Q4 2019 Earnings Call
Dead dead dead dead.
Good morning, and welcome to the Duluth Holdings Incorporated fourth quarter and fiscal year 2019 conference call. All participants will be in listen-only mode. So do you need assistance, please signal a conference specialist by pressing the star key followed by after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then one on your telephone keypad to withdraw your question, please press * then two, please note this event is being recorded. I would not to turn the conference over to Donnie case investor relations for Duluth Holdings, please go ahead.
Thank you, Gary.
And welcome to today's call to discuss Duluth Trading fourth quarter and fiscal year end 2019 Financial results our earnings release which we issue this morning is available on our investor relations website and iron duluthtrading.com under press releases. I am here today with Steve select chief executive officer and Dave Loretta Chief Financial Officer on today's call will provide prepared remarks and then we will turn 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 the word such as estimate anticipate expect and similar phrases forward-looking statements by their nature involve estimates projections gold forecast and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed and the forward-looking statements such risks and uncertainties in club.
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'd like to turn the call over to see select Chief Executive Officer of Duluth Trading Steve.
Good morning, and thank you for joining us today.
We are now an unprecedented times as a result of the Corona virus pandemic by companies across all sectors here at Duluth. We are taking precautionary measures to ensure the health and well-being of our employees customers and suppliers.
This situation is very fluid and changing rapidly and no one can predict its ultimate outcome our plans for fiscal 20 20 may just a few weeks ago or already out of date and under review.
For example, we are actively evaluating temporary store closure closures and will fully comply with all federal state and local regulations to date. We have close 8 stores primer in densely populated areas in the North East.
With our omni-channel model, we are fortunate to have a strong online business which accounts for over 50% of our sales that said we know that many customers are experiencing Financial uncertainty. They could have a significant impact on Direct Channel sales.
This is definitely a time that challenges all retailers, but in to lose twenty-five year history, we've been through difficult times before and emerged stronger. I think are resilient rest on our foundational three brand pillars solution based products manufactured with high quality craftsmanship humorous and distinctive marketing and an outstanding customer spiritual experience. We have created a Lifestyle brand that speaks directly to the modern self-reliant American will always Prevail regardless of challenging times.
a response to
And Saturday is to take it very conservative approach to our business across all categories of spending. We're reviewing the store opening plans and have already made adjustments that day will discuss in detail. We are closely monitoring our supply chain to keep our inventory in line and we have adequate Financial Resources to weather the storm while we are moving forward with great deal. Of course, we do not want to imperil the initiatives we have in place that are important for our long-term growth.
I'm moderating our store Bill. Pace. There's no doubt that our retail store is are very important in delivering top-line growth attracting new customers to the brand and expanding overall Market action.
Overall new customer growth was up 20% in 2019. Approximately 40% came from a retail stores.
With these benefits, we know that store productivity needs to show Improvement. Frankly. It's been a steep learning curve that initially we did not anticipate but we're getting smarter and we now he's more technology-enabled tools to work with
When the retail environment stabilizes, my number one priority for fiscal 2020 is to unlock the greater potential of our current Fleet of 62 stores offer an issue is include the steady flow of newness and product and visual field supported by targeted and localized promotions to drive traffic and Regional assortment of product. That's local appropriate.
Before turning the call today to provide details on her fourth quarter results and operations. I'd like to share some color on fourth quarter performance, like other retailers. We face headwinds that limited our fourth quarter potential most impactful was the shortest holiday show selling season since 2002 there were twenty six shopping days verses 32 in the premium package, which was the longest selling season possible. It also triggered some of the earliest and heaviest discounting that we seen in quite some time. This is further Complicated by some of the warmest wage is so low parts of the country.
That said we entered the fourth quarter well-prepared. Thanks to the tremendous efforts of our entire team net sales grew 7% on a comparable 13-week basis and reported operating margins basis points year-over-year.
Regardless of the current and unsettling environment. I'm confident that the Investments we've made over the last few years will indeed create long-term value.
I also know we must prove ourselves to the market everyone in Duluth understands. This and is on board to optimize our investments and drive profitability.
With that I will turn the call over to Dave.
Thanks, Steve. Good morning, everyone.
For the fourth quarter, we reported net sales of 259.6 million up 4% compared to two hundred fifty point five million last year.
Terrible 13-week basis sales grew 7% overall and was in line with their updated expectations.
Work for UPS was $0.75 compared to last year of $0.64 and included a benefit of roughly $0.02 from one-time tax credits pre-tax earnings for the quarter grew up 18% and marks the second quarter in a row of operating margin expansion. This was consistent with what we shared on our call this time last year, which was our goal to see operating margin expansion in the month of the year as we cycled past a heavy period of investments in new systems upgraded Logistics and new stores are adjusted. Ebitda was 39.99 a 13.7% compared to thirty five point 1 million last year.
Despite some of the sales headwinds in the quarter is Steve mentioned we successfully executed plans to improve customer service through all our channels. We float inventory for better in stock positions and we managed expensive or improve the bottom line results.
While the customer response to our holiday offering was robust. We do see further opportunities to refine our execution and drive additional efficiencies will apply these learnings to improve our results for the chef holiday season.
Within our sales channels direct product sales rep 1.5% on a 13-week basis compared to last year and shipping revenues were up 42% or 4.7 month compared to 3.3 million last year.
Store sales grew 15.5% driven by new stores open in 2018 and 2019.
We added three new stores in the fourth quarter and roughly 29,000 gross square feet to our retail footprint.
We ended the quarter with a total of 61 stores compared to forty six stores in the prior-year.
During the holiday. Sales were healthy day by day from Black Friday through Christmas the. After Christmas. Our expectations four out of the last five weeks our sales and the quarter of we're not enough to make up for the 6 lost shopping days between Thanksgiving and Christmas.
Momentum in our omni-channel initiatives continued shipping 11% of online orders from our stores and customers increase their use of focus and all locations.
Additionally, we were pleased to see that direct sales growth in the markets with a store continue to outpace non-store markets and our most established markets. We saw direct growth in the low teens off.
Gross margin rate for the fourth quarter increased 40 basis points compared with last year for gross profit dollars of 137 million due to higher shipping revenues and stabilized merchandising margins off.
Relative to the first three quarters of the Year where merchandise margins were down over two hundred basis points are balanced approach to competing in a very promotional season helped as maintain and improve margins in many product categories.
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For the number of days and clearance events. We avoided the flash-sale activity and overall discounting was not as steep as last year.
Our exposure did the China tariffs impacted our fourth-quarter gross profit by roughly a million dollars. We've shipped to the remaining production to other countries and we expect minimal margin impact in 2020 due to the terrorists.
With respect to any supply chain disruptions due to the coronavirus. Let me first say that our hearts go out to those in the US and overseas who have been affected by this pandemic.
We continue to monitor our supply chain and have seen minimal impacts on our spring and summer deliveries. The full extent of impact store fall and winter seasons are being evaluated now, but at this time we do not expect that production delays will be a material.
Back to the fourth quarter results are women's Business continue to outpace men's with an overall growth rate of 12% for the quarter and low double-digit growth rate online wage growth in the Women's Business was driven by fall and winter gear and the expansion of the women's plus line, which now represents 12% of total women's apparel sales.
The men's business group 5% over last year driven by a successful launch of new products such as dang soft underwear and growth in Alaskan hardgear.
Turning to expenses we continue to carefully manage our cost structure in the fourth quarter, including an ongoing effort to focus on the most productive advertising spend.
Additionally the steps we've taken to leverage fixed costs and gain variable expense efficiencies efficiencies resulted in improved operating margin of 80 basis points.
Spelling General and administrative expenses increased 2.7% to $104 billion compared to $101 billion last year.
It's included an increase of 5.8 million in general and admin expenses offset by a decrease of 1.4 million in selling expenses and the decrease of one point six million in advertising and marketing expenses.
As a percentage of net sales sg&a expense decreased 40 basis points to 40% compared to 40.4% last year.
As a percentage of net sales advertising and marketing costs decreased 120 basis points to 13.2% compared to 14.4% last year primarily do to leverage gains reduced catalogue circulation.
Selling expenses as a percentage of net sales decreased 110 basis points to 14.9% compared to 16% last year.
The decrease is attributed to savings from better shipping rates and less split shipments on orders efficiencies gained in RDC Network and improved store labor productivity.
General and admin expenses as a percentage of net sales increase 190 basis points to 11.9% compared to 10% last year primarily due to higher depreciation from technology projects as well as increased or occupancy costs.
At the end of the year net working capital was $83 million and we had $39 million outstanding on our 130 million line of credit.
Inventories at year-end increased 51% to $148 million compared to $98 Million last year.
The increase in inventory is primarily due to original orders being placed on higher sales plans from over 12 months earlier as well as incoming receipts for the spring 2026 arriving early earlier than they did last year. We made the decision earlier in 2019 to pull forward inventory receipts to smooth the retail for resets and also the minimum potential impacts from Port congestions due to Industry shipments arriving before tariffs would take effect.
That approach continues as we head into 2020 and it will help realign our inventory position in the back half of the year, but I will caution. This will be dependent on a recovery in customer demand off today is challenged by the Health crisis and uncertainty economic factors.
With regards to the higher marked down goods on hand at the at the end of the year it represented 18% of total inventory compared to 11% at the end of 2018.
Roughly 50% of mark down units are in styles that are considered year round which allows us more rim to optimize the cells roots.
Capital expenditures for 2019 with 31 million down 42% from prior a year.
The decrease reflects the one-time Capital span related to our corporate offices in 2018 lower spend on Distribution Center initiatives in 2019 and our plans to open a shoe stores in early 2020, which would typically impact the end of the prior-year.
The major technology Investments made to date including the new website enhanced mobile functionality and replacement of the order management system have resulted in systems that are more stable income taxable and scalable. The primary initiatives were working on now and expect to rollout 20/20 will be customer-facing enhancements at the store level and they use of customer data for deeper and Thursday and personalization of our marketing strategies. In addition. We are designing plans for the next generation of our merchandise life cycle planning systems.
Given the complexities of nurturing and growing multiple sub-brands and operating with a nationwide omni-channel presence the Investments we make in technology now to support our customer growth plans are critical to our long-term competitive position.
Well, we entry twenty-twenty with plans that reflected a continued emphasis on growing our brand with customers in new and existing markets leveraging fixed and variable expenses and growing bottom-line results faster than top-line sales the current Health crisis and consumer environment that were operating in casts an air of uncertainty that makes it difficult to estimate where we'll walk around on our financial objectives.
As of this week we have seen.
Speak to our stores slow significantly, but Demand on our through our online channels here today to have generally been up from last year other than the days that we were going against last year's 60% off clearance event that said if consumer spending over the coming weeks and months show significant weakness. We do expect the impacts will materially affect ourselves as said we were suspending Financial guidance and hope to provide updates on our next earnings call.
In response to the expected sales impacts. We have refocused our attention to measures that will curtail expenses and capital spending.
As of today, we have five new store locations planned in 2020 that we're proceeding with four with signed leases, but we're holding off in any additional locations. We have certain technology and infrastructure projects that will be deferred.
We were scrutinizing our marketing programs and other discretionary spend to preserve dry powder.
To help support liquidity there is extended capacity in our bank line of credit that is available if needed.
All told we are taking action to respond to this Dynamic business environment and are confident we can manage through this difficult time.
With that will open the line for questions.
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we will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
The first question is from John Maurice with d a Davidson, please go ahead.
Hi, thanks. Good morning, everybody. Hope everybody's doing well there and holding up given the circumstances Dave question for you. I guess on the inventory. Can you give us a feel for what that would have looked like excluding the early receipts that you wisely off, you know took in to avoid some of the delays in the ports and everything, but what would it have been excess receipts, but that's my first question. Yeah. Sure John, you know, what I would have been was I'd say roughly a third of the of of the increase is related to pulling in receipts for the spring and summer months into the year end.
And with respect to the cost control programs that you could put into place in terms of your expense line your STNA and I know you know, you're revisiting the budget now and I'm sure everything's quite fluid. I'm just wondering directionally is could it be that I'm actually asking $8 could actually be down as opposed to, you know, continuing to increase even with those expense curbs.
In the coming year. Yeah, certainly there there is enough control within our expense structure to maintain the level of spend. We do have increased in in fixed costs related to to the stores. We've opened up last year and plan this year. But but obviously there is enough flecks in the you know in our in our marketing, um are variable expenses are very flexible on the sales line. So, you know, we certainly could see sg&a flat under that scenario just you know, given the circumstances that the timing of of of when we think business is going to revive so I think that's a possibility.
Okay, great. And then my final question really kind of into areas. I wanted to get a little bit more color on in terms of your Investments the new systems talking about the customer enhancement at the store level. Can you tell us a little bit more about that what you expect maybe the time of you know, what that is some examples the timing of it and what kind of benefits you could get and then same with the adjustments to your new planning system. Thanks sure off at the store level the Investments that that we're working on now include an upgrade of our POS system. And this has been under under way for a number of months beginning in late 2019. We're on the path for having an omni-channel platform within our stores that makes fog
experience
a lot more seamless for our for our customers both when they come to the store to return items and were able to attribute the return to the original order if it was online or in another storm were able to fulfill Goods within the same transaction at the POS system if if that good is not in the store, but maybe it's going to be shipped to the customer's home. So we're able to put into our our sales associates and information at the register too much more quickly and seamlessly make that transaction and and have a dog will across the chain so that so that the order information in the inventory information is
Real-time, you know the other aspect to our POS system is simply upgrading off an older platform. That wasn't going to be scalable for us and off and it's not a requirement for for new hardware, but it's but it's a software that is being run on on the registers.
And then I think you asked about the planning systems.
You know, that's also in in the works our merchandise planning tools that we've integrated today have allowed us to be more Nimble on store replacement. But we haven't reached the point where we can truly get to store level assortment planning and and streamline a lot of the the back-office activities around all the way up from product development to manage the lifecycle of that of that item through through its through its life. So a merchandising life planning tool is is what we're developing now, but honestly, that's that's on hold given the current environment and something that we will pick back up when we have clear visibility, you know, the other the other system that that we are continuing to proceed with is
Is our customer data where?
How SRI platform and and that's been underway for a number of months and we are proceeding with that and we know that that's going to be able to to give us our marketing aspects much more personalized and and make it more efficient. So so that that initiative is well underway and and we're proceeding with that.
Great. Thanks. Appreciate. The next question is from Jonathan, with bear, please go ahead. Yeah. Hi. Thank you Dave. Could you may just start maybe if you wouldn't mind walking through the balance sheet the major items and the available liquidity either at your end or even you know, currently if you have any current views on just kind of where things stand and and more detailed there.
Sure, John, obviously the inventory levels are are are the first area that that we think about and and given my comments around, uh, setting receipts based on earlier earlier plans that is a um an issue that we will work through this year. As I said, a lot of them are are year-round and and don't require markdowns to really hit seasonal. So so we feel good about that but God, but at the end of the day, they they are higher than we ideally like to be at we do see that we can get by the year-end under a conservative sales plan inventories closer to in line with sales, but we will
We'll have that as an odd going. I'm going Factor. We think about the funding our our line of credit today as a hundred and thirty million of total capacity. We're we're evaluating the increase of that. We do have a incremental facility feature within our line of credit that will allow us to increase the capacity and that's that's in discussions right now with our bank group. Um, and and you know, whether we need to tap into that extra amount or not is really dead on how much um how much we can pull down our Capital spending our expenses. So we're we're making those decisions right now, you know, I guess what I also want to suck us on our balance sheet when you look at the total the total debt component, uh, you know, the the $28 million of long-term debt that relates to our our corporate office is he dead?
This is the tri organization that we consolidate that that you know, that's not our obligation, but it is on our balance sheet and reflects in the in the total debt picture. But you know, we thought we do see that through the course of the the short-term here. We've got ample capacity to fund fund our business and and are evaluated increase in that in in the very short-term here.
Okay.
That's helpful it maybe maybe a follow-up to that Dave if there's any if you're willing at all, maybe talk about either the you know, the quarterly or monthly type kind of cash burn rate to think about more more. I'm trying to get a sense if you could help kind of shore up any concerns about obviously a lot of unknowns out there and certainly the duration of what's going on as a key variable. But just how to think about anime an environment how long everything you just mentioned that you you still have some some margin for error from a cash burn rate.
Yeah, John, I I hesitate a little to to get into some short-term, you know short term projections just given the dynamic nature of where we're at as I you know, kind of articulated on the previous question about expenses and what we have in our control there there there is quite a bit of dead of discretionary spend that we that we can take action on and we've already prioritized those actions today and are going to be very Vigilant about it. So, you know, I today we don't have concerns that over the next few months that we'd have any cash issues. We we would certainly I hope that as we come into the third quarter and fourth quarter of the year, if if there's continued economic impacts then then we'll go to another layer of of take off.
action on on our expense and capital capital spend but
and we we were confident over the over the short-term here that we've got ample capacity of of liquidity to to to whether through that.
Okay, thank you. And and maybe just last one for me. I guess just address some of the internal actions you could take but I'm curious just given the unprecedented nature of what's going on. I mean when you think about either the committed leases you mentioned or even the the current rent that you're paying. I mean, is there any scenario that you would Envision where you'd be able to get some additional flexibility in the short term for for those types of of payments just given you know, the type of nature. We already any more flexibility. I'm curious here at your thoughts there.
Well, yeah, John, you know, when we establish our our store lease structures, we we purposely do it with a fairly low occupancy cost and wage. Like I'd say other kind of mall-based or or specialty center-based retailers. So we feel pretty good about the occupancy and at least structures that that we go into these with Iraq, you know, we do original plans. We were targeting 10 stores to open in 2020 and we were we're cutting that and half dead, you know until we open a store, you know, we feel good at that the ones we've got are going to be excellent locations. But but at this stage, we we do have plans to go back to existing leases and and and ask for any accommodations there. We we don't think that that's necessary at this stage.
Okay, I appreciate you taking all the balance sheet questions and best of luck. Thanks. Again. If you have a question, please press * then 1 month. The next question is from Jim Duffy with Steve, please go ahead.
Thank you. Good morning guys my question around the composition of the inventory. What's the mix of that spring summer Goods versus fall holiday and then inventories are obviously a potential source of cash. What are the strategies to manage through the inventory position?
Yeah, Jim, you know the composition of the inventory leans obviously heavily to to the spring summer. We're we're off today. You know, I'd say greater than 70% We do have fall-winter Goods that we that we always maintained because their core and there year-round and then to the extent that that some we put on mark down. Um, uh, you know, are are generally year round as well. So we we look at the the composition and and know that we're not tied to strictly clearing out of of of of fashion oriented or time seasonal aspects of our Peril gives us more room to to work through it. You know, we we can as we proceed through the months here take deep birth.
Action to to clear through inventory and I'd say, you know last year was was sort of the low point on Gross margins that we took the bar. That's still I think gives us room to to maneuver and and and Strikes some discounts if if needed but, you know, we feel pretty confident about the inventory levels and we're evaluating false winner receipts, uh, in terms of canceling some but not starving the business office the fourth quarter which at this stage, um, you know, we still have hopes that we're we're going to see a a good holiday. But you know, everything is in our ownership birth control, uh-huh, unlike inventory that might be spilling into wholesale channels that since we don't operate in those
Thanks Dave. That's a good segue. My next question. I was curious how you thinking about you know, offense versus defense. It's a dynamic environment, but you look towards the back half of the year. You know, how are you planning receipts for the third quarter? You mentioned the fourth quarter you're planning for more normalization at what point? Can you make adjustments or cancellations for those to you can regulate your info of inventory as appropriate for the business?
Well, we're we're making those decisions right now Jim and the closer we get to to the receipt time. Then we do lose flexibility because you know, we place orders directly with with our manufacturers. So, you know, there's not an a third-party wholesaler that that we can go back to so it may it does require further up front, you know assessment of what what the sell-through is are going to be but I'd say, you know, we we would be certainly in a better position to be the be on the offense if there's a you know, if the visibility in the business comes through and and we're able to offer be well positioned within our stores and online, you know, I think the other aspect that that we want to call out is we still are better than fifty percent an online wage.
Retailer so that that gives us some flexibility even even today that I think other primarily storms or base retailers are stuck with them. So yeah, I'm not not sure if that helps give you any more color gym, but that's where we're at.
It does. Thank you guys and good luck.
Thank you. Thank you. This concludes our question-and-answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
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