Duluth Trading Company reported sales were down 5 percent in the second quarter ended July 31. Earnings and sales came in short of analyst targets and Duluth lowered its guidance for the year.

Highlights for the Second Quarter Ended July 31, 2022 

  • Net sales of $141.5 million compared to $149.1 million in the prior year’s second quarter;
  • Gross margin of 53.4 percent, compared to 54.6 percent in the prior year’s second quarter excluding the non-recurring $1.3 million inventory write down, most of which came from product damaged in transit, the current quarter gross margin would have been 54.4 percent; 
  • Net income of $2.4 million, or $0.07 per diluted share, compared to net income of $9.0 million, or $0.27 per diluted share in the prior year’s second quarter; and
  • Adjusted EBITDA of $13.2 million, reflects 9.4 percent of net sales.

EPS of 7 cents a share was below the consensus analyst estimate of 15 cents. Revenue for the quarter of $141.5 million was below the consensus estimate of $156.2 million.

Management Commentary
President and CEO, Sam Sato commented, “During the second quarter we were not immune to the heightened level of macro uncertainty and inflationary pressures impacting discretionary spending. As a result, we have prudently revised our full-year guidance. Despite that backdrop, I am pleased with the underlying performance of our business and the progress we are making on our key strategic initiatives. We ended the second quarter with inventories up 22 percent compared to last year and 14 percent excluding in-transit goods. Importantly, nearly 90 percent of the inventory growth is in year-round evergreen goods. Simply stated, we are in a much healthier inventory position with an improved flow of new, seasonal receipts and better in-stock positions to support overall sales growth. We continue to manage expenses well in the face of inflationary headwinds and our strong balance sheet allows us to remain committed to key investments in support of our Big Dam Blueprint to build out our infrastructure and technical skillsets, while also investing in our teams as we focus on the long term.”

Sato concluded, “During the second quarter we were encouraged with the recent launch of our AKHG Women’s collection that fills the open space for innovative and technical outdoor clothing designed for women. This new offering directly addresses our customer’s desire for apparel and gear that meet their active work and outdoor recreational activities, in addition to staying true to the Duluth Trading heritage of designing for quality, durability and problem-solving functionality.   The customer response to our expanded Women’s categories overall has been strong and confirms our view of long-term growth potential embedded in our strategic plans. In particular, we see the Women’s apparel categories across our sub-brands having out-sized expansion opportunities.”

Operating Results for the Second Quarter Ended July 31, 2022
Net sales decreased 5.1 percent to $141.5 million, compared to $149.1 million in the same period a year ago. Direct-to-consumer net sales increased slightly by 0.1 percent to $85.3 million. Retail store net sales decreased by 12.0 percent to $56.2 million due to slower store traffic, which was partially offset by continued strong conversion rates.

Net sales in store markets decreased 6.3 percent to $100.4 million, compared to $107.1 million in the same period a year ago. The decrease was also driven by slower store traffic as compared to the prior year’s second quarter. Net sales in non-store markets decreased by 1.9 percent, to $39.9 million.

Gross profit decreased 7.1 percent to $75.6 million, or 53.4 percent of net sales, compared to $81.4 million, or 54.6 percent of net sales, in the corresponding prior year period. The decrease in gross profit margin was primarily driven by a non-recurring $1.3 million inventory write-down on products, mostly consisting of goods damaged while in transit, which decreased gross profit margin by 1.0 percent.

SG&A expenses increased 5.0 percent to $71.7 million, compared to $68.3 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses increased to 50.7 percent, compared to 45.8 percent in the corresponding prior year period.

The increase in SG&A expenses was primarily due to increased digital advertising to drive brand awareness and store traffic, investments in new headcount, as well as increased depreciation from continued capital investments.

The effective tax rate related to controlling interest was 23 percent compared to 25 percent in the corresponding prior year period.

Balance Sheet and Liquidity
The company ended the quarter with a cash balance of $15.4 million, an inventory balance of $164.5 million, net working capital of $102.4 million, and no outstanding Duluth Trading bank debt.

On July 8, 2022, the company entered into the First Amendment to its Credit Agreement. To support future investments, the First Amendment increased the revolving commitment from $150 million to $200 million, as well as extended the maturity date from May 14, 2026 to July 8, 2027.

Updated Fiscal 2022 Outlook
The company’s updated fiscal 2022 outlook is as follows:

  • Net sales in the range of $680 million to $705 million;
  • Adjusted EBITDA in the range of $69 million to $73 million;
  • EPS in the range of $0.61 to $.71 per diluted share; and
  • Capital expenditures, inclusive of software hosting implementation costs, of approximately $40 million.

Previously, guidance called for sales in the range of $730 million to $755 million, adjusted EBITDA in the range of $84 million to $88 million, and EPS in the range of 93 to $1.02. Capital expenditures guidance remains the same.

Photo courtesy Duluth Trading Company