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Designer Brands Looks to Future Growth

By Dan Caplinger - Aug 29, 2019 at 11:53AM

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The footwear and accessories retailer is still dealing with sluggish conditions.

The challenging retail industry has forced many companies to make changes to their strategic visions. For shoe retailer Designer Brands (DBI -3.60%), that's included a name change from DSW Shoe Warehouse to reflect the moves that the company has made to diversify and expand its business opportunities.

Coming into its fiscal second-quarter financial report, investors wanted to see signs that Designer Brands would be able to integrate newly acquired businesses to produce greater success. The numbers that the shoe retailer produced weren't all that attractive, but it thinks that the future looks bright for the industry and for its place in it.

Designer Brands deals with a bottom-line hit

Designer Brands' second-quarter results weren't entirely what shareholders were looking to see. Revenue of $860.2 million was higher by 8.2% from the same period a year ago, which was somewhat slower than the nearly 10% growth rate that those following the stock had expected. Adjusted net income of $35.8 million was down almost 30% year over year, and the resulting adjusted earnings of $0.48 per share fell from year-ago levels despite topping the consensus forecast among analysts by $0.01 per share.

Office with wall art and Vince Camuto logo.

Designer Brands just acquired the Camuto Group. Image source: Designer Brands.

Some of Designer Brands' fundamental business metrics showed signs of concern. Comparable sales were down 0.8% during the period, continuing to weaken from past quarters. The U.S. retail segment saw sales decline 2% year over year, and the Canada retail business suffered a nearly 13% hit. Only new revenue from the brand portfolio segment managed to keep the top line moving in the right direction.

Margin figures were also weak. Designer Brands saw its core U.S. retail business take a 2.5-percentage-point hit to gross margin, offsetting a nearly 10-percentage-point boost to gross margin for the Canadian side of the business. Companywide, gross margin fell more than 2 percentage points to 30%, and a significant rise in operating expenses also weighed on bottom-line performance.

CEO Roger Rawlins kept things in a longer-term perspective. "Each segment delivered what was needed this quarter," Rawlins said, "successfully integrating two significant acquisitions and leveraging the unique strength of each of our businesses to give Designer Brands greater control and flexibility in setting our own destiny in a world full of extraordinary external pressures."

What's ahead for Designer Brands?

There's a lot of optimism at Designer Brands about what lies ahead. The CEO highlighted the contribution of the Camuto Group, which has already unveiled its DSW Spring 2020 private-label offering. Rawlins thinks that "we will be in a solid position to not only see the gross margin benefit as we convert the production of our DSW private label to Camuto Group next spring, but also to increase brand loyalty and further drive sales within our warehouse footprint."

The retailer also kept betting on its stock's future performance. During the quarter, Designer Brands repurchased about 2.7 million shares, spending roughly $50 million in the process. That still leaves more than $350 million authorized for future buybacks.

Designer Brands investors reacted positively to the news, and the stock climbed 4% in early-morning trading following the announcement. The shoe retailer still has a lot of work to do to take full advantage of its new acquisitions and make good on its strategic promises in a tough environment for sellers of consumer goods. Yet at least for now, shareholders seem confident that Designer Brands is making the right moves to ensure its success for years to come.

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