Duluth Holdings Inc.

Good morning and welcome to Duluth Holdings' second quarter 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal 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, press star then on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I'll now turn the conference over to Nitsa McKee. Please go ahead.

Thank you, and welcome to today's call to discuss Duluth Trading's second 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, Senior Vice President and 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 prediction of future events. And with that, I'll turn the call over to Sam Sato, President and Chief Executive Officer. Sam?

Good morning, and thanks for joining today's call. Before I review our second quarter results, I'm thrilled to share an update on two of our key strategic initiatives that are cornerstones to our Big Dan Blueprint. I'll start with the exciting news that our newest highly automated fulfillment center located in Adairsville, Georgia, has as planned begun fulfilling customer online orders and replenishing our store inventories. The scheduled ramp-up is on time and gives us confidence that our October target date for being fully operational is achievable. Representing a significant investment to future-proof our business, this upgrade to our logistics network will support meaningful long-term growth, address our customers' expectations for faster delivery, and immediately generate cost efficiencies that will build over time. I'll share more about this shortly, but first I'd like to thank all our team members and vendor partners responsible for delivering on this key milestone. In addition to going live in our highly automated fulfillment center, I'm equally excited to share progress on the growth of our sourcing and product innovation functions with the onboarding of several new team members that have deep and extensive experience in apparel design and manufacturing. This team accelerates our efforts to develop and bring to market innovative products that serve a purpose or solve a problem for our customers. Duluth has a long track record of bringing first-to-market fabrications and features to our customers, representing a strong price-value proposition supported by cut-through marketing that is fun and memorable. The sourcing team will augment and strengthen this competitive advantage, allowing us to enhance the pipeline of new products while improving our speed to market, fueling greater full-price selling and sub-brand loyalty while generating significant product cost savings over time. This strategic initiative, coupled with the go-live of our highly automated fulfillment center, sets the stage for meaningful and sustainable long-term profitable growth. Now turning to our second quarter performance and the current consumer environment. Customer demand for our offer remained strong as evidenced by continued growth in units sold, increased buyer counts and online visits, all with higher conversion rates. We shipped more orders in the second quarter compared to last year as demand for our spring and summer collections were healthy. As we navigate what remains a dynamic macro environment in which customers continue to seek value, we are managing the business prudently, controlling what we can control, while staying keenly focused on elevating our unique brand and sub-brand positioning. Importantly, our inventory position is in good shape and ended the quarter below prior year levels due to strong seasonal sell-through and our disciplined efforts to appropriately plan our purchases, and receipt flow. Total net sales for the second quarter were 139 million, which was down 1.7% to last year and can largely be attributed to lower store traffic in the month of May, which subsequently trended flat to slightly positive beginning in June. We were very pleased by our strong online performance, which grew by nearly 2% in the quarter. Importantly, Our second quarter conversion rate improved year over year, both in-store and online, as our assortments and marketing efforts resonated with our broadening customer base. Double-clicking on our online performance, visits to our website were upped in the quarter, driven by higher volume of mobile traffic, which accounts for nearly 70% of all online visits. Sales transactions through mobile devices increased roughly 8%, and accounted for 55% of direct channel sales. We continue to realize the benefits from last fall's web platform upgrade, which enables faster load times on mobile devices and easier navigation, contributing to an increase of 50 basis points in our mobile conversion rate. With our direct channel representing 62% of the total, an increase of 200 basis points from last year, our results continue to prove that our digital-first strategy, balanced with an omnichannel service model, is delivering on our customer shopping expectations with Duluth. Moving down the P&L, we delivered adjusted EBITDA of $8.6 million for the second quarter. And while we're not satisfied with the bottom-line EPS results, the investments we are making now in technology, supply chain, and product innovation are keys to unlocking and fueling longer-term profitable growth. Our balance sheet strength with no drawings on our $200 million line of credit at second quarter end and none expected at year end supports our multi-year strategy to invest in the key growth drivers of the business while being funded by operating cash flows. We have strategically managed our inventories to support the programs that have momentum and minimize end-of-season clearance, which is in a healthy position and below last year. As I mentioned, demand for our spring and summer collections were strong and we continued to deliver great results in key collections like garden and landscaping and planning. These collections delivered a sales increase of nearly 40 percent in the second quarter. Our women's heirloom gardening bib overall was, again, the number one style for the quarter. Our plans are to make this hero product a year-round item, which we've designed with a soft fleece lining option to add warmth and comfort during cooler months. Our total women's business grew almost 3% during the quarter, with increases in Duluth-branded collections like Heirloom Garden, but also in the base layer unders and the newer AKHG collections. Growing our women's apparel segment, which now represents 35% of total apparel sales, is a key strategic initiative and continues to gain momentum. Success in the women's business is being derived from a combination of outstanding product design, expansion into relevant categories, and our secret sauce of utilizing proven fabrications across styles and uses. The women's bra collection was up nearly 50% in the quarter and represents a significant growth opportunity engineered with unique comfort, fabrics, and features in a wide range of fits and sizes. We're seeing great response from the newly released Armachillo T-Lux bra, which is infused with made-in-the-jade technology that features soft touch, seamless comfort, and all-around support elements. As we lapped last year's launch of Women's AKHG, we're pleased to see continued interest and demand for our outdoor recreation offering. We saw notable success in our lightweight access point collection made for ultimate endurance on the trails and the stone run collection, which provides the same functionality with a more structured and durable design. For fall, we're introducing new, soft, and cozy cross-layer styles in the AKHG meltware and bamboo programs. We're also expanding our use of Sherpa and fleece linings within AKHG, which broadens our assortment during seasonal transition periods. And our long success in flannel shirts continues as we expand new styles, colors, and prints. Overall, the AKHG sub-brand grew 14% in the second quarter, and we expect a similar growth rate in the back half of 2023. AKHG represents a significant growth opportunity for Duluth. We draw so much inspiration and product design ideas from our loyal Wayforger community, sharing their stories of work and play and the apparel they love that helps enable their passions. I encourage you to visit our Duluth Wayforger webpage to view the imagery and read about the folks that helped shape our brand offering as they embrace and live the true spirit of our family of brands. We're pleased with the favorable response to our early fall and winter collections and are particularly enthused about our core men's Duluth assortment with the recent introduction of new colors and fits in the Long Tail Tea Program, as well as the increased demand for our Duluth Ballroom Double Flex Denim Pants, which features new combinations of styles, washes, and fits. We expect men's pants to be a high-volume driver for us this fall, with the support of robust marketing plans over the next few months. We've also recently launched a new men's collection called Power Cord, which strikes the right balance between business casual and jobsite utility. Designed with abrasion-resistant Kedura nylon twill, the pants combine durability with sharp styling that pair well with button-down long-sleeve shirts, polos, or even a long-sleeve Henley. The new power cord collection is off to a great start and addresses the needs of our customers who are transitioning back to the office more regularly. Excitingly, our pipeline of new and innovative products is full this year, and we still have several key items that will be launching in the fourth quarter. This includes a new addition to our Buck Naked underwear collection that features a soft and smooth fabric, allowing for more extensive pattern printing, including photo images, a new fire hose carpenter pant featuring our strongest, most durable flex fire hose fabric to date, and a new women's AKHG fitness apparel assortment launching in January, just in time for New Year's resolutions. We've also been busy rolling out new pattern and printed underwear styles for men and women. Our Buck Naked collaboration with Pabst Blue Ribbon was a customer favorite and is being followed up with several additional collaborations with favorite beer brands dropping in September. Product newness combined with data-driven marketing strategies are proving to effectively increase customer retention rates and increase brand awareness. Our year-to-date retention rate on prior year customers is up 200 basis points, with much of that driven by our longer-term and most loyal customers. Our active buyer file overall is up year-over-year, and orders per customer is up mid-single digits, driven by increased purchase frequency. Within the paid social channels, our return on ad spend was up over 60% in the quarter from retained customers, and new customer acquisition rates have been on an improving trend all year long. Our marketing strategy provides nimble and informed shifts when appropriate, and we're looking to realize efficiency gains in the back half of 2023. New customer acquisition will continue to be a focus, and an expanded reach of new influencers and online content creators will be powerful sources of new buyers. As I mentioned in my opening comments, the go-live of our newest highly automated fulfillment center in Adairsville, Georgia, represents a significant milestone within our strategic roadmap. This facility is the largest and most efficient within our fulfillment network, and we remain on track to process up to 60% of online customer orders and store inventory replenishment through this new facility by the end of Q3. The efficiency gains will help us realize healthy reductions in cost per unit processing, as well as faster delivery times to a greater portion of our direct customer base. We're poised to fulfill our customers' needs and meet the peak demands as it builds towards the holiday selling season. Our inventory is in great shape. We're accelerating receipt of new product innovation. Our marketing plans are as sharp as ever, and our customer service teams are prepped to deliver superior omnichannel experiences. With the critical investments we've made and will continue to make, we're well positioned to meet the needs of our customers and drive sustainable long-term growth and profitability. I look forward to sharing more on our third quarter call, and we'll now turn it over to Dave to provide more details on our second quarter results and outlook for the year. Dave? Thanks, Sam, and good morning.