On September 10, Designer Brands (NYSE:DBI) reported second-quarter results that pushed full-year earnings guidance sharply higher, even as net sales slipped 1% year over year to $730.6 million. Adjusted operating income reached $39.4 million for the quarter, and management raised its adjusted diluted earnings per share outlook to a range of $0.47 to $0.52, up from $0.28 to $0.38. That kind of upward revision usually calms skeptics. Here, more than a third of the float is still sold short.
The Brand Engine Takes Over
The clearest story in this report is a company reorganizing itself around its own brands rather than its stores. Brand portfolio sales climbed 18% in the quarter to $86.3 million, and the growth showed up on the bottom line too, with year-to-date adjusted operating income of $58.8 million, more than doubling what Designer Brands produced over the same stretch last year. Topo grew revenue more than 24% during the quarter, and management now expects the brand to clear $100 million in 2027. Jessica Simpson sales rose about 24% as well, with growth across every major account, and intercompany sales between the brand and retail segments rose by double digits, a sign the two sides of the business are reinforcing each other rather than splitting the same customer dollar.
Profitability improved even where the headlines are less flashy. Gross margin expanded 430 basis points to 47.9%, and while $20.2 million in tariff refunds accounted for much of that, the company still added 150 basis points of margin from better assortment and inventory management alone. Merchandise margin in retail widened 140 basis points, with 100 of those points coming from less markdown activity, meaning more inventory is selling at full price. Debt fell by $93 million to $423.1 million compared with a year earlier, and total liquidity stood at roughly $198 million, funding room for projects like the Topo sourcing integration and the new Edit at DSW store-within-a-store pilot without leaning further on the balance sheet.
The Comeback Isn’t Complete Yet
The retail side of the business is still the drag. CEO Doug Howe said sandals, the company’s largest seasonal category, “were pressured by early weather-related headwinds and never fully rebounded,” and that alone accounted for roughly 200 basis points of the retail segment’s 2% sales decline. Comparable sales fell 2.6% in retail and 2.4% companywide, and the segment battled a sequential traffic headwind even as average unit retail and average dollars per sale held firm. Strip out the brand portfolio’s 18% growth, and the underlying store business is still shrinking.
Much of this quarter’s margin story also rests on a benefit that will not repeat. Of the 430 basis point gross margin gain, 280 basis points came directly from the $20.2 million tariff refund, meaning most of the headline number was a one-time item rather than a structural shift. Management also warned that the third quarter will face more profitability pressure than usual compared with last year, as the normalization of incentive-based compensation that already pushed adjusted operating expenses up 300 basis points in the second quarter becomes a tougher comparison in the next one.
A Stock Wall Street Doubts
Hedge fund ownership ticked up slightly, from 18 funds to 19 in the most recent quarter, suggesting institutional interest is stabilizing rather than fleeing. Short interest tells a very different story, with 35.60% of the float sold short, a level that points to a large and organized bear camp still positioned against the stock. Meanwhile, shares trade at a forward price-to-earnings ratio of just 9.51 as of September 11, cheap enough to suggest the market isn’t pricing in much of the earnings recovery management just described. That gap between a raised earnings outlook and a heavily shorted, low-multiple stock is the tension defining this name right now.
What Has To Go Right
Designer Brands has shown its brand portfolio can grow and generate cash even while the store base struggles, and management backed that up with a meaningfully higher earnings forecast. Topo and Jessica Simpson need to keep compounding, and the retail segment needs to stop shrinking once the weather-driven sandals fully roll off, for the turnaround to broaden. The third quarter’s tougher compensation comparisons and the fading tariff refund benefit will test whether the margin gains hold up without one-time help.
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