Duluth Holdings Inc. Q3 FY2025 earnings call

• Outlined plan to reset business focusing on improving gross margin by reducing promotional depth, controlling costs, etc. • Q3 showed consecutive quarter of improved profitability. • Reduced global promotional days by more than half. Raised prices on select products to mitigate tariffs and maintained sales volume. • Product wins: men's denim, AKHG; women's Heirloom Garden, relaunched denim; Highland Cows print; Hasbro collaboration. • Marketing efforts: full funnel approach, linear TV plan, sponsorships on Spotify and podcasts, new mobile retail experience (Big Dam Van), 2 new store openings. • Operational improvements: on track to exceed $10 million in cost savings in fiscal 2025; 17% reduction in Q3 ending inventory by rightsizing receipts; focused on core durable products and reducing SKU counts.

Third quarter net sales were $114.9 million, down 9.6%. For men's, sales declined by 8.7%, partially offset by growth in fall transitional outerwear, denim and AKHG. For women's, sales declined by 12.8%, partially offset by strength in the Heirloom Garden collection. Gross margin rate was 53.8%, expanding by 150 basis points compared to last year. Men's denim saw 9% growth in sales at higher margins. Men's AKHG was positive due to innovations. Women's Heirloom Garden collection was foundational, and relaunch of women's denim was successful. Highland Cows print and Hasbro collaboration were product wins.

• Affirmed 2025 adjusted EBITDA guidance range to $23 million to $25 million (previously $20 million to $25 million). • Full year sales range $555 million to $565 million (previously $570 million to $595 million). • Tariff impact projected to be down from $15 million to $12 million. • Cost savings expected to exceed $10 million target, closer to $12 million. • Plan to maintain advertising investment above 10% of sales. • Projected double-digit decrease in inventory levels at year-end. • Capital expenditure plan at approximately $17 million for the year. • Asset-based lending facility remains a key resource for flexibility.

• Risks described in most recent annual report on Form 10-K and other SEC filings, including uncertainties related to tariffs, promotional depth, macroeconomic conditions, etc.

Q: Stephanie, maybe stepping back, a bigger picture question. You referenced some encouraging customer and profitability metrics. How are you assessing the progress on your strategy to be more profitable and prioritize higher-value transactions? What are the key metrics that you focus on the most? And how do you expect that to play out into the holiday period, which typically is more promotional for the industry?

A: Jon, thanks for the question. So we look at some metrics that I think everyone would be familiar with around order transactions. So average order values being up year-over-year, our gross margin rate being up year-over-year. And we're also looking at longer term, our sales per customer or revenue per customer over a period of time. And so what we're seeing and we're encouraged by is our average order values continue to be stronger year-over-year. We are achieving the sales that we have with relatively fewer units. And so it's making the whole machine, if you will, more efficient. When we look at customers and how we are thinking about them or how we're -- what the reaction we're seeing in fourth quarter, you're right, fourth quarter tends to be and is more promotional than other quarters. But we're seeing those same dynamics kind of play through quarter-to-quarter. So we're encouraged by the fact that at the end of the day, while our revenues are down and they've been consistently tracking, if you will, to the down 10% or so year-over-year, it continues to be at a higher quality rate of sale, both on the customer level and on the order metrics.

Q: During the quarter, I believe you said you cut days of sales in half. So can you tell us the overall depth of promotional activity or maybe what your percentage of full-price sales were? And then how far do you think you are from an optimal level of promo?

A: So I will -- I'll take the second part first, Marcus, around how far we think we are from optimal promotion. At the end of the day, this has been a huge reset for the business. And I just want to highlight one number when you look at the gross margin improvement year-over-year that we saw in Q3, considering the fact that as we reported in last quarter, we came in with significantly more clearance inventory coming out of Q2, and it was the first quarter where tariffs were a part of the gross margin. For the team to be able to achieve 150 basis point improvement, I think, is kind of shows how far along the journey that we've come so far. We do still think there's continued promotional reset as we go into early next year, for example, in the February time period, we were up against a very heavy promotional time or clearance time in our Big Dam Birthday event last year. So that's a place that you will continue to see promotional resets, and we'll be tweaking that along the way. So our goal ultimately is to provide the best value for our customer to recognize that there are times of the year where value is a driver, like fourth quarter that we talked about just a few minutes ago, but to really build back in full price as a core premise of our business outside of those big promotional kind of milestone moments, if you will. So that's how we're looking at the business overall. And we'll continue to refine and tweak those as we go forward. Heena Agrawal: And Marcus, just to add, to clarify the number of days of promotion we were on in Q3 is what was cut in half. And to Stephanie's point, we are looking to continue resetting promotions. And this time, as we look forward, it's going to come more through reduction in markdowns as we've improved our assortment and inventory buying receipts. We expect to have higher sell-throughs on our products, which will reduce the markdowns and the discount that you see on our products. So we will continue on the promotional reset, but entering kind of Phase 2 where we have greater emphasis on markdowns and higher sell-throughs through a tighter assortment and buying.