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spk03: 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.
spk01: 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?
spk10: 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.
spk12: For the second quarter, we reported net sales of 139.1 million, down 1.7% compared to 141.5 million last year, and brings our year-to-date sales close to flat to last year. Sales in our direct channel were up 1.8% in the quarter, driven by an increase in web visits of roughly 1%, an increased conversion of nearly 50 basis points across both mobile devices and desktop. Sales on mobile devices increased high single digits and continues to become the digital channel of choice for our customers with enhancements made to site speed, navigation, and product information. Our retail channel sales were down 7% with store traffic down 2% compared to last year, which is an improvement from the trend traffic in the first quarter. The store teams are also continuing to drive increases in the conversion rate on the store visits with outstanding customer service and compelling assortments and targeted offers. As Sam mentioned, The demand for our seasonal and year-round offering was strong, generating positive growth in items sold and orders shipped. The slight decrease in net sales was largely attributed to a lower average retail and order value due to lower levels of full price selling and a higher level of promotional and clearance sales. Our quarter-end inventory position is healthy, with spring and summer goods down to high single-digit penetration to the total, from low teens last year, and clearance is down more than 300 basis points year over year to roughly 7% of the total. As planned, we began to receive and offer new fall and winter seasonal items sooner than last year, and a customer response has been strong. We have also improved the flow of our core year-round items and are experiencing demand build for some of the largest programs spanning men's pants, tops, and underwear. Total men's division sales during the quarter were down 3.5%, while women's was up nearly 3%, with increases for women's in Duluth, AKHG, and the first layer categories. We drove higher sell-through rates, in part through the use of incremental events and targeted offers, enabling us to keep our inventory turning. Our second quarter gross profit margin was 51.4%, compared to 53.4% last year and reflects a lower mix of full-price sales. Gross profit dollars declined 5.5% from last year. We did see stabilization in product gross margins relative to last year near the end of the quarter. Turning to expenses, SG&A for the second quarter increased 1.7% to 72.9 million, or 52.4% of sales, compared to 71.7 million last year, or 50.7% of sales. This included an increase of 2.8 million in general and administrative expenses, an increase of 1.1 million in selling expenses, and a decrease of 2.7 million in advertising and marketing expenses. Selling expenses as a percentage of net sales increased 100 basis points to 16%. compared to 15% last year, and was the result of higher outbound shipping costs from rate increases, as well as a greater volume of direct orders shipped with lower average order values. Within selling expense, costs related to variable labor in our stores and fulfillment centers declined compared to last year, and leveraged as a percent of sales due to efficiency gains made from scheduling and continuous improvement initiatives across our fulfillment network. Advertising and marketing costs were $11.9 million in the quarter compared to $14.6 million last year, and as a percentage of sales decreased 180 basis points to 8.5% compared to 10.3% last year. Our investment in brand awareness through national ad channels and TV streaming was flat compared to last year, and our digital media channel spend was reduced, along with lower creative costs. We saw stronger results with increased web traffic from organic search and email activities that focused on new product arrivals and clearance messaging that helped drive the increase in retention and reactivation rates. We also continue to realize high return on media spend through social channels when we highlight product innovation features and benefits. Overall, customer counts increased mid-single digits during the quarter while maintaining roughly flat sales per customer productivity. General and administrative expenses during the second quarter were 38.8 million or 27.9% of net sales compared to 36 million or 25.4% last year. Similar to the first quarter, The increase over last year reflects the incremental fixed cost for the new automated fulfillment center that is now operational, and additional personnel expenses associated with the new facility and our corporate functions in the area of product development, sourcing, and stock compensation costs. Adjusted EBITDA for the second quarter was 8.6 million, or 6.2% of sales, compared to 13.2 million or 9.4% of sales last year. Our net loss per share was six cents versus a profit per share of seven cents in the second quarter last year. Moving to the balance sheet, we ended the quarter with net working capital of 85 million, including 11 million in cash and zero outstanding on our 200 million line of credit. The healthy inventory flow during the second quarter lifted free cash flow and increased our cash balance by $2 million from the end of the first quarter. We remain on target for overall capital expenditures of $55 million this year funded by cash, with the lion's share of that spend associated with the new fulfillment center in Adairsville, Georgia. As Sam mentioned, we're pleased to see this project go live and ramp production up over the course of Q3 to begin realizing efficiency gains in our selling costs related to fulfillment center activities, as well as faster delivery times to a greater portion of our direct customer base. Our inventory balance ended the quarter down 4.5% from the same period last year and is in a healthy position with the mix of seasonal goods weighted to more fall-winter versus spring-summer, reflecting the strong sell-through on spring-summer and planned earlier receiving on fall winter goods. Total clearance units on hand are down over 10% from last year as a result of actively managing markdowns during the season to optimize sales and inventory turnover. We are confirming our net sales guidance for the year of 645 to 660 million, but have reduced the EPS and adjusted EBITDA estimates reflecting our first half results and a second half outlook in which we see consumers remaining somewhat price sensitive. We now expect full year adjusted EBITDA of 40 to 42 million and a loss per share of 15 cents to 8 cents. We expect full year gross profit margins will be down 50 to 100 basis points and SG&A to be flat to up 50 basis points. Before I turn it back to Sam, I want to take a moment to address my decision to step down as Senior Vice President and Chief Financial Officer on September 15th. I have accepted an employment opportunity outside the company, but I want to emphasize that it has been a privilege and an honor to work alongside Sam and the many talented individuals across this organization. I believe Duluth is well positioned to execute against the strategic pillars of the Big Dan Blueprint And I wish the team all the best and continued success in the future. I'll now pass it back to Sam.
spk10: Thanks, Dave. I can't thank Dave enough for his many contributions and leadership at Duluth over the past six years. Under Dave's leadership, Duluth has elevated and strengthened its finance organization, anchored on a deep bench of talent with extensive experience across all finance functions. I have the utmost confidence this will be a seamless transition as we search for a permanent replacement for Dave. I'd like to take this opportunity to welcome Mike Murphy, our current vice president and chief accounting officer, who will serve as interim chief financial officer. Mike has been in his current position since 2019. Prior to joining the company, Mike served for three years as chief accounting officer at First Business Financial Services, as well as eight years at KPMG. In closing, it's been an honor to partner with Dave, and I wish him much success in his future endeavors.
spk05: And with that, we'll open the call for questions.
spk04: We will now begin the question and answer session.
spk03: To ask a question, you may press star then run your telephone keypad. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press stars and two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Janine Stichter with BTIG. You may now go ahead.
spk08: Hi, good morning. I was hoping you could elaborate a bit more on the cadence of what you saw throughout the quarter. It sounds like May was the weakest, and I think you said you saw some improvement in June. So maybe just some thoughts on what changed there, how much of it's been maybe some stabilization in the environment versus some of the product initiatives that you spoke to versus just customer shopping around key events like Father's Day. And I'd love to hear about it both from a top-line standpoint and then also from a margin standpoint where I think you mentioned some product margin stabilization towards the end of the quarter. Thank you.
spk12: Yeah. Hi, Janine. This is Dave. So the quarter did kind of play out with May being the toughest month for us. Both retail and direct were down. But as we entered to June, things were improving. Father's Day and March was a big event for us, and it continued to build into July. I'd say July was our best month, and we saw positive traffic into the stores as well as a pretty high growth rate in the direct channel. So, but when you blend it together, you know, the results of being down just under 2 percent, margin pressure was certainly part of the impact as we, continue to find ways to drive traffic and transactions into the business. The margin pressure, you know, did impact with the 200 basis points down from last year. But as I did call out on my remarks, you know, as we came out of July, we're now starting to comp last year's period when gross margin pressures were really first starting to impact the business. And so far, as we look through August, gross margins are up to last year, but the top line is still slightly down. So top line, we're seeing kind of a continuing trend, but the margin has stabilized and has started to turn for us in a good way on that front.
spk08: Great, and then on the promotions or some of the pricing actions that you've been taking just to keep the product flowing through, maybe speak to potential for product cost reductions or sourcing benefits as you seem like you might need to keep these more promotional prices in place for longer.
spk10: Yeah, Janine to Sam. Yeah, so we're going to be and continue to be targeted with our offers you know, we try to balance the consumer sensitivity with the integrity of our brand and pricing strategy. So, you know, we're not going to have a fire sale, so to speak. There's a balance there. As I said in my prepared remarks, you know, we've now onboarded several new members to our sourcing group and, you know, with the intent of over the long term of creating a structural change to our pricing model and ultimately, you know, gives us more flexibility, you know, when business is a bit more challenged. And so, you know, we think the ramp up will occur over the next couple of years, but certainly see a tremendous opportunity for us to drive increased gross product margins
spk05: over the long term.
spk04: Great. Thanks so much, and best of luck.
spk06: Thank you.
spk04: Our next question will come from Jonathan Komp with Baird.
spk03: You may now go ahead.
spk09: Yeah. Hi. Thank you. Good morning. I want to follow up on the guidance, you know, holding the full-year revenue but lowering the margin again and participating in the promotional environment. Can you just maybe elaborate a little further thoughts on the strategy to participate in the price promotions you're seeing and why that's the right move to the brand here?
spk12: Yeah, I'll start there, John. Clearly, there's pricing pressure that we're feeling from the consumer out there, yet the demand is still robust. As we said, we shipped more orders, sold more units. But the price point is what the consumers are telling us needs to be, you know, a value for them to proceed. So we're confident that the brand's got the momentum. And where we're seeing some of the optimism that keeps us, from a top-line standpoint, confident is in some of the core categories of men's, while the quarter men's was down about three and a half percent. It's an improving trend from the last two quarters. And as we're entering in our third quarter here, we're seeing that play out with newness in some of our styles in the men's category, innovation in some other items that are bringing to market. In fact, this back half of the year, we're really bringing a significant amount of new items to market that we think is going to drive, you know, sustain that top line, which we're pleased with. But pricing pressures are still keeping the margin impact, you know, weighted on the bottom line results.
spk09: And maybe just to follow up, Sam, you know, when I think of the big damp blueprint, you know, this year being a transition year still, you know, you're not guiding to much profitability in terms of the EBIT dollars. So could you maybe talk about what's temporary impacting the business that might benefit future years? And are you pursuing the right strategies growth at the current margin level that you have today?
spk10: Yeah, thanks, Jonathan. Yeah, I mean, you know, as I talked at the beginning of my remarks, you know, two really exciting pillars to the Big Dan Blueprint is our highly automated fulfillment center and our sourcing group. And so when you think about that relative to the structural change of the business and the mid- and long-term implication of that from sustainability and both sales growth and profitability, they are two really critical unlocks. So from a fulfillment perspective, it's not only about cost efficiencies and being, you know, much more efficient from a CPU perspective, but also delivers on, you know, the consumer's expectations not just from us, but in general, of faster deliveries, especially click the doorbell and the online part of our business is the majority of how we sell products. And so that has real application to not only scaling our current business, but as the business continues to grow and we consider other avenues for growth, be it wholesale or anything else, That fulfillment center as the key part of our network becomes an unlock from a delivery and fulfillment perspective. The sourcing piece, you know, last year we announced the hiring of our first director of material innovations. Excuse me. And as a vertical operation, you know, that's a critical component, not just in terms of design and product development and you know, at the core of who Duluth is, it's about bringing high quality, you know, well-priced products that are innovative and solve a problem. And so investing in a more dynamic and experienced sourcing group will also bring a change to our pricing model and, you know, allow for, you know, longer term, greater profits and flow through. So, yeah, I think that, you know, in the near term, you know, some of these challenges in the P&L are really related to two things. One is, you know, the investment in our enablers, what we're calling our enablers for the enterprise. And then two, you know, the choppy macro conditions and the sensitivity that consumers are still showing. our brand loyalty and the affinity consumers have for Duluth ultimately leads back to higher full price selling, you know, based on our innovative products and what we bring to market. So I'm confident that that part will occur. And then it's about us ensuring that we've got the right infrastructure in place to take advantage of that and scale the business in a more cost efficient way that's sustainable.
spk09: Okay, that's helpful. Just last one for me, Dave, that the inventory, when I look at the current inventory relative to annual sales, it looks like about a mid 20% ratio inventory relative to full year sales. Prior to COVID, it was more like 18 to 19%. So is Is there some aspect of the business that requires more inventory today relative to several years ago? Or what other factors are you looking at when you highlighted the comfort with the current inventory base? Thank you.
spk12: Yeah. Longer term, as Sam described, some of the sourcing initiatives and even the logistics initiatives, those will be those will enable us to turn inventory quicker, be more, you know, shorten the lead times on new products, and allow us to operate with, you know, less inventory relative to sales. In this environment that we're in, we're getting the product in that's new and fresh.
spk11: And really still, you know,
spk12: me off of some of the supply chain issues from the last two years. Our focus was more about making sure we've got fullness in our assortment, the size ranges, and we're measuring where the categories really have relevance to the customer. So I'd say inventory turns are going to improve this year, so we're moving in the right direction, but the urgency isn't to manage that down and stifle, you know, the demand from a customer standpoint. And so it's a secondary initiative. Primary is to keep the brand robust with newness. But we're confident that inventory turns will return and even exceed any prior year period that we've realized because of those investments.
spk06: Okay. Thanks again. Thank you.
spk04: Our next question will come from Jim Duffy with Stifel.
spk03: You may now go ahead.
spk14: Thank you. Good morning. Hi, Sam. Hi, Dave. Dave, thanks for all the help over the years.
spk13: Dave, I'm going to let you off easy and I think focus most of my questions to Sam. Jim, can you please just speak to marketing strategies for the second half of the year? I'm specifically interested in media mix and messaging and messaging as it relates to branding versus specific products. And then I'll have some follow-ups. Thanks.
spk10: Yeah, sure. So as you know, Jim, you know, marketing is a fluid and dynamic, complex part of the business. And we continue to learn more and more about the right combinations to engage our customers and, and just at a high level, you know, we're, we're focused on specifically, you know, we've got this, this great loyal, um, current customer that's been with us. And so we want to make sure that we're continuing to serve up a product and content that, that keeps them engaged with our brand, um, as well as new customer, uh, acquisitions, um, on an improving trend. And obviously, you know, our focus to continue to build on new customers and bring new folks into the brand is a critical component. So across the spectrum, you know, where we have found continued success, it's a combination of, you know, top of the funnel in terms of brand building. And that really comes through a lot of streaming. When it comes to traditional network television as an example, when we place big bets during certain times of the year and specifically around certain programming, we get a pretty good lift in visits to our site. And then when it comes to our current consumer base, when we want to talk specifically about product features, bring, for instance, Wayforger stories to them. We do that largely through social media and different social-owned platforms, and we get big lift from that, including video content, whether it's our YouTube channel or other places. So we're targeting into what is a really broad mix of media, oh, streaming audio has become really important to us. And so that's become a big part of our initiative. And so really it's based on, you know, where we're trying to attract a broader visibility and brand awareness. You know, that influences where we invest. And then when we go deeper into the funnel, where we're trying to create greater visibility education and understanding around our product innovation that leads ultimately to transactions, you know, we're doing that on a much more personalized, targeted basis.
spk13: Okay. The follow-up and related question, the gains you're seeing in women's and AKHG suggest that the core men's offering is in decline. I understand you have a lot of newness coming for the second half of the year. but can you speak to how you're allocating marketing spend to recruiting new consumers through women's or AKHG versus, you know, stabilizing that core men's offering or trying to drive growth in that? Thank you.
spk10: Yeah. Yeah, so the men's business for the quarter was down 3.5%, but it was an improved trend from Q1. And I think what's exciting is what we're seeing is some of our – core offer for men's that we're bringing newness to, whether it's new colors and fits in our big long-tail tee program, or we're really starting to see increased demand for our double-flex denim pant, and we're bringing additional styles, washes, and fits. So some of that core program, as we're evolving it a bit, I talked in my prepared remarks about new items like the new fire hose pant, which is, you know, our most durable flex fire hose fabric to date. Those are things that we're doing to renew and evolve many of our core programs, which we believe, you know, over the long term will bring that core business back to growth. You know, specific to women's, you know, we're really excited. And we talked you know, a year and a half or so ago about the women's opportunity not only being, you know, a really great white space for us, but, you know, has become one of our internally focused strategic initiatives. And, you know, we continue to see season over season not only growth in top line sales and profitability, but, you know, we're getting more and more feedback from her and really allowing us to extend our brand and our offer into adjacent categories. You know, as an example, base layer, women's intimates, really, really competitive market. And yet, as we've introduced it and have gotten feedback and learned more about what she wants and potentially what's missing in the marketplace, our product development and design team has done a great job of bringing that to market and having it be a part of our assortment. And that business just continues to grow and expand. And so I think that we've got a tremendous opportunity to really optimize a women's offer, which today, while it's much larger than it was a year and a half ago, it's 35% of our total. And so when you think about that in the scheme of things, we got a long way to go in terms of building that business. And then lastly, specific to your question around marketing, we really don't look at it as an either or. We're going to invest in those businesses for him and for her, and we're going to do it in a way that's appropriate, not only from a brand position, but in terms of frequency and the types of stories that we tell. And so we don't look at it as trading off dollars. We allocate certain monies at the beginning of the year, but our brand and creative teams really have the flexibility throughout the year to change and rebalance and refocus initiatives based on some of the things that we're seeing relative to consumer demand or consumer feedback.
spk13: That's helpful, thanks. And Sam, just from a standpoint about allocation of capital, can you speak to any differences in cohort, your behavior that you're seeing between men and women? I'm curious whether she is a higher lifetime value or has higher repeat purchase frequency than your male consumer.
spk10: Yeah, it's interesting. At a high level, what's always been fascinating to me at Duluth and something that I think is it's hard to develop, and so when you have it, you have to make sure you keep your eyes on that, and that is we've talked about we have a 50-50 ratio of women and men buyers. And while our business isn't 50% women's and 50% men's, we have a lot of female buyers that are buying for him. And so that's also what's led to our belief that there's an opportunity for us to better assort our stores and provide a more compelling offer specifically for her because she's shopping our brand. And so what we're seeing is As we're expanding the women's business, we're seeing frequency and with our most loyal customers, basket size increase. I wouldn't say it's necessarily more men than women. I would just say in totality, as we've expanded into women's and added additional categories, we're seeing for sure more frequency in shopping.
spk06: Okay. Thank you. Thank you.
spk04: Our next question will come from Dylan Cardin with William Blair.
spk03: You may now go ahead.
spk02: Great. Thank you. Appreciate it. I just want to make sure I understand kind of the bounds of the guidance here. You're coming out of the second quarter with a nice, at least inflection here, seemingly in sales of cleaner inventories. But the incremental downside to... margins on the year is still kind of a promotional overhang. Do I have that right?
spk12: That's right, Dylan. That's really the update that we made was an overhang given the pricing pressures that we think will continue.
spk02: And so I guess the question embedded in that is, do you not feel given kind of what, are you driving the inflection through heightened promotional activity? Is that sort of ticked up incrementally? You've kind of been asked this, I guess, different ways on the call, but I guess why not kind of hold price more as opposed to give up the margin?
spk12: Well, no, we haven't seen heightened. I mean, it's been improving over the last six months. relative to the prior year, we see it stabilizing but not recovering from that pressure standpoint that we entered the year we anticipated the back half would be starting to see more recovery and a little more of the full price. And that might play out, but we're not going to expect it, and we're planning for that pressure to continue. you know, back half of the year guidance, you know, implies gross profit margins compressing 20 to 50 basis points to get to the full year guidance that are articulated. And that's significantly down from the first part of this year and the first quarter in particular. So, you know, all assured that the goal would be to, again, keep inventory moving and keep the customers engaged engaged through the period that they're in.
spk10: Dylan, I'll add to that because I think that there is an important distinction here. The frequency of events and promotions we're reducing. The issue becomes the customer is responding in terms of their purchases when we do run targeted promotions or, you know, a couple of our big events they're just spending more and purchasing more during those periods, thus driving our full price selling down. And so, you know, we're going to be balanced and targeted in the amount of offers that we put out there and the degree that we discount our products. But ultimately, when we do those things, you know, just what we're seeing is customers are just responding, you know, to a greater degree in purchasing more during those periods than not.
spk05: Got it.
spk02: And so I guess, you know, as you're kind of looking at negative margin here, operating margin, the swing factor looking at next year, presumably kind of recovering some full price selling on gross margin, but sort of holding that constant in the low 50 range. How should we think about the efficiencies or the STNA leverage opportunity on new distributions? Is there any way you can kind of quantify that as we look to next year?
spk12: Well, at this stage still, and it's probably not appropriate for me to even talk about next year, we'll provide that, the team will provide that on a fourth quarter call coming up. So, you know, but you can look into the back part of this year and then in our fourth quarter, when we anticipate, when we see just incremental sales growth, and it doesn't need to be much, leverage on SG&A is immediate. We expect leverage on SG&A in the fourth quarter and really in the back half of the year. So, it doesn't take much top line to start to see it flow through. which is kind of where we're at in the business model. Okay.
spk02: And then the new distribution – apologies, I forgot – allows for a bigger wholesale business. Do I have that right? How are you thinking about expansion of wholesale?
spk10: Yeah, well, it allows for, you know, a larger business in totality. That facility, the plan is to have it fulfill – about 60% of our online and retail store inventory replenishment, about 60% of that by the end of Q3. And so, you know, the opportunity for us to just grow the business in general, whether it's a combination of our current retail and DTC businesses or bolting on a wholesale business, And even, you know, as we've talked, you know, down the road, you know, the potential of an acquisition, that network not only has the capacity to do that, but it's going to do it at, you know, a highly cost-efficient manner. Got it.
spk02: Thank you very much.
spk06: Thanks, Dylan.
spk04: This concludes our question and answer session, as well as the conference. Thank you for attending today's presentation. You may now disconnect. you Thank you. Thank you. Bye.
spk00: Thank you.
spk03: 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 would now like to turn the conference over to Nitsa McKee. Please go ahead.
spk01: 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?
spk10: 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 print. 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.
spk12: For the second quarter, we reported net sales of 139.1 million, down 1.7% compared to 141.5 million last year, and brings our year-to-date sales close to flat to last year. Sales in our direct channel were up 1.8% in the quarter, driven by an increase in web visits of roughly 1%, an increased conversion of nearly 50 basis points across both mobile devices and desktop. Sales on mobile devices increased high single digits and continues to become the digital channel of choice for our customers with enhancements made to site speed, navigation, and product information. Our retail channel sales were down 7% with store traffic down 2% compared to last year, which is an improvement from the trend traffic in the first quarter. The store teams are also continuing to drive increases in the conversion rate on the store visits with outstanding customer service and compelling assortments and targeted offers. As Sam mentioned, The demand for our seasonal and year-round offering was strong, generating positive growth in items sold and orders shipped. The slight decrease in net sales was largely attributed to a lower average retail and order value due to lower levels of full-price selling and a higher level of promotional and clearance sales. Our quarter-end inventory position is healthy, with spring and summer goods down to high single-digit penetration to the total from low teens last year, and clearance is down more than 300 basis points year-over-year to roughly 7% of the total. As planned, we began to receive and offer new fall and winter seasonal items sooner than last year, and a customer response has been strong. We have also improved the flow of our core year-round items and are experiencing demand build for some of the largest programs spanning men's pants, tops, and underwear. Total men's division sales during the quarter were down 3.5%, while women's was up nearly 3%, with increases for women's in Duluth, AKHG, and the first layer categories. We drove higher sell-through rates, in part through the use of incremental events and targeted offers, enabling us to keep our inventory turning. Our second quarter gross profit margin was 51.4%, compared to 53.4% last year and reflects a lower mix of full-price sales. Gross profit dollars declined 5.5% from last year. We did see stabilization in product gross margins relative to last year near the end of the quarter. Turning to expenses, SG&A for the second quarter increased 1.7% to $72.9 million, or 52.4% of sales, compared to 71.7 million last year, or 50.7% of sales. This included an increase of 2.8 million in general and administrative expenses, an increase of 1.1 million in selling expenses, and a decrease of 2.7 million in advertising and marketing expenses. Selling expenses as a percentage of net sales increased 100 basis points to 16%. compared to 15% last year and was the result of higher outbound shipping costs from rate increases as well as a greater volume of direct orders shipped with lower average order values. Within selling expense, costs related to variable labor in our stores and fulfillment centers declined compared to last year and leveraged as a percent of sales due to efficiency gains made from scheduling and continuous improvement initiatives across our fulfillment network Advertising and marketing costs were 11.9 million in the quarter compared to 14.6 million last year, and as a percentage of sales, decreased 180 basis points to 8.5% compared to 10.3% last year. Our investment in brand awareness through national ad channels and TV streaming was flat compared to last year, and our digital media channel spend was reduced, along with lower creative costs. We saw stronger results with increased web traffic from organic search and email activities that focused on new product arrivals and clearance messaging that helped drive the increase in retention and reactivation rates. We also continue to realize high return on media spend through social channels when we highlight product innovation features and benefits. Overall, customer counts increased mid-single digits during the quarter while maintaining roughly flat sales per customer productivity. General and administrative expenses during the second quarter were 38.8 million or 27.9% of net sales compared to 36 million or 25.4% last year. Similar to the first quarter, The increase over last year reflects the incremental fixed cost for the new automated fulfillment center that is now operational, and additional personnel expenses associated with the new facility and our corporate functions in the area of product development, sourcing, and stock compensation costs. Adjusted EBITDA for the second quarter was 8.6 million, or 6.2% of sales, compared to 13.2 million or 9.4% of sales last year. Our net loss per share was six cents versus a profit per share of seven cents in the second quarter last year. Moving to the balance sheet, we ended the quarter with net working capital of 85 million, including 11 million in cash and zero outstanding on our 200 million line of credit. The healthy inventory flow during the second quarter lifted free cash flow and increased our cash balance by $2 million from the end of the first quarter. We remain on target for overall capital expenditures of $55 million this year funded by cash, with the lion's share of that spend associated with the new fulfillment center in Adairsville, Georgia. As Sam mentioned, we're pleased to see this project go live and ramp production up over the course of Q3 to begin realizing efficiency gains in our selling costs related to fulfillment center activities, as well as faster delivery times to a greater portion of our direct customer base. Our inventory balance ended the quarter down 4.5% from the same period last year and is in a healthy position with the mix of seasonal goods weighted to more fall-winter versus spring-summer, reflecting the strong sell-through on spring-summer and planned earlier receiving on fall winter goods. Total clearance units on hand are down over 10% from last year as a result of actively managing markdowns during the season to optimize sales and inventory turnover. We are confirming our net sales guidance for the year of $645 to $660 million, but have reduced the EPS and adjusted EBITDA estimates reflecting our first half results and a second half outlook in which we see consumers remaining somewhat price sensitive. We now expect full year adjusted EBITDA of 40 to 42 million and a loss per share of 15 cents to 8 cents. We expect full year gross profit margins will be down 50 to 100 basis points and SG&A to be flat to up 50 basis points. Before I turn it back to Sam, I want to take a moment to address my decision to step down as Senior Vice President and Chief Financial Officer on September 15th. I have accepted an employment opportunity outside the company, but I want to emphasize that it has been a privilege and an honor to work alongside Sam and the many talented individuals across this organization. I believe Duluth is well positioned to execute against the strategic pillars of the Big Dan Blueprint And I wish the team all the best and continued success in the future. I'll now pass it back to Sam.
spk10: Thanks, Dave. I can't thank Dave enough for his many contributions and leadership at Duluth over the past six years. Under Dave's leadership, Duluth has elevated and strengthened its finance organization, anchored on a deep bench of talent with extensive experience across all finance functions. I have the utmost confidence this will be a seamless transition as we search for a permanent replacement for Dave. I'd like to take this opportunity to welcome Mike Murphy, our current vice president and chief accounting officer, who will serve as interim chief financial officer. Mike has been in his current position since 2019. Prior to joining the company, Mike served for three years as chief accounting officer at First Business Financial Services, as well as eight years at KPMG. In closing, it's been an honor to partner with Dave, and I wish him much success in his future endeavors.
spk05: And with that, we'll open the call for questions.
spk04: We will now begin the question and answer session.
spk03: To ask a question, you may press star then 1 on your telephone keypad. If using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press stars and two.
spk04: At this time, we will pause momentarily to assemble our roster.
spk03: Our first question will come from Janine Stichter with BTIG. You may now go ahead.
spk08: Hi, good morning. I was hoping you could elaborate a bit more on the cadence of what you saw throughout the quarter. It sounds like May was the weakest, and I think you said you saw some improvement in June. So maybe just some thoughts on what changed there, how much of it's been maybe some stabilization in the environment versus some of the product initiatives that you spoke to versus just customer shopping around key events like Father's Day. And I'd love to hear about it both from a top line standpoint and then also from a margin standpoint where I think you mentioned some product margin stabilization towards the end of the quarter. Thank you.
spk12: Yeah. Hi, Janine. This is Dave. So the quarter did kind of play out with May being the toughest month for us, both retail and direct were down. But as we entered the June, things were improving. Father's Day was a big event for us. And it continued to build into July. I'd say July was our best month. And we saw positive traffic into the stores, as well as a pretty high growth rate in the direct channel. But when you blend it together, you know, the results of being down just under 2%, margin pressure was certainly part of the impact as we continue to find ways to drive traffic and transactions into the business. The margin pressure, you know, did impact with the 200 basis points down from last year. But as I did call out on my remarks, You know, as we came out of July, we're now starting to comp last year's period when gross margin pressures were really first starting to impact the business. And so far, as we look through August, gross margins are up to last year. But the top line is still slightly down. Top line, we're seeing kind of a continuing trend, but the margin has stabilized and has started to turn for us in a good way on that front.
spk08: Great. And then on the promotions or some of the pricing actions that you've been taking just to keep the product flowing through, maybe speak to potential for product cost reductions or sourcing benefits as you seem like you might need to keep these more promotional prices in place for longer.
spk10: Yeah, Janine to Sam. Yeah, so, you know, we're going to be and continue to be targeted with our offers. You know, we try to balance the consumer sensitivity with the integrity of our brand and pricing strategies. So, you know, we're not going to have a fire sale, so to speak. There's a balance there. As I said in my prepared remarks, you know, we've now onboarded several new members to our sourcing group and, you know, with the intent of over the long term of creating a structural change to our pricing model and ultimately, you know, gives us more flexibility, you know, when business is a bit more challenged And so, you know, we think the ramp-up will occur over the next couple of years, but certainly see a tremendous opportunity for us to drive increased gross product margins over the long term.
spk04: Great. Thanks so much, and best of luck.
spk06: Thank you.
spk04: Our next question will come from Jonathan Komp with Baird.
spk03: You may now go ahead.
spk09: Yeah, hi, thank you. Good morning. I want to follow up on the guidance, you know, holding the full year revenue, but lowering the margin again and participating in the promotional environment. Can you just maybe elaborate a little further, you know, thoughts on the strategy to participate in the price promotions you're seeing and why that's the right move to the brand here?
spk12: Yeah, I'll start there, John. You know, clearly there's pricing pressure that we're feeling from the consumer out there, yet the demand is still robust. As we said, we shipped more orders, sold more units, but the price point is what the consumers are telling us needs to be, you know, a value for them to proceed. So we're confident that the brand's got the momentum, And where we're seeing some of the optimism that keeps us, from a top-line standpoint, confident is in some of the core categories of men's. While the quarter men's was down about 3.5%, it's an improving trend from the last two quarters. And as we're entering in our third quarter here, we're seeing that play out with newness in some of our styles in the men's category, innovation in some other items that are bringing to market. In fact, this back half of the year, we're really bringing a significant amount of new items to market that we think is going to drive, you know, sustain that top line, which we're pleased with. But pricing pressures are still keeping the margin and impact weighted on the bottom line results.
spk09: And maybe just to follow up, Sam, when I think of the big damp blueprint, this year being a transition year still, you're not guiding to much profitability in terms of the EBIT dollars. So can you maybe talk about What's temporary impacting the business that might benefit future years? And are you pursuing the right strategies, growth at the current margin level that you have today?
spk10: Yeah, thanks, Jonathan. Yeah, I mean, you know, as I talked at the beginning of my remarks, you know, two really exciting – pillars to the big damn blueprint is our highly automated fulfillment center and our sourcing group. And so when you think about that relative to the structural change of the business and the mid and long-term implication of that from sustainability and both sales growth and profitability, they are two really critical unlocks. From a fulfillment perspective, it's not only about cost efficiencies and being much more efficient from a CPU perspective, but also delivers on the consumer's expectations, not just from us, but in general, of faster deliveries, especially click the doorbell and And the online part of our business, you know, is the majority of how we sell products. And so that has real application to not only scaling our current business, but as the business continues to grow and we consider other avenues for growth, be it wholesale or anything else, that fulfillment center as the key part of our network is becomes an unlock from a delivery and fulfillment perspective. The sourcing piece, you know, last year we announced the hiring of our first director of material innovations. Excuse me. And as a vertical operation, you know, that's a critical component, not just in terms of design and product development and, you know, at the core of who Duluth is, it's about bringing high quality, you know, well-priced products that are innovative and solve a problem. And so investing in a more dynamic and experienced sourcing group will also bring a change to our pricing model and, you know, allow for, you know, longer term greater profits and flow through. So yeah, I think that, you know, in the near term, you know, some of these challenges in the P&L are really related to two things. One is, you know, the investment in our enablers, what we're calling our enablers for the enterprise. And then two, you know, the choppy macro conditions and the sensitivity that consumers are still showing. But, you know, we've been through these times in the past, and ultimately, you know, our business our brand loyalty and the affinity consumers have for Duluth ultimately leads back to higher full-price selling, you know, based on our innovative products and what we bring to market. So I'm confident that that part will occur. And then it's about us ensuring that we've got the right infrastructure in place to take advantage of that and scale the business in a more cost-efficient way that's sustainable.
spk09: Okay, that's helpful. Just last one for me, Dave, that the inventory, when I look at the current inventory relative to annual sales, it looks like about a mid 20% ratio inventory relative to full year sales. Prior to COVID, it was more like 18 to 19%. So is Is there some aspect of the business that requires more inventory today relative to several years ago, or what other factors are you looking at when you highlighted comfort with the current inventory base? Thank you.
spk12: Yeah. Longer term, as Sam described, some of the sourcing initiatives and even the logistics initiatives, those will be those will enable us to turn inventory quicker, be more, you know, shorten the lead times on new products and allow us to operate with, you know, less inventory relative to sales. In this environment that we're in, we're getting the product in that's new and fresh earlier and really still, you know, off of some of the supply chain issues from the last two years our focus was was was more about making sure we've got full fullness in our assortment the size ranges and we're measuring where the categories really have relevance to the customer so I'd say you know inventory turns are going to improve this year so we're moving in the right direction but but the urgency isn't isn't to to manage that down and stifle, you know, the demand from a customer standpoint. And so it's a secondary initiative. Primary is to keep the brand robust with newness. But we're confident that inventory turns will return and even exceed any prior year period that we've realized because of those investments.
spk06: Okay. Thanks again. Thank you.
spk04: Our next question will come from Jim Duffy with Stifel.
spk03: You may now go ahead.
spk14: Thank you. Good morning. Hi, Sam. Hi, Dave. Dave, thanks for all the help over the years.
spk13: Dave, I'm going to let you off easy and I think focus most of my questions to Sam. Jim, can you please just speak to marketing strategies for the second half of the year? I'm specifically interested in media mix and messaging and messaging as it relates to branding versus specific products. And then I'll have some follow-ups. Thanks.
spk10: Yeah, sure. So as you know, Jim, you know, marketing is a fluid and dynamic, complex part of the business. And we continue to learn more and more about the right combinations to engage customers and and just at a high level you know we're focused on specifically you know we've got this this great loyal current customer that's been with us and so we want to make sure that we're continuing to serve up product and content that that keeps them engaged with our brand as well as new customer acquisitions on an improving trend. And obviously, you know, our focus to continue to build on new customers and bring new folks into the brand is a critical component. So across the spectrum, you know, where we have found continued success, it's a combination of, you know, top of the funnel in terms of brand building. And that really comes through a lot of streaming. When it comes to traditional network television as an example, when we place big bets during certain times of the year and specifically around certain programming, we get a pretty good lift in visits to our site. And then when it comes to our current consumer base, when we want to talk specifically about product features, bring, for instance, Wayforger stories to them. We do that largely through social media and different social-owned platforms, and we get big lift from that, including, you know, video content, whether it's our YouTube channel or other places. So, you know, we're targeting into what is a really broad mix of media, and oh, streaming audio has become really important to us. And so that's become a big part of our initiative. And so really it's based on, you know, where we're trying to attract a broader visibility and brand awareness. You know, that influences where we invest. And then when we go deeper into the funnel, where we're trying to create greater visibility education and understanding around our product innovation that leads ultimately to transactions, you know, we're doing that on a much more personalized, targeted basis.
spk13: Okay. The follow-up and related question, the gains you're seeing in women's and AKHG suggest that the core men's offering is in decline. I understand you have a lot of newness coming for the second half of the year. but can you speak to how you're allocating marketing spend to recruiting new consumers through women's or AKHG versus, you know, stabilizing that core men's offering or trying to drive growth in that? Thank you.
spk10: Yeah. Yeah, so the men's business for the quarter was down 3.5%, but it was an improved trend from Q1. And I think what's exciting is what we're seeing is some of our – core offer for men's that we're bringing newness to, whether it's new colors and fits in our big long-tail tee program, or we're really starting to see increased demand for our double-flex denim pant, and we're bringing additional styles, washes, and fits. So some of that core program, as we're As we're evolving it a bit, you know, I talked in my prepared remarks about new items like the new fire hose pant, which is, you know, our most durable flex fire hose fabric to date. Those are things that we're doing to renew and evolve many of our core programs, which we believe, you know, over the long term will bring that core business back to growth. you know, specific to women's, you know, we're really excited. And we talked, you know, a year and a half or so ago about the women's opportunity not only being, you know, a really great white space for us, but, you know, has become one of our internally focused strategic initiatives. And, you know, we continue to see season over season not only growth in top line sales and profitability, but we're getting more and more feedback from her and really allowing us to extend our brand and our offer into adjacent categories. As an example, base layer, women's intimates, really, really competitive market. And yet, as we've introduced it and have gotten feedback and learned more about what she wants and potentially what's missing in the marketplace, our our product development and design team has done a great job of bringing that to market and having it be a part of our assortment. And that business just continues to grow and expand. And so I think that we've got a tremendous opportunity to really optimize a women's offer, which today, while it's much larger than it was a year and a half ago, it's 35% of our total. And so when you think about that in the scheme of things, we got a long way to go in terms of building that business. And then lastly, specific to your question around marketing, we really don't look at it as an either or. We're going to invest in those businesses for him and for her, and we're going to do it in a way that's appropriate, not only from a brand position, but in terms of frequency and the types of stories that we tell. And so we don't look at it as trading off dollars. We allocate certain monies at the beginning of the year, but our brand and creative teams really have the flexibility throughout the year to change and rebalance and refocus initiatives based on some of the things that we're seeing relative to consumer demand or consumer feedback.
spk13: That's helpful. Thanks. And Sam, just from a standpoint about allocation of capital, can you speak to any differences in cohort, your behavior that you're seeing between men and women? I'm curious whether she is a higher lifetime value or has higher repeat purchase frequency than your male consumer.
spk10: Yeah, it's interesting. At a high level, what's always been fascinating to me at Duluth and something that I think is it's hard to develop, and so when you have it, you have to make sure you keep your eyes on that, and that is we've talked about we have a 50-50 ratio of women and men buyers. And while our business isn't 50% women's and 50% men's, we have a lot of female buyers that are buying for him. And so that's also what's led to our belief that there's an opportunity for us to better assort our stores and provide a more compelling offer specifically for her because she's shopping our brand. And so what we're seeing is As we're expanding the women's business, we're seeing frequency and with our most loyal customers, basket size increase. I wouldn't say it's necessarily more men than women. I would just say in totality, as we've expanded into women's and added additional categories, we're seeing for sure more frequency in shopping.
spk06: Okay. Thank you. Yep. Thank you.
spk04: Our next question will come from Dylan Cardin with William Blair.
spk03: You may now go ahead.
spk02: Great. Thank you. Appreciate it. I just want to make sure I understand kind of the bounds of the guidance here. You're coming out of the second quarter with a nice, at least inflection here, seemingly in sales of cleaner inventories. But the incremental downside to... margins on the year is still kind of a promotional overhang. Do I have that right?
spk12: That's right, Dylan. That's really the update that we made was an overhang given the pricing pressures that we think will continue.
spk02: And so I guess the question embedded in that is do you not feel given kind of what – are you driving the inflection through heightened promotional activity? Is that sort of ticked up incrementally? You've kind of been asked this, I guess, different ways on the call, but I guess why not kind of hold price more as opposed to give up the margin?
spk12: Well, no, you haven't seen heightened. I mean, it's been improving over the last six months. relative to the prior year, we see it stabilizing but not recovering from that pressure standpoint that we entered the year we anticipated the back half would be starting to see more recovery and a little more of the full price. And that might play out, but we're not going to expect it and we're planning for that pressure to continue. So you know, back half of the year guidance, you know, implies gross profit margins compressing 20 to 50 basis points to get to the full year guidance that are articulated. And that's significantly down from the first part of this year and the first quarter in particular. So, you know, all assured that the goal would be to, again, keep inventory moving and keep the customers, engaged through the period that they're in.
spk10: Dylan, I'll add to that because I think that there is an important distinction here. The frequency of events and promotions we're reducing. The issue becomes the customer is responding in terms of their purchases when we do run targeted promotions or, you know, a couple of our big events they're just spending more and purchasing more during those periods, thus driving our full price selling down. And so, you know, we're going to be balanced and targeted in the amount of offers that we put out there and the degree that we discount our products. But ultimately, when we do those things, you know, just what we're seeing is customers are just responding, you know, to a greater degree in purchasing more during those periods than not.
spk05: Got it.
spk02: And so I guess, you know, as you're kind of looking at negative margin here, operating margin, the swing factor looking at next year, presumably kind of recovering some full price selling on gross margin, but sort of holding that constant in the low 50 range. How should we think about the efficiencies or the STNA leverage opportunity on new distributions? Is there any way you can kind of quantify that as we look to next year?
spk12: Well, at this stage still, and it's probably not appropriate for me to even talk about next year, we'll provide that, the team will provide that on a fourth quarter call coming up. So, you know, but you can look into the back part of this year and then in our fourth quarter, when we anticipate, when we see just incremental sales growth, and it doesn't need to be much, leverage on SG&A is immediate. We expect leverage on SG&A in the fourth quarter and really in the back half of the year. So it doesn't take much. top line to start to see it flow through, which is kind of where we're at in the business model. Okay.
spk02: And then the new distribution, apologies, I forgot, allows for a bigger wholesale business. Do I have that right? How are you thinking about expansion of wholesale?
spk10: Yeah, well, it allows for a larger business in totality. That facility, the plan is to have it fulfill about 60% of our online and retail store inventory replenishment, about 60% of that by the end of Q3. And so, you know, the opportunity for us to just grow the business in general, whether it's a combination of our current retail and DTC businesses or bolting on a wholesale business And even, you know, as we've talked, you know, down the road, you know, the potential of an acquisition, that network not only has the capacity to do that, but it's going to do it at, you know, a highly cost-efficient manner.
spk06: Got it. Thank you very much, Chris. Thanks, Dylan.
spk04: This concludes our question and answer session, as well as the conference. Thank you for attending today's presentation. You may now disconnect.
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