Today’s news: Designer Brands (DBI) reported third-quarter results.
Designer Brands (DBI – yield 7.1%) reported a disappointing third quarter this morning, in which gross margins were impacted by three non-recurring situations:
1. CEO Roger Rawlins attributed less-than-expected performance to unseasonably warm weather, “which hindered performance across our entire business” during September/October, historically their most profitable and busiest time of the year.
2. Gross margins were also impacted by “the mitigation of tariffs, which led us to pull back inventory and cut marketing investment in anticipation of a change in consumer spending, that in hindsight was not the right decision to make.” Of note, the company successfully mitigated the cost of 90% of the tariffs affecting the Camuto Group – largely by moving production out of China and sharing costs with vendors – but the quarter’s gross margin problem resulted from marketing decisions made regarding the fear of consumers’ reactions to tariffs. The CEO stated that the feared consumer impact did not materialize.
3. To a lesser extent, gross margins were impacted as the company faced internal issues with their newly upgraded POS system: “We issued more discounts than expected to our promotional campaigns.”
Designer Brands reported $0.67 EPS vs. the consensus estimate of $0.75. Gross margins rose in Canada and fell in the U.S., for a net reduction of 3.7 percentage points to 28.9%. Operating expenses fell by 4.0 percentage points. Rawlins commented, “Our Camuto organization delivered their first positive operating income contribution in the quarter.”
As a result of these problems during the quarter, management lowered their full-year outlook for adjusted EPS in the range of $1.50 to $1.55 per diluted share, compared to their previous range of $1.87 to $1.97 per diluted share.
Quarterly revenue totaled $936.3 million, near the consensus estimate of $937.9 million. Comparable store sales increased 0.3% vs. a year ago.
The integration of the Camuto Group and the Shoe Company acquisitions are progressing as planned, as are various in-store innovations. For example, the company is reaping “a 40% increase in annual footwear [spending] when a Rewards member becomes a nail bar customer.” I’ll report additional details in next week’s update, after I listen to the full conference call.
The company repurchased 1.0 million shares during the quarter and 7.1 million shares year-to-date. Keep in mind that the large dividend yield is safe. If the company were anywhere close to being worried about their ability to pay the dividend, they would almost certainly discontinue share repurchases rather than reduce the dividend.
Designer Brands is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with 667 stores in 44 U.S. states and Canada, and Camuto Group. Designer Brands continues to cross-apply the successes of its separate U.S. and Canadian businesses in order to maximize revenue and profit growth, drawing upon expertise in retail and online operations and their rewards program. The company has delivered 27 consecutive years of revenue growth.
DBI is an undervalued, small-cap growth stock. The stock is down 17% right now to $14.12, retracing its August lows. I consider today’s price action to be an overreaction to temporary bad news at a solidly profitable and growing company. The annual dividend payout of $1.00 per share provides new investors with a 7.1% yield while they await the share price rebound. Dividend investors and growth stock investors who like to buy bargains should buy now. Strong Buy.