Why the Bull Market Is Passing These 2 Stocks By

November’s big gains in the stock market have many people on Wall Street looking for a run to new record highs in the near future. With the possibility of a Santa Claus rally before 2023 comes to a close, investors are gravitating toward stocks that they see as having the most potential to benefit from a broader move upward.

However, when it comes to individual stocks, a disappointing performance on the business front can take a company out of contention to join a rally in the overall stock market. That proved to be the case for Designer Brands (DBI -33.96%) and Daktronics (DAKT -10.14%) on Tuesday, as their most recent financial results inspired shareholders to lose confidence. Here’s what these two companies said to make their investors take pause.

Designer Brands sees tough times ahead

Shares of Designer Brands plunged 31% in premarket trading early Tuesday. The footwear and accessories retailer gave investors bad news about the fiscal third quarter that ended Oct. 28, and it foresees further trouble ahead even into the holiday shopping season.

Designer Brands saw sales slump 9% year over year to $786 million for the fiscal third quarter, with comparable sales falling 9.3% from year-ago levels. Gross margin deteriorated slightly, but adjusted net income of $14.8 million was down by more than two-thirds from the same quarter in the previous fiscal year. That produced disappointing adjusted earnings of $0.24 per share, well below what many had anticipated given better results in the previous quarter.

CEO Doug Howe blamed Designer Brands’ troubles on a combination of unseasonably warm weather and an overall contraction in the footwear market for the first time since the beginning of the COVID-19 pandemic in early 2020. Howe predicted that macroeconomic pressures are unlikely to let up soon, and so the footwear company is working to adjust inventory assortment and market itself more effectively.

That led Designer Brands to cut its guidance for the full 2023 year. The company now sees sales falling by high-single-digit percentages, and it cut its earnings estimate by $0.80 per share to a new range of just $0.40 to $0.70 per share. That doesn’t bode for a particularly happy holiday season for Designer Brands, and shareholders don’t seem to be willing to stick around until the next release to see what’s under the tree.

Daktronics can’t score a win

Elsewhere, shares of Daktronics moved lower by 10%. The scoreboard and electronic display operator reported fiscal second-quarter financial results for the period ended Oct. 28, and investors weren’t satisfied with declines in new orders even as current business metrics improved.

At first glance, Daktronics seemed to have a successful quarter. Sales inched higher by 6% year over year to $199 million. The company posted adjusted net income of $12.8 million, reversing a year-earlier loss and working out to adjusted earnings of about $0.28 per share. That was well ahead of the $0.12-per-share consensus among those following the stock.

However, Daktronics saw product order backlog fall by more than a third over the past 12 months, to $307 million. Although CEO Reece Kurtenbach attributed that reduction to efforts designed to cut lead times, order flow during the quarter was flat compared to the year-ago period. In particular, orders for commercial and live event products were down significantly, offset by higher demand in transportation and in Daktronics’ international segment.

Even after today’s drop, though, Daktronics stock has more than quadrupled over the past year. As live events have returned to the schedule, demand for Daktronics products is stabilizing, and that’s good news for long-term investors even if the stock price is volatile from time to time.