Duluth Holdings Inc. (DLTH) Earnings

Management highlights

- Strategic Turnaround Progress * The company has completed 4 consecutive quarters of improving net income margin and free cash flow, with the financial turnaround substantially complete. Management centered the strategic pivot on restoring profitability, improving product quality, resetting promotional cadence, driving operational excellence, and cutting expenses. The pivot has resulted in expanded gross margins, reduced inventory levels, improved overall profitability, and a stronger net liquidity position of ~$100 million. * Gross margin expanded 540 basis points year-over-year to 57.4% of net sales, driven by the promotional reset, direct-to-factory sourcing cost improvements, strategic pricing actions, and vendor negotiations that fully offset tariff costs. * SG&A expenses decreased $3.4 million (5.2%) year-over-year to $61.8 million, with advertising costs improving 20 basis points as a percentage of sales and shipping and variable costs leveraging 130 basis points due to fulfillment center consolidation. - Promotional and Pricing Strategy * The company reduced total global promotional days by over 50% and cut average discount depth by 700 basis points, driving a 14% increase in full-price sales and a 17% increase in average unit retail year-over-year. The intentional pullback from low-margin promotions reduced near-term top-line revenue but improved the quality of sales and overall profitability. - Marketing and Customer Performance * New targeted marketing campaigns (the "folks who work their butts off" brand platform, Max Gluteus for men's underwear, and dibs on the bibs for women's workwear) have resonated strongly with the core audience, driving double-digit growth for top core collections like Buck Naked. Full-funnel upper-funnel marketing investments have replaced low-value lower-funnel promotional spend, improving marketing efficiency. Traffic trends improved from February through March and April after a tough comparable period against 2025's large clearance event. * Customer quality has improved: sales per customer increased 10% year-over-year across all age, income, and gender segments, and net promoter score increased 16% year-over-year. While the total customer base has contracted, the remaining customer base has a more resilient, higher-yielding demographic profile. - Product and Inventory Management * Core high-margin collections represent ~two-thirds of total sales and grew 7% year-over-year, with strong performance from new additions like the women's gardening short overalls, garden dress, and men's no-quit utility shirt. SKU count has been reduced by over 20% to focus on core hero products. * Total inventory decreased 24.8% ($43.7 million) year-over-year to $132.4 million, marking the fourth consecutive quarter of year-over-year inventory improvement. 90.2% of inventory is now current product, spring-summer seasonal inventory was cut by 42%, and clearance inventory was down 17.4% in dollar value. Store-in-stock levels improved by over 900 basis points due to better inventory allocation. The company consolidated its fulfillment center network from 4 locations to 2 over the past 18 months, improving operational efficiency and cutting costs. - Balance Sheet Health * Net liquidity reached approximately $100 million, up from $45 million year-over-year. Free cash flow improved by $42.6 million compared to the first quarter of 2025. Capital expenditures totaled $3 million in the quarter, down from $4.9 million year-over-year, with investments focused on the Manhattan Omni retail and website platform.

Guidance

- Full year fiscal 2026 net sales guidance is maintained at a range of $540 million to $560 million, representing a 1% to 5% decline year-over-year, driven by the ongoing promotional reset to restore price integrity and annualization of 2025 price increases. - First half 2026 sales guidance is reaffirmed at a 6% to 10% year-over-year decline, which includes a 230 basis point headwind from the decision not to repeat a large wholesale order from the prior year. - Second half 2026 sales are projected to stabilize in a range of -2% to +2% year-over-year, after the company anniversaries pricing adjustments and the promotional reset. - Full year adjusted EBITDA guidance is raised to a range of $28 million to $32 million, up from the prior guidance range of $26 million to $30 million, reflecting accelerating gross margin expansion from the promotional reset and realized SG&A savings. - Full year capital expenditure guidance is maintained at approximately $12 million, equal to roughly 2.2% of net sales. - No potential benefit from $12 million in tariff refunds requested from the prior year is included in current guidance.

Segment performance

By channel: Direct-to-consumer (excluding wholesale) net sales decreased 6.4% year-over-year to $57.1 million, accounting for 57.9% of total net sales. Retail store net sales increased 3.3% year-over-year to $41.5 million, accounting for 42.1% of total net sales. By product category: Men's product sales decreased 1% year-over-year overall, with double-digit growth in first-layer and underwear collections driven by the Max Gluteus marketing campaign. Total women's product sales declined 12% year-over-year due to strategic SKU rationalization, with high growth in the core heirloom gardening collection. AKHG brand sales declined 17% year-over-year; double-digit growth in men's woven tops and bottoms was offset by exiting the swim category and rationalizing low-margin outerwear programs. Overall company net sales totaled $98.6 million, a 4% year-over-year decline.

Risks & headwinds

Forward-looking statements regarding turnaround progress, customer file growth, and future profitability are inherently subject to risks and uncertainties that could cause actual results to differ materially from projections. Key disclosed risks include potential macroeconomic headwinds that could impact consumer spending, ongoing execution risk associated with customer re-engagement and growth strategies, and uncertainty around the approval and timing of requested tariff refunds from 2025.

Analyst Q&A

• Q: How is gross margin tracking relative to earlier full-year guidance, and why was adjusted EBITDA guidance raised? /

  A: Management previously projected a 100 basis point full-year gross margin improvement over 2025's 53.4% gross margin. First quarter results showed gross margin expansion is accelerating ahead of original projections, so management added an extra 30 basis points of expected full-year gross margin gain, leading to the upward adjustment to adjusted EBITDA guidance.

• Q: How is the customer base evolving after the promotional reset, and what is the strategy to grow high-value customers without promotions? /

  A: The customer base reset has shifted to higher quality transactions, with higher average order values and sales per customer already achieved. Marketing spend is being shifted from low-funnel promotional spend to upper funnel brand awareness to build long-term high-value customer relationships. Management is prioritizing reactivation of existing long-term high-value customers, which costs one-third of new customer acquisition and is a very efficient use of marketing budget. Customer file growth is a core focus for 2026 and beyond, with early proof points already emerging.

• Q: What drives the expected sales stabilization in the second half of 2026? /

  A: The second half of 2026 will mark the one-year anniversary of both the full promotional reset and all 2025 price increases, removing the annual comparision headwinds that impacted the first half of the year. This gives management increased confidence that top-line results will stabilize close to flat year-over-year in the back half.

• Q: What is the $2.7 million asset impairment charge related to? /

  A: The charge stems from the February 2026 closure of the former Salt Lake City fulfillment center, which was part of the company's network consolidation from 4 locations to 2. The impairment covers remaining lease and building-related costs for the vacated facility.