Duluth Holdings (DLTH 17.91, -5.63, -23.92%) is trading sharply lower today after
reporting disappointing Q4 (Jan) earnings last night and providing weak
guidance for FY19.
The company’s products are only available online and at Duluth stores which the company has slowly been rolling out. The company has commercials that feature a portly man with a vice grip around his waist, who puts on his Duluth Trading "Buck Naked Underwear" and this causes him to dance. The tag line is: Feels Like Wearing Nothing At All.
This was a rough quarter for Duluth. JanQ EPS rose just 7% yr/yr to $0.64, which was well below market expectations. Revenue rose 15.0% yr/yr to $250.5 mln, which also was below expectations. The increase was driven by 5.4% growth in direct (online/catalog) sales and 38.9% growth in retail (brick and mortar stores) sales. The good news is that DLTH saw growth in virtually all product categories and in both men's and women's business. However, the guidance for FY19 was pretty weak: EPS of $0.74-0.80 and revenue of $645-655 mln. Both metrics are below market expectations.
So, what happened in Q4 (Jan)? DLTH does not say much in the press release but, on the call, management said “ We began the holiday shopping season with a strong showing on Black Friday and Cyber Monday… “as we got closer to Christmas and through January, we experienced a slowdown in customer response due to some factors that were in our control and others that were not.”
On a macro level, DLTH was not immune to the overall slowdown in consumer spending, and it felt the impact of lower traffic across all of its channels. Internally, DLTH stumbled a bit with some challenges with systems implementation and late deliveries of product. As a result, DLTH had inventory that was misaligned to the timing of sales and not distributed optimally throughout the network. This affected store productivity and added extra cost throughout the system.
Also, some of its high-demand products did not hit the market in time to reap the full benefit of the holiday season. For example, DLTH was out of stock in some of its highest volume sizes of its women's plus size program during this critical time of year. DLTH also took more back orders than planned due to later deliveries of product and incurred more labor in the distribution centers and in the stores to process the flow of goods, which added considerable expense to the quarter.
It was not all bad news. DLTH was happy to see that its new e-commerce platform had the stability to handle peak volume and the company saw significant improvement in site speed. Total website visits in JanQ increased 11% yr/yr. Most importantly, as its model successfully shifts from direct to omni-channel, retail stores continue to influence customer engagements and revenue across the entire ecosystem. DLTH knows that when it opens a store, that store presence quickly increases market penetration.
Looking ahead, investors should be aware that Q1 (Apr) looks like it will be a rough quarter as well. While not mentioned in the press release and no specific financial guidance was provided, DLTH provided some color on AprQ on the call. Specifically, that the sluggish trend in sales, both online and in stores, and heavier clearance activity is expected to continue in AprQ. DLTH typically reports AprQ results in early June.
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