Duluth Holdings Lowers Guidance On Q4 Miss

Duluth Holdings Inc. (dba, Duluth Trading Co.) on Thursday reported net income for the fiscal fourth quarter ended February 3 of $20.8 million, or 64 cents per diluted share, which missed analysts’ estimates by 11 cents. That’s compared with $19.5 million, or 60 cents per diluted share, in the prior-year fourth quarter.

Net sales increased 15 percent to $250.5 million, missing analysts’ projections by $7.6 million, and compared to $217.8 million in the prior-year fourth quarter, including $7.7 million of net sales from a 53rd week.

The company lowered fiscal 2020 guidance. It now projects net sales in the range of $645 million to $655 million, down from $675 million, and EPS in the range of 74 cents to 80 cents per diluted share, down from $1.01.

Highlights for the Fourth Quarter Ended February 3, 2019 (14 weeks compared to 13 weeks last year)

• Net sales increased 15 percent to $250.5 million compared to $217.8 million in the prior-year fourth quarter, includes $7.7 million of net sales from 53^rd week
• Gross margin decreased 90 basis points to 52.4 percent compared to 53.3 percent in the prior-year fourth quarter
• Operating income increased 2.6 percent to $30.3 million, or 12.1 percent of net sales, compared to $29.5 million, or 13.6 percent of net sales in the prior-year fourth quarter
• Net income was $20.8 million, or $0.64 per diluted share, compared to $19.5 million, or $0.60 per diluted share in the prior-year fourth quarter
• Adjusted EBITDA increased 8.8 percent to $35.3 million compared to $32.4 million in the prior-year fourth quarter
• The Company opened three new retail stores in Oklahoma City, OK; South Portland, ME and Cary, NC, totaling approximately 40,000 gross square feet
• 36^th consecutive quarter of increased net sales year-over-year

Highlights for the Fiscal Year Ended February 3, 2019 (53 weeks compared to 52 weeks last year)

• Net sales increased 20.5 percent to $568.1 million compared to $471.4 million in the prior year, includes $7.7 million of net sales from 53^rd week
• Gross margin decreased 80 bps to 54.6 percent compared to 55.4 percent in the prior year
• Operating income increased 0.8 percent to $37.4 million, or 6.6 percent of net sales, compared to $37.1 million, or 7.9 percent of net sales in the prior year
• Net income was $23.3 million, or $0.72 per diluted share, compared to $23.4 million, or $0.72 per diluted share in the prior year
• Adjusted EBITDA¹ increased 12.1 percent to $52 million compared to $46.4 million in the prior year
• The Company opened 15 retail stores, totaling approximately 250,000 gross square feet, and ended the year with a total of 46 stores

¹See Reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA in the accompanying financial tables.

Management Commentary

“We began 2018 with several objectives including revenue growth and implementation of key infrastructure improvements that will support continued expansion of the Duluth Trading brand. While we achieved solid growth in 2018 and marked our 36^th consecutive quarter of increased net sales year-over-year, we faced some challenges in the fourth quarter that pressured our full year results,” said Stephanie Pugliese, CEO of Duluth Trading.

“I am pleased to report that our team executed well and we finished 2018 with a number of accomplishments, including:

• An increase of nearly $100 million in total revenue;
• A 50 percent expansion of our store base, with 15 new locations;
• Continued double digit growth in our active customer base;
• Market share growth in both new and established store markets;
• Successful implementation of large-scale infrastructure improvements including a new order management system and an ecommerce platform, as well as an upgrade to our distribution center in Belleville, Wisconsin; and
• The launch of customer-facing omni programs such as Buy-Online-Pickup-In-Store and e-gift cards.

Looking ahead to 2019, we will continue to expand and refine our omnichannel model with the addition of 15 stores and more holistic efforts to engage customers across channels.  We will optimize the investments that we made this year by refining processes at our distribution center, the functionality of the order management systems and ecommerce platform, and our inventory planning system to improve productivity and results. We will also continue to build our women’s business, Alaskan Hardgear and men’s base layers, which are significant and proven drivers of growth.”

Operating Results for the Fourth Quarter Ended February 3, 2019 (14 weeks compared to 13 weeks last year)

Net sales increased 15 percent to $250.5 million, compared to $217.8 million in the same period a year ago. The increase was driven by a 5.4 percent growth in direct net sales and a 38.9 percent growth in retail net sales, with growth in virtually all product categories and in both men’s and women’s business. The inclusion of the 53^rd week in fiscal 2018 resulted in an additional $7.7 million of net sales. The increase in retail net sales was attributable to the opening of 15 new retail stores during fiscal 2018.

Gross profit increased 13.1 percent to $131.3 million, or 52.4 percent of net sales, compared to $116 million, or 53.3 percent of net sales, in the corresponding prior-year period. The 90 basis point decrease in gross margin was primarily due to the continued decline in shipping revenues and an increase in freight cost related to transporting inventory to our retail stores due to geographic expansion.

Selling, general and administrative expenses increased 16.7 percent to $100.9 million, compared to $86.5 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses increased 60 basis points to 40.3 percent, compared to 39.7 percent in the corresponding prior-year period. As a percentage of net sales, advertising and marketing costs decreased 200 basis points to 14.4 percent compared to 16.4 percent in the corresponding prior-year period, primarily due to a planned decrease in catalog spend coupled with a shift in catalog delivery in-home dates from late January into February 2019 and advertising leverage gained from a higher mix of retail net sales. As a percentage of net sales, selling expenses increased 190 basis points to 16 percent, compared to 14.1 percent in the corresponding prior-year period, primarily due to an increase in customer service expense related to retail store growth, and an increase in shipping expense and distribution labor. As a percentage of net sales, general and administrative expenses increased 70 basis points to 9.9 percent compared to 9.2 percent in the corresponding prior-year period, primarily due to an increase in depreciation as a result of more stores and investments in technology and infrastructure.

Balance Sheet and Liquidity

The Company ended the quarter with a cash balance of approximately $0.7 million, with net working capital of $64.7 million, and $16.5 million outstanding on its $130 million line of credit.

Fiscal 2019 Outlook

• Net sales in the range of $645 million to $655 million
• Adjusted EBITDA¹ in the range of $60 million to $64 million
• EPS in the range of $0.74 to $0.80 per diluted share
• Capital expenditures, net of proceeds from finance lease obligations, of $40 million to $45 million² 
• 15 new store openings, adding 230,000 to 240,000 of additional gross square footage