Please note that the September edition of The Turnaround Letter will be published next Tuesday, September 8th, the day after Labor Day. The delay is due to the staff vacation schedules.
Three companies reported earnings this week - Duluth Holdings, Macy’s and Signet Jewelers. The stocks retain their Buy ratings and price targets.
Duluth Holdings (DLTH) - Duluth is now led by its founding CEO who is refocusing the company on profit margins, after a period of unproductive revenue growth driven by rapid new store openings. The company’s efforts to upgrade its tech and operating infrastructure were well-timed, as these improvements, including its on-line upgrades, helped it produce strong second quarter profits.
While the operational emphasis is on profit margins, a critical component is proof that the company’s products remain relevant, with sales remaining on an upward path. The second quarter results were highly encouraging in this regard.
In the quarter, Duluth’s revenues of $137 million grew 13% from a year ago and were 16% higher than consensus estimates. Physical store sales fell 40% due to pandemic closures but on-line sales jumped 67%. Net income of $.18/share was sharply higher than $0.06/share net income a year ago and was more than triple the $0.05/share consensus.
Duluth does not report same store sales. The company had 62 stores in this quarter compared to 55 stores a year ago (a 12.7% increase). While much of the revenue growth came from new stores, many of its fleet were at least partly closed during the quarter, and the omnichannel sales were impressively strong, suggesting that some equivalent of same store sales were probably positive.
While gross margins fell modestly due to a more-promotional environment, operating expenses relative to sales fell sharply as labor-intensive in-store sales were replaced by on-line sales. Operating profits increased by 164%.
Inventories were a tad too high, so the company will use more promotions in the upcoming quarters, but expects to be right-sized by calendar 2021. Debt remains a bit too high as the company borrowed during the height of the pandemic. Also, the company will face higher shipping and marketing costs in what they expect to be a promotional holiday period.
Overall, the quarter’s results provided strong evidence that the company remains relevant, is executing on its omni-channel and cost-efficiency initiatives and has improving prospects. DLTH shares have surged following the report and are up about 40% from our initiation price.
We retain our Buy rating with a $15 price target on Duluth Holdings (DLTH)
Macy’s (M) - The department store chain is struggling to maintain its relevance, compounded by higher debt taken on to provide liquidity during the pandemic-related store closures. Its large $(142 million) adjusted EBITDA loss compared to a $402 million profit a year ago, a swing of $544 million. Macy’s has a challenging future but we retain our Buy rating given the reasonable chance for a recovery and the currently low share price.
Macy’s reported $3.6 billion in revenues, down 36% from a year ago as its stores were closed during the pandemic. Weak -35% same store sales were partly offset by higher digital sales. Revenues were fractionally better than consensus estimates.
The net loss of $(0.81)/share was considerably better than consensus estimates for a $(1.77)/share loss, but much lower than the $0.28/share profit a year ago.
Macy’s gross margin weakened by over 15 percentage points due to promotional pricing and less-favorable mix. While SG&A expenses fell by a remarkable $779 million, or 36%, this reduction was not nearly enough to produce an operating profit.
An encouraging sign was the resilience in credit card revenues, which fell only 5% from a year ago. These revenues are essentially pure profit and clearly bolster the company’s meager annual profits. The company guided for some weakness in card revenues in upcoming quarters.
Inventories are in good shape, suggesting limited discounting beyond normal during the upcoming holiday season. Liquidity is strong as Macy’s has $1.4 billion in cash, although the incremental cash is fully offset by incrementally higher debt. Nevertheless, the company said it has plenty of liquidity for the foreseeable future - we think this means at least through mid-2021. Capital spending will remain subdued and focused on high-impact projects.
Macy’s is aggressively pressing its all-encompassing Polaris turnaround strategy - a sound approach with an impressive array of sub-initiatives for restoring sustainable profits.
The back half of the year will be challenging but Macy’s merchandising, marketing and efficiency initiatives should position it reasonably well to stay in the game and fight on in 2021.
We retain our Buy rating with a $13 price target on Macy’s (M).
Signet Jewelers (SIG) - Signet is under new leadership, with a focus on improving the basic fundamentals, including merchandising, ecommerce penetration and cost efficiency. The turnaround is making considerable progress, although the store closures during the pandemic have delayed the timing.
In the quarter, revenues of $888 million fell 35% from a year ago, but were 15% higher than consensus estimates. Physical same store sales fell by 46% but ecommerce sales grew by 72%. The adjusted operating loss of $(42) million compared to a $53 million profit a year ago. The per-share loss of $(1.13) compared to profits of $0.51 a year ago, but was much better than estimates for a $(2.19) loss.
Gross margins fell by 8 percentage points due to fixed rent costs that weren’t covered by revenues. Overhead costs improved fractionally as a percent of revenues.
Signet’s liquidity is robust, backed by $1.2 billion in cash, although most (but not all) is due to higher borrowings. The company generated $133 million in free cash flow in the first six months of the year - highly encouraging in our view.
The company continues to close unproductive stores, with 293 closures and no new openings in the past six months, on track for a total of 380 closures. Nearly all of these closures are in low-traffic malls.
Signet’s sharp-pencil analyses are discovering some valuable opportunities. One example is that while ecommerce sales traditionally were lower-ticket, the company’s ‘consulted sales’ program has helped drive ecommerce tickets a lot higher. And, their bridal business remains robust as apparently over 50% of engaged couples decided to quarantine together with 93% saying it improved the relationship.
Overall, the Signet story continues to improve although there is a lot more to accomplish.Signet shares have rebounded since the report and are up 10% from our initiation price.
We retain our Buy rating with a $35 price target on Signet Jewelers (SIG).
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.