Behind The Numbers – Duluth Holdings (DLTH)
Duluth Holdings operates as a lifestyle brand, selling solutions-based apparel, accessories, and footwear through its company-owned distribution channels. As a way to engage customers, Duluth’s marketing incorporates humor and storytelling that conveys the uniqueness of products in a distinctive, fun way.
Yesterday morning, the company reported its Q3 earnings:
-EPS of ($0.10) vs ($0.10) estimate – In-Line
-Revenue of $106.7M vs $104.68M estimate – Beat
-Net Sales increased 27% Y/Y
-Retail Sales increased 58% Y/Y (driven by new store openings)
-Direct Sales increased 10.5% Y/Y
-Men’s Category increased 25% Y/Y
-Women’s Category increased 35% Y/Y
-Gross Profit Margins increased 50bps Y/Y
-FY EPS Guidance of $0.79 – $0.84 vs $0.84 estimate
-FY Revenue Guidance of $555M – $575M vs $575.68M estimate
Systems Issues
On the conference call, CEO Stephanie Pugliese would comment, “While we achieved our goals for the quarter, the team also worked through some challenges.”
During the quarter, Duluth experienced higher-than-expected SG&A expense related to two separate systems implementations issues:
Customer Service Related: There were inefficiencies in customer care functions that came as a result from latency introduced by the company’s new order management system. According to Stifel analyst Jim Duffy, while the latency has not been resolved, the Company has increased staffing levels to ensure no compromise to customer service levels during the peak season. Rather than introducing risk by recoding the system ahead of Holidays, the Company has chosen to absorb incremental costs.
Replenishment and Distribution Center Related: During Q3, Duluth introduced automation and new workflow to its Belleville, WI distribution center that services retail stores. This occurred at the same time as changeover to its new retail inventory replenishment. The replenishment process into the higher volume season increased throughput demand at the same time employees were being trained on new processes creating inefficiencies and added expense.
Tis’ The Season
As Stifel analyst Jim Duffy stated in his post-earnings note, “4Q and for that matter, December, remain hugely important to annual earnings power.” To be even more specific, approximately 90% of annual earnings power for the year occurs in the upcoming quarter.
According to CEO Stephanie Pugliese:
“As we entered into the fourth quarter, we had a very strong holiday weekend, the Black Friday through Cyber Monday. We also see that customers are shopping later and later as it comes into the Christmas time period. We are shipping 3 days longer or later into the Christmas time period this year than we did last year. And we’re watching the business and reacting every single day. As with any fourth quarter, it’s highly competitive. There are different kind of shopping patterns as people are, and we have an extra week in between Thanksgiving and Christmas and people are shopping later, et cetera. And so we’re watching the fourth quarter business as we always do very, very closely. One other thing that I just want to add, when we talk about our systems and very specifically, I feel very, very good about the systems that we put in place. We have had minimal customer disruption with any of our systems. We have had improvement in speed, for example, in our desktop through our mobile sites.”
