The past six months have been a windfall for Designer Brands’s shareholders. The company’s stock price has jumped 143%, hitting $6.72 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Designer Brands, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Designer Brands Will Underperform?

We’re happy investors have made money, but we're swiping left on Designer Brands for now. Here are three reasons we avoid DBI and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Designer Brands’s demand has been shrinking over the last two years as its same-store sales have averaged 3.6% annual declines.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Designer Brands, its EPS declined by 78.2% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Designer Brands’s $1.27 billion of debt exceeds the $51.35 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $112.4 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Designer Brands could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Designer Brands can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Designer Brands falls short of our quality standards. Following the recent rally, the stock trades at 20.4× forward P/E (or $6.72 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our top digital advertising picks.

Stocks We Like More Than Designer Brands

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