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Market Watchers Divided on Designer Brands After a Disappointing Q3

It was a rough day Wednesday for Designer Brands Inc., when the firm posted a third-quarter earnings miss and slashed its outlook for the year. The news had sent its shares tumbling while analysts appeared divided on the firm’s prospects for the next fiscal year.

According to Susquehanna Financial Group analyst Sam Poser, opportunities for improvement remain despite a soft same-store sales gain of just 0.3% for the months ended Nov. 2, compared with a 7.3% jump in the prior year period. In the coming weeks, Designer Brands expects its Camuto-produced merchandise to hit selling floors and projects nearly $500 million of retail sales from the brand’s products in 2020.

“The third-quarter results and downward revision … were a hiccup in our view, and we fully expect a recovery beginning in first-quarter 2020,” Poser explained. “Investors are not giving DBI credit for the benefits Camuto will deliver over the next two years.”

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As part of the $238 million deal last year that closed on Nov. 6, Designer Brands assumed control of Camuto Group’s sourcing, production, design and distribution infrastructure, along with a 40% share in the intellectual property of its brand portfolio, which includes labels such as Vince Camuto, Enzo Angiolini and Sole Society. Brand management firm Authentic Brands Group acquired the remaining share of the IP, bringing the total purchase price to $341 million.

“We continue to see notable synergies between DSW and Camuto,” Designer Brands CEO Roger Rawlins said in the Q3 call. “Over time, will enhance our product offering across multiple channels, utilizing Camuto’s production capabilities, coupled with the retail footprint of our existing store base and digital platforms.”

For the third quarter, the Columbus, Ohio-based firm logged adjusted profits of $48.6 million, or 67 cents per share — well below consensus bets of 74 cents. On a reported basis, net income was $43.5 million, or 60 cents per share. Revenues rose 12.4% to $936.26 million, which topped Wall Street’s forecasts of $935.03 million.

The footwear group also lowered its full-year guidance for adjusted earnings per share in the range of $1.50 to $1.55, versus the previous range of $1.87 to $1.97 per share. It continues to expect low double-digit revenue growth, but it predicts flat comps compared with its previous outlook of low single-digit gains.

In a subsequent earnings call, DBI cited two major challenges: Unseasonably warm weather, particularly in September and October, which the company considers its two largest-selling months; and the impact of tariffs, leading the retailer to pull back inventory and trim marketing investments as it anticipated a change in consumer spending.

Wedbush Securities analyst Christopher Svezia, however, appeared to be more cautious about Designer Brands’ ability to weather the risk from promotions and inventory leading into the spring, adding that consumer response to Camuto’s new private-label offerings remains largely “unknown.”

“There needs to be greater visibility that execution missteps are in the rearview mirror, headwinds are abating and that the company can profitably drive positive comps and also seamlessly deliver the Camuto private label ramp-up in order to become more constructive on shares,” wrote Wedbush Securities analyst Christopher Svezia.

During the conference call, Rawlins added that the company is on track to increase its private-label penetration from roughly 15% to nearly 30% over time, with the goal of improving margins and lowering costs.

“While we recognize that DBI had a challenging quarter — particularly at the DSW U.S. operation — and has several headwinds to face, we think it’s incredibly important to note that we remain excited about the future of our business,” he said. “With our Camuto acquisition, we now have a fully integrated supply chain, which will allow us to continue to maintain our leading position in the market.”

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