Duluth Holding (DLTH) is a company that may be best known for its “No Bull Guarantee” and its unique and humorous advertising. As for its products, the company offers solution-based casual wear that is rather high quality (and hence pricey) as well as various lines of workwear and accessories. While the company’s primary niche has always been men historically, in recent times the company has aggressively shifted its focus toward women.

What we find interesting is that this publicly traded company has focused most heavily in recent years on driving customers to its e-commerce site. While the company’s products are sold exclusively through its website, catalogs, and “store like no other” retail locations, we think the strength and future of the company rests with its approach to driving e-commerce sales.

The stock, however, has faced some pressure recently, but we think this is setting the name up nicely for a potential rebound trade:

Source: Yahoo Finance, Quad 7 Capital overlaid graphics

As you can see, the name has been volatile. We think this allows for a nice potential trade to be made here. Let us discuss the fiscal side of the business a bit more.

We thought Duluth’s fiscal 2017 was a year of solid growth given 25% top-line growth and 23% growth in total new customers. It has not rushed to expand either, at least physically as the company opened 15 stores and continued to expand in the Eastern and Western United States. Net sales in the men’s business grew 22% and the women’s business grew 37%, exceeding the $100 million milestone. What is more, this was the 32^nd consecutive quarter of increased net sales year-over-year.

Sales were strong in the most recent quarter. Net sales increased 24.7% to $217.8 million, compared to $174.7 million in the same period a year ago. The net sales increase was driven by a 8.5% growth in direct net sales and a 98.8% growth in retail net sales, with growth in all product categories. That is a substantial victory. But is the company doing well on margins?

The answer is absolutely. In fact, gross profit increased 19.9% to $116.0 million, or 53.3% of net sales, compared to $96.8 million, or 55.4% of net sales, in the corresponding prior-year period.  This decline in margin was disappointing, but is still strong. The 210 basis point decrease in gross margin was primarily due to an increase in global promotional days and flash sales, coupled with the continuing decline in shipping revenues. In order to stay competitive, it has had to take a hit on shipping charges. We think this is appropriate. What about other expenses?

We saw that selling, general and administrative expenses increased 17.0% to $86.5 million, compared to $73.9 million in the same period a year ago. This increase may seem like a negative, but as a percentage of net sales, they decreased 260 basis points to 39.7%, compared to 42.3% last year. What is more, as a percentage of net sales, advertising, and marketing costs decreased 370 basis points to 16.4% compared to 20.1% in the corresponding prior-year period

Taken as a whole, operating income increased 29.3% to $29.5 million, or 13.6% of net sales, compared to $22.9 million, or 13.1% of net sales last year. Adjusted EBITDA increased 31.4% to $32.4 million compared to $24.7 million, while earnings per share grew markedly. Net income was $19.5 million, or $0.60 per diluted share, compared to $14.0 million, or $0.43 per diluted share in the prior-year fourth quarter. Excluding the impact of the U.S. Tax Cuts and Jobs Act (the “Tax Act”), net income was $17.6 million, or $0.55 per diluted share, which is still substantial growth. So, what is next for the company?

Well, the company plans to keep its expansion manageable. It will open another 15 new stores that will reach into major customer markets like Texas. We believe that with the opening of these new stores and a high-single-digit growth mark in digital sales, that we will see net sales rise in 2018 to $561.0 million to $576.0 million. Assuming comparable expense growth was we saw in 2017, we see adjusted EBITDA in the range of $51.75 million to $54.5 million. Considering the impact of tax cuts, the company is projecting a 26% tax rate. Employing this figure, we believe earning per share will approximate $0.81 to $0.85 per share. All things considered, we rate Duluth Holdings a buy, and part of our BAD BEAT Investing approach. We think it will set up for a nice swing trade.