Helped by a pickup in sales in the company’s direct business, Duluth Holdings Inc., the parent of Duluth Trading Company, reported sales grew 28.3 percent in the second quarter, accelerating from the 19.7 percent gain seen in the first quarter. Both earnings and sales topped Wall Street guidance, although the apparel company maintained guidance for the year.
In the quarter ended July 29, sales reached $110.7 million, above Wall Street’s consensus estimate of $106.6 million.
Net income increased 48.9 percent to $6.4 million, or 20 cents per share, exceeding Wall Street’s target on average of 14 cents. Adjusted EBITDA jumped 38.6 percent to $13.1 million.
“We had a strong second quarter with an increased growth rate in our direct business relative to first quarter, healthier product margins and a reduced use of promotions,” said Stephanie Pugliese, CEO, on a conference call with analysts.
Retail sales for the quarter delivered a 74 percent growth rate, largely driven by new stores opened in 2017 and 2018. The six stores opened in the quarter opened strong and are meeting initial expectations.
Direct sales grew 5.5 percent after climbing 3.8 percent in the first quarter, reflecting a return to more normalized seasonal buying patterns and pent-up demand from the cooler weather experienced late in the first quarter. Growth was seen across all categories in its men’s and women’s divisions, with men’s growing 26 percent year-over-year and women’s continuing its strong trajectory with 37 percent growth.
Product gross profit rate was up slightly to last year, a result of less reliance on promotional activity and increased initial margin.
Said Pugliese, “We got past the drag of clearance merchandise from first quarter, and in second quarter we sold more product at full price than last year as a percent of total sales. Core year-round product and seasonal categories all performed very well, and we ended the quarter in a better inventory position than we have seen in prior quarters.”
Gross margins eroded slightly to 56.2 percent from 56.7 percent last year, primarily due to the decline in shipping revenues and an increase in freight cost for delivery of products to growing store base, partially offset by an increase in product margin due to a higher percentage of full price sales.
SG&A expenses decreased 90 basis points to 47.3 percent. The decline reflects a drop in advertising and marketing costs by 310 basis points to 14.3 percent due to a planned reduction in catalog costs coupled with greater leverage of web marketing and television advertising expenses due to the growth in retail sales.
Selling expenses increased 60 basis points to 14.7 percent due to a higher retail selling cost resulting from additional stores coupled with a short term increase in call center staffing needed for training on a new order management system. G&A expenses increased 160 basis points to 18.3 percent compared due to an increase in technology expenses, depreciation and higher store occupancy cost.
Providing an update on omnichannel initiatives, Pugliese noted that the company’s order management system went live the last week of May, and an updated e-commerce platform was launched to customers in the first week of August. Both projects were implemented with minimal disruption to customers.
Duluth also upgraded the point-of-sale system in many of the company’s stores and kicked off the company’s assortment and inventory planning system implementation.
In marketing, the “Summer Solved” campaign extended across all channels through the timely integration of TV and radio advertising, catalog, digital, billboards and in-store displays. Said Pugliese, “With the continued growth of our retail presence, we are using these learnings to maximize the customers’ experiences in each channel and across the enterprise.”
Integrated marketing campaign in particular have amplified favorable responses to the company’s new offerings, including the Women’s Plus launch.
“We remain very focused on building continued momentum in our women’s line overall, not only for its sales potential but also because women are valuable customers,” said Pugliese. “They tend to shop more often and across more product categories. Our retail stores have been instrumental in breaking down a key barrier to women adopting the brand, namely the ability to see, feel and try on products.”
Also for fall, launches include Flexpedition men’s and women’s pants that plays up flexibility as well as durability, including water repellency. In addition, the new Spit & Polish Apothecary line for men and women launched last month with 32 styles of new products.
“The line uses natural ingredients and universal scents to fight dirt and grime encountered with an active lifestyle,” said Pugliese. “We also expect continued growth in men from Alaskan Hardgear through new styles and additional store within a store concepts in retail.”
Stores opened in the quarter in Colorado Springs; Portland, OR; Columbus, OH and three within Texas: Lubbock, Denton and Arlington. The target remains to open 15 this year.
Direct sales in established store markets continue to outpace those without stores. Pugliese added, “With our larger retail footprint, we have an even greater opportunity to leverage the momentum created by customers who shop across channels and to serve those customers better. That is why we will begin to roll out additional services like buy online, pick up in store, easier returns processes and ship from store later this year.”
For the full year, Duluth reaffirmed its guidance calling for net sales between $555 million and $575 million with the retail segment accounting for up to 40 percent of total net sales. The direct segment is expected to grow in mid-single digits. Earnings are still expected to range between 79 cents and 84 cents, which compares to 67 cents, excluding the impact of the Tax Act
Asked in the Q&A session if the company thought of raising guidance for the year, Pugliese said that while SG&A was lower than planned, the rest of the company’s performance in the quarter was generally in line with internal targets, and the fourth quarter drives the “lion’s share” of Duluth’s full-year results.
“Right now, we’re really pleased with the momentum that we’ve got coming into the second half of the year, but our focus is on continuing to execute well the plans that we have to get us ready as we get closer and closer to that fourth quarter,” said Pugliese. “So at this point, we’re very comfortable with the guidance that we’ve put out there. The team is executing very well, and we’ve got big things ahead of us.”
Photo courtesy Duluth Trading
