Description
I am writing up the Duluth Trading Company as long. This write-up ended up being quite concise, probably because the thesis is simple:
1 - They are straight-shooters and the man who built the company (Chairman) still owns 29% of the shares
2 - They have a unique brand and a good set of products
3 - They are long-term focused, they know how to grow a business and will probably continue to do so
4 - Basic valuation ratios are low due to macro headwinds. Therefore, if the world doesn’t end, the current price is a great entry point. All they have to do is keep executing.
Description
Duluth was started by two brothers who came up with a product called The Bucket Boss, a leather wearable bucket in which workers can carry tools. Eventually they grew this into a mail-order catalog business with various products including accessories, tools and storage equipment. It was mostly aimed at workers in construction and other hands-on occupations.
The business was then sold to a Finnish company, which flipped it in the beginning of the 2000’s to Steve Schlecht, owner of a similar business called Gempler’s. Originally his idea was to merge Duluth and Gempler but later he decided to sell Gempler and focus on growing Duluth, which he grew by 100x. This was accomplished by introducing Duluth-branded apparel, using e-commerce and doing lots of advertising. In 2010 the company started opening retail stores, mostly in the eastern half of the United States. They were taken public in 2015. The Schlecht family currently owns 29% of the equity and Schlecht is now just chairman.
Today Duluth sells mostly apparel. They offer innovative, durable, comfortable, functional and casual clothing (and shoes), as well as various accessories. These items are designed (by them) for either outdoor activities or people who work outdoor or in a rough environment. They even have their own proprietary material. All manufacturing is contract. They still have a catalog and they still invest a lot in customer service over the phone. The brand is edgy. They use a lighthearted humorous approach using their own cartoon characters. I encourage you to watch their commercials online. Here’s a couple:
https://www.youtube.com/watch?v=pBJk3XICfaU
https://www.youtube.com/watch?v=iJOqjh1hrBw
I wanted to include some comments I found online from customers in order to give a bit of a peak into the world of those who use such items regularly:
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1
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All of my jeans and most of my slacks are from DTC. While I am not a particularly intense user, I have had them for a while and they are wearing like iron. My uncle, who is a construction worker, swears by their longevity.
As for sizing, they seem to follow the standards from what I have seen. They do seem to cut just a bit little looser in the leg than most other manufacturers. Personally, I like this and it is why I have them. The one time I had to return something (I ordered the wrong size) it was extremely smooth and simple.
Personally, I like their Firehose Flex series as they have a little extra give which is nice if you frequently crouch down. The Firehose line is extremely durable but has no stretch.
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2
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I own multiple polos and pairs of their flex firehose cargo pants. I also own this beast: http://www.duluthtrading.com/store/prod ... or=content as a winter jacket.
All of their stuff is excellent quality. I think I own 4 pairs of the firehose flex pants, and at least 5 polos. I worked for an agriculture company, so I was frequently in fucking grain elevators and fertilizer plants, but still had to dress "business casual." I skirted the dress code with their stuff, and it was great. Plus, their warehouse and corporate HQ was next door to one of our feed mills, so I could hit the outlet store whenever I went there.
In my experience they vanity size a bit. At least on the outer wear. I usually wear a 3X tshirt, and the 2x of the parka is large enough that I can easily layer a hoodie under it. Same thing with the pants. My normal size requires me to use a belt and I can easily put a pair of thermal underwear under them and they still fit easy.
Good stuff, highly recommend everything I've got from them.
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3
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I have a pair of the firehose canvas pants out of curiosity(and a sale). The 36 waist is probably a 35. Other than that they're comfortable. Haven't had them long enough to judge durability. The extra space for the yarbles while crouching is a real thing.
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4
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After testing out a variety of Duluth's products, I can say that I was pleasantly surprised by two things: the quality of the products, and the number of compliments that I received after wearing them. By far, my favorite Duluth Trading Co. products are the men's contractor oxford work shoes. You can tell the quality of the shoes right off the bat – they are heavy! But man, are they comfortable, and I cannot begin to tell you how many people have told me how much they love the look of them.
I am also a BIG fan of Duluth's work belt. I've searched high and low for a belt that will last longer than a couple of months. This one has lasted the better part of a year and still does not show any signs of wear and tear. In fact, this belt is so great that Duluth has dubbed it as their “Gets Better With Age” belt!
One of Duluth Trading Co.'s most popular products are their ballroom jeans. These might not be the most fashionable jeans to wear when you go clubbing, but if you want a durable pair of jeans to wear on the job site or at home on the weekends, I am not sure that you'll find a pair more comfortable than these. I kid you not, these jeans are about as comfortable as wearing a cozy pair of sweatpants!
Be sure to check out Duluth Trading Co.'s full line of Made in the USA products here. You can also visit one of Duluth's brick and mortar stores to see their products in person!
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Over the past decade sales and EBITDA have grown at a ~15% CAGR. In recent years they’ve been expanding into women’s clothing so that part is experiencing much higher growth, as are various other recently introduced business lines or sub-brands. The expansion of the product offering is therefore ongoing, as is the geographical retail/distribution footprint. Gross margin averages mid-50s.
The company’s current strategy consists of:
- digital first: using tech to increase engagement and connect what is happening across channels, as well as to save on costs
- optimizing customer service, including returns, logistics, sales and in-store experience
- taking great care of their multiple brands and make sure each one is enhanced as much as possible
- testing as many new things on a small scale as possible
- finding ways to build up their moat further, including using tech, talent and supply chain advantages
Recently they’ve seen some softness because of the macro situation and their margins have shrunk due to some promotions, but they seem to have a solid footing brand-wise and this should carry them through tough economic times. They certainly are focusing on the long term and don’t seem too phased by short-term fluctuations.
They have no long-term debt and the stock is currently trading at a price/sales of 0.33x. I would therefore say that this stock can easily double from here and probably more. The market seems to be concerned about execution through a potentially stagflationary environment but I don’t think that’s a big issue at this valuation. I would also note that macro-wise, industry and agriculture will make somewhat of a comeback in the U.S. and that should provide some support during these difficult times.
So it’s really as simple as that.
Risks
Macro: if things go really bad then potentially they might hit too big of a bump
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
- I think the catalyst is any positive news macro-wise. Even if we get a wiggly market like in the 1964-1981, many stocks like this one are now at a low point and this is historically proven to be a harbinger of above-average returns. Therefore, valuation will eventually be its own catalyst
- Above-average growth will further help along