proceedings | 24
Item 1A. Risk Factors | 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 24
Item 3. Defaults Upon Senior Securities | 24
Item 4. Mine Safety Disclosures | 24
Item 5. Other Information | 24
Item 6. Exhibits | 24
Signature | 25

All references to "we," "us," "our," "Designer Brands," "Designer Brands Inc.," or the "Company" in this Form 10-Q mean Designer Brands Inc. and its subsidiaries.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)

|  |  | Three months ended
|  |  |  |  | May 1, 2021 |  | May 2, 2020
Net sales |  |  |  |  | $ | 703,155 |  |  | $ | 482,783 |
Cost of sales |  |  |  |  | (487,044) |  |  | (509,243) |
Gross profit (loss) |  |  |  |  | 216,111 |  |  | (26,460) |
Operating expenses |  |  |  |  | (200,814) |  |  | (187,221) |
Income from equity investment |  |  |  |  | 1,708 |  |  | 2,270 |
Impairment charges |  |  |  |  | — |  |  | (112,547) |
Operating profit (loss) |  |  |  |  | 17,005 |  |  | (323,958) |
Interest expense, net |  |  |  |  | (8,814) |  |  | (2,158) |
Non-operating income (expenses), net |  |  |  |  | 806 |  |  | (87) |
Income (loss) before income taxes |  |  |  |  | 8,997 |  |  | (326,203) |
Income tax benefit |  |  |  |  | 8,029 |  |  | 110,345 |
Net income (loss) |  |  |  |  | $ | 17,026 |  |  | $ | (215,858) |
Basic and diluted earnings (loss) per share: |  |  |  |  |  |  |
Basic earnings (loss) per share |  |  |  |  | $ | 0.23 |  |  | $ | (3.00) |
Diluted earnings (loss) per share |  |  |  |  | $ | 0.22 |  |  | $ | (3.00) |
Weighted average shares used in per share calculations: |  |  |  |  |  |  |
Basic shares |  |  |  |  | 72,613 |  |  | 71,914 |
Diluted shares |  |  |  |  | 76,976 |  |  | 71,914 |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
1

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)

|  |  | Three months ended
|  |  |  |  | May 1, 2021 |  | May 2, 2020
Net income (loss) |  |  |  |  | $ | 17,026 |  |  | $ | (215,858) |
Other comprehensive income (loss), net of income taxes: |  |  |  |  |  |  |
Foreign currency translation gain (loss) |  |  |  |  | 543 |  |  | (3,541) |
Unrealized net gain on debt securities |  |  |  |  | — |  |  | 195 |
Reclassification adjustment for net gains realized in net loss |  |  |  |  | — |  |  | (368) |
Total other comprehensive income (loss), net of income taxes |  |  |  |  | 543 |  |  | (3,714) |
Total comprehensive income (loss) |  |  |  |  | $ | 17,569 |  |  | $ | (219,572) |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
2

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)

| May 1, 2021 |  | January 30, 2021 |  | May 2, 2020
ASSETS |  |  |  |  |
Cash and cash equivalents | $ | 49,301 |  |  | $ | 59,581 |  |  | $ | 250,874 |
Receivables, net | 213,447 |  |  | 196,049 |  |  | 81,953 |
Inventories | 540,088 |  |  | 473,183 |  |  | 533,638 |
Prepaid expenses and other current assets | 60,461 |  |  | 51,772 |  |  | 82,742 |
Total current assets | 863,297 |  |  | 780,585 |  |  | 949,207 |
Property and equipment, net | 284,823 |  |  | 296,469 |  |  | 359,841 |
Operating lease assets | 686,704 |  |  | 700,481 |  |  | 799,482 |
Goodwill | 93,655 |  |  | 93,655 |  |  | 93,655 |
Intangible assets, net | 16,131 |  |  | 15,635 |  |  | 13,908 |
Deferred tax assets | — |  |  | — |  |  | 139,269 |
Equity investment | 57,012 |  |  | 58,598 |  |  | 57,538 |
Other assets | 30,843 |  |  | 31,172 |  |  | 24,941 |
Total assets | $ | 2,032,465 |  |  | $ | 1,976,595 |  |  | $ | 2,437,841 |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |  |  |
Accounts payable | $ | 341,819 |  |  | $ | 245,071 |  |  | $ | 283,054 |
Accrued expenses | 195,237 |  |  | 200,326 |  |  | 231,359 |
Current maturities of long-term debt | 62,500 |  |  | 62,500 |  |  | — |
Current operating lease liabilities | 200,666 |  |  | 244,786 |  |  | 218,313 |
Total current liabilities | 800,222 |  |  | 752,683 |  |  | 732,726 |
Long-term debt | 274,887 |  |  | 272,319 |  |  | 393,000 |
Non-current operating lease liabilities | 663,018 |  |  | 677,735 |  |  | 788,704 |
Other non-current liabilities | 31,526 |  |  | 30,841 |  |  | 25,305 |
Total liabilities | 1,769,653 |  |  | 1,733,578 |  |  | 1,939,735 |
Commitments and contingencies |  |  |  |  |
Shareholders' equity: |  |  |  |  |
Common shares paid-in capital, no par value | 992,379 |  |  | 990,153 |  |  | 975,304 |
Treasury shares, at cost | (515,065) |  |  | (515,065) |  |  | (515,065) |
Retained earnings (deficit) | (211,759) |  |  | (228,785) |  |  | 44,076 |
Accumulated other comprehensive loss | (2,743) |  |  | (3,286) |  |  | (6,209) |
Total shareholders' equity | 262,812 |  |  | 243,017 |  |  | 498,106 |
Total liabilities and shareholders' equity | $ | 2,032,465 |  |  | $ | 1,976,595 |  |  | $ | 2,437,841 |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
3

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 (deficit) |  | Accumulated other comprehensive loss |  | Total
Three months ended May 1, 2021
Balance, January 30, 2021 | 64,666 |  |  | 7,733 |  |  | 22,169 |  |  | $ | 990,153 |  |  | $ | (515,065) |  |  | $ | (228,785) |  |  | $ | (3,286) |  |  | $ | 243,017 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 17,026 |  |  | — |  |  | 17,026 |
Stock-based compensation activity | 468 |  |  | — |  |  | — |  |  | 2,226 |  |  | — |  |  | — |  |  | — |  |  | 2,226 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 543 |  |  | 543 |
Balance, May 1, 2021 | 65,134 |  |  | 7,733 |  |  | 22,169 |  |  | $ | 992,379 |  |  | $ | (515,065) |  |  | $ | (211,759) |  |  | $ | (2,743) |  |  | $ | 262,812 |
Three months ended May 2, 2020
Balance, February 1, 2020 | 64,033 |  |  | 7,733 |  |  | 22,169 |  |  | $ | 971,380 |  |  | $ | (515,065) |  |  | $ | 267,094 |  |  | $ | (2,495) |  |  | $ | 720,914 |
Net loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (215,858) |  |  | — |  |  | (215,858) |
Stock-based compensation activity | 269 |  |  | — |  |  | — |  |  | 3,924 |  |  | — |  |  | — |  |  | — |  |  | 3,924 |
Dividends ($0.10 per share) | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,160) |  |  | — |  |  | (7,160) |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (3,714) |  |  | (3,714) |
Balance, May 2, 2020 | 64,302 |  |  | 7,733 |  |  | 22,169 |  |  | $ | 975,304 |  |  | $ | (515,065) |  |  | $ | 44,076 |  |  | $ | (6,209) |  |  | $ | 498,106 |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
4

DESIGNER BRANDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

| Three months ended
| May 1, 2021 |  | May 2, 2020
Cash flows from operating activities: |  |  |
Net income (loss) | $ | 17,026 |  |  | $ | (215,858) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |  |
Depreciation and amortization | 20,575 |  |  | 23,133 |
Stock-based compensation expense | 7,457 |  |  | 4,917 |
Deferred income taxes | 320 |  |  | (109,308) |
Income from equity investment | (1,708) |  |  | (2,270) |
Distributions received from equity investment | 3,294 |  |  | 2,493 |
Impairment charges | — |  |  | 112,547 |
Other | (341) |  |  | 340 |
Change in operating assets and liabilities: |  |  |
Accounts receivable | (8,160) |  |  | 6,999 |
Income tax receivable | (9,066) |  |  | — |
Inventories | (65,215) |  |  | 96,588 |
Prepaid expenses and other current assets | (8,524) |  |  | (15,014) |
Accounts payable | 94,469 |  |  | (11,816) |
Accrued expenses | (5,439) |  |  | 37,421 |
Operating lease assets and liabilities, net | (46,044) |  |  | 30,359 |
Net cash used in operating activities | (1,356) |  |  | (39,469) |
Cash flows from investing activities: |  |  |
Cash paid for property and equipment | (5,641) |  |  | (14,625) |
Sales of available-for-sale investments | — |  |  | 24,612 |
Net cash provided by (used in) investing activities | (5,641) |  |  | 9,987 |
Cash flows from financing activities: |  |  |
Borrowing on revolving line under Credit Facility | — |  |  | 251,000 |
Payments on revolving line under Credit Facility | — |  |  | (48,000) |
Borrowing under ABL Revolver | 250,513 |  |  | — |
Payments on borrowings under ABL Revolver | (245,670) |  |  | — |
Payments on borrowings under Term Loan | (3,125) |  |  | — |
Dividends paid | — |  |  | (7,160) |
Other | (5,307) |  |  | (1,940) |
Net cash provided by (used in) financing activities | (3,589) |  |  | 193,900 |
Effect of exchange rate changes on cash balances | 306 |  |  | (108) |
Net increase (decrease) in cash and cash equivalents | (10,280) |  |  | 164,310 |
Cash and cash equivalents, beginning of period | 59,581 |  |  | 86,564 |
Cash and cash equivalents, end of period | $ | 49,301 |  |  | $ | 250,874 |
Supplemental disclosures of cash flow information: |  |  |
Cash received for income taxes | $ | 3,926 |  |  | $ | 31 |
Cash paid for interest on debt | $ | 7,042 |  |  | $ | 2,105 |
Cash paid for operating lease liabilities | $ | 95,079 |  |  | $ | 24,983 |
Non-cash investing and financing activities: |  |  |
Property and equipment purchases not yet paid | $ | 2,875 |  |  | $ | 9,478 |
Operating lease liabilities arising from lease asset additions | $ | 7,588 |  |  | $ | 9,408 |
Net increase (decrease) to operating lease assets and lease liabilities for modifications | $ | 16,760 |  |  | $ | (15,849) |

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
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Table of Contents
DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Business Operations- Designer Brands Inc. is one of North America's largest designers, producers and retailers of footwear and accessories. We operate in three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment operates the DSW Designer Shoe Warehouse ("DSW") banner through its U.S. stores and e-commerce site. The Canada Retail segment operates The Shoe Company, Shoe Warehouse, and DSW banners through its Canada stores and e-commerce sites. The Brand Portfolio segment earns revenue from the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels (which we refer to as "First Cost"), and the sale of branded products through the direct-to-consumer e-commerce site at www.vincecamuto.com. An integral part of the Brand Portfolio segment is our equity investment in ABG-Camuto, LLC ("ABG-Camuto"), which is a partnership between Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," and Authentic Brands Group LLC, a global brand management and marketing company. Camuto Group has a 40% stake in ABG-Camuto, a joint venture that owns several intellectual property rights, including Vince Camuto, Louise et Cie, and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. Camuto Group has a licensing agreement with ABG-Camuto whereby we pay royalties on our net sales from the brands owned by ABG-Camuto, subject to guaranteed minimums. Camuto Group also owns footwear and in some cases handbags, licensing rights of Jessica Simpson, Lucky Brand, and through a joint venture, Jennifer Lopez. Our other operating segments are below the quantitative and qualitative thresholds for reportable segments and are aggregated into Other for segment reporting purposes.
Basis of Presentation- The accompanying unaudited, condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 30, 2021 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the 2020 Form 10-K.
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 2020 Form 10-K.
Impact of COVID-19- In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as reductions to our expense and capital expenditure plans.
During the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout fiscal 2020 and into the first quarter of fiscal 2021, resulting in the elimination of approximately 1,000 associate positions. The severance charges recorded as a result of this reorganization are included in our restructuring costs discussed below.
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Following the re-opening of stores, we experienced and have continued to experience significantly reduced customer traffic and net sales from historic periods prior to COVID-19, which included subsequent store closures and reduced hours in certain areas, primarily in Canada, where government-imposed restrictions were mandated. Our retail customers in the Brand Portfolio segment have had and are having similar experiences. Customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all. We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures and reduced customer traffic resulted in a sharp decline in our net sales and cash flows.
During the first quarter of fiscal 2020, as a result of the material reduction in net sales and cash flows, we performed impairment analyses for our U.S. Retail and Canada Retail segments at the store-level, which represents the lowest level for which identifiable cash flows are independent of the cash flows of other assets. The carrying amount of the store asset group, primarily made up of operating lease assets, leasehold improvements and fixtures, is considered impaired when the carrying value of the asset group exceeds the expected future cash flows from the asset group. The impairment loss recognized is the excess of the carrying value of the asset or asset group over its fair value (categorized as Level 3 under the fair value hierarchy). Fair value at the store level is typically based on projected discounted cash flows over the remaining lease term. During the three months ended May 2, 2020, we recorded impairment charges of $84.9 million ($65.2 million and $19.7 million for the U.S. Retail segment and Canada Retail segment, respectively). Also during the three months ended May 2, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life (categorized as Level 3 under the fair value hierarchy).
As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores, the decrease in net sales from our retailer customers and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets during the first quarter of fiscal 2020. We calculated the fair value of the reporting units with goodwill primarily based on a discounted cash flow analysis (categorized as Level 3 under the fair value hierarchy). Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the three months ended May 2, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.
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 reflects reductions for merchandise marked down with charges to cost of sales. As a result, earnings are negatively impacted as the merchandise is marked down prior to sale. Inventories for the Canada Retail and Brand Portfolio segments are accounted for using moving average cost method and are stated at the lower of cost or net realizable value. During the first quarter of fiscal 2020, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our peak spring selling season. During the three months ended May 2, 2020, we recorded $84.0 million of additional inventory reserves over the same period of the previous year.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which, among other things, provided employer payroll tax credits for wages paid to employees who were unable to work over a defined period and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualified for certain employer payroll tax credits, which were treated as government subsidies to offset related operating expenses, as well as the deferral of payroll and other tax payments in the future. Similar credits were also available in Canada and continue to be provided. During the three months ended May 1, 2021 and May 2, 2020, the qualified government credits reduced our operating expenses by $2.7 million and $4.5 million, respectively, on our condensed consolidated statements of operations. A s of May 1, 2021, we had $10.0 million of deferred qualified payroll and other tax obligations, half of which is included in accrued expenses on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2021, with the remaining incl uded in other non-current liabilities on the condensed consolidated balance sheets that we expect to pay at the end of fiscal 2022.
We recorded our income tax expense, income tax receivable, and deferred tax assets and related liabilities based on management’s best estimates. Additionally, we assessed the likelihood of realizing the benefits of our deferred tax assets. Our ability to recover these deferred tax assets depends on several factors, including our ability to project future taxable income. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal statutory tax rate was 35%, as opposed to the current rate of 21%. In evaluating future taxable income, significant weight is given to positive and negative evidence that is objectively verifiable. As a result of the losses incurred in fiscal 2020 due to COVID-19, we are in a three-year cumulative loss position as
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
of May 1, 2021, which is significant objective negative evidence in considering whether deferred tax assets are realizable. Such objective evidence limits the ability to consider other subjective evidence, such as the projection of future taxable income. A valuation allowance has been recognized as a reserve on the total deferred tax asset balance due to the uncertainty of realization of our loss carry forwards and other deferred tax assets. Our effective tax rate changed from 33.8% for the three months ended May 2, 2020 to negative 89.2% for the three months ended May 1, 2021. The negative rate for the three months ended May 1, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the three months ended May 2, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.
The COVID-19 pandemic remains challenging and unpredictable. The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences, including reductions in consumer spending, which may necessitate further shifts in our business model. As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and will depend on future developments, including the widespread availability, use and effectiveness of vaccines, which are highly uncertain and cannot be predicted. As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.
Restructuring Costs- During the three months ended May 1, 2021 and May 2, 2020, we incurred restructuring costs, which consisted primarily of severance of $1.4 million and $1.7 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of May 1, 2021 and May 2, 2020, we had accrued severance of $5.1 million and $2.6 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.
Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands Inc. and its subsidiaries, including variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. dollars.
Use of Estimates- The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and reported amounts of net sales and expenses during the reporting periods. Certain estimates and assumptions use forecasted financial information based on information reasonably available to us, along with the estimated, but uncertain, future impacts of COVID-19. Significant estimates and assumptions are required as a part of accounting for sales returns allowances, customer allowances and 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, income taxes, and self-insurance reserves. Although we believe these estimates and assumptions are reasonable, they are based on management's knowledge of current events and actions we may undertake in the future. Changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.
Fair Value- Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to the subjectivity associated with the inputs to fair value measurements as follows:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Quoted prices for similar assets or liabilities in active markets or inputs that are observable.
•Level 3 - Unobservable inputs in which little or no market activity exists.
The carrying value of cash and cash equivalents, receivables, and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowing under our ABL Revolver and our previous senior unsecured revolving credit agreement ("Credit Facility") approximated the carrying value. As of May 1, 2021, the fair value of borrowings under our Term Loan was $250.6 million compared to the carrying value of $240.6 million. The fair value of debt borrowings was estimated based on current interest rates offered for similar instruments (categorized as Level 2).
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. REVENUE
Disaggregation of Net Sales- The following table presents net sales disaggregated by product and service category for each segment:

|  |  | Three months ended
(in thousands) |  |  |  |  | May 1, 2021 |  | May 2, 2020
Net sales: |  |  |  |  |  |  |
U.S. Retail segment: |  |  |  |  |  |  |
Women's footwear |  |  |  |  | $ | 405,300 |  |  | $ | 259,563 |
Men's footwear |  |  |  |  | 131,947 |  |  | 70,355 |
Kids' footwear |  |  |  |  | 54,732 |  |  | 29,183 |
Accessories and other |  |  |  |  | 28,679 |  |  | 17,972 |
|  |  |  |  | 620,658 |  |  | 377,073 |
Canada Retail segment: |  |  |  |  |  |  |
Women's footwear |  |  |  |  | 20,431 |  |  | 15,972 |
Men's footwear |  |  |  |  | 9,528 |  |  | 6,803 |
Kids' footwear |  |  |  |  | 9,513 |  |  | 5,556 |
Accessories and other |  |  |  |  | 1,132 |  |  | 998 |
|  |  |  |  | 40,604 |  |  | 29,329 |
Brand Portfolio segment: |  |  |  |  |  |  |
Wholesale |  |  |  |  | 48,643 |  |  | 67,304 |
Commission income |  |  |  |  | 3,331 |  |  | 5,123 |
Direct-to-consumer |  |  |  |  | 5,453 |  |  | 9,686 |
|  |  |  |  | 57,427 |  |  | 82,113 |
Other |  |  |  |  | — |  |  | 13,623 |
Total segment net sales |  |  |  |  | 718,689 |  |  | 502,138 |
Elimination of intersegment sales |  |  |  |  | (15,534) |  |  | (19,355) |
Total net sales |  |  |  |  | $ | 703,155 |  |  | $ | 482,783 |

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 1, 2021 |  | May 2, 2020
Gift cards: |  |  |  |  |  |  |
Beginning of period |  |  |  |  | $ | 34,442 |  |  | $ | 35,461 |
Gift cards redeemed and breakage recognized to net sales |  |  |  |  | (17,170) |  |  | (13,525) |
Gift cards issued |  |  |  |  | 13,537 |  |  | 8,972 |
End of period |  |  |  |  | $ | 30,809 |  |  | $ | 30,908 |
Loyalty programs: |  |  |  |  |  |  |
Beginning of period |  |  |  |  | $ | 11,379 |  |  | $ | 16,138 |
Loyalty certificates redeemed and expired and other adjustments recognized to net sales |  |  |  |  | (4,896) |  |  | (6,609) |
Deferred revenue for loyalty points issued |  |  |  |  | 6,472 |  |  | 5,039 |
End of period |  |  |  |  | $ | 12,955 |  |  | $ | 14,568 |

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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. RELATED PARTY TRANSACTIONS
Schottenstein Affiliates
As of May 1, 2021, the Schottenstein Affiliates consist of entities owned or controlled by Jay L. Schottenstein, the executive chairman of our Board of Directors, and members of his family. As of May 1, 2021, the Schottenstein Affiliates beneficially owned approximately 17% of the Company's outstanding common shares, representing approximately 52% of the combined voting power, consisting of, in the aggregate, 4.7 million Class A common shares and 7.7 million Class B common shares. The following summarizes the related party transactions with the Schottenstein Affiliates for the relevant periods:
Leases- We lease our fulfillment center and certain store locations owned by the Schottenstein Affiliates. During the three months ended May 1, 2021 and May 2, 2020, we recorded rent expense from leases with Schottenstein Affiliates of $2.7 million and $2.8 million, respectively. As of May 1, 2021 and May 2, 2020, we had related party current operating lease liabilities of $6.8 million and $7.1 million, respectively, and non-current operating lease liabilities of $22.9 million and $30.5 million, respectively.
Other Purchases and Services- During the three months ended May 1, 2021 and May 2, 2020, we had other purchases and services we incurred from the Schottenstein Affiliates of $1.4 million and $1.3 million, respectively.
Due to Related Parties- Amounts due to Schottenstein Affiliates, other than operating lease liabilities, were immaterial for all periods presented.
ABG-Camuto
We have a 40% interest in our equity investment in ABG-Camuto. We have a licensing agreement with ABG-Camuto, pursuant to which we pay royalties on the net sales of the brands owned by ABG-Camuto, subject to guaranteed minimums. During the three months ended May 1, 2021 and May 2, 2020, we recorded royalty expense payable to ABG-Camuto of $4.6 million and $4.4 million, respectively. Amounts due to ABG-Camuto were immaterial for all periods presented.
4. 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 and restricted stock units ("RSUs") calculated using the treasury stock method.
The following is a reconciliation between basic and diluted weighted average shares outstanding, as used in the calculation of earnings (loss) per share:

|  |  | Three months ended
(in thousands) |  |  |  |  | May 1, 2021 |  | May 2, 2020
Weighted average basic shares outstanding |  |  |  |  | 72,613 |  |  | 71,914 |
Dilutive effect of stock-based compensation awards |  |  |  |  | 4,363 |  |  | — |
Weighted average diluted shares outstanding |  |  |  |  | 76,976 |  |  | 71,914 |

For the three months ended May 1, 2021 and May 2, 2020, the number of shares relating to potentially dilutive stock-based compensation awards that were excluded from the computation of diluted earnings (loss) per share due to their anti-dilutive effect was 3.6 million and 5.6 million, respectively.
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. STOCK-BASED COMPENSATION
Stock-based compensation expense consisted of the following:

|  |  | Three months ended
(in thousands) |  |  |  |  | May 1, 2021 |  | May 2, 2020
Stock options |  |  |  |  | $ | 253 |  |  | $ | 463 |
Restricted and director stock units |  |  |  |  | 7,204 |  |  | 4,454 |
|  |  |  |  | $ | 7,457 |  |  | $ | 4,917 |

The following table summarizes the stock-based compensation award activity for RSUs for the three months ended May 1, 2021:

| Number of shares
(in thousands) | Time-Based RSUs |  | Performance-Based RSUs
Outstanding - beginning of period | 6,445 |  |  | 540 |
Granted | 984 |  |  | — |
Exercised / vested | (461) |  |  | (359) |
Forfeited / expired | (24) |  |  | — |
Outstanding - end of period | 6,944 |  |  | 181 |

6. SHAREHOLDERS' EQUITY
Shares- Our Class A common shares are listed for trading under the ticker symbol "DBI" on the New York Stock Exchange. There is currently no public market for the Company's Class B common shares, but the Class B common shares can be 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 1, 2021 |  | January 30, 2021 |  | May 2, 2020
(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 | 87,303 |  |  | 7,733 |  |  | 86,835 |  |  | 7,733 |  |  | 86,471 |  |  | 7,733 |
Outstanding shares | 65,134 |  |  | 7,733 |  |  | 64,666 |  |  | 7,733 |  |  | 64,302 |  |  | 7,733 |
Treasury shares | 22,169 |  |  | — |  |  | 22,169 |  |  | — |  |  | 22,169 |  |  | — |

We have authorized 100 million shares of no par value preferred shares, with no shares issued for any of the periods presented.
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accumulated Other Comprehensive 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 1, 2021 |  | May 2, 2020
(in thousands) | Foreign Currency Translation |  | Available-for-Sale Securities |  | Total |  | Foreign Currency Translation |  | Available-for-Sale Securities |  | Total
Accumulated other comprehensive income (loss) - beginning of period | $ | (3,286) |  |  | $ | — |  |  | $ | (3,286) |  |  | $ | (2,668) |  |  | $ | 173 |  |  | $ | (2,495) |
Other comprehensive income (loss) before reclassifications | 543 |  |  | — |  |  | 543 |  |  | (3,541) |  |  | 195 |  |  | (3,346) |
Amounts reclassified to non-operating income (expenses), net | — |  |  | — |  |  | — |  |  | — |  |  | (368) |  |  | (368) |
Other comprehensive income (loss) | 543 |  |  | — |  |  | 543 |  |  | (3,541) |  |  | (173) |  |  | (3,714) |
Accumulated other comprehensive loss - end of period | $ | (2,743) |  |  | $ | — |  |  | $ | (2,743) |  |  | $ | (6,209) |  |  | $ | — |  |  | $ | (6,209) |

7. RECEIVABLES
Receivables, net, consisted of the following:

(in thousands) | May 1, 2021 |  | January 30, 2021 |  | May 2, 2020
Customer accounts receivables: |  |  |  |  |
Serviced by third-party provider with guaranteed payment | $ | 38,572 |  |  | $ | 29,615 |  |  | $ | 46,694 |
Serviced by third-party provider without guaranteed payment | 323 |  |  | 363 |  |  | 637 |
Serviced in-house | 3,558 |  |  | 4,576 |  |  | 5,702 |
Income tax receivable | 158,890 |  |  | 149,824 |  |  | — |
Other receivables | 13,305 |  |  | 12,865 |  |  | 31,467 |
Total receivables | 214,648 |  |  | 197,243 |  |  | 84,500 |
Allowance for doubtful accounts | (1,201) |  |  | (1,194) |  |  | (2,547) |
| $ | 213,447 |  |  | $ | 196,049 |  |  | $ | 81,953 |

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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill- Activity related to our goodwill was as follows:

| Three months ended
| May 1, 2021 |  | May 2, 2020
(in thousands) | Goodwill |  | Accumulated Impairments |  | Net |  | Goodwill |  | Accumulated Impairments |  | Net
Beginning of period by segment: |  |  |  |  |  |  |  |  |  |  |
U.S. Retail | $ | 93,655 |  |  | $ | — |  |  | $ | 93,655 |  |  | $ | 93,655 |  |  | $ | — |  |  | $ | 93,655 |
Canada Retail | 43,086 |  |  | (43,086) |  |  | — |  |  | 41,610 |  |  | (41,610) |  |  | — |
Brand Portfolio | 19,989 |  |  | (19,989) |  |  | — |  |  | 19,989 |  |  | — |  |  | 19,989 |
| 156,730 |  |  | (63,075) |  |  | 93,655 |  |  | 155,254 |  |  | (41,610) |  |  | 113,644 |
Activity by segment: |  |  |  |  |  |  |  |  |  |  |
Canada Retail- |  |  |  |  |  |  |  |  |  |  |
Currency translation adjustment | 1,735 |  |  | (1,735) |  |  | — |  |  | (2,467) |  |  | 2,467 |  |  | — |
Brand Portfolio- |  |  |  |  |  |  |  |  |  |  |
Impairment charges | — |  |  | — |  |  | — |  |  | — |  |  | (19,989) |  |  | (19,989) |
| 1,735 |  |  | (1,735) |  |  | — |  |  | (2,467) |  |  | (17,522) |  |  | (19,989) |
End of period by segment: |  |  |  |  |  |  |  |  |  |  |
U.S. Retail | 93,655 |  |  | — |  |  | 93,655 |  |  | 93,655 |  |  | — |  |  | 93,655 |
Canada Retail | 44,821 |  |  | (44,821) |  |  | — |  |  | 39,143 |  |  | (39,143) |  |  | — |
Brand Portfolio | 19,989 |  |  | (19,989) |  |  | — |  |  | 19,989 |  |  | (19,989) |  |  | — |
| $ | 158,465 |  |  | $ | (64,810) |  |  | $ | 93,655 |  |  | $ | 152,787 |  |  | $ | (59,132) |  |  | $ | 93,655 |

Intangible Assets- Intangible assets consisted of the following:

(in thousands) | Cost |  | Accumulated Amortization |  | Net
May 1, 2021 |  |  |  |  |
Definite-lived customer relationships | $ | 1,465 |  |  | $ | (1,465) |  |  | $ | — |
Indefinite-lived trademarks and tradenames | 16,131 |  |  | — |  |  | 16,131 |
| $ | 17,596 |  |  | $ | (1,465) |  |  | $ | 16,131 |
January 30, 2021 |  |  |  |  |
Definite-lived customer relationships | $ | 2,909 |  |  | $ | (2,791) |  |  | $ | 118 |
Indefinite-lived trademarks and tradenames | 15,517 |  |  | — |  |  | 15,517 |
| $ | 18,426 |  |  | $ | (2,791) |  |  | $ | 15,635 |
May 2, 2020 |  |  |  |  |
Definite-lived customer relationships | $ | 2,780 |  |  | $ | (2,353) |  |  | $ | 427 |
Indefinite-lived trademarks and tradenames | 13,481 |  |  | — |  |  | 13,481 |
| $ | 16,261 |  |  | $ | (2,353) |  |  | $ | 13,908 |

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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:

(in thousands) | May 1, 2021 |  | January 30, 2021 |  | May 2, 2020
Gift cards | $ | 30,809 |  |  | $ | 34,442 |  |  | $ | 30,908 |
Accrued compensation and related expenses | 29,945 |  |  | 49,864 |  |  | 13,700 |
Accrued taxes | 32,093 |  |  | 24,206 |  |  | 21,628 |
Loyalty programs deferred revenue | 12,955 |  |  | 11,379 |  |  | 14,568 |
Sales returns | 20,422 |  |  | 17,333 |  |  | 47,625 |
Customer allowances and discounts | 5,276 |  |  | 4,579 |  |  | 5,600 |
Other | 63,737 |  |  | 58,523 |  |  | 97,330 |
| $ | 195,237 |  |  | $ | 200,326 |  |  | $ | 231,359 |

10. DEBT
Debt consisted of the following:

(in thousands) | May 1, 2021 |  | January 30, 2021 |  | May 2, 2020
ABL Revolver | $ | 104,843 |  |  | $ | 100,000 |  |  | $ | — |
Term Loan | 240,625 |  |  | 243,750 |  |  | — |
Credit Facility | — |  |  | — |  |  | 393,000 |
Total debt | 345,468 |  |  | 343,750 |  |  | 393,000 |
Less unamortized Term Loan debt issuance costs | (8,081) |  |  | (8,931) |  |  | — |
Less current maturities of long-term debt | (62,500) |  |  | (62,500) |  |  | — |
Long-term debt | $ | 274,887 |  |  | $ | 272,319 |  |  | $ | 393,000 |

ABL Revolver- On August 7, 2020, we replaced our Credit Facility with the ABL Revolver, which provides a revolving line of credit of up to $400.0 million, including a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of letters of credit, a $40.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Term Loan. The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of May 1, 2021, the ABL Revolver had a borrowing base of $400.0 million, with $104.8 million outstanding and $5.3 million in letters of credit issued, resulting in $289.9 million available for borrowings.
Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") (as defined) plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0% as of May 1, 2021. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the ABL Revolver.
Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of May 1, 2021.
Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum earnings before interest, taxes, depreciation, and amortization ("EBITDA") covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary events of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral. As of May 1, 2021, we were in compliance with all financial covenants.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings- We are involved in various legal proceedings that are incidental to the conduct of our business. Although it is not possible to predict with certainty the eventual outcome of any litigation, we believe the amount of any potential liability with respect to current legal proceedings will not be material to 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.
Insurance Recoveries- During fiscal 2020, a third-party vendor experienced a shutdown of services to us that impacted our ability to fulfill orders from customers for a limited period of time. This incident was covered under an insurance policy that provides for reimbursement of lost profits and recognized losses as a result of the outage. During the fourth quarter of fiscal 2020, we recognized an insurance recovery receivable of $3.0 million, recorded as on offset to cost of sales, for recognized losses that we believe are probable of being reimbursed through the insurance policy. Reimbursement for lost profits and any additional recoveries in excess of recognized losses are treated as gain contingencies and will be recognized when realized or realizable. We continue to work with the insurance carrier to reach an agreement on the total amount to be recovered.
Guarantee- We provide guarantees for lease obligations that are scheduled to expire in fiscal 2023 for locations that have been leased to third parties. If a third party does not pay the rent or vacates the premise, we may be required to make full rent payments to the landlord. As of May 1, 2021, the total future minimum lease payment requirements for these guarantees were approximately $14.4 million.
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
12. SEGMENT REPORTING
The following provides certain financial data by segment reconciled to the condensed consolidated financial statements:

(in thousands) | U.S. Retail |  | Canada Retail |  | Brand Portfolio |  | Other |  | Corporate/Eliminations |  | Total
Three months ended May 1, 2021 |  |  |  |  |  |  |  |  |  |  |
Net sales: |  |  |  |  |  |  |  |  |  |  |
External customer sales | $ | 620,658 |  |  | $ | 40,604 |  |  | $ | 41,893 |  |  | $ | — |  |  | $ | — |  |  | $ | 703,155 |
Intersegment sales | — |  |  | — |  |  | 15,534 |  |  | — |  |  | (15,534) |  |  | — |
Total net sales | $ | 620,658 |  |  | $ | 40,604 |  |  | $ | 57,427 |  |  | $ | — |  |  | $ | (15,534) |  |  | $ | 703,155 |
Gross profit | $ | 193,113 |  |  | $ | 10,835 |  |  | $ | 11,926 |  |  | $ | — |  |  | $ | 237 |  |  | $ | 216,111 |
Income from equity investment | $ | — |  |  | $ | — |  |  | $ | 1,708 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,708 |
Three months ended May 2, 2020 |  |  |  |  |  |  |  |  |  |  |
Net sales: |  |  |  |  |  |  |  |  |  |  |
External customer sales | $ | 377,073 |  |  | $ | 29,329 |  |  | $ | 62,758 |  |  | $ | 13,623 |  |  | $ | — |  |  | $ | 482,783 |
Intersegment sales | — |  |  | — |  |  | 19,355 |  |  | — |  |  | (19,355) |  |  | — |
Total net sales | $ | 377,073 |  |  | $ | 29,329 |  |  | $ | 82,113 |  |  | $ | 13,623 |  |  | $ | (19,355) |  |  | $ | 482,783 |
Gross profit (loss) | $ | (32,970) |  |  | $ | (2,311) |  |  | $ | 13,904 |  |  | $ | (5,428) |  |  | $ | 345 |  |  | $ | (26,460) |
Income from equity investment | $ | — |  |  | $ | — |  |  | $ | 2,270 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,270 |

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview and Trends in our Business
The volatile macro environment and business conditions have required us to be nimble and quickly adapt our business model. The business returned to profitability in the first quarter of fiscal 2021 for the first time since the onset of COVID-19. The following are examples of trends in our business and changes we have made in response to the impacts of COVID-19 and the current macroeconomic environment:
•Inventory Management- COVID-19 negatively impacted North America and global economics, resulting in a drop in demand for our products, specifically in the seasonal and dress categories. Although the seasonal and dress categories remain depressed from pre-COVID-19 levels, we are beginning to see strengthened results and we are responding to the increased demand with increased production within our Camuto Group business. We implemented inventory management actions that enabled us to reduce the number of markdowns in the first quarter of fiscal 2021, which has allowed us to invest more in direct marketing.
•Changing Consumer Preferences- There has been a clear shift in consumer behavior and preferences to athleisure, which includes athletic and casual products, and away from dress and seasonal categories. We have modified receipts to match these expectations and continue to see opportunity ahead of us given our historic under-penetration in the athleisure space. Our business model remains flexible and we were able to increase production of brands produced by Camuto Group to match emerging demand in seasonal and dress categories during the first quarter of fiscal 2021.
•Strength in Digital- With store traffic continuing to trend lower than pre-COVID-19 levels, our digital fulfillment options, such as Buy Online Pick Up in Store, Buy Online Ship to Store, and Curbside Pickup, coupled with our ability to use our stores for fulfillment, have continued to serve us well as our customers look for convenient ways to shop. We were able to generate strong digital demand during the first quarter of fiscal 2021, well above the digital demand for the same period last year.
We anticipate that adapting to operating as a digital-focused retailer will have a lasting influence on how we operate moving forward. In addition, we believe that our increased penetration in the athletic market, coupled with our historical success in dress and seasonal and a fully integrated supply chain supported by Camuto Group, position us well to be a premier footwear retailer for all of the family's needs over the long term.
Impact of COVID-19 on our Results of Operations
In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 18, 2020, to help control the spread of the virus and protect the health and safety of our customers, employees, and the communities we serve, we temporarily closed all of our stores in the U.S. and Canada. In addition, we took several actions in late March 2020 to reduce costs and operations to levels that were more commensurate with then-current sales, including furloughs and pay reductions. As this continues to be an unprecedented period of uncertainty, we have made and may continue to make adjustments to our operational plans, inventory controls, and liquidity management, as well as reductions to our expense and capital expenditure plans.
During the second quarter and into the third quarter of fiscal 2020, we re-opened all of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. Beginning in July 2020, we initiated an internal reorganization and reduction of our workforce with additional actions taken throughout fiscal 2020 and into the first quarter of fiscal 2021, resulting in the elimination of approximately 1,000 associate positions.
Following the re-opening of stores, we experienced and have continued to experience significantly reduced customer traffic and net sales from historic periods prior to COVID-19, which included subsequent store closures and reduced hours in certain areas, primarily in Canada, where government-imposed restrictions were mandated. Our retail customers in the Brand Portfolio segment have had and are having similar experiences. Customer behavior has been and may continue to be slow to return to pre-COVID-19 patterns and levels, if at all. We have continued to serve our customers through our e-commerce businesses during the period that our stores were closed and beyond, but store closures and reduced customer traffic resulted in a sharp decline in our net sales and cash flows.
The COVID-19 pandemic remains challenging and unpredictable. The ongoing and prolonged nature of the outbreak has continued to adversely impact our business and may lead to further adjustments to store operations, as well as continue to drive changes in customer behaviors and preferences, including reductions in consumer spending, which may necessitate further shifts in our business model. As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and will depend on future developments, including the widespread availability, use and effectiveness of vaccines,
17

which are highly uncertain and cannot be predicted. As a result, we may have future write-downs or adjustments to inventories, receivables, long-lived assets, intangibles, goodwill, and the valuation allowance on deferred tax assets.
Financial Summary and Other Key Metrics
Net sales increased to $703.2 million for the three months ended May 1, 2021 from $482.8 million for the three months ended May 2, 2020. The 45.6% increase in net sales was primarily driven by a 52.2% increase in comparable sales during the three months ended May 1, 2021, compared with depressed sales during the three months ended May 2, 2020 due to the temporary closure of all stores beginning in March 2020 and continuing through the rest of the first quarter of fiscal 2020. During the three months ended May 2, 2020, we also maintained higher sales returns reserves while stores were unavailable to accept returns. During the three months ended May 1, 2021, we had lower Brand Portfolio segment sales due to reduced orders as our retailer customers have shifted towards athletic and casual offerings.
During the three months ended May 1, 2021, gross profit as a percentage of net sales was 30.7% as compared to negative 5.5% for the same period last year. The change to a gross profit from a loss was primarily driven by increased sales during the quarter as compared to the first quarter of 2020. In the first quarter of fiscal 2020, in response to the impacts of the COVID-19 outbreak on our operations, we addressed the temporary closure of stores with aggressive promotional activity and significant inventory markdowns. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the first quarter of fiscal 2021, tight inventory management resulted in being less promotional. Accordingly, gross profit as a percentage of net sales for the first quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 29.7% for the first quarter of fiscal 2019.
Net income for the three months ended May 1, 2021 was $17.0 million, or $0.22 earnings per diluted share, which included net after-tax benefits of $7.6 million, or $0.10 per diluted share, primarily related to the the change in the valuation allowance on deferred tax assets. Net loss for the three months ended May 2, 2020 was $215.9 million, or a loss of $3.00 per diluted share, which included net after-tax charges of $85.6 million, or $1.19 per diluted share, primarily related to impairment charges and integration and restructuring expenses.
Comparable Sales Performance Metric
The following table presents the increase (decrease) in comparable sales for each segment and in total:

| Three months ended
| May 1, 2021 |  | May 2, 2020
Comparable sales: |  |  |
U.S. Retail segment | 56.3 | % |  | (42.4) | %
Canada Retail segment | 10.0 | % |  | (32.4) | %
Brand Portfolio segment - direct-to-consumer channel | 6.8 | % |  | 92.8 | %
Other | NA |  | (62.0) | %
Total comparable sales | 52.2 | % |  | (42.3) | %

NA - Not applicable
We consider comparable sales, a primary metric commonly used throughout the retail industry, to be an important indicator of the performance of our retail and direct-to-consumer businesses. We include stores in our comparable sales metric for those stores 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 in which they are closed. Comparable sales include stores temporarily closed as a result of the COVID-19 outbreak as management continues to believe that this metric is meaningful to monitor our performance. Comparable sales include e-commerce sales. Comparable sales for the Canada Retail segment exclude the impact of foreign currency translation and are calculated by translating current period results at the foreign currency exchange rate used in the comparable period of the prior year. Comparable sales for the Brand Portfolio segment include the direct-to-consumer e-commerce site at www.vincecamuto.com. Beginning with the third quarter of fiscal 2020, comparable sales no longer include the Other segment due to no longer having activity in the Other segment. 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.
18

Number of Stores
At the end of the first quarter of fiscal 2021 and 2020, we had the following number of stores:

| May 1, 2021 |  | May 2, 2020
U.S. Retail segment - DSW stores | 516 |  |  |  |  | 521 |  |  |
Canada Retail segment: |  |  |  |  |  |  |
The Shoe Company / Shoe Warehouse stores | 118 |  |  |  |  | 118 |  |  |
DSW stores | 27 |  |  |  |  | 27 |  |  |
| 145 |  |  |  |  | 145 |  |  |
Total number of stores | 661 |  |  |  |  | 666 |  |  |

Results of Operations
Comparison of the Three Months Ended May 1, 2021 with the Three Months Ended May 2, 2020

| Three months ended |  |  |  |
| May 1, 2021 |  | May 2, 2020 |  | Change
(dollars in thousands, except per share amounts) | Amount |  | % of Net Sales |  | Amount |  | % of Net Sales |  | Amount |  | %
Net sales | $ | 703,155 |  |  | 100.0 | % |  | $ | 482,783 |  |  | 100.0 | % |  | $ | 220,372 |  |  | 45.6 | %
Cost of sales | (487,044) |  |  | (69.3) |  |  | (509,243) |  |  | (105.5) |  |  | 22,199 |  |  | (4.4) | %
Gross profit (loss) | 216,111 |  |  | 30.7 |  |  | (26,460) |  |  | (5.5) |  |  | 242,571 |  |  | NM
Operating expenses | (200,814) |  |  | (28.5) |  |  | (187,221) |  |  | (38.8) |  |  | (13,593) |  |  | 7.3 | %
Income from equity investment | 1,708 |  |  | 0.2 |  |  | 2,270 |  |  | 0.5 |  |  | (562) |  |  | (24.8) | %
Impairment charges | — |  |  | — |  |  | (112,547) |  |  | (23.3) |  |  | 112,547 |  |  | NM
Operating profit (loss) | 17,005 |  |  | 2.4 |  |  | (323,958) |  |  | (67.1) |  |  | 340,963 |  |  | NM
Interest expense, net | (8,814) |  |  | (1.2) |  |  | (2,158) |  |  | (0.5) |  |  | (6,656) |  |  | 308.4 | %
Non-operating income (expenses), net | 806 |  |  | 0.1 |  |  | (87) |  |  | (0.0) |  |  | 893 |  |  | NM
Income (loss) before income taxes | 8,997 |  |  | 1.3 |  |  | (326,203) |  |  | (67.6) |  |  | 335,200 |  |  | NM
Income tax benefit | 8,029 |  |  | 1.1 |  |  | 110,345 |  |  | 22.9 |  |  | (102,316) |  |  | (92.7) | %
Net income (loss) | $ | 17,026 |  |  | 2.4 | % |  | $ | (215,858) |  |  | (44.7) | % |  | $ | 232,884 |  |  | NM
Basic and diluted earnings (loss) per share: |  |  |  |  |  |  |  |  |  |  |
Basic earnings (loss) per share | $ | 0.23 |  |  |  |  | $ | (3.00) |  |  |  |  | $ | 3.23 |  |  | NM
Diluted earnings (loss) per share | $ | 0.22 |  |  |  |  | $ | (3.00) |  |  |  |  | $ | 3.22 |  |  | NM
Weighted average shares used in per share calculations: |  |  |  |  |  |  |  |  |  |  |
Basic shares | 72,613 |  |  |  |  | 71,914 |  |  |  |  | 699 |  |  | 1.0 | %
Diluted shares | 76,976 |  |  |  |  | 71,914 |  |  |  |  | 5,062 |  |  | 7.0 | %

NM - Not meaningful
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Net Sales- The following summarizes net sales by segment:

| Three months ended |  | Change
(dollars in thousands) | May 1, 2021 |  | May 2, 2020 |  | Amount |  | % |  | Comparable Sales %
Segment net sales: |  |  |  |  |  |  |  |  |
U.S. Retail | $ | 620,658 |  |  | $ | 377,073 |  |  | $ | 243,585 |  |  | 64.6 | % |  | 56.3%
Canada Retail | 40,604 |  |  | 29,329 |  |  | 11,275 |  |  | 38.4 | % |  | 10.0%
Brand Portfolio | 57,427 |  |  | 82,113 |  |  | (24,686) |  |  | (30.1) | % |  | 6.8%
Other | — |  |  | 13,623 |  |  | (13,623) |  |  | (100.0) | % |  | NA
Total segment net sales | 718,689 |  |  | 502,138 |  |  | 216,551 |  |  | 43.1 | % |  | 52.2%
Elimination of intersegment net sales | (15,534) |  |  | (19,355) |  |  | 3,821 |  |  | (19.7) | % |  |
Consolidated net sales | $ | 703,155 |  |  | $ | 482,783 |  |  | $ | 220,372 |  |  | 45.6 | % |  |

NA - Not applicable
The increases in comparable sales for all segments and in total consolidated net sales was due to the temporary closure of all stores beginning in March 2020 and continuing through the rest of the first quarter of fiscal 2020. Also during the first quarter of fiscal 2020, we maintained higher sales returns reserves with stores not being available to accept returns, which resulted in significantly lower sales. During the first quarter of fiscal 2021, the sales returns rates normalized to pre-COVID-19 rates. The Canada Retail segment continues to be impacted by mandated closures and restrictions in certain key markets. In addition, we had lower Brand Portfolio segment sales due to reduced orders as our retailer customers have shifted towards athletic and casual offerings.
Gross Profit (Loss)- The following summarizes gross profit (loss) by segment:

| Three months ended |  |
| May 1, 2021 |  | May 2, 2020 |  |
(dollars in thousands) | Amount |  | % of Segment Net Sales |  | Amount |  | % of Segment Net Sales |  | Change |  |  |  |
Segment gross profit (loss): |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Retail | $ | 193,113 |  |  | 31.1 | % |  | $ | (32,970) |  |  | (8.7) | % |  | $ | 226,083 |  |  |  |  |
Canada Retail | 10,835 |  |  | 26.7 | % |  | (2,311) |  |  | (7.9) | % |  | $ | 13,146 |  |  |  |  |
Brand Portfolio | 11,926 |  |  | 20.8 | % |  | 13,904 |  |  | 16.9 | % |  | $ | (1,978) |  |  |  |  |
Other | — |  |  | — | % |  | (5,428) |  |  | (39.8) | % |  | $ | 5,428 |  |  |  |  |
| 215,874 |  |  |  |  | (26,805) |  |  |  |  |  |  |  |  |
Elimination of intersegment gross profit | 237 |  |  |  |  | 345 |  |  |  |  |  |  |  |  |
Gross profit (loss) | $ | 216,111 |  |  | 30.7 | % |  | $ | (26,460) |  |  | (5.5) | % |  | $ | 242,571 |  |  |  |  |

The change to a gross profit from a loss was primarily driven by increased sales during the quarter as compared to the first quarter of 2020. In the first quarter of fiscal 2020, in response to the impacts of the COVID-19 outbreak on our operations, we addressed the temporary closure of stores with aggressive promotional activity and significant inventory markdowns. These actions resulted in higher inventory reserves, increased shipping costs associated with higher digital penetration, and the deleverage of distribution and fulfillment and store occupancy expenses on lower sales volume during fiscal 2020. During the first quarter of fiscal 2021, tight inventory management resulted in being less promotional. Accordingly, gross profit as a percentage of net sales for the first quarter of fiscal 2021 tracked higher than the pre-COVID-19 rate, which was 29.7% for the first quarter of fiscal 2019. The Canada Retail segment continues to be impacted by mandated closures and restrictions in certain key markets, which resulted in deleverage impacts to gross margin when compared to pre-COVID-19 gross margin rates. In addition, the lower Brand Portfolio segment sales also results in deleverage of fixed royalty expenses included within cost of sales.
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Elimination of intersegment gross profit consisted of the following:

| Three months ended |  |
(in thousands) | May 1, 2021 |  | May 2, 2020 |  |  |  |
Elimination of intersegment activity: |  |  |  |  |  |  |
Net sales recognized by Brand Portfolio segment | $ | (15,534) |  |  | $ | (19,355) |  |  |  |  |
Cost of sales: |  |  |  |  |  |  |
Cost of sales recognized by Brand Portfolio segment | 10,935 |  |  | 12,134 |  |  |  |  |
Recognition of intersegment gross profit for inventory previously purchased that was subsequently sold to external customers during the current period | 4,836 |  |  | 7,566 |  |  |  |  |
Gross profit | $ | 237 |  |  | $ | 345 |  |  |  |  |

Operating Expenses- For the three months ended May 1, 2021, operating expenses increased by $13.6 million over the same period last year, primarily driven by the implementation of temporary leaves of absence without pay for a significant number of our employees and reducing pay for nearly all employees not placed on temporary leave in response to the COVID-19 outbreak for most of the first half of fiscal 2020. Operating expenses as a percentage of sales improved to 28.5% compared to 38.8% in the same period last year, but were still elevated compared to the pre-COVID-19 rate for the first quarter of fiscal 2019, which was 24.9% as a percentage of sales.
Impairment Charges- As a result of the material reduction in net sales and cash flows due to the temporary closure of all of our stores beginning in the first quarter of fiscal 2020, we performed an impairment analysis at the store-level. During the three months ended May 2, 2020, we recorded impairment charges of $84.9 million for under-performing stores. In addition, during the three months ended May 2, 2020, we recorded an impairment charge of $6.5 million for the Brand Portfolio segment customer relationship intangible resulting in a full impairment due to the lack of projected cash flows over the remaining useful life. Also, as a result of the material reduction in net sales and cash flows and the decrease in the Company's market capitalization due to the impact of the COVID-19 outbreak on macroeconomic conditions, we performed an impairment analysis for goodwill and other indefinite-lived intangible assets. Our analysis concluded that the fair value of the First Cost reporting unit within the Brand Portfolio segment did not exceed its carrying value. Accordingly, during the three months ended May 2, 2020, we recorded an impairment charge of $20.0 million for the First Cost reporting unit in the Brand Portfolio segment, resulting in a full impairment.
Income Taxes- Our effective tax rate changed from 33.8% for the three months ended May 2, 2020 to negative 89.2% for the three months ended May 1, 2021. The negative rate for the three months ended May 1, 2021 is the result of maintaining a full valuation allowance on deferred tax assets while also recording net discrete tax benefits, primarily as a result of adjustments to our estimated fiscal 2020 return reflecting implemented tax strategies. The rate for the three months ended May 2, 2020 is the result of carry back of losses to a tax year where the U.S. federal statutory tax rate was 35%.
Seasonality
Our business is generally subject to seasonal 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. Since the COVID-19 outbreak, we have not experienced the typical seasonal trends given the changes in customer behavior.
Liquidity and Capital Resources
Overview
Our primary ongoing operating cash flow requirements are for inventory purchases, payments on lease obligations and licensing commitments, other working capital needs, capital expenditures, and debt service. Our working capital and inventory levels fluctuate seasonally. We are committed to a cash management strategy that maintains liquidity to adequately support the operation of the business and withstand unanticipated business volatility, including the impact of COVID-19. We believe that cash generated from our operations, together with our current levels of cash, as well as the use of our ABL Revolver, are sufficient to maintain our ongoing operations, fund capital expenditures, and meet our debt service obligations over the next 12 months.
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Operating Cash Flows
For the three months ended May 1, 2021, net cash used in operations was $1.4 million compared to $39.5 million for the three months ended May 2, 2020. The decrease in cash used in operations was dr iven by the net income recognized in the first quarter of fiscal 2021 versus a net loss incurred during that same period last year as a result of the COVID-19 outbreak, after adjusting for non-cash activity including impairment charges and the change in deferred income taxes. This was partially offset by higher spend on working capital as business recovers from COVID-19 and the measures we implemented last year to manage our working capital to preserve liquidity, including delaying vendor and landlord payments while we renegotiate terms, reducing inventory orders, and significantly cutting costs.
Investing Cash Flows
For the three months ended May 1, 2021, our net cash used in investing activities was $5.6 million, which was due to capital expenditures. During the three months ended May 2, 2020, our net cash provided by investing activities was $10.0 million, which was due to the liquidation of our available-for-sale securities partially offset by capital expenditures of $14.6 million.
Financing Cash Flows
For the three months ended May 1, 2021, our net cash used in financing activities was $3.6 million compared to net cash provided by financing activities of $193.9 million for the three months ended May 2, 2020. During the three months ended May 1, 2021, we had net borrowings of $4.8 million from the ABL Revolver with payments on the Term Loan of $3.1 million. During the three months ended May 2, 2020, we had net borrowings of $203.0 million from the Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering uncertainty in the U.S. and global markets resulting from COVID-19.
Debt
ABL Revolver- On August 7, 2020, we replaced the Credit Facility with the ABL Revolver, which provides a revolving line of credit of up to $400.0 million, including a Canadian sub-limit of up to $20.0 million, a $50.0 million sub-limit for the issuance of letters of credit, a $40.0 million sub-limit for swing loan advances for U.S. borrowings, and a $2.0 million sub-limit for swing loan advances for Canadian borrowings. Our ABL Revolver matures in August 2025 and is secured by substantially all of our personal property assets, including a first priority lien on credit card receivables and inventory and a second priority lien on personal property assets that constitute first priority collateral for the Term Loan. The amount of credit available is limited to a borrowing base based on, among other things, a percentage of the book value of eligible inventory and credit card receivables, as reduced by certain reserves. As of May 1, 2021, the ABL Revolver had a borrowing base of $400.0 million, with $104.8 million outstanding and $5.3 million in letters of credit issued, resulting in $289.9 million available for borrowings.
Borrowings and letters of credit issued under the ABL Revolver accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greatest of (i) the prime rate, (ii) the overnight bank funding rate plus 0.5%, and (iii) the adjusted one-month London Interbank Offered Rate ("LIBOR") (as defined) plus 1.0%; or (B) an adjusted LIBOR per annum (subject to a floor of 0.75%), plus, in each instance, an applicable rate to be determined based on average availability, with an interest rate of 3.0% as of May 1, 2021. Commitment fees are based on the unused portion of the ABL Revolver. Interest expense related to the ABL Revolver includes interest on borrowings and letters of credit, commitment fees and the amortization of debt issuance costs.
Term Loan- On August 7, 2020, we also entered into a $250.0 million Term Loan. The Term Loan requires minimum quarterly principal payments with the remaining outstanding balance due in August 2025. The Term Loan has limited prepayment requirements under certain conditions. The Term Loan is collateralized by a first priority lien on substantially all of our personal and real property (subject to certain exceptions), including investment property and intellectual property, and by a second priority lien on certain other personal property, primarily credit card receivables and inventory, that constitute first priority collateral for the ABL Revolver.
Borrowings under the Term Loan accrue interest, at our option, at a rate equal to: (A) a base rate per annum equal to the greater of (i) 3.25%, (ii) the prime rate, (iii) the overnight bank funding rate plus 0.5%, and (iv) the adjusted one-month LIBOR plus 1.0%, plus, in each instance, 7.5%; or (B) an adjusted LIBOR per annum (subject to a floor of 1.25%), plus 8.5%, with an interest rate of 9.8% (effective interest rate of 11.8% when including the amortization of debt issuance costs) as of May 1, 2021.
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Debt Covenants- The ABL Revolver contains a minimum availability covenant where an event of default shall occur if availability is less than the greater of $30.0 million or 10.0% of the maximum credit amount. The Term Loan includes a springing covenant imposing a minimum EBITDA covenant, which arises when liquidity is less than $150.0 million. In addition, the ABL Revolver and the Term Loan each contain customary covenants restricting our activities, including limitations on the ability to sell assets, engage in acquisitions, enter into transactions involving related parties, incur additional debt, grant liens on assets, pay dividends or repurchase stock, and make certain other changes. There are specific exceptions to these covenants including, in some cases, upon satisfying specified payment conditions. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. Both the ABL Revolver and the Term Loan contain customary covenants of default with cross-default provisions. Upon an event of default that is not cured or waived within the cure periods, in addition to other remedies that may be available to the lenders, the obligations may be accelerated, outstanding letters of credit may be required to be cash collateralized and remedies may be exercised against the collateral. As of May 1, 2021, we were in compliance with all financial covenants.
Capital Expenditure Plans
We expect to spend approximately $35.0 million to $45.0 million for capital expenditures in fiscal 2021, of which we invested $5.6 million during the three months ended May 1, 2021. Our capital expenditures for the remainder of the year will depend primarily on the number of store projects, as well as infrastructure and information technology projects that we undertake and the timing of these expenditures.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of commitments and contingencies at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. We base these estimates and judgments on factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and valuation techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate. While we believe that the factors considered provide a meaningful basis for the accounting policies applied in the preparation of the condensed consolidated financial statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results may differ from those estimates, and such differences may be material to our condensed consolidated financial statements. There have been no material changes to the application of critical accounting policies disclosed in our 2020 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have market risk exposure related to interest rates and foreign currency exchange rates. There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our 2020 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this Form 10-Q, that such disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
No change was made in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d -15(e), during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 11, Commitments and Contingencies - Legal Proceedings, of the Condensed Consolidated Financial Statements of this Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors
As of the date of the filing, there have been no material changes to the risk factors as set forth in Part I, Item 1A., Risk Factors, in our 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 17, 2017, the Board of Directors authorized the repurchase of an additional $500 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 is subject to the ABL Revolver and Term Loan restrictions and 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. Any share repurchases will be completed in the open market at times and in amounts considered appropriate based on price and market conditions.
The ABL Revolver and the Term Loan each contain customary covenants restricting our ability to pay dividends or repurchase stock. We are restricted from paying dividends or repurchasing stock until the third quarter of fiscal 2021 at the earliest, after which certain limitations apply. We currently do not anticipate paying dividends or repurchasing additional shares under our share repurchase program.
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
31.1* |  | Rule 13a-14(a)/15d-14(a) Certification - Principal Executive Officer.
31.2* |  | Rule 13a-14(a)/15d-14(a) Certification - Principal Financial Officer.
32.1** |  | Section 1350 Certification - Principal Executive Officer.
32.2** |  | Section 1350 Certification - Principal Financial Officer.
101* |  | The following materials from the Designer Brands Inc. Quarterly Report on Form 10-Q for the quarter ended May 1, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.
104* |  | Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.

* Filed herewith
** Furnished herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DESIGNER BRANDS INC.

Date: | May 28, 2021 |  | By: | /s/ Jared Poff
|  |  |  | Jared Poff
|  |  |  | Executive Vice President and Chief Financial Officer
|  |  |  | (Principal Financial Officer and duly authorized officer)

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