Macroaxis Stories

An In Depth Analysis of Designer Brands Inc and Its Market Position

July 31, 2024  By Nico Santiago
Macroaxis Story

This analysis on Designer Brands Inc (DBI) looks into the company's current challenges and opportunities ahead of its Q1 earnings report. With high short interest, the stock faces potential volatility as management changes and market trends in the footwear industry evolve. Notably, DBI's alignment with well-performing brands such as Birkenstock and Crocs signals potential recovery, although risks remain from historical mismanagement and changing consumer preferences.

Published over six months ago
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Reviewed by Ellen Johnson

Designer Brands Inc (DBI) is at a critical point, poised for potential volatility due to high short interest and an upcoming earnings report. The company's historical performance has included poor decisions, such as unfavorable share buybacks and management turnover. However, recent positive trends in the footwear industry and strong performances by brands like Nike, Birkenstock, and Skechers provide a glimmer of hope for improvement.

Investment perspective, in general, refers to a viewpoint or opinion regarding investment opportunity in Designer Brands. It encompasses the assessment of an investment's potential risks and rewards, and expectations for its performance over time. Several factors influence the investment perspective on Designer Brands, including investment goals, risk tolerance, time horizon, market conditions, and research and analysis. Investors have varying goals, such as capital preservation, income generation, or long-term growth. Risk tolerance plays a significant role in shaping an investor's perspective, with some being more risk-averse and others willing to take on higher risks for potential returns.

How important is Designer Brands's Liquidity

Designer Brands financial leverage refers to using borrowed capital as a funding source to finance Designer Brands ongoing operations. It is usually used to expand the firm's asset base and generate returns on borrowed capital. Designer Brands financial leverage is typically calculated by taking the company's all interest-bearing debt and dividing it by total capital. So the higher the debt-to-capital ratio (i.e., financial leverage), the riskier the company. Financial leverage can amplify the potential profits to Designer Brands' owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its debt costs. The degree of Designer Brands' financial leverage can be measured in several ways, including by ratios such as the debt-to-equity ratio (total debt / total equity), equity multiplier (total assets / total equity), or the debt ratio (total debt / total assets). Please check the breakdown between Designer Brands's total debt and its cash.

How does Designer utilize its cash?

As of now, Designer Brands' Net Loss is decreasing as compared to previous years. . To perform a cash flow analysis of Designer Brands, investors first need to understand how to read the cash flow statement. A cash flow statement shows the amount of cash Designer Brands is receiving and how much cash it distributes out in a given period. The Designer Brands cash flow statement breaks down these inflows and outflows into different buckets, including operating activities, investing activities, and financing activities.

Designer Brands Gross Profit

Designer Brands Gross Profit growth is one of the most critical measures in evaluating the company. The Gross Profit growth rate is calculated simply by comparing Designer Brands previous period's values with its current period's values. Each time period you're measuring should be of equal lengths the increase or decrease, in a company's Gross Profit between two periods. Here we show Designer Brands Gross Profit growth over the last 10 years. Please check Designer Brands' gross profit and other fundamental indicators for more details.

Breaking down Designer Brands Further

 

DBI has high short interest and this idea - taking the other side - will be a test of that which adds to potential volatility. Also be aware second quarter earnings are coming up this coming month on August 27, 2024, and this idea isn't a specific call on that result. The company has been written up several times on this site.

I don't find it to be a bad business model, more similar to offprice retailers (NYSE: TJX, NASDAQ: ROST, NYSE: BURL) than the trading multiples would suggest. Of course, those companies have a historical algorithm that gets more consistent high single-digit or better EPS growth, whereas DBI has faltered and destroyed value recently (in terms of DBI's intrinsic value). But from a conceptual business model perspective, there are similarities, as DBI helps brands sell a niche of their merchandise and DBI can chase to create closeout deals.

Leadership Changes

Historically, DBI's track record raises concerns, particularly due to poor decisions like share buybacks executed at unfavorable prices, including a somewhat bungled accelerated share repurchase executed at poor prices relative to initial announcement and then followed by another guidance reduction.
 
The CFO remains in place; however, the company has seen management changes, including a new CEO with a year of experience. The new CEO, who though promoted internally has only been in place just over a year, but he is perhaps an upgrade over the previous one. Additionally, with a new head of DSW, a new Brands president, and a new Canada head being external hires, it seems like the CEO is willing to make changes and seeks fresh thinking. New hires are expected to improve brand relationships and drive growth.
 
Performance from peers Genesco, which operates the Journeys mall-heavy footwear stores, and FootLocker recently surpassed expectations, positively influencing DBI’s stock price, which rose 10% the Friday of these announcement during last quarter's earnings call.
 

Footwear Market

There’s a noticeable shift in the footwear market as competition expands beyond major players like Nike, which could benefit DBI, particularly through its DSW brand. Overall, footwear which previously was more concentrated and dominated only by the likes of Nike is showing some signs of change towards a greater number of brands, shoe-types, and styles. I think this will benefit DSW given their collection as referenced above.
 
Management has also upgraded the store aesthetic. It's not a bad place to shop, especially on a budget and for those undecided on their exact preference. That value brought to the consumer also gives some of these smaller but fast growing brands an opportunity to acquire new customers.

The company still has nearly $400 million of net financial leverage (>2x EBIDTA) and more that can ease its financial burden if including leases, but it is supposed to soon receive their CARES Act tax refund of $40 million, which will help alleviate this burden.

Overall, this is a business that doesn't seem to have been operated particularly well historically which combined with some industry trends that didn't play in its favor (Nike leaving, shift towards athletic from casual post COVID) and poor financial management, created a bad outcome over the past couple years for shareholders. That is also the reason DBI is no longer in Nancy Pelosi Stock Trades Tracker. The bet here - to sum it up - is that the shorts have overstayed or will overstay their welcome as trends are shifting back in the company's favor, as they've improved exposure to relevant category and brands such as Crocs, Birk, and Skechers. The risks involve overcoming seasonal sales fluctuations and reliance on mall traffic, which remain headwinds.

Recent history isn't on the side of the longs, so confidence is limited by those factors but I think the above positive thesis points are well discounted, and this could make for a nice opportunity in 2024-2025 as the short thesis and discount factor play out against the current investor base.

To read more of these analyses and get access to a full suite of investing tools (valuation platform, screener, watchlist, ETFs, …), check out ValueInvesting.io.

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Editorial Staff

Nico Santiago is a PR Contributor to Macroaxis Editorial Board. Nico is a relatively new author here at Macroaxis and he likes to work on advertising and sponsored content and marketing for the company. Nico spends most of his time surfing when the weather is nice and he spends the rest of the year writing for various blogs and companies, as he works on his upcoming books, The Rise of the Financial Machines and Time Series Modelling with AI. View Profile
This story should be regarded as informational only and should not be considered a solicitation to sell or buy any financial products. Macroaxis does not express any opinion as to the present or future value of any investments referred to in this post. This post may not be reproduced without the consent of Macroaxis LLC. Macroaxis LLC and Nico Santiago do not own shares of Designer Brands. Please refer to our Terms of Use for any information regarding our disclosure principles.

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