Designer Brands Inc. (DBI) delivered the kind of earnings surprise that can make short sellers very nervous. The footwear retailer reported third-quarter adjusted earnings that absolutely crushed expectations, sending shares up over 17% in premarket trading Tuesday.

The numbers tell an interesting story. Designer Brands posted adjusted earnings per share of 38 cents, more than doubling the analyst consensus of 18 cents. That's the kind of beat that gets attention, especially when you consider what's happening with the stock's short interest.

Revenue Softness, Margin Strength

Quarterly sales came in at $752.4 million, down 3.2% year over year and slightly below the $763.4 million analysts expected. Total comparable sales decreased 2.4%, reflecting ongoing challenges in the retail environment.

The segment breakdown shows where the pressure points are: U.S. Retail declined 0.8%, Canada Retail fell 7.5%, and the Brand Portfolio segment dropped 8.6% compared to last year.

But here's where things get interesting. Despite the revenue headwinds, gross profit actually climbed to $339.6 million from $333.8 million a year ago. More impressively, gross margin expanded to 45.1% from 43.0%. That's a significant improvement that shows the company is getting better at managing its business, even if it's selling slightly less stuff.

"Our third quarter performance represents another meaningful step forward in our transformation, as we demonstrated continued sequential improvement across multiple financial and operating metrics," said Doug Howe, Chief Executive Officer.

Consolidated operating profit jumped 87% year over year to $42.7 million, which helps explain why the stock is rallying despite the revenue miss.

Balance Sheet Progress

Designer Brands ended the quarter with $51.4 million in cash and equivalents. More notably, long-term debt contracted to $463.1 million from $529.6 million a year ago—a reduction of roughly $66 million that shows disciplined financial management.

The company currently operates 672 stores across North America, including 497 DSW Designer Shoe Warehouse locations in the United States and 175 stores in Canada under the DSW, The Shoe Company, and Rubino banners.

Designer Brands also announced a dividend of 5 cents per share for both Class A and Class B common shares, payable December 19 to shareholders of record as of December 5.

Looking Ahead

For fiscal year 2025, the company expects adjusted operating profit between $50 million and $55 million. Net sales are projected to decline 3% to 5%, suggesting management expects the current environment to persist.

The Short Squeeze Factor

Here's what makes Tuesday's move particularly interesting: Designer Brands has 8.10 million shares sold short, representing a staggering 57.07% of its public float. That's an unusually high level of bearish positioning, and when a heavily shorted stock reports unexpectedly strong results, short sellers scrambling to cover their positions can amplify the upward move.

DBI shares were trading at $5.68 in premarket action Tuesday, up 17.11% and potentially just the beginning of a squeeze if momentum continues.