Investment Thesis

Designer Brands (NYSE:DBI) has very few competitors to DSW when it comes to having a shoe-centered store that encompasses all types of footwear specifically formal and casual, with less emphasis on athletics. There are lots of sneaker centered stores such as Foot Locker (NYSE:FL) and Finish Line, but DSW has a monopoly on other types of footwear. Therefore, the inherent problem is not that DSW is unable to compete in today’s market, but whether or not these styles of shoes are still relevant? They appeal to different consumers, and while workplace fashion is in jeopardy, there is still a consumer for the DSW product.

Athleisure

DSW could use some expansion into athletic wear, but they mainly benefit from not being another speaker emporium. The more DSW gets immersed into the sneaker game, the more competition they face at a severe disadvantage as DSW is not known for sneakers. People go to DSW to look at a variety of other types of shoes, and while office footwear is in peril, people still like to wear heels and other types of shoes. One aspect DSW could stand to expand more into is men’s and kid’s footwear, but overall, the models they sell are very much relevant. Not everybody needs to be a Nike (NYSE:NKE) or an adidas (OTCQX:ADDYY), but what DSW could use is a rebrand. They need to remind people why DSW is such a good place to shop, online or in-store.

Valuation

At the current share price of $5.44, and assuming the P/E ratio stays at around 5, the stock is pricing in $1.088 in EPS. Over the last five years, DSW has averaged about $0.98 in EPS. Excluding 2018, the year of the Camuto Group acquisition, where EPS was a loss of $0.26 average EPS was $1.29. Therefore, DSW has the potential to reach its target EPS. At this point, it is up to DSW to remain front of mind for consumers; retail spending for the rest of the year is likely in jeopardy, especially during this holiday season. Good news; DSW’s debt to EBITDA ratio at -0.896 is an incredible advantage in today’s environment.

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ChartData by YCharts

DSW U.S. online sales were up by 27%, and DSW Canada was up 154%. The U.S. digital sales in comparison to competitors’ astronomical growth look a little bit sluggish, but they are promising. DSW was having some relatively strong revenue growth rates pre-pandemic, indicating consumer interest in the brand is far from dead. It wasn’t insane growth, but they were averaging some high single-digit increases, and they benefited from the additional revenue brought on by Camuto, but in the last 10 years, annual growth rates have never been negative. That says something about the company and a dedicated consumer base. Comparable revenue growth rates need to improve, as you should not only be seeing sales improve dramatically based on acquisitions. Comp sales are generally down YoY, making improvement necessary. However, the core structure is there. DSW’s 52-week high is $19.08, and the 52-week low is $2.60, so the stock has gone up since the low. Moreover, the ceiling for gains is pretty high. DSW is not a growth stock, and they have no intention of being a growth stock, but what they do bring to the table is consistency in an era defined by chaos.

ChartData by YCharts

Vince Camuto Acquisition

Management has acknowledged that the acquisition of Camuto Group was a bad call on multiple fronts as they were expecting workplace attire to continue growing, disappointingly with the introduction of COVID-19 and more at-home workplaces, that has all been thrust into chaos. It was also a surprising deal as workplace attire was leaning more and more casual in recent years, and many began opting for sneakers instead of dress shoes. Additionally, Camuto is not bringing anything new to the formal shoe market as many of the designs they perpetrate are broadly marketed with lower costs.

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(Source: dsw.com)

(Source: dsw.com)

They also don’t have the notoriety of high-end shoe brands such as Christian Louboutin or Manolo Blahnik. The price isn’t the issue here since companies like LVMH (OTCPK:LVMHF) are turning out good sales. The problem is that, for the price point, consumers aren’t getting the value they believe they can get elsewhere. Brand value is not everything but, the style needs to match the price and make consumers feel they are getting something new with Camuto.

Conclusion

DSW is not an easy stock to love. They have been a sleepy company over the past few years, and growth rates are far from exciting. They made a mistake with the Vince Camuto acquisition and not expanding more into the men’s market and more expansion into kids and athleisure and all the problems that have accumulated over the last few years. However, there are very few companies like DSW that have the scope and a monopoly for formal and casual footwear warehouses. DSW has a steady consumer base, and while things aren’t looking the best right now, they still bring a lot of value to the consumer and are incredibly relevant. In terms of pricing, $5.44 could be too expensive, therefore postponing your buy on the stock may be best until it gets even lower. It especially could take a hit from lower holiday earnings. This stock is a very underrated pick, and if it can get back around the $2 range, it could be well worth the money.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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