Duluth Holdings (NASDAQ: DLTH) -- which sells casual clothing and workwear under the Duluth Trading brand name -- recently reported second-quarter earnings that showed retail operations driving strong year-over-year increases in sales and adjusted EBITDA. With the fiscal year now half over, let's see how Duluth's full-year 2017 results are likely to look in context of its multiyear track record.
The shift to retail is accelerating
Duluth got its start selling its merchandise through catalogs, and later selling online. Since opening its first physical store in 2010, however, its sales mix has shifted substantially.
In 2013, the company's sales mix was 93.8% direct (online and catalog sales) and 6.2% retail. By the end of 2016, retail sales had reached 17.7% of total sales. And by the end of 2017, Duluth believes that its retail segment will account for "close to 30%" of sales.
On a year-to-date basis, retail sales have been about 28.5% of total sales, so for the purposes of the chart above, I'm estimating 29% for the full year, which would be a gain of more than 11 percentage points from the previous year. Expect this trend to continue for the foreseeable future, with retail becoming even more crucial over the next few years as Duluth continues to aggressively open new stores.
Sales keep soaring
Despite the retail industry's well-documented struggles, Duluth's healthy sales growth has continued to defy skeptics as its core solution-based clothing products are embraced by customers across the U.S.
From 2013 through 2016, Duluth grew its net sales at a compound annual growth rate (CAGR) of 32.1%. As the company gets bigger, that number will moderate, but Duluth is aiming for a long-term target of 20% annual top-line growth from here. And the company's latest guidance calls for full-year 2017 sales of $455 million to $465 million, reflecting 22.3% growth at the midpoint. How many retail concepts do you know with that kind of top-line potential?
Scorching rates of new store growth
Duluth's growth goals are tied to its plans for opening additional retail locations. At the end of 2013, the company had just four stores. By the end of 2016, it had 16. And Duluth says it will open a total of 15 stores in 2017. That would work out to 94% annual store growth this year -- a clear acceleration from previous years.
There are no signs of slowing down next year, either. Duluth's initial outlook for 2018 includes another 15 new stores, for a total of 46. And given that the company has a history of boosting its guidance for new stores during the year, it's entirely possible that by the end of 2018, Duluth could be halfway to its long-term goal of 100 stores.
Earnings growth will be muted by expansion for a while
Because of Duluth's conversion to a C corporation in 2015 (which affected its tax rate), multiyear comparisons of net income are complicated. Instead, we can look at adjusted EBITDA for a more helpful view of Duluth's earnings trends. From 2013 to 2016, this measure of earnings grew at a CAGR of 32.8%.
Similar to what's happening on the sales side, that rate of growth will slow a bit as the company continues to scale up. Duluth's long-term target from here for annual adjusted EBITDA growth is 25%. But, as you might expect, with the company building new stores at a breakneck pace, those substantial capital expenditures will put a damper on adjusted EBITDA and net income growth for at least the next few years. Even so, the company's latest full-year 2017 guidance calls for adjusted EBITDA of $47 million to $49.5 million, which would be a 17.2% increase at the midpoint.
While Duluth's bottom-line growth might not look all that impressive for a while, sacrificing short-term earnings for long-term sales growth seems like the right move given that the company is just scratching the surface of its retail potential. While many other bricks-and-mortar stores are scaling back and closing locations, Duluth is the rare retail concept that looks as if its best days still lie ahead.
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Andy Gould owns shares of Duluth Holdings. Andy Gould has the following options: Short Nov. 2017 $25 puts and short Nov. 2017 $30 puts. The Motley Fool recommends Duluth Holdings. The Motley Fool has a disclosure policy.