Duluth Impresses in Q2, but Uncertainty Keeps This Analyst on the Sidelines

The markets pulled back sharply toward the end of last week, but you wouldn’t care much if you are Duluth Holdings (DLTH). The outdoors-lifestyle retailer added 34% of muscle to its share price during the week, the bulk of which came after Wall Street applauded the company’s solid second-quarter fiscal 2020 results.

Duluth reported revenue of $137.38 million, up by 12.6% year-over-year and ahead of the estimates by $18.83 million. The uptick boosted by a 67% year-over-year increase in direct sales and more than doubling Q1’s direct sales growth rate. Q2 GAAP EPS of $0.18 (compared to $0.06 in the same period last year) came in a massive $0.15 above the Street estimate.

By mid-June, the company had in some capacity re-opened the doors for all its 62 retail stores.

William Blair analyst Dylan Carden attributes the strong showing to Duluth’s mix of digital and physical presence, noting that “being online alone has not been enough to grow sales in this environment, with online apparel sales broadly down 12.5% in the second quarter.”

Those with a mix of both have displayed stronger performances than the broader industry. The success “points to the current benefit of Duluth’s more recent retail expansion, as these newer customers have shifted online.”

However, interestingly, Dylan believes Duluth’s model, while “well levered to the current environment,” might pose a problem once a sense of normalcy is fully restored.  

The analyst said, “While the model has shined amid the current environment, ironically we believe a more normalized backdrop will again highlight some of these more structural issues. We see the biggest risk in the model at this point being the potential for store closures after the company pauses new openings into 2021 (with only one lease signed thus far). As such, at 15.5 times our initial 2021 EPS estimate, we believe valuation is relatively high as the company shifts from a growth company to more of a recovery story, with lingering uncertainty around new store ramp and capacity to pull back on promotions and marketing spend.”

As a result, Carden reiterated a Market Perform (i.e. Hold) on DLTH shares without suggesting a price target. (To watch Carden’s track record, click here)

It is a similar story amongst Carden’s colleagues. The analyst consensus rates the stock a Hold, based on 3 Hold ratings. With an average price target of $12, the Street anticipates shares to stay range bound for now (See Duluth stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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