Good morning and welcome to the Duluth Holdings, Inc. Second Quarter 2022 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 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 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 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, Nitza and thank you for joining today's call. We're excited to share progress and updates on our key strategic initiatives as we move into the back half of the year and prepare for the fall winter season. As you recall from last quarter's earnings call, we recently updated our brand positioning by introducing The Duluth by Duluth Trading, and the AKHG sub brands to our brand platform. We also launched our AKHG women's collection to fill the open space for innovative and technical outdoor clothing designed for women. The brand positioning directly addresses our customers desire for apparel and gear that meet their active work and outdoor recreational activities while staying true to the Duluth Trading heritage of standing for quality, durability, and problem solving functionality. The customer response to our brand positioning has been strong and confirms our view of long-term growth potential embedded in our strategic plans. In particular, we see the women's apparel categories across our sub brands having outsized expansion opportunities. During the second quarter women's grew nearly 4% over last year and represented a nearly 30% increase from the pre pandemic period in 2019. The introduction of the women's AKHG collection was a key driver of this growth in Q2 but also contributing to the multi-year expansion is our core Duluth Garden and Forgers [ph] work wear collections. By focusing on both fit and function, our broad size inclusive options and trusted technical designs continue to build loyal brand consumers. Moving to a more balanced assortment across men's and women's, expands our addressable market potential and leverages the technical and logistics investments we're making to support product offerings that appeal to a broader customer base. I'll share more regarding recent product launches and customer insights informing our growth strategy shortly but first, I'd…

Thanks, Sam and good morning. For the second quarter we reported net sales of 141.5 million down 5.1% compared to 149.1 million last year, and up 3% compared to the same period in 2020. The decrease in clearance sales between this year and last was roughly $13 million and was the contributing factor in our sales decline year-over-year. Our direct channel sales were up 0.1% from last year, while the retail channel was down 12% driven by a decline in store traffic, partially offset by an improvement in store conversion. As we shared on our last call, better inventory balances combined with our new brand positioning and marketing support drove sales growth in April and during the first six weeks of Q2. However, a slowdown leading into the Father's Day selling period impacted both channels. Our direct channel recovered in July with sales growth of mid-single-digits, driven by adjustments made in our digital advertising mix, and continued focus on the new brand messaging. Additionally, direct sales and store markets outperformed non-store markets with strength coming from both established markets in the Midwest, and newer markets in the Southeast and Mountain States. As Sam mentioned, our other strategic objective is to adjust our new customer prospecting to attract conventional spend buyers versus purely price driven buyers. Early signs of progress here show a mid-single-digit percent increase in the second quarter in conventional spend buyers. As we continue to strategically utilize deeper customer analytics to inform our media and messaging strategies we expect our active buyer file will continue to shift slightly younger and will be reflective of customers whose long-term value is tied to our brand propositions. Our second quarter gross profit margin was 53.4% compared to 54.6% last year. This represents a 7.1% decline in gross profit dollars from 81.4…

Thank you. [Operator Instructions]. And the first question will be from Jonathan Komp from Robert Baird. Please go ahead.

Yeah, hi, thank you. Good morning. I want to just start on the changes to the guidance for the year, could you may just break out how you've thought about roughly that $50 million reduction in the revenue guidance for the year and as we think about the plans you just laid for the second half and the sequential acceleration in both of your channels, can you just share more how you're thinking about modeling that in light of some of the uncertainties out there?

Yeah, hi, Jon, this is Dave. Certainly the back half of the year, as we look at it always had a significant opportunity from year-over-year standpoint, given the inventory shortages that we had last year. So despite some of the kind of macro headwinds that that we know we're facing, we really feel like we're in a position with the inventory to recapture lost sales that were missed last year and some of it was in a good part of Q3, where we know we didn't have an inventory, and we dialed down marketing in response to that, and then continued with a greater delay in inventory in Q4. So those are -- that's the primary driver for saying some of the inflection on sales, growth rates heading into the back half of the year. I'll say, quarter-to-date, we're trending similar to the overall Q2, down slightly in aggregate, low single digits, but direct is outperforming retail. And retail has improved relative to where it was at the end of -- at the end of the second quarter. So momentum is improving, and the inventory position is really what's going to be a big driver of that sales growth in addition to putting into place sort of the marketing tactics that we held off last year in doing.

Okay. And just as a follow up, can you maybe share what you're seeing in terms of promotions across the industry, and just how you think about competitive promotional intensity impacting your business, especially as you shift your focus to more high value customers?

You know, I mean, we -- we're pretty happy with our gross margin performance. And despite the write off that we talked about in the second quarter, our product margins are holding pretty, pretty strong. Especially think about, year-to-date you take out some of the isolated items were up significantly year-over-year on gross margins on product selling. So, while we're seeing some customers shift to more promotional periods, we're holding our margin rates fairly healthy on that front. Average transaction value in the retail channel is strong and holding where we've been at. Conversion rates continue to be better than in prior years. And, we're just in a better in stock position as well, throughout this period of time now that the supply chain is released. And I say on top of that, we're excited about the women's collections that are lot a momentum with the launch of AKHG and the base layer categories. So I think, competitively we're feeling like we're in a good spot.

Got it. And just last one from me, bigger picture question on the margin. The adjusted EBITDA margin for this year, I think now is guided a little bit below 2021. And so just thinking more broadly longer term, I know you have your long-term targets for 14% to 15%, adjusted EBITDA margin, are those still viable and realistic in this environment or are there changes in the degree of spending or the intensity of some of the investments or other efficiencies, you see that still keep those as relevant targets out to 2025? Thank you.

Yes, Jon. I mean, we're still seeing a high receptiveness for our products and selling performance. So, I don't think that holds down some of our longer term goals at this point. We'll see how the back half of the year goes and we'll refresh our long-term goals when we come out of this back half of this year and share our perspective there. But we don't see any underlying signs of not being able to achieve those operating margins in that timeframe.

Okay, fair enough. Thanks again.

And the next question will be from Jim Duffy from Stifel. Please go ahead.

Thank you. Good morning. Guys, because [Multiple Speakers] good to speak with you. Guys because so much of the earnings power is in the fourth quarter, there's going to be a lot of focus on trajectory momentum and the assumptions in the guide. I wanted to dig in some about just trends across the quarter and into the 3Q, you spoke about things swirling around Father's Day, was that true for both retail and direct to consumer or was that more of a retail comment?

Yeah, Jim that that was really more of a retail foot traffic situation where direct was coming out of the first quarter much stronger and pretty healthy. Direct, I think also was impacted a bit by the slowdown but relative to the trend it was on it was much better. So it's foot traffic to the stores is where we saw the slowdown materialize the most.

Presumably maybe some link with gas prices there. I'm curious as gas prices came down into the third quarter, did you see any improvement in traffic trends in the retail locations?

Yeah, we have seen since August and through this past month, the trend improved from what it was on whether that was gas prices or not. But when we do look at our customers, those that live further away from the stores is where the impact was most and those that are closer to the stores had a better performance. So I think that's probably a connection to possibly driving a gas prices.

Okay. And then the guide for the second half, it seems to improve -- excuse me, imply improving retail productivity in 3Q and 4Q. And it sounds like much of that is your belief that you're better in stock and in a better inventory position and that should help conversion. What's assumed for traffic in this?

Well, the assumption is that we'd still be down slightly to last year. But we're talking mid-single-digits versus the mid-teens that it was in the second quarter. And so, continuing at the pace that we're now on right now where retail foot traffic is down, again mid to high single digits instead of double digits. And that's what we're going to assume is going to continue through the back half of the year.

And then from a technical standpoint guys, should store traffic remain challenged or be more difficult than you'd anticipated, what's the philosophy around promotion, do you see promotion as a tool to drive traffic or given your focus on acquiring consumers at full price, is that something you hope to avoid?

Yeah, I mean, Jim at a high level, we want clearance and promotions really to be just a necessary evil, so to speak and continue to drive greater regular price business. And importantly, drive engagement through our highest value, most loyal consumers. And so while we're watching carefully the competitive landscape, we're watching some of the macroeconomic headwinds, like gas prices. We're also going to make sure that we're prudently managing our costs, but also ensuring that we're making the right pricing decisions to help our consumers, but also not compromise our longer-term brand position. And so as I said in my prepared remarks, the consumer purchasing behavior has shifted a bit more heavily towards our promotional timeframes. But, when you do the math, and you look at the reduction of clearance sales at those really low margins, our gross product margins are remaining pretty healthy, and near flat for the quarter. And we expect that it'll be similar as we get through the back half of the year. So, we're going to be really thoughtful and purposeful about our pricing and promotional strategy, more focused around the long-term than any kind of near-term benefits that we may get from just taking severe price actions.

Understood. I'll leave it at that. Thank you, guys.

Thanks, Jim.

Thank you. And the next question is Dylan Carden with William Blair. Please go ahead.

Thanks a lot. Just kind of continuing on that same vein of sort of the outlook here and I agree with Jim, that's kind of the crux of this. The deleverage or the reduction of 3 million in marketing spend in the fourth quarter, I'm just trying to kind of track that with having the inventory back in stock and having pulled back in marketing last year, I guess what am I missing it would stand to reason then that you would increase the dollar amount, I guess, what's the nuance in that outlook?

Yeah, some of that is really just the shift from the amount of dollars we had allocated last year in response to the inventory delays. So we are increasing our marketing in Q3 knowing that we were in a better position heading into the back half of the year. And so the reduction in Q4 is really just a shift. The minor decline is coming out of some of the TV, national brand awareness, areas of advertising that's not as efficient in the short-term. What is efficient in the short-term is the digital spend and that's where we are increasing quite a bit in both quarters. So digital, social, and paid search are where we're seeing the most near-term traction in driving traffic and sales. And so that's -- so it's more of a mix opportunity in our overall spend to get to those sales.

Got you. And then just kind of best way to ask this question, but is having the inventory enough here. I mean, it seems like we're kind of almost in a similar position that we were in coming into the second quarter where there was sort of anticipation of acceleration sales predicated on having certain inventory backed up by marketing, and I get all the enhancements to market and I agree with them. But is the guidance now reflective of simply just having core basic items that you didn't have last year and kind of that customer you know is going to show up or is there a certain amount of kind of recovery still necessary in the broader economy to kind of hit the new targets, does that make sense?

Yeah, Dylan this is Sam. I would say a couple of things. One is, when you look at our year-over-year comps, last year as we analyzed our business, we were pretty short on a big chunk of our core products, and that represents over half of our business. And so the fact that we are going to be or are and will continue to be in a much better in stock position, relative to our needs and certainly when you look at it year-over-year, that absolutely gives us greater confidence in the back half of the year. We really try not to build much into the improvements in the macro conditions. It's so uncertain and so choppy that it just -- it wouldn't be prudent of us to do that. And so, we really believe that that combination of being in really good stock in our year round goods coupled with the early reads we're getting on new products for fall in some big categories for us, like flannels as an example. And then the continued escalation of our women's business continues to give us confidence that the back half we've got some opportunity for some expansion there relative to not only our current trends, but an equally important relative to the year-over-year comparisons.

Okay. And then finally, just in closing any sort of update on how wholesale is performing in this environment?

Yeah, well it is specifically Tractor Supply, our results there we continue to see positive momentum. In fact, we're in the process now of expanding our test to an additional 70 stores ahead of the peak holiday season. So we'll now be in 180 stores and then online. We recently partnered with them on an offer through their Loyalty Club Membership and that resulted in 1000s of new buck naked customers from Tractor Supply. So, we continue to work closely with them. They've been great partners, and continue to look forward to expanding that business.

And is that the customer -- how does that customer match up with that kind of core customer you're kind of speaking to -- speaking with -- talking to speaking with directly through some of these new engagement tactics. Is that a more, I guess, agricultural working class customers that line up pretty closely with who you are trying to get on the other side of the retail business?

Yeah, I think at a high level lines up really well with us. It's a segment of that consumer. So to your point around this agricultural farming industry, that's only a subset of the more high level consumer we're focused on. But certainly, within demographic, socio geographic, economic standings and whatnot it fits really nicely within where Duluth continues to target our engagement and customer journey strategy.

Very good, awesome. Thanks, guys.

Thank you

Ladies and gentlemen this concludes our question-and-answer session and thus concludes Duluth Holdings second quarter 2022 conference call. Thank you very much for joining today's presentation. You may now disconnect. Take care.