Designer Brands (DBI) Struggles with Earnings as Shift to Athletic Footwear Creates Margin Pressures

Designer Brands (DBI), the parent company of DSW and a prominent player in the footwear and accessories retail market, faced a challenging second quarter of fiscal year 2025.

The company reported earnings that fell short of analyst expectations and subsequently lowered its full-year guidance, sending its shares tumbling to multi-year lows.

The results reflect a combination of weak discretionary spending, a mixed product strategy, and margin pressures that continue to weigh on the company's performance.

Q2 Earnings Miss Amid Declining Sales

In the second quarter, Designer Brands experienced a 2.6% decline in total sales and a 1.4% drop in comparable sales, underscoring the persistent struggles in key segments like seasonal and dress footwear.

Despite efforts to shift its focus towards the growing athleisure and athletic footwear markets, the gains in these categories were insufficient to offset the softness in traditional dress and seasonal offerings.

A significant portion of the company's woes stems from the ongoing pressure in the dress and seasonal categories, where demand remains weak. Designer Brands has been actively pivoting to increase its inventory of athletic and athleisure footwear, a strategy that has seen some success but has also introduced new challenges.

The shift in product mix away from higher-margin dress shoes towards more athletic options has created a headwind for gross margins, which contracted by 170 basis points year-over-year in the second quarter.

Margin Pressures from Promotional Activities and Inventory Challenges

One of the key factors contributing to Designer Brands' margin pressure has been lower initial markups (IMU) on athletic footwear, which typically carries lower margins than dress shoes.

To compound this issue, the company has had to increase promotional activity to clear out seasonal inventory, further squeezing margins and impacting earnings.

The management team at Designer Brands remains cautiously optimistic that it can reduce its reliance on promotions in the upcoming fall season, citing a solid back-to-school shopping period as a positive sign.

However, the company has acknowledged that IMU pressures are likely to persist as it continues to build its athletic inventory, meaning margin expansion may be challenging in the near term.

Athletic and Athleisure Focus: A Silver Lining?

Despite the broader struggles, there are some bright spots in Designer Brands' recent performance.

The company’s top eight brands, all within the athletic and athleisure categories, saw robust growth of over 30% in the second quarter. These brands now account for 39% of total sales, up from 30% in the prior year, indicating a successful shift toward this more popular segment.

The strong performance in athletic categories, particularly with a 15% comparable sales increase for adult athletic footwear, suggests that Designer Brands is on the right track in tapping into a consumer trend that favors comfort and versatility. This shift is part of a larger strategy to rejuvenate the company’s product offering and better align with market demand.

Looking ahead, Designer Brands anticipates positive comparable sales for the second half of the year, driven by continued momentum in its athletic and athleisure categories.

However, the pace of improvement has been slower than expected, primarily due to sluggish discretionary spending trends, which have been a drag on the broader retail sector.

Lowered FY25 Guidance Highlights Lingering Challenges

In light of the challenges faced in Q2 and the uncertain outlook for consumer spending, Designer Brands has adjusted its full-year guidance downward. The company now expects earnings per share (EPS) to be between $0.50 and $0.60, down from its previous forecast of $0.70 to $0.80.

Revenue growth is projected to be flat to low-single digits, a slight downgrade from the earlier guidance of low-single-digit growth.

The revised guidance reflects not only the softer-than-anticipated sales recovery but also the ongoing margin headwinds.

The company’s ability to navigate these challenges will hinge on the effectiveness of new marketing initiatives and its enhanced eCommerce platform, which has shown promising results with mid-single-digit growth for the third consecutive quarter.

Conclusion: Navigating a Tough Retail Landscape

Designer Brands' Q2 earnings report paints a picture of a company that is in the midst of a difficult transition. While there is progress in shifting toward athletic and athleisure footwear, the benefits have been partially offset by ongoing softness in the dress and seasonal categories, coupled with margin compression due to increased promotional activities.

The lowered guidance further underscores the uncertainties facing the company as it tries to balance growth in popular segments with margin management.

The near-term outlook remains cautious, with success likely dependent on the broader economic environment, consumer spending patterns, and the company’s ability to execute on its strategic initiatives without sacrificing profitability.

For investors, the situation with Designer Brands highlights both the opportunities and risks inherent in a retail sector grappling with changing consumer preferences and economic headwinds.