Step up to Designer Brands: A Favorite in Footwear

06/17/2019 5:00 am EST

Focus: CONSUMER

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

Designer Brands Inc. (DBI) operates DSW Warehouses and other retail stores with over 1,000 locations in 44 U.S. states and Canada, and e-commerce, growth and income expert Crista Huff, editor of Cabot Undervalued Stocks Advisor.

DSW was the #1 omnichannel retailer in the U.S. in 2017 and 2018, and has delivered 27 consecutive years of sales growth.

CEO Roger Rawlins’ June 6 presentation at the William Blair Annual Growth Stock Conference emphasized how management is drawing upon the most successful individual aspects of DSW Warehouses, The Shoe Company, and Camuto Group, and applying those profit-generating processes to each of these three divisions of the company in order to escalate revenue and gross margin growth.

For example, Designer Brands recently acquired Camuto Group, which is the leader in private brand footwear in the U.S.

Private brand footwear carries about 10 percentage points of higher gross margin than branded footwear, so Designer Brands plans to use Camuto’s expertise to provide new brands to DSW Warehouses that will then boost total-store gross margins.

DBI is an undervalued growth stock with a hefty dividend yield. After reporting a first-quarter earnings and revenue beat, management raised full-year 2019 EPS guidance to a range of $1.87-$1.97 vs. their previous guidance of $1.80-$1.90 per diluted share.

Thereafter, the 2019 analysts’ consensus earnings estimate rose from $1.86 to $1.91. Expected EPS growth rates are now 15.1% and 13.6% in 2019 and 2020. The current P/E is moderate at 9.9.

Weakness in the broader market and poor results at other retailers have pushed the DBI price down to support at 18 that was established in late 2017 and early 2018.

The stock offers a yield of 5.4%. Income investors and risk-tolerant growth stock investors should buy DBI now. Although we expect volatility, we rate the stock as a strong buy.

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