Duluth Holdings Inc., the parent of Duluth Trading, reduced its outlook for sales and earnings for the year after reporting second-quarter results that came in below Wall Street targets.
Highlights for the Second Quarter Ended August 4, 2019
- Net sales increased 10.2 percent to $122.0 million compared to $110.7 million in the prior-year second quarter
- Gross margin decreased 310 basis points to 53.1 percent compared to 56.2 percent in the prior-year second quarter
- Operating income of $3.7 million compared to operating income of $9.9 million in the prior-year second quarter
- Net income of $1.9 million, or $0.06 per diluted share, compared to net income of $6.4 million, or $0.20 per diluted share, in the prior-year second quarter
- Adjusted EBITDA of $9.6 million compared to $13.1 million in the prior-year second quarter
- The company opened four retail stores in Rogers, AR; Danbury, CT; Madison, AL; and Kennesaw, GA; totaling approximately 61,000 gross square feet
- 38th consecutive quarter of increased net sales year-over-year
Earnings of 6 cents a share were below analysts’ consensus target of 10 cents. Sales of $122 million were below consensus of $127.6 million.
“Since reassuming the role of CEO following the resignation of Stephanie L. Pugliese on August 29th, I have had the complete support of our talented and dedicated leadership team, and together, we have achieved a quick and smooth transition without disruption to our business,” said Stephen L. Schlecht, founder and chief executive officer of Duluth Trading. “We know that our performance in the first half of this fiscal year fell below our expectations, and that now all our attention and resources must be completely focused on delivering a successful fourth quarter, which accounts for the lion’s share of our sales and profitability for the entire year.”
Schlecht added, “I also want to recognize that we have had some growing pains over the past year and a half. In response, we plan to slow down the pace of our retail expansion in 2020 and direct our focus to improving asset productivity and thus our operating margin rate. We have made a number of improvements in our business that are expected to bear fruit in 2020, and we have a strong team in place focused on the long-term success of our company.”
Operating Results for the Second Quarter Ended August 4, 2019
Net sales increased 10.2 percent, to $122.0 million, compared to $110.7 million in the same period a year ago. Net sales were driven by a 23.8 percent growth in retail net sales, with increases in both our men’s and women’s businesses, offset by a 0.9 percent decline in direct net sales. The increase in retail net sales was driven by new stores with 55 stores in the second quarter of 2019 as compared to 39 stores in the same period a year ago, partially offset by existing stores.
Gross profit increased 4.1 percent, to $64.8 million, or 53.1 percent of net sales, compared to $62.2 million, or 56.2 percent of net sales, in the corresponding prior-year period. The 310 basis point decrease in gross margin rate was primarily attributable to a decrease in product margins due to additional global promotions, coupled with recent clearance activity.
Selling, general and administrative expenses increased 16.7 percent to $61.1 million, compared to $52.3 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses increased 280 basis points to 50.1 percent, compared to 47.3 percent in the corresponding prior-year period. As a percentage of net sales, advertising and marketing costs decreased 90 basis points to 13.4 percent, compared to 14.3 percent in the corresponding prior-year period, primarily due to advertising leverage gained from a higher mix of retail sales. As a percentage of net sales, selling expenses decreased 30 basis points to 14.4 percent, compared to 14.7 percent in the corresponding prior-year period, primarily due to a decrease in shipping expenses due to improved shipping rates, partially offset by an increase in-store labor. As a percentage of net sales, general and administrative expenses increased 400 basis points to 22.3 percent, compared to 18.3 percent in the corresponding prior-year period, primarily due to an increase in occupancy and equipment cost due to growth in the number of retail stores, an increase in depreciation expense due to investments in technology and corporate facilities, and an increase in personnel cost due to an increase in headcount to support the growth of the business.
Balance Sheet and Liquidity
The company ended the quarter with a cash balance of $3.5 million, net working capital of $66.1 million, and $45.0 million outstanding on its $130.0 million revolving line of credit.
Updated Fiscal 2019 Outlook
The company updated its fiscal 2019 outlook as follows:
- Net sales in the range of $610.0 million to $620.0 million, down from previous guidance in the range of $645.0 million to $655.0 million
- Adjusted EBITDA in the range of $51.0 million to $55.0 million, down from previous guidance in the range of $60.0 million to $64.0 million
- EPS in the range of $0.60 to $0.66 per diluted share, down from previous guidance in the range of $0.74 to $0.80 per diluted share
- Capital expenditures of $38.0 million to $42.0 million, down from previous guidance in the range of $40.0 million to $45.0 million
- 15 new store openings, adding approximately 215,000 of additional gross square footage. Previously, the company expected to open 15 stores and add 230,000 to 240,000 of additional gross square footage.
Photo courtesy Duluth Holdings