Designer Brands Stock: Is it Time to Buy?

Options traders could be hedging their bets with calls

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Designer Brands Inc. (NYSE:DBI) is an American designer, producer, and retailer of brand-name footwear and accessories. The company operates more than 500 brick-and-mortar stores across 44 states, and operates nearly 150 physical locations more in Canada under the names “The Shoe Company”, “Shoe Warehouse”, and “DSW Designer Shoe Warehouse." DBI paid dividends to investors for five quarters before cutting them in the second quarter of 2020. The last dividend the company paid was for $0.10.

Earnings are due out for Designer Brands before the open on Wednesday, Dec. 9. DBI will look to bounce back from its disappointing post-earnings reactions from the past two quarters. Wall Street is expecting a reported earnings per share (EPS) of -$0.48 for DBI tomorrow. There is a lot on the line with tomorrow's earnings call, as Designer Brands stock has beat expectations just once out of its four most recent earnings reports.

As background on previous earnings reports, the only earnings beat reported by the company over the past 12 months was in the first quarter of 2020. In the fourth quarter of 2019, Designer Brands stock missed expectations by $0.07. The company reported an EPS of $0.67. In the first quarter of 2020, DBI dropped its EPS to $0.05, but squeaked by to beat expectations by a margin of $0.02. Designer Brands stock demonstrated a decline in EPS in the second quarter of 2020. The company reported an EPS of -$1.83, missing expectations by a huge margin of $1.23. Most recently, with third quarter of 2020 earnings, Designer Brands stock saw its EPS increase to -$1.28. However, the company still missed expectation by $0.43 as DBI was expected to report an EPS of -$0.85.

So far this year, DBI stock has dropped 44.5%. While the shares are up 60.7% this quarter, the rally still has to contend with their 320-day moving average, a trendline not conquered on a closing basis since March 2019. 

Despite the stock's shaky technical footing, options traders are pursuing calls. The security's Schaeffer's put/call open interest ratio (SOIR) of 0.12, which is ranked in the 8th annual percentile -- meaning short-term speculators are more call-skewed than usual. Considering DBI is heavily shorted -- more than 14% of the stock's float is dedicated to these bearish bets -- it's possible some of these out-of-the-money calls are being used as an options hedge.

 

DBI Stock Chart

Designer Brands still needs to make some major changes in order for the company survive the ongoing pandemic. It's not like Designer Brands was not performing exceptionally even before the spread of COVID-19 and the subsequent shutdowns. The company's net income declined drastically between 2017 and 2019, going from $125 million all the way down to -$20 million.

With 2020 mercifully coming to an end in three weeks, Designer Brands will be adding yet another bright red year to its income statement. The company reported a net income drop to -$153 million over the past twelve months. Further, Designer Brands now carries a massive $1.41 billion in total debt, compared to its just $206.72 million in cash.

Perhaps the most redeeming quality for investors to see in Designer Brands stock is that its revenue has only fallen about $390 million. The company has generated a respectable $3.1 billion in the past twelve months, despite the incredible circumstances for retail businesses. If you're looking for a long-term investment, it Is certainly possible that Designer Brands stock is nearly done dipping down. However, it is difficult to see DBI recovering any time soon after the the nearly 50% drop in stock price that occurred in 2020.

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