Earnings reports for Turnaround Letter recommended companies for this past week are summarized below. All companies mentioned retain our Buy rating and price targets unless otherwise specified.
Duluth Holdings (DLTH) - The company modestly missed consensus estimates and offered no forward guidance given the high uncertainty in the economy. Revenue growth was uninspiring at +6.5% (when adjusting for last year’s 53rd week), particularly since the company ended the quarter with 15 more stores, or 33%, compared to a year ago. Clearly they continue to struggle with store productivity, although the warmer and shorter holiday season likely had some effect on the weak growth.
As a percent of revenues, gross profits increased modestly and operating costs fell modestly as the company started its cost-efficiency program. Fourth quarter adjusted EBITDA of $39.9 million increased 14% from a year ago. For the year, Adjusted EBITDA was $51.9 million, slightly higher than a year ago and reasonably in-line with ours and the consensus estimates.
The company generated GAAP net income of $19 million for the year. Although this declined 18% from a year ago, the profit indicates that the company remains quite viable despite its strategic issues. Duluth had about $650 million in one-time tax benefits, reducing the $19 million to about $18.4 million.
Working capital remains elevated at 15.5% of revenues, due to the 51% increase in inventories. Duluth will need to work this down to perhaps 11% of revenues, an effort that will be helped by the company’s product array that has little fashion risk from year to year. Also, part of the surge in inventory was due to their early buying of goods ahead of the Chinese tariffs.
The company repaid $51 million of its revolver, reducing the balance to $39 million, as expected. Capital spending in 2020 will likely be lower than the $31 million last year, as the company plans only 5 new stores vs 15 in 2019 and will slow down some discretionary projects. Much of its infrastructure is completed with benefits that should start to favorably impact results. There was no update on the CEO search.
No guidance was provided. On-line sales appear to be healthy so far this quarter but in-store sales are slow particularly as the company is temporarily closing its stores due to the coronavirus.
The company is managing its cash flow and has some levers to pull as it progresses through negative cash flow quarters (given its highly holiday-skewed profits). While this bears watching it doesn’t appear to present a problem based on the current but admittedly murky outlook.
Volkswagen (AG) - the company reported solid unit volumes, revenues, earnings and cash flow for the quarter. Compared to a year ago, vehicle volumes grew 7% (boosted by strength in China), and vehicle revenues grew 7.7% (boosted by strength in Europe). Operating profits excluding one-time charges for the diesel scandal and other costs increased 18.5% and increased 12.2% including the charges. Automotive segment free cash flow was €2.2 billion compared to an outflow a year ago.
For the year, revenues increased 7.1% and operating profit before special items increased 12.8%. Financial Services segment profits increased by 13% to a record high €3 billion. Free cash flow for the year was a strong €10.8 billion and its cash balance is a sturdy €21.3 billion.
Not surprisingly, the company said that 1Q results would be weak but maintained its full-year 2020 guidance for 6.5% to 7.5% operating margins. We think they will be challenged to meet this given the likely on-going coronavirus and recessionary slowdown. Similarly, its credit operations may struggle to find cost-efficient funding even as credit losses will likely increase. VW credit is an important driver of vehicle sales, so tighter conditions will affect overall VW on several fronts.
The company has the financial resources to weather the downturn better than most other automakers, and appears to have a good start in developing electric vehicles. While the near-term will be challenging, VW looks well-positioned for the longer term.