Designer Brands Inc (DBI, Financial) offers good value for the money, in my opinion, and it could deliver a stock price recovery after its 38% decline in the past year.
The footwear retailer is investing in its website, seeking to differentiate its stores from those of its sector peers and implementing new technology to improve the shopping experiences of its customers.
Camuto acquisition
The company’s 2018 acquisition of footwear retailer Camuto could catalyze its financial performance. Designer Brands reported in its fiscal 2019 third quarter results that its integration of the Camuto business is improving its efficiencies and lowering its costs.
Camuto also provides Designer Brands with a range of exclusive private label products that will help to differentiate the company from its sector peers. They could lead to improving margins for the business as it seeks to increase the proportion of its own brands sold through its stores from 15% in the third quarter to 30% in the upcoming years.
Canada growth potential
The company relaunched its Canadian website in the fiscal 2019 first quarter. This could enable it to capitalize on the growth potential in online sales in Canada, where purchasing clothing and footwear through a website, rather than in a store, is less common among consumers than it is in the U.S.
Designer Brands is using the expertise it has gained in online sales in the U.S. to strengthen its position in Canada. This could provide it with a competitive advantage versus its sector peers. It also launched a new rewards program in Canada in the third quarter, which could improve its levels of customer loyalty.
Differentiation
The retailer is expanding the services provided by the nail bars that are located within its stores. This could increase the number of customers who visit its stores, and may broaden its appeal to consumers who would not otherwise shop at its stores.
The company’s nail bars also provide a boost to its footwear sales. For example, it reported in its third quarter results that its loyalty program members typically spend 40% more on footwear when they become a nail bar customer.
Additionally, its nail bars diversify the business and help to differentiate it from sector peers. This could strengthen its competitive position in the upcoming years.
Potential threats
The company’s financial performance in the third quarter was disappointing. Its gross margin declined from 32.6% in the fiscal 2018 third quarter to 28.9% in the fiscal 2019 third quarter. This was partly due to the impact of tariffs placed on its imports from China, which caused the retailer to reduce the amount of inventory at its stores and lower its marketing expenditure.
In addition, it experienced difficulties in implementing new checkout technology at its stores. This led to the company applying discounts to its products that were larger than they should have been, which reduced its margins.
In response, Designer Brands has made changes to its new checkout technology. It now expects to reduce waiting times for its customers through a faster checkout process. This could lead to the company requiring fewer staff at its stores, and for its existing staff to have more time to serve its customers.
The business plans to continue its efforts to mitigate the impact of tariffs placed on its imports from China. It has moved almost all of its production out of China and is accelerating its rollout of private brands in an effort to improve its margins in the upcoming quarters.
Outlook
Market analysts forecast that Designer Brands will deliver a 19.7% rise in its earnings per share in fiscal 2021. Its forward price-earnings ratio of 10.6 suggests that it offers a wide margin of safety and could produce a successful stock price recovery.
Disclosure: the author has no position in any stocks mentioned.
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