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Footwear and accessories retailer Designer Brands (DBI) is not in style today as shares sink to multi-year lows after the company reported soft Q2 results that missed expectations and cut its FY25 EPS and revenue guidance. The owner of the DSW brand experienced sustained pressure in the seasonal and dress categories, resulting in total sales and comparable sales declining by 2.6% and 1.4%, respectively. While DBI's pivot to increasing its athleisure and athletic footwear assortment has helped mitigate the weakness in the dress category, the shift has also created a headwind for gross margin, which contracted by 170 bps yr/yr in Q2.

• In addition to lower initial markups (IMU) for athletic footwear, DBI ramped up promotional activity in order to clear out some seasonal inventory, putting more pressure on margins and earnings. The company believes that it can be less reliant on promotions this fall season following a solid back-to-school shopping season, but IMU is still expected to be a negative factor as it continues to grow its athletic inventory.
• On that note, DBI's top eight brands, each of which are in the athletic and athleisure categories, generated strong growth of more than 30% in Q2 and now account for 39% of total sales compared to 30% a year earlier. Although the momentum for this category has continued into Q3, prompting DBI to forecast positive comps in the back half of the year, the improvements from its reinvigorated assortment strategy have been more muted than it anticipated due to sluggish discretionary spending trends.
• The slower-than-expected sales recovery and gross margin headwinds not only resulted in a Q2 top and bottom-line miss, but they also caused DBI to lower its FY25 EPS and revenue guidance. Specifically, the company now sees EPS of $0.50-$0.60, down from its prior outlook of $0.70-$0.80, on flat to low-single digit revenue growth versus its previous guidance of low-single-digit growth.
• Looking beyond just this current quarter, DBI is banking on new marketing initiatives and an enhanced eCommerce platform to support its shift to a more athletic product assortment. There's some reason for optimism here since the digital platform posted mid-single-digit growth for the third consecutive quarter. 

Overall, it was another rough quarter for DBI as a mixture of industry-wide and company-specific items combined to weigh on its results and outlook. While the company's strategy to expand its assortment of athletic footwear and apparel is paying dividends, as illustrated by the +15% comp for the adult athletic category, the benefits haven't been enough to overcome the softness in dress and seasonal, and the margin erosion.