Heading into Designer Brands' (DBI, Financial) Q1 earnings report, expectations were high for improved results as the company continues its turnaround plan for its struggling DSW banner. This optimism, reflected in a 17% stock surge last Thursday and Friday, was partly driven by strong performances from other footwear companies like Deckers (DECK, Financial), Shoe Carnival (SCVL, Financial), and Skechers (SKX, Financial).
- DBI returned to growth this quarter with a modest sales increase of 0.6%. However, the company's performance fell short compared to its peers. DBI missed EPS expectations, while DECK and SKX exceeded them. DBI's operating expenses rose by 8%, outpacing its sales growth and contributing to its earnings miss.
- Weak results in the U.S. retail business, primarily DSW, have overshadowed the company's progress. Improving DSW's performance remains a priority for DBI's executive team, but investors are disappointed with the progress so far.
- In Q1, U.S. retail sales increased by 1.4% year-over-year, but comps were down 2.3%. Despite this, U.S. retail comps improved from a nearly 10% decline last quarter, indicating positive momentum. The improvement is attributed to changes in DSW's product assortment, focusing more on athletic and casual categories.
- Athletic sales were particularly strong, up 15%, driving athletic penetration of total DSW sales higher by 460 basis points year-over-year to 30%.
- This strength in the athletic category has DBI optimistic about the back-to-school shopping season starting towards the end of Q2.
- In the Brands portfolio segment, sales increased by 12%, with strong results from Keds, Hush Puppies, and Jessica Simpson, which delivered a double-digit positive comp. While focusing on returning the U.S. retail business to growth, DBI is also aiming to improve profitability on the Brands side.
- The company plans to reduce costs by rightsizing the organization and expanding margins. Company-wide gross margin improved by 80 basis points year-over-year to 32.8%, mainly due to fresher inventory levels, resulting in fewer promotional sales.
Despite these improvements, DBI only reaffirmed its FY25 EPS, sales, and comp guidance. The EPS miss and the lack of an improved outlook are causing disappointment as investors await a more convincing turnaround at DSW.
