About a month ago I highlighted this name as one of a couple of interesting retail stocks seeing substantial insider buying. Today, I'm mentioning it as an option trade for consideration on Monday.
We are going to go into a bit more detail around the company's valuation and offer up a covered call recommendation. Options on this name are liquid and provide a more-than-adequate return even if the stock does nothing over the term of the option duration.
I am talking about Designer Brands (DBI) .
The company is a designer, manufacturer, and retailer of footwear and accessories that has just over 650 stores located in North America. Just over 500 of its stores are Designer Shoe Warehouses (DSW) in the United States with the rest of its retail locations in Canada. The United States accounts for the vast bulk of sales. Just over half of its sales come from women's footwear.
The company did a good job managing through the pandemic and really improved its e-commerce offerings and service. The company now fulfills online orders in two to three days versus five to seven days pre-Covid. As a result, e-commerce now makes up over 25% of overall sales, compared to less than 20% prior to the outbreak.
The company easily beat both top and bottom-line expectations when it last reported quarterly results at the end of August. However, the shares have not gotten the benefit from those impressive second-quarter numbers as investors continue to be concerned about supply-chain challenges that have hit most of the sector as well as many areas of the economy.
The stock currently trades at around $13.00 a share. The mean analyst estimate calls for Designer Brands to post earnings if slightly better than $1.10 a share in fiscal year 2021, with an approximate 20% uptick to $1.35 a share in FY 2022.
The company has a solid balance sheet and should soon reinstate both its dividend and stock buyback program in the near future. These were suspended during the start of pandemic to conserve cash. Reinstatement of dividend payouts and stock buybacks should help lift investor investment sentiment on the stock. One insider needs to no encouragement as the Executive Chairman of the company has added more than $20 million to his core holdings since mid-September.
Given all this, I don't see too much downside risk outside a recession or another round of lockdowns; both of which I put low probabilities on at the moment. That said, concerns about the global supply chain could continue to be a headwind for the retail sector until they are resolved.
Here is how one can initiate a position in DBI via a covered call strategy.
Using the April $12.50 call strikes, fashion a covered call order with a net debit in the $10.55 to $10.65 a share range (net stock price - option premium). By selecting a call strike approximately 5% below the current trading level of the stock you are boosting downside protection to right at 25%.
While this trade has less upside potential than using the April $15 call strikes, it will still make right at 18% over less than the six months of the option duration even if the shares drift down a bit from here. You might even pick up a small dividend payout if the company reinstates its quarterly dividend as I expect.
(Bret Jensen is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive columns from daily columns and trade ideas from Tim Collins, Paul Price, Doug Kass and others.)