Having underperformed the S&P 500 in the last year, shoe retailer Designer Brands (DSW, Financial) has the prospect for improvement.
The company is implementing a number of changes to its strategy that are expected to lead to rising profitability over the medium term. For example, it is investing in its loyalty program, while further expanding into kids’ footwear. This could improve its competitive position, while increasing sales of private brands may boost its margins.
Although there is uncertainty facing the retail sector, the company is seeking to differentiate its offering in order to improve the customer experience. With a low valuation, it could outperform the S&P 500 in the long run.
Loyalty program
With over 90% of the company’s sales coming through its loyalty program, planned changes to the program could have a significant influence on its financial performance. Designer Brands will launch the next phase of its VIP loyalty program, which includes a variety of personalized benefits that allow members to customize their own shopping experience. For example, they will be able to elect to receive free next-day shipping on a specified number of orders. A mobile wallet will also become available, while consumers will be able to enroll in the program through SMS.
Further improvements to the loyalty program include a DSW.com customer community, as well as enhanced rewards when exclusive brands are purchased. There will be an increased use of data to suggest products based on past shopping experiences, which could boost cross-selling opportunities. Rewards for social media interactions will also be offered, as there exists a major opportunity to mobilize the program’s 26 million members on social media.
Growth opportunities
Cross-selling opportunities are being enhanced through the recent introduction of kids’ products in the company’s warehouses. The kids’ footwear market represents 10% of the total U.S. footwear market, at around $6.5 billion. Expansion into this segment increases the size of the company’s total addressable market and has also boosted sales of its adult footwear. In 31% of kids’ footwear transactions, adult footwear is also purchased. Customers who buy kids products are also spending $75 more per year on average than non-kid buyers. As a result, the company is seeking to grow the proportion of its sales from kids’ products from 4% to 10% by 2021.
Designer Brands is seeking to increase sales of exclusive, private brands from $300 million to $700 million per year by the end of 2021. This is expected to provide it with greater differentiation versus rivals, while also improving its margins. The relationship it has formed with Camuto is due to aid it in this opportunity, having a long track record of creating successful brands for other retailers. Camuto’s brands also allow Designer Brands to capture the retail and wholesale margins on offer, which will increase their impact on profitability versus the company’s existing private brands.
Risks
The prospects for the retail sector continue to be uncertain. Retail sales in December 2018 fell by the largest amount recorded in over nine years, increasing only modestly in January 2019. There has also been a weakening in consumer confidence in recent months, with it falling in March. It is expected to continue to decline during the course of the year, as weak jobs growth contributes to an increasingly price-conscious consumer.
This could cause Designer Brands’ sales growth to disappoint over the near term. In response, it is seeking to improve the customer experience in order to increase its competitive advantage versus sector peers. It is set to utilize a significant amount of data on customer buying patterns in order to determine the inventory it has in its warehouses. This should mean that it has the right products available in order to meet customer demand more frequently. It is also set to target promotions to customers based upon their prior shopping patterns. This will allow it to more accurately target its marketing message to different consumers, which is expected to drive increased traffic to its stores and website.
Outlook
The company is forecast to post a rise in earnings per share of 10.5% in the 2021 fiscal year. Since it trades on a forward price-earnings ratio of 11.5 using fiscal 2020’s forecast earnings per share, this suggests that it offers good value for money.
Further profit growth could be ahead, with improvements to its loyalty program and the cross-selling opportunities of its move into kids’ footwear acting as potential catalysts. An increasing assortment of private labels may also enhance its differentiation versus rivals, as well as boost margins.
Although the retail sector faces an uncertain future, the company’s plans to improve the customer experience may strengthen its competitive position. Having underperformed the S&P 500 in the last year, the stock could offer investment appeal.
