Duluth Holdings Inc. (NASDAQ:DLTH) is a lifestyle brand that has carved out a niche in the workwear and casual apparel market. Despite facing some near-term challenges, the company is taking strategic actions to unlock the full potential of its business and position itself for sustainable, profitable growth in the long run.

Business Overview

Duluth Trading is a Wisconsin-based company that designs and sells a comprehensive line of innovative, durable, and functional products, including its popular Longtail T® shirts, Buck Naked™ underwear, Fire Hose® work pants, and No-Yank® Tank. The company's brand has a heritage in workwear that appeals to a broad demographic for everyday and on-the-job use.

Over the past decade, Duluth Trading has built strong brand awareness, a loyal customer base, and robust sales momentum by staying true to its "there's gotta be a better way" philosophy and relentlessly focusing on providing high-quality, functional products. The company operates an omnichannel platform, selling its products nationwide through its website, catalog, and a growing network of retail stores.

Financials

In fiscal 2023, Duluth Holdings reported annual net sales of $646.7 million, a 1% decrease compared to the prior year. The company's annual net income was -$9.4 million, and it generated annual operating cash flow of $38.7 million and annual free cash flow of -$10.4 million.

For the first quarter of fiscal 2024, the company reported net sales of $116.7 million, a 5.7% decrease compared to the same period in the prior year. The decline in net sales was primarily due to challenging traffic and a lower in-stock position at the beginning of the quarter. Gross margin for the quarter was 52.8%, a 20-basis-point decrease year-over-year. Adjusted EBITDA for the quarter was $1.8 million, compared to $5.3 million in the same period last year.

Outlook

For the full fiscal year 2024, Duluth Holdings expects net sales to be approximately $640 million, the low end of its previous guidance range. This includes a 60-basis-point contribution from a potential Father's Day shipment and a 150-basis-point benefit from the 53rd week in the fiscal year.

The company anticipates gross margin for the full year to expand by approximately 200 basis points, driven by its sourcing and product development initiatives. However, gross margin is expected to be flat in the first half of the year as the company sells through older, higher-cost inventory, with further improvement in the back half of the year.

Selling, general, and administrative (SG&A) expenses are expected to deleverage by approximately 100 basis points for the full year. Advertising expenses are planned to be in line with sales growth at approximately 11% of sales, while variable or selling expenses are expected to leverage by over 100 basis points, driven by transportation savings and continued efficiencies.

The company is confirming the low end of its prior full-year adjusted EBITDA guidance range of approximately $39 million and earnings per share (EPS) of -$0.22, which includes an estimated diluted share count of approximately 33 million and a tax rate of 25%.

Recent Developments

To improve its near-term performance, Duluth Holdings has taken several immediate actions, including:

1. Doubling down on leveraging technology to deliver more targeted advertising and drive incremental traffic, both online and in stores. 2. Elevating in-store events to emotionally engage with existing and new customers within local markets, such as a successful underwear trade-up event. 3. Conducting a comprehensive benchmarking study to identify opportunities to improve operating margin, working capital, and asset efficiency. 4. Engaging a third-party expert to review the company's retail strategy and identify efficiencies.

Looking ahead, Duluth Holdings is focused on three key areas to unlock the full profit potential of its current business:

1. An in-depth review of its real estate portfolio, strategy, and operating productivity. 2. Embarking on Phase 2 of its fulfillment center network footprint optimization to maximize productivity and capacity. 3. Leveraging insights from the comprehensive benchmarking study to drive structural gains in operating margin, working capital, and asset efficiency.

In addition to optimizing its current business, the company is also strategically allocating capital to drive growth in its existing channels and capture white space opportunities. This includes efforts to improve consumer acquisition and retention, as well as exploring potential partnerships and new distribution channels, such as the recent test with Costco.

Risks and Challenges

Duluth Holdings operates in a highly competitive and evolving apparel market, which presents several risks and challenges. The company faces macroeconomic headwinds, including inflation, recessionary concerns, and uncertainty around consumer spending patterns. Additionally, the company must adapt to changes in customer preferences, effectively manage its supply chain and inventory, and continue to innovate and differentiate its product offerings.

Liquidity

As of the end of the first quarter of fiscal 2024, Duluth Holdings had $6.8 million in cash and cash equivalents and $195.8 million in total liquidity, including availability under its revolving credit facility. The company's balance sheet remains strong, with a current ratio of 1.76 and a debt-to-equity ratio of 0.26.

Conclusion

Duluth Holdings is navigating near-term challenges, but the company is taking decisive actions to improve its performance and position itself for long-term, sustainable growth. By optimizing its current business, strategically investing in growth initiatives, and leveraging its strong brand and loyal customer base, Duluth Holdings is well-positioned to capture opportunities in the workwear and casual apparel market.