Shares of Duluth Trading fell $5.94, or 25.2 percent, to $17.60 Friday after the company reported fourth-quarter earnings that came in well short of Wall Street’s targets because of delivery challenges and a poor response to newer offerings. Guidance for the current year was also significantly cut with a sales recovery not expected until the second half.

“We really see first quarter sluggish, second quarter perhaps a little bit of recovery, but the inflection point is the latter half of the year for some of the product turnaround as well as some of the marketing efforts that we have in place,” said Stephanie Pugliese, president and CEO, on a conference call with analysts.

For the current year, Duluth Trading now expects sales in the range of $645 million to $655 million, down from $675 million previously. EPS is now projected in the range of 74 cents to 80 cents, down from $1.01.

In the quarter ended February 3:

  • Earnings rose 6.3 percent to $20.8 million, or 65 cents a share. Wall Street’s consensus estimate had been 76 cents. Duluth had guided earnings to come in between 71 cents and 78 cents.
  • Sales increased 15.0 percent to $250.5 million, short of Wall Street’s consensus target of $258.1 million. Duluth had guided sales to arrive in the range of $237.4 million and $257.4 million.
  • Gross margin decreased 90 basis points to 52.4 percent. The 90 basis point decrease rate was primarily due to an 80 basis point decline in shipping revenues and increased freight cost of stores. Gross margins on product sales improved by 40 basis points, but were largely offset by end of year shrink and other cost of goods adjustments, including some adjustments related to correcting inventory balances which were inflated by the transition to a new order management system earlier in the year.
  • SG&A expense increased 60 basis points to 40.3 percent of sales. The higher rate reflects increased retail selling costs from additional stores, an increase in shipping expenses due to higher back orders and higher shipping rates during the peak season, and increase in distribution and call center labor due to expected wage-rate hikes and higher shipments per order due to a greater percentage of back orders.
  • Operating income increased 2.6 percent to $30.3 million.
  • Adjusted EBITDA increased 8.8 percent to $35.3 million, below the company’s guidance in the range of $36.3 million and $39.3 million.

Direct sales were healthy through Christmas with the first eight weeks of the quarter, expanding 7 percent over last year. This trend reversed in the last four weeks with direct sales lagging last year by close to 6 percent. In January, Duluth faced a highly-promotional period last year with direct sales growing over 20 percent in that period. The addition of clearance goods and flash events this year didn’t result in enough business to drive online gains in January.

Store sales productivity was solid through early December but didn’t finish the holiday selling season as strong as last year.

Addressing the shortfall, Pugliese said the company’s stores were “not immune to the overall slowdown in consumer spending and we felt the impact of lower traffic across all of our channels.”

Internally, systems implementation issues and late deliveries of product led to some high-demand product not reaching the market in time to maximize on holiday selling. For instance, some of the highest volume sizes of its women’s plus size program faced stock-outs during the holiday period.  Some of the late deliveries were attributed to port congestion. Duluth also faced some challenges with its new distribution center in Belleville, WI handling peak holiday volume.

On the upside, Duluth’s new e-commerce platform saw significant improvement in site speed and was able to handle the holiday uptick in volume. Total website visits in the fourth quarter increased 11 percent year-over-year with continued growth in new visitors.

Finally, Pugliese noted that part of the fourth-quarter shortfall was that several product ranges were short to expectations, particularly in men’s accessories and outerwear. She said, “They were new launches of products that just didn’t meet our expectations overall. We had certain pockets of outerwear that were good, but by and large, our outerwear business fell short. We also saw that the accessories hard goods part of the business didn’t meet our expectations, again geared more toward the men’s side of things.”

By product category, men’s sales rose 14.4 percent to $179.4 million, slowing from 18.6 percent growth in the year. Women’s sales climbed 19.4 percent to $56 million. Hard goods/other’s sales increased 7.8 percent to $15.1 million.

For the full year, earnings were down slightly to $23.3 million, or 72 cents, from $23.4 million, or 73 cents, a year ago. Sales grew 20.5 percent to $568.1 million.

To revive sales in the current year, Pugliese said the company plans to double-down on efforts to drive traffic to stores and part of that push will be to emphasize newness. She noted that while the direct business is supported by core staple product, delivering fresh assortments to retail stores drives overall sales, attracts new customers to the brand and boosts traffic overall.

As a result, Duluth is planning for a 40 percent increase in new product for the fall and peak holiday season. The number of SKUs in its women’s plus size category will be doubled. The rest of its women’s business will be further built out, and the men’s Alaskan Hardgear range and base layers will be further developed.

“We know that we can do better and we are planning for more new styles, sizes and color options to create a pipeline of fresh impactful product year-around,” Pugliese said.

More investment is also planned in marketing to women. Said Pugliese, “We know that the influence of women customers on omnichannel sales is important and growing, yet we were underpenetrated in marketing efforts that spoke specifically and directly to her. We will leverage the momentum in this part of our business by investing in additional advertising, increasing visibility within retail stores and doubling and improving our marketing mix.”

Pugliese said the women’s business overall continues to outpace the overall business. She added, “We are definitely seeing an increasing momentum in women’s even as we go into the first quarter, particularly around some of our newest product launches and our plus-size business.”

Despite the outerwear shortfall, the men’s business grew 19 percent year-over-year with Alaskan Hardgear being one of the fastest growing segments and achieving a three-year CAGR of 95 percent. Said Pugliese, “We have a lot of opportunity to grow this popular sub-brand by expanding its retail footprint in appropriate store markets and by leveraging its brand appeal beyond outerwear with year-around apparel.”

For the current year, Duluth will open 15 stores. Duluth closed 2018 with 46, adding 15.

Duluth will also roll out of BOPIS (buy online pick-up in store). A BOPIS test at seven stores during 2018 exceeded expectations with 91 percent of the customers polled indicating they’re likely or very likely to use BOPIS again.

Other priorities for 2019 include improving the speed of its order management systems and continuing to build on the assortment and inventory planning tool to more accurately predict inventory needs by location. Productivity focuses include will be on the use of pop up distribution centers for peak-selling seasons and increasing the amount of product that is retail ready from vendors.

Said Pugliese, “I feel really good about where we’re going go forward. It’s going to take a little bit of time for us to get there because we’re not there yet.”

Image courtesy Duluth Trading