Why Designer Brands Stock Was Moving Higher Today
Key Points
Designer Brands' comparable sales fell, but it still increased profits.
It's delivering significant margin expansion due to better inventory controls and product selection.
The stock looks cheap at a forward P/E of just 11.
Shares of Designer Brands (NYSE: DBI) were climbing today after the parent of DSW posted better-than-expected results in its second-quarter earnings report, even as sales fell.
As a result, the stock was up 5.2% as of 11:04 a.m. ET.
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Designer Brands hops over low expectations
During a challenging time for the footwear industry, Designer Brands, which also owns brands like Keds, Vince Camuto, and Lucky Brand, reported a comparable sales decline of 2.4%, as overall revenue fell 1.2% to $730.6 million, which missed estimates at $744.7 million.
However, the company impressed on the profit side. Adjusted gross margin significantly improved from 43.6% to 47.9%, due to better product selection and tighter inventory control. It also received $15.3 million in tariff refunds, though that wasn't factored into the adjusted gross margin.
On the bottom line, adjusted earnings per share rose from $0.33 to $0.34, which beat estimates at $0.26.
CEO Doug Howe said, "Our second quarter results represent significant improvement in profitability year-over-year, highlighted by meaningful gross margin expansion as well as impressive sales growth in our Brand Portfolio segment." Its Brand Portfolio business, which grew comps by 7.1%, remains much smaller than its retail business but represents a strategic pivot for the company.
What's next for Designer Brands
Management also noted a strong start to the third quarter, and raised its guidance for the full year, calling for overall revenue growth of flat to 1%, up from a previous range of -1% to +1%. It also sees adjusted earnings per share of $0.47-$0.52, compared to an earlier forecast of $0.28-$0.38.
After that hike, the stock looks cheap at a forward P/E of just 11, but the company will have to return to meaningful top-line growth to move higher over the long term, as margin expansion can only take it so far.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Designer Brands. The Motley Fool has a disclosure policy.