Weak Consumer Demand And Margin Strain Will Spur Emerging Value

Key Takeaways

• Expansion of owned brands and private labels boosts margins, but weak consumer demand and declining store traffic undermine sustainable revenue growth.
  
• Digital investments help retention, yet heavy reliance on promotions, limited pricing power, and a burdensome retail footprint pressure margins and earnings.
  
• Ongoing sales declines, margin pressures, and macroeconomic uncertainty threaten profitability as heavy reliance on physical stores and external partners amplifies operational and strategic risks.

Catalysts

Engages in the design, production, and retailing of footwear and accessories in the United States and Canada.

• While Designer Brands is seeing strong growth in owned brands such as Topo-with sales up 84% year-over-year and improved gross margin from private label expansion-persistently weak consumer discretionary demand and declining foot traffic, which led to an 8 percent drop in comparable sales this quarter, may continue to offset the long-term revenue and margin benefits that come from these brand initiatives.
  
• Although the company is making progress in inventory management, including enhanced allocation between digital fulfillment centers and stores, and has improved in-store product availability and conversion rates, accelerating consumer migration toward digital-first and direct-to-consumer brands is eroding brick-and-mortar relevance, likely resulting in further store-based sales and revenue pressure over the long term.
  
• Despite success in athleisure and athletic categories-sectors supported by demographic and lifestyle shifts toward health, comfort, and versatile footwear-Designer Brands remains exposed to ongoing shifts in consumer spending patterns away from discretionary goods toward experiences, calling into question the sustainability of revenue growth from these categories.
  
• While investments in digital platforms, data-driven marketing, and the relaunch of the VIP Rewards program could improve customer retention and conversion, limited pricing power and a reliance on promotional activities to drive sales have already led to lower consolidated gross margins, indicating ongoing margin risk as competitive pressures intensify.
  
• Even as the company aggressively pursues cost optimization, including $20 million to $30 million in annual expense reductions, its large physical retail footprint and exposure to volatile sourcing costs and tariffs-especially given that less than 20 percent of product sourcing is directly controllable-may continue to constrain improvements in net earnings and cash flow.

Designer Brands Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Designer Brands compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Designer Brands's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Designer Brands will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Designer Brands's profit margin will increase from -1.0% to the average US Specialty Retail industry of 4.4% in 3 years.
• If Designer Brands's profit margin were to converge on the industry average, you could expect earnings to reach $131.9 million (and earnings per share of $3.38) by about July 2028, up from $-28.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1.2x on those 2028 earnings, up from -4.8x today. This future PE is lower than the current PE for the US Specialty Retail industry at 17.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Designer Brands Future Earnings Per Share Growth

Risks

• Persistent declines in comparable sales across both US and Canadian retail segments, driven by weakening consumer sentiment and lower traffic, indicate ongoing vulnerability to broader secular shifts in consumer behavior away from discretionary goods; this continued top-line contraction could negatively affect future revenue growth.
  
• The company's heavy reliance on national brand partners and lack of full control over product sourcing regions leaves it exposed to both margin compression from partner-driven pricing and ongoing supply chain and tariff risks, which threaten net margin stability.
  
• Designer Brands' large physical retail footprint, combined with industry trends of declining brick-and-mortar traffic and the acceleration of e-commerce and digitally native brands, poses a long-term risk of elevated fixed costs and store-related expense deleverage, pressuring net earnings.
  
• Increased usage of promotional activity and markdowns to drive store traffic resulted in lower gross margins, and ongoing price sensitivity among value-oriented customers could limit the company's ability to pass through cost increases, thus constraining both revenue quality and overall profitability.
  
• The current withdrawal of forward-looking guidance due to macroeconomic volatility and unpredictable consumer demand highlights management's limited visibility, which could undermine investor confidence and signals heightened risk of further deterioration in both earnings and cash flow.

Valuation

• The assumed bearish price target for Designer Brands is $3.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Designer Brands's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $4.0, and the most bearish reporting a price target of just $3.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $131.9 million, and it would be trading on a PE ratio of 1.2x, assuming you use a discount rate of 11.6%.
• Given the current share price of $2.8, the bearish analyst price target of $3.0 is 6.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.