Having fallen over 20% following the release of its fourth-quarter results on Thursday, clothing retailer Duluth (DLTH, Financial) seems to offer good value for money. The company has an improving financial outlook, with changes to its strategy set to catalyze its bottom line.
For example, it is set to invest in its omnichannel capabilities, while becoming a more efficient business. Increasing product innovation could improve its appeal to customers, while plans to drive traffic to stores could enhance its sales performance.
While there are risks facing the wider U.S. retail sector, an efficiency program and a refreshed marketing strategy could mean that the stock is able to outperform the S&P 500 in the long run.
Omnichannel opportunities
Duluth is making further changes to its omnichannel offering in order to improve its competitive position. The company is aiming to add 15 new stores in 2019, while rolling out "buy online, pickup in store" (BOPIS) across its estate. The trial of BOPIS in seven of its stores during 2018 led to 91% of customers who were polled indicating that they are likely to use BOPIS again.
The introduction of BOPIS across the company’s estate is expected to improve customer satisfaction levels, since it means that products reach customers quicker. It also encourages in-store purchases at the time of pickup, while ensuring that the company has the required product on hand when customers travel to stores.
In order to make BOPIS more appealing to customers, the company plans to invest in improving the speed of its order management systems, while continuing to build on the assortment and inventory planning tool. This will help to predict inventory requirements by location, which may improve the overall efficiency of its omnichannel offering.
Refreshed strategy
The company will focus on delivering new high-volume products in its assortments each season. Although it aimed to do so in the previous fiscal year, it believes that there is still scope to offer a wider range of styles, sizes and color options to create a pipeline of fresh, impactful products year-round. For example, it plans to double the number of items in its women’s plus size category, and will continue to build out the rest of its women’s business. Alongside this, its men’s business will see an increased footprint in stores, while offering year-round apparel instead of focusing on outerwear.
While online sales have grown recently, with total website visits increasing 11% in the most recent quarter, driving traffic to stores remains a key priority for the business. This will become increasingly important as it expands into more new markets, with the company seeking to improve customer engagement and frequency of visits. As part of this, it is investing more heavily in staff training and customer service levels.
Risks
In its fourth quarter results, Duluth reported a 90 basis-point decrease in gross margin, falling to 52.4% versus 53.3% in the same quarter of the previous year. The vast majority of the decline was due to a drop in shipping revenues, as well as the increased freight cost of its stores. Reduced margins could impact negatively on its bottom line at a time when US retail sales are slowing. In February, for example, retail sales decline 0.2%, while consumer confidence is forecast to fall through 2019. This could cause a downgrade in the company’s financial outlook.
The company also reported operational issues in its fourth quarter results, which may be a major reason for its sharp stock price fall following their release.Ă‚
In response, the company is focusing on productivity improvements in order to leverage the variable costs associated with its investments. This will include increasing the use of pop-up distribution centers for peak selling season, more accurately anticipating on-hand inventory needs and increasing the amount of product that is retail-ready from its vendors.
Duluth will also seek to improve its ability to attract and retain new and existing customers through more targeted marketing, as well as a more personalized web and store experience. As part of this, it will utilize insights from a recent marketing mix study to more fully engage customers across its marketing efforts. This could help to differentiate its offering versus sector peers.
Outlook
In the current fiscal year, Duluth is forecast to post a rise in earnings per share of 7%. Although its price-earnings ratio of 25 is relatively high, the impact of its refreshed strategy on earnings growth could be significant over the medium term.
While there are risks facing the U.S. retail sector, the company’s continued investment in its omnichannel offering could boost customer loyalty and improve its competitive position. A renewed focus on driving store traffic, while becoming increasingly innovative regarding the products that it has on offer, could help to differentiate it from sector peers.
Although Duluth has underperformed the S&P 500 by 20% over the last year, with the index rising 10% in that time, capital growth could be ahead for the stock in the long run.
