What happened
In response to an earnings report that showed fourth-quarter results soaring past Wall Street's projections, shares of the niche retailer Duluth Holdings (DLTH -0.15%) rose by more than 12% as of 11:05 a.m. EDT on Wednesday.
Image source: Getty images.
So what
Here's a review of the key numbers from the quarter that put traders in a good mood:
- Revenue rose 24% to $174.7 million, driven by 15% growth in direct sales and 106% growth in retail sales. This figure was far better than the $163 million in revenue that market watchers had expected.
- The promotional retail environment caused gross margins to fall by 70 basis points to 55.4%. When combined with higher spending on new-store openings and a surging tax bill, this resulted in a net income decline of 20% to $14 million, or $0.43 per share. However, this figure easily exceeded the $0.34 in earnings per share (EPS) that Wall Street was expecting.
- Duluth opened two new retail stores during the fourth quarter.
In 2017, Duluth's management team is targeting 10 to 12 new store openings and is offering up the following guidance:
| Metric | 2016 Actual | 2017 Guidance | Year-Over-Year Change at Midpoint |
|---|---|---|---|
| Revenue | $376 million | $455 million to $465 million | 22% |
| Adjusted EBITDA | $41.2 million | $47 million to $49.5 million | 15% |
| GAAP EPS | $0.66 | $0.66 to $0.71 | 4% |
Duluth Trading's 2017 guidance. Data source: Duluth Holdings.
By contrast, Wall Street expects only $444 million in revenue and EPS of $0.69 for the full year.
The better-than-expected fourth-quarter results mixed with bullish revenue guidance for 2017 sent the company's share price soaring.
Now what
Eagle-eyed investors might notice that Duluth's 2017 guidance falls a bit short of the company's long-term financial growth targets. Specifically, management had previously told investors to expect top-line growth of 20% and net income growth of 25%. Since the company's profit guidance is lower than its long-term target, CEO Stephanie Pugliese stated the following:
We continue to believe these goals are achievable in the long term; however, over the next 18 to 24 months, we will be making substantial investments in growth, primarily by scaling our retail store expansion at a faster rate than previously planned.
Traders appeared to overlook this weak profit guidance and sent shares screaming higher anyway. This reaction hints that they applaud the company's decision to forgo short-term profits in exchange for turbo-charging the top line. That's a trade-off that I, for one, applaud, so I can't blame the markets for bidding up shares today.
