Designer Brands, Inc Is A Reversal In Process
The only people surprised by Designer Brands, Inc’s (NYSE: DBI) blowout second-quarter report are those not paying attention to the trends. The results from sporting goods companies to shoe stores, to mall retailers, prove that not only are the pandemic tailwinds still blowing n the retail world but that eCommerce Trends are still strong, and that business is supported by back-to-school and the resumption of In-person work environments. In our view, these tailwinds should continue to blow and will be supported by the ever-improving employment landscape as well. The fundamental picture, compounded by the high 12% short interest, should keep the stock moving higher but it’s going to have to cross a major hurdle first.
Designer Brands, Inc Beats On The Top And Bottom Line
Designer Brands, Inc had a great quarter with fantastic results in all metrics save one. While the $817.34 in net revenue is up 15% sequentially, 66.9% over last year, and beat the consensus estimate by 880 basis points it is still shy of the 2019 revenue level by 5%. One mitigating factor for us is the fact comp sales are up 84.9% on an as-open basis relative to last year's pandemically impacted quarter. Another mitigating factor is the fact that margins expanded significantly over the past year and to a level above the pre-pandemic rate.
The company's gross margin of 34.8% is up nearly 3,000 basis points from last year's 7.6% and 430 basis points better than 2019’s 30.5%. This has the company set up for significant earnings leverage as the business rebound continues and that can be seen in the bottom-line results. The GAAP earnings of $0.55 beat the consensus by $0.29 and are up nearly $0.20 from 2019. On an adjusted basis, the $0.56 reported by the company beat the consensus by $0.38 and is up nearly a dime better than in 2019. Incredibly, these results also include a 13.5% build-up in inventory worth more than 100% of GAAP earnings.
The company did not give any formal guidance for the back half of the year but did give commentary that leads us to believe business will continue to improve.
“We have organized our efforts around three pillars: customer, brand and speed. All three of these pillars interact with one another and simultaneously strengthen each other. We are offering customers the experiences they crave, the speed they demand, and the brands that can rise to those challenges. Given the positive momentum and strength of our strategy, we expect to achieve an adjusted operating income in the second half of fiscal 2021 that will be in-line or slightly better than fiscal 2019 levels," says CEO Rodger Rawlins.
The Technical Outlook: Designer Brands Incorporated Struggles With Short Selling
Shares of Designer Brands appear to be attempting a reversal but the bears are putting up a fight. Price action was initially higher in the wake of the Q2 earnings report but has since fallen under the load of a 13% short interest. Price action may remain under pressure in the near term but we expect to see support establish itself very soon and keep the stock moving sideways if not lead to an uptrend. The fundamental picture for this company is sound, it's driving free cash flow and paying down debt, so we expect to see it retesting the highs near $20 before the end of the year. The one thing missing from this picture right now that would seal the deal on the reversal is the analysts. PriceTargets.com’s analyst tracking tools reveal that no major sell-side reports have come out since the spring, a shortfall that is having an impact on price action today.
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