Duluth Holdings (DLTH 24.55, +0.76, +3.18%), which operates under the name Duluth
Trading Company, has broken out over the past few weeks. With news being light this
week due to the Fourth of July holiday, we wanted to use this slow moment to
provide some color on Duluth.
Having made its public trading debut in November 2015, Duluth Holdings is still a relatively recent IPO. Duluth Trading Company is a rapidly growing lifestyle brand of men's and women's casual wear, workwear, and accessories sold exclusively through its own channels, including via the company’s website and catalogs and at more than thirty retail and outlet stores located throughout the U.S., with the Midwest seeing the highest concentration of locations. It offers a comprehensive line of durable and functional products bearing established brand names, such as its Longtail T shirts, Buck Naked underwear, and Fire Hose work pants. Its brand has a heritage in workwear, but its appeal transcends tradesmen to appeal to a broad demographic of men and women for everyday wear and on-the-job use alike.
The company uses attention-grabbing ads that are humorous, quirky, and irreverent and which serve to reinforce the company’s brand identity. Its storytelling differentiates its products in the marketplace and creates emotional connections with customers. These marketing directives, together with the company’s cultivation of a homegrown, “store like no other” retail environment at its physical locations, combine to allow DLTH to offer customers with a unique and entertaining experience across all channels.
To protect the integrity of the Duluth Trading brand, it offers products exclusively through its own website, catalogs, and retail stores. You will not be able to locate DLTH products for sale at department stores. This model enables DLTH to control both its Duluth Trading brand expression as well as its product pricing. This strategy also eliminates any need to sell through third-party retailers.
The majority of sales (70%) are still processed through the company's direct segment (website and catalogs), but DLTH has been branching out to brick-and-mortar locations. It opened its first store in 2010 and slowly began adding new stores to its portfolio of locations. As these stores have shown success, DLTH has picked up the pace in terms of new openings.
In June, DLTH announced the opening of its 38th store in Columbus, Ohio. The company reports plans to open 15 stores this fiscal year. Looking ahead, DLTH has identified market areas with the potential for hosting approximately 100 U.S. store locations that feature high concentrations of existing customers and potential customers among concentrations of brand demographics matches. In addition to the bonus of providing new sales channels, brick-and-mortar locations also benefit the retailer by providing ancillary marketing benefits through giving new and existing customers a destination in which to experience the brand.
In addition to opening new stores, another of the company’s growth strategies involves broadening DLTH's Men's assortment to span new categories, such as its Duluth-built business wear, outerwear, and footwear. DLTH also hopes to expand its Women's business. Since launching in 2005, its women's business has grown significantly; in FY17, it comprised 23% of total sales. In order to seize a significant opportunity to grow its women's business further, DLTH is allocating a higher percentage of its ad budget to the women's business.
The stock had been stuck in a narrow trading range around $16-20 from June 2017 until early June 2018, when the stock aggressively broke above this range. The catalyst was a surprisingly strong Q1 (Apr) earnings report. DLTH reported a loss, as expected, but it was much narrower than expected at $(0.02) in the seasonally slower quarter. Revenue increased 19.7% year/year to $100.2 mln, driven by new stores, growth in the women's business, and direct segment growth. For all of FY18, DLTH expects revenue of $555-575 mln and EPS of $0.79-0.84, showing nice profitability on a full year basis. AprQ is just a seasonally weaker period for DLTH.
In sum, DLTH is an attractive early stage retail growth story. They have a unique brand and memorably humorous commercials. You may have seen the commercial featuring an animated sketch of a portly man caught in a vice grip around his waist who is able to start dancing once he switches to his very comfortable Duluth Trading "Buck Naked Underwear" using the tag line: Feels Like Wearing Nothing At All. Other commercials advertise elongated t-shirts bearing the tag line: Plumber's Butt Fixed. Customers respond to this unique advertising.
We like the company’s intentions to expand the Men's business into new categories, and we like the success in early efforts to grow the Women's business. Also, we have followed DLTH for some time and remember the days when they had a total of 5-10 stores and were opening them slowly. It's good to see them pick up the pace with 15 stores this year. This should add a nice tailwind for sales.
- OUR VIEW
- LEARNING CENTER