Good morning and welcome to the Duluth Holdings Incorporated. Fourth Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nitza McKee. Please go ahead.

Thank you, and welcome to today's call to discuss Duluth Trading's fourth 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 am here today with Sam Sato, President and Chief Executive Officer; and Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks and then we will open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified by the use of words such as estimate, anticipate, expect, and similar phrases. Forward-looking statements by their nature, involve estimates, projections, goals, forecasts, and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties include, but are not limited to those that are described in our most recent annual report on Form 10-K and other SEC filings as applicable. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. And with that, I will turn the call over to Sam Sato, President and Chief Executive Officer. Sam?

Thank you and good morning. I'm excited to share our results for our fourth quarter, recap our performance for the year. In 2021, we delivered record results across many performance metrics including sales of $699 million, adjusted EBITDA of $77 million, earnings per share of $0.90 and free cash flow of nearly $82 million. Importantly, we ended the fiscal year in a solid financial position, which gives us confidence to continue to invest in our Big Dam Blueprint. Anchored on our Big Dam Blueprint, 2021 was a year of evolution, as we embarked on a journey to position our company to better compete and enable long-term growth. Our Big Dam Blueprint that we outlined on prior calls focuses our attention on the shifts we are making to address sizable market growth opportunities for Duluth. Our results in 2021 highlight the progress we've made on seizing market growth opportunities, while also highlighting where we can make even greater gains. Before I expand on the performance highlights, I'd like to share how we're thinking about the business and responding to conditions that are shifting faster than they ever have in the past. Our company's mission has long been grounded in the belief that there's always a better way. Today's consumer sets a high bar for what they expect in apparel and gear that enables them to take on life with their own two hands to be more self-reliant and for how they choose to engage with brands. To that end, I'll touch on the progress we're making to know our customers both new and existing better, leverage our omnichannel model to meet our customers, where, when and how they want to engage with us, aligning our family of brands to address customers' evolving lifestyles and activities, invest in areas that will allow…

Thanks, Sam, and good morning. I'll begin this morning with a brief overview of our fiscal year results, then I'll cover our fourth quarter performance and conclude with commentary on our outlook and guidance for 2022. As Sam mentioned in his comments, the Duluth team delivered outstanding results for the year, and made the necessary adjustments to maintain healthy brand growth in the face of a fluid environment. As customers shifted much of their business back into our stores, our retail channel realized significant growth over 2020 with a 46% increase. While our direct channel contracted 4.9% from the prior year's record 32% increase. As a result, our mix between channels is now 63% direct and 37% retail, compared to two years ago, when direct was 57% and retail was 43%. This rebalancing of sales between channels confirms that there has been some permanent adoption and comfort with customers shopping online with much of it spurred by the pandemic. This also reaffirms Sam's comments regarding our strategic shift to being digitally-led and focusing the majority of our investments to driving long-term growth in our direct channel. Net sales for 2021 were $698.6 million, up 9.4% compared to $638.8 million last year and up 13.5% compared to 2019. While the sales results are in line with our original plans for the year, we are on track to greatly exceed those plans, if not for the supply chain disruptions that left inventory gaps and unfulfilled customer demand. We estimate that roughly $15 million to $20 million of demand exceeded our supply in the fourth quarter alone, as inventory levels were running below last year by as much as 25%. Although inventory flow remains slower than normal, which we expect will impact sales in the first half of 2022, we are beginning to…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jonathan Komp with Robert W. Baird. Please go ahead.

Yes. Hi. Good morning. Thank you. I want to first ask about the direct business. It sounded like the traffic was up in the fourth quarter, but the sales obviously were down on a one-year basis. So just I want to understand a little bit more of what drove that disconnect? And how long you expect that to continue given the inventory situation? And then when you look at direct for the full year it sounds like Q1 will be starting soft. So maybe just any more color on the trajectory and what supports your confidence in the growth after the first quarter?

Yes. Hi, Jonathan. It's Sam. Thanks for that question. So as we said fourth quarter January in particular largely impacted by our clearance inventory position. 2020 had a bit more clearance -- quite a bit more clearance and we took some pretty aggressive price action there. And so that was the biggest miss for us in terms of sales. And then similarly as we'll share quarter-to-date new receipts for Q4 fall/winter were delayed. And so as we got through a really healthy November and partial December selling we sold down into our new receipts and left us in a much leaner inventory of regular priced goods. Having said that the direct business in terms of consumer demand, consumer traffic really healthy. We ended the year up 9.5%, 13.5% on a two-year stack. Our margins continue to expand because of our disciplined approach to pricing. We could have made the decision in Q4 to promotional price some of our regular-priced goods because we are missing so much clearance and we're under pressure on the top-line. But we made a strategic decision earlier in the year that we are going to stay the course in terms of positioning ourselves from a regular price perspective and really focus our efforts around brand health consumer engagement innovative products that we're going to bring to market with great price value relationships and not go into a heavily promotional tactics to drive the top-line.

Yes, that's really helpful. And then maybe switching to margin. I know Dave last quarter you gave us some guide rails to think about gross margin and SG&A for 2022. And it looks like there's some moving parts there on both of those lines. So could you maybe just highlight both on gross margin which looks a little bit lower, but also G&A which looks like less deleverage versus the prior view maybe what moving parts you see there?

Yes. Sure, John. Gross profit margin given the gains that we have been picking up and really the focus on selling full price versus as much promotional clearance we have is what drove some of the significant increase in this past fourth quarter and what we're seeing in the first quarter. But the one transitory item that's weighing on that is the freight cost that we had from expediting goods in and that's in the neighborhood of $4 million that we'll absorb in the first half of this year. So absent that we would certainly see more -- gross profit margin flow-through in 2022. But as it is we're looking at 50 basis points on a full year and that's with healthy selling through margins as well. SG&A we know we've got some annualization of costs that will lap this first half of the year and that's creating some deleverage. But as we talked about some of the investments those will layer in over the course of 2022 and see slight deleverage. Our commitment though is, operating margin expansion and that's what the guidance suggests. So that gives you some color.

Yes. Great. And maybe just one more bigger picture question. When you think about the 2025 targets, they do require some acceleration in the revenue growth and in the rate of margin expansion compared to what you're guiding for in 2022. So could you maybe just highlight your broader thinking on sort of how 2022 fits within the next three to four-year targets. And at this stage, are you more confident in the sales target or in the margin target, or how should we think about balancing growth and showing leverage over time?

Yes. Jonathan, I'll talk a little bit at a high level from a strategic perspective and then I'll turn it over to Dave, to address some of those financial questions. Yes, when we think about our road map to $1 billion it's not -- as you know it's not going to be linear. There's going to be some ups and downs and some growth that increases over the years largely driven by some of the investments we're making in three key areas. So the first being, our continued commitment and investment in our product development group. I talked about it in the prepared remarks we've got internal folks that are doing a great job. That's their focus. They're incredible and we don't believe that that should be outsourced. And as we talk about a lot, innovation is part of our secret sauce and we're going to continue to invest in product development, material sourcing, all of those types of things. The second is the investment that we're making beginning this year, with our logistics network and really excited about this additional fulfillment center in Georgia. It will be fully automated which obviously, increases not only speed and accuracy but is much more cost efficient. And from a capacity perspective gives us significantly more room to grow, as we move forward and that creates some pretty incredible value for us. And then the third component, that I mentioned in my prepared remarks, was our investment in ERP and just continuing to stay on top of some technology, some systems, some of the things we're doing around consumer insight and data analytics. All of those things will help us make better more informed and better decisions as we move forward, which we believe will continue to drive not only the top line but will continue to drive improved inventory decisions that translate to greater margins and greater inventory turns.

Yes. And Jon, I'll just add, between top line and margin growth. Obviously, they're both important to us. There are factors that will impact the top line that might be out of our control that we're experiencing with supply chain today but we've got maneuverability below that to continue to drive the operating margin. So I mean, I think our confidence is balanced between both of those and picking up 300 basis points of operating profit margin between now and then, is going to come probably one-third of it from gross profit margin expansion and two-thirds from SG&A leverage that will gain the efficiencies from the investments we're making today. So high level of confidence that it's achievable and that's our commitment.

Yes, that’s very helpful. Thank you and best of luck.

Thanks, Jonathan.

Thank you.

This concludes our question-and-answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.