Q1 2020 Duluth Holdings Inc Earnings Call
Quarter 2020 earnings conference call.
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Thank you and welcome to today's call to discuss the least Dreamforce <unk> financial results.
Earnings release, which we issued this morning is available on our Investor Relations website at <unk> IR to live trading Dotcom under press releases.
Here today, what keeps like Chief Executive Officer, and David Wright, Chief Financial Officer on today's call management will provide prepared remarks, and then we will open the call to your questions before he begins I would like to remind you that the comments on today's call will be well include forward looking statements, which can be identified by the yourself words.
She is estimate anticipate expects and similar phrases.
Looking statements by their nature.
This projection scholes forecasts and assumptions.
Subject to risk 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 state.
And then 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 Steve Slack, Chief Executive Officer of Duluth trading Steve.
Good morning, everyone and thank you for joining today's call.
When we last spoke on March 19th the Cobot 19 pandemic, we're just starting to grip our country.
Matter of days, we went from 62 to lose doors open to 62 stores closed.
Well sure financial resiliency, we immediately went to work to preserve liquidity right size, our overhead adjust future inventory purchasing and expand our borrowing capacity.
We also decided to curtail capital expenditures by limiting our new store build out to four locations. This year.
They will cover the details of these initiatives in his comments.
Well, some states, allowing businesses to reopen in early May we quickly we're able to reopen 20 stores in accordance with local regulations.
As of today all stores are open with a couple exceptions in full compliance with local regulations and employing heightened measures to ensure customer and employee safety.
Oh stores offer curbside order pickup service for those using our BOPUS capabilities.
Since our stores are not in shopping malls or customers have an easy access to them finding ample parking and plenty of space inside providing additional safety and comfort.
And I don't believe we're seeing that customers returning to stores our buyers not just shoppers.
Even so it's still too early to predict if there will be a major and permanent dislocation in consumer shopping trends.
With all stores close for seven weeks, we lean heavily on our strong and long established digital direct to consumer business with its roots in the mail order Kellogg World.
We started the you're thinking retail stores would represent half of our business went direct the other half.
In April with all stores close direct alone carried the day.
Direct sales were up 84% in April year over year.
Driving an increase in company net sales of 5% or April.
We finished the quarter with net sales of 110 million or decreased only 3.8% your where year.
This didn't just happen.
We have made considerable investments in technology distribution and digital marketing over the last two years that are coming together.
As people shouldering in place.
A surge we saw an online demand was enormous and it drove a 32% increase in our direct business during the quarter.
Our April and direct demand was equivalent to peak season holiday demand and we were challenged our distribution centers to get orders out the door on a timely basis due to staffing issues.
One of our initiatives last year West developed a ship from store capability for situation just like this.
April 20% of customer direct orders were shipped from inventory coming from the back room of our stores firestorm, Andrew and his or her assisted well the stores were closed.
Our enhanced website and mobile features are believed ship from store, our strong digital marketing campaigns and the tireless efforts of our people all played key roles in fulfilling our brand promise to our customers during the quarter.
Beyond the increased volume and direct sales other favorable trends emerge this quarter.
Our women's direct business accelerated to 57% year over year growth.
This is 10 times the growth rate, we experienced in quarter one of 2019.
We attribute this to a rebranding effort of our women's business.
TV advertising that resonated and compelling new products.
It also indicates to us that our product offerings are squarely in the sweet spot what people want sheltering at home.
Comfortable durable solution based apparel that can transition from work to leisure activities.
Our targeted digital marketing, we're very pleased that many new customers discovered the Duluth trading brand during this time.
The first quarter, great new buyer growth exceeded 113%.
There's people began to venture outside for a walk for home repairs or some gardening, we're ready to serve our customers with a great line up for spring and summer apparel and accessories.
I'm pleased to report to the trends I just outlined continued in may this year with direct providing the bulk of our sales. Although sales were made our preliminary basis, we're essentially equal to last year.
Greg sales were up 66% year over year and product gross margins are trending much better.
And new buyer additions were 76% better than May 2019.
The first quarter performance of our direct business may raise the question whether the store expansion model is still important to our future growth strategy.
The answer is yes.
However, the rate of new store additions will certainly slow down.
Our stores play a key role and the shock to the system confirmed that.
Even with the temporary closing of all our stores, we saw increased customer activity in markets with the store.
In fact direct sales in all store market class is greatly exceeded the non store market growth during the quarter.
Another element of our growth strategy is the pursuit of newness in our product portfolio.
For the past year, we have embraced the importance of newness with good results.
Plus sizes increased to 10% of the overall women's business and our garden collection was up over 100% this quarter.
We also recently rebranded our women's business and launched a new campaigns celebrating inspirational women, who forged their own way.
There was continued success with men's newness as well, especially with the Dang Sock program print underwear and additional pants, which.
We're also excited to launch 40 grip this October.
We think we can capture wallet share of a non no nonsense price sensitive younger guy with this new line.
It's an important step in attracting a younger generation to the Duluth trading brand.
The other plants on the drawing board to keep momentum moving in this direction.
While we will continue to accelerate innovation and agility. There is still considerable uncertainty ahead of us recognizing that we've taken several putin maker to weather the unforeseen, including cutting our original 2020 plan for 10 stores divorced doors. This reduces our capital expenditures by have.
And also signals that we are focusing on a capital efficiency strategy well continue to make critical get reduced investments in our future growth.
We have high conviction in the strength of the Duluth trading brand and our omni channel model.
We have made some very important and timely investments over the past few years to enhance our brand presence and the customer experience and they're beginning to bear fruit.
As the time to focus on unlocking the potential these investments to deliver improved profitability and value creation.
In closing I want to thank our entire team for their commitment and dedication during these trying times.
Now 2020 will test the level of all retailers.
I feel more confident and excited about our future than ever.
Now I will turn the call over today.
Thanks, Steve and good morning, everyone.
For the first quarter, we reported net sales of 109.9 million.
Down, 3.8% compared to 114 million last year.
The decline in that sales was the result of the temporary closure of our stores for approximately seven weeks, leading to a 52% decrease in retail channel sales for the 13 week quarter.
Well people were required to shelter in place many turned to online shopping and shifted focus to comfortable basics garden and digging for good deals.
As noted our direct segment net sales increased 32% in the first quarter driven by the shift in store shoppers to online, but also significant new buyer growth of 113% indirect.
Our women's category, especially benefited from increased traffic to our digital channels. We saw total sales increased by 10% in the quarter.
The overall men's business down 9% in the quarter to last year women's increased its penetration to 32% of the mix compared to 28% last year.
As Steve mentioned the years of building our brand as well as the investments we've made on our omni channel model to get deeper penetration in markets, where we have stores are paying off.
The strong direct benefits business in the quarter offset much of the lost revenue, resulting from store closures you.
We saw a direct growth in store markets up 40% compared to 26% and non store markets.
As a pandemic hit we quickly adjusted our advertising spend to increase paid digital prospecting to drive sales and pick up new customers.
New buyer counts were up in every category other than the stores and total new buyer growth increased 59%.
Our enhanced web platforms were stable during the heavy volume days that compared to levels, we usually see of a holiday peak season.
Total website visits grew 43% mobile traffic was up 67% and conversion was greater than last year in all digital channels.
With a captive at home audience and uncertainty about when stores might reopened we seize the opportunity to convert inventory in the cash.
The offer deeper online discounts in several categories to continue moving inventory, while the stores were close.
You also activated more inventory to be shipped from the stores in order to maximize the clearance sell throughs.
As a result of more aggressive product promotions gross margin for the quarter decreased 570 basis points to 47.6% compared to 53.3% last year.
As I mentioned last quarter, we entered fiscal 2020 with inflated inventory levels that we're going to take some time to work through.
Facing the disruptions due to covert 19, we initiated a number of actions to adjust inventory.
Both to take advantage of strong online demand and to mitigate strains on cash flow.
Hi, working collaboratively with our manufacturing partners to balance the inventory flow well preserving a healthy supply chain, we've been able to adjust our fall and winter orders.
Push some year round orders into the spring of next year.
Reduce the order size on slow moving skews and we temporarily extended supplier payment terms.
These actions will help mitigate the impact of disruptions to our sales channel and keep our inventory management objectives on track, but we still expect to see inventory balances higher through the end of 2020.
The year over year increase in inventory at the end of the first quarter and projected and of the second quarter, we'll be at the peak.
Then improving in the back half of the or.
We also expect that this near term pressure on gross margins will impact second quarter results.
Turning to expenses at the beginning of the pandemic. We were quick quick to take a number of actions to prepare the company for extended business disruption.
Measures to reduce expenses were implemented and with the stores closed we cut in half the cash burn from the retail channel.
That said, while the stores were closed to customers. We kept on a limited staff that we're able to fulfill 20% of direct orders, while the stores were shuttered.
Overall SGN expenses for the quarter increased less than 1% to 71.3 million compared to 70.6 million in a year ago period.
This included an increase of 1.2 million in selling expense and $3.4 million, an increase in general and administrative expense.
Actually offset by a decrease of 3.9 billion, an advertising and marketing expense.
As a percentage of mat sales SGN, a increased 310 basis points to 64.9% compared to 61.8% in the first quarter last year.
Included in the next Monday was 1.6 million of Nonreoccurring personnel charges related to the cobot 19 disruption.
Excluding the non recurring charges as SGN a decreased 2%.
Selling expenses as a percentage of net sales increased 180 basis points to 18.4% due to an increase in the shipping cost on the greater order volume and additional pay for store staff, while the stores were closed and temporary increase in pay rate for the distribution center teams.
General and administrative expenses as a percentage a net sales increased 400 basis points to 28.1% compared to 24.1% last year.
Largely due to new store growth over the last eight over the last 12 months and higher depreciation related to technology costs.
We opened one new store during the first quarter in short pump, Virginia, a suburb of Richmond.
And we ended the quarter was 62 stores.
As a percentage in that sales advertising and marketing costs decreased 270 basis points to 18.4% compared to 21.1% in the first quarter last year.
The 270 basis point decrease was primarily driven by reduced catalog spend and national TV advertising, which was partially offset by an increase in digital advertising.
Our adjusted EBITDA was negative 11.6 million compared to negative 4.4 million on a year ago period.
We recorded an income tax benefit of 5.1 million compared to 2.7 million in the first quarter last year with the effective tax rate of 25.2%.
For the quarter, we reported a net loss of 15.1 million or 47 cents per diluted share compared to a net loss of 7.6 million or 23 cents in the first quarter last year.
In our press release dated May 4th we outlined additional measures taken to help support liquidity through this crisis included an increase of 20 million to our borrowing capacity.
We ended the quarter was 9 million in cash and 84.8 million outstanding on our total line of credit of 150 million.
Well, we're making every effort to preserve cash and build our financial resiliency to whether a prolonged downturn, we're still making critical investments for our company is long term future.
We are moving forward with prior priority initiatives that include upgrades to our Omnichannel point of sale system and customer data warehouse initiative to drive revenue growth.
Our current plans are to proceed with four new store openings in fiscal 2020, instead of the original tends to our plan.
This will cut overall capital expenditures by 50%, which are expected to be a 15 million this year.
During the past year, we've made investments in our distribution Center network with the result of improving efficiency and reducing costs.
Automation enhancements in our Bellville facility. The addition, and expansion of our WTC and the growth of our ship from store capabilities have allowed us to wind down the third party logistics operations and realized cost savings starting this year.
Because we just recently reopened our stores the outlook for when traffic will return to previous levels is uncertain.
As such we're not in a position to give financial guidance for fiscal 2020.
However, I can say that the strong results we saw a direct for the back half of Q1 have continued through today.
In closing we are in a solid financial position with sufficient liquidity to manage through these challenging times.
For scrutinizing expenses, while making making key investments to continue building, our brand and acquiring new customers.
Where we sit today. We believe this is the recipe for a long term value creation.
With that we'll open the call for questions.
We will now begin the question and answer session.
Ask your question Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset pressing the keys, whose draw. Your question. Please press Star then to.
At this time, we'll pause momentarily to assemble the roster.
Yes.
And our first question today comes from John Morris with Davidson. Please go ahead.
Hey, Thanks, good morning, and good work in such a challenging time.
Especially with the.
It really nice contribution from the DTC channel the E Com channel.
Question for you Dave.
If you can give us a field directionally on SGN a.
The go forward quarters now it sounds like.
You're incurring some of the additional costs associated with co good bit at same time.
It sounds like you've got some room to maybe cut some costs further so maybe you could give us a feel.
[music].
For a year over year dollar.
Change over the next couple of quarters could that be down or continue to be down.
Thats My first question.
Yeah, Hi, John.
Yeah, we do expect that SGN a year over year, we'll we'll start to see some of the improvement.
Decrease year over year.
On a on a full year basis.
We're looking at upwards of $20 million of reduced SGN a.
A lot of that might be coming out of the advertising category certainly some of that gionee buckets that we talked about with with the expense initiatives and in some of the pay cuts that we've taken throughout the organization. So.
That's that's kind of the the full.
Your goal number that we've got in front of us.
Okay, Great that's super helpful and.
We are hearing and seeing the pattern out there for a company see new customer growth. Obviously, there's been this channel share shift.
But I think 59% increase is really commendable.
For you guys says a lot about the potential for future growth.
As you bring those customers into the those new customers into the fold can you give us some context for what that trend would have looked like prior to this.
I would would new customer growth has been.
I don't know single digits low double digits. So we can kind of understand what that how how significant that increases which looks pretty significant.
Well I can respond to that John Steve.
Yeah. Good morning, Stephen Thank important running we now. These these numbers are through may so it's more than just the quarters for for periods.
Last year 2019 for the first for periods, we brought on 313000.
New customers and that's both channels. This year, we brought in 511000, that's 200000 pickup.
For those those four months.
And that the the trend really kicked off again.
In April late March to April as before shoulder at home.
Yes.
Yes go ahead that hurts you know we.
We were seeing some strong new buyer acquisition, even before the pandemic. It was slowing down in the first part of 19, but it started to reaccelerate, even coming out of out of 19.
And up to the point of.
February and through early March we were saying.
In a low double digit growth and new customers.
On that kind of a trend. So you know we did have some momentum going into it as well.
[music].
Okay and in terms of them in terms of the mix.
Women versus the man is your growth and female new customers.
[laughter].
Ben higher than the then the obviously you do more business with with.
Or a growing amount of business with women anyway. So is that is that new customer female growth been.
Faster than.
What the average otherwise we would be.
For a year.
Growth in in the female business.
Oh, absolutely has been been greater in the women's category as a rate of growth.
No.
Roughly double double the rate of growth.
In womens compare demands.
This year.
During the first quarter.
And that sorry, Dave that's that's double the rate of men's in terms of female new customers.
Or just.
Just female business overall.
Well customers that were coming in and buying in the women's category.
Got it okay.
Okay. Thanks.
Yep.
And our next question comes from Jonathan Cohen with Baird. Please go ahead.
Yeah, Hi, Thank you good morning.
Maybe just a follow up on the line of questioning there around the customer performance.
I guess can you haven't shared a lot I kinda customer cohort metrics in the past could you can you maybe just expand upon maybe what the implication as that you're seeing for existing customers are you seeing kind of lower engagement, there where they're coming back in the stores reopened and died any any.
Talked about how those customers hold up in that environment with higher unemployment here.
Well certainly John.
The the uncertainty in front of us around around a prolonged downturn is going to drive some of that repeat business that we that forgetting now.
You know there was a portion of the new customer growth that came into the direct channel that were existing store customers who.
Transacted with us without.
Without R&D the details of their credit card information. So we know there's there's been a transfer of that.
59%, 10% to 20% of it was probably just customers who were already an existing store customer and then they shifted pattern to buy online, but a majority of those new customers are new to the brand and and we started to see some early trends of repeat business.
That give us a good indication that.
Over time, there will be permanent customers are the brand, but but there's certainly an uncertainty around.
Around the coming months and the back half of the year, but.
I think it's the investments we made between the marketing.
And.
Some of the product promotions, we're going to serve as well with these new customers in our database.
Okay, Great and maybe maybe a related question, but when do you think about gross margin implication.
It's certainly.
With the higher promotional environment, you're as you've acquired new customers just any anything you could provide you know any reason to think that's the I've had the gross margin performance could could get better year.
Certainly maybe.
That to inventory, which work scope looks quite high coming out of the corridor.
Yes, we're already seeing some improvement in that year over year contraction of gross margin rate.
May has has seen as that rate improved.
As we lead up to.
A pretty good father's day business that we've got we are planning.
Typically we have some clearance activities in the back half of June and July when things get slow.
But I wouldn't.
Look for the same the decrease in gross margin rate that we had the first quarter I think it will moderate.
And and then improve as the year goes on but but that's going to be one of the levers that we certainly will be willing to pull.
More this year coming coming into it.
Now that we're into it compared to where we thought we may be coming into this fiscal year.
Okay, maybe last one if I could just on that the SGN eight comments Dave.
Are you speaking to.
Expecting a 20 million dollar net reduction Vince you her you're looking at that the dollar level for last year and that just as you think board how much about maybe kind of sustainable areas versus cost about that may come back looking looking to future years.
I.
Yes, we do expect that net amount to be a $20 million range and.
And that's all a lot of that is variable costs that we're going to be able to flex up and down based on based on the sales volumes.
So.
The permanent cuts or.
There are some of the temporary nonrecurring cuts as I mentioned, we had about 1.6 million that we could attribute to to this event, where we've been in.
But otherwise going forward, it's going to be mostly variable expenses that were able to to cut and end to the extent that we.
Our new store growth will really dictate any future a permanent.
Expenses that get layered in.
Okay. That's very helpful. Thank you.
Yep.
And our next question comes from Jim Duffy with Stifel. Please go ahead.
Thank you good morning, and thank you for all the details in the script.
A couple of questions from me first can you guys talk more about how you've planned inventory receipts for the second half a year, including some specifics around merchandising strategies, we go deeper in core categories.
With respect to the newness that you've planned will you go deep there and how are you planning more seasonal categories.
With respect to inventory receipts.
Well, yeah, we we came into the year with the receipt plan that that focused on newness.
That focused on on the seasons women's has a more of a.
Seasonal aspect to it than men's.
Over half of our.
Greater than half of our inventory balances is in what we call year round categories and men's makes up a good portion of that so when we think about adjustments were making for the fall.
We've we've been able to make some reductions in some of those year round, but but we've done our best to preserve the seasonal and the new because that's really what gets us the most traction.
As of late so.
Making adjustments to preserve the newness and even.
Give us some room to chase products as they are doing well, but but I don't want to gloss over the fact that we realize we're sitting on inventory levels overall that that are elevated and.
We'll take some time to to work through meaning getting them back in line with the rate of growth of sales.
Okay, and then building on that last comment.
Dave You mentioned your margin rate has improved thus far in the second quarter. What are you expecting with respect to promotional cadence over the balance of the year.
Yeah, I understand it's difficult to necessarily respond to give an uncertain traffic patterns and so forth, but any high level thoughts there would be appreciated.
Well at this point I'd say, the third and fourth quarter promotional plans will look similar to last year, we we introduced.
A sale of that in the third quarter last year that we're going to repeat.
And then we'll also flex clearance activities in the third quarter based on how the selling plays out through the balance of.
The second quarter, but fourth quarter.
Where we're going to look to a similar pattern to to what we did last year.
As a starting point and adjust as we go I think we were we were pleased with the cadence that we had in the last fourth quarter and you know in saw some improvement overall.
In.
And our operating margins and so that's what we're really focused on so.
At this point, where we're going to really flex to drive growth is in some of the advertising categories around the digital.
And placement of TV, the until the point that Weve.
Got to make decisions on whether those are running or not but.
But digital gives us the best near term kind of short term lever to drive growth.
Okay, and then last one just a follow up on a new customer growth.
That's encouraging I'm curious can you attribute that back to certain marketing campaigns.
Yes, we can definitely attributed back to.
To some of the broad marketing campaigns, and then drilling certainly down to the the digital spend activity.
Paid.
Prospecting ons on search terms paid prospecting and social media.
That's where we picked up a lot of new customers and and when we did it in times that featured some of the women's product.
For example that we also had womens new women's book and women's TV advertising around the rebranding effort. There. That's that's where that's how we saw the womens new customer growth accelerate.
So we know down too.
Obviously every city and location that the new buyers came from and they are spread across the country in many.
Locations.
With us some store markets and a non store markets. So we've captured that and we'll be following up with.
More directed.
Outreach that E mail.
Campaigns.
With that file based on the new tools that were going to happen part of it data customer warehouse.
Steve My understanding was it during April and even through May.
Advertising rates were very favorable for prospecting did economic still work as rates or perhaps reflect back to historical levels.
Well, you see rates, you're talking about media costs.
Correct digital advertising rates.
Yes, I don't indeed, yeah, you know the thing about the that pay per click model is we we've got.
No.
Very short term and timely ability to to throttle that up and down.
And and we can set.
You know and add ratio on what we want to do any given day. So so as a cost starts to increase weaken throttle it down and be very nimble on that point, if that's what you're referring to with the digital advertising, if you're referring to maybe TV media than that that's another aspect.
Maybe just last one following up on that as you look back to a new customer growth was that more driven by digital or or driven by traditional media.
Well the incremental growth was was more driven by digital.
Without it I don't think we would have seen the same numbers. We would have been continued on a on a similar pace.
But I think there's an element of.
What which was unusual during the pandemic and.
Consumers time spent on line that really change that that dynamic.
That's really helpful. Thanks, guys for indulging me in the detailed questions.
Sure. Thank you.
And our next question will come from deal in accordance with William Blair. Please go ahead.
Thank you very much yet just curious here the Alaskan hard gear segment seems to be holding up pretty well here to what do you attribute that strength.
I don't know if you can give us a sense of kind of what percent of sales and makes up now and kind of where are you projected to be maybe in a couple of years.
And also curious sort of along the same lines of questioning the new product pipeline.
Whether or not Newpark releases gets put on hold here, whether or if we can expect to see kind of some new new stuff coming out towards the end of the thanks a lot.
Yeah.
Thanks, the Alaskan hurt your line is continuing to grow.
The rate of growth did did slow down a bit but it's still.
An important category for us the the percentage that it that it really makes up of though of the overall men's business is still small.
You know in that 10% to 15% range at the most and.
With that grows grew roughly 10% in the first quarter.
We're expecting to continue to to kind of feel that it seeing even.
Greater growth as of late as we head into the summer and some of the categories that were featuring around fishing lifestyle fishing is going to be a segment that that's doing well for us right now so.
I'm pleased with that and.
New products.
We absolutely are going to continue to lean into new products.
As Steve mentioned, the 40 grit line that we're coming out with in the fall that's an entirely new.
Line of lower price still high quality, but a good entry price point on on.
Workwear from for men and.
And we expect to that to potentially have some essentially overreach into womens future down the road, but.
We're if anything really trying to take the overall assortment and and coal out some of the some of the other core year round items and focused on new as much as possible.
It brings up an interesting point around.
As my management activity, so to speak are shut down.
Maybe just anecdotally you know if you're seeing kind of a.
Supporting business based on things like fishing hiking, just outdoor activities as a kind of the only thing that remains that is that a significant part of your business.
Yes, it certainly is and I'd add to that gardening that was a big feature in our women side.
Search term for overall drily drove that item for us this past quarter.
We featured on on the cover whatever catalogs and so outdoor activity that.
That can be done not large groups I think is having its moment right now and we're playing into that really nicely.
Awesome. Thanks, a lot guys take care.
Yep.
And this will conclude our question and answer session also concluding todays conference we'd like to thank you for attending today's presentation. You may now disconnect your lines at this time.