Duluth Holdings Sees Q2 Revenues Climb 31 Percent

Duluth Holdings Inc. reported earnings rose 18.4 percent in the second quarter ended July 30 on a 31 percent revenue gain.

 Highlights For Second Quarter Ended July 30, 2017

• Net sales increased 31 percent to $86.2 million compared to $65.8 million in the prior-year second quarter.
• Gross margin decreased 240 basis points (bps) to 56.7 percent compared to 59.1 percent in the prior-year second quarter.
• Net income increased 18.4 percent to $4.3 million, or 13 cents per diluted share, compared to $3.6 million, or 11 cents per diluted share, in the prior-year second quarter.
• Adjusted EBITDA increased 26.7 percent to $9.5 million compared to $7.5 million in the prior-year second quarter.
• During the second quarter, the company opened two retail stores, one in West Chester, OH and one in Pittsburgh, PA, and an outlet store in Redwing, MN.
• Thirtieth consecutive quarter of increased net sales year over year.

Management Commentary

“I am pleased to report that net sales increased over 30 percent during the second quarter, which marked our 30^th consecutive quarter of increased net sales year-over-year. We drove a 35 percent increase in new customer acquisition year-over-year, as we continue to invest in our omnichannel model and in growing our brand awareness with our direct marketing efforts and with geographical expansion of our retail stores,” said Stephanie Pugliese, chief executive officer of Duluth Trading.

“This quarter we opened three retail stores and our first store in the West will open later this week in Thornton, CO, a suburb of Denver,” Pugliese continued. “We are excited to bring our unique Duluth retail experience to our many fans in this region. Including the Thornton store, we will have opened nine stores this year, and we are on track to open six more stores for the remainder of the year, for a total of 15 new stores in fiscal 2017. We believe our retail strategy is working, as our new stores continue to attract new customers to the brand and are performing exceptionally well. We are pleased with our first half results and expect to deliver on our fiscal 2017 guidance, as previously stated.”

Operating Results For Second Quarter Ended July 30, 2017

Net sales increased 31 percent to $86.2 million, compared to $65.8 million in the same period a year ago. The net sales increase was driven by a 7.1 percent growth in direct net sales and a 138.3 percent growth in retail net sales. Growth was achieved in all product categories. The increase in retail net sales was primarily attributable to an increase of 12 stores in the second quarter of 2017 as compared to the same period a year ago.

Gross profit increased 25.7 percent to $48.9 million, or 56.7 percent of net sales, compared to $38.9 million, or 59.1 percent of net sales, in the corresponding prior-year period. The 240 basis point decrease in gross margin was primarily due to a decline in shipping revenues as a result of promotions that had more free shipping days as compared to the prior-year period, coupled with an increase in inventory reserve due to retail growth and an increase in freight cost from the company’s distribution center to the retail stores. The company’s product margins were up slightly compared to the corresponding prior-year period.

Selling, general and administrative expenses increased 26.1 percent to $41.5 million, compared to $32.9 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses decreased 180 basis points to 48.2 percent, compared to 50 percent in the corresponding prior-year period. As a percentage of net sales, advertising and marketing costs decreased 340 basis points to 17.4 percent, compared to 20.8 percent in the corresponding prior-year period, primarily attributable to launching the women’s television advertising campaign in the first quarter of this year versus the second quarter of the prior year, coupled with the planned decrease in catalog spend as a percentage of net sales.

As a percentage of net sales, selling expenses increased 100 basis points to 14.1 percent, compared to 13.1 percent in the corresponding prior-year period, primarily due to an increase in customer service expenses due to retail store growth, which was partially offset by leverage in shipping expenses from an increase in the proportion of retail net sales. As a percentage of net sales, general and administrative expenses increased 60 basis points to 16.7 percent, compared to 16.1 percent in the corresponding prior-year period, primarily due to an increase in store occupancy and equipment expense and depreciation, which was partially offset by personnel expenses due to operating leverage from higher sales.

Balance Sheet And Liquidity

The company ended the quarter with a cash balance of approximately $1.4 million, with net working capital of $58.3 million, and $28.1 million available on its $40 million revolving line of credit. Effective August 1, 2017, the company’s borrowing availability under its revolving line of credit increased to $50 million.

 Fiscal 2017 Outlook

The company reaffirmed its fiscal 2017 outlook as follows:

• Net sales in the range of $455 million to $465 million
• Adjusted EBITDA in the range of $47 million to $49.5 million
• EPS in the range of 66 cents to 71 cents per diluted share

The company updated its fiscal 2017 retail store openings and capital expenditures:

• The company expects to open a total of 15 stores, adding approximately 173,000 selling square feet
• Capital expenditures of $38 to $42 million

The table below recaps the company’s fiscal 2017 stores opened, signed new store leases and the anticipated opening timeframe.