Duluth Holdings Inc.

Good day and welcome to the Duluth Holdings first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, press star, then two. Please also note this event is being recorded. And now I'd like to turn the conference over to Nisa McKee. Please go ahead.

Thank you and welcome to today's call to discuss Duluth Trading's first quarter financial results. Our earnings release, which was issued this morning, is available on our investor relations website at ir.duluthtrading.com under press releases. I'm here today with Sam Sato, President and Chief Executive Officer of 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 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 uncertainties 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 of 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?

Thank you, Nitsa, and thanks for joining today's call. We made tremendous progress on key strategic initiatives over the course of the first quarter, and I'm excited to share some of the details. We know that our customers demand well-designed products that are grounded in durability, functionality, and are solution-based for the intended end-use. Our customers take on life with their own two hands and embrace a can-do attitude in both work and play. To address our customers' various needs and attract new customers, we set out to create distinct positions for each of our sub-brands with product assortments that resonate and deliver against their expectations. I'm pleased to highlight that during the first quarter, we introduced our new Duluth by Duluth Trading Company brand logo. The Duluth sub-brand is focused on the lifestyle of Americana workwear. The first quarter also marked the transition of our Alaskan hard gear brand to AKHG, and we launched our women's collection in April. AKHG is focused on more technical products needed to support outdoor activities as well as the lifestyle of enjoying the outdoors. And importantly, our first layer business has undergone many updates. We've elevated our assortments through the creation of new, innovative products and intensified our focus on growing categories. Collectively, these updates are meaningful steps forward to position our overall Duluth Trading Company business under a common umbrella that will enable each sub-brand to serve our customers' desire for being active in their work and their recreation. I'll share more shortly how we see the evolution of our business and brand positioning to address the growing active lifestyle of our target customers. But first, I'll touch on our recent results. Today, we reported first quarter net sales of nearly $123 million, net income loss of $1.3 million, and earnings loss per share of $0.04. These results were better than our internal plan as well as our early projections and demonstrate our continued operational effectiveness in the face of a dynamic macro environment. With inventories reaching a healthier position at quarter end and digital marketing tactics that draw on elevated data analytics, we are meeting the needs of our customers and executing our strategies for long-term brand growth. The efficiency of our Omnichannel model is producing a consistently strong gross profit margin, which for Q1 was 54.6%, an increase of 470 basis points over last year. We continue to fund our strategic brand development initiatives with an increase in creative asset investments, supporting our Duluth by Duluth training company and AKHG sub-brand launches. The new brand positioning features seasonally relevant items for active outdoor categories in swim, gardening, and hiking. And as our receipts improve, the customer's response to our offering overall is strong and led to high single-digit sales growth in April. With the support of new brand awareness campaigns, the momentum continued through the Memorial Day weekend with customer demand exceeding last year. Our reported net sales for the first quarter were nearly $123 million and were planned to be down to the prior year due to expected inventory delays and a strategic shift to carry meaningfully lower levels of clearance inventory. In fact, we ended the quarter with clearance goods making up 3% of total inventory compared to 8% last year. Our overall inventory position at quarter end is 6% higher than last year, a significant improvement from the beginning of the quarter, where we are down 18%. Importantly, the makeup of our inventory is significantly healthier compared to last year. The positive outcome of our strategic transition in inventory mix is that we are generating significantly higher gross product margins, fueling gross profit dollar growth. while absorbing higher than normal transportation costs. Our reported gross profit margin of 54.6% includes the additional expense of roughly $4 million in air freight costs associated with inbound inventory from last fall. Absent these incremental freight costs, our gross profit margin is as strong as we've seen in the last five years, and the direct results of inventory management and pricing disciplines put in place. Our strategies continue to yield results that support improved operating margins, which Dave will go into further. Our EPS loss for the quarter of 4 cents reflects the impact of the $4 million in air freight costs I just mentioned, but also sound operational expense management. Absent the air freight costs, our earnings per diluted share in Q1 would have been a positive 5 cents. Our business is not immune to the inflationary pressures in fuel, labor markets, and commodity prices. We will continue to make adjustments to our model to keep the momentum going across the business and continue to execute our strategic playbook. Our teams put many actions in place to address some of the headwinds we identified last year. For example, we've been selective in raising retail price points on certain core items and expect further adjustments to prices in our fall and winter assortment. We established early delivery dates from our manufacturers to account for continued supply chain congestion. And we also plan to air freight orders on certain new fall and winter products to meet key offer dates. We anticipate being well-positioned with merchandise to meet customer demand during the important sales periods beginning with Father's Day and into the fall and winter seasons. We were able to flex our variable expenses below last year and realize expense leverage relative to our plans that support the continued investments we're making in our brand portfolio. These investments take advantage of the broader trends we see in our target customers to live an active lifestyle, and are designed to unlock tremendous growth opportunities while mitigating the impact of near-term macroeconomic factors. To that end, we purposefully held back some customer acquisition dollars in our first quarter marketing spend given the lighter inventory levels. The benefit of being more selective on attracting new buyers is we've seen a higher average order size on their first purchase. As receipt flow improved, We dialed up digital prospecting in the back half of the quarter, and as a result, new buyer growth increased with much of the activity driven by our enhanced brand messaging and introduction of the women's collection in AKHG. New buyers who are motivated by the new assortment, focused brand messaging, and product stories are significantly more valuable to us. Net sales in our retail store channel for the first quarter was up versus last year 0.4%, driven by a higher average transaction value that is up 6% compared to last year. More recently, an improvement in our conversion metrics indicate that our heightened focus on store associate product knowledge training and assisting customers to build their basket, along with better inventory position, are paying off. Quarter to date, sales in the retail channel are trending up to last year. Net sales in our direct channel was down for the quarter 12%, largely reflecting the heavy clearance volume in last year's direct sales, but also our purposeful decision to run lighter in working media in February and March. With a better inventory position by April, we leaned into digital advertising in social media and paid search, to accelerate the direct channel growth. In April, direct sales were up low teens to last year. Our rebranding efforts are paying off. We introduced our new Duluth by Duluth Training Company brand logo and have ramped up the messaging, providing a more unified voice across men's and women's. The customer response has been amazing. Duluth favorites, such as Flex fire hose pants for men, and classic Noga performance stretch pants for women are great examples of products designed to support an active get-it-done lifestyle with features and durability that stand up to a wide range of work activities. This spring, we built upon the Duluth brand success we have had in our garden collection by introducing a short version of the women's heirloom garden overall and new styles that leverage our other well-known fabrications such as Dry on the Fly, Double Flex Denim, and Fire Hose Coolmax. These are innovative lead products that are seasonally relevant and provide real benefits such as moisture wicking, cooling, and comfort. Our brand realignment of AKHG focuses on outdoor recreation for our customers who embrace the work-of-play, addressing their needs for high-performance apparel and gear, that can stand up to the conditions they face while in the elements. Formerly Alaskan Hard Gear, we've always infused this brand's identity with high-quality, innovative clothing and outerwear that is functional and allows for comfort and movement while outdoor conditions change. While we know the collection can stand up in these conditions, we also know that most of our customers simply want to trail hike or fly fish in the streams. This brand positioning opens up AKHG to a much wider consideration set and expands the brand's potential for the everyday outdoor adventure that may be closer to home. Our rebranding of AKHG coincided with the introduction of our women's collection. Since then, the AKHG women's segment has quickly reached a similar level of penetration as women's has for the Duluth brand at roughly one-third. The five star reviews are quickly adding up for the new collection and our live action branding allows for a broader aspirational imagery of women and men together in highly photogenic and real life settings. We're excited for the long run potential of AKHG and growing our women's segment. Our first layer products outperformed and remains core to our business, serving both men and women we consider our offering to be America's most comfortable unders and have collected over 40,000 five-star reviews. That being said, we see greater potential, particularly in the women's assortment. Included in this collection is the perennial favorite, No Yank Tank. But expansion of our base layer tops and bras for women has seen significant growth of close to 40% in the first quarter. Lastly, within our family of brands is Best Made, which realized a healthy 30% growth rate in the first quarter, albeit still small relative to the other brands. The curated offering within Best Made allows for great storytelling about the source and craftsmanship behind the products, but also unique individuals that live and work a lifestyle embodied in the Best Made spirit. Our men's summer collection features linen tops and bottoms, swimwear, and beach accessories inspired by the Pacific coastline and tropics of Hawaii. In partnership with the iconic brand Kahala, we offered two exclusive Aloha shirt styles. On our last call, we shared details about our capital investment plans for the year and in support of our Big Dan Blueprint. I'm pleased to report that we are on track with the early stages of our logistics expansion and automation project, and we've kicked off core technology initiatives that serve to advance our internal capabilities and build the foundation to support long-term growth. Within our existing fulfillment centers, we are implementing capabilities that will be fully operational in advance of our peak season this year. These capabilities increase the speed, accuracy, and capacity of inbound receipts with sortation equipment that expands daily capacities. The quicker we can receive inventory into our system, the faster we can make it available to our customers. In addition, investments are underway to automate sortation and scanning equipment on outbound orders that facilitate quicker replenishment of our store inventory and shipping cost savings through automated carton labeling. The investments we're making in merchandising tool sets will ground our capabilities to continue driving efficiencies in how we plan, buy, and seamlessly move from one season to the next. The enhanced systems will allow for quicker and more insightful assortment decisions. Ultimately, our merchandise planning tools will generate automated recommendations based on deeper trend analysis and allow our teams to focus on higher value merchandise activities. The utilization of customer insights and data analytics will better enable our merchandising strategies and long-range brand growth decisions. We've been engaging in a number of deeper reviews of our customer base, the interactions we have with them, and measuring the opportunities for greater market and channel penetration. These reviews are informing our plans as well as the technology we're investing in to activate our plans. In summary, despite the external environment posing challenges, we continue to see healthy underlying demand from our customers for products and shopping experiences that meet their needs. We are in a strong financial position with ample access to liquidity, positive cash flow, and earnings power that support our strategic growth plans. With that, I'll turn it over to Dave to provide more details on our first quarter and our outlook for the balance of the year.