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Turnaround Letter
Out-of-Favor Stocks with Real Value

June 6, 2020

We review the two recommended companies that reported earnings this week, including Duluth Trading (DLTH) and Toshiba Corporation (TOSYY). Both stocks retain our Buy rating with no changes to their price targets.

Duluth Holdings (DLTH) - Revenues of $110 million fell 3.8% from a year ago. This was remarkable feat, as the company’s stores were closed for much of the quarter. Boosting sales was the 32% increase in online and catalog sales. Amazingly, total April sales (when the stores were entirely closed) exceeded the year-ago April sales by over 5%. The Women’s Direct business grew 57% from a year ago, partly reflecting a successful rebranding effort. Importantly, the company is seeing strong growth in the number of new customers. Duluth franchise appears to have a lot of resilience. DLTH shares rose 59% for the week.

Profits suffered, however, as the company extended its clearance events and launched a new online promotion to help move inventory, and as overhead costs rise 1% due to Covid-related advertising, shipping and other unique costs. Adjusted EBITDA fell to a loss of $12 million compared to a loss of $5 million a year ago. The fact that this quarter is seasonally one of their slowest was fortuitous timing in an otherwise very difficult event.

Duluth’s liquidity appears fine, as it amended its credit agreement to provide extra financing. Inventories are elevated, but fortunately much of its inventory is evergreen and not subject to much fashion risk.

Another positive is that the company reduced its capital spending by 50% for the year including reducing their new store additions to only 4 from ten originally planned. We think this will allow them to not only conserve cash, but also allows them to focus only on the highest-value locations after years of poorly-conceived expansion. Some of the reductions also come from tech and infrastructure projects - we would actually prioritize these but have no insight into which projects are being delayed.

Overall, it was an encouraging report indicating that the company’s franchise is intact and actually appears to be strengthening.

Toshiba Corporation (TOSYY) - The company provided more color on previously-reported summary results. Fourth quarter fiscal year 2020 (ended March 31) sales fell 11% but operating income more than doubled to ¥68 billion (about $62 million, $1 = ¥109) from ¥27 billion a year ago. Excluding costs related to Covid-19, adjusted operating income was ¥88 billion. The adjusted operating margin of 9.5% was sharply higher than the 2.6% margin a year ago, indicating that Toshiba’s profit turnaround is working.

The company announced a reorganization into 4 segments (from 7 currently) with a focus on infrastructure services. Part of this includes divesting capital-intensive operations, with much of this effort already completed. The company guided FY2021 revenues to decline about 6%, which may include the effect of divestitures. We are encouraged by Toshiba’s more aggressive efforts to improve its business value.

Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.