This growth action has only just begun. Should you buy now?

Ultra Growth Action Designer brands (DBI 1.39%) emerges as a potential leader in a recovering consumer discretionary sector. The title of this designer, producer and seller of shoes and accessories has jumped nearly 30% since the start of the year, solidly outperforming the main indices.

But amid supply chain pressures, logistical issues and a labor shortage, Designer Brands is also weathering the current headwinds. Having its own flexible infrastructure, along with strategic partnerships, has allowed it to maintain its edge in these uncertain times.

When it’s hot, sell sandals

Designer Brands’ flagship store is DSW Designer Shoe Warehouse, and the company operates more than 500 stores in 44 states. DSW specializes in brand designer clothes, casual shoes and sports shoes. In addition to DSW Designer Shoe Warehouse, Designer Brands runs other brand concepts like The Shoe Company and Shoe Warehouse, both located in Canada.

A major transformation for Designer Brands took place in 2018 when the company acquired Camuto Group, a product design and brand development company. Along with the Vince Camuto brand and licensing rights to Jessica Simpson, Jennifer Lopez and Lucky Brand shoes, this acquisition helped Designer Brands increase its market share and enabled the company to be nimble and self-sufficient.

Most notably, the $238 million deal in 2018 gave Designer Brands control of Camuto Group’s distribution infrastructure. Access to this distribution network has given Designer Brands its secret weapon: the ability to quickly adjust inventory as demand changes.

Image source: Getty Images.

This flexible business model has proven indispensable during the pandemic. When consumers suddenly turned to athletic and comfortable footwear, Designer Brands quickly adjusted inventory to match changing demand. Now that pandemic fears have subsided and demand has changed, the company can quickly return to fashion-focused lines.

As CEO Roger Rawlins said on the company’s latest earnings call: “When it was 35 degrees in April, we sold a ton of boots. When it hit 75 degrees, we sold a ton sandals…that’s the beauty of our business.”

Obstacles along the way

Current headwinds for designer brands are found across the industry, such as high transportation costs, supply chain disruptions and staffing shortages. With the combination of high operating costs and the effects of inflation on consumer behavior, Designer Brands will need to remain vigilant to navigate the current landscape in the most cost effective manner possible.

Another factor to consider is that the company’s forecast for the rest of the year assumes that the trends seen in the first quarter will continue to develop, particularly higher than expected store sales. If consumer behavior changes dramatically, Designer Brands must rely on its flexible selling model to adapt over time.

Sales at Designer Brands stores exceeded their digital sales in the first quarter, which the company said was normal. It makes sense that customers would prefer to buy items like shoes in person rather than online. But it also poses a risk if DSW cannot have enough staff in its stores.

Designer brands also face fierce competition in the footwear space from companies such as shoe carnival, Foot locker, and famous shoes. Despite the competitive landscape, CEO Rawlins remains “hyper focused on maintaining our edge.”

Twinning with strategic partners

Designer Brands differentiates itself through partnerships with the biggest shoe brands. A prime example is its partnership with Authentic Brands Group (ABG), the parent company of Reebok, which was part of the acquisition of Camuto Group in 2018. This relationship gave designer brands access to more styles and Reebok product colors.

Most recently, Designer Brands launched its first prototype Warehouse Reimagined store, which opened in Houston DSW in May. The Warehouse Reimagined concept helps strengthen DSW’s relationships with national brands through “shop-in-shops”, which allows each brand to tell its unique story within a DSW.

This has helped Designer Brands strengthen its relationships with brands such as New Balance, Adidas, Crocodile, Puma (OTC: PUMSY), Reebok, Suits youBirkenstocks and Designers.

Looking ahead, Designer Brands has an ambitious goal of doubling sales by 2026, with Warehouse Reimagined accounting for 30% of total sales. Although the near-term outlook is a little slippery for luxury brand stocks, Designer Brands could emerge as a major footwear player in the years to come. After a strong first quarter earnings report, watch for continued momentum in the upcoming second quarter earnings release on August 31.

James T. Quintero