Executive Summary / Key Takeaways

• Designer Brands Inc. is undergoing a significant strategic transformation, pivoting its assortment towards athletic and athleisure and optimizing its operational structure, which showed signs of traction with a return to positive comparable sales in Q4 2024 after nine quarters of declines.
• The company faced a challenging start to fiscal 2025, with Q1 comparable sales declining 8% and net sales decreasing 7.7% year-over-year, driven by weakening consumer sentiment, lower traffic, and unfavorable weather, leading to a net loss of $17.4 million.
• Despite top-line pressure, DBI demonstrated progress in areas within its control, including expense management (targeting $20-$30 million in savings in 2025) and operational efficiency (improved store conversion, faster digital fulfillment).
• The Brand Portfolio segment, while seeing overall sales decline in Q1 2025, grew operating income by over 30% due to expense reductions and saw strong growth in key brands like Topo Athletic (up 84%).
• Due to the rapidly evolving and unpredictable macro environment, the company has withdrawn its full-year 2025 financial guidance, emphasizing a near-term focus on value, cost control, inventory management, and sourcing diversification to navigate uncertainty.

Setting the Stage: A Footwear Giant's Strategic Pivot

Designer Brands Inc. stands as a significant player in the global footwear and accessories market, operating a multi-faceted business encompassing retail through its DSW and Canadian banners and a Brand Portfolio segment that designs, produces, and wholesales its own labels. Historically, the company's retail assortment leaned heavily into dress and seasonal styles. However, recognizing a structural shift in consumer preferences towards more casual and athletic footwear, DBI embarked on a comprehensive transformation over a year ago. This strategic refresh involves new leadership, a modernized assortment, enhanced marketing, and operational streamlining across the organization.

The footwear retail landscape is intensely competitive, marked by diverse players ranging from large athletic brands with growing direct-to-consumer presence like Nike (NKE), to broad-line retailers like Foot Locker (FL), and specialized players such as Deckers Outdoor (DECK) and Skechers (SKX). DBI competes across multiple dimensions: style, price, brand availability, shopping platforms, and customer service. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, DBI's strategic pivot has enabled it to gain ground in key areas. According to Circana data, DSW outpaced the overall footwear market in Q2 and Q4 2024, notably gaining 10 basis points in athleisure footwear market share in Q1 2025. DBI's Brand Portfolio, featuring exclusive labels and growth brands like Topo and Keds, provides a degree of differentiation from pure retailers, offering potential for higher margins compared to national brands.

DBI's strategic response to market dynamics includes investments in operational technology and customer experience. The company has focused on enhancing its omnichannel capabilities, recognizing that many customers start their shopping journey online before visiting a store. Recent initiatives include rolling out tech-enabled shoe fitting services and post-purchase shoe cleaning in stores. A significant operational improvement is the opening of a new distribution center in Arizona in March 2025, dedicated to store fulfillment, aiming to reduce service time for Western U.S. stores. The company is also leveraging technology to optimize inventory allocation between digital fulfillment centers and stores, which has already led to a 56% increase in digital orders fulfilled through logistics centers and a 13-point increase in store in-stock levels compared to Q4 2024. These operational enhancements are designed to improve the customer experience, drive higher in-store conversion (up 60 basis points year-over-year), and deliver efficiencies in digital order fulfillment. While not a deep product technology moat like advanced material science, these operational and customer-facing technologies are foundational to DBI's strategy of enhancing its retail execution and driving efficiency in a competitive market.

Transformation Meets Macro Headwinds: Recent Performance

The strategic transformation began to yield tangible results in the latter half of fiscal year 2024. After nine consecutive quarters of comparable sales declines, DBI achieved positive comps in Q4 2024. This was driven by the strengthening athletic and athleisure categories and improved execution. The Brand Portfolio segment also reached operating profitability for the first time in 2024, a testament to efforts to rightsize the organization and streamline operations.

However, the momentum encountered significant resistance as fiscal year 2025 began. The first quarter of 2025 saw consolidated net sales decrease by 7.7% to $686.9 million, primarily due to an 8% decline in total comparable sales.

The U.S. Retail segment, the largest contributor, experienced a 7.3% comparable sales drop, largely attributed to a roughly 10% decrease in comparable transactions driven by lower traffic. The Canada Retail segment also saw a 9.2% comparable sales decline, impacted by similar traffic issues and unfavorable foreign currency translation. The Brand Portfolio segment's net sales decreased by 7.9%, mainly due to lower wholesale orders as retail partners pulled back.

Profitability metrics reflected the top-line pressure. Consolidated gross profit as a percentage of net sales decreased by 120 basis points to 43.0% in Q1 2025. This was due to lower margin rates across all segments, including increased promotional activity and a less favorable product mix in U.S. Retail, lower margins from the acquired Rubino business in Canada, and higher freight costs in the Brand Portfolio segment. Operating expenses decreased by 6.7% in dollar terms, reflecting cost management efforts, but deleveraged as a percentage of net sales due to the steeper decline in revenue. This resulted in a consolidated operating loss of $7.3 million in Q1 2025, compared to an operating profit of $9.4 million in the prior year period, and a net loss attributable to Designer Brands Inc. of $17.4 million, or $0.36 per diluted share.

Strategic Responses and Outlook Amidst Uncertainty

In response to the challenging start to 2025 and the unpredictable macro environment, management has shifted its near-term focus to tactical actions aimed at mitigating risks and preserving financial health. Key initiatives include amplifying value messaging to appeal to the value-conscious consumer, optimizing the assortment by reducing unproductive styles while increasing depth in key performers, and accelerating sourcing diversification efforts. The company aims to reduce its sourcing from China to less than half by the end of 2025, down from 70% at the start of the year, to mitigate potential tariff impacts and supply chain disruptions.

Cost control remains a critical lever. The company is implementing expense cuts expected to deliver $20 million to $30 million in savings over the course of 2025 compared to 2024. Capital expenditures for 2025 have also been reduced, now anticipated to be approximately $40 million. These actions are intended to preserve liquidity and navigate the current volatility.

Despite the overall challenging environment, bright spots persist within the strategic focus areas. The Brand Portfolio segment, while facing wholesale headwinds, saw its operating expenses decrease by 23% in Q1 2025, leading to a more than 30% increase in segment operating income. Growth brands like Topo Athletic continue to perform exceptionally well, growing 84% year-over-year in Q1 2025, benefiting from strategic distribution expansion and diversified sourcing. Keds also saw significant gross margin improvement (approximately 700 basis points in Q1 2025) driven by the transition to DBI's own production. These successes underscore the potential of the Brand Portfolio as a future margin driver and differentiator.

Due to the heightened uncertainty and reduced planning visibility, particularly around consumer behavior and the potential impact of tariffs, Designer Brands has withdrawn its full-year 2025 financial guidance. This decision reflects the difficulty in reliably estimating future performance in the current rapidly evolving environment. Management stated that consumer sentiment reached its second lowest point on record in May, highlighting the ongoing pressure on discretionary spending.

Risks and Competitive Dynamics

The primary risks facing DBI are deeply intertwined with the current macroeconomic landscape. Uncertain general economic conditions, including potential recession, inflationary pressures, and fluctuating employment levels, directly impact consumer discretionary spending, which has already led to lower traffic and sales declines. Evolving trade policies and potential new tariffs, particularly on goods sourced from Asia, pose risks to sourcing costs and supply chain stability, which the company is actively trying to mitigate through diversification.

Competition remains fierce. While DBI has shown an ability to gain market share in specific categories like athleisure, it faces formidable competitors with strong brand recognition, extensive resources, and established market positions. Nike, as a dominant brand, continues to invest heavily in innovation and direct-to-consumer channels, potentially impacting multi-brand retailers like DSW. Foot Locker is also focused on enhancing its athletic and omnichannel offerings. DBI's ability to differentiate through its curated assortment, value proposition, loyalty program, and operational efficiencies like improved in-stock levels and faster fulfillment will be crucial in defending and expanding its market share against these rivals. The success of its Brand Portfolio, particularly the growth of Topo and Keds and the expansion of private label penetration, is key to improving overall margins and reducing reliance on national brands where competition on price and terms can be intense.

The company's debt levels, including the ABL Revolver and Term Loan, while currently in compliance with covenants, require ongoing monitoring, especially in a challenging operating environment with higher interest rates. Liquidity, while deemed sufficient for the next 12 months, could be impacted by a prolonged downturn in consumer demand or unforeseen operational disruptions.

Conclusion

Designer Brands is navigating a period of significant external pressure, marked by a volatile macro economy and a cautious consumer, which overshadowed the positive momentum gained from its strategic transformation in late 2024. The Q1 2025 results underscore the severity of these headwinds, leading to a top-line decline and net loss. However, the company is not standing still. It is actively implementing cost controls, optimizing its operational footprint, refining its assortment strategy, and accelerating sourcing diversification to adapt to the challenging environment.

The core investment narrative hinges on DBI's ability to execute its strategic pivot successfully despite the macro backdrop. The early signs of progress in expense management, operational efficiency, and the growth of key brands within the Brand Portfolio offer glimpses of the underlying potential. While the withdrawal of guidance signals near-term uncertainty, it also reflects a pragmatic approach in an unpredictable market. Investors should closely monitor trends in consumer spending, the effectiveness of DBI's value and assortment strategies, the impact of cost savings and sourcing initiatives, and the continued performance of growth drivers like Topo Athletic and the repositioned Keds brand. The path forward remains challenging, but the strategic actions being taken position DBI to potentially capitalize on a market recovery and emerge as a more streamlined and focused footwear and accessories player.