DULUTH HOLDINGS INC. Q3 FY2024 earnings call

Key Points

• Third quarter performance didn't meet expectations due to promotional environment and warm weather, resulting in 8.1% net sales decline. Average order value grew and digital traffic increased, but not enough to offset transaction contraction.
• Inventory levels were higher than planned, but top-line trends improved leading into Black Friday week. Committed to managing inventory prudently for holiday season.
• Big Dam Blueprint initiatives on track: Sourcing and product innovation led to 200 basis points of gross margin expansion. Fulfillment center network optimization saw Adairsville processing more units with reduced click-to-delivery time and cost-per-unit benefits. Channel strategy focused on mobile-first (71% of visits and 57% of sales via mobile) and retail stores (critical in omnichannel, with two-thirds of new consumers preferring in-store).
• Product innovations: Women's had growth in First Clear, AKHG, and Heirloom Garden. Men's had strength in dry-on-the-fly technology, Souped-Up Flex collection, and new outerwear with solar ball insulation. Marketing efforts included new ad agency, GMA feature, college football playoff presence, and Yellowstone partnership.

In the third quarter, net sales were $127.1 million, a decline of 8.1%. Gross margin expanded 210 basis points to 52.3%. Women's business declined 4%, but Women's First Clear was up 22%, AKHG up 6%, and the Heirloom Garden collection was up nearly 70%. Men's business declined 10%, primarily due to colder weather categories, but dry-on-the-fly technology and the Souped-Up Flex collection resonated well. Revenue contribution percentages weren't explicitly stated in absolute terms but the segments' performances were detailed as above.

Guidance

• Reaffirmed full-year net sales guidance of $640 million, including 60 basis points from COSCO order and 150 basis points from 53rd week.
• Projected full-year gross margin reduction of approximately 125 basis points due to higher promotional activity and commitment to clear seasonal inventory.
• SG&A, excluding sales tax contingency, expected to deleverage by ~80 basis points, with savings from fulfillment center optimization starting in Q4.
• Capital expenditures on track to be reduced to ~$23 million, with liquidity expected to be over $200 million at year-end with no debt.

Risks

• Highly promotional environment which impacted sales.
• Seasonably warm weather affecting sales of fall-winter goods.
• Inventory management challenges due to higher-than-planned inventory levels.
• Competition in the retail market which could impact market share and sales.

Q: You mentioned 25% of the fleet comes due by '26. Do you have a sense of what falls under your new threshold as far as sort of the -- even if it's a range, the magnitude of closures from here?

A: We've got about 25% that come due. We're recalibrating hurdle rates for profitability and assessing stores store by store as renewal dates approach, with plans to either renew, close, or relocate.

Q: What's sort of the primary driver to get you back above the line from an SG&A perspective?

A: Progress on Big Dam Blueprint initiatives, like product development and sourcing leading to gross margin expansion, logistics strategy with Adairsville showing cost benefits, and CapEx reduced which helps with depreciation in SG&A. Also, structural changes in fulfillment center network and store portfolio optimization.

Q: The cool weather gear that you couldn't sell in September October, is any of that, can you pack any of that away or do you have to kind of clearance it by year-end?

A: Inventory scenario has three buckets: in-transit, planned early receipt of core goods, and fall/winter goods not sold due to weather. Seasonal items unique to this season will be marked down and sold through Q4. Core seasonal products like black down puffer jackets will be packed away as they are a small amount and won't impact clearance levels moving into next year.