You've seen the headlines: Malls are dying.
With chains like Sports Authority, Aeropostale, and Eastern Mountain Sports going bankrupt last year, and others like Macy's, The Limited, and Kohl's announcing large-scale store closings, retailers are going through some very tough times. As has been well-documented, these losses have been Amazon's gain (along with other online competitors), with many investors leaving the rest of the retail industry for dead.
In spite of this environment, Duluth Holdings (NASDAQ:DLTH) -- the iconic purveyor of rugged work wear -- looks like a different animal. While Duluth's stock has languished since the company reduced guidance in December, the company's long-term growth trends seem intact. In fact, with expected annual revenue and earnings-per-share growth of 20% or better, Duluth continues to shine as one of the brightest spots in the retail landscape.
E-commerce expertise -- the foundation for successful retail expansion?
Perhaps it's not technically accurate to call Duluth a retailer -- at least not exclusively, since only 22% of the company's current sales take place at its stores. The other 78% comes from online and catalog sales, which is how the company got its start. In fact, a big part of Duluth's appeal is that, in a digital age where most retailers are still trying to figure out how to compete with Amazon, Duluth already excels at e-commerce.
Duluth's retail efforts are a means of turbocharging its growth by expanding the company's reach. Case in point: The company's retail sales grew 68% year-over-year in the most recent quarter. Duluth's customer base is spread throughout the country with California, Texas, and New York representing its top three markets, yet its stores are located mostly in the Midwest. With 80% to 85% of all apparel purchased at brick-and-mortar stores, Duluth is betting that rolling out a nationwide physical presence where its customers live will be a profitable move.
Enormous long-term potential
Duluth operates only 16 retail stores at the moment, but it's preparing for a major expansion over the next several years, having identified 100 suitable locations with the right mix of customer demographics and population density. The company will open eight to 10 new stores in 2017 and is committed to increasing its already aggressive rate of expansion.
Building the store base at a rapid clip will be essential to the kind of growth Duluth is targeting. The company intends to increase its net sales by 20% annually over the long-term. Additionally, Duluth says its retail operations will eventually be responsible for 30% to 35% of net sales. Using the company's full-year 2016 guidance of $365 million in net sales as a starting point, we can project the company's growth for the next five years and the corresponding rate of retail sales growth. If the company achieves the targets above, its 2021 net sales would be $908 million, with $295 million of that coming from its retail stores. That would give Duluth's retail sales an impressive six-year compound annual growth rate (CAGR) of around 41%.
Can the good times continue?
Duluth's e-commerce savvy and retail ambitions look like a powerful combination that will continue to juice the company's growth for years. Jonathan Komp, an analyst at Robert W. Baird, estimates the brand's potential at more than $1 billion in annual sales.
But is it realistic, in the age of Amazon, to think that Duluth can pull off those kinds of numbers? Well, even though Duluth did reduce its guidance last quarter (blamed mainly on unseasonably warm weather, which hurt sales of its cold-weather products), its full-year 2016 sales guidance still represents 20% top line growth, in line with the company's long-term target. The company also left unchanged its stated goal of 25% annual growth for both net income and adjusted EBITDA.
When you consider that the company has grown its sales at a 29% CAGR and net income at a 47% CAGR over the last six years, it's quite clear the company's products are resonating with consumers. As can be seen across the rest of the retail industry right now, that kind of sustained growth is increasingly rare. As Raymond James analyst Dan Wewer recently noted:
It is difficult finding retailers and consumer brands that possess Duluth's 20%-plus revenues and profit growth potential. In fact, Duluth's revenue growth is in line with Under Armour and faster than any other retailer we cover.
That sounds like the exact opposite of a dying retailer to me.