Shares of Duluth Holdings Inc.DLTH plunged almost 23% on Dec 9, a day after the company posted lower-than-expected sales in the third-quarter fiscal 2016, despite earnings beat. The primary reason behind sluggish sales can be attributed to an unusually warm weather. The company also slashed its fiscal 2016 guidance after weak quarterly results.
Quarter in Detail
After registering a positive surprise of 57.1% in second-quarter fiscal 2016, the company's third-quarter earnings of a penny inched past Zacks Consensus Estimate of a break even. After adjusting for income taxes expenses of $3.05 million for the prior year figure, earnings slipped 75% year over year.
The adjusted net income considers the effect of conversion of Duluth Holdings to a "C" corporation, which was put to effect on November 25, 2015. The company commenced trading in Nov 2015. Prior to the conversion, Duluth Holdings was a "S" corporation and usually not subject to income taxes.
Revenue and Margins
Net sales gained 21.2% year over year to $67.0 million during the third quarter, recording the 27th consecutive quarter of higher year-over-year sales. The robust performance of the company is reflected in the price movement. Shares of this apparel retailer gained 95.7% so far this year, outperforming the Zacks categorized Textile-Apparel Manufacturing industry, which has witnessed a decline of 2.8%.
However, revenue missed the consensus mark of $69.0 million by 2.9%. Moreover, sales fell short of management's expectation during the quarter. Soft performance of men's and women's fall product such as transitional outerwear, heavier weight bottoms and midweight fleeces limited sales growth during the quarter. However, categories like First Layer product, Alaskan Hardgear and women's accessories performed strongly.
Although cost of sales gained by 19.3%, gross profit increased 23% to $38.7 million due to higher year-over-year sales. Gross margin inflated 60 basis points (bps) to 57.8% in both direct and retail segments driven by lower initial product costs, along with a product mix shift to higher margin products.
DULUTH HOLDINGS Price, Consensus and EPS Surprise
Selling, general and administrative expenses as a percentage of net sales increased by 410 bps to 19.7% mainly due to higher store opening expenses, rent and operating costs from retail stores and headcount increases. Operating income declined 50.2% to $8.2 million during the quarter.
Earnings excluding interest, tax, depreciation and amortization (EBITDA) was $2.5 million compared to $2.7 million in the prior-year.
During the quarter, Duluth opened three new retail stores, two in the Chicago metro market and one in Prussia, PA, for a total of 12 retail stores and two outlet stores.
Revised Fiscal 2016 View
Duluth Holdings revised its fiscal outlook following an unseasonable weather and a highly promotional environment that continued into early fourth quarter. The company expects net sales in the range of $360 million to $370 million, compared to a range of $370 million to $380 million expected previously. Duluth Holdings anticipates GAAP earnings to be in the range of 52 cents to 60 cents per share compared to a range of 66 cents to 70 cents expected earlier. Earnings excluding interest, tax, depreciation and amortization (EBITDA) are estimated to be in the range of $34.0 million to $38.0 million compared to a range of $40.0 million to $42.5 million expected previously. The company expects to incur capital expenditures of $25.0 to $26.0 million compared to a range of $24.0 to $25.0 million expected earlier.
Other Financial Details
The Company ended the quarter with a cash balance of approximately $0.2 million compared to $23.3 million in the previous quarter. Long term debt less current maturities amounted to $7.31 million compared to $7.47 million in the previous quarter.
Zacks Rank & Other Stock Picks
Duluth Holding currently carries a Zacks Rank 3 (Hold).
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Ross Stores has an expected earnings growth of 11.4% while Target Corporation has an expected earnings growth of 8.05%.
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