Duluth Holdings Inc.'s Q3 Results Come Up Short

Challenges in the retail environment haven't stopped Duluth Holdings(NASDAQ: DLTH) from putting up impressive top-line growth. The company's focus on offering innovative apparel and accessories to tradesmenhas paid off in spades, and heading into Thursday's fiscal-third-quarter financial report, investors were expecting that the company's growth would continue unabated. Unfortunately, a handful of factors caused Duluth's results to come up short of what the company was expecting. As a result, management decided to cut its guidance for the full year.

Let's take a closer look at Duluth's quarterly results to see what happened.

Image source: Duluth Holdings.

Duluth Holdings Q3 results: The raw numbers

Metric Q3 2016 Q3 2015 Year-Over-Year Change
Revenue $67.0 million $55.3 million 21%
Net income $0.5 million $1.5 million (67%)
Earnings per share $0.01 $0.06 (83%)

Data source: Duluth Holdings Inc.

What happened with Duluth Holdings this quarter?

  • The company opened three new retail stores during the quarter, bringing its total to 12 retail stores and two outlets.
  • Overall revenue jumped 21%, to $67 million. The rise was caused by a 12% jump in direct sales and 68% growth in retail sales. Unfortunately, this number was quite a bit shy of the $69 million in revenue that Wall Street was looking for and management said net sales fell short of the company's expectations.
  • Gross margin for the quarter was 57.8%, which was up 60 basis points when compared with the year-ago period. Management credited the gains to favorable sales leverage and a general shift to higher-margin products.
  • Selling, general, and administrative costs grew to $37.9 million, which was up 27% over the same quarter last year. This figure represents 57% of net sales, which was a year-over-year increase of 240 basis points. Management said thatincreased rent expense and related store-opening costs drove the additional spending.
  • Expense growth outpaced revenue growth yet again, causing net income to fall. Net income for the period was $0.5 million, or$0.01per diluted share. That was down considerably from the $1.5 million, or$0.06per diluted share, that was reported in the year-ago quarter.
  • Pro forma net income, which adjusts for last year's conversion from an S corporation to a C corporation, was$0.9 million, or$0.04per diluted share.

What management had to say

CEO Stephanie Pugliese gave insight into the company's disappointing results in the company's press release:

Pugliese also went on to say that weather is having an impact on the company's fourth-quarter results, too.

Despite the short-term challenges, she reaffirmed her belief that the company's store expansion strategy is working and that it will drive strong growth over time:

Looking forward

The softer-than-hoped-for third-quarter results caused management to rein in its full-year guidance.

Here's an updated look at what management now expects to happen in fiscal 2016:

Metric New Guidance Previous 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

Duluth Trading's 2016 guidance. Data source: Duluth Holdings.

Management also reaffirmed the company's "long-term" growth targets. These figures call for sales growth of approximately 20%, and roughly 25% growth in net income growth. Despite the short-term bumps, Duluth's strong top-line growth and gross margin expansion do suggest that its store expansion strategy is working.

Investors were not happy with the company's third-quarter results, sending shares down 23% at 1 p.m. Friday.

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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@Longtermmindset, or connect with him on LinkedIn to see more articles like this.

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