DESIGNER BRANDS INC. Management report and analysis of the financial position and operating results (Form 10-Q)

Executive overview and corporate trends


Operating profit in the third quarter of fiscal 2021 surpassed pre-COVID-19
levels with an 86% growth when compared to the third quarter of fiscal 2019.
This growth came despite the lingering effects of the COVID-19 pandemic. The
volatile macro environment and supply chain disruptions have required us to be
nimble and quickly adapt our business model.

As we look ahead to our strategic growth, we have organized our efforts around
three pillars - Customer, Brand and Speed:
•Customer- More than ever, our customers have a great desire for products and
experiences, and we are adding resources to our digital, IT and analytics teams
to understand precisely what they want and what can be improved to provide the
best possible experience. Undertaking these actions will enable us to better
understand our customers, provide improved service, and target new demographics
in ways that we have never deployed before. We are also developing new ideas for
how we can provide more value to our VIP rewards members, who we believe
continue to be the lifeblood of our business and our largest competitive
differentiator.
•Brand- Controlling our own brand destiny is critical for our growth. As we
continue to design some of the best brands in the industry, Vince Camuto,
Jessica Simpson, Lucky Brand and JLO Jennifer Lopez, we are combining that with
our strong direct-to-consumer distribution through our physical footprint in
North America and digital infrastructure. We are also partnering with some of
the top brands in the industry to offer one of the largest and most broad
assortments. We remain focused on investing in some of the top 50 brands in
footwear and will continue to prioritize growing our own brands.
•Speed- Moving quickly is of the utmost importance to consumers. We are
developing processes to deliver products more quickly. Fulfillment of digital
customer orders currently takes five to seven business days and we are working
to improve that to two to three calendar days while simultaneously finding
efficiencies to contain costs. We are optimizing our current infrastructure and
expanding our delivery partnerships. We are also working to improve
collaboration through technology and processes across our organization and to
gain additional efficiencies in our overall development cycle.

Despite some of the challenges we face, including the ongoing COVID-19 pandemic and the potential for more serious or contagious variants and supply chain disruptions, we have experienced strong performance in our key assortments, including including athleisure, kids and men, all powered by the top 50 shoe brands and our womenswear business has also improved dramatically.

Impact of COVID-19


As we continue to closely monitor the COVID-19 pandemic, our top priority
remains protecting the health and safety of our customers and associates. 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 changes to our expense and capital
expenditure plans. While trends have improved during fiscal 2021, we cannot
reasonably estimate the extent to which our business will continue to be
affected by the COVID-19 pandemic and to what extent the recent improved trends
will continue. For instance, we have continued to experience reduced customer
traffic and consolidated net sales remain lower when compared to pre-COVID-19
periods. It also remains unclear whether customer behavior may continue to be
slow to return to pre-COVID-19 patterns, if at all. We have also experienced
supply chain challenges and significantly increased shipping costs, as well as
labor shortages and higher labor costs. The ongoing and prolonged nature of the
outbreak may lead to further adjustments to our operations. As such, the
ultimate impacts of the COVID-19 pandemic on our businesses will depend on
future developments, including the availability of labor, global supply chain
disruptions, the variants of COVID-19, and the global availability and use 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.

Financial summary and other key metrics for the third quarter of fiscal 2021


Net sales increased to $853.5 million for the three months ended October 30,
2021 from $652.9 million for the three months ended October 31, 2020. The 30.7%
increase in net sales was primarily driven by a 40.8% increase in comparable
sales during the three months ended October 30, 2021, partially offset by store
closures, including those serviced in the Other segment. The increase in
comparable sales during the three months ended October 30, 2021 was due to the
fact that during the three months ended October 31, 2020, the prolonged COVID-19
outbreak resulted in significantly reduced customer traffic and net sales. In
addition, the Brand Portfolio segment's net sales were higher in the third
quarter of fiscal 2021 as compared to the same period last year due to increased
orders as our retailer customers recover, but net sales were still below
pre-COVID-19 levels.
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During the three months ended October 30, 2021, gross profit as a percentage of
net sales was 36.7% compared to 25.4% for the same period last year. The
improvement in gross profit was primarily driven by increased sales compared to
the third quarter of fiscal 2020. In the third quarter of fiscal 2020, the
impact of the COVID-19 outbreak resulted in increased shipping costs associated
with higher digital penetration and deleveraging distribution and fulfillment
and store occupancy expenses on lower sales volume. During the third quarter of
fiscal 2021, tight inventory positions resulted in fewer promotions.
Accordingly, gross profit as a percentage of net sales for the third quarter of
fiscal 2021 was higher than the pre-COVID-19 rate, which was 29.3% for the third
quarter of fiscal 2019.

Net income for the three months ended October 30, 2021 was $80.2 million, or
$1.04 earnings per diluted share, which included net after-tax benefits of $13.6
million, or $0.18 per diluted share, primarily related to the change in the
valuation allowance on deferred tax assets. Net loss for the three months ended
October 31, 2020 was $40.6 million, or a loss of $0.56 per diluted share, which
included net after-tax charges of $22.1 million, or $0.30 per diluted share,
primarily related to impairment charges.

Comparable sales performance indicator


The following table presents the increase (decrease) in comparable sales for
each segment and in total:
                                                                               Three months ended
                                                                   October 30, 2021          October 31, 2020
Change in comparable sales:
U.S. Retail segment                                                           43.9  %                  (31.9) %
Canada Retail segment                                                         15.2  %                  (18.7) %
Brand Portfolio segment - direct-to-consumer channel                          50.4  %                   13.4  %
Total comparable sales                                                        40.8  %                  (30.4) %



We consider the change in comparable sales from the same previous year period, 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 in our comparable sales metric 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 pandemic 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,
www.vincecamuto.com. Beginning with the third quarter of fiscal 2020, comparable
sales do not 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.

Number of stores

From October 30, 2021 and October 31, 2020, we had the following number of stores:

                                                          October 30, 2021  

October 31, 2020


U.S. Retail segment - DSW stores                                   515                                               524
Canada Retail segment:
The Shoe Company / Shoe Warehouse stores                           117                                               118
DSW stores                                                          27                                                27
                                                                   144                                               145
Total number of stores                                             659                                               669



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Results of operations


Comparison of the Three Months Ended October 30, 2021 with the Three Months
Ended October 31, 2020

                                                                    Three months ended
                                              October 30, 2021                               October 31, 2020                              Change
(dollars in thousands, except per
share amounts)                          Amount             % of Net Sales              Amount             % of Net Sales           Amount              %
Net sales                         $       853,467                 100.0  %       $       652,870                 100.0  %       $ 200,597             30.7  %
Cost of sales                            (539,850)                (63.3)                (487,214)                (74.6)           (52,636)            10.8  %
Gross profit                              313,617                  36.7                  165,656                  25.4            147,961             89.3  %
Operating expenses                       (211,909)                (24.8)                (196,067)                (30.1)           (15,842)             8.1  %
Income from equity investment               2,600                   0.3                    1,902                   0.3                698             36.7  %
Impairment charges                              -                     -                  (30,081)                 (4.6)            30,081              NM
Operating profit (loss)                   104,308                  12.2                  (58,590)                 (9.0)           162,898              NM
Interest expense, net                      (7,706)                 (0.9)                  (9,009)                 (1.3)             1,303            (14.5) %
Non-operating income, net                     172                   0.0                       24                   0.0                148            616.7  %
Income (loss) before income taxes          96,774                  11.3                  (67,575)                (10.3)           164,349              

NM

Income tax benefit (provision)            (16,590)                 (1.9)                  26,932                   4.1            (43,522)             NM
Net income (loss)                 $        80,184                   9.4  %       $       (40,643)                 (6.2) %       $ 120,827              NM
Basic and diluted earnings (loss)
per share:
Basic earnings (loss) per share   $          1.10                                $         (0.56)                               $    1.66             

NM

Diluted earnings (loss) per share $          1.04                                $         (0.56)                               $    1.60             

NM

Weighted average shares used in
per share calculations:
Basic shares                               73,191                                         72,344                                      847              1.2  %
Diluted shares                             77,135                                         72,344                                    4,791              6.6  %


NM - Not meaningful

Net sales– Here is a summary of net sales by segment:

                                         Three months ended                                                  Change
(dollars in thousands)       October 30, 2021           October 31, 2020            Amount               %                Comparable Sales %
Segment net sales:
U.S. Retail                $         709,608          $         501,901          $ 207,707              41.4  %                 43.9%
Canada Retail                         74,792                     61,598             13,194              21.4  %                 15.2%
Brand Portfolio                      103,919                     83,905             20,014              23.9  %                 50.4%
Other                                      -                     27,020            (27,020)             NM                        NA
Total segment net sales              888,319                    674,424            213,895              31.7  %                 40.8%
Elimination of
intersegment net sales               (34,852)                   (21,554)           (13,298)             61.7  %

Consolidated net sales $ 853,467 $ 652,870

     $ 200,597              30.7  %


NA - Not applicable
NM - Not meaningful

The improvement in sales, including increases in comparable sales and total
consolidated net sales, during the three months ended October 30, 2021 over the
same period last year was due to the fact that during the three months ended
October 31, 2020, the prolonged COVID-19 outbreak resulted in significantly
reduced customer traffic. Additionally during the three months ended October 31,
2020, there was an incident at a third-party vendor that experienced a
ransomware attack that resulted in a shutdown of some of its U.S. operations,
which temporarily impacted fulfillment services to us and led us to temporarily
reduce
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product availability on our U.S. e-commerce sites. The improvements to net sales
were partially offset by store closures, including those serviced in the Other
segment. In addition, the Brand Portfolio segment net sales were higher in the
third quarter of fiscal 2021 as compared to the same period last year due to
increased orders as our retailer customers recover, but net sales were still
below pre-COVID-19 levels.

Gross Profit – The following summarizes gross profit by segment:

                                                                            Three months ended
                                                      October 30, 2021                               October 31, 2020
                                                                    % of Segment                                   % of Segment
(dollars in thousands)                          Amount                Net Sales                Amount                Net Sales             Change
Segment gross profit:
U.S. Retail                               $       258,059                  36.4  %       $       117,679                  23.4  %       $ 140,380
Canada Retail                                      28,588                  38.2  %                18,905                  30.7  %       $   9,683
Brand Portfolio                                    32,329                  31.1  %                22,128                  26.4  %       $  10,201
Other                                                   -                     -  %                 6,272                  23.2  %       $  (6,272)
                                                  318,976                                        164,984
Net recognition (elimination) of
intersegment gross profit                          (5,359)                                           672
Gross profit                              $       313,617                  36.7  %       $       165,656                  25.4  %       $ 147,961



The improvement in gross profit was primarily driven by increased sales compared
to the third quarter of fiscal 2020. In the third quarter of fiscal 2020, the
impact of the COVID-19 outbreak resulted in increased shipping costs associated
with higher digital penetration and the deleverage of distribution and
fulfillment and store occupancy expenses on lower sales volume. During the third
quarter of fiscal 2021, tight inventory positions resulted in fewer promotions.
Accordingly, gross profit as a percentage of net sales for the third quarter of
fiscal 2021 was higher than the pre-COVID-19 rate, which was 29.3% for the third
quarter of fiscal 2019.

The elimination of intersectoral activity consisted of the following:

                                                                            Three months ended
(in thousands)                                                  October 30, 2021           October 31, 2020
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment               $         (34,852)         $         (21,554)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment                      22,950                     17,155

Recognition of intersegment gross margin for previously purchased inventory that was subsequently sold to external customers during the current period

                                       6,543                      5,071

Net recognition (elimination) of intersegment gross margin $ (5,359)

             672



Operating Expenses- For the three months ended October 30, 2021, operating
expenses increased by $15.8 million over the same period last year, primarily
driven by an increase in store payroll costs in line with the increase in net
sales and higher incentive compensation expense. Operating expenses as a
percentage of sales improved to 24.8% compared to 30.1% in the same period last
year but were still elevated compared to the pre-COVID-19 rate for the third
quarter of fiscal 2019, which was 23.1% as a percentage of sales, primarily due
to higher direct marketing and incentive compensation expense.

Impairment Charges- During the three months ended October 31, 2020, we updated
our impairment analysis at the store-level and, as a result, we recorded store
impairment charges of $30.1 million, primarily related to certain U.S. Retail
stores located in urban areas that experienced significantly lower traffic than
the rest of the store fleet as a result of the continuing COVID-19 outbreak.

Income Taxes- Our effective tax rate changed from 39.9% for the three months
ended October 31, 2020 to 17.1% for the three months ended October 30, 2021. The
rate for the three months ended October 30, 2021 is the result of maintaining a
full valuation allowance on deferred tax assets. The rate for the three months
ended October 31, 2020 is the result of the carry back of losses to a tax year
where the U.S. federal statutory tax rate was 35%.
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Comparison of the Nine Months Ended October 30, 2021 with the Nine Months Ended
October 31, 2020

                                                                      Nine months ended
                                              October 30, 2021                                October 31, 2020                               Change
(dollars in thousands, except per
share amounts)                          Amount              % of Net Sales              Amount              % of Net Sales           Amount              %
Net sales                         $      2,373,957                 100.0  %       $      1,625,367                 100.0  %       $ 748,590             46.1  %
Cost of sales                           (1,559,548)                (65.7)               (1,449,129)                (89.2)          (110,419)             7.6  %
Gross profit                               814,409                  34.3                   176,238                  10.8            638,171            362.1  %
Operating expenses                        (637,108)                (26.9)                 (551,712)                (33.9)           (85,396)            15.5  %
Income from equity investment                6,598                   0.3                     6,325                   0.4                273              4.3  %
Impairment charges                          (1,174)                 (0.0)                 (149,363)                 (9.2)           148,189            (99.2) %
Operating profit (loss)                    182,725                   7.7                  (518,512)                (31.9)           701,237              NM
Interest expense, net                      (24,592)                 (1.0)                  (14,955)                 (0.9)            (9,637)            64.4  %
Non-operating income, net                      734                   0.0                       680                   0.0                 54              7.9  %
Income (loss) before income taxes          158,867                   6.7                  (532,787)                (32.8)           691,654             

NM

Income tax benefit (provision)             (18,797)                 (0.8)                  178,072                  11.0           (196,869)             NM
Net income (loss)                 $        140,070                   5.9  %       $       (354,715)                (21.8) %       $ 494,785              NM
Basic and diluted earnings (loss)
per share:
Basic earnings (loss) per share   $           1.92                                $          (4.92)                               $    6.84            

NM

Diluted earnings (loss) per share $           1.81                                $          (4.92)                               $    6.73            

NM

Weighted average shares used in
per share calculations:
Basic shares                                72,911                                          72,134                                      777              1.1  %
Diluted shares                              77,216                                          72,134                                    5,082              7.0  %


NM - Not meaningful

Net sales– Here is a summary of net sales by segment:

                                          Nine months ended                                                  Change
(dollars in thousands)       October 30, 2021           October 31, 2020            Amount               %                Comparable Sales %
Segment net sales:
U.S. Retail                $       2,053,359          $       1,272,951          $ 780,408              61.3  %                 62.6%
Canada Retail                        172,981                    140,509             32,472              23.1  %                 13.7%
Brand Portfolio                      211,875                    196,476             15,399               7.8  %                 22.8%
Other                                      -                     62,909            (62,909)             NM                        NA
Total segment net sales            2,438,215                  1,672,845            765,370              45.8  %                 57.4%
Elimination of
intersegment net sales               (64,258)                   (47,478)           (16,780)             35.3  %
Consolidated net sales     $       2,373,957          $       1,625,367          $ 748,590              46.1  %


NA - Not applicable
NM - Not meaningful

The increases in comparable sales for all segments and in total consolidated net
sales was a result of the temporary closure of stores in fiscal 2020 during our
peak spring selling season in response to the COVID-19 pandemic and
significantly reduced customer traffic since re-opening. During a portion of
fiscal 2021, the Canada Retail segment was impacted by further temporary
closures and restrictions in certain key markets. In addition, net sales were
impacted by store closures, including those serviced in the Other segment.

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Gross Profit – The following summarizes gross profit by segment:

                                                                             Nine months ended
                                                      October 30, 2021                               October 31, 2020
                                                                    % of Segment                                   % of Segment
(dollars in thousands)                          Amount                Net Sales                Amount                Net Sales             Change
Segment gross profit:
U.S. Retail                               $       708,065                  34.5  %       $       124,806                   9.8  %       $ 583,259
Canada Retail                                      58,191                  33.6  %                22,244                  15.8  %       $  35,947
Brand Portfolio                                    52,788                  24.9  %                24,592                  12.5  %       $  28,196
Other                                                   -                     -  %                   962                   1.5  %       $    (962)
                                                  819,044                                        172,604
Net recognition (elimination) of
intersegment gross profit                          (4,635)                                         3,634
Gross profit                              $       814,409                  34.3  %       $       176,238                  10.8  %       $ 638,171



The improvement in gross profit was primarily driven by increased sales during
the nine months ended October 30, 2021 compared to the same period last year. In
response to the impacts of the COVID-19 pandemic on our operations in fiscal
2020, we addressed the temporary closure of stores and the subsequent reduction
in customer traffic upon store re-openings with aggressive promotional activity.
These actions resulted in higher inventory reserves, increased shipping costs
associated with higher digital penetration, and deleveraging distribution and
fulfillment and store occupancy expenses on lower sales volume during fiscal
2020. During fiscal 2021, tight inventory positions resulted in fewer
promotions. Accordingly, gross profit as a percentage of net sales for the nine
months ended October 30, 2021 was higher than the pre-COVID-19 rate, which was
29.8% for the same period in fiscal 2019. The Canada Retail and Brand Portfolio
segments have significantly improved gross profit as a percentage of net sales
during the nine months ended October 30, 2021 compared to the same period last
year, but gross profit as a percentage of net sales remained below pre-COVID-19
levels when compared to the same period in fiscal 2019 due to the deleverage
impacts of lower net sales.

The elimination of intersectoral activity consisted of the following:

                                                                             Nine months ended
(in thousands)                                                  October 30, 2021           October 31, 2020
Elimination of intersegment activity:
Net sales recognized by Brand Portfolio segment               $         (64,258)         $         (47,478)
Cost of sales:
Cost of sales recognized by Brand Portfolio segment                      43,592                     34,116

Recognition of intersegment gross margin for previously purchased inventory that was subsequently sold to external customers during the current period

                                      16,031                     16,996

Net recognition (elimination) of intersegment gross margin $ (4,635) $

           3,634



Operating Expenses- For the nine months ended October 30, 2021, operating
expenses increased by $85.4 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 pandemic for most of
the first half of fiscal 2020. Operating expenses as a percentage of sales
improved to 26.9% compared to 33.9% in the same period last year but were still
elevated compared to the pre-COVID-19 rate, which was 24.6% as a percentage of
sales for the same period in fiscal 2019, primarily due to higher direct
marketing expense and incentive compensation on lower sales.

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Impairment Charges- During the nine months ended October 30, 2021, we recorded
an impairment charge of $1.2 million for abandoned equipment we are replacing.
As a result of the material reduction in net sales and cash flows due to the
temporary closure of all of our stores during the nine months ended October 31,
2020, we performed an impairment analysis at the store level. In addition, we
evaluated other long-lived assets based on our intent to use such assets going
forward. During the nine months ended October 31, 2020, we recorded impairment
charges of $122.9 million for under-performing stores. Also during the nine
months ended October 31, 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. Further, 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 pandemic 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 nine months ended October 31, 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 33.4% for the nine months
ended October 31, 2020 to 11.8% for the nine months ended October 30, 2021. The
rate for the nine months ended October 30, 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 nine
months ended October 31, 2020 is the result of the 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 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
ongoing impacts of the COVID-19 pandemic. 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 and beyond.

Operating Cash Flows

For the nine months ended October 30, 2021, net cash provided by operations was
$164.3 million compared to net cash used in operations of $106.3 million for the
nine months ended October 31, 2020. The change was driven by the net income
recognized in the nine months ended October 30, 2021 versus a net loss incurred
during that same period last year as a result of the impacts of the COVID-19
pandemic, after adjusting for non-cash activity including impairment charges and
the changes in deferred income taxes. This was partially offset by higher spend
on working capital as our business recovers from the impacts of the COVID-19
pandemic and the measures we implemented last fiscal 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 nine months ended October 30, 2021, our net cash used in investing
activities was $22.1 million, which was due to capital expenditures relating to
infrastructure and IT projects and store improvements. During the nine months
ended October 31, 2020, our net cash provided by investing activities was $6.8
million, which was due to the liquidation of our available-for-sale securities
and the proceeds from a settlement from a vendor partially offset by capital
expenditures of $26.9 million.

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Cash flow financing


For the nine months ended October 30, 2021, our net cash used in financing
activities was $117.9 million compared to net cash provided by financing
activities of $127.2 million for the nine months ended October 31, 2020. During
the nine months ended October 30, 2021, we made net payments of $100.0 million
on the ABL Revolver and payments of $9.4 million on the Term Loan. During the
nine months ended October 31, 2020, we had net proceeds from borrowings from our
ABL Revolver and Term Loan of $346.9 million offset by the settlement of
borrowings under the Credit Facility of $190.0 million and the payment of debt
issuance costs of $21.1 million associated with the changes we made to our debt
structure.

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
formulated on, among other things, a percentage of the book value of eligible
inventory and credit card receivables, as reduced by certain reserves. As of
October 30, 2021, the ABL Revolver had a borrowing base of $400.0 million, with
no outstanding borrowings and $5.3 million in letters of credit issued,
resulting in $394.7 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 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 October 30, 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 October 30, 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 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. As of October 30, 2021, we are limited
in our ability to pay dividends, repurchase stock, and make certain restricted
payments above a maximum of $10.0 million over the term of the Term Loan. 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 October 30, 2021, we were in compliance with all financial
covenants.

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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 $22.1 million during the nine
months ended October 30, 2021. Our capital expenditures for the remainder of the
year will depend primarily on the number of store projects, as well as
infrastructure and IT projects, that we undertake and the timing of these
expenditures.

Critical accounting conventions 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.

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