On Wednesday, UBS adjusted its outlook on Designer Brands Inc. (NYSE: NYSE:DBI), reducing the price target to $10 from the previous $11 while maintaining a Neutral rating on the stock. The firm based its decision on the latest quarterly report from Designer Brands, which highlighted the company's strides towards achieving positive comparable sales growth. Focused efforts on expanding their athletic and casual footwear offerings are anticipated to contribute to a revenue upswing in the second half of 2024.
The report by UBS acknowledges that Designer Brands has made significant progress, particularly in the first quarter, towards rebounding to positive comparable sales growth. The company's shift towards more athletic and casual footwear is seen as a strategic move that could potentially lead to a top-line improvement later in the year.
Despite these positive developments, UBS expressed concerns about the company's spending on selling, general, and administrative (SG&A) expenses. The investment firm anticipates that these elevated costs will likely result in Designer Brands' operating margin remaining below the levels seen before the pandemic. This outlook has led to a downward revision of the company's earnings per share (EPS) estimates for the coming years.
UBS forecasts that Designer Brands will experience a flat six-year EPS compound annual growth rate (CAGR). This projection stems from the belief that the anticipated growth rate is unlikely to facilitate an expansion in the company's price-to-earnings (P/E) ratio. The firm's stance remains neutral, reflecting a cautious perspective on the company's stock performance potential in light of the identified financial challenges.
In other recent news, Designer Brands Inc. reported a nearly 1% increase in sales for the first quarter of 2024, with improved gross margins due to better inventory management and growth in direct-to-consumer sales. Despite a slight 2.5% drop in comparable sales, the acquisition of the profitable Canadian footwear retailer Rubino is expected to contribute positively to sales and operations in Canada. The company's new President, Andrea O'Donnell, has prioritized cost reduction, margin increase, and refining the brand's portfolio.
On the other hand, Telsey Advisory Group reduced its price target for Designer Brands from $11.00 to $10.00 while maintaining a Market Perform rating on the stock. This decision was influenced by higher than expected Selling, General & Administrative (SG&A) expenses reported by the company. Despite this, Designer Brands has reiterated its previous forecast for low single-digit revenue growth and low single-digit to mid-teens year-over-year growth in earnings per share for fiscal year 2024.
In response to financial pressures, Designer Brands is actively seeking additional methods to streamline its operations and improve efficiency. Recent developments include the strong performance of brands like Keds and Topo Athletics, and the successful integration of Rubino, which generated $47 million in sales last year. The company expects these positive developments to continue, with plans to open more stores by the end of 2024.
InvestingPro Insights
Designer Brands Inc. (NYSE: DBI) has been navigating through a dynamic retail landscape with a strategic focus on athletic and casual footwear. As per InvestingPro data, the company's market capitalization stands at $490.75 million, suggesting a modest size within the retail sector. Notably, the adjusted P/E ratio for the last twelve months as of Q4 2024 is 14.9, which indicates a more favorable valuation compared to the current P/E ratio of 27.39. This improvement in valuation reflects the company's efforts to enhance profitability and could be a sign of investor confidence in its cost management and growth strategies.
One of the key InvestingPro Tips highlights that management has been aggressively buying back shares, a move often seen as a signal of management's belief in the company's value. Additionally, the company's valuation implies a strong free cash flow yield, which could be attractive to investors looking for companies with solid financial health and the potential for future investments or dividend payouts. With analysts predicting profitability for the current year and the company having been profitable over the last twelve months, these factors could provide a positive outlook for investors considering Designer Brands' stock.
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