In 2020, retail has taken one blow after another. Standing among the beaten-up names is Designer Brands (DBI), which houses well-known brands like DSW and Camuto Group.
While investor focus has locked in on the 56% year-to-date decline, Needham analyst Rick Patel believes this focus is misplaced. In no way does he dispute the fact that the second quarter was “tough on multiple fronts,” but he argues the real question is, “where do we go from here?” The analyst explained, “We don’t expect smooth sailing, but do believe the worst is behind DBI. We attribute much of the Q2 pain to not having enough athleisure inventory, as it was in high demand – this should be corrected in 2H.”
Looking more closely at the Q2 print, EPS came in at -$1.28, significantly below both the consensus estimate and Patel’s call. This miss was driven by lower sales and gross margin. Total sales declined 43.1% year-over-year, a steeper drop than what was expected.
Offering further explanation, Patel commented, “Lower Q2 sales reflected closed doors early in the quarter and weak traffic upon reopening. Sales pressure was partially offset by strength in the digital channel, which has remained strong even with the majority of stores now re-opened. On its Q1 call, DBI cited relative strength with comps of (20%) for doors that were open a month at the time. However, intra-quarter trends in Q2 were lumpy due to Covid spikes in big states, including Florida, California and Texas.”
It should be noted that DBI is exposed to metro markets where the recovery has been slower, including New York City and Washington D.C. Additionally, merchandising has spurred headwinds, with dress and seasonal segments feeling the heat as a result of lower demand and insufficient athleisure inventory.
That said, Patel highlights the positives for DBI, namely back-to-school trends. “While much of the industry is dealing with soft back-to-school trends, DBI’s kids segment is growing and gaining share,” he stated.
The analyst added, “DBI is also renegotiating rents, which should lower the bar for future earnings leverage. Its recent debt restructuring also buys time for trends to stabilize. We also think that DBI is taking a conservative yet prudent approach to 2H20; given the improving assortment, momentum in kids, and digital strength, we see 2H progress.”
Based on all of the above, Patel reiterated his Buy rating. Even though he trimmed the price target from $9 to $8, this still leaves room for shares to gain 14% in the next twelve months. (To watch Patel’s track record, click here)
Looking at the consensus breakdown, Wall Street is taking a more cautious approach. 1 Buy, 2 Holds and 1 Sell have been published in the last three months. Therefore, DBI gets a Hold consensus rating. At $6.50 average price target, the analysts expect shares to remain range bound for the foreseeable future. (See Designer Brands’ stock-price forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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