Duluth Holdings (NASDAQ:DLTH) reported its fiscal third-quarter results on Thursday, Dec. 6. Total sales jumped by 27% during the period thanks in large part to new store openings; however, those gains were outstripped by a 32% jump in expenses. The combination pushed the company's bottom line into the red.

Duluth Holdings Q3 results: The raw numbers

Metric Q3 2018 Q3 2017 Change (YOY)
Revenue $106.7 million $83.7 million 27.4%
Net income ($3.2 million) ($0.8 million) N/A
Earnings per share ($0.10) ($0.03) N/A

Data source: Duluth Holdings Inc.

Outside view of a Duluth retail store

Image source: Getty Images.

 

What happened with Duluth Holdings this quarter?

  • The double-digit revenue growth was driven by a 10% increase in direct sales and 58% growth in retail sales. The big jump in retail sales was mostly attributable to the 43 stores that were in operation during this period, compared to just 26 last year. Total revenue of $106.7 million came in ahead of Wall Street's estimate.

  • Gross margin increased by 50 basis points to 57.1%.

  • Expenses jumped 32% because of higher spending on advertising, store openings, and technology. 

  • Net loss of $3.2 million, or $0.10 per share, matched the consensus estimate among analysts.

  • Four new stores were opened during the period, bringing the total number of new stores opened so far this fiscal year to 15.

What management had to say

CEO Stephanie Pugliese stated that she was pleased with the company's performance, and believes that Duluth is well positioned to deliver on its targets for the year:

We continue to see strong contribution from our new stores and growth from our Women's business. Throughout the year, our team worked tirelessly and our results year-to-date put us in a strong position heading into the holiday season. We expect to deliver on our fiscal 2018 guidance.

Looking forward

The strong quarterly performance caused management to update its guidance for the fiscal year.

Here's what those numbers look like:

  • Net sales in the range of $555 million to $575 million. This represents year-over-year growth of about 18% to 22%. 
  • Adjusted EBITDA is projected to land between $53 million and $56 million. This is a $2 million bump from prior guidance.
  • Earning per share are expected to land between $0.79 to $0.84. This represents growth of 18% to 26%. 

For context, Wall Street was expecting the company to deliver $575.7 million in revenue and $0.84 in earnings per share for the full year. The disappointing guidance caused traders to sell off shares in early morning trading after the earnings were released. However, the share price almost fully recovered by midday.

There are both positive and negative takeaways for investors in this report. 

The good news is that Duluth's sales continue to grow rapidly on the back of new store openings. Since the company has plenty of white space left for continued expansion, there's ample reason to believe that growth should continue from here.

The bad news is that expenses are growing very rapidly as management continues to invest in new store openings. Since the company keeps an extremely lean balance sheet -- Duluth's cash balance at quarter end was only $2.5 million -- management is tapping its revolving credit facility to drive growth. That could be a savvy move as long as its new stores continue to drive growth, but taking on debt to fund store expansion is a risky strategy.

Duluth drives a significant amount of its full-year profits during the holiday quarter, so the pressure is on for the company to execute. Thankfully, Duluth has spent the bulk of its fiscal year expanding its store footprint, enhancing its e-commerce experience, and rolling out new product lines, so the business looks well positioned for success.

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.