Q2 2020 Duluth Holdings Inc Earnings Call
Good morning, and welcome to the Duluth Holdings second quarter 2020 earnings Conference call. All participants will be in listen only mode should you need assistance. Please ignore conference specialist by pressing the star keep followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question could you. Please press Star then too. Please note. This is that is being recorded I.
I would now like to turn the conference over to Die a case Investor Relations for Phil is holding please go ahead.
Thank you and welcome to today's call to discuss Duluth, Trading's second quarter financial results.
Thanks release, which we issued this morning is available on our Investor Relations website at <unk> I do this trading dotcom under press releases I'm here today with <unk>, Chief Executive Officer, and Desiderata, Chief Financial Officer on today's call managing that will provide prepared remarks, and then open the call to you.
Question before we begin I would like to remind you that the comments on today's call will include forward looking statements.
Can be identified by they use words, such as estimate anticipate expects and similar phrases.
Forward looking statements by their nature involved estimates projections schools forecasts and assumptions.
Our 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 they are not limited to those now I'm just glad you're not most recent annual report on form 10-K, and other FCC filings as a pickup.
These forward looking statements speak only as of the date of this conference call and should not be relied upon as prediction of future events and with that I'd like to turn the call over to Steve <unk>, Chief Executive Officer of Duluth trading Steve go ahead.
Good morning, everyone and thank you for joining todays call.
I'm pleased to report that net sales for the second quarter grew 13%.
$137 million, driven by 67% growth indirect sales year over year.
In the quarter, we also saw meaningful improvement in earnings and cash flow.
Well.
We're far from taking a victory lap in the cold winter environment, yet I can clearly see the Duluth trading story, playing out according to our long term tragedy.
Our company was built luxury brand pillars.
Solution based design.
Humorous and distinctive marketing.
Outstanding and engaging customer experience.
Two years to set us apart regardless of the competitive landscape.
I'm very proud of how our agility brand strength that business model.
Our serving us well during these unconventional times.
Solid results, we reported this quarter reflect our unwavering commitment to our customers.
First we are heads down focused on creative on creating innovative solution based apparel and goods that consumers value.
When comfort with key our spring and summer product Assortments and widespread appeal to both men and women.
Men's business was especially strong this quarter it was up 15% over last year and our drive to deliver the newness factor to customers such as the launch of a men's swimwear line accounted for close to 18%.
Total men's sales for the quarter.
Women's apparel delivered a 10% year over year growth rate.
All basics like no yank tank based layers, no debt and outdoor favorites like gardening, and overall were especially strong.
The second factor was in the investments, we made to scrape and customer engagement before the pandemic reshape consumer shopping.
All right standing online performance this quarter was supported by enhanced website and mobile capabilities.
Easily accommodate as a surge in demand.
Well site visits increased 34% and the second quarter.
Mobile traffic was up 42%.
Sales from mobile doubled versus a comparable period.
Investments in our distribution system also paid off.
We continue to fulfill online orders from both warehouse and store inventory through our ship from store process as well as BOPUS and contact was curbside pickup in store locations.
In fact, our omni channel capabilities or a leading competitive edge for us with 26% of digital orders fulfilled by stores.
Third we shifted our focus to more digital marketing versus traditional media spend.
Digital when combined with relevant product messaging that promotions drives higher and more customized engagement.
This has been notably effective in our direct channel, where we saw 830% lift and new buyers during the second quarter.
Strong digital capabilities, well becomes especially important now third and fourth quarters, if traditional media opportunities like sports events are curtailed.
Fourth.
Any channel model continues to validate our commitment even in the face a store closures and lower traffic and stored began to reopen.
Our thesis that having a store in a market builds overall brand awareness. Once again proved out in the second quarter was direct sales growth of 80% in store markets.
Outpacing that an onshore markets.
We can also draw at very strong correlation that went in store shopping was curtailed by the pandemic customers readily adapted to online shopping.
The ultimate value of a true and strong omnichannel is that a retailer does not lose precious customers.
Offers an alternative path to purchase.
And then move in the back half of fiscal year I have a couple of observations.
First we were fortunate that are strong online capabilities filled the gap created by store closures in the first half of this year.
Second while no one has a crystal ball on how things will ultimately shake out over the coming much.
We know there will be some headwinds.
We already anticipated deep discounting will continue holiday deals will be again, even earlier and shipping networks will be constrained by increased volume.
And there are other external factors that could have a meaningful impact on consumer sentiment.
Even so.
We are already executing our plan for the peak selling season, which basically boils down to doing what works and lean into it.
We will continue to drive will messages that are resonating with customers shop, your way online curbside pickup at BOPUS.
We will ramp up digital marketing, especially around events like our big Damn birthday, and the launch of 40 grip 40 grid, which as I mentioned on our last call.
No price point category and the younger shoppers.
Well, the email and digital campaigns, we will market newness to pass purchasers of similar products and categories and target 2020, new customers to make additional purchases.
As we move into the fall and holiday seasons, I'm confident that our team is focused on doing our level best to keep momentum going.
While we must fastener seatbelts, where a bumpy ride we have a we have the talent agility and conviction.
The challenges ahead.
Now I'll turn the meeting over to Dave to discuss our financials and operations.
Thanks, Steve and good morning, everyone.
We're pleased with our second quarter performance, especially during such a challenging economic environment.
We're fortunate to be in a sweet spot for what our customers are craving at this time functional comfortable collections that serves a purpose for the active lifestyle.
But also satisfied customers needs with working at home and getting the most out of outdoor activities during the hotter months.
As Steve mentioned for the second quarter, we reported net sales of 137.4 million up 12.6% compared to 122 million last year.
The momentum in digital sales, we saw in the back half of the first quarter continue throughout the second quarter with total direct sales growth up 67%.
Within non store markets, the direct business grew 59% and even more encouraging within store markets. The direct business grew 80% year over year as customer shifted from buying in store to buying online.
Where's began reopening the first week of May and we're fully operational by father's day over.
Overall, we saw healthy reopening ramp up with a gradual leveling up 70% productivity compared to the prior year.
From the time that all stores were reopened we've seen the direct business in those store markets absorb entirely the shortfall in lower store traffic.
In fact for markets, where the store that opened prior to 2019 total sales growth was 9% in those markets.
This accounts for 76% of our full line store base and this positive same market sales trend has continued into August.
Customer traffic through digital channels continued at a strong pace on the second quarter was 15 million site visits up 34% to last year.
The efficiency and productivity of our digital marketing campaigns allowed us to generate incremental sales of 12 million in the second quarter compared to the first quarter.
Even though actual site visits were down 16% versus the first quarter.
This efficiency improvement led to a conversion rates and all digital channels of 7.2% in the second quarter, an improvement of 230 basis points over last year.
Our product offerings hit the Mark in the second quarter, our men's business improved significantly driven by a successful father's day sale that was up 7.4% over last year.
We realized strong sales a new summer styles taken advantage of our coolmax and our material OFAB fabrication.
Well as new underwear styles and pants that benefited from improved store layout and signage based on fit.
Continuing on pace for Q1, our women's business grew 10% over last year, largely due at 30% sales contribution from our somersaults collection.
Women's full price business reflected strong sales and shorts and comfortable basics and the plus business grew 11% of total women's apparel.
While many customers continue to shop online we offer deeper discounts in several categories to continue moving inventory early in the quarter, while our stores were closed.
As a result of more aggressive product promotions, our gross margin overall for the quarter decreased 30 basis points to 52.8% compared to 53.1% last year.
The selling product gross margins reflected this deeper discounts were down 250 basis points in the quarter.
But favorable return rates and retail shrink results from our physical inventory accounts offset roughly 200 basis points from the heavier markdowns.
SGN a expenses for the second quarter increased 2.6% to 62.7 million compared to 61.1 million in the comparable period.
Given largely by higher selling cost associated with increased direct sales.
This included an increase of 4.8 million in selling expense and the 2 million increase in general and administrative expense, partially offset by a decrease of 5.2 million an advertising and marketing expense.
As a percentage of that sales SGN, a decreased 450 basis points to 45.6% compared to 50.1% in the second quarter last year.
Selling expenses as a percentage of net sales increased 190 basis points to 16.3% due to a higher mix of direct sales as a percentage of total sales.
General and administrative expenses as a percentage of net sales decreased 110 basis points from last year to 21.2%.
And dollars DNA expenses increased 2 million largely due to new store growth over the last 12 months and higher depreciation related technology at logistics investments.
We opened two new stores after the close of the second quarter, one in Springfield, Oregon, near Eugene and one in Orland Park, Illinois, a suburban Chicago.
This brings our total store count to 64.
In addition, we have one more store to open this year in Florence, Kentucky suburban Cincinnati.
As a percentage a net sales advertising and marketing costs decreased 530 basis points to 8.1% compared to 13.4% in the second quarter of last year.
530 basis point decrease was primarily driven by reduced catalog and TV advertising, partially offset by an increase in digital advertising.
This extraordinary leverage we realized in the quarter is benefiting from some timing of expenses between first and second quarter.
However, the year to date AD spend of just under 13% of sales, which is over 400 basis points below last year represents a better reflection of the efficiencies we've gained and expect to benefit from down the road.
We also typically see greater efficiencies and AD spend during the fall and winter seasons.
We expect for the full year that the AD ratio will be in the low double digits as a percentage of net sales.
Our adjusted EBITDA for the quarter was 16.8 million or 12.2% of sales.
An increase of 75% over last year, and 440 basis points of EBITDA margin expansion.
Income tax expense was 1.9 million for an effective tax rate of 24% compared to 700000 in the second quarter last year or an effective tax rate of 26%.
The lower tax rate year over year relates to a lower blended state tax rate as we expanded our geographical presence, particularly during the second half of 2019.
For the quarter, we reported net income of 5.9 million or 18 cents per diluted share compared to net income of 1.9 million or six cents in the second quarter last year.
Well, the cobot 19 impact on our profitability weighed mostly in the first quarter.
We're pleased that our ongoing objective to expand profit margins are back on track.
Now see the trailing four quarters of operating margin expansion has nearly 40 basis points.
Last year at this time I explained that we were at the turning point of growing operating margins and delivering the growth and bottom line results.
While we still expect the coming months in quarter, two quarters to be clouded by an uncertain economic outlook and disruptions and shopping behaviors, we have proven the ability to flex and adjust our business to meet the customer's needs well doing it profitably.
Moving onto the balance sheet.
We ended the quarter with net working capital of 117.7 million, including 19 million in cash and 79.5 million outstanding on our total line of credit of 150 million.
Our net liquidity position improved by 15 million in the quarter as the strong sales managed expenses and reduced capex drove positive free cash flow.
Our capital expenditures for the full year on track to be 15 million.
Our inventory position at the end of Q2 was $167.6 million, which is up 46% to last year.
But improved from first quarters position about 68% to prior year.
While the competitive discounting has impacted gross margins year to date that has allowed us to clean up the over inventory positions. We started the year with.
We're now projecting end of year inventory to be essentially flat to last year's ending inventory of 148 million and back in line to realize improvement in inventory turns.
Yeah around inventory, which comprises 62% of total inventory is up 20 million or 28% to last year.
With an end of season inventory still higher than ideal we anticipate continued discounting into the third quarter, which will pressure gross margin.
We're not in a position to give financial guidance for fiscal 2020 based on a number of factors.
First.
Prolonged coated 19 safety concerns that keeps store traffic at subdued levels through 2020.
Pounded by in decisions regarding additional stimulus money that support consumer spending.
Second the surge and online shopping as straining the residential last mile networks, which will potentially results and extended delivery times and higher shipping costs that will be forced to absorb.
In fact, our primary shipper for customer orders, yes.
As announced Steve peak charges and extremely tight daily allocations at or below our forecast it needs.
Third direct fulfillment operations are all competing for staff with entry level wages and incentives that continue to grow.
And fourth.
The national advertising channels are in disarray with fall sporting events been canceled and retailers attempting to pull holiday spend for even more than last year.
In closing, while we will seek all opportunities to mitigate the likely strains in the near term from fulfillment disruptions and the cautious consumer spend outlook. We're confident in the steps we've taken to invest in our Omnichannel model expand our branded product offerings and bolster our liquidity to position the company for.
Long term value creation.
Yeah that we'll open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your hands had before pressing the key to withdraw from the question Q. Please press Star then too.
The first question is from John Morris of Davidson. Please go ahead.
Hi, Thanks, Congratulations and all the improvements in the end the hard work.
Wanted to ask.
Yes, sure, yes, really two questions here one is.
Very impressed with the new customer growth.
With your digital file maybe tell us a little bit more about what you're doing come market to them in particular to turn them into regular ongoing recurring customers.
It is matching the mix between TV and digital as well is that going to yes.
Continue to be much more digital on a go forward basis.
Yes, let's start there thanks.
Sure John.
The new customers that we've picked up so far year to date.
Luckily what we have right in front of us and we're starting to tested.
Is the implementation of our new customer data warehouse tools.
Through Adobe with that we'll be able to segment.
Those customers.
Specifically with what they purchased.
When and what frequency and Taylor some were outreach through email campaigns.
Or even through through web activity, and we'll be able to target specifically for repurchase.
Secondary items and as a tool that we havent had in the past so.
So far.
Quarter to date year to date, we're seeing retention rates on those new customers equal what we had in prior years, but what we were expecting to see that's going to improve with the implementation of this of our new tools that we've gotten place right now heading into this.
At quarter.
Regarding the mix of TV and digital.
We'll we'll certainly see digital take on a larger.
Component of our AD spend.
Yeah.
And we've rationalized some of the TV, but we're going to be back on air.
This this week and heading into the rest of the third quarter. So we'll see that balance come back in place, where we have really taken some of the dollars out of our AD mix is in the catalogs, removing some of that catalogs in the spring in the summer, but we'll have circulation and catalogs.
Then in the fourth quarter to to drive.
Some at some of that activity as well.
So hopefully that answers your question.
Yeah, no very complete thanks for that added information.
The other question is maybe just comment a little bit further beyond the prepared remarks.
August trends.
I guess recap that but then what I'm really looking for here is to see if you if you're comfortable.
I am telling us.
Little bit more in terms of the.
I guess the mix of this trend.
You said you said things were similar in terms of the momentum I believe is it.
Similar and.
[music].
[noise] digital versus in store.
And.
Men women and I guess overall start to fall, how you're feeling about that thanks.
Yes, certainly.
At quarter to date through August and even right up through this first week of our fiscal September were continuing to see the same growth momentum in direct and where we have seen improvement is in store traffic relative to the to the whole second quarter second quarter was.
Only half of the period, where the stores were opened the full time. So now they have been open.
We're seeing improved traffic there I mean.
I mentioned on on the call that they were leveling off at 70% productivity, but as a more recently, they're getting back to 80% productivity and.
And so we're excited to see that that that that trends improving while the direct is maintaining.
Alright, great. Good luck for fall thanks.
Good.
The next question is from Jonathan Komp of Baird. Please go ahead.
Yeah, Hi, Thank you maybe to follow up on direct maybe a bigger picture question I now.
In 2019, you had a period of Bob Yes, four quarters, or so or directly it's pretty flat and then this you're seeing a big acceleration it sounds like it's continuing.
And part of that's been a big improvement and the conversion rate just wanted to ask maybe big picture, how much of what you're seeing a direct the uptake and.
Some of the new enhancements, we've made to your business versus more a function of the environment and.
Any thoughts on those.
Factors sustaining as they look ahead.
I, certainly think theres, it's a combination but.
The activity that we really.
Leaned into from a marketing in a digital marketing aspect had.
Had a big effect year to date in our in our direct growth.
Combine that with.
As our customers, who got very comfortable with shifting some of their spend from the stores one when the stores or close to the direct channel.
So.
I think it's the in.
Enhancements that we put into place from a functionality standpoint, that's been a big part of it.
But we've also seen improvement in our product assortment that I'd say year over year is leading to some of that acceleration in the business right now a year ago. We we were looking at some of this spring and summer results and and didn't find that we were hitting the mark as well as we did this.
Sure and when we came out this year with some of the fabrication some of the cool.
Warmer weather goods and swim line that we talked about for men.
That is what the customer ultimately was looking for especially when they were sheltering at home. So I think it's a combination of those factors, but once we've got these customers in our.
In our database and in our in our brand that.
Weve.
We can continue to market to them in a more efficient way.
So yes, I think it's more leaning towards what we've been able to do that just the environment, but.
The.
Tough this piece of part exactly.
Yes, great.
Helpful, but here, maybe one follow up.
Just on your comments for holiday are you willing to quantify any of the bottlenecks. We mentioned the there on that shipping.
After the or some of that you added expenses that you see and maybe related to that as a margin picture.
How soon do you think you might be able to get back to more of a full price selling environment for for the brand.
Yes, I guess on that last point John.
Full prices.
Still.
Upwards of a third of our of our business today in last year. At this time is around 40%. So we're always going to have.
A blend of what what we sell saw with some promotional activity in full price.
I would expect when we head into.
2021 that the inventory position is going to be much more favorably leaning towards full price.
As we don't have as much clearance to work through so so 2021 spring summer Weve.
We've targeted to improve gross margins.
From where they where this year and that with with less of the clearance activity.
With regards to the.
Financially the bottleneck on delivery. That's that's is an issue that's.
In the works right now and we're.
Working to find the alternatives for for how to make sure we can satisfy the demand.
We're going to see 60% plus increase in demand in the fourth quarter that those are some large numbers that means shipments.
That that today, our primary carriers said that they can't handle so we're looking at the alternatives to do that obviously, we can we can drive a lot of our shipments out of our stores, we've proven to be able to do that so far and encourage customers to buy online pickup in store and safe way.
But I would expect the cost associated with at least what we're hearing here in this this early stages.
From a percentage of.
Of direct sales, we could be saying.
100 to 200 basis points of added cost.
To to make sure that we.
That we can get all the goods to the customers home in time.
And the other thing that we don't want to do as missed sales if we can't keep that promise on on the delivery timeframe. So.
It's a tricky one I'll be honest with you but.
We're looking at it from all different angles.
Okay, Great. That's that's really helpful. Thank you.
Yep.
The next question is from Jim Duffy of Stifel. Please go ahead.
Thank you good morning.
Hi.
On.
The advertising and marketing efficiency that you're seeing that's really nice leverage.
The low double digit rate, you're looking for for the year for the.
Advertising and marketing costs.
Yes, you're tracking that continue.
Curious are you seeing any inflation and digital advertising Ray tour or things, which could.
Put downward pressure on that advertising efficiency, if you look to the back half a year.
Well, we we aren't in as much as we've seen in national TV advertising, where where inflation is continue to increase there, but on digital because it's much more of a market driven.
Platform, we can be nimble and only.
Lean into it where we know it's going to be efficient. So we can be very selective on the return of that spend real time.
Versus.
Locking in that spend months in advance. So we think we can navigate through any price.
Cost issues within digital much better than the other than the other channels of marketing with which which is good.
Okay, then Steve that dynamic environment, you must be very pleased with the productivity of the digital business.
Can you share some thoughts on store opening plans as you look out to 21 future years.
Sure.
We're going to hit we've hit the pause button on store expansion for a while.
We have one lease that we've signed for 21.
Which will be in the second half of the year.
But with the growth that we're seeing in direct or E commerce.
And so with a major.
Internal technology improvements, we plan on making next year, there's sort of further our technological said.
This is a good year to sort of take a pause and really rethink our business model in terms of where the stores fit into the omni channel approach.
Other stores are different shapes. Your sizes are places that we should be addressing.
And then we'll look into 22.
You are 22 for.
Probably rethinking that.
Moving forward.
Obviously, California Biggs, our interest we have new stores, there and is the largest area in the country, but we've decided to hold off for there.
Incidentally, we're seeing excellent direct growth out of California.
Without any stores there so it's.
That's been very encouraging.
Yes, Steve also encouraging is to return or productivity improvements is seen with digital investments that you've made in recent years can you talk a little about about what you have planned as you look across 2020 entered the 21.
Jim from.
All right from the standpoint of you mentioned some.
We're going to make some technology and systems investments.
Adobe.
Yes, I think I think with what we're referring to there is the enhancements with this customer data warehouse re platform in the tools that better.
That we're going to have in place in the third quarter here, that's where we're going to expect to see even greater efficiency in that in that AD spend because not only we can we target customers better, but we can avoid.
Costs for mailing or E mailing or.
Or trying to get in front of customers that aren't going to be is as relevant to us. So so it's a function of cost avoidance as much as it is looking for the highest value.
Spend.
Great last one for me is on products you've seen some good return on innovations.
Can you.
We get all about the innovation pipeline is look into holiday and into 2021.
Yes, certainly we've got a new line, that's coming out very shortly here that Steve referred to the 40 grid.
It's it's.
Ill say doesn't need to to be on the cutting edge of innovation, but in some some terms. It's the simplicity of the product and it's the price point that really makes it interesting.
Other other areas, though that we are looking from greater innovation is.
We've had success on the mens side with some sort of entry level swimwear, we'd like to be doing that and the women's category.
We're also working on other outerwear items that that are really taking advantage of some of the synthetics that we've got.
That are working well and some small collections will expand that.
But where we see success in certain fabrications like as I mentioned, our mature lower or Coolmax, we can extend that into products.
Other base layer products as well as sort of tops and bottoms and that's that's how we're finding some of the.
The opportunity to create new newness in the product assortment.
You're also going to stay very show you some really clever humorous TV ads that were that are new that will be.
Addressing our double flex denim pants, though there will be showing in the next 10 days so stay tuned.
Very good thank you guys.
Thank you.
Again, if you have a question. Please press Star then one next question is from doubling Carden of William Blair. Please go ahead.
Yes, thank you very much.
Just curious I don't know if you've looked at it this way.
But the new customer additions and the growth there in the quarter.
You broken that down between kind of store markets and non store markets and do you think it's safe to assume or or sort of forecast that you're kind of gaining new customers at a very efficient rate in store markets that can translate longer term from an awareness standpoint to store traffic.
Yes, we have looked at that and we we estimated how much of the new customers.
That we got into store markets that we're likely a store customer, but you know they hadn't transacted with us in a way that we could capture their information.
But we know that theres another good amount of new customers in store markets that are new to the brand.
And.
Once we.
Well, so we'll be able to market to those customers just as effectively.
As the customers and non store markets.
But the benefit to is let them know that we can drive into a store as well. So we're looking at that.
Don't have a lot of more details to share at this time, but.
But we're looking at non store versus store in a very.
Granular way.
Okay. Thanks.
And then the other when you kind of addressed it there in the last question, but.
The new product.
Upon feels like it's kind of accelerating here I want to know if that sort of stare and then the underperformance I want to make too big appointed because it was relatively minor but in the women's business is that a factor of maybe some.
Lack of innovation or lack of new products so to say.
Is there sort of more to come for women sort of beyond maybe this one layer.
Go forward and that's all I got yet.
Well underperformance simply relative to mens.
Right.
Yes, I don't I don't think we consider it underperforming it's really.
Forming as well year to date.
At a level that we're pleased with.
Mens really took a sharp improvement with some of the the new new product, we had coming out for the guys and hitting a father's day window that surround it with some better marketing this year.
But no we have new product in the women's category that that we believe is just as compelling.
Is going to continue to see see growth in that category.
Awesome Nice work guys. Thank you very much for taking my question. Thank.
Thank you.
This concludes our question and answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.