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Duluth Holdings Inc.'s Q2 Revenue Surges, but Higher Spending Dings Margins

By Brian Feroldi – Sep 9, 2016 at 7:02AM

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Revenue continued to grow rapidly for the niche apparel maker, but higher spending on a nationwide advertising campaign kept profits in check.

Image source: Duluth Holdings.

Retailers of varying sizes have been operating in a difficult environment all year long, but those companies that have carved out a niche for themselves are holding up just fine. That's the case right now for Duluth Holdings (DLTH -1.54%), an apparel and gear maker that primarily targets tradesman in rural areas. The company has been putting up impressive growth numbers since it went public in late 2015, and coming into Thursday's fiscal second-quarter financial report, shareholders were expecting that strong growth to continue. Let's take a closer look at how the company performed during the quarter to see if momentum continued, yet again. 

Duluth Holdings Q2: The raw numbers

MetricQ2 2016Q2 2015Change
Revenue $65.8 million $51.7 million 27.4%
Net income $3.6 million $5.7 million (36.8%)
Earnings per share $0.11 $0.24 (54.2%)


What happened with Duluth Holdings this quarter?

  • Revenue surged 27.4% thanks to 24.2% growth in direct sales and 43.8% growth in retail sales. The company credited gains, in part, to the success of its national advertising and digital-marketing campaigns.
  • Gross margin increased by 20 basis points, to 59.1%, when compared to the year-ago period, due to favorable sales leverage and product mix.
  • Selling, general, and administrative expenses jumped 33.3%, to $32.9 million, or 50% of sales. That was up 220 basis points over the same quarter last year, which management stated was primarily driven by increased spending on advertising.
  • The higher spending levels caused net income to drop 36.8%, to $3.6 million, or $0.11 per diluted share. However, in the year-ago period, the company was taxed as an "S" corporation, so it paid no income taxes. If you adjust for the different tax structure, then net income last year would have only been $3.4 million, or $0.14 per diluted share.
  • Duluth opened two new retail stores during the quarter, bringing its total store count to nine retail stores and two outlet stores at the quarter's end.
  • The company completed its 75,000-square-foot expansion at its Belleville, Wisconsin, distribution center. 

What management had to say

CEO Stephanie Pugliese expressed her pleasure with the company's solid quarterly performance by saying:

Our strong second-quarter results marked our 26th consecutive quarter of increased net sales year over year. Net sales growth of 27% reflected solid performance in both our direct and retail segments, as well as our men's and women's product lines. With the momentum gained in the second quarter, we expect to deliver full year fiscal 2016 results as previously guided.

Looking forward

Management reiterated its guidance for the full year, calling for net sales to land between $370 million to $380 million, and for GAAP (generally accepted accounting principles) earnings per share to be in the range of $0.66 to $0.70. However, the company now expects to open seven new retail stores in fiscal 2016, which is up from its prior outlook of only five stores. Those new stores are expected to add between 75,000 to 85,000 feet in additional selling square footage.

Management continues to feel bullish about the company's future prospects, and reiterated its long-term financial targets, calling for annual sales growth of 20%, and net income gains of 25%.

Wall Street appears to be quite pleased with this report, and sent shares up a few percentage points in after-hours trading. Given the company's strong revenue growth, faster-than-expected rate of new store openings, and bullish long-term outlook, perhaps that shouldn't be much of a surprise.

Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.

The Motley Fool recommends Duluth Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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