DLTH - Duluth Holdings Inc.

[spartansaver]

-Strong retail outdoor brand

-Rolling out retail network

-Trading at ~.7x Lease Adj. EV/TTM Sales. Comps trade at over 2x

-Margins under pressure partly due to: large store rollout of stores (immature store base), large investments in IT, lower shipping revenues (drops to bottom line-very immaterial now)

-Owner/Operator

-Biggest risk seems to be that its a retailer (majority of profits come in 4Q requiring good operational execution on a yearly basis), and the balance sheet is okay (I would prefer net cash)

[Broeb22]

Does seem interesting...look-through EPS when you back out store opening expenses and investments in direct biz makes this company look like it’s trading at sub 10x earnings

 

Retail business seems likes it’s doing ok based on last quarter with >30 growth on 20% growth in 2019 YTD store openings this year, though slightly higher store openings on a yoy basis

 

Why is direct business performing so poorly relative to last year? Seems like that Will course correct over time (assuming sales grow again).

 

Seems like a decent bet on a cult retailer facing some pessimism, but I can’t claim to be an expert in retail.

[spartansaver]

Two main reasons direct business looks ugly is that gross margins are falling as the company must face the burden of close to free shipping (used to charge for shipping and this has slowly been chipped away to nearly nothing). The other reason is that most of the company’s fixed costs are lumped into the direct business. So the company recently rolled out a new website and distribution system which hit direct margins. The company is planning to slow store growth a bit to focus on improving margins at retail stores and I think preserve the balance sheet (previous ceo was incentivized by growth in sales and income). I think fashion risk is partly mitigated by the brand being more tied to quality/durability as well as functional clothing.

[spartansaver]

Growth wise management described flat growth in the direct business mostly due to supply chain issues: stock outs, and back orders.

[Spekulatius]

DLTH looks atrocious to me, why do they keep expanding their physical footprint, when the new store economics look dreadful? There are also issues with their retail locations, they seem to rent real estate from insiders at not so great locations.

https://twitter.com/hotlantacapital/status/1174420160284958724?s=21

 

Most likely another retail business headed for a long grind towards zero.

[kab60]

At least it seems like a huge job to close stores and get footprint in order. Lack of SSS always turned me off. I'd be more interested in Lands End if I liked the space. When Sears and that fashion chick couldn't kill the brands imagine some decent execution. Seems to have lots of low hanging fruit.

[Spekulatius]

At least it seems like a huge job to close stores and get footprint in order. Lack of SSS always turned me off. I'd be more interested in Lands End if I liked the space. When Sears and that fashion chick couldn't kill the brands imagine some decent execution. Seems to have lots of low hanging fruit.

 

I think I would rather bet on next gen retail like SFIX. I do agree that LE is enduring, but I am not exactly sure they will ever prosper again. LLBean has the best brand identity in this space, imo.

[Broeb22]

Based on the group's feedback, sounds like Pugliese will fit right in at UA, where pumping inventory through deep discounts seems to have been the way of life.

[spartansaver]

DLTH looks atrocious to me, why do they keep expanding their physical footprint, when the new store economics look dreadful? There are also issues with their retail locations, they seem to rent real estate from insiders at not so great locations.

https://twitter.com/hotlantacapital/status/1174420160284958724?s=21

 

Most likely another retail business headed for a long grind towards zero.

 

How did you come to the conclusion that store economics are dreadful?

[Spekulatius]

FWIW, I started to look into DLTH a bit when Askeladden posted about the stock in his Q2 letter as a contrarian play. He also mentioned on Twitter that he has done extensive research on this company and published an extensive research report on Sumzero I believe (it is behind a paywall for sure). Since Askeladden is a pretty good stock picker, I decided to look into this. I didn’t really like what I saw. The key page is Page 6 of the Y2018 annual report, which shows several graphs and breaks down their B&M retail versus online metrics. When I calculated that they generate ~$315/sqft ($217.5M Sales / 690k sqft ), I just dropped the hammer because I think that running a retail operation with C- mall metrics is probably not a winning strategy.

 

It could well be that I have overlooked something and I really didn’t put much work in it, because at that point I am just not interested. The numbers since then from DLTH haven’t been encouraging either, stock has tanked further and rebounded a bit and we all know that retail is tough, so I moved on.

 

If still interested, it might be worthwhile to contact the folks from Askeladden and/or get access to that report at Sumzero.

[spartansaver]

FWIW, I started to look into DLTH a bit when Askeladden posted about the stock in his Q2 letter as a contrarian play. He also mentioned on Twitter that he has done extensive research on this company and published an extensive research report on Sumzero I believe (it is behind a paywall for sure). Since Askeladden is a pretty good stock picker, I decided to look into this. I didn’t really like what I saw. The key page is Page 6 of the Y2018 annual report, which shows several graphs and breaks down their B&M retail versus online metrics. When I calculated that they generate ~$315/sqft ($217.5M Sales / 690k sqft ), I just dropped the hammer because I think that running a retail operation with C- mall metrics is probably not a winning strategy.

 

It could well be that I have overlooked something and I really didn’t put much work in it, because at that point I am just not interested. The numbers since then from DLTH haven’t been encouraging either, stock has tanked further and rebounded a bit and we all know that retail is tough, so I moved on.

 

If still interested, it might be worthwhile to contact the folks from Askeladden and/or get access to that report at Sumzero.

 

Using an ending sq. ft. balance for any fast growing retailer is a mistake (DLTH more than tripled store base between FYE16&18). The stores opened in the 4Q will only have an average of 1.5 months of operations. These are 15k sq. ft. stores and they take some time to mature, so even using some kind of average of YE17&18 will understate your normal sales densities.

[Broeb22]

I think adding SSS would help clear up a lot of the confusion, and it doesn't make sense why management would avoid doing so, with the only potential pushback being that the store base is so small there could be a lot of noise. I would think that having a small store base would actually unfairly skew perception of the brand upwards since the first 60 stores of any successful concept should be killin' it. This is especially true because they would only show performance of stores that have been open at least 13 months (typical practice, I believe), which would further shrink the store base used for SSS.

 

On the other hand, I think the company views itself as more of an apparel manufacturer and not a retailer, and I don't believe all apparel companies report comparable or SSS.

[peridotcapital]

FWIW, I started to look into DLTH a bit when Askeladden posted about the stock in his Q2 letter as a contrarian play. He also mentioned on Twitter that he has done extensive research on this company and published an extensive research report on Sumzero I believe (it is behind a paywall for sure). Since Askeladden is a pretty good stock picker, I decided to look into this. I didn’t really like what I saw. The key page is Page 6 of the Y2018 annual report, which shows several graphs and breaks down their B&M retail versus online metrics. When I calculated that they generate ~$315/sqft ($217.5M Sales / 690k sqft ), I just dropped the hammer because I think that running a retail operation with C- mall metrics is probably not a winning strategy.

 

 

I am curious why you think sales per square foot, without taking into account expense levels, should be the end of the analysis. I would guess DLTH's cost base is below average given they are not building stores in big cities. Also, DLTH has higher sales productivity than TGT and many other high quality retailers.

[Guest roark33]

Someone mentioned the Askeladden sum zero post, so I thought I would attach it. I find it to contain a lot of "strong" language without a lot of strong facts. 

2019-07-11_Duluth_Trading_DLTH_Writeup_-_Askeladden_Capital.pdf

[kab60]

At least it seems like a huge job to close stores and get footprint in order. Lack of SSS always turned me off. I'd be more interested in Lands End if I liked the space. When Sears and that fashion chick couldn't kill the brands imagine some decent execution. Seems to have lots of low hanging fruit.

 

I think I would rather bet on next gen retail like SFIX. I do agree that LE is enduring, but I am not exactly sure they will ever prosper again. LLBean has the best brand identity in this space, imo.

LE's numbers are looking good I'd say, but it has also doubled already. Still think there's more to come in that there are so many fix internally to fix.

[Spekulatius]

Someone mentioned the Askeladden sum zero post, so I thought I would attach it. I find it to contain a lot of "strong" language without a lot of strong facts.

 

I am not sure it’s Ok to post the Askeladden writeup  this here, since it was posted behind a paywall (at least that’s my understanding). I mentioned some of my concerns on Twitter to him when he posted about DLTH and he kind of was pretty dismissive. He tends to use a lot of hyperbole in his writeups, which I find a bit cringeworthy.

 

On another note, it’s interesting that he mentions COLM in his report, which I find to be somewhat interesting , as it is a quite well managed business, as far as I can tell, but it’s not an obvious value stock either.

 

Anyhow, DLTH should post their quarterly earnings today, so we will see how they do.

[Guest roark33]

Yeah, Samir can really pound the table on ideas, like everyone in the market is an idiot if they don't agree with me.  I mentioned this to him years ago when he was writing about LQDT on Seeking Alpha.  Luckily his fund performance track record doesn't include that investment.  He was just completely wrong about that company. 

 

In other news, DLTH post results today.  A bit improved, but you are still dealing with a retailer here and if you read closely, once a retailer starts to heavily use discounting, you have really lost your brand.  This is something that Duluth wasn't dealing with when they were only selling to their hardcore customers, but now that they are playing the discounting game, it's just going to be an up and down rollercoaster...It just doesn't seem to be any different.  If the founder was in his 40s and had no intention of stepping away, I might think differently.  But he is 71 and said on the last conference call that he is only coming back for the holiday season and then will start the CEO replacement search in the new year. 

 

 

[glorysk87]

Promotional activity drove some growth here, but I still think this company is going to look silly cheap a couple years out. If store productivity (once fully ramped) is anywhere in the same galaxy as their original group of stores, this company is going to be easily doing $1B+ of revenue in a few years with low double digit EBITDA margins.

[BG2008]

Yeah, Samir can really pound the table on ideas, like everyone in the market is an idiot if they don't agree with me.  I mentioned this to him years ago when he was writing about LQDT on Seeking Alpha.  Luckily his fund performance track record doesn't include that investment.  He was just completely wrong about that company. 

 

In other news, DLTH post results today.  A bit improved, but you are still dealing with a retailer here and if you read closely, once a retailer starts to heavily use discounting, you have really lost your brand.  This is something that Duluth wasn't dealing with when they were only selling to their hardcore customers, but now that they are playing the discounting game, it's just going to be an up and down rollercoaster...It just doesn't seem to be any different.  If the founder was in his 40s and had no intention of stepping away, I might think differently.  But he is 71 and said on the last conference call that he is only coming back for the holiday season and then will start the CEO replacement search in the new year.

 

I think the discounting comment is very spot on.  From my failed foray into investing in retail businesses, I have noticed that the money is made in concepts that don't discount.  Once you start, it is so hard to move back to everyday low prices. JCP, I am looking at you.  Macy's heavily discounts and can only draw people in with their deals.  TJX is not discounting, it's more sourcing weird quirky products and buy it before it disappears. 

[Foreign Tuffett]

Worth noting that the write up posted by roark33 (which is from July) forecasts "~$66MM in EBITDA" for 2019, but the company's current guidance is "Adjusted EBITDA in the range of $51.0 million to $55.0 million."

 

Agree with all the above comments about discounting. To a certain extent Duluth has already played the discounting game, with gross margin falling from ~57% in FY 2015 to something like ~54%

 

The leverage means this is almost certainly a pass for me. I have a hard time getting excited about a leveraged clothing retailer. That said, I am going to be driving right past one of their stores later today and might stop in and have a look.

 

Finally, does anyone have any thoughts about where Ebay sellers are sourcing Duluth stuff? A single seller has sold 800+ Duluth Trading Men's Longtail T-Shirts. Another seller has sold almost 100 Buck Naked Performance Boxer Briefs.

[spartansaver]

Worth noting that the write up posted by roark33 (which is from July) forecasts "~$66MM in EBITDA" for 2019, but the company's current guidance is "Adjusted EBITDA in the range of $51.0 million to $55.0 million."

 

Agree with all the above comments about discounting. To a certain extent Duluth has already played the discounting game, with gross margin falling from ~57% in FY 2015 to something like ~54%

 

The leverage means this is almost certainly a pass for me. I have a hard time getting excited about a leveraged clothing retailer. That said, I am going to be driving right past one of their stores later today and might stop in and have a look.

 

Finally, does anyone have any thoughts about where Ebay sellers are sourcing Duluth stuff? A single seller has sold 800+ Duluth Trading Men's Longtail T-Shirts. Another seller has sold almost 100 Buck Naked Performance Boxer Briefs.

 

Management revised guidance in Sept. He was likely using previous management guidance.

 

I'd say the biggest reason for decline in gross margins is the large decrease in shipping revenues. DLTH recognizes shipping revenues at the top-line, but puts the expenses within SG&A (shipping revenue gross margin = 100%). Over the past several years, shipping revenues have dramatically fallen. The company doesn't break it out, but has frequently attributed the majority of gross margin decline to this reason. In the most recent nine months promotions seem to have had more of an impact on gross margins. While I don't like seeing discounts, it seems this is the world we live in. There are plenty of higher-end comps (Columbia Sportswear, North Face, LL Bean, etc.), that use discounting to drive sales. I wouldn't say a brand is dead simply because they use discounts to drive sales.

[spartansaver]

I think I'm selling and chalking up as a mistake to ever invest. The balance sheet was subpar from the start, and as the share price has declined I haven't been able to pull the trigger in buying more. Who knows what will happen with the coronavirus, but when you source nearly all your product from Asia, it can't be a good thing. In a worst case scenario, the brand can survive, but the equity won't. I should have paid more attention to The North Face.

[kab60]

What is your diagnosis of their problems, Spartan?

 

I probably still think LE looks more interesting either way. If you can survive Sears, chances are you can survive most. LE's ecommerce focus plus starting retail from scratch in this new retail world seems like a great opportunity. Seems like DLTH botched it with their physical stores or what?

[BG2008]

I have never made money buying a "value retail" name and I doubt I ever will

[spartansaver]

What is your diagnosis of their problems, Spartan?

 

I probably still think LE looks more interesting either way. If you can survive Sears, chances are you can survive most. LE's ecommerce focus plus starting retail from scratch in this new retail world seems like a great opportunity. Seems like DLTH botched it with their physical stores or what?

 

I love the brand and think it will survive. I let this blind me from other issues. The biggest problem for me is the balance sheet. It's awful for an apparel retailer. I knew that going in, but I've been thinking hard about it. I haven't been able to average down as the share price has fallen, and I think its a sign that I'm not confident in the investment. I think The North Face is a great example of a poor balance sheet combined with a great brand. In the late 90s the company ran into some issues and the equity essentially got wiped out. VF Corp. bought the brand and made a killing. I was looking at DLTH similar to Timberland. The biggest difference is that Timberland had a great brand and a great balance sheet. Some black swan event could wipe out DLTH (perhaps its Coronavirus hitting DLTH's supply chain in Asia or maybe it hurts consumer purchases if it spreads to the US). I think the equity could do very well from these prices, and understand why others may continue to hold, but its my two cents.