Designer Brands’s stock price has taken a beating over the past six months, shedding 21.7% of its value and falling to $5.34 per share. This was partly due to its softer quarterly results and 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? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even though the stock has become cheaper, we're cautious about Designer Brands. Here are three reasons why there are better opportunities than DBI and a stock we'd rather own.

Why Do We Think Designer Brands Will Underperform?

Founded in 1969 as a shoe importer and distributor, Designer Brands (NYSE:DBI) is an American discount retailer focused on footwear and accessories.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

Designer Brands’s demand has been shrinking over the last two years as its same-store sales have averaged 6.1% annual declines.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Designer Brands’s margin dropped by 12.7 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Designer Brands burned through $79.58 million of cash over the last year, and its $1.34 billion of debt exceeds the $36.23 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Designer Brands’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Designer Brands until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Designer Brands falls short of our quality standards. After the recent drawdown, the stock trades at 7× forward price-to-earnings (or $5.34 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at Uber, whose profitability just reached an inflection point.

Stocks We Would Buy Instead of Designer Brands

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