As for its Q3 results, DLTH posted a loss per share of ($0.10), in-line with consensus, with revenue increasing by 27.5% to $106.7 mln, slightly ahead of the $104.7 mln consensus. The primary driver for this growth was the company’s expansion of its store base, which climbed to a total of 43 from 26 in the same period a year ago. Additionally, its women's clothing line continues to grow as the company works to diversify its customer base. However, as we discuss below, in order to achieve this building out of the women’s brand, the company has also turned to ramping up its Sales & Marketing expenses.
Gross margin was one of the more positive metrics for the quarter, improving to 57.1% from 56.65% in the year ago period. The improvement here is related to increases in product margin, indicating that DLTH has been less promotional. With revenue growth remaining steady relative to its recent past performance, that is especially encouraging.
Even with this solid top-line growth and improved gross margin, DLTH's operating loss widened to ($2.6) mln from ($0.6) mln, and, its Adjusted EBITDA decreased by 47% year/year to $1.0 mln. The jump in SG&A expense is the main culprit for this. Specifically, SG&A expenses grew by 32%, and, as a percentage of revenue, SG&A increased to 59.5% from 57.4%. Within this expense category, advertising and marketing costs were higher by 20 basis points to 20.4% from 20.2%. This is related to an increase in women's television advertising in order to fuel growth in that business.
In its earnings press release, DLTH also reaffirmed its guidance for FY19, seeing EPS of $0.79-$0.84 vs. the $0.84 consensus, on revenue of $555-$575 mln vs. the $575.7 mln consensus. At the mid-point of its guidance, DLTH's outlook comes up short of expectations, and, as we noted above, the company has opted not to raise its guidance, despite exceeding expectations in both Q1 and Q2. So, much of the disappointment and negative reaction in the stock this morning is likely related to this cautious or conservative outlook.
To conclude, DLTH delivered a good report, highlighted by healthy and consistent revenue growth, along with an improvement in gross margin. But with the stock having climbed higher by about 20% in the week leading up to the report, the company’s in-line results and mere reaffirmation of its 2019 outlook left traders feeling a bit underwhelmed by the report. And, of course, the considerable weakness in the broader markets today isn't doing DLTH any favors either.