Designer Brands' Q2 Earnings Miss Estimates, Comps Decline Y/Y

Designer Brands Inc. DBI released second-quarter fiscal 2024 results, wherein both the bottom and top lines lagged the Zacks Consensus Estimate and declined year over year.

However, during the second quarter, the company continued to advance with its strategic initiatives aimed at business transformation. Despite challenges in categories like dress and seasonal footwear, the expansion of athletic and athleisure brands helped mitigate some of the pressure.

Looking ahead, the focus will be on investments in retail and brand businesses to drive growth. Enhancements in product assortment, marketing and the omnichannel customer experience are intended to ensure the company remains a top destination for footwear. These enhancements will also help it to adapt to changing consumer spending patterns and evolving market trends.

More on Designer Brands' Q2 Results

Designer Brands posted adjusted earnings of 29 cents per share, which missed the Zacks Consensus Estimate of 56 cents. The company recorded earnings of 59 cents per share in the year-ago period.

Net sales were $771.9 million, down 2.6% year over year. The top line missed the Zacks Consensus Estimate of $819 million. Also, comparable sales (comps) decreased 1.4% year over year compared with the Zacks Consensus Estimate of a nearly 3.7% decline.

Insight Into DBI's Margins & Expenses

Gross profit amounted to $252.9 million, down 7.5% from $273.4 million in the year-ago quarter. This was primarily due to lesser revenues. Also, the gross margin decreased 170 bps to 32.8% from the prior-year period's level.

This decline was mainly due to a lower initial markup on athletic and athleisure products as the company focused on increasing its market share in these categories. Additionally, the need to run promotions to clear seasonal inventory put pressure on the gross margin, leading to reduced profitability.

Adjusted SG&A expenses, as a percentage of net sales, rose to 28.9%, up 200 basis points from 26.9% in the same quarter last year. This increase in the ratio was primarily due to a drop in overall sales, combined with higher fixed costs and greater investment in areas like talent acquisition and IT, particularly for e-commerce and back-to-school marketing. However, this impact was somewhat mitigated by cost reductions implemented at the start of the second quarter.

Adjusted net income amounted to $17.1 million, down 56.7% from $39.4 million in the year-ago quarter.

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Update on Designer Brands' Segmental Performance

U.S. Retail: Segment sales decreased 2.6% year over year to $641.7 million compared with the Zacks Consensus Estimate of $652 million.

Canada Retail: Segment sales increased 6.4% year over year to $74.8 million compared with the Zacks Consensus Estimate of $86 million.

Brand Portfolio: Segment sales of $96 million increased 14% year over year. The metric lagged the Zacks Consensus Estimate of $121 million.

DBI's Financial Snapshot: Cash, Debt & Equity Overview

In the second quarter, the company reported cash and cash equivalents totaling $38.8 million compared with $46.2 million at the end of the same period in 2023. It also had $155.1 million available for borrowings under its senior secured asset-based revolving credit facility.

Debt levels also rose significantly, reaching $465.7 million by the end of the second quarter compared with $331 million in the year-ago period. Additionally, the company ended quarter with inventories of $642.8 million, which marked an increase from the $606.8 million recorded at the end of second-quarter 2023.

As part of its efforts to return value to shareholders, the company repurchased 2.7 million Class A common shares during the second quarter, with an aggregate cost of $18 million. As of Aug. 3, 2024, there remained $69.7 million worth of Class A common shares available for repurchase under the share repurchase program.

Update on DBI's Stores

During the fiscal second quarter, the company closed one store in the United States and opened two stores in Canada, resulting in a total of 499 U.S. stores and 177 Canadian stores as of Aug, 3, 2024.

Designer Brands' FY24 Guidance

The company has revised its financial outlook for 2024. It now expects sales growth to be flat to low-single digits compared with the initial projection of low-single digits growth.

Additionally, the company has lowered its guidance for adjusted earnings per share. The metric is now expected to be in the range of 50-60 cents compared with the prior guided range of 70-80 cents. This revised outlook reflects more cautious expectations for the remainder of the year.

Shares of this Zacks Rank #3 (Hold) company have lost 29.7% in the past three months compared with the industry's 12.6% decline.

Key Picks

Some better-ranked companies are Boot Barn Holdings, Inc. BOOT, Abercrombie & Fitch Co. ANF and Steven Madden, Ltd. SHOO.

Boot Barn operates as a lifestyle retail chain devoted to western and work-related footwear, apparel and accessories. It currently sports a Zacks Rank #1 (Strong Buy).

The Zacks Consensus Estimate for Boot Barn's fiscal 2025 earnings and sales indicates growth of 10.3% and 10.7%, respectively, from the fiscal 2023 reported figures. BOOT has a trailing four-quarter average earnings surprise of 7.1%.

Abercrombie is a specialty retailer of premium, high-quality casual apparel. It sports a Zacks Rank of 1 at present. ANF delivered a 16.8% earnings surprise in the last reported quarter.

The consensus estimate for Abercrombie's fiscal 2025 earnings and sales indicates growth of 61% and 12.6%, respectively, from the fiscal 2024 reported levels. ANF has a trailing four-quarter average earnings surprise of 28%.

Steven Madden designs, sources, markets and sells fashion-forward name-brand and private-label footwear. It currently has a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for Steven Madden's 2024 earnings and sales indicates growth of 6.9% and 12.6%, respectively, from the year-ago actuals. SHOO has a trailing four-quarter average earnings surprise of 9.5%.

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