Designer Brands Inc. has gotten a bump from popular athletic fashions, but growth could hit a wall when its relationship with Nike Inc. ends, UBS analysts say.
The benchmark S&P 500 index SPX is up 20.6% for 2021 so far.
“Athleisure continues to be the hottest trend in footwear,” Bill Jordan, president of Designer Brands told MarketWatch. The company has jumped into the more casual trends that took hold even before COVID-19, though there are also “green shoots” in dress shoes and optimism about seasonal items like boots. Jordan says the company also benefits from supply chain advantages like manufacturing its own shoes and investing in digital.
“The whole point of the Camuto acquisition was to be a more vertical brand to react quicker and offer unique product,” he said.
Now UBS says it’s Nike that could hurt the company.
“[W]e reduce our FY22 sales growth forecast to 3.3% from 9.5%. We think fashion footwear will take longer to recover,” wrote analysts led by Jay Sole.
“Plus, we expect Designer Brands will have a challenging FY22 as it loses Nike as a vendor and laps stimulus. We anticipate more moderate FY22-23 gross margin expansion given a slower penetration of Designer Brands’ internally sourced products, inflationary pressures, and limited fixed cost leverage.”
UBS rates Designer Brands stock neutral with a $16 price target. Designer Brands stock has tumbled 19% over the past three months, trading at $13.58 on Tuesday afternoon.
Still, Designer Brands is upbeat about its future in the athletic space.
“At DSW, our pivot to athletic continues to yield strong results with comps up 45% compared to 2019 and kids’ comps up 55%,” said Roger Rawlins, chief executive of Designer Brands on the recent earnings call, according to a FactSet transcript. He went on to say that the retailer has taken market share in both categories since 2019.