Duluth Holdings Inc. (dba, Duluth Trading company) on Thursday reaffirmed its guidance for the year after announcing a net loss for the fiscal first quarter ended May 5 of $7.6 million, or 23 cents per diluted share, compared to a net loss of $0.7 million, or 2 cents per diluted share, in the prior-year first quarter. Earnings were in line with Wall Street’s projections.

Highlights for the First Quarter Ended May 5, 2019

  • Net sales increased 14 percent to $114.2 million compared to $100.2 million in the prior-year first quarter
  • Gross margin decreased 250 basis points to 53.3 percent compared to 55.8 percent in the prior-year first quarter
  • Operating loss of $9.7 million compared to operating loss of $0.3 million in the prior-year first quarter
  • Net loss of $7.6 million, or $0.23 per diluted share, compared to net loss of $0.7 million, or $0.02 per diluted share, in the prior-year first quarter
  • Adjusted EBITDA of $(4.4) million compared to $2.6 million in the prior-year first quarter
  • The company opened five retail stores in Friendswood, TX; Katy, TX; Wichita, KS; Spokane Valley, WA; and Jacksonville, FL, totaling approximately 78,000 gross square feet
  • 37th consecutive quarter of increased net sales year-over-year

Management Commentary

“We achieved our 37th consecutive quarter of increased net sales year-over-year. Our 14 percent top-line growth was driven by new stores, ongoing expansion of the women’s business, and new product introductions, with direct sales in established omnichannel store markets continuing to outpace that of non-store markets,” said Stephanie Pugliese, Chief Executive Officer of Duluth Trading. “From a market perspective, the softer demand trends we experienced at the end of the fourth quarter persisted through May. In response, our entire Duluth team is focused on the areas of improvement that are in our control. They include better product selection with deeper inventory in new styles, driving higher traffic to our stores and website through more targeted spend in marketing, and refining our investments to improve productivity. We are executing on these areas and expect to see improving results in the back half of the year.”

Operating Results for the First Quarter Ended May 5, 2019

Net sales increased 14 percent to $114.2 million, compared to $100.2 million in the same period a year ago. The net sales increase was driven by a 42.8 percent growth in retail net sales, offset by a 0.8 percent decline in direct net sales, with increases in both the men’s and women’s businesses. The decrease in direct net sales has continued into the first five weeks of the second quarter. The increase in retail net sales was driven by new stores with 51 stores in the first quarter of 2019 as compared to 33 stores in the same period a year ago, partially offset by existing stores.

Gross profit increased 8.9 percent to $60.9 million, or 53.3 percent of net sales, compared to $55.9 million, or 55.8 percent of net sales, in the corresponding prior-year period. The 250-basis point decrease in gross margin was primarily attributable to a decrease in product margins due to product mix on recent clearance activity, coupled with a slight decrease in shipping revenues.

Selling, general and administrative expenses increased 25.6 percent to $70.6 million, compared to $56.2 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses increased 570 basis points to 61.8 percent, compared to 56.1 percent in the corresponding prior-year period. As a percentage of net sales, advertising and marketing costs decreased 50 basis points to 21.1 percent, compared to 21.6 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. As a percentage of net sales, selling expenses increased 50 basis points to 16.6 percent, compared to 16.1 percent in the corresponding prior-year period, primarily due to an increase in customer service expense as a result of the growth in retail, partially offset by a decrease in shipping expenses due to leverage from an increase in the proportion of retail net sales. As a percentage of net sales, general and administrative expenses increased 570 basis points to 24.1 percent, compared to 18.4 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 $1 million, net working capital of $63.4 million, and $39.2 million outstanding on its $130 million revolving line of credit.

Fiscal 2019 Outlook

The company reaffirmed its fiscal 2019 outlook as follows:

  • 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 of $40 million to $45 million2
  • 15 new store openings, adding 230,000 to 240,000 of additional gross square footage