Good morning, and welcome to the Duluth Holdings Inc Third Quarter 2023 Earnings Conference Call. All participants are in a listen only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions [Operator Instruction] 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 third 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 Mike Murphy, Vice President, Chief Accounting Officer and Interim 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'll turn the call over to Sam Sato, President and Chief Executive Officer. Sam?

Thank you for joining today's call. Reflecting on what has remained a dynamic consumer environment in which we continue to see customers gravitating to value. Our third quarter performance was hampered by lower traffic in both our direct and retail channels as well as an under penetrated position in spring/summer goods following strong unit sell-throughs during the second quarter. In addition to managing the business prudently on both the inventory and expense fronts, we strategically post a higher-than-planned level of events, combined with select pull-forward of fall/winter receipts enabling us to maintain high levels of in-store shopper conversion as well as improve our conversion and retention rates in our direct channel. To be clear, we are not satisfied with our performance, and we've made adjustments to improve the trend in the business for the final quarter of the fiscal year. I'm pleased to report that we've experienced a solid improvement in business trends over the Black Friday through Cyber Monday period, which gives us confidence. That tactical adjustments we are making are resonating with our customers. Let me outline at a high level the actions we're taking to improve our business performance. In the fourth quarter, we're introducing more new products than we ever have as well as pulling forward select items from our spring 2024 assortments. We're chasing and, in some cases, expediting freight for targeted best sellers to capitalize on these winning products throughout the holiday season. And we've added back global events and pulsed our Black Friday deals throughout November. Despite the challenging third quarter results, we registered notable merchandising wins highlighting that our brand and sub brands remain strong, and our product innovation engine is creating winning assortments. Key wins for the third quarter included continued strength in our garden landscaping and planting category, which now…

Thanks, Sam, and good morning. For the third quarter, we reported total net sales of $138.2 million, down 6.1% compared to $147.1 million last year. which brings our year-to-date sales decline to 2.5% versus last year. Our direct channel sales declined 4.4% as lower web visits were partially offset by increased conversion of 70 basis points. However, sales on mobile devices increased roughly 2% with even greater improvement in conversion up 80 basis points, indicating that our investments and continued focus on the mobile experience is paying off. Our retail channel sales were down 8.8%, driven by a store traffic decline of more than 6% compared to last year, coupled with a moderate decrease in shopper conversion. Total men's division sales decreased 7% during the quarter, while women's was down 3%. Women's momentum from the previous 3 quarters slowed but continued to grow as a percentage of our overall business as compared to the prior year. As Sam mentioned, the actions we are taking have resulted in improvements in business trends over Black Friday through Cyber Monday. We are pleased with our improved quarter-to-date sales trends, but we also recognize that we have many important selling days ahead of us leading up to Christmas. That said, we are lowering our guidance largely based on our Q3 results which I will provide more details on shortly. Our third quarter gross profit margin was 50.2% compared to 52.3% last year, and reflects a lower mix of full price sales this quarter versus last year, while gross profit dollars of $69.4 million declined 9.8% from last year. As mentioned last quarter, we started to see our year-over-year product gross margin decline stabilized at the end of Q2, and that remained consistent throughout Q3. However, as noted by Sam, we continue to see customers…

[Operator Instructions] And our first question will come from Janine Stichter of BTIG.

I wanted to ask about Black Friday and Cyber Monday specifically, understanding it was very strong Sam starts the holiday season. How do you think about extrapolating that into your go-forward outlook? Just knowing that, I think, for you and for the industry in general, we've seen consumer shopping more around promotions. And then I have a follow-up.

Yes, I mean, we're obviously pleased with the solid start to the holiday shopping period and saw a solid trend improvement in the business from Black Friday through Cyber Monday. Obviously, we continue to see the consumer sensitivity around price. And certainly, the Q3 results as we look at it by price bucket is a clear indicator of that. And so while the trend certainly improved, we're taking a slight tempered look to the remaining upcoming weeks, still a lot of business to do, and we're watching that closely. I still think that there's some consumer sensitivity and we're watching that closely. At the same time, as we continue to share while we've got to be promotional and in the case of Q3, we post events more frequently than we have historically. We're not going to chase bad sales, meaning we're not going to discount the product to the point where it's not providing both top line and flow through to the bottom line. And damaging the brand position. So while the trend changed over the course of Black Friday weekend, through Cyber Monday, it was during a highly promotional time. And so we're just being cautious in terms of extrapolating that throughout the rest of the quarter.

Great. And then I also wanted to ask around the inventory. It sounds like there's a fairly large bifurcation between some of the items that are really working some of the hero products. And then kind of the balance of the assortment. So how does that inform how you think about SKU intensity and bringing product to market going forward? Is there an opportunity to kind of maybe shrink the SKU intensity and invest more deeply behind some of these clear winners?

Yes, absolutely. So I mean it's a dynamic kind of fluid scenario. So we've got some hero products, key year-round goods that we're on pretty fast recovery. So we're writing orders on a regular basis and flowing those goods, whether it's Flex Fire Hose or some of our key under products. At the same time, we're looking at these opportunities of products and categories that we're starting to see greater growth, and we're working hard to not only ensure that we stay in stock at the right time, but that we're looking forward and exploiting those opportunities. I think what's interesting about some of the things we've got going right now is the continued innovation against franchise like Fire hose, Carpenter pant that that is coming in, then we identify new categories like our AKHG fitness line across women and men's. No-Yank has been a staple for us and the team worked hard to introduce a few new silhouettes and new fabrications. And so it's kind of we're looking at new opportunities within new categories that we aren't currently participating in as well as evolving, expanding kind of true blue categories and items that have really made dilute what we are today.

The next question comes from Jonathan Komp of Baird.

Sam, I just want to follow up on the topic of promotions and discounting and just understand the strategy. You highlighted clearance units down a lot, you're not intending to chase sales. But I think through yesterday, you had 40% off everything there's still more frequency of deals. Just could you maybe go a little more in depth of strategy there, why pursue those deals at all versus maybe a more profitable base of revenue if you didn't -- and then how should we think about the gross margin level you need going forward for this to be a healthy level of profitability to the total company?

Yes, sure. Thanks, Jonathan. Yes, I mean, it's a complex and kind of tricky scenario when you're balancing brand integrity with market competitiveness. And so the whole house, what we call whole house global events that we have, we're comping those and -- and actually, we're not adding a lot more of those. We are pulsing in certain item kind of promotions. And as I said, it's considerably more price promotional out there than it has been over the last couple of years. And so in order to remain competitive, yes, we're having to promote a bit more frequently. But as I said, the depth of our promotion in terms of the discount -- discounting is not significantly deeper, and that's where we're going to draw the line a bit. So yes, I mean, we're always thinking about how much is too much, how much is too little how do we ensure that we continue to drive sell-through brand awareness because all of those things have implications into the future. And certainly, as it relates to kind of mind share, could we do less promoting? Yes. I mean we always could. Does that necessarily improve or help us meet some of our other required measurements like sell-throughs and market share, no, we probably give some of that back margin rate, the rate itself might increase. But total profitability for the company, both near term and in the immediate kind of future would be hurt. So, I mean, it's tricky. And I know the basis of your question, Jonathan, you and I have talked about this a lot, and I think just know that we're internally talking about the balance of promotions versus regular price. The fact of the matter is when we look at our sales mix, as I shared in the prepared remarks, customers are just gravitating more greatly to value. And so when we do run these events, the sales numbers jump during those events and they're just -- they're choosing to purchase less during regular price periods. The great news is in all of our buckets, clearance included, although clearance is significantly down from a year ago, but all 3 of our buckets, regular price promotions and clearance, our margin rates are actually slightly flat to slightly up in all 3 buckets. And so in totality versus a year ago and even when we look back a couple of years ago, margin rates by bucket aren't that far off just the percentage of sales are being driven more by that promotional bucket right now than they are regular priced or clearance. So we're sensitized to it. We're trying to remain competitive, but at the same time, not jeopardize our brand position. But no, we also have to ensure that we're delivering sell-through so that it doesn't come back to bite us next quarter.

Just as a follow-up, is it right to think at some point in the future getting back to mid, maybe high 50s gross margin might be required to drive higher profitability for this business? Is that sort of a reasonable expectation? And is there a path to get there? Or if not, are there other paths to drive better profitability?

Yes, absolutely. I think the way you're thinking about it is right. And what I would point you to is as I mentioned, the enablers to our big dam blueprint, specifically logistics vis-a-vis Adairsville that not only -- that only benefits us from a consumer expectation perspective, but certainly from a speed and expense perspective, it significantly more efficient than our legacy fulfillment centers. The second part is our sourcing and product innovation initiative. Last call, we mentioned we onboarded several new members. We just hired a new VP of Sourcing and she's got unbelievable experience in the industry and [Indiscernible] not only a greater depth of experience and expertise, but she's going to really help us start to optimize the team that we're hiring to bring more innovation, more frequently, quicker and, quite frankly, with expansions in IMU. And so we're addressing how we structurally change the financial model of the organization from the top, meaning IMUs through the P&L on expenses like variable related to our fulfillment centers. And then of course, we've got a whole technology transformation road map that will help us make better, faster, more informed decisions that's more future-looking than it is kind of review looking. So yes, I think I think numerically, the way you're thinking about it is right, and I think that we've got a solid plan to deliver those things, and they're starting to come to fruition.

Okay. And then could you just maybe talk about the factors in the fourth quarter guidance. It looks like the revenue range is somewhat wide, could be down slightly to maybe up mid-single digits year-over-year. So just how are you thinking about the factors embedded in the near-term outlook?

Yes. So I'll start at the top line. The reguide really was just well, it's primarily driven by the actualization of the Q3 number. Q4, while we don't share quarterly numbers, what we had in our internal plans for the back half of the year, Q4 remains intact, and it's really the Q3 actualization. It does call for an improvement in trend from Q3 and year-to-date. And we remain optimistic and bullish in that regard for a couple of reasons. One is, as I mentioned in my prepared remarks, some of the things that our team has been working on more tactically to change the trend, including chasing in kind of hot sellers as well as fast-forwarding some new introductions into Q4. So things like I already mentioned it, but like AKHG fitness, a whole new category for us, the expansion of No-Yank Tanks, big category for us, and we believe bringing in the new spring products will get us some upside as well as -- I talked about fire hoses, HD and then our Double Flex denim program has really done well. And so we're chasing that in to take advantage of that during this big sales period. So -- so Q4 is largely intact. So that's part one. Part two is, again, while I don't want to lean too heavily on what we saw Black Friday through Cyber Monday, it was a solid enough business trend that it just affirms our confidence that Q4 is a deliverable quarter that -- then brings our year-end to within that range.

Just last one for me. I'll just ask just given some of the activity that looks almost more like liquidation online, is best made still part of the ongoing plan? And should we think acquisitions are off the table until the core business is stable for longer. Just any thoughts on those 2?

Yes. So yes. So a couple of things. Our intent is not for it to look like kind of a liquidation. In fact, we're being purposeful, as I said, in the frequency of our global events and then really offering kind of post deals I wouldn't say in reaction to the marketplace, but recognizing that the marketplace is significantly more price competitive and consumers are much more price sensitive than they have been in recent years. Best Made actually, we announced the sale of Best Made 3 weeks ago or something like that. And so in fact, the original founder we were talking with. And ultimately, he repurchased the brand from us. And the fact of the matter is, as we continue to work hard on growing the dilute business, AKHG is starting to get a lot of traction as well as our women's initiative. And so our focus was to get our product development and merchandising teams really narrowly focused on making those brands kind of the winners in the near term. And so this was an intentional act to just narrow the focus on those 2 brands. And then the last thing I would say relative to acquisitions is we're still in the kind of vetting mode. We're vetting different potential acquisitions. But as we've always talked, we're not going to stray too far from where we are. We're going to remain focused on Duluth and AKHG. If an opportunity presents itself, we'll look more deeply, but I'll tell you right now, we're in the crawl stage. We're not aggressively seeking out acquisitions as the next phase of growth. We think we've got some near-term opportunities with Duluth and AKHG.

The next question comes from Dylan Carden of William Blair.

Curious on the promotion, just following up with that. I mean, I don't know if you can answer this per se, but one thought would be that you've kind of trained your customer over time to sort of look for these rapid fire promotions? And the evidence of that potentially being that even if you pull back on promotions, the mix share still skews higher clearance, higher promo. Is that something that you think is a valid concern? Or is this sort of more a reflection of the environment for a value-seeking consumer?

Yes, I'd say a couple of things, Dylan. One is we are highly, highly sensitized to that. And that's part, as I mentioned in my answer to Jonathan, is internally, we talk about this balance, the balance of being competitive with the broader marketplace with brand positioning. And we have strategically, while maybe it doesn't appear that way. We've strategically shied away from more and deeper at the expense of driving greater top line. And we do that purposely because -- at the end of the day, that additional top line doesn't necessarily flow through. And importantly, it starts to, I think, weighed into this area of training the customer to think about Duluth as an off-price brand only. And so we're highly sensitized to that. I think, candidly, that as promotional as the marketplace is today and as sensitive to price and discretionary spend that the consumer is as well. That the level of promoting we're doing today is such that the brand is not being compromised longer term. And importantly, I think that's why we're putting so much energy into the service we provide consumers, whether it's click to doorbell speed or in our stores. Our metrics in the stores continue to be solid are measurable KPIs, whether it's conversion or units per transaction continue to be positive year-over-year. Stores continue to be cash flow positive and four-wall profitable in the mid-teens. And so we know that customers are coming to us. Secondarily, the investments we're making in product innovation and sourcing. That's the core of who Duluth is, and that's at the heart of our DNA. And so we're going to continue to invest in bringing really high-quality problem-solving products that are leading the marketplace, bring those to market. And we believe that the price value of the products we make our goods will withstand the test of time relative to price promoting.

Great. And then I'm kind of curious the drag from not having the inventory in spring summer goods in the front part of the quarter, was that -- was that simply just poor management on inventory? Or did you pull back too quickly? Was that weather related? Just kind of trying to understand, particularly if you can maybe even size the drag that you estimate that, that had?

Yes. So a couple of things I'll say there. Again, Dylan, pretty complex answer to what seems like a simple question. At a high level, I'll start with saying philosophically, we talked about this for a little while now. We're going to continue to reduce inventories and get our stock-to-sales ratios in line. I think our turns are slower than I want them to be. And obviously, there's all kinds of benefits that comes with faster turns, not least of which is greater profitability and cash flow, but also the expectations around sell-throughs and those types of things increase. And so at a high level, that's why the inventories are down, and they'll continue to be down as we move into the next couple of years. In terms of spring/summer goods or previous seasons carryover, it was largely based on greater sell-throughs during the season. So we typically have excess inventory that we carry over from season to season that will sell in the following season. And because of some of the price sensitivities that were happening and that shift we started to see into this promotional bucket, we were selling more units. So if you go back and look at our comments on the last couple of calls, unit sales were up. And so we're selling through more goods. And what ends up happening is the total sell-through for the season is just higher, which limits our carryover. So it's a little bit of a double-edged sword because in a perfect world, you'd want to sell everything at 100% at full price. And not have any markdowns into the next season. But simultaneously, it then forces you to be better planning in terms of your receipts for the following season's goods. And so one of the things we're starting to institute, as you've heard now a couple of fall seasons is we're starting to move or seasons. We're starting to move that next season's goods up earlier to start setting our floors earlier. So for instance, this fall, we started to receive goods in July, we typically will set up in late August, and we brought certain items in earlier. And I think that that's the right way to run the business, a little early receipts on the next season's goods and not rely on carryover of previous seasons products.

Great. And then final one for me. The new distribution capacity in Georgia, can you remind us as far as expanding out some of the wholesale that's not part of this initiative, right? That would come later?

Well, it is connected. So the capabilities of Adairsville allows us absolutely to expand into wholesale. The other component, though, is really about the work we're doing with product innovation and sourcing. So the ability for us to develop products on a faster time line with greater IMU efficiencies. That plays a role. And then there's an organizational requirement to really I think, optimize wholesale opportunity. And so we're building the parts for it and ultimately will come together, but all of these things we're doing are with the broader intention of wholesale acquisition expansion into more stores, as an example, all of the technological and logistical things and then product development initiatives all are with those types of considerations in mind.

So could you see wholesale that relationship expand into next year? Or is that too early to call?

Yes, I think that that's probably a bit early. Never say never. In fact, we are now testing with Costco. We see that as an opportunity to provide key items to a company that's got very similar has a number of similar customers to dilute, and it becomes a bit of a gateway item to broaden our customer base. The initial test we ran was in was in summer in a very small base, did really well. They've come back for this period right now. And then we're looking to expand with them as we go into next year. And their model requires a much less reliance on a organizational structure to support them. And so given the way we're testing with them, we think that there's an opportunity for us to continue to build our brand awareness and a business with a retailer that's got millions of customers, of which we see great overlap with Duluth.

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