Duluth Holdings (NASDAQ:DLTH) reported its fiscal first-quarter results on Tuesday, June 5. The maker of premium rough-and-tumble clothing and gear reported strong top-line growth of nearly 20% thanks to 13 new store openings over the last year. However, the company struggled to translate it into gains on the bottom line. 

Let's put Duluth's results under the microscope to get a better idea of where this company is heading.

Front of a Duluth Trading store

Image source: Duluth Trading.

Duluth Holdings Q1 results: The raw numbers

Metric Q1 2018 Q1 2017 Change (YOY)
Revenue $100.2 million $83.7 million 19.7%
Net income ($0.7 million) $0.4 million N/A
Earnings per share ($0.02) $0.01 N/A

Data source: Duluth Holdings Inc.

What happened with Duluth Holdings this quarter?

  • Retail sales grew 71% to $34 million mostly on the back of 13 new store openings. Management also noted that it saw growth in "virtually all product categories and in both men's and women's business."
  • Online and catalog sales increased 3% to $66 million.
  • Total revenue of $100.2 million came in just shy of what Wall Street had predicted.
  • Gross margin fell 230 basis points to 55.8%. Management stated that the decline was caused by higher sales of clearance items, higher shipping costs, and a decrease in shipping revenue.
  • Lower spending growth on selling, general, and administrative expenses and marketing helped to offset the large gross margin decline. However, net income still fell year over year.
  • The loss of $0.02 per share was slightly better than the $0.05-per-share loss that market watchers were expecting.
  • Cash balance at quarter-end was $1.2 million. The company has borrowed $21.3 million against its revolving credit line.
  • Two new retail stores were opened during the quarter. 

What management had to say

CEO Stephanie Pugliese said that she was pleased that the company was able to keep its streak of increasing net sales alive during the period. This record has now been extended to 33 quarters in a row. She also mentioned that the company's sales were impacted by the "late arrival of spring in several regions of the country."

Pugliese was also happy to share some data that continues to suggest that their aggressive store rollout program is working: "We continue to attract new customers to our brand through retail stores, and during the quarter, new customers acquired through retail were up 56% as compared to the prior year."

Looking forward

Management reaffirmed its guidance for the full year. Here's a reminder of what the company expects:

Metric 2018 Guidance 2017 Actual Implied Growth at Midpoint
Sales $555 million to $575 million $471.4 million 20%
Adjusted EBITDA $51 million to $54 million $46.4 million 13%
EPS $0.79 to $0.84 $0.67 14%

Table source: Duluth Holdings.

The company also stated that it continues to target 15 new stores during the year. For perspective, Wall Street currently projects that Duluth's revenue for the year will reach $592 million and that its EPS will hit $0.83.  

Investors knocked down Duluth's stock by about 6% in early morning trading after results were announced. The decline is likely being caused by the lower-than-expected quarterly sales results and disappointing revenue guidance.

My view is that Duluth continues to offer investors reason for both optimism and caution. On the plus side, revenue growth continues to trend in the right direction and it is great to see that the new store openings are helping to bring in new customers. The company's valuation also seems to be very reasonable right now given its enormous growth potential. On the other hand, Duluth's gross margin struggles give me pause, and I don't like that the company is relying on debt to fund its aggressive growth strategy.

All told, I think there's ample reason for growth investors to believe that Duluth's future continues to look bright. However, Duluth is far from my favorite small-cap business out there, so I'm content to focus my time and capital elsewhere.

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.