Designer Brands (DBI)

Footwear and accessories discount retailer Designer Brands (NYSE:DBI) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 8% year on year to $686.9 million. Its non-GAAP loss of $0.26 per share was significantly below analysts’ consensus estimates.

Company Overview

Founded in 1969 as a shoe importer and distributor, Designer Brands (NYSE:DBI) is an American discount retailer focused on footwear and accessories.

Footwear sales–like their apparel counterparts–are driven by seasons, trends, and innovation more so than absolute need and similarly face the bigger-picture secular trend of e-commerce penetration. Footwear plays a part in societal belonging, personal expression, and occasion, and retailers selling shoes recognize this. Therefore, they aim to balance selection, competitive prices, and the latest trends to attract consumers. Unlike their apparel counterparts, footwear retailers most sell popular third-party brands (as opposed to their own exclusive brands), which could mean less exclusivity of product but more nimbleness to pivot to what’s hot.

Retail competitors offering discount or mid-priced footwear and accessories include Foot Locker (NYSE:FL), Genesco (NYSE:GCO), and TJX (NYSE:TJX).

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $2.95 billion in revenue over the past 12 months, Designer Brands is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.

As you can see below, Designer Brands’s revenue declined by 2.1% per year over the last six years (we compare to 2019 to normalize for COVID-19 impacts) despite opening new stores. This implies its underperformance was driven by lower sales at existing, established locations.

This quarter, Designer Brands missed Wall Street’s estimates and reported a rather uninspiring 8% year-on-year revenue decline, generating $686.9 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3.4% over the next 12 months, an acceleration versus the last six years. This projection is above the sector average and suggests its newer products will catalyze better top-line performance.

Number of Stores

Designer Brands operated 669 locations in the latest quarter. It has opened new stores quickly over the last two years, averaging 2.5% annual growth, faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Designer Brands’s demand has been shrinking over the last two years as its same-store sales have averaged 5% annual declines. This performance is concerning - it shows Designer Brands artificially boosts its revenue by building new stores. We’d like to see a company’s same-store sales rise before it takes on the costly, capital-intensive endeavor of expanding its store base.

In the latest quarter, Designer Brands’s same-store sales fell by 7.8% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

Designer Brands has great unit economics for a retailer, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an excellent 44.2% gross margin over the last two years. That means for every $100 in revenue, only $55.76 went towards paying for inventory, transportation, and distribution.

In Q1, Designer Brands produced a 43% gross profit margin, up 10.1 percentage points year on year but still missing analysts’ estimates by 1.9%. Designer Brands’s full-year margin has also been trending up over the past 12 months, increasing by 2.1 percentage points. If this move continues, it could suggest the company has less pressure to discount products and is realizing better unit economics due to stable or shrinking input costs (such as labor and freight expenses to transport goods).

Designer Brands was profitable over the last two years but held back by its large cost base. Its average operating margin of 1.3% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.

Analyzing the trend in its profitability, Designer Brands’s operating margin decreased by 1.4 percentage points over the last year. Designer Brands’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Designer Brands generated an operating margin profit margin of negative 1.1%, down 2.3 percentage points year on year. Conversely, its gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like marketing, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Designer Brands’s full-year earnings are still negative, it reduced its losses and improved its EPS by 28.1% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Designer Brands reported EPS at negative $0.26, down from $0.08 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Designer Brands’s full-year EPS of negative $0.14 will reach break even.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Designer Brands has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 2.4% over the last two years, slightly better than the broader consumer retail sector.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Designer Brands historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.6%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Designer Brands’s $1.33 billion of debt exceeds the $46.03 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $114.4 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Designer Brands could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Designer Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We struggled to find many positives in these results. Its revenue missed and its EPS fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 21% to $2.93 immediately following the results.

Updated: June 23, 2025 at 10:23 PM EDT

Before making an investment decision, investors should account for Designer Brands’s business fundamentals and valuation in addition to what happened in the latest quarter.

We see the value of companies helping consumers, but in the case of Designer Brands, we’re out. To begin with, its revenue has declined over the last six years, and analysts don’t see anything changing over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

Designer Brands’s P/E ratio based on the next 12 months is 9.3x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $3.50 on the company (compared to the current share price of $2.31).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.