Designer Brands Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Sequential improvement continued in Q3 with healthier traffic, higher store conversion, and disciplined expense and inventory management.
• Focused on two pillars: customer and product. In the customer pillar, moving into Q4 with a holiday-centric execution of the Let Us Surprise You campaign. In the product pillar, refining assortment, improving inventory productivity, and driving efficiency in digital fulfillment operations.
• Unveiled a reimagined DSW store in Framingham, Massachusetts, with plans to roll out the elevated experience to additional stores and evaluate innovation pilots for broader fleet.
• Sourcing team navigating global environment, mitigating tariff impact, and diversifying supply chain to reduce risk.

Segment Performance

• U.S. Retail: Total sales for the quarter were down 1% year over year, with comparable sales down 1.5%. Gross profit dollars exceeded last year by $5.8 million, and adjusted operating income for the U.S. Retail segment improved by $5.7 million compared to Q3 last year. The top eight brands outperformed, with a positive 4% comp for the quarter, and penetration expanded to 42% of total sales. Boots had an 8% increase in regular price product sales, and athletic category showed improvement.
• Canadian Retail: Total sales for the quarter were down 8% with comp sales down 6.6%, largely due to unseasonably warm weather softening demand for seasonal products. However, performance in Q4 is rebounding as weather has normalized.
• Brand Portfolio: Total sales for the quarter were down 9% driven by a decline in external wholesale business due to temporary sourcing-related delivery delays. Operating income increased by $0.5 million year over year despite lower top line, with the Topo business growing 25% over Q3 last year and Jessica Simpson external wholesale sales increasing roughly 8%.

Guidance

• Expect total net sales for the year to be down in the range of 3% to 5% with adjusted operating income in the range of $50 million to $55 million.
• Forecasts contemplate tax expense for the year in the range of $8 to $10 million.
• Momentum from Q3 carried into Q4, with confidence in closing the year strong.

Risks

• Macro pressures remaining, including uncertainty in the external environment.
• Tariff landscape uncertainty affecting supply chain and margins.
• Temporary sourcing-related delivery delays impacting Brand Portfolio segment in Q3.

Q: 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, you know, 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?

A: Mauricio, this is Doug Howe. Thanks for your question. Yeah. We are encouraged, obviously, as we said in our prepared remarks with regards to the sequential improvement we saw in Q3. And October was actually the strongest month of that period. And that momentum has continued into Q4. I don't want to get into a lot of specifics in the current quarter, but the key categories, the key brands, the classifications that were giving momentum in Q3 have continued, namely the top eight brands, continue to outperform. The boot category, in particular, as I mentioned, was off to a very strong start. Specifically as it relates to regular price selling in Q3. That has definitely continued. The teams have done an amazing job to be able to react to that trend as well. The affordable luxury business, while small in overall volume, is almost double what it was last year. So we're seeing some really nice momentum there as well. And all of that is based into the guidance that we provided for the full year. There's a little bit of noise if you think about the difference between the retail sales and brands. As I mentioned, brands had a bit of a decrease in Q3 based on some temporary timing shifts of delivery. But that will be rebounding, and we're forecasting positive sales there. So that creates a little bit of noise in the Q4 results for total net retail sales.

Q: In terms of, like, gross margin, you know, nice to see the progress. How are you thinking about the gross margin in Q4 and maybe just any high-level commentary of what you're seeing in terms of the promotional environment?

A: Yeah. Thanks for the question. We're continuing to be encouraged by how the teams have managed gross margins, specifically at DSW. As I mentioned, in Q3, we had a 140 basis point improvement in markdown rate. And we see similar favorability in Q4. We're anticipating that as well. The gross margin in Q4, you know, there is a promo environment. But we're not seeing a lot of resistance from our customers as it relates to higher prices. Our ARR was up nicely. Some of the categories that are strongest performing are the higher AUR categories as well. We, as I said, have been mindful of walking away from some unprofitable digital promotions. And we'll continue to do that, seeing a little bit of pressure on digital top line, but significant expansion in operating income in that channel.