Sure, athleisure and back-to-school sales looked better, but the company's still got big problems: profitability is down, debt is climbing, and the recovery isn't as strong as hoped. My analysis argues that even with some positive signs, the financial issues and industry challenges make DBI stock a risky bet right now.
Designer Brands Inc. is a top footwear and accessories company in North America. It's best known for its retail chain, Designer Shoe Warehouse (DSW). DBI started in 1969 as Shonac Corporation, originally a shoe licensee for Value City. In 1991, it opened its first store in Dublin, Ohio. Now, it runs over 640 stores across the U.S. and Canada.
DBI runs three main segments: U.S. Retail, Canada Retail, and Brand Portfolio. Along with retail chains like DSW (dsw.com), The Shoe Company, and Shoe Warehouse, DBI owns brands like Vince Camuto (vincecamuto.com), Jessica Simpson, and JLO Jennifer Lopez.
Its capabilities in design and sourcing were boosted with the 2018 acquisition of the Camuto Group, which increased the breadth of its brands. In 2019, it changed its company name from DSW Inc. to Designer Brands Inc., reflecting the fact that it had moved beyond being just a retailer to marketing, designing, producing, and distributing footwear.
DBI has taken a serious nosedive in stock price since 2016, dropping from $23.76 to $5.14 by September 2024. Meanwhile, the S&P 500 Index (SPY) grew by 14.50%, while DBI sank by -10.29%. In fashion, trends change fast, and before diving into the fundamentals, DBI's issues seem bigger than that - there's something deeper going wrong.
The annualized return without dividends is even worse: DBI lost -16.31%, while the SPY gained 13.40%. Plus, its dividends are all over the place - the average dividend growth rate is down -7.29% over eight years, and the compound growth rate is a dismal -15.91%. In 2020, they slashed their dividend by 90%, which screams cash flow problems.
Seeking Alpha's Dividend Safety Grade of "F" also reflects the carnage here, with a dividend payout ratio sitting at 113.64% (GAAP). Simply put, it means DBI is paying out more than it earns. This aggressive approach isn't sustainable long-term.
Even with retail being tough, Designer Brands is taking baby steps to get back on track. The big win? Comp sales were positive for the third consecutive quarter. In Q2 2024, things started looking up, and they rolled into Q3 with positive momentum. It's the first time sales have been up since September 2022, hinting at a comeback. Despite consumer spending being tight, DBI is finding ways to stay ahead in a challenging market.
With inflation touching the sky and the price of daily needs going through the roof, people are finding it difficult to buy non-essentials like fancy shoes or other accessories. Prices are shooting up, and people are cutting back, with all age groups caught in the claw of inflation. Wasting money or the desire to splurge on items is no longer a priority. People are "trading down" (see above) looking for bargains in the market or cutting down on what they bought a few years ago.
On a more optimistic note, CEO Doug Howe highlighted a glimmer of hope:
However, with consumers being increasingly mindful of their discretionary spend, that improvement has been more muted than anticipated. In spite of this, as expected, our comps have now turned positive as we've moved into the back half of the year and reached our anticipated inflection point.
The company saw solid momentum during the back-to-school season, a key time for retailers. This carried into the third quarter. DBI handled its inventory deftly, especially by bringing in athletic stock early to meet demand, which boosted Q3 sales.
They're also using digital and in-store strategies, such as collaborating with influencers and creating an online "lookbook," to encourage people to get involved. On TikTok alone, their engagement rate jumped over 450 basis points, far exceeding the industry standard. They've also doubled their video views and organic engagements, and they're consistently gaining new followers. One of their main focuses, especially in back-to-school, was to market Nike across all their products for their customers.
There were several standout brands, such as Vince Camuto's wide cap and oversized boots, the Jessica Simpson dress line, and Topo and Keds, which had great potential. Topo Athletic grew 109% in its wholesale channel, and Jessica Simpson grew 70% in wholesale distribution. In Canada, DBI's business grew 6% year over year, fueled by new store openings and the Rubino (Canadian footwear retailer) acquisition, which took place in April 2024 for around $18 million - very similar to "The Shoe Company" in terms of ambience and the products they sell. They'll continue to be run under the Rubino name.
DBI's success largely comes from its push into athletic and athleisure, now central to its strategy. Sales of its top eight athletic brands jumped over 30%, continuing the strong performance from last quarter. Athletic sales overall grew by 16%, with adult sales up 15% and kids' sales over 25%, driven by back-to-school demand. These top eight brands now make up 39% of total sales, up from 30% a year ago. DBI's shift toward athletic and casual footwear has reshaped its product lineup, which now represents 42% of its offerings, compared to 32% in 2017.
DBI's ability to grow in the athletic and athleisure market is part of large-scale industry trends. The global athleisure market is expected to reach $456 billion by 2029 and experience a CAGR of more than 6% from 2024 to 2029. The spike in demand for athleisure can be attributed to the steady increase in people prioritizing health and leading more active lifestyles. Consumers are increasingly opting for athletic and versatile clothing due to its comfort and ability to be used in a multitude of settings.
Other research points to the athleisure market climbing to $1,069.84 billion by 2034.
Moisture-wicking fabrics and performance tech, such as Nike's Dri-FIT, are driving interest in sportswear that is equal parts functional and fashionable. This is, in part, a generational shift - Gen Z and millennials are embracing the athleisure fad, which is poised to continue pushing the market forward.
DBI showed confidence by buying back $18 million in shares this quarter. Their digital platform kept strong, posting mid-single-digit growth for three straight quarters. Financially, DBI is in good shape with $193.9 million in cash and generating $28 million in free cash flow. Even though shifting from higher-margin dress brands to lower-margin athletic brands has added pressure, DBI expects markdown leverage in the fall to balance things out and keep gross profit steady for the year. Looking ahead, they updated their outlook, expecting positive EPS growth in the second half of 2024, driven by strength in athletic and casual segments.
DBI's blended price-to-earnings ratio is 8.83x, lower than its usual 12.15x, but that doesn't mean it's an undervalued buy. The earnings growth rate is down to 7.07%, which points to shrinking profits and raises questions about future cash flow that we already talked about. Add in a 68.2% long-term debt-to-capital ratio, and you've got a company with limited wiggle room. Even though the earnings yield is 11.32%, a good sign normally, the company's challenges make it less reassuring.
And while Seeking Alpha's valuation metrics give this an A- rating, the biggest red flag is DBI's heavy debt load: the company has $1.28 billion in total debt, while its market cap is just $297.11 million. This imbalance inflates enterprise value and worsens its EV-based multiples. The EV/EBITDA of 17.14 is much higher than the sector's 10.64, showing DBI is more leveraged than its peers.
The EV/EBIT ratio is another problem, with DBI trading at a huge 349.85% premium to the sector, which means even if the company is making money, it's not turning that into earnings after operating expenses. The forward EV/EBIT ratio of 20.20 is still high, so this issue won't go away soon.
Bottom line: the stock has a fair value ratio of 15.00x, leaving a clear gap from where it's trading. The stock might look cheap, but the shrinking profits and high debt risks seem to outweigh any reward right now.
DBI faced some challenges. Net sales dropped, hitting $772 million, down 2.6% from last year. U.S. retail segment sales fell 1.1%, showing the strain on consumers. Gross margins shrank 170 basis points to 32.8%, due to lower mark-ups on athletic and athleisure gear and more promotions to clear inventory. Operating expenses climbed to 28.9% of sales, up from 26.9%, mainly due to higher fixed costs, talent investments, and more spending on marketing.
The company's interest expenses jumped to $11 million from $6.9 million due to term loans and higher rates. DBI's adjusted net income fell to $17.1 million from $39.4 million. Diluted EPS dropped to $0.29 from $0.59. Inventory levels rose 5.9% year-over-year, especially in the athletic category, raising concerns about overstocking.
Moreover, the company's Canadian business grew, but comparable sales dropped 3.1%, echoing U.S. market challenges. DBI lowered its full-year earnings outlook to $0.50-$0.60 EPS, down from $0.70-$0.80, due to a slower recovery. Dress and seasonal footwear underperformed, adding more pressure to overall results. Lastly, DBI closed the quarter with $465.8 million in total debt, which already mentioned poses a potential risk if the economy takes a steep downturn.
I give DBI a rating of "Sell." While a resumption of positive comps and the pickup in the athletic footwear segment may signal the start of a turnaround, DBI is still too risky for my taste. Current valuation reflects ample business problems, including outstanding debt, eroding profitability, and poor dividend safety. With the stock trading at multiyear lows amid industry headwinds and high leverage, the upside in the coming years may be limited with the company's financial condition being fragile.