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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.