Earnings preview: Costs to hurt Duluth Holdings Q2 results

Duluth Holdings (NASDAQ: DLTH), doing business as Duluth Trading Co., is set to release its second-quarter earnings results on Thursday before the market opens. The bottom line will be hurt by higher costs and expenses despite the top line benefitting from new stores opening in the retail segment.

The results will be hurt by the costs associated with the investments for strengthening its omnichannel model. The second-quarter results will continue on the first-quarter softness in traffic and customer response. The company will also face the challenging retail environment.

Duluth continues to see year-over-year sales declines in the direct channel and expect second-quarter results to be impacted by these trends. The product and inventory initiatives won’t become fully annualized or realized until the third and fourth quarters. The inventory plans for second and third quarters reflect a higher year-over-year growth rate ahead of the peak selling period.

The company’s business relies on cash from operating activities and a credit facility as its primary sources of liquidity. Duluth used $13.11 million of cash in operating activities during the first quarter and is expected to use of cash in operating activities for the second quarter as it acquires inventory in anticipation of the peak selling season.

During last week, the company announced the resignation of Stephanie Pugliese as President and Chief Executive Officer and as a Board member, effective as of August 29, 2019. The board appointed Steve Schlecht, currently serving as Executive Chairman, to the role of CEO, effectively August 30, 2019.

Analysts expect the company’s earnings to dip by 50% to $0.10 per share while revenue will increase by 15.30% to $127.59 million for the second quarter. In comparison, during the previous year quarter, Duluth posted a profit of $0.20 per share on revenue of $110.65 million. The company has missed analysts’ expectations twice in the past four quarters.

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For the first quarter, Duluth reported a wider loss due to an increase in costs and expenses. Net sales grew by 14% driven by a 43% jump in retail sales, which was partially offset by a 0.8% decline in direct sales. In general, sales benefitted from new store additions, the continuing growth of the women’s business and new product launches.

For 2019, the company expects earnings in the range of $0.74 to $0.80 per share and net sales in the range of $645 million to $655 million. The estimate for adjusted EBITDA is $60 million to $64 million and for capital expenditures are $40 million to $45 million. The management plans to open 15 new stores this year, adding 230,000-240,000 of additional gross square footage.

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