Today’s note includes earnings updates, ratings changes and the podcast.
Earnings updates
Duluth Holdings (DLTH) – This retailer of rugged workwear and outdoor gear struggled with a disjointed and overly aggressive retail store expansion strategy. Duluth’s turnaround started with the return of the founder to the interim CEO seat in September 2019. He slowed the expansion, instead focusing on upgrading infrastructure, operating efficiency and navigating the company through the pandemic. A new, permanent CEO started in May 2021 and is continuing Duluth’s turnaround. The company has immense opportunities – its challenge is to strike a successful balance between pursuit and execution.
The company reported acceptable first quarter 2021 results, and it might be considered a “bridge” quarter between its pandemic period and the post-pandemic period. Sales and profit comparisons relative to a year ago are not particularly meaningful. As a bridge quarter, the near-term outlook is mixed due to shifting the timing of its marketing, inventory purchases, pricing/merchandising and other costs, but net of all the changes the company ticked up its full-year sales and earnings guidance.
The new CEO is just starting to get up to speed, the company is adjusting as consumers are encouragingly returning to the physical stores (although this is diverting revenues from the internet/mail order segment), it is adjusting its inventory, pricing and marketing spending to adapt to shifting and murky conditions, and the outlook is unclear but appears favorable.
Strategically, the company is making the right moves and appears to be tactically awake. Duluth is blessed with an immense opportunity, and is working on many strategic and operational initiatives to capture this opportunity, but risks sloppy execution – there is a lot going on.
Revenues of $133 million increased 21% from the pandemic-weakened year-ago results and were about 6% higher than consensus estimates. Earnings of $0.02/share compared to a $(0.47)/share loss a year ago and were sharply higher than the year-ago $(0.20) loss. Adjusted EBITDA of $10.1 million compared to a $(11.6) million loss a year ago and estimates for $1.1 million. Excluding stock-based compensation, Adjusted EBITDA was $9.8 million.
Sales were generally consistent with the mix and trends that we expected. The company pushed out a lot of excess inventory, at discounted prices, helping sales but gross margins still need to improve. Yet, overall, the trade-off worked, particularly as marketing spending was sharply reduced.
Overhead costs fell 9% from a year ago, but this appears to be due entirely to lower advertising spending, which will likely rebound in future quarters, depressing reported profits but is tactically sensible. Like many retailers, Duluth is having trouble finding workers. The company produced $12 million of operating cash flow, helped by paring its inventories and slowing its payments to suppliers.
Duluth repaid most of its long-term debt and its balance sheet is in good shape. A new loan structure reduces its borrowing costs by a full percentage point while extending its maturities.
Highly encouraging – the trial sale of Buck Naked™ underwear at 13 Tractor Supply stores is going well and will be expanded to 100 stores. We have little color on the numbers, but the direction is positive. Strategically, third-party sales could radically accelerate Duluth’s sales and profit growth, although the chances of success are unknown.
Strategically, the company is developing its three newer brands: Alaskan Hardgear, 40Grit and Best Made.
The new CEO, Sam Sato, started about a month ago. He spoke briefly about his progress with meeting employees throughout the organization. Sato launched his career at Nordstrom, working his way up from store sales associate to vice president of corporate merchandising, and led retailer Finish Line through its successful acquisition by a strategic buyer. He looks like a good choice but it is too early to tell.
Ratings Changes
None.
Friday, June 4, 2021 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.
Today’s podcast is about 11¼ minutes and covers:
- Brief updates on:
- Duluth Holdings (DLTH) – acceptable first quarter earnings as they transition to the post-pandemic economy.
- Meredith Corp (MDP) – price of their TV station divestiture goes up by 17%.
- General Motors (GM) – implied raise to second quarter guidance.
- Mosaic (MOS) – above our price target, now under review.
- Biogen (BIIB) – FDA will announce its recommendation on Alzheimer’s treatment aducanumab on Monday. Biogen shares will almost certainly be sharply volatile.
- Altria (MO) – battling FTC regarding Juul.
- Elsewhere in the Market:
- AMC Entertainment’s (AMC) brilliant navigation of the Reddit/meme rally
- Final note:
- Observations from the Indy 500 race.
Please feel free to share your ideas and suggestions for the podcast with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.
Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated Recommendation. The chief analyst may purchase or sell securities discussed in the “Ratings Changes” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter Friday update at any time.