Designer Brands (DBI 6.50%) stock has lost nearly half of its market value over the last eight months after making a business-transforming acquisition and changing its name from DSW. Going from being a footwear retailer to a more vertically integrated designer and manufacturer has weighed on performance, and although retail operations continue to produce strong results, the new operations have been an anchor on earnings.
With Designer Brands reporting first-quarter results on Thursday, May 30, let's see what investors might expect.
Learning the ropes will take time
The DSW business is still strong and has reported seven consecutive quarters of rising same-store sales. The business had really just regained its footing last year when it said it was buying footwear designer Camuto Group. Being a retailer is a much different animal than being a design house or manufacturer, which was why some were critical of the deal -- in addition to it being a completely new direction in which the company had no expertise.
The acquisition has taken its toll as discounting needed to be done during the acquisition, causing Designer Brands to take a big hit to its selling, general, and administrative expenses. Operating margin tumbled to 6.2% last quarter, and it expects Camuto to have half the operating margin of DSW.
Moreover, Designer Brands expects Camuto to serve as a drag on performance not only this year, but next year as well. Over the long term, though, it believes Camuto can help generate as much as $1 billion in higher-margin revenue as it turns profitable by 2020 because all of the problems Designer Brands inherited from the business will "evaporate" by then.
Retail was not enough
The idea behind the acquisition has been that the former DSW retailer could not continue to grow if it simply remained a footwear retailer. CEO Roger Rawlins said, "what got us here won't get us there," so it needed to head in a new direction.
While it was spending a billion dollars building the brands of DSW and its vendor partners, its partners used technology to allow them to sell direct-to-consumer and do an end run around DSW. Rawlins says if it stood by and did nothing, the company would end up like HH Gregg, Radio Shack, and Circuit City. So, it went out and made acquisitions.
It bought Canada's Town Shoe, which sells footwear under The Shoe Company, Shoe Warehouse, and DSW Designer Shoe Warehouse banners, saying it gives it the ability to be more targeted in the Canadian market in a smaller space. Then it bought Camuto, which gives it broad access to the wholesale market and the ability to expand it across all of its retail operations.
The risk, of course, is that it's not able to fix Camuto Group as it plans -- or at least not in the time frame suggested. While there is potential in the business, it introduces new risks into operations from all the new moving parts it needs to learn about.
Hopeful for the future
Wall Street forecasts that Designer Brands will report $0.42 per share in earnings in the first quarter, an 8% increase from the $0.39 it reported last year, but we're not likely to see sales or profit accelerate for a number of quarters yet. DSW says by 2021, it will be reporting earnings of $2.65 to $2.75 a share, and while that's better than what analysts are forecasting, it won't need to do anything "heroic" to get there.
CFO Jared Poff says all Designer Brands needs is (1) for its retail units to post consistent comps, (2) for Camuto to keep doing what it's doing, and (3) to bring DSW's private labels on board. And though that sounds simple, such transformational acquisitions rarely go as smoothly as planned.
Fortunately, DSW retail operations remain on point and should help to at least partially offset the drag from Camuto until Designer Brands can straighten it all out.