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Here's Why Duluth Holdings Inc. Is Dropping Today

By Brian Feroldi - Mar 20, 2018 at 10:43AM

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Disappointing guidance overshadows upbeat fourth-quarter results.

What happened

In response to reporting fiscal fourth-quarter results and sharing guidance for 2018, shares of Duluth Holdings ( DLTH -2.19% ), a retailer focused on clothing and gear for tradespeople, fell as much as 12.5% in early morning trading on Tuesday. Shares have since recovered a bit but were still down 9% as of 10:15 a.m. EST.

So what

Here's a look at the headline numbers from the fourth quarter:

  • Revenue jumped 25% to $217.8 million. That was ahead of the $210 million in revenue that Wall Street had projected.
  • Gross margin fell 210 basis points to 53.3%. 
  • Net income soared 39% to $19.5 million, or $0.60 per share. However, this figure was boosted by the recent passage of the U.S. Tax Cuts and Jobs Act tax. When adjusting for the tax change net income would have been $17.6 million, or $0.55 per share. This was a penny better than analysts had predicted.

Turning to guidance, here's what management is projecting will happen in fiscal 2018:

  • Net sales are estimated to land between $555 million to $575 million. The midpoint of this range represents growth of 20%. That's well short of the $588 million that Wall Street was looking for. 
  • 15 new stores are expected to be opened during the year.
  • EPS is projected to land between $0.79 to $0.84 per share. That's also below the $0.95 target that market watchers had wanted to see.

Given the lower-than-hoped-for guidance, it isn't surprising to see that traders are taking a hatchet to Duluth's share price today.

Business man looking stressed at computer with cups of coffee everywhere.

Image source: Getty Images.

Now what

This report wasn't flawless, but I think that bulls have a few positive takeaways from this earnings release, including:

  • Revenue growth came in higher than management had predicted.
  • Total new customer count grew 23% during the year.
  • The women's business grew 37% during the year and accounted for almost a quarter of total sales. 
  • The company experienced sales growth at its established stores.

For 2018, management intends to keep its foot on the gas by continuing to invest in new stores and building out its e-commerce platform. This should allow the company's strong top-line growth to continue. 

On the flip side, the falling gross margin remains a concern that is worth watching, though it is most likely owed to the company's decision to offer more free shipping promotions to customers that shop online.

Overall, Duluth's sales and customer count continue to head in the right direction. If you're bullish on this company's long-term growth trajectory then I think that today's dip represents a good chance to buy into this stock at a discount.


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