Footwear and accessories retailer Designer Brands (DBI, Financial) saw its shares hit multi-year lows after reporting disappointing Q2 results and slashing its FY25 EPS and revenue guidance. The owner of the DSW brand faced ongoing challenges in the seasonal and dress categories, leading to a 2.6% drop in total sales and a 1.4% decline in comparable sales. Despite efforts to increase its athleisure and athletic footwear offerings, gross margin contracted by 170 basis points year-over-year in Q2.
- Lower initial markups (IMU) for athletic footwear and increased promotional activity to clear seasonal inventory further pressured margins and earnings. Although DBI expects to rely less on promotions this fall after a strong back-to-school season, IMU remains a negative factor as athletic inventory grows.
- DBI's top eight brands, mainly in athletic and athleisure categories, saw over 30% growth in Q2, now making up 39% of total sales compared to 30% a year ago. While this momentum has carried into Q3, prompting positive comps for the back half of the year, improvements have been muted due to sluggish discretionary spending.
- The slower-than-expected sales recovery and gross margin challenges led to a Q2 miss on both top and bottom lines, causing DBI to lower its FY25 EPS and revenue guidance. The company now forecasts EPS of $0.50-$0.60, down from $0.70-$0.80, with flat to low-single-digit revenue growth versus previous low-single-digit growth expectations.
- Looking ahead, DBI is focusing on new marketing initiatives and an enhanced eCommerce platform to support its shift to a more athletic product assortment. The digital platform has shown mid-single-digit growth for three consecutive quarters, offering some optimism.
Overall, it was a challenging quarter for DBI as a combination of industry-wide and company-specific issues weighed on its results and outlook. While the strategy to expand athletic footwear and apparel is showing some success, with a +15% comp for the adult athletic category, it hasn't been enough to offset the weakness in dress and seasonal categories and the resulting margin erosion.
