Ultra-growth stock Designer Brands (DBI 2.85%) is emerging as a potential leader in a recovering consumer discretionary sector. The stock of this designer, producer, and seller of footwear and accessories has surged nearly 30% since the start of the year, solidly outperforming the major indexes.

But amid supply chain pressures, logistical concerns, and a labor shortage, Designer Brands is also weathering current headwinds. Having its own flexible infrastructure, along with strategic partnerships, has allowed it to hold its edge through uncertain times.

When it gets hot, sell sandals

Designer Brands' flagship store is DSW Designer Shoe Warehouse, and the company operates over 500 stores in 44 states. DSW specializes in brand name designer dress, casual, and athletic shoes. In addition to DSW Designer Shoe Warehouse, Designer Brands runs other brand concepts like The Shoe Company and Shoe Warehouse, both located in Canada.

A major transformation for Designer Brands took place in 2018 when the company acquired Camuto Group, a product design and brand development company. Along with the Vince Camuto brand and licensing rights to Jessica Simpson, Jennifer Lopez, and Lucky Brand footwear, this acquisition helped Designer Brands to grow its market share and enabled the company to be nimble and self-sufficient.

Most notably, the $238 million dollar deal in 2018 gave Designer Brands control of Camuto Group's distribution infrastructure. Having access to this distribution network gave Designer Brands its secret weapon -- the ability to quickly fine-tune inventories based on changes in demand.

Woman shopping for shoes high heels

Image source: Getty Images.

This flexible business model proved to be indispensable during the pandemic. When consumers suddenly shifted their focus to athletic, comfortable footwear, Designer Brands quickly adjusted its inventories to accommodate the shift in demand. Now that pandemic fears have subsided and demand has shifted, the company can quickly pivot back to fashion-oriented lines.

As CEO Roger Rawlins stated in the company's most recent earnings call, "When it was 35 degrees in April, we sold a ton of boots. When it got to be 75, we sold a ton of sandals ... that is the beauty of our business."

Obstacles along the path

Current headwinds for Designer Brands can be found industry wide, such as high freight costs, supply chain disruptions, and staffing shortages. With the combination of elevated operating costs and the effects of inflation on consumer behavior, Designer Brands will have to stay on its toes to navigate the current landscape as profitably as possible.

Another factor to consider is that the company's guidance for the rest of the year assumes that the trends observed in the first quarter will continue to develop, specifically higher-than-expected store sales. If consumer behavior changes dramatically, Designer Brands must rely on its flexible sales model to adapt in time.

Designer Brands store sales outperformed its digital sales in Q1, which the company said was normal. It makes sense that customers would rather purchase items like shoes in person than online. But this also presents a risk if DSW cannot sufficiently staff its stores.

Designer Brands also must contend with fierce competition in the footwear space from companies like Shoe Carnival, Foot Locker, and Famous Footwear. Despite the competitive landscape, CEO Rawlins remains "hyper-focused on maintaining our edge."

Pairing with Strategic Partners

Designer Brands is differentiating itself through partnerships with top footwear brands. A prime example is its partnership with Authentic Brands Group (ABG), the parent company of Reebok, which was part of the Camuto Group's acquisition in 2018. The relationship gave Designer Brands access to more styles and colors of Reebok products.

More recently, Designer Brands launched its first prototype Warehouse Reimagined store, which opened at a Houston DSW location in May. The Warehouse Reimagined concept helps strengthen DSW's relationships with national brands through "shop-in-shops," which allows each brand to tell its unique story within a DSW.

This has helped Designer Brands bolster relationships with brands including New Balance, Adidas, Crocs, Puma (OTC: PUMSY), Reebok, Teva, Birkenstock, and Sketchers.

Looking forward, Designer Brands has the ambitious goal of doubling its sales by 2026, with Warehouse Reimagined to account for 30% of total sales. Although the short-term outlook is a bit slippery for luxury brand stocks, Designer Brands could emerge as a major footwear player in the coming years. After a strong Q1 earnings report, watch for continued momentum in the upcoming Q2 earnings release on August 31.