Good day, and welcome to the Duluth Holdings First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded. And now, I'd 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 first quarter financial results. Our earnings release, which was issued this morning, is available on our Investor Relations Web site, 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 risk and uncertainties that could cause the 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, Nitsa, and thanks for joining today's call. We made tremendous progress on key strategic initiatives over the course of the first quarter, and I'm excited to share some of the details. We know that our customers demand well-designed products that are grounded in durability, functionality, and are solution-based for the intended end use. Our customers take on life with their own two hands, and embrace a can-do attitude in both work and play. To address our customers' various needs and attract new customers, we set out to create distinct positions for each of our sub-brands with product assortments that resonate and deliver against their expectations. I'm pleased to highlight, that during the first quarter, we introduced our new Duluth by Duluth Trading Company brand logo. The Duluth sub-brand is focused on the lifestyle of Americana workwear. The first quarter also marked the transition of our Alaskan Hardgear brand to AKHG, and we launched our women's collection in April. AKHG is focused on more technical products needed to support outdoor activities as well as the lifestyle of enjoying the outdoors. And importantly, our first layer business has undergone many updates. We've elevated our assortments through the creation of new, innovative products and intensified our focus on growing categories. Collectively, these updates are meaningful steps forward to position our overall Duluth Trading Company business under a common umbrella that will enable each sub-brand to serve our customers' desire for being active in their work and their recreation. I'll share, more shortly, how we see the evolution of our business and brand positioning to address the growing active lifestyle of our target customers. But first, I'll touch on our recent results. Today, we reported first quarter net sales of nearly $123 million, net income loss of $1.3 million, and earnings loss…

Thanks, Sam, and good morning. For the first quarter, we reported net sales $122.9 million, down 7.9% compared to $133.4 million last year and up 11.8% compared to the same period in 2020, a decrease in sales between this year and last was roughly $11 million. And was the contributing factor in our sales declining year-over-year. Our direct channel sales were down 12.1% from last year, while the retail channel was up 0.4%, driven largely by a 6% increase in average transaction value in the stores. As we shared on our last call, we anticipated softer sales in the first quarter due to the heavier clearance position we are in last year and continue transportation delays our new seasonal and core year around products. Because of these two factors, we focused much of business on selling at regular price and preserving some of traffic driving media spend until later in the quarter when inventory reached a better position and our new sub branded collections were enhanced. By April, our customers responded well to the new spring assortment, the new brand messaging, and better in-stock positions on core items. Customer traffic and conversion through both our store and digital channels improved in the back-half of the quarter. As Sam mentioned, total net sales for April increased high single digits, and the momentum has continued with strong customer demand through the Memorial Day weekend. During the quarter, average order value and sales per customer overall increased mid-single digits driven by the demand strength of our core offering and being strategically less promotional compared to last year. The higher customer sales productivity is combined with an improving trend on retaining customers who have shopped with us more than once, and were new buyers prior to last year. Buyers who renew and purchase primarily…

We'll now begin the question-and-answer session. [Operator Instructions] And the first question comes from Jonathan Komp with Baird. Please go ahead.

Yes, hi, good morning. Thank you. I wanted to start by following up on the brand realignment. And I think, Sam, you walked through pretty clearly the rationale. But I'm curious if you could share more on the consumer reception so far, and if the differences are being noticed, and any feedback you've gathered. And then as you look forward, sort of any changes in brand character or positioning or sort of the product approach as a result of the realignment that you see going forward?

Yes, thanks, Jonathan, appreciate the question. Yes, so at a high level, this was part of our initial work within the Big Dam Blueprint, and it was to create these really purposeful and distinct positions for each of the sub-brands. And it allows us, not only from a product development perspective to be really narrowly focused on all of the performance and benefit features in developing and designing the products, but then gives our brand marketing team the ability to really lean in heavily and capture the intended use of these products. So, at the start of our strategic work, that was one of our priorities, to create distinction and a unique position. Two, I will say that, yes, we've seen some pretty incredible response. And I would point you back to our prepared remarks around AKHG in particular. We've created some clear separation relative to what that represents in comparison to Duluth and Best Made. And really -- we saw it as we launched the women's piece, in April; it immediately went to a similar penetration point as women's has for the much larger Duluth brand. So, the combination of distinct positions from a product development and from a brand marketing perspective, I think, is serving us well. And importantly, is creating a clear understanding by our customers.

Great, that's really helpful perspective. And then maybe a follow-up on the full-year outlook, I know mentioned that Q1 exceeded the internal plans, you've maintained the outlook for the year. Understanding it's early in the year, but are you baking in any additional conservatism in your outlook for the balance of the year, just trying to understand your thinking and your confidence level after better-than-expected Q1 results?

Yes, so I'll just -- I'll answer quickly, and then I'll let Dave maybe provide a little bit more color. One of the things we were thinking about all along as we planned our receipt flow this year, and in part with supply chain constraints that we faced last year with -- our team took some really purposeful and intentional action, like scheduling earlier receipt dates to ensure that we accounted for these multiple weeks of delay. And so, I think that's starting to show in the receipt flow as we went through Q1, and expect that to be the case as we go through Q2, and then, importantly, through the buildup in Q3, and into the peak holiday season, in Q4. As a reminder, last year we were talking about coming out of Q3, how our inventories were now dipping into the mid-20% below 2020 levels. And that continued through Q4. So, part of our forecast and our planning for this year includes what we expect was -- or what we thought was projected was some demand we left on the table last Q3, and Q4 in particular, because of the lack of inventory.

Yes, that makes sense. And I guess when you look at April specifically, could you maybe further isolate some of the tailwinds that you saw, and maybe relate that to the discussion about some of the marketing reallocations and the strategies for the balance of the year, and whether or not you could carry forward some of the successes that it looks like you may have seen in April?

Yes, I think what has impressed me, since joining the company a year ago, Jonathan, is that the flexibility in our ability to target and increase or decrease purposeful ad spend. And so, this is unlike anything we've experienced in terms of supply chain and its impact on availability of inventory. And so, the great news is when inventory flow isn't what we need it to be, we could dial that back. And then as we start to see inventory flow in at a higher rate, we can dial that up pretty quickly. And part of that's because we made a strategic shift, over the last couple of years, to a more digital marketing strategy, which is much more flexible than the linear advertising vehicles we would use in the past, where you had to commit to contracts well in advance, and then you're locked in. So, our brand marketing team is doing an unbelievable job of pulling levers throughout the months and the weeks, quite frankly. And so, in the case of April, as inventories started to flow in, and especially things like the AKHG women's launch, that was initially planned to launch in March, and because the receipts weren't here, we pushed it out. And as soon as we saw that stuff start to hit our fulfillment centers, they ramped up their plans on really targeted marketing initiatives. And that drove a lot of business to both the stores and to our digital site.

Yes, Jonathan, I'll just add, balance of year is still a lot of business ahead of us. I mean, our first quarter only represents 16% or 17% of the total annual sales. So, quarter-to-date through Memorial Day weekend, where the business is up in the low single-digit range, and obviously needs to continue to accelerate to get to the back-half of the growth rates that we have. So, I think it's just early in the year still. And that's reflective of our guidance that we're reaffirming.

Great, that's helpful color. I'll pass it on. Thanks again.

Thanks, Jonathan.

The next question comes from Jim Duffy with Stifel. Please go ahead.

Thank you. Good morning.

Hi, Jim.

I wanted to ask about some comments you made in your response to the last question. I'm curious about the indications on return on incremental marketing spend. During the first quarter, you pulled back on some marketing. If you had the inventory to do so and set out to scale the business, do you have [high ROI] [Ph] initiatives you could invest behind that you believe would drive growth?

Yes, absolutely. As I said, as the inventory flows in against our planned launches or new collections, we're able to flex that marketing spend up or down depending on the choppiness of receipt flow. And so, today, we've got some unbelievable new products that we're launching, we're excited about. I'll give you a couple of examples. We've got a hunting capsule in partnership with Mossy Oak, which is this unbelievable brand that brought kind of this new age of camouflage to the market. We're excited about that; we'll ramp up advertising against that as it comes in. We've got -- I mentioned in my prepared remarks that bras, as a category within women's first layer is delivering some outsized growth. And so, we've got this whole new women's offer called [Line Tamer] [Ph], and its seamless line disguising first layer for her. And so, we've got a pretty good marketing campaign against that. And so, really as Dave mentioned in his prepared remarks, we're increasing our ad spend in Q2 because we're seeing the receipt flow of some of these new goods and new collections. And we'll continue to flex that as our receipts flow in. But we absolutely have some really incredible and exciting new products, new innovations in the pipeline that are coming; it's just working through the choppiness of the receipt flow.

Understood. And I want to dig in to another level of detail there. Is this established proof of concept with new customer acquisition efforts that you could use to go to customer file or is this simply compelling product that you're using to reengage the existing customer base?

Yes, I think it's a couple of things. One is as -- we've always had a rich treasure-trove of consumer data. And as we've mentioned over the last handful of calls, as we continue to invest in and stand-up our data insight and customer insight tools, we're gaining a lot of really good actual information. And, in fact, we recently hired a new Director of Customer Insight, who brings an unbelievable amount of experience. And has already shown us the way he can chop that data up and add really great perspective and where we should target our customer acquisition strategies. One of the things that he has shown us, and Dave mentioned it in his prepared remarks, is this difference between consumers that we acquire primarily through price, versus what we call conventional spenders or those that are coming to us, over time -- or have come to us because of the product needs that have. And over time, they are significantly more valuable to us because, not only in the size of their basket, but the frequency of their interaction with us. So, we're targeting look-alike customers through different types of channels largely through digital acquisition. And that's even making our ad spend that much more effective because we can narrow in and be selective on who it is we're trying to attract and retain.

That's great. Your full-price selling penetration is super encouraging. And I think this dimension of a shift of focus on the conventional buyer versus [the price to a purer buyer] [Ph] seems powerful. I'm curious, how does that change the addressable market and potential size of the revenue base, does that narrow the potential size of the revenue base but improve the structural margin opportunity for the business? How do you think about that part?

Yes, no, I don't think so. I think -- listen, I think whether you're in kind of inflationary times, like we are now or not, even in an expanding market, everybody's -- everyone considers price in -- when they make choice. But I think, ultimately, the size of the market for where we serve and the types of produce and price value, the durability, the built of our products is a large opportunity for us. And we're just not -- we're just scratching the surface in terms of market penetration.

Great. Thank you, guys.

Thanks, Jonathan. Oh, Jim, I'm sorry. Thanks, Jim.

The next question comes from Dylan Carden with William Blair. Please go ahead.

Thanks a lot. Kind of continuing some of this same vein, I guess kind of further up the P&L, you're flirting around sort of peak gross margin or underlying gross margin to kind of back out some of the artificial cost headwinds. And so, I'm curious, you're speaking a lot more towards full-price selling, being more efficient with your promotional cadence, which is something you've long talked about. Is there kind of a structural level of gross margin that sort of underpins the blueprint? And is there any consideration here from a mix shift standpoint for some of these other portfolio brands that's kind of imbedded in that kind of recession?

Yes, I'll start that, Dylan. The, I guess, foundational gross profit margin that we see can continue is certainly kind of in the mid-50s long-term. And so, there's room to continue to grow there that is driven by strategically more full-price, regular price with the appropriate mix of promotional activity. The big benefit that, hopefully, we will continue to deliver on is inventory levels are in control, and that prevents the clearance activity that we really had in the last two years. So, it's about managing that level of the -- that mix of the product that's going to support the consistent gross margin and gross profit margin delivery on us. But in terms of the product categories and mix shift, we strive all of these sub-brands to be at a comparable gross margin when we're selling to the end customer, which is what we do. We look for that opportunity on the value of the cost, and the price competitiveness to have a consistent initial markup and kind of gross margin on -- after selling. So, we don't see a big impact due to the sub-brands growing and having that kind of alter our gross profit margin opportunity.

But is -- as per -- I guess I'm getting at is sort of mid-50s is where you've been, looking back at least in pre-pandemic history, maybe a little bit of both, you're sort of flirting around high-50s. Is it crazy to think that you're growing up a high-50 kind of underlying margin from here is what you're saying that sort of the core business structurally still runs at kind of that mid-50s level?

Yes, I mean and when I, I guess, talk about high 50s, our product margins sell at that kind of level. And then we have other costs that are baked into our gross profit margin. So, yes, I think that that's definitely achievable to maintain on a kind of rolling 12-month basis.

Okay. And then, across the brands, I guess where are you, Duluth core, Duluth legacy versus sort of the combined portfolio brand from a revenue penetration standpoint? And then the opportunity to cross-sell amongst those brands, are you kind of early days, are you exploring some of that opportunity? I know the customer profiles are going to be different, but there's got to be some overlap, I'm just kind of curious if there's any commentary there?

Yes, so just at a high level, Duluth or, say AKHG and Best Made represent just under 10% of the business, with Duluth being the balance. And our plan is to continue to grow AKHG and Best Made at a much faster rate than we are Duluth, to have that be a larger share of the percentage as we move forward. In terms of crossover, as I was saying earlier to Jonathan, we've set out to work really hard to create these distinct positions for end use intended, and geared for alike consumer. So, we're working hard from an assortment perspective not to have -- intentionally, not to have a lot of crossover products because it's end-use focus. And so, we believe that that allows us to build the basket size because the customers aren't making a choice between a flannel shirt in Duluth versus a flannel shirt in AKHG, that they are, in fact, buying them for their different needs. And we're actually seeing some of that happen in terms of average order value in particular.

Sorry. So, that would mean that there is high cost over potential, right, because if I am buying a flannel shirt for one use case and I am buying a rain jacket for another, my total basket is the combination of both of those and not cannibalize each other, right?

That's correct. Not cannibalizing each other.

And so, you are actively out there kind of marketing to those sorts of distinct customers that might be a customer of one brand and now another, is that sort of something that's yet to come?

Yes, distinct end use is first and foremost, similar customer. But as we learn more about different consumers and how they are engaging with us, there is opportunities for us to market, for instance, some of that's buying primarily AKHG to market some potential consideration items within Duluth or Best Made.

All right, okay. And I am still -- I know we talked about it lot on the call. I am still little bit lost. So, the pulling back on marketing when you didn't have the inventory makes all the sense in the world to me. But yet marketing actually de-levered if I understood it right. And so, I am just curious and it sounds did I hear you right? You have gotten rid some of the catalog as well. I am just kind of try to understand the go-forward outlook for marketing sort of rest around or maintain sort of low double digit percent of sales level?

Yes, so two things there. One is over the last couple of years we've been pulling back on catalog. So, we're investing in catalog. It's still a great brand building piece for us. And importantly, as we re-brand it Duluth and repositioned AKHG gives us an opportunity to really do it across genders. We're doing it over to key timeframes like Father's Day for instance. Our Father's Day catalog is hitting this week. So, we'll take those key moments to tell those family brand and full family stores. In terms of the de-leverage, part of it is -- and maybe we just have to explain it a bit better, we've got working media and nonworking. Nonworking is really creative brand building. So, for instance, as we launched women's AKHG and the repositioning of Duluth by Duluth Trading Company, we spent money in creating brand messaging and brand positioning marketing versus targeted commerce driven marketing.

Got you. That makes more sense. And so, -- and ultimately kind of resting level of ad spend should be kind of high-single low-double. I know I guess maybe you probably won't commit to that right now, but just out of curiosity and if I can get you too.

Historically, it's kind of been this low double digit range. And I am not comfortable in saying that today we are probably in the range of where we will be as we move forward somewhere in that low double digit range.

Very good. Thanks guys for taking all the questions. Nice work.

Thanks, Bill. Appreciate it.

This concludes our question-and-answer session, which also concludes today's conference call. Thank you very much for attending today's presentation. And you may now disconnect.