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Duluth Holdings Gives Investors 100 Reasons to Buy Into Its Rapid Expansion

By Andy Gould - Jun 17, 2017 at 10:39AM

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One of the few attractive brick-and-mortar growth stories remaining, this apparel and gear seller is looking to quintuple its current store base.

Duluth Holdings (DLTH -4.54%) sells casual clothing and workwear under its Duluth Trading brand, and the company recently pitched investors at the William Blair Annual Growth Stock Conference. CEO Stephanie Pugliese made a presentation that was heavily focused on Duluth's fast-growing retail operations, and she provided some key details on how the company plans to expand, as well as how current stores are performing.

A goal of 100 stores -- five times the current base

Though Duluth first alluded to a potential footprint of 100 locations last year, management had not explicitly stated how it intended to reach that number. Pugliese was more blunt during the presentation, stating that 100 stores is indeed the goal and expressing confidence the company will get there.

A Duluth Trading storefront

Image source: Duluth Holdings. 

That's an ambitious target for a company that finished 2016 with only 16 locations and just opened No. 22 in early June. But Duluth has already made good on its promise to accelerate the pace of expansion this year, committing to opening a total of 13 new stores in 2017 -- which would represent annual store growth of more than 80%. In an era of e-commerce, when so many other retailers are closing their doors, Duluth's growth plans stand out as one of the few bright spots left in the industry.

A secret weapon for site selection

When it comes to choosing the best locations for its stores, Duluth has something of an ace up its sleeve. That's because prior to opening any physical stores, the company got its start as a successful catalog and online retailer. As a result, it has many years of data showing exactly where in the country the densest clusters of its best customers reside.

When selecting new sites, the company also overlays external demographic data to see where the kinds of people who resemble their current customers are most likely to live. Pugliese says these combined data points help Duluth predict with good certainty whether a particular location is likely to succeed. This explains why the company has begun to expand far from its Midwestern base of smaller towns like Mt. Horeb, Wisconsin into much larger markets like Chicago, Philadelphia, and Washington, D.C.

Coming soon to a town near you

In 2016 and 2017, Duluth's growth efforts have been focused on expanding eastward. Later this year, the company plans additional locations in Ohio, Michigan, Missouri, and Kentucky. The company will also make its first push into the western part of the country with a Denver-area store.

A map showing where Duluth is planning new locations in 2017, 2018 and 2019

Image source: Duluth Holdings.  

In 2018, Duluth expects to open its first stores in New Jersey, Tennessee, Florida, Texas, Alaska, and the Pacific Northwest. The following year, the company's focus will turn to building out the Florida market, as well as its initial foray into California -- currently Duluth's No. 1 market in terms of direct sales.

Retail doesn't cannibalize online sales -- it increases them

With its direct (online and catalog) segment still contributing 76% of the top line in the first quarter of 2017, you might think retail stores have the potential to cannibalize the e-commerce business. However, the company says the effect is actually the opposite.

Pugliese noted that during the first 12 months of a retail store's opening, direct sales growth in that market -- compared to Duluth's national average -- does tend to decelerate. But after that first year, company data shows direct sales in that same market not only rebound but end up growing at rates faster than the national average.

Over time, this multi-channel approach can provide a powerful one-two punch to help boost growth. For example, in the Minneapolis-St. Paul area -- after Duluth added a pair of physical stores -- the company estimates that sales in that market are now triple what its direct sales would be otherwise. That accelerated growth provides a powerful incentive for Duluth to keep adding stores as quickly as possible.

Attractive store-level economics

While Duluth isn't releasing a lot of store-level sales data yet, what the company has revealed bodes extremely well for the future. Duluth says that to date, its stores are meeting or exceeding all financial targets and delivering store-level EBITDA margins in the mid-20% range, resulting in an average payback on investment of less than two years.

Stores are also meeting or exceeding the company's $450 sales-per-square-foot target, which would be higher than many other apparel retailers including Abercrombie & Fitch ($401), Gap ($335), Express ($337), and American Eagle Outfitters ($424), but lower than premium brands like Lululemon Athletica ($1,560) or Oxford Industries' Tommy Bahama ($528), according to eMarketer data.

DLTH Chart

Data by YCharts.

The market's still sleeping on Duluth ... for now

From 2014 to 2016, Duluth grew both its top and bottom lines at a compound annual growth rate of around 32%. And despite another strong performance in its most recent quarter, investors are still giving this stock the cold shoulder, as the company continues to be unfairly lumped in with other struggling apparel retailers.

While it may be another few quarters before investors take notice, with Duluth increasing its store base at a rapid pace, robust top and bottom line gains should follow, eventually attracting growth-seekers back into this early innings expansion story.

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