Here's Why Duluth Holdings Inc Is Soaring

By Brian Feroldi Markets Fool.com

What happened

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In response to an earnings report that showed fourth-quarter results soaring past Wall Street's projections, shares of the niche retailerDuluth Holdings (NASDAQ: DLTH)rose by more than 12% as of 11:05 a.m. EDT on Wednesday.

Image source: Getty images.

So what

Here's a review of the key numbers from the quarter that put traders in a good mood:

  • Revenue rose 24% to $174.7 million, driven by15% growth in direct sales and 106% growth in retail sales. This figure was far better than the $163 million in revenue that market watchers had expected.
  • The promotional retail environment caused gross margins to fall by 70 basis points to55.4%. When combined with higher spending on new-store openings and a surging tax bill, this resulted in a net income decline of 20% to $14 million, or $0.43 per share. However, this figure easily exceeded the$0.34 in earnings per share (EPS) that Wall Street was expecting.
  • Duluth opened two new retail stores during the fourth quarter.

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In 2017, Duluth's management team is targeting10 to12 new store openings and isoffering up the following guidance:

Metric 2016 Actual 2017 Guidance Year-Over-Year
Change at Midpoint
Revenue $376 million $455 million to $465 million 22%
Adjusted EBITDA $41.2 million $47 million to $49.5 million 15%
GAAP EPS $0.66 $0.66 to $0.71 4%

Duluth Trading's 2017 guidance. Data source: Duluth Holdings.

By contrast, Wall Street expects only $444 million in revenue and EPS of $0.69 for the full year.

The better-than-expected fourth-quarter results mixed with bullish revenue guidance for 2017 sent the company's share price soaring.

Now what

Eagle-eyed investors might notice that Duluth's 2017 guidance falls a bit short of the company's long-term financial growth targets. Specifically, management had previously told investors to expect top-line growth of 20% and net income growth of 25%. Since the company'sprofit guidance is lower than its long-term target, CEO Stephanie Pugliese stated the following:

We continue to believe these goals are achievable in the long term; however, over the next 18 to 24 months, we will be making substantial investments in growth, primarily by scaling our retail store expansion at a faster rate than previously planned.

Traders appeared to overlook this weak profit guidance and sent shares screaming higher anyway. This reaction hints that they applaud the company's decision to forgoshort-term profits in exchange for turbo-charging the top line. That's a trade-off that I, for one, applaud, so I can't blame the markets for bidding up shares today.

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Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends Duluth Holdings. The Motley Fool has a disclosure policy.