Duluth Holdings Inc.

And welcome to the Duluth Holdings Inc. Third Quarter 2022 Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal 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 then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Misa McKee. Please go ahead.

Thank you, and welcome to today's call to discuss Duluth Trading's third 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, 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 statement. 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 for joining today's call. We're in the midst of our peak season when direct order volume and store traffic are at their highest levels. So I look forward to providing insights on the trends we're experiencing and the great work our teams are doing to deliver against evolving consumer expectations and execute on our strategic playbook. I'm also excited to share updates on our brand positioning and critical investments we're making to position our business for long-term growth. We're committed to staying the course on our Big Dan Blueprint initiatives in the face of many macroeconomic headwinds that we're experiencing today and expect to continue into 2023. While the current environment does pose some near-term challenges for the business, our efforts remain focused on unlocking the company's full potential for sustainable growth. We're all in on the commitment to support scalability and further enable Duluth to deliver long-term growth and profitability. I'll share further detail on some of the key initiatives shortly, but at a high level, we'll continue to execute against our commitments on leading with a digital-first mindset supported by investments in our logistics and technology infrastructure, and in product development and new innovation, while driving brand awareness across our evolving portfolio of sub-brands. But first, regarding our current business, I'm pleased to share that we've seen several key trend reversals that point to progress in the areas that have been our focus, most notably Total net sales for the company grew 1.3% in the third quarter, a sequential improvement of 770 basis points when compared to the first half of the year. Driving that growth was our direct channel, which was up 7% in Q3 versus down 6% in the first half of the year. I'll share more regarding the positive initiatives around inventory management marketing execution, and new product introductions that are supporting this growth. But I would be remiss to not mention up front that we're seeing the impacts of the inflationary environment on our core consumer with a higher level of price sensitivity. This is resulting in a reduction in the overall basket size and lower levels of full price selling in both our direct and retail channels. The good news is we saw consistent and strong shopper conversion, a clear indication our brand, sub-brands, and products are resonating. In high-core inflationary environments like we are in, where many consumers face strains on their pocketbook, the price-value balance in their discretionary purchase decisions can tilt in the direction of values. In response to the customer's need to balance their own spend decisions, we have strategically and selectively increased our mix of discounted offers and extended some sale event periods to meet these adjusting expectations. Our product offering is centered around fulfilling customers' needs for durable, long-lasting gear and apparel that meets a high-quality standard with an appropriate price-value proposition. But we understand for some, trade-offs are made between the need to cover the rising cost of staple items and investing in their apparel and accessories. The demand for Duluth trading product has remained strong. That said, to address the evolving consumer and macro environments, we focused on critical levers to maximize opportunities. For example, to minimize supply chain risk like we experienced last year, we plan to receive inventory sooner to ensure improved in-stock positions as we headed into Q4. We adjusted the mix of our marketing tactics to maximize efficiencies, and we strategically post promotional activity to capitalize on consumer demand while maximizing profitability. These efforts materialized in the third quarter as we realized a 9% increase in units sold, and customers who have been with us the longest were the highest retained group of customers. These results speak to our flexibility and agility as we continue to read, react, and adjust to the rapidly changing consumer and macro conditions. As a result of the price sensitivity we are seeing from the customer, we took appropriate actions aligned with the shift resulting in contraction in our selling gross margins, impacting the bottom line results. Today, we reported a net loss of $0.19 per diluted share and positive adjusted EBITDA of $1.7 million. While we are not satisfied with these results, we are confident that keeping our inventory clean, generating cash flow, and continuing to meet the customers' evolving expectations will serve us well and allow us to continue investing in the strategic priorities we have set for the business. Our overall inventory position, while up 24% to last year, is down 4% to the same period in 2020. As I mentioned earlier, we front-loaded inventory receipts to de-risk supply chain challenges by taking early delivery of Q4 goods in Q3. Our strategic actions to be in stock at all times in our core year-round items is paying off. We can flex our position in these categories in shorter time frames and make adjustments relative to quarterly demand trends. Dave will share more about how we expect inventory flow and year-end position to play out. Importantly, our current overall inventory is in a healthy position to support peak holiday shopping. From a seasonal merchandise standpoint, our fall winter offering is off to a great start. Sales of seasonal styles were up 8% in the third quarter, driven by flannels, fleece, shirt jacks, and line pants. It took a little longer for the weather to turn colder this year, but when it did, our mix of transition and cold weather items took off. In Duluth women's, the folklore flannel collection, featuring several styles and patterns, has seen standout performance, as has the Frost Lake collection of fleece tops featuring super soft, anti-peeling fabric, and cut shaping that is suitable for wearing alone or as an extra layer. New in the Duluth women's business this season is the shiftless sweater collection that we've designed with the classic V-neck, crew neck, and turtleneck options as well as the cardigan duster style with extra length for comfort and freedom of movement that our customers expect. Overall, our women's business increased 10% in the third quarter with positive gains in the Duluth branded collections, while we also continue to see strong momentum within the AKHG sub-brand. After a successful introduction of AKHG women's in the spring, Our fall-winter assortment is being led by the Meltwater First Layer Program and the Midnight Sun Flannel Program. Combined, our women's business increased to 31% of total sales in Q3 compared to 28% last year and has grown significantly, up 35%, since 2019. The investments we've made in product innovation and great brand marketing to build out our women's assortment is paying off by cementing Duluth Trading Company as truly a co-gender lifestyle brand. Importantly, the proportion of new buyers is closely approaching a 50-50 split between men and women, with the number of female shoppers at the highest peak in the past three years. With the great success we are seeing in our women's business, we're excited to have recently launched a reconfiguration in 20 of our stores that expands our women's footprint. The expansion is informed by customer research and focus group insights, highlighting the desire to allocate more space to our women's assortment and balance the shopping experience. These stores have already produced better than average results so far this holiday season. We see great opportunities in women's and will continue to focus on this segment of our business as a strategic pillar. Within our men's business, we realize growth in apparel across the three sub-brands of Duluth, AKHG, and Best Made. Our men's pants program continues to be a dominant category for our company, where many of our top volume items live, and where workwear innovation is integral to our success. A good example is the Men's Ballroom Double Flex Relaxed Fit Carpenter Jeans, a top new product performer this quarter by a wide margin. While we introduced Duluth Double Flex Denim several seasons ago, we leveraged our Double Flex Denim innovation into a carpenter style which blends proven innovation with updated styling and functionality and has quickly become a customer favorite. Another great example of driving success by offering more choices is in our men's long-tailed tee collection. We reintroduced an additional style called the un-long-tailed tee that shortens the length, adjusts the fit, and provides more color choices to further enhance our staple work shirt offering. Complemented by a new intuitive web selection guide, our customers can more easily browse the many options and find their perfect mix of size, color, and features. Overall, the Long Tail T program drove a mid-single-digit increase during Q3. We did experience some softness in our men's unders business this quarter, and while unit sales in the overall unders business was up high single digits, average unit prices were down due to the higher promotional actions leading to a low single-digit decline in net sales. We're seeing the men's underwear customer become increasingly more price-sensitive and value-driven. This trend has been the opposite in women's, however, with net sales in the category up, high single digits, driven by high growth in underwear, bras, and our famous no-yank tanks. We also introduced our new line tamer collection in Q3, offering an innovative, seamless solution for women's bras and underwear. Newness in our unders business is just as critical as other categories, highlighted by another top new product this quarter. The Men's Funkno Bullpen Boxer Brief was among the top new items this period and demonstrates that innovation and uniqueness will break through. Of the recently introduced collaboration with the Green Bay Packers for co-branded Packers-themed clothing, the Men's Buck Naked Cheese Pattern Boxer Brief has been a top selling item so far this season. We're also excited to see the success that broadening our AKHG sub-brand to women's has had on the overall brand growth. AKHG increased nearly 45% in the quarter due in large part to the introduction of women's. Men's AKHG also saw healthy growth amid single digits in the quarter driven by new programs such as Blackburn and Crosslayer, which features pullovers, hoodies, and vests, and in meltwater base layers. Dramatically improved in-stock positions compared to last year helped drive increases in our Boar's Nest and Crosshaul collections, which feature sweatpants, sweatshirts, and flannels. Overall, we see AKHG having outsized growth potential and can aggressively compete in the sizable outdoor recreational apparel space. And to support this growth opportunity, we plan to increase our brand building investments in AKHG in future seasons. More near term, our marketing focus to drive brand growth has been to prioritize digital channels with paid advertising and personalized communication across our own channels, email, and brand followers and influencers. During the third quarter, we realized a mid-single-digit increase in total customer counts and repeat buyers with success in reactivating customers that haven't purchased in more than a year. Tactically, we were able to increase this segment of lapsed buyers in the quarter by over 30%. We increased our working media investments in Q3 by roughly 15%, which helped drive an increase in web visits in the quarter by 6% and mid single-digit sales growth in September and October. In addition, we tested digital messaging to drive store traffic in 15 local store markets that led to increases, and we have broadened the investment in all our store markets for the holiday season. The increase in web visits and direct sales in the third quarter came through a mobile device, with desktop and tablet essentially flat. Not coincidentally, we saw outsized customer growth coming from the younger age cohorts who are more apt to transact on their mobile device. As we've shared in our Big Damn Blueprint, targeting a younger customer in the age range of 40 to 50-year-old with our product offering and marketing mix is gaining traction. With our average customer age today in the mid-50s, we are actively balancing our mix of advertising to both target and build visibility with our 40 to 50-year-old target customer, while maintaining visibility within media channels that index well with the older demographic. In Q3, we observed that the content consumption behavior of our target 40 to 50-year-old customer is becoming more fragmented, meaning that they consume content in multiple channels, including most streaming platforms, cable TV, YouTube, and streaming audio. As such, building awareness with the customer must be selective, focused, and intentional by channel. For example, within digital channels, social platforms index well with a female buyer and prove to be successful in driving sales from new, younger female buyers in the quarter. YouTube specifically indexes well with males age 40 to 50, along with social channels. Our success long-term will be driven by the learnings we're gaining now about our target customers' media consumption and how to appropriately best flex the mix of working media investments. Related to the investments we make in working media, I'm excited to share news about our recent website replatform, that has meaningfully improved the user experience and transactional performance of the DuluthTrading.com site. In October, we successfully relaunched our website using headless site architecture known as a progressive web application. The improvements to site speed upon launch have been meaningful and customers are taking notice. We believe this investment will drive a lift in site conversion and engagement going into peak especially for those customers who choose to shop on their mobile device. Next year, this new platform will allow us to progress our digital experiences faster than ever before by enabling more rapid enhancements, richer digital storytelling, and quicker upgrades for third-party tools such as new site search functionality. We have recently completed key investments in our logistics operations, and met critical milestones in our southeast fulfillment center project. Between our existing Belleville and Dubuque facilities, we have increased the speed and capacity for sorting and relaying inbound inventory, and we have automated scanning and manifest printing on outbound orders that will save freight costs. The efficiencies we are seeing in managing fulfillment costs are directly related to the value these investments are bringing. In addition, our inventory position between fulfillment centers and stores is in great shape and has contributed to the outstanding work our store teams are doing to convert traffic to sales by having the right inventory in the right place. In the Southeast Fulfillment Center project in Adairsville, Georgia, we are on schedule with the facility's infrastructure in place and the delivery of the auto store material equipment is ahead of schedule. Our plans are to go live during Q3 of next year. Regarding our technology strategy, under the direction of our new Chief Technology Officer, we have strategically redirected our technology investments and have prioritized a new warehouse management system to advance our Southeast Fulfillment Center capabilities and have paused on the upgrade of our current ERP system. The upgraded cloud-native versionless warehouse management system will provide end-to-end supply chain and logistics process orchestration, resulting in vastly improved inventory management and turns. The prudent management of expenses is always heightened in our business, but in the inflationary environment and uncertain consumer outlook that exists today, we're acutely focused on ensuring that operating and capital outlays we make are core to supporting our strategic priorities. With that, the heightened levels of macro and consumer uncertainty that have weighed on our business in 2022 is impacting our plans for 2023. That said, I want to again emphasize we will continue to control our costs and conservatively plan our inventories but we remain steadfast on carrying out our Big Damn Blueprint, which serves as the foundation for Duluth Trading Company's long-term success and value creation. Now, I'll turn the call over to Dave to provide more details on our third quarter results and discussion of our year-end outlook. Dave?