Designer Brands' Q3 2025-2026: Contradictions Emerge on Tariff Impact, Sales Momentum, Gross Margins, Sales Guidance, and Promotional Strategy

Date of Call: November 01, 2025

Financials Results

• Revenue: $752.4M, down 3.2% YOY
• EPS: $0.38 per diluted share, up from $0.27 prior year
• Gross Margin: 45.1%, a 210 basis point improvement versus prior year
• Operating Margin: $46.5M adjusted operating income, up $2.9M YOY (vs $43.6M); adjusted operating expenses 39.4% of sales, deleveraged 160 bps

Guidance:

• Total net sales for fiscal year expected to be down 3% to 5%.
• Adjusted operating income for the year expected in the range of $50M to $55M.
• Tax expense for the year expected to be $8M to $10M.

Business Commentary:

• Sequential Improvement in Sales:
• Designer Brands reported total sales for Q3 were down 3% year-over-year, with comparable sales down 2.4%, reflecting a 260 basis point sequential improvement from the previous quarter.

• The improvement was driven by healthier traffic, higher store conversion, disciplined expense management, and effective inventory management.

• Gross Profit and Margin Expansion:

• Gross profit dollars exceeded the previous year by $5.8 million, with a 210 basis point improvement, including a 100 basis point increase in merchandise margin.

• This expansion was attributed to strategic markdown management and improved fulfillment efficiency through the East Coast logistics center.

• 
  U.S. Retail Segment Performance:

• U.S. retail comparable sales decreased by 1.5% year-over-year, with total sales down 1%, demonstrating a trend of sequential improvement.

• This was underpinned by strong execution in DSW stores, high demand in key categories, and the success of the Let Us Surprise You campaign.

• Canada Retail Segment Challenges:

• The Canada Retail segment saw a 8% decline in total sales and a 6.6% decrease in comparable sales, primarily due to unseasonably warm weather impacting demand for seasonal products.

• The performance has since improved with normalized weather conditions.

• Brand Portfolio Segment and Sourcing Strategy:

• Brand Portfolio sales were down 9% primarily due to temporary sourcing-related delays, but external wholesale sales are expected to recover in Q4.
• The company's sourcing strategy, focused on diversifying the supply chain and mitigating tariff impacts, continues to support profitability and business resilience.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted sequential improvement (Q3 comps down 2.4% vs Q2), gross profit dollars up $5.8M, adjusted operating income up to $46.5M, paid down $47M of debt and stated 'the momentum established in the third quarter has continued into the fourth quarter' while expressing optimism about closing the year strong.

Q&A:

• Question from Mauricio Serna Vega (UBS): First, on the commentary about the momentum continuing into the fourth quarter. Could you elaborate a little bit more about what your trends are quarter-to-date? And if I just look at the guidance for the full year, I think the implied guide for Q4 is roughly minus 5% to up almost 4%. Could you maybe explain like a little bit more why you have like this wide range for the Q4 sales guidance?
  Response: Momentum from Q3 has continued into Q4 (October strongest); top-8 brands and boots remain outsized drivers. The wide Q4 sales range reflects noise from timing shifts in brand/wholesale shipments (brands expected to rebound in Q4), creating variability in consolidated sales.

• Question from Mauricio Serna Vega (UBS): And in terms of gross margin, nice to see the progress. How are you thinking about the gross margin in Q4? And maybe just any high-level commentary on what you're seeing in terms of the promotional environment?
  Response: Expect continued gross-margin improvement in Q4 driven by lower markdowns and higher AUR; management is pulling back on unprofitable digital promotions—accepting some digital top-line pressure to expand operating income and protect margins.

Contradiction Point 1

Tariff Impact and Consumer Sentiment

It involves the direct impact of tariffs on the company's operations and the indirect impact on consumer sentiment, which could influence sales and revenue predictions.

Can you provide more details on your quarter-to-date trends and explain why the Q4 sales guidance has such a wide range (-5% to +4%)? - Mauricio Serna Vega(UBS Investment Bank, Research Division)

20251209-2026 Q3: The direct impact of tariffs is not a major concern as only 20% of products are imported. Indirect impact on consumer sentiment is a concern. Working strategically with brand partners, selectively passing on price increases. Most customer-facing price increases only now coming in last couple of weeks. - Douglas Howe(CEO)

Can you provide more details on Q3, including the expected impact of tariffs on costs and inventory, specifically the weighted average tariff or incremental cost? - Mauricio Serna Vega(UBS Investment Bank, Research Division)

2025Q2: Direct impact of tariffs is not a major concern as only 20% of products are imported. Indirect impact on consumer sentiment is a concern. Working strategically with brand partners, selectively passing on price increases. Most customer-facing price increases only now coming in last couple of weeks. - Douglas Howe(CEO)

Contradiction Point 2

Sales Momentum and Category Performance

It involves the reported sales momentum and the performance of specific product categories, which are crucial for forecasting future sales and market positioning.

Can you provide an update on your quarter-to-date trends? Why is there such a wide range in the Q4 sales guidance (approximately -5% to +4%)? - Mauricio Serna Vega(UBS Investment Bank, Research Division)

20251209-2026 Q3: We are encouraged by the sequential improvement we saw, with October being the strongest month. The momentum has continued into Q4. Major categories and brands continue to perform well, such as top 8 brands and the boot category, which started strongly and maintained momentum. The affordable luxury business is also showing momentum. - Douglas Howe(CEO)

Could you detail the intra-quarter trend improvement, comp sales performance during the quarter, and how to assess this given the momentum continued into August? - Mauricio Serna Vega(UBS Investment Bank, Research Division)

2025Q2: We saw a sequential improvement as we moved through the quarter. Encouraged by improvements in athletic, kids, and adult segments. Noted a significant improvement in women's dress, which was a 900 basis point improvement in the quarter. Initial boot selling, specifically regular price is very encouraging. - Douglas Howe(CEO)

Contradiction Point 3

Gross Margin Improvement

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

What are your expectations for Q4 gross margin, and could you provide high-level commentary on the promotional environment? - Mauricio Serna Vega (UBS Investment Bank, Research Division)

20251209-2026 Q3: We are encouraged by the management of gross margin at DSW. In Q3, we saw a 140 basis point improvement in markdown rate, which we expect to continue in Q4. - Douglas Howe(CEO)

Could you clarify the gross margin trajectory for the year, including the expected decline in Q2 and factors affecting future changes? - Michael Binetti (Credit Suisse)

2025Q1: Gross margins improved 90 basis points during the quarter. During Q1, we continue to see pressure on our gross margins due to the increase in inbound freight and transportation costs. - Jared A. Poff(CFO)

Contradiction Point 4

Sales Performance and Guidance

It involves differing outlooks on sales performance and guidance, which are critical for investor expectations.

What are your trends quarter-to-date? And could you explain why Q4 sales guidance ranges from -5% to +4%? - Mauricio Serna Vega (UBS)

20251209-2026 Q3: We are encouraged by the sequential improvement we saw, with October being the strongest month. The momentum has continued into Q4. - Douglas Howe(CEO)

What drove fourth-quarter athleisure growth? How is Nike performing in DSW as it laps the brand's return? What factors are driving the expected first-quarter sales decline compared to last year, and what is the projected range of decline? - Mauricio Serna Vega (UBS)

2025Q4: We had a slow start to the year due to several factors, including macroeconomic uncertainty, and we assume that will continue to be a factor throughout the Q1. - Douglas Howe(CEO)

Contradiction Point 5

Promotional Strategy and Gross Margin

It involves changes in the company's promotional strategy and its impact on gross margins, which are critical for financial performance.

What are your expectations for gross margin in Q4? Can you provide high-level insights regarding the promotional environment? - Mauricio Serna Vega (UBS)

20251209-2026 Q3: The promotional environment is stable, with no resistance from customers to higher prices. We are mindful of unprofitable digital promotions but see expansion in operating income in that channel. - Douglas Howe(CEO)

Could you clarify your expectations for gross margin and SG&A dollar growth this year, and elaborate on your promotional strategy and its implications? - Mauricio Serna Vega (UBS)

2025Q4: Our current guidance has promotional activity leveraging our gross margin rate. We are offsetting continued pressure on IMU from athletic growth with less promotional activity. - Jared Poff(CFO)