Designer Brands May Be Pinched By Reduced Discretionary Spending In Q2: Analyst Warns

Telsey Advisory Group analyst Dana Telsey reiterated the Market Perform rating on Designer Brands Inc. DBI, with a price target of $8.

DBI will report second-quarter results on Thursday, September 7, before the market opens.

While the first quarter was expected to be pressured, trends ended up being more challenged than anticipated, according to the analyst. 

In Q2-to-date (through the first week of June), DBI saw this trajectory persist, with initial trends below prior plans, Telsey adds.

As a result, management expected the discretionary spend recovery may be even further delayed (prior expectations looked for a soft landing in Q3 and a return to growth in Q4), mentioned the analyst.

For the quarter to be reported, the analyst looks for EPS of $0.46 vs. $0.62 in the prior year, compared to the consensus estimate of $0.44.

On the top line, the analyst forecasts a total sales decline of 6.8% Y/Y to $801 million (compared to the consensus forecast of down 8.3% Y/Y $788 million), driven by same-store sales contraction of 6.8%, roughly in line with the consensus of down 6.9%.

While casual sales continue to see strong demand, the analyst thinks category growth was unable to offset declines in dress and seasonal items, notably sandals. 

Below the topline, Telsey estimates a gross margin of 33.5%, down 90 bps from last year's 34.4% and compared to consensus of 30.7%. 

The analyst estimates an operating expense deleverage of 100 bps to 27.4%, compared to the consensus estimate of 24.6%.

Telsey is particularly interested in the company's ability to capture market share during this likely competitive back-to-school season. FY23 marks DBI's third year, making a larger push for the children's back-to-school business to gain a share during this period. 

Altogether, the analyst looks for 180 bps of operating margin contraction to 6.4%, compared to the consensus of 6.1% and last year's 8.2%. 

With one quarter under its belt (which was slightly below internal plans) as well as continued uncertainty, DBI is now planning for a slower recovery in discretionary spend relative to prior expectations.

Going ahead, Telsey believes that the reintroduction of Nike, Inc. NKE should help drive incremental revenue beginning in Q4.

Price Action: DBI shares are trading higher by 1.79% to $10.52 on the last check Thursday.