Duluth Holdings (DLTH -0.46%), a purveyor of clothing and gear targeted at tradespeople, reported its fiscal first-quarter earnings results on Tuesday, June 6. The company's sales once again grew at a breakneck pace, but surging spending on new store openings and promotions caused the company's profits to sink.
Let's take a deeper look at Duluth's first-quarter performance to get a better sense of whether or not the bull thesis for owning this stock is still intact.
Image source: Duluth Trading.
Duluth Holdings Q1 results: The raw numbers
| Metric | Q1 2017 | Q1 2016 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $83.7 million | $68.6 million | 22% |
| Net income | $0.4 million | $3.2 million | (88%) |
| Earnings per share | $0.01 | $0.10 | (90%) |
Data source: Duluth Holdings Inc. Chart by author.
What happened with Duluth Holdings this quarter?
- Top-line growth was driven by a 5.7% gain in direct sales and 139.7% growth in retail sales. The latter soared as the company had 20 stores open this quarter compared to only nine in the year-ago period. However, management also said it saw growth in "virtually all product categories." This marks the 29th quarter in a row of increasing sales, and total revenue of $83.7 million surpassed Wall Street's estimate by nearly $1 million.
- Gross profit margin expanded by 30 basis points year over year. Management credited the gains to favorable product mix and better use of promotions.
- SG&A expenses soared 39.4% to $47.9 million. Management said the big jump was driven by higher spending on advertising, marketing, and store pre-opening expenses.
- The higher spending rate caused net income to plunge 88% to $0.4 million, or $0.01 per share. That result came up well short of the $0.05 in EPS that analysts had expected.
- Duluth's cash balance at quarter-end was $13.6 million.
- Four new retail stores were opened during the quarter.
What management had to say
CEO Stephanie Pugliese said the company's first-quarter results were "in line" with expectations and that it remains "on track" to hit its full-year guidance.
She also defended the company's decision to ramp up spending, stating, "We made several investments in the business this quarter that impacted SG&A in the short term but will benefit us long term."
Pugliese also noted that the company's efforts to appeal to women are paying off:
In addition to the expansion of retail, we invested in the growth of our women's business through incremental spend in women's TV advertising, continuing to grow that part of the business and bringing new brand fans to the customer base.
Looking forward
For fiscal 2017, management now expects to open 12 new stores and one outlet, which is at the high end of its prior plan to open between 10 and 12 stores. The company also reaffirmed its full-year guidance, which calls for the following:
| 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 | $47.0 million to $49.5 million | 17% |
| GAAP EPS | $0.66 | $0.66 to $0.71 | 4% |
Data source: Duluth Holdings. Chart by author.
Despite posting a solid top-line beat and reaffirming its bullish guidance for the year, investors reacted negatively to this report. Shares fell by double-digits in morning trading on Wednesday, likely in response to higher-than-expected spending levels and the miss on the bottom line. Nonetheless, Duluth's strong revenue growth continues to prove that its products and unique marketing strategy are helping it win new customers. Sacrificing near-term profitability in exchange for powering faster long-term growth is a decision that will likely benefit shareholders in the long run.
