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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 August 1, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number 001-32545
DESIGNER BRANDS INC.
(Exact name of registrant as specified in its charter)
Ohio31-0746639
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
810 DSW Drive,Columbus,Ohio43219
(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 classTrading SymbolName of each exchange on which registered
Class A Common Shares, without par valueDBINew 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 filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Number of shares outstanding of each of the registrant's classes of common stock, as of September 1, 2020: 64,591,131 Class A common shares and 7,732,786 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 fo the Private Securities Litigation Reform Act of 1995, 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 "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 February 1, 2020 (the "2019 Form 10-K"), filed with the Securities and Exchange Commission (the "SEC") on May 1, 2020 and amended on May 7, 2020, and Part II, Item 1A. Risk Factors in our Form 10-Q for the fiscal quarter ended May 2, 2020, filed with the SEC on June 19, 2020, and herein, 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;
our ability to protect the health and safety of our employees 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 holdings of cash and investments and access to liquidity and the financial markets on terms that are favorable to us, if at all;
risks related to our international operations, including international trade, our reliance on foreign sources for merchandise, exposure to foreign tax contingencies, and fluctuations in foreign currency exchange rates;
maintaining strong relationships with our vendors, manufacturers, licensors, and retailer customers;
our ability to successfully integrate acquired businesses or realize the anticipated benefits of the acquisitions after we complete our integration efforts;
risks related to the loss or disruption, whether as a result of COVID-19 or otherwise, of any of our distribution or fulfillment centers;
our reliance on our loyalty programs and marketing to drive traffic, sales and customer loyalty;
our ability to anticipate and respond to fashion trends, consumer preferences and changing customer expectations;
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;
risks associated with remote working arrangements;
our ability to comply with privacy laws and regulations, as well as other legal obligations;
the effect of Stein Mart Inc. ("Stein Mart") filing for relief under Chapter 11 of the United States Bankruptcy Code;
our success in growing our store base and digital demand;
our ability to protect our reputation and to maintain the brands we license;
our ability to execute our strategies;
seasonality of our business and fluctuation of our comparable sales and quarterly financial performance;
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;
the imposition of increased or new tariffs on our products;
risks related to our qualification under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") for payroll tax credits and deferral of payroll taxes in the U.S., as well as other similar regulations in Canada; 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
PART II. OTHER INFORMATION

All references to "we," "us," "our," "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 Six months ended
August 1, 2020August 3, 2019August 1, 2020August 3, 2019
Net sales$489,714 $855,952 $972,497 $1,729,241 
Cost of sales(452,672)(594,779)(961,915)(1,208,735)
Operating expenses(168,424)(222,370)(355,645)(439,950)
Income from equity investment2,153 2,464 4,423 4,692 
Impairment charges(6,735) (119,282) 
Operating profit (loss)(135,964)41,267 (459,922)85,248 
Interest expense, net(3,788)(1,972)(5,946)(3,773)
Non-operating income (expenses), net743 199 656 (143)
Income (loss) before income taxes(139,009)39,494 (465,212)81,332 
Income tax benefit (provision)40,795 (12,087)151,140 (22,731)
Net income (loss)$(98,214)$27,407 $(314,072)$58,601 
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per share$(1.36)$0.37 $(4.36)$0.78 
Diluted earnings (loss) per share$(1.36)$0.37 $(4.36)$0.77 
Weighted average shares used in per share calculations:
Basic shares72,142 73,529 72,028 75,267 
Diluted shares72,142 74,316 72,028 76,281 

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 Six months ended
August 1, 2020August 3, 2019August 1, 2020August 3, 2019
Net income (loss)$(98,214)$27,407 $(314,072)$58,601 
Other comprehensive income (loss), net of income taxes:
Foreign currency translation gain (loss)1,290 461 (2,251)(253)
Unrealized net gain on debt securities 196 195 438 
Reclassification adjustment for net losses (gains) realized in net income (loss) 23 (368)(65)
Total other comprehensive income (loss), net of income taxes1,290 680 (2,424)120 
Total comprehensive income (loss)$(96,924)$28,087 $(316,496)$58,721 

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)
August 1, 2020February 1, 2020August 3, 2019
ASSETS
Cash and cash equivalents
$206,720 $86,564 $51,762 
Investments
 24,974 25,504 
Accounts receivable, net
49,240 89,151 85,162 
Inventories
445,044 632,587 706,168 
Prepaid expenses and other current assets
69,456 67,534 55,561 
Total current assets
770,460 900,810 924,157 
Property and equipment, net
332,730 395,009 402,779 
Operating lease assets
797,413 918,801 975,963 
Goodwill
93,655 113,644 116,280 
Intangible assets
15,663 22,846 21,112 
Deferred tax assets
182,866 31,863 29,515 
Equity investment
56,690 57,760 55,033 
Other assets
23,780 24,337 32,407 
Total assets
$2,273,257 $2,465,070 $2,557,246 
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable
$224,693 $299,072 $289,457 
Accrued expenses
202,831 194,264 173,437 
Current operating lease liabilities
241,694 186,695 185,969 
Total current liabilities
669,218 680,031 648,863 
Debt
393,000 190,000 235,000 
Non-current operating lease liabilities
778,826 846,584 905,546 
Other non-current liabilities
25,586 27,541 38,590 
Total liabilities
1,866,630 1,744,156 1,827,999 
Commitments and contingencies



Shareholders' equity:
Common shares paid-in capital, no par value
980,749 971,380 963,312 
Treasury shares, at cost
(515,065)(515,065)(498,436)
Retained earnings (deficit)
(54,138)267,094 266,957 
Accumulated other comprehensive loss
(4,919)(2,495)(2,586)
Total shareholders' equity
406,627 720,914 729,247 
Total liabilities and shareholders' equity
$2,273,257 $2,465,070 $2,557,246 

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 sharesAmounts
Class A common sharesClass B common sharesTreasury sharesCommon shares paid in capitalTreasury sharesRetained earnings (deficit)Accumulated other comprehensive lossTotal
Three months ended August 1, 2020
Balance, May 2, 202064,302 7,733 22,169 $975,304 $(515,065)$44,076 $(6,209)$498,106 
Net loss
     (98,214) (98,214)
Stock-based compensation activity276   5,445    5,445 
Other comprehensive income      1,290 1,290 
Balance, August 1, 202064,578 7,733 22,169 $980,749 $(515,065)$(54,138)$(4,919)$406,627 
Three months ended August 3, 2019
Balance, May 4, 201967,434 7,733 18,501 $957,100 $(448,436)$257,453 $(3,266)$762,851 
Net income     27,407  27,407 
Stock-based compensation activity145   6,212    6,212 
Repurchase of Class A common shares(2,668) 2,668  (50,000)  (50,000)
Dividends ($0.25 per share)
     (17,903) (17,903)
Other comprehensive income      680 680 
Balance, August 3, 201964,911 7,733 21,169 $963,312 $(498,436)$266,957 $(2,586)$729,247 
Six months ended August 1, 2020
Balance, February 1, 202064,033 7,733 22,169 $971,380 $(515,065)$267,094 $(2,495)$720,914 
Net loss
     (314,072) (314,072)
Stock-based compensation activity545   9,369    9,369 
Dividends ($0.10 per share)
     (7,160) (7,160)
Other comprehensive loss      (2,424)(2,424)
Balance, August 1, 202064,578 7,733 22,169 $980,749 $(515,065)$(54,138)$(4,919)$406,627 
Six months ended August 3, 2019
Balance, February 2, 201970,672 7,733 15,091 $953,801 $(373,436)$254,718 $(2,706)$832,377 
Cumulative effect of accounting change     (9,556) (9,556)
Net income     58,601  58,601 
Stock-based compensation activity317   9,511    9,511 
Repurchase of Class A common shares(6,078) 6,078  (125,000)  (125,000)
Dividends ($0.50 per share)
     (36,806) (36,806)
Other comprehensive income      120 120 
Balance, August 3, 201964,911 7,733 21,169 $963,312 $(498,436)$266,957 $(2,586)$729,247 

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)
Six months ended
August 1, 2020August 3, 2019
Cash flows from operating activities:
Net income (loss)$(314,072)$58,601 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
44,075 42,485 
Stock-based compensation expense
10,596 9,731 
Deferred income taxes
(152,988)1,043 
Income from equity investment
(4,423)(4,692)
Distributions received from equity investment
5,493 7,784 
Impairment charges
119,282  
Gain on settlement(8,990) 
Other
403 1,689 
Change in operating assets and liabilities, net of acquired amounts:
Accounts receivable
30,699 (14,800)
Inventories
186,965 (61,748)
Prepaid expenses and other current assets
(847)(2,972)
Accounts payable
(67,282)30,683 
Accrued expenses
26,693 (24,677)
Operating lease assets and liabilities, net
44,777 (8,935)
Net cash provided by (used in) operating activities
(79,619)34,192 
Cash flows from investing activities:
Cash paid for property and equipment(22,141)(40,259)
Purchases of available-for-sale investments (3,014)
Sales of available-for-sale investments24,755 47,764 
Proceeds from settlement4,166  
Net cash provided by (used in) investing activities
6,780 4,491 
Cash flows from financing activities:
Borrowing on revolving line of credit
251,000 320,700 
Payments on revolving line of credit
(48,000)(245,700)
Cash paid for treasury shares
 (125,000)
Dividends paid
(7,160)(36,806)
Other
(2,646)(397)
Net cash provided by (used in) financing activities
193,194 (87,203)
Effect of exchange rate changes on cash balances
(199)(286)
Net increase (decrease) in cash, cash equivalents, and restricted cash
120,156 (48,806)
Cash, cash equivalents, and restricted cash, beginning of period
86,564 100,568 
Cash and cash equivalents, end of period
$206,720 $51,762 
Supplemental disclosures of cash flow information:
Cash paid (received) for income taxes
$165 $21,796 
Cash paid for interest on debt
$5,606 $4,052 
Cash paid for operating lease liabilities
$62,262 $118,563 
Non-cash investing and financing activities:
Property and equipment purchases not yet paid
$1,981 $8,648 
Operating lease liabilities arising from lease asset additions
$9,408 $9,184 
Increase to operating lease assets and lease liabilities for modifications
$23,195 $48,029 

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 a leading North American footwear and accessories designer, producer and retailer. We operate a portfolio of retail concepts in the U.S. and Canada under the DSW Designer Shoe Warehouse ("DSW"), The Shoe Company and Shoe Warehouse banners. Through Camuto LLC, a wholly-owned subsidiary doing business as "Camuto Group," we design and produce footwear and accessories. We also own licensing rights for the Jessica Simpson footwear business and footwear and handbag licenses for Lucky Brand and Max Studio. In partnership with Authentic Brands Group LLC, a global brand management and marketing company, we have a 40% stake in ABG-Camuto, LLC ("ABG-Camuto"), a joint venture that acquired several intellectual property rights, including Vince Camuto, Louise et Cie, Sole Society, CC Corso Como, and others, and focuses on licensing and developing new category extensions to support the global growth of these brands. We have 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.

We present three reportable segments: the U.S. Retail segment, the Canada Retail segment, and the Brand Portfolio segment. The U.S. Retail segment includes stores operated in the U.S. under the DSW banner and its related e-commerce site. The Canada Retail segment includes stores operated in Canada under The Shoe Company, Shoe Warehouse, DSW banners and related e-commerce sites. The Brand Portfolio segment includes the sale of wholesale products to retailers, commissions for serving retailers as the design and buying agent for products under private labels ("First Cost"), and the sale of branded products on direct-to-consumer e-commerce sites. 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 February 1, 2020 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 2019 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 2019 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. However, 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, liquidity management, and reductions to our expense and capital expenditure plans.

With the easing of stay-at-home orders and other state-imposed restrictions on non-essential businesses, during the second quarter and into the third quarter of fiscal 2020, we have re-opened the majority of our stores, discontinued the furlough program, and restored pay for our associates that had taken pay reductions. In July 2020, we implemented an internal reorganization and reduction of our workforce, resulting in the elimination of over 1,000 associate positions, including approximately 220 vacant positions that will not be filled. The charges recorded as a result of this reorganization are included in our integration and restructuring costs discussed below.

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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Given the continuation of overall depressed consumer sentiment, 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 resulted in a sharp decline in our net sales and cash flows during the first half of fiscal 2020. Although the majority of our stores are now open, we are experiencing, and may continue to experience, significantly reduced customer traffic and net sales. Our retailer customers in the Brand Portfolio Segment are having similar experiences.

As a result of the material reduction in net sales and cash flows during fiscal 2020, we updated our impairment analysis 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 (categorized as Level 3 under the fair value hierarchy). In addition, we evaluated other long-lived assets based on our intent to use such assets going forward. During the three months ended August 1, 2020, we recorded an impairment charge of $6.7 million for the U.S. Retail segment. During the six months ended August 1, 2020, we recorded impairment charges of $92.8 million ($73.1 million and $19.7 million for the U.S. Retail and Canada Retail segments, respectively). Also during the six months ended August 1, 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).

We evaluate goodwill and other indefinite lived intangible assets for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. 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 updated our 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 six months ended August 1, 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. For goodwill within the U.S. Retail segment, which is also the reporting unit, the fair value was in excess of the carrying value.

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 weighted average cost method and are stated at the lower of cost or net realizable value. For all inventories, we also monitored excess and obsolete inventories in light of the temporary closure of stores during our peak spring selling season and reduced traffic experienced since re-opening stores. During the six months ended August 1, 2020, we recorded approximately $64.0 million of additional inventory reserves over the same period last year.

On March 27, 2020, the U.S. government enacted the CARES Act, which, among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 outbreak and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualify for certain employer payroll tax credits, which are 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 and deferrals were also available in Canada. During the three and six months ended August 1, 2020, the qualified payroll tax credits reduced our operating expenses by $3.5 million and $7.9 million, respectively, on our condensed consolidated statement of operations. We expect to record additional payroll tax credits from government agencies in the third quarter of fiscal 2020 to offset qualified wages paid to our employees and we intend to defer qualified payroll and other tax payments where permitted.

We recorded our income tax expense, 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. 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%. As of August 1, 2020, we did not significantly adjust the valuation allowance on deferred tax assets based on available evidence. However, we will continue to monitor the realizability of our deferred tax assets, particularly in certain jurisdictions where the outbreak has created significant net operating losses. Our ability to recover these deferred tax assets depends on several factors, including the amount
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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

of net operating losses we can carry back and our ability to project future taxable income. Total deferred tax assets as of August 1, 2020 were $182.9 million, which are all related to jurisdictions where we expect to incur significant net operating losses in the near term, although the risks of failing to realize these benefits vary across the jurisdictions. Our effective tax rate changed from 27.9% for the six months ended August 3, 2019 to 32.5% for the six months ended August 1, 2020. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S. federal statutory tax rate was 35%.

In addition, during the three and six months ended August 1, 2020, we incurred $6.4 million and $8.1 million, respectively, of incremental costs directly related to COVID-19, including termination fees, pre-open cleaning services, signs used to encourage customers in social distancing, plexiglass shields used at store registers, and supplies of thermometers, masks, gloves, cleaning agents, and other items. We expect to record additional similar costs during the remainder of fiscal 2020 as we strive to protect our associates and serve our customers in the safest way possible and in compliance with applicable government mandates.

The COVID-19 pandemic remains challenging. The continuation of the outbreak or a new surge in cases may cause new and prolonged periods of store closures, further adjustments to store operations, and changes in customer behaviors and preferences, which may necessitate further shifts in our business model, and potential reductions in consumer spending. As such, the ultimate impacts of the COVID-19 outbreak to our businesses remain highly uncertain and we may have additional write-downs of inventories, accounts receivables, long-lived assets, intangibles, and goodwill and an inability to realize deferred tax assets.

Integration and Restructuring Costs- During the three months ended August 1, 2020 and August 3, 2019, we incurred integration and restructuring costs, which consisted primarily of severance of $7.3 million and $2.4 million, respectively, and professional fees and other integration costs of $1.2 million and $7.2 million, respectively. During the six months ended August 1, 2020 and August 3, 2019, we incurred integration and restructuring costs, which consisted primarily of severance of $9.0 million and $3.6 million, respectively, and professional fees and other integration costs of $1.2 million and $8.5 million, respectively. These costs are included in operating expenses in the condensed consolidated statements of operations. As of August 1, 2020 and August 3, 2019, we had accrued severance of $8.4 million and $4.6 million, respectively, included in accrued expenses on the condensed consolidated balance sheets.

Lease Modifications- In response to the COVID-19 outbreak, we negotiated deferrals of lease payments to be repaid over various time periods, with no substantive changes to the total consideration. For these deferrals, we have elected to treat the changes as modifications to our leases, which resulted in remeasuring the related lease assets and liabilities and including non-lease components per our policy.

Gain on Settlement- During the three months ended August 1, 2020, we recognized a gain of $9.0 million, recorded to operating expenses in the condensed consolidated statements of operations, due to a settlement with a vendor for costs incurred on internal-use software that was capitalized and impaired in a previous fiscal year. During the three months ended August 1, 2020, we collected $4.2 million, net of legal costs incurred, and recorded a $4.8 million receivable included in accounts receivable on the condensed consolidated balance sheets, which has been subsequently received.

Principles of Consolidation- The condensed consolidated financial statements include the accounts of Designer Brands and its subsidiaries, including variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. All amounts are in U.S. 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 net sales and expenses during the reporting period. Certain estimates and assumptions use forecasted financial information using information reasonably available to us, along with the estimated, but uncertain, future impacts of the COVID-19 outbreak. 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, legal reserves, foreign tax contingent liabilities, 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 it may undertake in the future, and changes in facts and circumstances may result in revised estimates and assumptions, and actual results could differ from these estimates.

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DESIGNER BRANDS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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.

We measure available-for-sale investments at fair value on a recurring basis. These investments were measured using a market-based approach using inputs such as prices of similar assets in active markets (categorized as Level 2). The carrying value of cash and cash equivalents, accounts receivables and accounts payables approximated their fair values due to their short-term nature. The carrying value of borrowing under our senior unsecured revolving credit agreement (the "Credit Facility") approximates its fair value based on its term and variable interest rate.

Prior Period Reclassifications- Certain prior period reclassifications were made to conform to the current period presentation, consistent with the changes made during the fourth quarter of fiscal 2019. Commission income previously presented in commission, franchise and other revenue was reclassified to net sales. Other revenue, which primarily included operating sublease income, also previously presented in commission, franchise and other revenue, was reclassified to operating expenses. In addition, we reclassified a previously presented basis difference related to acquisition of commonly controlled entity to common shares paid in-capital within shareholders' equity for all periods presented. The basis difference related to the acquisition of a commonly controlled entity related to a legal entity acquisition in fiscal 2012 from certain Schottenstein Affiliates (as defined below), which legal entity owned property that was previously leased by us. As this was a transaction between entities under common control, the difference between the historical cost carrying amounts and the consideration transferred is reflected as an equity transaction within common shares paid in-capital.

Adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments- During the first quarter of fiscal 2020, we adopted Accounting Standards Update ("ASU") 2016-13, which replaces the previous incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements.

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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 Six months ended
(in thousands)August 1, 2020August 3, 2019August 1, 2020August 3, 2019
Net sales:
U.S. Retail segment:
Women's footwear$253,539 $458,390 $513,102 $940,511 
Men's footwear85,012 140,895 155,367 269,884 
Kids' footwear32,232 34,824 61,415 72,028 
Accessories and other23,194 43,811 41,166 87,337 
393,977 677,920 771,050 1,369,760 
Canada Retail segment:
Women's footwear25,329 35,533 41,301 64,159 
Men's footwear13,970 16,432 20,773 29,440 
Kids' footwear8,231 8,556 13,787 16,383 
Accessories and other2,052 2,785 3,050 5,140 
49,582 63,306 78,911 115,122 
Brand Portfolio segment:
Wholesale15,563 88,577 82,867 180,331 
Commission income5,018 7,525 10,141 11,204 
Direct-to-consumer9,877 6,845 19,563 15,958 
30,458 102,947 112,571 207,493 
Other22,266 29,480 35,889 65,087 
Total segment net sales496,283 873,653 998,421 1,757,462 
Elimination of intersegment sales(6,569)(17,701)(25,924)(28,221)
Total net sales$489,714 $855,952 $972,497 $1,729,241 

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 Six months ended
(in thousands)August 1, 2020August 3, 2019August 1, 2020August 3, 2019
Gift cards:
Beginning of period$30,908 $30,066 $35,461 $