Company Overview

Duluth Holdings Inc. (NASDAQ:DLTH) is a leading lifestyle brand that offers a comprehensive line of innovative, durable, and functional apparel, workwear, and accessories. The company has a rich history rooted in workwear that has transcended its initial target audience, appealing to a broader demographic for everyday and on-the-job use. Over the past decade, Duluth Trading has successfully 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.

Historical Background

Duluth Holdings' journey began in 1989 as a catalog company serving the needs of tradesmen. The company had its roots in Duluth, Minnesota, which is where it derived its name. Over the next two decades, Duluth Trading established itself as a leading retailer of functional and durable apparel and gear. In 2010, the company took a significant step forward by launching its omnichannel platform with the opening of its first retail store. This move allowed Duluth Trading to expand its customer base beyond its traditional tradesmen clientele and reach a broader demographic. The company's innovative and high-quality products, such as its Longtail T-shirts and Fire Hose work pants, helped build strong brand awareness and customer loyalty. Since then, Duluth Trading has steadily expanded its retail presence and currently operates 62 stores and three outlet stores across the United States as of July 28, 2024.

Financial Performance

The company's financial performance has been a mix of successes and challenges in recent years. In fiscal 2022, Duluth Holdings reported net sales of $698.58 million and a net income of $29.70 million, showcasing the brand's strength and appeal. However, the COVID-19 pandemic and the subsequent macroeconomic environment, marked by inflationary pressures and recessionary concerns, have presented headwinds that the company has had to navigate.

For the fiscal year ended January 28, 2024, Duluth Holdings reported net sales of $646.68 million and a net loss of $9.37 million. The company's gross profit margin stood at 50.0%, a decline from the pre-pandemic level of 54.1% in fiscal 2020. Duluth's operating cash flow for the year was $38.67 million, while its free cash flow was -$10.41 million.

In the second quarter of fiscal 2024, which ended on July 28, 2024, Duluth Holdings reported net sales of $141.62 million, a 1.8% increase compared to the same period in the prior year. This growth exceeded the company's previous guidance. Gross margin expanded by 90 basis points to 52.3%, driven by the company's successful sourcing initiatives and also surpassing prior guidance. The company reported a net loss of $3.73 million in the quarter, with an adjusted EBITDA of $10.61 million.

For the first six months of fiscal 2024, net sales decreased 1.7% year-over-year to $258.3 million. Gross profit decreased 1.1% to $135.6 million, with gross margin expanding to 52.5% of net sales. Selling, general and administrative (SG&A) expenses increased 2.6% to $146.9 million, including a $2.4 million non-recurring sales tax expense. The net loss attributable to controlling interest was $11.6 million, compared to a net loss of $5.9 million in the prior year period. Adjusted EBITDA decreased to $12.4 million from $13.8 million in the first six months of fiscal 2023.

It's worth noting that Duluth's business is affected by seasonality, with a significant portion of revenue and operating profit typically generated in the fourth fiscal quarter due to increased sales during the holiday season.

Liquidity and Balance Sheet

Duluth Holdings' balance sheet remains strong, with $9.79 million in cash and cash equivalents and $210 million in total liquidity as of July 28, 2024. The company has no outstanding debt on its line of credit, having paid off $11 million during the quarter. Duluth has access to a $200 million revolving credit facility, maturing on July 8, 2027.

The company's debt-to-equity ratio stands at 0.20, indicating a relatively low level of leverage. The current ratio of 1.60 suggests that Duluth has sufficient short-term assets to cover its short-term liabilities, while the quick ratio of 0.27 indicates a lower level of immediate liquidity.

Strategic Initiatives

To navigate the evolving consumer landscape and drive long-term growth, Duluth Holdings has been actively implementing strategic initiatives across several key areas:

1. Product Development and Sourcing: The company has made significant investments in strengthening its product development and sourcing capabilities. By leveraging its relationships and expertise, Duluth is now able to bring innovative, high-quality products to market more frequently, increase its speed to market, and improve profit margins.

2. Logistics Network Optimization: Duluth has been focused on optimizing its fulfillment center network to enhance productivity and cost-efficiency. The company's highly automated fulfillment center in Adairsville, Georgia, is now processing nearly 60% of all online orders and replenishment volume, enabling the company to exit a legacy fulfillment center and achieve annualized run-rate savings of approximately $5 million.

3. Retail Store Portfolio Strategy: Duluth recognizes the importance of its omnichannel approach, with stores playing a critical role in the company's strategy. The company is evaluating its existing store portfolio, considering options such as remodels, relocations, or exits, to enhance the productivity and profitability of the fleet. Additionally, Duluth is targeting the opening of two new stores in the second half of 2025, focusing on locations with strong market share potential and alignment with its target customer.

4. Digital and Mobile-First Initiatives: Duluth has been steadfast in its focus on digital and mobile-first strategies, which have driven positive results. In the second quarter of fiscal 2024, mobile penetration accounted for 70% of website visits and 57% of sales, reflecting increases of 100 basis points and 230 basis points, respectively, compared to the prior year.

5. Brand Awareness and Marketing: Duluth continues to invest in building brand awareness and driving consumer engagement through various marketing initiatives. The company has had success with its Underwear Trade-Up events, which have attracted increased in-store traffic and a growing proportion of female participants, aligning with its focus on expanding the women's business.

Outlook and Risks

Despite the ongoing macroeconomic challenges, Duluth Holdings remains committed to its long-term strategic priorities. The company has reaffirmed its fiscal 2024 outlook, excluding the impact of restructuring expenses and a one-time sales tax expense accrual. Duluth expects full-year net sales of $640 million, which includes 60 basis points from cost per order and 150 basis points of growth from the 53rd week. The company anticipates adjusted EBITDA of $39 million and projects full-year gross margin expansion of 150 basis points, driven by lower product costs, partially offset by higher clearance inventory.

Duluth is guiding for adjusted EPS of negative $0.22 for fiscal year 2024, excluding the impact of restructuring and the one-time sales tax expense. The company plans to reduce capital expenditures by more than half to approximately $25 million in fiscal year 2024, with a focus on its strategic technology roadmap.

Risks facing Duluth Holdings include the potential for further macroeconomic headwinds, the ability to effectively manage its inventory and promotional levels, the success of its new product introductions, and the company's ability to navigate the evolving retail landscape. Additionally, the company's reliance on a limited number of large customers and its exposure to disruptions in its supply chain and distribution network could pose challenges.

Industry Trends

The apparel and workwear industry has seen moderate growth in recent years, with a compound annual growth rate (CAGR) of around 3-5% over the past 5 years. Duluth Holdings operates primarily in the United States market, focusing on casual wear, workwear, and accessories for both men and women. The company's product offerings include popular items such as Longtail T-shirts, Buck Naked underwear, Fire Hose work pants, and No-Yank Tank tops, reflecting its positioning as a "Modern, Self-Reliant American Lifestyle" brand.

Conclusion

In conclusion, Duluth Holdings has demonstrated resilience and adaptability in the face of a dynamic consumer environment. The company's strategic initiatives, focused on product innovation, operational efficiency, and omnichannel growth, position it well to navigate the current challenges and drive long-term sustainable growth. With a strong financial position, no outstanding debt, and $210 million in total liquidity, Duluth is well-equipped to execute its strategic plans. As the company continues to evolve and expand its reach, investors will closely follow Duluth's ability to capitalize on emerging trends, maintain its flexible and competitive approach to pricing and promotions, and deliver consistent financial performance in line with its guidance.