Active lifestyle retailers better run faster because Duluth Holdings Inc. is grabbing market share by the horns with its double-digit earnings growth.
Duluth has become a force to be reckoned with since 2000, when its founder Steve Schlecht sold his catalogue business Gempler’s. Schlecht used that money to buy Duluth and began the transformation. Revenue has grown from less than $10 million in 2000 to an estimated $370 million in sales for this year and that business is coming at the cost of its peers.
“Through a maniacal focus on solutions-based product innovation and the use of storytelling-based advertising, Duluth has developed a differentiated positioning supporting what we view as in excess of a $1 billion brand opportunity,” said Robert W. Baird analyst Jonathan Komp.
The solutions Komp refers to are features that include the long-tailed T-shirt that doesn’t pop out of the back of your pants or the ballroom jeans with the hidden crotch gusset that allows for a more comfortable feel.
These solutions are resonating with shoppers. Customer satisfaction for Duluth’s products ranks higher than its peers. According to Baird, consumers ranked Duluth higher than Williamson Dickie Manufacturing Co. (Dickies), Lee Jeans Co. Inc., Eddie Bauer Holdings Inc., Lands’ End, Cabela’s Inc., Levi Strauss & Co. and L.L. Bean Inc. in categories like comfort, quality and durability. The only metric that Duluth had less of a positive gap was “value for money.” Duluth doesn’t go for cheap; it prices for its solutions-based features.
Komp acknowledges that Duluth has low brand awareness, but believes as shoppers get to know the brand better, the company will be well-positioned to capitalize on it. Komp thinks that as more consumers give Duluth a try, sales will increase. He noted that Duluth’s peers with better brand awareness, but lower customer satisfaction have annual sales over $1 billion suggesting Duluth could eventually hit those numbers as well.
Another area for growth for Duluth is the women’s line. It was launched in 2005 and chief executive officer Stephanie Pugliese, who joined the company in 2008, has played a major role in developing the category. Pugliese came from Lands’ End and before that spent 10 years at Ann Taylor. The women’s business has grown 55 percent during 2012-14 and counts for 19 percent of overall sales. Duluth uses real women “of grit and substance” as their female models and each woman’s story makes for a compelling narrative.
Duluth management said it expects the women’s business to account for 30 to 35 percent of the mix by fiscal year 2019. Komp said, “We also note that women’s apparel and footwear typically have made up a majority share for some of Duluth’s mature peers [including Eddie Bauer, Lands’ End].” Duluth’s women’s line has become more diverse over the years and Komp believes that by expanding the neckline silhouettes, building out accessories and innovating around the “Longtail T”, the company will have more opportunities to capture women’s business. Where Duluth has physical stores, the women’s mix is 25 percent and higher proving that as the women learn more about the brand and try it, they buy more.
William Blair analyst Amy Noblin has an outperform rating on Duluth and she believes store growth will also give investors long-term value. Duluth had been mainly a catalogue business until 2010 when it opened its first store. There are nine stores today, with five stores planned for this year and eight planned per year during 2017-19. Management has identified locations for up to 100 stores over the long-term. “New stores have displayed a capacity to grow a market, as has been the case in Minneapolis, where sales grew threefold over the last four years after the company opened up two stores on top of an existing direct business,” Noblin said.
The warm winter and oil patch weakness did not hurt Duluth as much as it hurt its peers either. During the 2008-09 recession, Duluth cut back on its outerwear stockkeeping units, which has reduced its exposure to weather trends. Duluth, positions itself as a workwear brand, but 87 percent of its customers work outside the building trades. Duluth’s product is more casual and recreational and that has helped it in the energy states, whereas retailers like Boot Barn have felt a pinch from oil company cutbacks.
When fourth-quarter sales are compared, Duluth’s sales grew 27.5 percent, while Cabela’s increased 10.5 percent and Lands’ End fell 12 percent. L.L. Bean reported flat sales for 2015, while Levi’s revenues grew 5 percent in 2015. The Eddie Bauer brand went bankrupt in 2009 and is owned by Golden Gate Capital.
Year-to-date Duluth stock is up 62 percent, while Cabela’s is up 4 percent and Lands’ End stock is up 2 percent. Duluth has only been publicly traded since November of 2015, when it priced its shares at $12, below its planned IPO range. It now trades at approximately $24.