What happened

Shares of Designer Brands (DBI 1.52%) were falling sharply from where they ended last week, according to data from S&P Global Market Intelligence. The stock was down 27.9% for the week at 11:41 a.m. ET on Friday.

Most of the losses came yesterday after the shoe outlet reported third-quarter earnings that fell short of Wall Street expectations on the top and bottom line.

Person with colorful handbags and shoes.

Image source: Getty Images.

So what

While Designer Brands managed to report comparable sales growth of 3%, which came in on top of a near-41% rise in the year ago quarter, net sales of $865 million were just short of analyst forecasts of $866 million, while profits of $0.67 per share were a full nickel less than the $0.72 per share analysts anticipated.

That led to a 370-basis point contraction in gross margins, while operating profits plummeted 38% from last year. Even worse for the shoe company, management slashed its guidance for the rest of the year.

Designer Brands had been expecting full-year 2022 earnings of $2.05 per share to $2.15 per share, but took an axe to those estimates and now expects to generate just $1.75 per share to $1.80 per share, a 17% difference at the midpoint.

CEO Roger Rawlins noted in a press release that Designer Brands was "seeing many of the same pressures across the consumer landscape that most retailers are seeing" but remained confident the company would be able to navigate the headwinds because of its "flexible business model."

Now what

Although consumer demand has been buffeted by the highest inflation in 40 years, elevated gas prices, and rising interest rates, it wasn't a complete washout of the shoe stock. Designer Brands' own footwear brands actually saw sales soar. Owned-brand sales jumped 25% in the third quarter as consumers traded down for lower-cost shoes. 

In another hopeful note, inventory levels were more "normalized" than they have been in recent quarters, which is a departure for Designer Brands compared to other retailers that have been battered with excessive levels of extra merchandise. 

It has made for a much more promotional environment, which is likely why Designer Brands saw its margins contract as much as they did.