Designer Brands Q3 2025: Contradictions Emerge in Sales Momentum, Q1 Outlook, and Tariff Strategy Shift

Date of Call: November 3, 2025

Financials Results

• Revenue: $752.4 million, down 3.2% year-over-year
• EPS: $0.38 per diluted share, up from $0.27 last year
• Gross Margin: 45.1%, a 210 basis point improvement versus the prior year
• Operating Margin: Adjusted operating income of $46.5 million, up nearly $3 million year-over-year despite prior year benefit

Guidance:

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

Business Commentary:

• Sequential Sales and Profitability Improvement:
• Designer Brands Inc. reported comparable sales down 2.4% for Q3 2025, a 260 basis point sequential improvement from Q2 2025.

• This improvement was driven by healthier foot traffic, higher store conversion, and disciplined expense and inventory management, which also contributed to a 210 basis point improvement in gross margin and stronger adjusted operating income.

• U.S. Retail Segment Performance:

• The U.S. retail segment saw total sales down 1% year-over-year and comparable sales down 1.5%, reflecting a sequential improvement from Q2's decline of roughly 5%.

• Momentum was driven by improved in-stock levels, strong execution, and positive trends in key categories like boots and affordable luxury, with the top 8 brands outperforming with a positive 4% comparable sales.

• Gross Margin Expansion and Promotional Management:

• The company achieved a 210 basis point increase in gross margin year-over-year to 45.1%, with gross profit dollars up $5.8 million despite lower sales.

• This was primarily due to a strategic reduction in markdowns (up 140 basis points in Q3) and improved fulfillment efficiency; promotions were managed profitably, including a strategic pullback from unprofitable digital promotions.

• Brand Portfolio and Wholesale Business:

• The Brand Portfolio segment faced sales down 9% year-over-year in Q3, driven by a decline in external wholesale due to temporary sourcing/delivery delays.

• However, operating income increased by $0.5 million year-over-year due to disciplined expense management and tariff mitigation; external wholesale is expected to rebound in Q4.

• Inventory and Liquidity Management:

• Total inventory ended Q3 down 2.7% year-over-year, reflecting disciplined management to align with sales trends.
• Strong cash flow allowed the company to pay down $47 million of debt and maintain solid liquidity, with total liquidity of $218.3 million (including cash and revolver availability) providing financial flexibility.

Sentiment Analysis:

Overall Tone: Positive

• Management expressed encouragement and optimism, citing 'another quarter of sequential improvement,' 'positive momentum,' and 'confidence in our strategy.' Quotes: 'I'm encouraged by the sequential improvement we saw,' 'We are positioned well as we close out the year,' 'I'm confident we are well equipped to capture the opportunities ahead.'

Q&A:

• Question from Mauricio Serna Vega (UBS): 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, with top 8 brands outperforming, boots seeing strong regular-price sales, and affordable luxury nearly doubling. The wide Q4 sales range is due to temporary timing shifts in external wholesale sales for brands, which are expected to rebound.

• 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: Encouraged by gross margin management, expecting similar favorability in Q4 with improved markdown rates. The promotional environment is present but not seeing customer resistance to higher prices; AUR is up, and the company continues to walk away from unprofitable digital promotions.

Contradiction Point 1

Sales Trends and Momentum

This represents a significant shift in the narrative around recent sales performance, moving from a story of sequential improvement and positive momentum to guidance implying underlying weakness. It directly impacts revenue forecasts and investor confidence in execution.

Can you provide more details on Q4 trends to date? Can you explain the wide range in Q4 sales guidance (-5% to +4%)? - Mauricio Serna Vega (UBS)

20251209-2026 Q3: Momentum from Q3 has continued into Q4, with October being the strongest month. - Douglas Howe(CEO)

Can you detail the intra-quarter trends, including comp sales during the quarter and how the momentum into August should be considered? - Mauricio Serna Vega (UBS Investment Bank, Research Division)

2025Q2: ...Positive momentum was also noted in regular price boot sales... However, total company comps were still slightly negative at the end of Q2, though they improved sequentially into August. - Douglas Howe(CEO)

Contradiction Point 2

First Quarter Sales Outlook

This is a direct contradiction in financial guidance. The shift from expecting Q1 to be "below last year's Q1" (which implies a potential for improvement) to explicitly stating it started "slower than anticipated" and being "down versus last year" without a recovery narrative is a material change in forward-looking performance expectations.

What trends have you observed quarter-to-date? Why is the Q4 sales guidance range so wide (−5% to +4%)? - Mauricio Serna Vega (UBS)

20251209-2026 Q3: Regarding Q1, the year started slower than anticipated due to macro uncertainty (rising prices, less discretionary income). - Douglas Howe(CEO)

Can you provide more details on Q4 performance? What was the extent of athleisure growth? How did Nike perform in DSW following the brand's return? Can you explain the expectation for Q1 sales to decline compared to last year? What are the current Q-to-date results and the potential range of the decline? - Mauricio Serna Vega (UBS)

2025Q4: Initial trends suggest Q1 will be below last year's Q1, which is now factored into guidance. Performance is expected to gradually improve throughout the year. - Jared Poff(CFO)

Contradiction Point 3

Gross Margin Expectations

This involves a change in the drivers and outlook for a key financial metric. The shift from expecting promotional activity to provide margin leverage and a relatively flat gross profit rate, to focusing on execution and a stable promotional environment, signals a potential change in the margin trajectory and the challenges faced.

How are you planning for gross margin in Q4? Are there any high-level insights on the promotional environment? - Mauricio Serna Vega (UBS)

2025Q4: Promotional activity is expected to provide leverage to the gross margin rate in 2025... The year's gross profit rate is planned to be relatively flattish, offsetting pressure from lower IMU... due to a reduction in promotions. - Jared Poff(CFO)

How are you planning for gross margin and SG&A dollar growth this year? Will the promotional strategy become more or less aggressive, and what impact will that have on gross margin and SG&A? - Mauricio Serna Vega (UBS)

20251209-2026 Q3: Teams are encouraged by gross margin management, with similar favorable markdown trends anticipated in Q4 as seen in Q3. - Douglas Howe(CEO)

Contradiction Point 4

Supply Chain and Tariff Mitigation Strategy

This reflects a significant change in a stated corporate strategy. The shift from an aggressive, time-bound goal of reducing sourcing from China to "less than 5%" to a more measured approach focused on maintaining optionality and proximity to favorable Chinese sourcing indicates a strategic pivot with implications for cost structure and supplier relationships.

How can the company balance diversification efforts with leveraging favorable Chinese pricing in the dress category? - Mauricio Serna Vega (UBS Investment Bank)

2025Q1: On tariff mitigation, the company has accelerated diversification efforts, aiming for less than 5% sourcing from China by year-end (down from 70%)... - Jared A. Poff(CFO)

Could you remind us how large the Topo brand is currently for the company and what revenue expectations you have for it in 2025? - Mauricio Serna Vega (UBS Investment Bank)

20251209-2026 Q3: While diversification provides optionality, the team wants to stay close to sourcing decisions because prices in China remain quite favorable for certain categories like dress footwear where they have a heavy penetration. - Jared A. Poff(CFO) & Douglas M. Howe(CEO)

Contradiction Point 5

Brand Portfolio Segment Performance and Outlook

This contradiction concerns the explanation for a segment's performance, which affects the credibility of management's narrative. Attributing weakness to different causes (inventory cleanup vs. shipment delays) creates confusion about the underlying business drivers and the reliability of future performance guidance for that segment.

Can you update us on current quarter trends? Why is the Q4 sales guidance range so wide? - Mauricio Serna Vega (UBS)

2025Q1: For the Brand Portfolio segment, performance was mixed... while Keds faced top-line headwinds due to a cleanup of excess inventory from last year, which actually resulted in a ~700 basis point gross margin improvement. - Douglas M. Howe(CEO)

Can you provide more details on the reversal in the Canadian and brand portfolio, specifically whether the comp performance of the brand portfolio was primarily driven by Keds? Also, how is the weak Canadian market impacting these segments, especially with adjustable mortgages improving? - Dylan Douglas Carden (William Blair & Company L.L.C.)

20251209-2026 Q3: The wide range in Q4 sales guidance is partly due to the rebound in the Brand Portfolio segment, which had a temporary decline in Q3 due to shipment timing delays but is expected to deliver positive sales in Q4. - Douglas Howe(CEO)