Making a follow-up of an article written two weeks ago makes little sense. Relevant changes are uncommon in so short period of time. However, being Duluth Trading (DLTH) in the midst of a turnaround process and having reported its FY2023 results last week, I think it might be useful.
The results were in line with its guidance in terms of revenues but below with regard to profitability and market expectations. Market reaction was rather tame, but negative during the previous days, so all in all the stock has kept falling.
However in my opinion those results were not so bad. It is clear that the Company is still suffering within this macro environment and still trying to reach the “inflection point”, but there are many aspects that invite to remain optimistic. Let’s have a look to some of those aspects:
· DLTH reported net sales increase of +1.6%, with women’s apparel sales +12.4% and men’s flat. Ok, it could be better, but let’s have a look to some of its public peers to get a little bit of context (figures refer to the last quarter reported and to the most comparable data):
Dickies -11% in Americas
The North Face -24% in Americas
Timberland -30% in Americas
Columbia -12% in the US
Boot Barn -9.7% (same store sales)
Wolverine Worldwide -20.8%, with -18.9% in the Work Group
Dockers decreased -18% due to “continued softness in U.S. wholesale” (while Levi's brand overall was +4%)
As we can observe, DLTH outperformed all other similar companies/brands and, even reporting a weak revenue increase, it could be considered rather satisfactory taking into account what has happened within the sector.
· Women’s business, which is one of its most relevant revenue initiatives, has kept growing, with double digit growth in Q4 2023. Women’s currently represents more than 30% of the total business and steadily growing (it was just slightly above 20% some years ago). This segment could become one of the most relevant DLTH’s contributors in the future.
· Men’s business is flat but at least reversed the trend of the previous four negative quarters and it is well above its peers.
· Gross profit and margin are still under pressure due to the promotional environment and to customers shopping around promotional events. However the Company expects to improve 200bps in 2024 thanks to its investment in sourcing initiatives, and despite assuming that 2024 will still be a challenging year and promotional. They expect top line pressure but better flow through with higher proportion of full-price items compared to 2023. Additionally they “expect further improvement in margin in the out years as (they) continue to optimize (their) sourcing strategy”. Yes, I know that management expectations should be taken with a grain of salt, but in this case those expectations seems rather realistic taking into account all the investments the Company has made during the last years in sourcing and product innovation functions and the reinforcement of its team.
· DLTH has been able to reduce its SG&A, both in dollars and in percentage terms, starting to reap the benefits of its new fulfillment infrastructure and within a context of higher depreciation expenses due to the recent investments. Indeed depreciation is heavily penalizing its P&L due to the investment intensity of the previous years. DLTH has recorded $171M in capital expenditures in the last six years and depreciated $155M. This situation makes the bottom line to appear much worse than it is. Looking at EBITDA levels the picture is much rosier: DLTH is trading at ~7x EV/2024E Adj. EBITDA.
· The capital cycle is almost over for DLTH and capital expenditures will fall in 2024 by more than 50% compared to 2023 ($53M vs. $25M). As capital expenditures return to more normalized levels, cash flows and profitability should improve.
· The balance sheet remains strong with $32M in cash and no financial debt (DLTH is not the obligor of TRI Holdings debt), despite the abovementioned heavy investment cycle of the last years.
In summary, I do still think that DLTH is taking steps in the right direction and working on its turnaround process within a really difficult environment. Its investment cycle is almost finished and cash flows and profitability should start to recover thanks to the lower pressure of capital expenditures and depreciation and amortization expenses. DLTH is outperforming its peers and, though FY2024 is forecasted to remain challenging, it is expected to improve its margins thanks to its improved sourcing and product innovation and fulfillment functions. It will take time and require the macroeconomic environment to start changing, but in my opinion the “inflection point” is a little bit closer.