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Designer Brands (NYSE:DBI) Reports Sales Below Analyst Estimates In Q3 Earnings, Stock Drops 22%


Full Report / December 05, 2023

Footwear and accessories discount retailer Designer Brands (NYSE:DBI) missed analysts' expectations in Q3 FY2023, with revenue down 9.1% year on year to $786.3 million. It made a GAAP profit of $0.17 per share, down from its profit of $0.67 per share in the same quarter last year.

Designer Brands (DBI) Q3 FY2023 Highlights:

  • Revenue: $786.3 million vs analyst estimates of $822.8 million (4.4% miss)
  • EPS: $0.17 vs analyst estimates of $0.43 (-$0.26 miss)
  • Full year guidance lowered across the board, with huge EPS outlook cut (well below Consensus)
  • Gross Margin (GAAP): 32.6%, down from 33% in the same quarter last year
  • Same-Store Sales were down 9.3% year on year (big miss vs. expectations of down 3.6% year on year)
  • Store Locations: 643 at quarter end, increasing by 1 over the last 12 months

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

The company operates under various banners including DSW (Designer Shoe Warehouse), The Shoe Company, and Shoe Warehouse. In addition to footwear, Designer Brands also carries a broad selection of handbags. A customer can find Nike, Converse, Clarks and other shoe brands as well as Michael Kors, Kate Spade, and Marc Jacobs bags. Prices on this merchandise are typically meaningfully lower than prices at traditional department stores and other specialty retailers.

Designer Brands can offer these low prices because the company typically purchases overstocks, closeouts, and discontinued styles directly from manufacturers, as well as from other retailers and distributors ridding themselves of unwanted stock. The typical customer is therefore someone who cares about brands and fashion but loves a good deal and doesn’t mind somewhat inconsistent selection.

The company’s stores vary, but the average size across the different banners is roughly 20,000 square feet. They are generally located in shopping centers and malls alongside other retailers and are laid out with sections dedicated to different categories such as women's footwear, children's footwear, and women’s accessories. In addition to the physical store footprint, Designer Brands has an e-commerce site for each banner.

Footwear Retailer

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).

Sales Growth

Designer Brands is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's revenue has declined over the last four years, dropping 3.1% annually as its store count shrunk.

Designer Brands Total Revenue

This quarter, Designer Brands reported a rather uninspiring 9.1% year-on-year revenue decline, missing Wall Street's expectations. Looking ahead, analysts expect sales to grow 2.4% over the next 12 months.

Number of Stores

The number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.

When a retailer like Designer Brands is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. As of the most recently reported quarter, Designer Brands operated 643 total retail locations, in line with its store count a year ago.

Designer Brands Operating Retail Locations

Taking a step back, the company has generally closed its stores over the last two years, averaging a 1.6% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for retailers.

Designer Brands's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 3.4% year on year. Given its declining store count over the same period, this performance stems from higher e-commerce sales or increased foot traffic at existing stores, which is sometimes a side effect of reducing the total number of stores.

Designer Brands Year On Year Same Store Sales Growth

In the latest quarter, Designer Brands's same-store sales fell 9.3% year on year. This decline was a reversal from the 3% year-on-year increase it posted 12 months ago. We'll be keeping a close eye on the company to see if this turns into a longer-term trend.

Gross Margin & Pricing Power

Designer Brands has weak unit economics for a retailer, making it difficult to reinvest in the business. As you can see below, it's averaged a 32.5% gross margin over the last eight quarters. This means the company makes $0.32 for every $1 in revenue before accounting for its operating expenses. Designer Brands Gross Margin (GAAP)

Designer Brands produced a 32.6% gross profit margin in Q3, flat with the same quarter last year. This steady margin stems from its efforts to keep prices low for consumers and signals that it has stable input costs (such as freight expenses to transport goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Designer Brands generated an operating profit margin of 3.6%, down 3.8 percentage points year on year. We can infer Designer Brands was less efficient with its expenses or had lower leverage on its fixed costs because its operating margin decreased more than its gross margin.

Designer Brands Operating Margin (GAAP)

Zooming out, Designer Brands was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer retail business, producing an average operating margin of 4.8%. On top of that, Designer Brands's margin has slightly declined, on average, by 2.3 percentage points year on year. This shows Designer Brands has faced some speed bumps.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q3, Designer Brands reported EPS at $0.17, down from $0.67 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.

Designer Brands EPS (GAAP)

Between FY2019 and FY2023, Designer Brands's adjusted diluted EPS grew 74.6%, translating into a solid 18.7% average annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).

Over the next 12 months, however, Wall Street is projecting Designer Brands's EPS to stay flat.

Key Takeaways from Designer Brands's Q3 Results

With a market capitalization of $744.7 million and more than $54.64 million in cash on hand, Designer Brands can continue prioritizing growth.

We struggled to find many strong positives in these results. Its full-year earnings forecast underwhelmed and its revenue missed Wall Street's estimates, driven by a huge same-store sales decrease which greatly underperformed expectations. The commentary was just as bad as the results. Management said that "footwear market that contracted for the first time since COVID coupled with unseasonably warm weather, which significantly reduced customer demand for shoes and pressured our heavily seasonal assortment" and doesn't anticipate that these headwinds will ease. Overall, the results could have been better. The company is down 22% on the results and currently trades at $10 per share.

Is Now The Time?

Designer Brands may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Designer Brands, we'll be cheering from the sidelines. Its revenue growth has been weak over the last four years, but at least growth is expected to increase in the short term. And while its average annual EPS growth over the last four years has been decent, the downside is its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its declining physical locations suggests its demand is falling.

Designer Brands's price-to-earnings ratio based on the next 12 months is 8.4x. While we think the price is reasonable and there are some things to like about Designer Brands, we think there are better opportunities elsewhere in the market right now.

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