Designer Brands's (NYSE:DBI) Q2 Earnings Results: Revenue In Line With Expectations

Footwear and accessories discount retailer Designer Brands (NYSE:DBI) reported results in line with analysts' expectations in Q2 FY2023, with revenue down 7.81% year on year to $792.2 million. The company didn’t provide any forward revenue guidance. Turning to EPS, Designer Brands made a GAAP profit of $0.56 per share, down from its profit of $0.62 per share in the same quarter last year.

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Designer Brands (DBI) Q2 FY2023 Highlights:

• Revenue: $792.2 million vs analyst estimates of $785.7 million (0.82% beat)
• EPS: $0.56 vs analyst estimates of $0.45 (23.7% beat)
• Gross Margin (GAAP): 34.5%, in line with the same quarter last year
• Same-Store Sales were down 8.9% year on year (miss vs. expectations of down 6.9% year on year)
• Store Locations: 636 at quarter end, decreasing by 8 over the last 12 months

Doug Howe, Chief Executive Officer, stated, "I am proud of the sequential improvement in both sales and profitability in the second quarter as well as the progress that has been made on our strategic initiatives, with several exciting milestones in the quarter – including new collaborations and celebrity partnerships. Our portfolio of Owned Brands and National Brand partners remains strong and we are excited to be rolling out our new athletic and athleisure offerings from Le Tigre and Keds while continuing to elevate our relationship with Nike (NYSE:NKE) during a time that athletic and athleisure demand continues to grow.

Founded in 1969 as a shoe importer and distributor, Designer Brands (NYSE:DBI) is an American discount retailer focused on footwear and accessories.

Footwear sales–like their apparel counterparts–are driven by seasons, trends, and innovation more so than absolute need and similarly face the bigger-picture secular trend of e-commerce penetration. Footwear plays a part in societal belonging, personal expression, and occasion, and retailers selling shoes recognize this. They therefore aim to balance selection, competitive prices, and the latest trends to attract consumers. Unlike their apparel counterparts, footwear retailers most sell popular third-party brands (as opposed to their own exclusive brands), which could mean less exclusivity of product but more nimbleness to pivot to what’s hot.

Sales GrowthDesigner Brands is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's revenue has declined over the last four years, dropping 1.81% annually as its store count shrunk.

This quarter, Designer Brands reported a rather uninspiring 7.81% year-on-year revenue decline, in line with Wall Street's expectations. Looking ahead, the Wall Street analysts covering the company expect revenue to remain relatively flat over the next 12 months.

Number of StoresThe number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.

When a retailer like Designer Brands is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Since last year, Designer Brands's store count shrank by 8 locations, or 1.24%, to 636 total retail locations in the most recently reported quarter.

Taking a step back, the company has generally closed its stores over the last two years, averaging a 1.83% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.

Same-Store Sales

Designer Brands's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 9.68% year on year. Given its declining store count over the same period, this performance could stem from higher e-commerce sales or increased foot traffic at existing stores, which is sometimes a side effect of reducing the total number of stores.

In the latest quarter, Designer Brands's same-store sales fell 8.9% year on year. This decline was a reversal from the 6.2% year-on-year increase it posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Key Takeaways from Designer Brands's Q2 Results With a market capitalization of $683.1 million and more than $46.2 million in cash on hand, Designer Brands can continue prioritizing growth.

Although same-store sales missed, revenue beat slightly and EPS beat comfortably, driven by better gross and operating margins. The company maintained its previous full year guidance, which is a welcome sign in a choppy retail environment that has seen a number of companies miss and cut guidance. The stock is up 3.76% after reporting and currently trades at $10.75 per share.

The author has no position in any of the stocks mentioned in this report.