This week’s Friday Update includes comments on earnings from Duluth Holdings (DLTH). Two stocks are at or near our price targets: Marathon Oil (MRO) and Shell plc (SHEL).
We are moving Marathon Oil (MRO) from Buy to Sell.
We are reluctant to sell Marathon, as the company’s cash generating power remains incredibly strong. The shares are not expensive but are no longer the bargain they once were. Oil prices remain elevated toward the high end of reasonable. Even though Russian oil may be cut off, we are well aware of the ability and perhaps the newfound willingness of the Saudi government to open its oil taps just a bit.
The bane of being a contrarian and a value investor is that we sometimes sell too early. But we also recall the admonition of Nathan Rothschild, the incredibly wealthy financier from a few centuries ago, who, when asked how he got so rich, he replied, “I always sell too soon.”
We are a captive of our rating system which is basically binary – either Buy or Sell. But, today’s call is not a “sell it all today” call; it’s rather a recommendation to start trimming out. From a tactical perspective, investors holding MRO shares may want to initially reduce any outsized positions, then gradually chip away at the remaining balance over perhaps weeks. We see nothing wrong with keeping a stub position for an extended period. This both captures much of the strong profits but also allows some participation should the shares continue to ride higher.
From our initial recommendation in September 2021, the MRO investment has produced an estimated 160% total return.
We are keeping our current rating on Shell plc (SHEL) until it convincingly crosses our 60 price target. These shares remain undervalued.
Earnings update:
Duluth Holdings (DLTH) – This retailer of rugged workwear and outdoor gear struggled with a disjointed and overly aggressive store expansion strategy. Duluth ousted the CEO in September 2019, brought the founder back to the CEO seat on an interim basis, terminated the failed strategy, and hired a new, permanent CEO in May 2021. The company has immense opportunities – its challenge is to strike a successful balance between pursuit and execution.
Duluth reported a reasonably good quarter and, favorably, reaffirmed its full-year 2022 outlook. The net loss of $(0.04)/share compared unfavorably to the $0.02/share profit a year ago but was about 13% above the consensus estimate. Revenues fell 8% and were 3% below the consensus estimate. Their reiteration of their full-year 2022 revenue and profit guidance was a surprise positive, especially when many other retailers have sharply reduced theirs. Overall, an encouraging report, but after a sharp intra-day jump the shares ended the day down about 3%.
Sales were reasonable given the disruptions across the industry and some post-Covid changes to consumer preferences (away from goods/clothing). Management said that April results were strong. Online sales from customers in markets with Duluth stores performed considerably better than markets without stores, supporting the company’s claims that online sales are buttressed by physical stores. Overall, their improved data analytics and execution have helped them better navigate the complicated supply and demand environment. More work and spending are ahead but the progress seems encouraging. Duluth said it will not open any more stores this year – smartly removing what we see as a distraction.
Gross profit improved to 54.6%, enough to fully offset the revenue decline due to better inventory management (lower inventory), which allowed more sales at full price. Inventories, while elevated, are mostly full-priced rather than clearance items, which should help their profits the rest of this year. Duluth said they are seeing a close link between their marketing spending and sales, allowing them to dial up and dial down their promotions based on their inventory. If true, this would be an impressive dynamic.
Overhead and marketing costs rose as the company is spending more to promote its products and upgrade its tech infrastructure, expand its staffing and open a few new warehouses.
The company is working to improve its brands and products. Many of the developments make sense but changing Alaskan Hardgear to AKHG seems more like the irresponsible discarding of a cool brand name that has meaning, only to replace it with some letters that sound more like a medical diagnosis. The rationale is that Duluth wants to soften, just a bit, the hard edge implied by the Alaskan Hardgear label, allowing the brand to expand into closer-to-home types of activities. So far, it appears that this move is working well.
The balance sheet remains healthy, although we would like to see some debt reduction, and the company said it expects to generate between $15 million and $20 million of free cash flow this year. Combined with maintaining its full-year revenue and earnings guidance, producing this free cash flow would be highly encouraging if it happens.
Friday, June 3, 2022 Subscribers-Only Podcast:
Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.
Today’s podcast is about 11½ minutes and covers:
- Ratings change:
- Marathon Oil (MRO) from Buy to Sell.
- Shell plc (SHEL) – no change until it crosses our price target.
- Earnings:
- Comments on Duluth Holdings (DLTH) earnings.
- Comments on other recommended companies:
- Shell plc (SHEL) – new U.K. windfall profits tax.
- M/I Homes (MHO) – liquidation value support looks very strong.
- Toshiba (TOSYY) – company added several board candidates to its slate for the upcoming election, but these candidates don’t look like the picture of management-friendly.
- Gannett (GCI) – announced an evolutionary change to its structure.
- Elsewhere in the market:
- Insightful slide deck from Sequoia Capital
- https://content.fortune.com/wp-content/uploads/2022/05/Adapting_to_Endure_May_2022.pdf
Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.
| Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | 6/2/22 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 3.98 | 0.0% | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 12.33 | 0.0% | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 30.90 | 0.0% | Buy (44) |
| Small cap | ZimVie | ZIMV | Apr 2022 | 23.00 | 22.14 | 0.0% | Buy (32) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 24.87 | 0.0% | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 5.38 | 0.0% | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 37.78 | 0.0% | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 68.11 | 0.4% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 19.15 | 1.3% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 11.19 | 0.0% | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 12.11 | 1.0% | Buy (26) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 37.33 | 0.8% | Buy (46) |
| Mid cap | Marathon Oil | MRO | Sep 2021 | 12.01 | 31.20 | 0.3% | SELL |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 40.50 | 0.0% | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 37.12 | 0.5% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 17.84 | 1.3% | Buy (25) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 51.66 | 0.3% | Buy (93) |
| Mid cap | Polaris | PII | Feb 2022 | 105.78 | 106.75 | 0.0% | Buy (160) |
| Mid cap | Goodyear Tire & Rubber | GT | Mar 2022 | 16.01 | 13.45 | 0.0% | Buy (24.50) |
| Mid cap | M/I Homes | MHO | May 2022 | 44.28 | 47.51 | 0.0% | Buy (67) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 78.00 | 0.1% | Buy (160) |
| Large cap | Shell plc | SHEL | Jan 2015 | 69.95 | 59.24 | 0.8% | Buy (60) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.09 | 0.4% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 23.81 | 0.7% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 7.02 | 0.9% | Buy (24) |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 22.95 | 0.7% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 9.98 | 1.1% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 21.57 | 1.1% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 16.35 | 1.6% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 36.39 | 1.1% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 53.98 | 0.7% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 314.95 | 0.0% | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 45.33 | 0.4% | Buy (64) |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 61.93 | 0.0% | Buy (78) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 24.84 | 0.0% | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 43.43 | 1.1% | Buy (70) |
Disclosure
: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” 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 at any time.Please feel free to share your ideas and suggestions for the podcast and the letter 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 and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.