I'm not a big fan of companies that blame the weather for poor sales results. However, occasionally you find the rare example where the weather excuse makes sense. And after reviewing Duluth Holdings' (DLTH 0.12%) solid fourth-quarter results, I'm convinced this is one of those cases.
For the third quarter of 2016, the workwear brand and apparel retailer reported sales that fell short of analyst expectations. On Duluth's earnings call, management cited record high temperatures in much of the country as the primary reason why sales of its colder weather products suffered. The company lowered its full-year guidance, and the stock was punished severely after that Dec. 8 report, falling by around 50% over the next few months.
However, the weather eventually -- inevitably -- turned colder and the company bounced back with a terrific fourth quarter that made its sales slowdown look like a one-time event. You can see in the chart above that the stock climbed after the March 21 fourth-quarter report.
Beating expectations
Duluth's fourth-quarter sales increased 24% to $174.7 million, well ahead of the $163.1 million analysts were expecting. In addition, earnings per share came in at $0.43, also outpacing analyst estimates of $0.34.
On a full-year basis, Duluth's third-quarter disappointment looks like it was just a small bump on an otherwise smooth road. For all of 2016, sales increased 23.7% to $376.1 million, adjusted EBITDA grew 21.1% to $41.2 million, and net income was $21.3 million, compared to pro forma net income (adjusted for income taxes) of $17.3 million the previous year. (Duluth's conversion to a C corporation in 2015 means that net income for these two years is a cleaner comparison after the tax adjustment.)
Image source: Duluth Holdings.
These results not only exceeded the updated, lowered guidance Duluth had provided on its third-quarter call, but the figures for sales and adjusted EBITDA actually met the mid-range of Duluth's initial, higher guidance. This indicates that sales bounced back faster and stronger than even Duluth's management had anticipated once the weather pattern began to turn more normal. Duluth's fiscal year ended at the end of January.
On the conference call (transcribed by Thomson Reuters), CEO Stephanie Pugliese said::
We spoke in December about the unseasonably warm weather through November, and the fact that there was a distinct shift in consumer purchasing patterns, including customers waiting longer and longer to do their holiday shopping. While these factors created significant headwinds in the first half of the quarter, I am especially pleased, and I must say relieved, to report that the latter part of December and January were very strong. ... we saw a pick up in cold weather product sales. In addition, many customers emerged from their shopping hibernation, to provide a holiday and year-end bump.
Retail continues to outperform direct channels
At the time of Duluth's IPO in late 2015, its direct segment (online and catalog sales) represented 90% of total sales, while its retail segment accounted for the other 10%.
And though Duluth's direct sales are still expanding, retail sales are growing at much faster rates, with this trend intensifying in the fourth quarter. While direct channels grew by 14.5% for the quarter, retail sales increased a whopping 105.6%, with the company citing sales growth in all product categories.
For the full year, direct sales grew by 16%, while retail sales grew by 76%. As a result, direct sales now make up 82% of the sales mix, with retail accounting for the other 18%. Eventually, Duluth believes its retail operations will be responsible for 30% to 35% of its net sales. The company had 16 retail locations at the end of the fiscal year and has plans for more.
Image source: Duluth Holdings.
Turbocharging retail expansion
Another piece of good news for investors is that Duluth is accelerating its expansion for the coming year. With the company experiencing very positive consumer reaction to the new stores it's opening, it increased its 2017 plan (previously eight to 10 new stores) to 10 to 12 new stores this year. In terms of store count, the midpoint of Duluth's updated guidance would represent 69% annual growth. This increased pace of planned expansion is exciting given that the company has already identified 100 locations across the country where it believes it could be successful.
Expect more rapid growth in 2017
Following up on these impressive results, the company issued the following guidance for full-year 2017:
- Net sales of $455 million to $465 million, reflecting 22.3% growth at the midpoint
- Adjusted EBITDA of $47 million to $49.5 million, reflecting 17.8% growth at the midpoint
- GAAP EPS of $0.66 to $0.71, reflecting an increase of 4.2% at the midpoint
Management has long-term business goals in place of 20% top-line growth, and 25% adjusted EBITDA and net income growth. Addressing the disparity between these goals and the guidance above, CFO Mark DeOrio noted that over the next 18 to 24 months, Duluth will be investing even more heavily in its retail growth, which will reduce its near-term profitability. Given the long runway for top-line expansion Duluth appears to have in front of it, that seems like a smart move to me. And judging by the market's reaction so far to the report, investors appear to agree.
