Revamped Leadership And Brand Focus Will Expand Market Reach

Key Takeaways

• Revamped leadership and strategies aim to enhance operational efficiencies, driving earnings growth through an optimized brand portfolio and private label expansion.
  
• Strategic investments and expanded omnichannel reach are expected to boost revenue, margins, and overall profitability through market reach and sales growth.
  
• Reliance on seasonal categories and increased SG&A expenses, combined with macroeconomic uncertainty, could pressure margins and revenue growth if trends do not improve.

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 has been revamping its leadership team and implementing new strategies, likely improving operational efficiencies and supporting future earnings growth.
  
• The company has revitalized its assortment and optimized its brand portfolio, which could drive both top-line revenue growth and better margins.
  
• Designer Brands is expanding its private label brands, focusing on products with higher margins, which should enhance net margins and overall profitability.
  
• Strategic investment in brands like Topo Athletic and Keds, projected for strong growth, is expected to contribute to both revenue growth and gross margin expansion.
  
• The company plans to expand its omnichannel presence and open new stores, which should increase market reach and boost sales, positively impacting revenue and earnings.

Designer Brands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Designer Brands's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.4% today to 2.4% in 3 years time.
• Analysts expect earnings to reach $78.7 million (and earnings per share of $1.62) by about March 2028, up from $-10.5 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 3.2x on those 2028 earnings, up from -17.7x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.7x.
• 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 11.41%, as per the Simply Wall St company report.

Designer Brands Future Earnings Per Share Growth

Risks

• The reliance on seasonal categories and the 900 basis point decrease in the boot category could continue to impact revenue and gross margins if the trend does not stabilize or is not fully offset by athleisure gains.
  
• Despite efforts to improve inventory availability and productivity, macroeconomic uncertainty such as inflation, rising prices, and reduced discretionary income may dampen consumer spending, affecting revenue and net income.
  
• The anticipated increase in SG&A expenses by approximately $50 million due to new logistics infrastructure and incentive compensation could pressure net margins, particularly if revenue growth does not meet expectations.
  
• The shift towards national brands, like athleisure, could continue to pressure gross margins due to lower initial markup (IMU) compared to private labels, potentially impacting net margins if promotional improvements do not compensate.
  
• The soft start to fiscal 2025, with expectations of first-quarter sales below the previous year, reflects potential challenges in achieving projected revenue growth and operating income improvements for the full year.

Valuation

• The analysts have a consensus price target of $4.75 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 $78.7 million, and it would be trading on a PE ratio of 3.2x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $3.9, the analyst price target of $4.75 is 17.9% 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.