Direct-to-Consumer Expansion And Athleisure Focus Ignite Growth

Key Takeaways

• Strategic focus on high-performing categories and enhanced marketing efforts could boost revenue through increased sales efficiency and brand visibility.
  
• Prioritizing cost optimization and digital channel investments may improve profitability and drive future earnings through expanded reach and high-margin product leverage.
  
• Unseasonably warm weather, consumer spending pullback, and inventory risks threaten Designer Brands' sales and profit margins amidst high interest expense concerns.

Catalysts

Engages in the design, production, and retailing of footwear and accessories for women, men, and kids primarily in the United States and Canada.

• Designer Brands is evolving its assortment strategy by pulling back on underperforming seasonal items and focusing on high-performing categories like athletic and athleisure wear. This should drive future revenue growth by aligning inventory with consumer preferences and increasing sales efficiency.
  
• The company has enhanced its marketing efforts, leading to increased media impressions and engagement. This improved brand visibility and customer engagement is likely to support revenue growth in the long term.
  
• The company is strategically reducing expenses, which has already improved operating income by 40% year-over-year in the third quarter. This focus on cost optimization is expected to enhance net margins and profitability.
  
• Designer Brands has identified opportunities in giftable accessories for the holiday season, which are expected to drive higher in-store sales. This initiative could increase revenues and improve net margins by leveraging high-margin products.
  
• The company is investing in its direct-to-consumer channels, evidenced by triple-digit growth at topo.com. This investment in digital channels is likely to drive future earnings growth by expanding its reach and improving sales efficiency.

Designer Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Designer Brands's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.1% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $270.7 million (and earnings per share of $5.14) by about January 2028, up from $-2.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 1.6x on those 2028 earnings, up from -125.6x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 3.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Designer Brands Future Earnings Per Share Growth

Risks

• Unseasonably warm weather has negatively impacted seasonal sales, such as boots, which are a significant category for Designer Brands, potentially affecting revenue and profit margins.
  
• Continued pullback in consumer discretionary spending due to macroeconomic uncertainties poses risks to maintaining or growing sales revenue across key categories.
  
• Despite improvements, overall sales were still down 1.2% year-over-year with a 3.1% decrease in comp sales, indicating potential challenges in sustaining revenue growth.
  
• High interest expenses as a result of the term loan and higher rates could negatively impact net earnings by increasing financial costs.
  
• Risks related to inventory management, particularly with seasonal products, could lead to excess inventory and require further discounts, impacting profit margins and net earnings.

Valuation

• The analysts have a consensus price target of $6.0 for Designer Brands based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $270.7 million, and it would be trading on a PE ratio of 1.6x, assuming you use a discount rate of 10.9%.
• Given the current share price of $5.45, the analyst's price target of $6.0 is 9.2% 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.