Good morning, and welcome to the Duluth Holdings Inc Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be 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 and full year 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 Heena Agrawal, Senior Vice President and 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. Before I share some of the details of our business performance and progress on key strategic initiatives, I'd like to first introduce Heena, and welcome her to the Duluth family. Heena is joining us as our Senior Vice President and Chief Financial Officer. And with more than 20 years of finance and leadership expertise, Heena brings a breadth of experience across different facets of global finance accounting and mergers and acquisitions. Heena was recently with Contour brands holding the position of Global Wrangler and Global Contour Supply Chain, Chief Financial Officer. We're thrilled to have attracted such a seasoned executive to fill the important Chief Financial Officer position at such a pivotal time for Duluth's trading. Heena's extensive experience and strong finance and leadership acumen will play a critical role in the evolution of Duluth's long-range plans as we remain steadfast on executing the pillars of our Big Dam Blueprint. As a brief review of our fourth quarter performance, net sales increased approximately 2%. The quarter was highlighted by growth in both the Duluth and AKHG brands driven by strong outperformance in our women's business, which registered year-over-year growth of 12%. We were particularly pleased with the continued momentum in our AKHG women's business posting stellar year-over-year quarter growth of more than 20%. Product performance highlights in our women's business included positive momentum in our newest Hero product, the Heirloom Gardening bid in which we introduced align version, making it suitable for year-round wear. Flannel and bras also played a significant role in our fourth quarter growth with both categories up strong double digits. In flannels, our improved in-stock position benefited sales during the peak giving period. In bras, the success we are seeing is a testament to our unique product innovation and growing…

Thanks, Sam, and good morning. First, I'd like to express how thrilled I am to have joined the Duluth Trading family. In just shy of four weeks in my new role as CFO, I have had the pleasure of meeting with our Board of Directors and the entire leadership team. I visited several stores and toured our fulfillment centers in Adairsville and Belleville. I'm impressed by the strength of our brands, consumer loyalty, innovative product design, engaging storytelling and the strategic choice to invest in infrastructure to capitalize on growth opportunities. I look forward to partnering with Sam and the entire leadership team as we further pursue our growth initiatives. I firmly believe Duluth's trading is uniquely positioned to expand its reach, and I am excited to leverage my experience to drive our next phase of profitable growth. Let me begin with a review of our full year 2023 and Q4 financial results. Today, we reported full year 2023 net sales of $646.7 million, adjusted EBITDA of $33.4 million and EPS of negative $0.28. Our Q4 reported results were net sales of $245.6 million, adjusted EBITDA of $21.1 million and EPS of $0.21. Starting with the top line. For the full year 2023, net sales were $646.7 million, down 1%. In Q4, we saw a trend reversal from prior quarters as net sales grew 1.6% to $245.6 million, powered by acceleration in women's and AKHG. Women's business grew double digits across both Duluth and AKHG brands, driven by flannels, intimates, fitness and garden collection. The men's apparel business reversed trend from prior quarters and was flat to last year, with growth in AKHG and growth in core Duluth categories of first layer, bottoms and woven tops, offset by declines in cold weather categories of outerwear, sweater and footwear impacted by…

[Operator Instructions] Our first question will come from Janine Stichter of BTIG. Please go ahead.

Good morning, and welcome, Heena. I want to ask a bit about the promotional strategy. If we think about the past few quarters, it's been the fact that consumers are shopping more around the promotions than they have in the past that's in pressuring gross margins. So as you think about the gross margin expanding 200 basis points next year, is that entirely due to the sourcing initiatives? I'm curious what you're assuming for planned promotions and then the consumer shopping behavior around those promotions.

Yes. Janine, so maybe I'll just -- I'll answer at a top level and then I know Heena has got some comments. We expect there to be ongoing consumer headwinds. And last year was heavily promotional, and we anticipate something similar this year. Having said that, a lot of the strategic initiatives we've put in place specifically around product development and sourcing. We believe will start to show benefits in this coming year, beginning with Q1, as Heena stated, gross margin improvement of 200 basis points is contemplated in our guidance over the course of the year, but we think that there's ongoing upside. And so we're going to remain balanced in our approach to pricing and competitiveness with brand integrity and really rely more on our product development strategy to bring more newness more frequently. And as I said in my prepared remarks, we delivered more newness than ever before in the pipeline as we go through Q4 looks really strong.

Yes. Thanks, Sam. Janine, thanks for your question. So yes, we did see a significantly higher portion of our holiday sales occurred during Thanksgiving through mid-Cyber Week period when we ran our global event, and our sales during this period were the strongest in our company's history. We are evaluating the season's performance and we will continue to monitor the macroeconomic and competitive environment. Our guidance for 2024 assumes AUR to be similar to what we experienced in 2023. We are being prudent in our sales outlook and inventory management for 2024. As Sam mentioned, our sourcing and product development initiatives are enabling greater and more frequent introduction of new products, which positions us to drive more full price sales. Our expectation on top line is to be down low to mid-single digits in the first half and our guidance for the full year reflects gross margin up 200 basis points as said in my prepared remarks, and that is mainly driven by our sourcing and product development initiatives, while maintaining AURs year-on-year. And as Sam mentioned, we expect further improvement in margin in the out years as we continue to optimize our sourcing strategy.

And maybe along the lines of some of the sourcing initiatives enabling quicker product development. Can you talk about some of the soft launches that you mentioned in the prepared remarks how quickly you can chase into a broader launch of those assortments.

Yes. So as I said earlier, items like Flex Fire Hose HD as we build on our iconic firehose pant program came in and the reception to that was really strong. Buck Smooth is interesting. We've talked about Buck Smooth leading up to Q4 as being a new innovation in fabric that allows us to actually print kind of photoreal print on there. And that was met with overwhelming success, I would also add our intimates program in women's. We've introduced some new bra, TeeLUXE bra, being our number one bra in its first season. And then last call, we talked about the excitement around our AKHG fitness category, and that came in the last week or so of December and really came out of the gate strong, and we think that across AKHG in total, but specifically AKHG fitness, that there's a long runway. So a lot of these things are not just about items. They're kind of strategic building blocks to some of our other key merchandising initiatives like our strategic focus on growing the women's business. The women's penetration was 30% and it increased 200 bps and so we've mentioned in the past that we think the women's opportunity to be a larger business in total and a larger share of our business, we're starting to see some traction in that regard. And women's again, double-digit increase for the quarter, up high single digits for the year. And so a lot of these soft launches were yes, item-driven, but critically a critical component of the strategic building blocks to some of these other longer-term product initiatives.

The next question comes from Jonathan Komp of Baird. Please go ahead.

I want to follow up. I know there was reference to seeing an inflection in the business during the fourth quarter. If you could just maybe share a little bit more. Are there some underlying metrics or full price selling or anything that you would highlight just because from a reported perspective, still seeing gross profit dollars declining. It's hard to see signs of the inflection. So just hoping you could maybe share more insight there.

Yes, Jonathan. Well, so a couple of things I'll say. One is the holiday -- or the Black Friday weekend through the midpoint of Cyber Week was the strongest sales results we've seen in the history of the company. It was -- as we've seriously done over that time period, that's where we run our global event and there's competitive aspects to that. And because of the global event plus the amount of demand, it drove a bit of the top line, but the flow-through clearly wasn't what we expected or what we've seen in the past. And so that was a bit of drag on us. It also -- as the holiday season played out, it was clear that it pulled sales forward from the weeks leading up to Christmas where we typically do more business at higher margins. And so that was a bit tough. But then as we go back and we're assessing the business both today and during the quarter, we did see a sequential improvement in our regular price sales bucket as a percent to total sales, especially as we started to bring in early these new spring goods, and launch them in the back end of the fourth quarter. And so January, in particular, as all of those items I just mentioned to Janine as those new items started to hit the last week of December, it really moved the needle for us from a regular price perspective in January. And so we expect while we expect kind of the headwinds to remain challenging as we go through the first half of this year, we're also optimistic about the sales on early launched goods as well as what the product development and sourcing initiative is bringing us. And so we believe that while the top line will be challenged, we're going to get better flow through over the course of the year.

And just as a follow-up, could you maybe just speak to ideally or from a target perspective, what percentage of product would you like to sell on at full price? And how far off are you today? And then really a broader strategic question, just what needs to change in sort of the focus. If you look at the guidance here for the year, still not profitable at a net basis even though you're realizing benefits now from some of the multiyear supply chain initiatives. So what needs to change? And if you could share any more insight on the strategic [Indiscernible] price.

Yes, absolutely. So a couple of things. The product development and sourcing initiative, as you know, is about creating more newness more new innovation more frequently, which this is now just kind of starting to ramp up. We really started this initiative last year. And so this is kind of the first full year based on our order time line that the work that was done last year starts to come to retail. And so we expect that as Heena mentioned, gross margin improvements. And yes, while today, it's still adding up to a negative, you think about over the last 1.5 years or so with where our margins have moved towards from a competitive perspective, this becomes kind of a starting point for us to move the margin upwards as we move through '24 and beyond. And then Adairsville really just kind of got up and running in Q4 of last year, really October, so call it the end of Q3. And as I shared on the Q3 call, we saw some benefits in some of the metrics, whether it was CPU or time to delivery in that last month of Q3. And then Q4, we saw lower variable cost per unit. And the actual number is -- it's about 42% of our average legacy FC cost per unit. So as we go through this year, we expect to see the variable costs coming out of that fulfillment center, helping us leverage the total cost total variable cost of our FC network. So I guess what I would say is a lot of the things we've invested in are now starting to show some benefit. And I think '24 becomes the year where we start to realize them over the course of the full year. And as we start building on top of those, you'll see incremental improvements in gross margin for instance.

And just last question for me. But I mean, would it make sense to maybe change focus instead of targeting top line growth and it looks like you're embedding an inflection as the year goes on for total revenue, but would it make sense in the short term to focus back on profits into the revenue in terms of how you're managing the organization? Or just any thoughts there.

Yes. I think -- yes, I think it's a combination of both. We have to be focused on the top line, and that's what's driving a big part of our product development and sourcing is how do we create a pipeline of more frequent new products because that also drives to your earlier question, greater full price sell-throughs, which then translates to greater bottom line profits of the company. And so I think it's a combination of both. What I'll tell you is that the variable cost of our business will continue to improve as we move forward and leverage as a percentage to sale where our costs continue to grow a bit are on the fixed side of it because of the investments we've made in the strategic initiatives. So our P&L, as you know is hampered a bit by the depreciation associated with those investments. But in terms of the manageable costs and the benefits we're getting out of these investments that part of the expense structure is starting to lever in. And that's what we're looking for right now. And then there becomes this inflection point as we move forward specifically, CapEx is now going to be less than half of its high last year, and that's largely going to be associated with our technology road map that should result in improved sales and margin because of our ability to better allocate by style size, color and location as well as enable other opportunities for us. So I think we're being prudent about how we're managing the business, and we're doing it in a very intentional way without cutting our nose off despite our face. Heena, do you have anything you want to add to that?

Yes. I would say our focus for 2024 will be to accelerate the operational improvements that we are seeing from the strategic road map by expanding our pipeline of new and innovative products, optimizing our marketing mix, improving gross margin through our sourcing initiatives and controlling what we can control by prudently managing expenses and inventories. The other point I would make is, as I said in my prepared remarks, we are seeing capital investment cut in half in '24, and we will continue to see EBITDA -- adjusted EBITDA outpaced net income and EPS as we get through the depreciation that -- from the capital investment we've already made in the past years hit our P&L.

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

Kind of similar line of question a bit. I guess, I'm trying to think about the decline in gross margin over the years, 700 basis points, 600 basis points going back to 2015, 2016. Is that all best understood as an increase in promotion. And then can you quantify or even directionally sort of the margin drag from the retail channel kind of over that same period, you've seen productivity in your stores effectively have. Just taking those two things together to kind of think about how the new glide path back to above the line on profitability, if there's a risk around kind of having your customers now so used to higher promotions, et cetera, et cetera, and sort of how you maybe get the retail chain back on some firmer footing.

Go ahead.

So on your long-term gross margin question, we've meaningfully advanced our sourcing and product development initiatives. And as I mentioned in my guidance, we are expecting 200 basis points of improvement, which will continue to build over the coming years and get back to our pre-pandemic levels in a few years. So we see a path forward to get back to those higher gross margins.

But is that can I stop you there -- is that the promotional impact -- I get the sourcing and the benefits that can do, but as far as how much you're embedding as far as being able to get back to a higher price plan higher initial mark on whatever -- however you want to quantify it relative to what was pre-period?

For 2024, we are being prudent in our outlook and we are not assuming any AUR improvement in our guidance. But we are looking at what our seasonal performance is and how to optimize it and also how our new innovation can drive, position us to drive more full price sales.

Okay.

So that's one thing. And then on the store question, I've been able to visit several of our stores, which have a unique and engaging experience for the consumer. And they are part of our omnichannel strategy along with digital and mobile and they create an ecosystem where it helps us get to consumers and retain them. And so they are a critical part of our strategy going forward. All of our stores are cash flow positive. Having said that, we do have an opportunity to -- in the context of the omnichannel environment, look at the size, the format, the depth of assortment to make them even more efficient and profitable. So we will be instituting more rigor as we think about new locations going forward.

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.