What happened

Shares of Duluth Holdings (NASDAQ:DLTH), a company focused on selling clothing and accessories to tradespeople, fell by 17% as of 10:50 a.m. EDT on Wednesday after reporting first-quarter results.

So what

Here's a look at the key numbers from the quarter that are driving today's price action:

  • Revenue grew 22%, to $83.7 million. This marks the 29th quarter in a row of top-line growth, and it also surpassed the $82.9 million in revenue that Wall Street had expected.
  • Direct sales increased 5.7%, while retail sales surged 139.7%. The big jump in retail sales is the result of 20 stores being open for business this quarter compared to only nine in the year-ago period.
  • Gross profit margin expanded by 30 basis points thanks to product mix and better management of promotions.
  • Spending on selling, general, and administrative expense (SG&A) jumped 39.4%, which vastly outpaced revenue growth. Management said the increase was caused by higher spending on advertising, marketing, and from the big increase in store pre-opening expenses. 
  • Net income dropped 88%, to $0.4 million, or $0.01 per share. This result was well shy of the $0.05 in earnings per share (EPS) that Wall Street was looking for. 

Traders reacted harshly to the big bottom-line miss, which is why shares are selling off on Wednesday.

The inside of a Duluth Trading store.

Image Source: Duluth Holding.

Now what

CEO Stephanie Pugliese stated that she was pleased with the company's first-quarter results and that Duluth is on track to deliver on its full-year guidance. In addition, she defended the company's decision to rapidly increase spending on SG&A noting, "We made several investments in the business this quarter that impacted SG&A in the short term but will benefit us long term."

Management stated that they plan on opening 12 new stores and one outlet during fiscal 2017. They also reaffirmed 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 million to $49.5 million 15%
GAAP EPS $0.66 $0.66 to $0.71 4%

Data Source: Duluth Holdings. (EBITDA is earnings before interest, taxes, depreciation and amortization. GAAP is generally accepted accounting principles.)

Wall Street might not be happy with the company's decision to sacrifice near-term profits to drive long-term growth, but that's a trade-off that I think should be applauded by investors who are in this stock for the long run. If you agree, then it might make sense to look at today's drop as a great chance to buy into a winning retail concept at a discount.

Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends Duluth Holdings. The Motley Fool has a disclosure policy.