What happened

After management reported an ugly fiscal second quarter and issued soft guidance, shares of Duluth Holdings (NASDAQ:DLTH), a rough-and-tumble retailer focused on the needs of tradespeople, dropped 16% as of 1:33 p.m. EDT on Thursday.

So what

The headline numbers from the fiscal second quarter weren't pretty:

  • Revenue jumped 10% to $122 million. That was well below the $127.6 million Wall Street wanted.
  • Gross margin plunged 310 basis points to 53.1%.
  • Operating income contracted to $3.7 million, down sharply from $9.9 million in the year-ago period.
  • Net income was $1.9 million, or $0.06 per share. That was well below the $0.20 it recorded last year and also fell short of the $0.10 analysts were expecting.
  • Cash balance at quarter-end was $2.5 million. The company has drawn $45 million on its revolving line of credit.
  • Longtime CEO Stephanie Pugliese resigned on Aug. 30. Stephen Schlecht, Duluth's founder, has assumed the role of CEO.
Businessman with hand over face while talking on phone.

Image source: Getty Images.

Management also updated its full-year guidance:

  • Sales are now expected to land between $610 million and $625 million. This is well below the $648 million that was expected.
  • Earnings per diluted share are expected to land between $0.60 and $0.66. Market watchers were expecting $0.70.

Given the worse-than-expected quarterly numbers and ugly guidance, it isn't hard to figure out why shares are nosediving today.

Now what

Schlecht was up front with investors and Duluth's recent business performance:

We know that our performance in the first half of this fiscal year fell below our expectations, and that now all our attention and resources must be completely focused on delivering a successful fourth quarter, which accounts for the lion's share of our sales and profitability for the entire year. I also want to recognize that we have had some growing pains over the past year and a half. In response, we plan to slow down the pace of our retail expansion in 2020 and direct our focus to improving asset productivity and thus our operating margin rate. We have made a number of improvements in our business that are expected to bear fruit in 2020, and we have a strong team in place focused on the long-term success of our Company.

It's hard to find any good news in this earnings report. Sales growth is slowing, margins are contracting, a senior leader resigned, guidance was cut, and management is purposely taking its foot off the gas. That's an awful combination, especially considering that Duluth Holdings was supposed to be a high-growth stock.

Schlecht clearly has a lot of work ahead of him in order to rebuild trust with investors. With so much uncertainty in the air, I for one plan on avoiding this turnaround stock until we see meaningful signs of improvement.