Duluth Holdings Inc.

Good morning, everyone, and welcome to the Duluth Holdings Second Quarter 2021 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please see a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touchtone phones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Donnie Case, Investor Relations for Duluth Holdings.

Please go ahead. Thank you, and welcome to today's call to discuss Duluth Trading's second quarter financial results. Our earnings release, which we issued this morning, is available on our investor relations website at irdeluftrading.com under press releases. I am here today with Sam Sato, President and Chief Executive Officer, and Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we will open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified as by the use of words such as estimate, anticipate, expect, and similar phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts, and assumptions, and are subject to risk and uncertainty that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such risk and uncertainties include, but are not limited to, those that are described in our most recent annual report on Form 10-K and other SEC filings as applicable. These forward-looking statements speak only as the date of this conference call and should not be relied upon as predictions of future events. And with that, I'll turn the call over to Sam Sato, President and Chief Executive Officer. Sam?

Thanks, Donnie, and thank you all for joining today's call. My first 100 days were, of course, busy and productive, but incredibly energizing after meeting personally with most of our team members. I continue to be impressed with the level of talent, commitment, and energy this team brings day in and day out. And I'm proud and excited to be part of Team Duluth. Over the last 60 days or so, together with our team leaders, we continued our comprehensive review of our current operations, logistics networks, our marketing and technology capabilities, and our unique brands and products. This review provided the foundation to formulate our strategic plan, which we are referring to as our Big Damn Blueprint. Our blueprint, we believe, will set the foundation to unlock our company's full potential for long-term sustainable growth and is driven in part by meaningful shifts in consumer behavior. The five pillars to our blueprint are, one, lead with a digital mindset. Two, intensify our efforts to optimize our own DTC channels. Three, evolve our multi-brand platform to enable long-term growth. Four, test and learn to unlock new channels of growth. And lastly, five, invest in the enablement and future-proofing of our enterprise. The importance of delivering a harmonious relationship between offline and online experiences has never been more important and, in fact, is expected by the customer. Digital disruption was only amplified during the pandemic when customers from all generations adapted to digital-first behaviors in most areas of their lives and now expect consistent experiences across all channels. To this end, the five pillars of our big damn blueprint are linked through a common thread, which is the first pillar and is foundational to our plan. That is to begin with a digital first mindset. A digitally led organization integrates technology into all areas of the business, fundamentally changing how it operates and delivers value to customers. Our digital transformation will provide the structure for how we prioritize our short, mid, and long-term efforts, investments, and overall operations of the business. Traditionally, our business has largely served a more established consumer with brand awareness efforts prioritized through traditional media channels. More recently, we've added brand trials such as localized digital, deeper behavioral-based social targeting, and tests in connected TV, which have helped drive new buyer growth and customer retention. In fact, these efforts have allowed Duluth to test our ability to be more targeted in awareness media channels. These recent efforts have proven to drive a similar lift in brand awareness, and when scaled appropriately, have the potential to evolve our media investment strategy to better reach our target customer where they are consuming content. In the future, these types of investments will become a larger component of our marketing spend. Among younger consumers, shifts in content consumption can be seen through nearly all traditional media channels, including linear TV, terrestrial radio, and other channels moving to on-demand streaming and digital content. As you know, these younger customers are predominantly digital-first audiences, and a shift to a digitally-led mindset makes our brands and our products more relevant to this important demographic. It creates near-term benefits through building awareness and trial through channels where they currently consume content. It also puts us in a better position to grow and compete longer term through a continued commitment to emerging media and technologies as consumer preferences evolve and change. Focusing our efforts through the lens of the customer is how we will define the best ways to optimally engage with them. Our emphasis on digital enablement is being driven by the need for rich brand experiences that deepen relationships in ways historically reserved for offline channels. And with the pandemic accelerating the migration from offline to online, our consumer experiences must be grounded in speed, ease, convenience, and delivered as friction-free as possible through improved digital capabilities and logistics. The second pillar of our blueprint is to intensify our efforts to optimize our own DTC channels. Our relevance with the customer through our direct channel is as strong as ever. Digital disruption, as mentioned earlier, was only amplified during the pandemic and has led to a permanent shift in consumer behavior. This shift in consumer shopping preferences plays to our strength in leadership in direct and gives us confidence to increase our focus and investments in our direct channel as our primary growth vehicle. Having said this, we also believe our stores are a critical piece of the omnichannel ecosystem. Our research tells us that the Duluth customer places a high value on our stores because they serve, in addition to a place to purchase our products and experience our brand, as a convenient touchpoint for services like buy online, pick up in store or curbside, ship to store, and returns and exchanges. SOARs also play an important role in driving new customer engagement as well as servicing business needs like fulfillment. Currently, we are conducting strategic research to better inform our decisions in the future, which includes market data that will provide better insight into the size and composition of markets with a focus on the opportunity set of Duluth-type customers in any given DMA, and our potential to capture market share that has sustainable growth and profitability. We are also looking closely at what the store of the future should look like to best serve the needs of the Duluth customer. For example, as our growth expands across multiple brands and as we continue to elevate our women's business, which we believe is under-penetrated, the layout of the stores will need to be more flexible. As we learn more, we plan to retrofit a few existing stores with future store concepts to better understand the impact. In our third pillar, we see great opportunity to evolve our multi-brand platform as a new pathway to grow the business. With the Duluth and Buck Naked brands still representing 90% of the business, our emerging brands, Alaskan Hard Gear, 40 Grit, and Best Made, provide a long runway for growth by gaining greater share of wallet among our current customers as well as attracting new customers. We'll achieve this by creating unique brand positions and develop and deliver products to address our customers' needs for various occasions spanning work, outdoor recreation, casual lifestyle, and first layers. In the future, this platform will allow us to develop and integrate new brands and expand our offerings to broaden our customer base. Our current brands will target the different needs of our customers who take on life with their own two hands and embrace the can-do attitude in both work and play. The products will be grounded in durability, functionality, and solution-based design for the intended end use. The Duluth brand will be focused on the lifestyle of American workwear. Our products will prioritize comfort throughout the workday while remaining timeless, quirky, and humor-infused. FortiGrit will become a sub-brand under Duluth focused on core products at sharper price points to service a more price-sensitive workwear consumer. Alaskan Hard Gear will focus on products needed to support outdoor activities and specifically the work that goes into enjoying the outdoors. The products will be focused on innovative solutions and versatility to be worn in a broad range of conditions and outdoor recreation, such as fishing, hiking, and camping. Best Made will focus on well-crafted, timeless casual wear and hard goods while prioritizing branding and aesthetic. The products will remain focused on high quality and rich storytelling and will be infused with origin stories. And finally, Buck Naked. We have garnered so much equity with Buck Naked and believe we should position it as the hero brand that it is. We will launch Buck Naked by Duluth Trading as a solution-based, predominantly first-layer brand. This will allow us to elevate our assortment and intensify our focus on innovation with a focus on growing key categories such as underwear, undershirts, and loungewear. We are also extending the reach of our portfolio brands by introducing a women's line to Alaskan hard gear in spring of 22 and best made a bit later to complement our current Duluth, 40 Grit, and Buck Naked women's offerings. The fourth pillar will be anchored on carefully testing and learning to unlock long-term growth potential. Innovation is deeply embedded in our DNA. We're constantly exploring new ways to engage existing and new customers through product, services, and touch points that they expect and value. For example, we're testing different avenues of B2B to evaluate new opportunities for growth. Our current partnerships are providing valuable learnings we can use to determine future needs across logistics, technology, and talent. These learnings will help steer our investment decisions and priorities as we work towards enabling a more flexible and integrated infrastructure and logistics network. And finally, the fifth pillar in our blueprint we are committed to increasing, and in some cases, accelerating investments to future-proof our business. Right now, we're analyzing investments that will allow us to scale more easily and effectively, as well as deliver on the ever-evolving customer expectations. We're currently analyzing and prioritizing four key areas. Increasing our investments in automation across our logistics network to strengthen our supply chain resilience by improving flexibility, gaining efficiencies, maximizing inventories, and ultimately increasing speed from click to door. The appropriate investment level in technology, for example, data science and order management, that will improve operations, generate positive impact and sustainable returns. Enhancing our multi-brand platform to support growth through multiple brands, and to seamlessly integrate new brands into the portfolio, and attracting the talent, skill sets, and expertise that we need to scale the business. We believe our blueprint is sound and necessary to continue to strengthen our relationship with our customer, lead as a competitive force, and strengthen our position for sustainable long-term growth. Our strategy will enable Duluth to meet its long-term growth objectives, which are by the end of 2025, achieve at least $1 billion in sales, operating margins of high single to low double digits, earnings power of at least $2 in earnings per share, generate positive free cash flow, and maintain low balance sheet leverage to preserve liquidity and strategic dry powder. Our blueprint provides a clear path to ongoing and sustainable profitability and sales growth, and our entire team is very excited about the opportunities ahead of us. Now let me take you through a few high-level thoughts on our second quarter performance. For the second quarter, we're pleased with a solid performance as improvements across multiple metrics drove positive year-over-year results. Our initiatives continue to deliver the planned results, and we're excited to build upon them. Total sales for the quarter grew nearly 9% versus last year, and just over 22% on a two-year basis, which is the result of the strong relationships we have with our customers and the experience we are delivering to them. Our direct channel continues to deliver strong results as we saw sales expand by 42% on a two-year basis. Year to date, our direct channel represented 61% of our total net revenues. The positive momentum in our retail channel continues to improve as store sales grew high double digits versus last year and 3.5% to 2019. We achieved sales growth with both men's and women's businesses, as well as across all brands, which greatly contributed to second quarter sales and earnings growth and per share results of 27 cents. This represents a 50% increase over last year and a 350% increase when compared to 2019. Our results were firm the relevance of our assortment and the underlying strength of our business. Many of the positive trends that we saw in Q2, including sales and gross margin rate, have continued into Q3. Going forward, we will continue to focus on areas that are driving positive momentum. These include developing and delivering high-quality solution-based products, delivering relevant customer experiences through our own DTC channels to drive continued improvements in sales and profits, refining initiatives that increase our regular price business as a percentage of total sales, and strategically intensifying our marketing investments to capture consumer interest and engagement, build brand awareness and loyalty, and attract new customers. In looking at the back half of the year, we now have better visibility into some of the headwinds others have reported on and to which we are not immune. Wage pressure for hourly associates has escalated, and incremental costs associated with inbound receipts have increased significantly. We estimate that these incremental costs for the back half of the year will be around $16 to $17 million. The freight-specific costs will be absorbed in the cost of goods. However, we believe this impact can be offset by reducing promotions and continuing our efforts to sell more products at full price, which will result in back half gross margins being flat with last year. We'll continue to be prudent as we carefully monitor the fluidity of this situation, and we'll take the appropriate action to ensure that we are putting ourselves in the strongest position to succeed long term. I'm excited about our results year to date and the momentum we are seeing, and I look forward to sharing our progress next quarter. I'll now turn the call over to Dave to provide more details on our second quarter results. Dave?