DLTH — Q2 2026 Financial Report Analysis

A one-time tariff refund made the quarter; the business underneath shrank and roughly held its profit

Duluth Trading's fiscal second quarter (the three months to August 2, 2026) shows net income of $18.4 million, up from $1.3 million a year earlier. About $16.3 million of that came from refunds of tariffs the company paid in 2025, after the U.S. Supreme Court struck down the tariffs imposed under the International Emergency Economic Powers Act (IEEPA) on February 20, 2026. Without the refunds, Duluth earned about $2 million, slightly more than last year. That came from charging closer to full price on fewer sales: net sales fell 7.8% to $121.4 million. (Duluth's fiscal year ends around January 31, so "fiscal 2026" runs from February 2026 to January 2027.)

At a glance

• Diluted EPS of $0.50, of which $0.44 was the tariff refund. The company does not exclude the refund from its "adjusted" EPS, so reported and adjusted EPS are both $0.50. The underlying figure is about $0.06, the same as last year's adjusted $0.06.
• Gross margin of 59.6% excluding refunds, up 4.9 points. Gross margin is the share of each sales dollar left after paying for the goods. It rose because Duluth ran fewer discounts and its products cost less to source. Including the refunds, the reported figure was 72.8%.
• Online sales fell 11.5% to $70.1 million. Cutting promotions cost Duluth website visitors and buyers. Advertising spending rose 12.9% at the same time, so the company spent more to bring in fewer online sales.

Results table

Duluth does not publish a comparable-store sales percentage. The filing says only that store sales fell because of "lower traffic, partially offset by higher average order values in comparable stores," plus two stores opened in the third quarter of 2025. It ran 63 retail stores and three outlets at quarter-end.

Where the refund money came from

The $16.0 million cut to cost of goods sold has three parts, all described in Note 1 of the 10-Q:

• $12.5 million of IEEPA tariffs refunded by U.S. Customs. Duluth filed for this in the first quarter. It covers tariffs paid from February 2025 to February 2026. The company had collected $12.8 million in cash by quarter-end, including $0.4 million of interest, which is booked in other income rather than cost of goods.
• $5.5 million credited by a vendor for tariff charges the vendor had passed on to Duluth. This is still a receivable (money owed to Duluth), not cash.
• A $2.0 million charge for money Duluth expects to repay to vendors it had itself charged for tariffs.

Duluth booked these as a reduction in cost of goods sold because that is where the tariffs were originally recorded. The result is that a past-year cost refund shows up as this quarter's gross margin. The company says it "cannot reasonably estimate the amount or timing of any further recovery."

Sales: fewer discounts, fewer online orders

All of the sales decline came from fewer discounts. For the second year running, Duluth has been "resetting" its promotions, meaning it runs fewer sales events so that more items sell at full price. The 10-Q says the direct-to-consumer decline resulted from "declines in web traffic and web conversion due to reduced promotional activity partially offset by higher average order values." (Conversion is the share of site visitors who actually buy.) Stores held up better, down 2.4%, but that compares with a 3.3% increase in the first quarter. Store traffic turned negative this quarter.

For the first six months, sales were $220.0 million, down 6.2%. Online sales fell to $127.2 million from $141.7 million. Store sales were flat at $92.8 million.

Costs: the margin gain is being spent on marketing

The 4.9-point rise in underlying gross margin is real progress. Duluth credits "an increase in average unit retail prices from reduced promotional activity, coupled with an improvement in product costs from our direct to factory sourcing initiative" (buying straight from factories instead of through middlemen). Underlying gross profit was $72.4 million, about level with last year's $72.0 million even though sales were $10.3 million lower.

Operating expenses (SG&A) absorbed most of that gain. The segment table in the 10-Q breaks them down:

Advertising and shipping rose while online sales fell 11.5%. That can be a deliberate bet on bringing customers back ahead of the autumn and winter season, which is Duluth's largest. So far, though, the extra spending has not stopped the fall in web traffic. Overhead is fixed at about $39 million a quarter. With sales still falling, the company has little room left to keep improving profit by cutting costs.

What the headline numbers hide

• The profit jump is almost entirely the refund. Without the $16.0 million cost-of-goods credit, operating income was about $2.8 million, a 2.3% margin. Last year it was $2.4 million, or $3.3 million before an $0.85 million restructuring charge. On that like-for-like basis, operating profit was flat to slightly down. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization, plus Duluth's own add-backs) was about $10.7 million without the refunds, compared with $12.0 million last year.
• "Adjusted" EPS includes the refund. Duluth's adjusted EPS removes restructuring and impairment charges but leaves the tariff refund in. Reported and adjusted EPS are therefore the same $0.50, even though the company itself puts the refund's effect at $0.44 a share.
• Almost no tax. Duluth booked $61,000 of tax on $18.5 million of pre-tax income. It keeps a valuation allowance against its deferred tax assets, an accounting reserve against tax savings from past losses, so profits are barely taxed for now. That helps EPS while it lasts.
• Cash flow is better than last year, and the refund is a large part of it. Operating cash flow for the first half was +$15.5 million, compared with -$24.4 million a year earlier and above net income of $8.4 million. Roughly $12.8 million of it was refund cash. Inventory reduction added $6.2 million. Another $5.6 million of refunds is still sitting in receivables.
• The balance sheet is in better shape. Nothing was drawn on the credit line at quarter-end, compared with $32.5 million a year earlier. Interest expense nearly halved to $0.8 million, and cash was $26.8 million. Inventory down 15.5% while sales fell 7.8% means stock is falling faster than sales, which reduces the risk of forced clearance discounts.
• Share dilution, not buybacks. Diluted shares rose 5.0% to 36.4 million, and basic shares rose 2.4%. There were no buybacks, so the per-share figures trail the profit change slightly.

Takeaway: Fewer discounts are now earning Duluth about five extra cents of gross profit on every sales dollar. That gain is going into advertising and shipping, and online sales are still falling at double digits. Without the $16 million one-time tariff refund, this was a roughly break-even quarter on about 8% lower sales.

Outlook

Management kept its fiscal 2026 net sales forecast of $540 million to $560 million, down 1% to 4.5% from $565.2 million in fiscal 2025. It raised its adjusted EBITDA forecast to $38 million to $42 million, from $28 million to $32 million in June, and says the new range includes the tariff refunds. Its own forecast table shows a full-year GAAP net result of a $3.0 million loss to $1.4 million profit.

The arithmetic says more than the headline "raise":

• The raise ($10 million) is smaller than the refund ($16.3 million). Neither release says whether the June range assumed any refund. If it did not, management has quietly lowered its expectations for the underlying business by about $6 million.
• The second-half forecast is weaker than last year. Adjusted EBITDA was $29.7 million in the first half, so the full-year range implies $8.3 million to $12.3 million for August to January. The same period last year produced about $16.7 million (fiscal 2025's $24.9 million minus the first half's $8.2 million). That is a forecast for lower second-half profit, while implied second-half sales of $320 million to $340 million are roughly flat against last year's $330.8 million.
• Capital spending is still planned at about $12 million.

Our read: the promotional reset is doing what it was meant to do for margins and inventory, but the second half has to show that online traffic can stabilise without discounts. The next filing, for the quarter ending around November 1, 2026, should show three things. Watch whether direct-to-consumer sales fall less steeply than this quarter's 11.5%. Watch whether higher advertising spend starts bringing in sales. And check that underlying gross margin holds near 59-60% without the refund. If store traffic stays negative as well, the sales forecast is at risk.

Figures from Duluth Holdings' Form 10-Q for the quarter ended August 2, 2026, and its September 3, 2026 earnings release (Exhibit 99.1). Fiscal 2025 comparisons are from the Form 10-K for the year ended February 1, 2026.