Why Duluth Holdings Inc Stock Is Plunging Today

By Brian Feroldi Markets Fool.com

Image source: Duluth Holdings.

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What happened

After reporting disappointing third-quarter results, shares of Duluth Holdings (NASDAQ: DLTH), a niche apparelmaker that caters to tradesmen in rural areas, fell by more than 22% as of 11:30 a.m. EST on Friday.

So what

Here's a quick look at the quarterly highlights:

  • Duluth opened three new retail stores during the quarter, bringing its total up 12 retail stores and two outlets.
  • Revenue grew 21% to $67 million. This figure came up short of the $69 million in revenue that Wall Street had expected.
  • Gross margin expanded by 60 basis points in the period to 57.8%.
  • Costs related to new store openings caused selling, general, and administrative expenses to rise by 27% to $37.9 million.
  • Net income for the quarter dropped 67% to $0.5 million, or$0.01per diluted share. That was roughly in line with what market watchers had expected.

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Management blamed the revenue shortfall on "unseasonable weather, coupled with a highly promotional environment."In response, it lowered guidance forfiscal 2016.

Here's an updated look what it expects to happen during the full year:

2016 Guidance New Guidance Old Guidance
Revenue $360 million to $370 million $370 million to $380 million
Adjusted EBITDA $34 million to $38 million $40 million to $43 million
GAAP EPS $0.52 to $0.60 $0.66 to $0.70
Capital expenditures $25 million to $26 million $24 million to $25 million

Data source: Duluth Trading.

Given the disappointing third-quarter sales and cut to full-year guidance, it's no surprise to see shares cratering today.

Now what

Duluth's long-term shareholders have enjoyed a fantastic run in 2016. Even after including today's huge drop, shares are still up more than 96% since the start of the year. That blows past the returns of the retail sector in general as measured by the SPDR S&P Retail ETF (NYSEMKT: XRT).

DLTH data by YCharts.

While Duluth's third-quarter results were a bit light of expectations, the company continues to feel good about its long-term prospects. In the release, management reaffirmed its long-term financial growth targets, which call for roughly 20% annual sales growth and 25% net income growth.

With plenty of room left for new store openings and rising gross margins, these long-term targets appear to be achievable. If true, then it wouldn't surprise me one bit to see shares continue to provide investors with market-beating returns.

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Brian Feroldi has no position in any stocks mentioned.Like this article? Follow him onTwitter where he goes by the handle@Longtermmindsetor connect with him on LinkedIn to see more articles like this.

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