Q4 2021 Duluth Holdings Inc Earnings Call
[music].
Good morning, and welcome to the Duluth Holdings incorporated fourth quarter 2021 earnings Conference call.
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Please note this event is being recorded.
I would now like to turn the conference over to Niko Mcgee. Please go ahead.
Thank you and welcome to today's call to discuss Duluth, Trading's fourth quarter financial results. Our earnings release, which was issued this morning is available on our Investor Relations website at IR Dot Duluth trading dotcom under press releases.
I'm here today, with Sam Sato, President and Chief Executive Officer, and Dave Loretta Chief Financial Officer on today's call management will provide prepared remarks, and then we will open the call to your questions before.
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 words, such as estimate anticipate expect and similar phrases.
Forward looking statements by their nature involve estimates projections goals forecasts and assumptions and are 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 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'll turn the call over to Sam Sato, President and Chief Executive Officer Sam.
Thank you and good morning.
I'm excited to share our results for our fourth quarter recap our performance for the year.
In 2021, we delivered record results across many performance metrics, including sales of 699 million.
Justice EBITDA of 77 million earnings per share <unk> 90.
And free cash flow of nearly $82 million.
Importantly, we ended the fiscal year in a solid financial position, which gives us confidence to continue to invest in our big Dam blueprint.
Anchored on a big Tam Blueprint 2021 was a Europe evolution as we embarked on a journey to position our company to better compete and enable long term growth.
Our big Tam blueprint that we outlined on prior calls focuses our attention on the shifts we are making to address sizable market growth opportunities for Duluth.
Our results in 2021 highlight the progress we've made on season market growth opportunities, while also highlighting where we can make even greater gains.
Before I expand on the performance highlights I'd like to share how we're thinking about the business and responding to conditions that are shifting faster than they ever have in the past.
Our company's mission has long been grounded in the belief that there is always a better way.
Today's consumer sets a high bar for what they expect in apparel and gear that enables them to take on their own two hands.
To be more self reliant and for how they choose to engage with brands.
To that end I'll touch on the progress, we're making to know our customers, both new and existing better <unk>.
Leverage our omni channel model to meet our customers, where when and how they want to engage with us.
Aligning our family of brands to address customers' evolving lifestyles and activities.
Invest in areas that will allow our business to scale.
And generate consistent financial results that create value for all stakeholders.
While the beginning of the year was met with uncertainty about how the effects of COVID-19 were going to impact shopping behavior and consumer demand.
Our customers had already proved that demand for apparel and gear that beat their active indoor and outdoor lifestyles were not going to be dampened due to the pandemic.
On top of growing sales in 2020, our direct to customer channel accelerated in 2021 more than doubling the annual growth rate to nine 4%, resulting in two year growth of 13, 5%.
This impressive growth showcases the resilience of the Duluth brand as well as our loyal and growing customer base.
Let's dig a little deeper into our customers.
We know that shopping behavior overall was impacted by Covid in 2020 in waves and accelerated online buying created changes in customers' clothing needs in.
And so to that consumer spending with government stimulus money and limited choice due to disruptions in global supply channels.
Our 12 month active buyer file is 14% larger than it was two years ago and for the first time. The mix is tilted to buyers who have been purchasing with us for greater than two years.
These buyers represent our most loyal longstanding customers and they were not immune to the COVID-19 impacts that shifted shopping behavior.
But they returned to Duluth in bigger numbers than they ever had in the past.
Building on the learnings we've gained through shifting to digital prospecting as a primary source of acquisition to the brand. We also acquired a significant number of new customers during the year.
Moving forward, we will continue to increase our efforts to acquire new customers through engaging experiences, including when and how they prefer.
This leads to greater frequency of purchase with more full priced products and higher retention, which is much better for us longer term and speaks to a key change we've made in our business model today.
In many ways, our top of the funnel customer opportunities have never been bigger.
With retail net sales up 46% over last year, we realized a very healthy increase in store level conversion up almost 300 basis points.
Combined with an 8% increase in retail average order value our stores are closing in on pre pandemic sales productivity levels.
New buyers coming from the retail channel was up 22% over last year with having the benefit of only one new store opening this past fall.
Regarding our stores today, we have 65 retail stores spread across 33 states.
While our concentration is in the Midwestern region of the country, we operate stores as far as Alaska, and the Pacific Northwest as well as several stores up in the northeast region and many in the southern States.
Our stores range in size from 6000 to 15000 selling square feet and are generating strong four wall EBITDA margins in the mid 20% range and all generate positive cash flows.
As we've discussed previously our store channel serves as a critical piece of our Omnichannel network.
In addition to supporting critical business needs like fulfilling online orders they serve customers directly with convenient services such as buy online pickup in store.
Curbside pickup and.
And handling network returns and exchanges.
Our stores are realizing up to 30% attachment rate on buy online pickup in store orders, which is all incremental sales.
The investments we have already made to facilitate enterprise wide visibility into inventory served us well again this past holiday season, where stores fulfilled 17% of online direct orders.
While we do not have plans to open new stores in 2022, we are actively pursuing new sites for Grand openings in 2023, and will overlay our ongoing target customer research, incorporating qualitative and quantitative data analytics to inform our plans.
During 2022, we will embark on several existing store and product layout tests that align with our brand positioning plans and are guided by customer feedback.
Now turning to our brand portfolio as I mentioned earlier, an important evolution in our business today is the position of our brand offering from a primarily single brand of Duluth trading company to our family of brands under the Duluth trading company umbrella.
Duluth Duluth trading company is our workwear brand offering both mens and womens apparel with a focus on hard working heritage.
Included in Duluth will be our 40 grit collection offering entry level price points on core workwear items for both men and women.
The Duluth brand will sit alongside our other brands AK HG, formerly Alaskan hard gear and best mate.
Each share common brand values target men and women and will be designed for unique and purposes.
At its core Duluth is our workwear brand for hard working men and women, who live a life of doing whether it's for their career or outside their day job.
The products are designed and tested to support customers' activities around getting things done and are infused with features and functions that solve the problems faced in their work and hobbies.
Within Duluth brand today since our first layer business, which include men's and women's underwear undershirts, raws loungewear and sleepwear.
Many of our strongest and most innovative collections sit within this area and include Buck naked are mature low dang soft bullpen three range and the most recent addition of bump no.
Next is our Alaskan hard gear outdoor brand, which will be renamed AK HG and include a launch for women. This spring here.
Historically, AK ESG focused on serving our customers' needs for outside.
Creation under more severe conditions.
While we expect many will continue to buy for this purpose. We believe the larger opportunity is for customers, whose needs are for products that enable their outside recreation under a multitude of conditions.
The growing segment of outdoor activities, such as hiking camping and fishing fits squarely in our wheelhouse of designing solution based products and built through a performance lens.
With the addition of women's as well as expanding the range of fit and sizes supported by the brand positioning we expect AK HG, which grew 12, 5% in 2021 can grow from roughly mid single digit percent of total sales today to a much greater.
<unk> share of our business over the coming years.
And finally, best made which we acquired in 2020.
With a history of find curated men's apparel and crafted hard gear. Our first refinements, we're just simply edit the overall assortment and build consistency in the apparel fit standards.
<unk> made fits into our brand portfolio as a casual yet premium alternative to the hard working collections of Duluth and AK HG.
The products comprise consistent attention to detail made from high quality fabrics, but also in view rich and distinct origin stories that offer our customers. An aspirational addition to their wardrobe kitchen and workshop.
We are also currently working on a best mean women's collection expected to debut in 2023.
A cornerstone of each brand that extends from our company's roots is our deep commitment to product innovation.
Our team of 30 in house product designers developers and technicians are the creative force behind the majority of the products, we produce and sell today.
In addition to quality, our customers expect products to fit function and come in an extensive range of sizes and we believe this is part of our innovative secret sauce.
Can't be outsource.
Building on our Omnichannel model, we do see areas in the business that require investments that will enable us to scale.
Allow us to consider new channels of growth in the future.
Enhanced digital engagement and.
And ultimately meet the expectations of our customers.
To this end in 2022, we plan to allocate up to $57 million for capital expenditures and address the strategic areas.
The most significant capital investment we see are in our supply chain network.
I am pleased to report that we just recently signed a long term lease on a new fulfillment center located in <unk> GA.
And nearly 500000 square feet. This facility will be the largest and most automated of our fulfillment centers.
Planned to be operational in late summer of 2023. This facility will have capacity for up to 40% of our annual direct bone and will cut our average delivery time in half for the southeast region, which extends west to Texas and north along the entire eastern seaboard.
Board.
This new facility will leverage state of the art automated storage and retrieval technology that greatly increases the speed accuracy and efficiency of our fulfillment operations with.
With robotics, the operations will be able to flex up and down with greater ease based on the seasonality of our business and mitigate some of the strains in reliance on the local labor pools.
In addition to the New center in the Southeast we will invest a portion of the capital into our existing fulfillment locations in Wisconsin and Iowa.
New receiving and sortation equipment will greatly increase our daily inbound capacity, which means having sellable product available sooner for direct orders and replenishment of our stores.
For outbound efficiencies, new technology will enable the picking and preparation of packages that increase speed and accuracy of the order and cost savings on freight.
Lastly, we have a number of technology investments that will go towards advancing our internal capabilities, including customer data to action marketing campaigns.
<unk> seen our customers experience on our website and mobile device through progressive web App solutions and shore up the state of our ERP system to current generation.
The scope of investments we have planned in 2022 and over the next few years are necessary to position our business competitively and future proof core capabilities.
As Dave will share shortly our strong financial position allows us to embark on these investments and continue to be dynamic with brand development product innovation and take advantage of compelling growth opportunities such as our partnership with tractor supply and similar initiatives.
Today, we are in just over 100 tractor supply stores and featured on their website with an offering of our best selling men's Buck naked underwear.
The business continues to build and we are garnering information about the customer base and operational capabilities necessary to successfully grow our wholesale business.
We've also been actively testing our footwear shop in shop in three of our stores with Danner, a well recognized provider of rugged hiking and work boots that has given us great learnings regarding opportunities to expand and grow the footwear business.
Investing in the business to grow our capabilities and solidify our foundation will allow us to pursue new channels and reinforced existing channels to support the sales growth needed to reach our $1 billion goal by the end of 2025.
Additionally, our commitment to grow bottom line results to achieve our prior best operating margin of 9% to 10% is a priority and will help guide our capital allocation decisions.
Our healthy balance sheet and strong liquidity position of over $200 million between cash and available line of credit provides us the flexibility necessary to continue to execute on our big Dam blueprint.
Our focus on what's in our control and being operationally nimble resulted in our second year of growing adjusted EBITDA margins.
At 11, 1% of net sales this represents the highest mark since becoming a public company.
Full year earnings per share of <unk> 90 per diluted share represents a record high net income level for Duluth.
The strong earnings growth and well managed capital outlays contributed to free cash flow of nearly $82 million and finishing the year with zero bank borrowings on the balance sheet.
These outstanding results in 2021 reflects great execution by the team in the face of unprecedented supply chain disruptions and dramatic shifts in consumer shopping behaviors.
In conjunction with the supply chain challenges our inventory management disciplines also contributed to a much leaner and cleaner levels of inventory that drove higher gross margins. In fact, the gross margin on product sales in the fourth quarter was up 400 basis points compared to last year and.
Was largely the result of selling more at full price and less on promotional or clearance pricing.
This was a key objective for us coming into 2021 and remains a top structural strategic priority moving forward.
Our pipeline of new products, and extending hero fabrications into existing product designs has been fanatically received by our customers in several areas. This past fall.
The women's division in particular has leveraged the success of <unk> and denim soft fabrics into several first layer categories.
Our highly successful <unk> technology has been blended with the Duluth double flex canvas in jackets pants and overhauls.
And one of our most successful womens Pant launches. This fall included an expanded assortment of the daily Denim collection.
This premium denim provides the flex and shape that are in high demand along with the durability and resiliency to standup to frequent wear.
In men's we launched the boxer underwear and just recently introduced a new control room boxer briefs.
Both items infused technology that regulates body temperature provides odor resistance and comfortable design features.
Like womens fabric technologies, such as our <unk> and <unk> have been designed into lighter weight hoodies fleece and joggers.
Men's core Duluth Flex Workwear line that includes fire hose pants.
Max Overalls, and a greater assortment of lined pants were among our bestsellers. This fall winter season.
I touched earlier on our progress in marketing to build brand awareness and fill the top of the funnel with potential new and repeat buyers.
I am pleased to report that 2021 was another year of applied learnings that successfully leveraged advertising spend by over 50 basis points.
The shifts we made during the year to scale spend on digital media platforms and reduce reliance on print and linear television continues to drive efficiencies and increase awareness.
Combining contextual targeting through streaming and Youtube with conversion tactics that triangulate the viewers intention and interests are among the most powerful marketing tools today.
As we continue to build our personalization toolbox and improve our ability to generate repeat purchases, we expect retention rates will notably improved in 2022.
Our focus with core programming will be through linear cable and extending to streaming to drive awareness through our peak period.
We see lift in web visits alongside programming such as our alignment with the Yellowstone television show our sponsorship of the U S Olympic Luge team.
Live sporting events and other cable programming events.
Yeah.
Lastly, we are finding that what we message is just as important as when and how we deploy the messaging.
More personalized outreach through our owned media channels, such as social media followers and E mail based on customer preferences and brand specific Onboarding will drive higher first time buyer retention rate.
Our creative teams are developing dedicated category awareness campaigns focused on the collections or brands features and benefits versus promotional pricing.
Operationally I wanted to commend our teams for managing what is in our control and delivering overall SG&A expense leverage in 2021 that contributed to exceptional earnings growth.
Dave will share in more detail, our 2022 expense plans contemplate deeper investments and our organizational capabilities with the goal of evolving our business to have a digital first mentality both in how we operate and how we engage with our customers.
Our belief is that to be competitive in our space, we must meet our customers, where they are and anticipate where theyre going for this we need our teams to model the digital mindset.
In summary, we have great underlying momentum in the business, we're confident in executing on our Big Dam blueprint, we are attracting new customers growing our family of brands and working on several consumer facing and operational initiatives that position Duluth for many years.
Our profitable growth.
And lastly, I'd like to thank all our team members for an outstanding year in serving our customers at the highest levels and contributing to our record results.
With that I'll turn it over to Dave to provide more details on our fourth quarter and what our financial plans look like for 2020 to date.
Dave.
Thanks, Sam and good morning.
I'll begin this morning with a brief overview of our fiscal year results and I'll cover our fourth quarter performance and conclude with commentary on our outlook and guidance for 2022.
As Sam mentioned in his comments the delivery team delivered outstanding results for the year and made the necessary adjustments to maintain healthy brand growth in the face of a fluid environment.
As customers shifted much of their business back into our stores, our retail channel realized significant growth over 2020 with a 46% increase.
While our direct channel contracted four 9% from the prior year's record 32% increase.
As a result, our mix between channels is now, 63% direct and 37% retail compared to two years ago, when direct was 57% and retail was 43%.
This rebalancing of sales between channels confirms that there has been some permanent adoption and comfort with customer shopping online with much of its spurred by the pandemic.
This also reaffirms Sam's comments regarding our strategic shift to being digitally led and focusing the majority of our investments to driving long term growth in our direct channel.
Net sales for 2021 were $698 6 million up nine 4% compared to $638 8 million last year and up 13, 5% compared to 2019.
While the sales results are in line with our original plans for the year. We are on track to greatly exceed those plans if not for the supply chain disruptions that left inventory gaps and unfulfilled customer demand.
We estimate that roughly 15% to $20 million of demand exceeded our supply in the fourth quarter alone as inventory levels were running below last year by as much as 25%.
Although inventory flow remains slower than normal, which we expect will impact sales in the first half of 2022.
We're beginning to see some early signs that gives us confidence the supply chain congestion will improve by the second half of the year.
Today, we.
Reported net earnings per share of <unk> 90 for fiscal year 2021, a record level of annual earnings for Duluth.
And an increase over last year of 117%.
Our operating margin expanded 250 basis points to six 3%.
Driven by higher product gross margins and expense leverage.
And our full year adjusted EBITDA of $77 4 million represents dilutes highest level of earnings ever.
The investments we made over the last few years to build our innovative product pipeline.
Deepen our marketing effectiveness and leverage an omnichannel infrastructure are materializing in our results.
Turning now to the fourth quarter, we reported net sales of $270 8 million up five 8% compared to $256 million last year and up four 3% compared to the same period in 2019.
Our direct channel sales were down to 2024, 1%, but grew 10, 3% over 2019.
While the retail channel was up 32, 8% over 2020 and down five 9% to 2019.
Traffic to our direct and retail channels improved as the year progressed and were up in the fourth quarter with web visits increasing 7% and store traffic, increasing 15% to last year.
For the full year, our sales per customer increased 10% driven by a 10, 5% increase in average order size.
The healthy increase in marketing spend in the back half of the year to build brand awareness drove a 20% increase in first time visitors to our website.
In addition, we strategically moderated our promotional pricing during key holiday sale events that contributed to lower conversion.
Greatly increased merchandise gross margins by as much as 400 basis points.
Both our men's and women's businesses benefited from a higher mix of full price selling and less clearance inventory compared to last year.
Roughly a third of our sales in the fourth quarter, we're at full price, which is up from the low 20% levels in prior years.
Our clearance inventory position post the holidays was in the 8% to 10% range as a percentage of total inventory compared to 23% to 25% last year.
The lower level of clearance inventory is largely reflective of a structural shift in how we are planning and positioning inventory to maximize turns and profitability.
This shift impacted sales in January as well as in the first quarter year to date.
While simultaneously bolstering our gross margin on these sales by several hundred basis points.
As we mentioned on our prior calls to help mitigate the supply chain delays, we took action to expedite certain goods through airfreight and other higher cost of transportation forms to maintain in stock positions on core items and holiday themed products.
In total the incremental cost to expedite was $10 million.
Roughly $6 million was expense in the fourth quarter impacting gross profit by 220 basis points.
While the remaining amount will impact 2022 gross profit as we sell through the expedited items.
Despite the higher inbound freight costs gross profit margin in the fourth quarter improved 80 basis points over the comparable period last year.
Turning to expenses.
SG&A for the fourth quarter increased 15, 5% to $121 4 million compared to $105 1 million last year.
As a percentage of net sales SG&A expense increased to 244, 9% compared to 41, 1% last year.
This included increases of $8 $2 million in general and administrative expenses.
$6 $7 million in advertising and marketing expenses, and an increase of $1 4 million in selling expenses.
Selling expenses as a percentage of net sales in the fourth quarter decreased 30 basis points to 16, 4% compared to 16, 7% last year driven by shipping costs leverage from retail comprising a greater percentage of the total business.
As well as efficiency gains made in our fulfillment center operations and store labor.
We took concerted action in 2021 to increase wage rates across our workforce.
In all our locations, we strive to be the employer of choice to attract and retain the best talent in retail.
On average we increased hourly wage rates nearly 20% and have enhanced our pool of employee benefits that we believe positions us amongst the top tier in our industry.
These incremental costs were largely absorbed in our operations and leverage on higher sales in the quarter with greater productivity and direct fulfillment and on our store sales floor.
We beat our goal of leveraging full year total selling expenses and realized 130 basis points of improved selling costs as a percentage of sales.
Advertising and marketing costs as a percentage of net sales increased 190 basis points to 12, 5% compared to 10, 6% last year.
By redirecting media spend to digital channels and being less price promotional this peak season, our strategic objective is to build greater brand awareness, both on our core Duluth brand and our emerging brands.
The incremental advertising spend along with greater investments in creative assets support our objective of attracting and retaining customers based more on product features and benefits versus purely price.
To that end, we're pleased with the advertising contribution we realized in both growing new high value customers and margin gains.
The near term proof point of this strategy is in customer retention rates.
Seeing new buyers that made a second purchase within a 30 day window of their first purchase.
Compared to 2020 this rate has improved in the back half of 2021, where we shifted significant advertising spend during the year.
And we believe would have been even stronger if not for the inventory gaps due to supply chain delays.
General and administrative expenses as a percentage of net sales increased 220 basis points to 16% compared to 13, 8% last year due to additional personnel and technology costs as well as incremental incentive compensation and depreciation from investments.
We have made in logistics and technology.
As we shared on our last call. We opened our third distribution center located in Salt Lake City in the third quarter to expand our fulfillment capacity, particularly during peak volume periods.
And to shorten our reach for delivery to customers in the Western U S.
The teams did a great job getting this location up and running in time to allow for a more balanced outbound operations during peak periods, while tapping into a new diversified labor pool.
Additionally, as Sam mentioned, we just recently signed a lease on a new distribution facility located in Georgia, where we will invest in highly efficient automation capabilities and be in a position to cut delivery times to roughly 40% of our customer base.
This investment will be dilutive single largest to date and represent a critical step in transforming our direct fulfillment operations from a cost center to a value creation center.
To recap the fourth quarter bottom line results adjusted EBITDA for the period was 33 million a 14% decrease from last year due to the greater investment in marketing and personnel to support the shifts in our strategic brand positioning and longer term growth objectives.
In addition, the incremental expedited freight costs, we incurred while weighing on short term profit growth does not undermine the earnings growth power in our business today.
Net income for the period was $17 4 million or <unk> 53 per diluted share compared to net income of 21 8 million or <unk> 67 per diluted share reported in the fourth quarter last year.
Moving onto the balance sheet, we ended the quarter with net working capital of $107 million.
Including $77 million in cash and zero outstanding on our line of credit.
Free cash flow for the full year was $81 6 million a significant increase over last year's free cash flow of $38 5 million due to the strong annual earnings growth.
Low inventory levels, and moderated capital spending of $15 million.
Despite supply chain disruptions and delays on inbound receipts.
The actions, we took to expedite key items and the flexibility in our business model contributed to positive sales growth and a healthy balance sheet position in 2021.
Turning to fiscal year 2022, as we entered the year our top line trends are being impacted by two factors.
First <unk>.
Lower levels of clearance inventory coming out of the fourth quarter compared to last year are weighing on our ability to realize sales growth.
As I mentioned before our mix of clearance inventory is less than 10% of the total compared to 25% last year.
With a total amount of inventory also lower than last year, the amount of clearance is down 68% compared to the prior year balance.
The offset to that impact as our product gross margins quarter to date are running significantly higher than last year.
The second factor impacting sales trends are slow receipts on spring and summer seasonal goods that were due to arrive by this time.
We are making adjustments to the spring collection events and marketing promotions, but the combination of these two factors now has is projecting first quarter sales at a low to mid teens percent decline from 2021.
The good news is inbound receipts have accelerated giving us confidence that the supply chain congestion is improving.
Between our channels retail continues to outperform direct and is still driving positive sales growth over last year.
Assuming inventory receipt flow improves heading into the back half of 2022, we expect the sales growth the team between channels to be more balanced and support the mid to high single digit growth rates implied in our new guidance.
To that end, we have taken actions in a number of ways to pull forward our inventory flow where we can.
We have placed earlier delivery dates with vendors, we've diversified our ports of entry to avoid the bottlenecks and we're prepared to selectively expedite orders to maintain in stock positions in key items and seasonally sensitive products.
Due to the strength of our full price selling and managing with less clearance goods, we expect our product gross margins in the near term and absorbed the transitory expedited freight costs and we will pick up close to 400 basis points of gross profit margin growth in the first quarter.
Inventory flow and decisions on further expediting activity will determined gross profit margin performance in the subsequent quarters.
But we do expect to realize roughly 50 basis points of improved gross profit margin for the full year.
SG&A expenses in the near term will be burdened by the <unk> of selling cost increases from mid 2021 in incremental G&A from added logistics and technology infrastructure.
As well as personnel costs from additional talent and skill sets.
For marketing, we intend to maintain a similar level of marketing spend on a percent of sales to this year and between 10 and 11% of sales with the opportunity to leverage advertising costs in the back half of the year.
Overall, we expect SG&A as a percentage of sales to increase slightly 20 to 30 basis points for the full year.
As we have noted previously the operating and capital investments, we're planning to make across the business will facilitate expanded distribution capacity heightened product and brand development to build scale in the emerging brands and elevate our data analytics capabilities.
All with an eye towards evolving the business to be more digitally led.
We are encouraged by the healthy customer demand when our business and confident that the strategic initiatives. We are embarking on will allow us to build a powerful brand portfolio, while reaching our goal of achieving $1 billion in sales by 2025.
Additionally, our commitment to generate bottom line growth annually as a management priority.
As is generating positive free cash flow inclusive of our capital expenditures.
As such in 2022, we expect operating margins to continue the multiyear expansion.
Our capital expenditures for next year are planned to be $57 million with the majority of this spend centered around the distribution center expansion and logistics productivity plans and existing Dcs.
And the remaining amount will be in technology investments that Sam touched on.
Our funding plans for the capital investments are still under review, but we have the financial flexibility and liquidity to consider our mix of funding options, while remaining within our comfort leverage ratio of one five to two five times adjusted debt to EBITDAR.
As a reminder, our committed bank loan facility of $150 million has over four years remaining on its term and is fully available today.
I'll note that while we are still evaluating the alternatives for funding the capital plans. Our interest expense line will still be in the $4 million to $5 million range due to existing capitalized lease accounting treatment that partially flows through interest expense.
Lastly, we.
We understand that over the long term our ability to create shareholder value is greatly driven by our success in generating a return on invested capital that exceeds our cost of capital.
Our inflection point on ROIC coincide with our inflection point on operating margins roughly 18 months ago.
These measures provide the guardrails of our operating plans and capital allocation decisions as we've outlined them today.
To that end our fiscal 2022 guidance is as follows.
Net sales of $730 million to $755 million.
Adjusted EBITDA in the range of $84 million to $88 million.
EPS in the range of <unk> 93.
To a $1 two per diluted share.
Capital expenditures of $57 million inclusive of software hosting implementation costs.
In closing, we're pleased with our exceptional results in 2021 proud of our team's execution to deliver the results and confident in the outlook we provided for 2022.
And with 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 telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Jonathan Komp with Robert W. Baird. Please go ahead.
Yes, hi, good morning. Thank you I wanted to first ask you about the direct business. It sounded like the traffic was up in the fourth quarter, but the sales obviously were down on a one year basis. So just want to understand a little bit more what drove that disconnect and how long do you expect that to continue given the inventory situation.
<unk> and then when you look at direct for the full year.
It sounds like Q1 will be starting soft so maybe just any more color on the on the trajectory and what supports your confidence in the growth after the first quarter.
Yes, hi, Jonathan that Sam Thanks for that question, so as we said.
Fourth quarter January in particular.
<unk>.
Largely impacted by our clearance inventory position too.
2020.
Had a bit more clearance quite a bit more clearance and we took some pretty aggressive price action there and so that was the.
The biggest miss for us in terms of sales.
And then and then similarly.
As well as we'll share our quarter to date.
New receipts for Q4.
Fall winter were delayed and so as we got through a really healthy November and.
Partial December selling.
We sold down into our new receipts and left us in.
In a much leaner inventory of regular priced goods, having said that the direct business in terms of <unk>.
Consumer demand consumer traffic really healthy we ended we ended the year up 95% 13, five on a two year stack.
Margins continue to expand because of our disciplined approach.
Two two pricing we could have made the decision in Q4.
Promotional price some of our regular price goods, because we are missing so much clearance and we're under pressure on the top line, but we made a strategic decision earlier in the year that we were going to were going to stay the course in terms of positioning ourselves.
From a regular price perspective, and really focus our efforts around.
Brand health consumer engagement.
Innovative products that we're going to bring to market with great price value relationships.
And not not go into heavily promotional.
Tactics to drive to drive the top line.
Yeah, that's really helpful. And then maybe switching to margin I know Dave.
Last quarter, you gave us some.
Some guide rails to think about gross margin and SG&A for 2022, and it looks like there's some moving parts there on both of those lines. So could you maybe just highlight.
Both on gross margin with which looks a little bit lower but also G&A, which looks like less deleverage versus the prior view, maybe what moving parts you see there.
Yes sure John .
Gross.
Profit margin.
Given the gains that we have been picking up and really to focus on.
Selling full price versus as much promotional clearance we have is.
What drove some of the Cigna.
The significant increase in.
In this past fourth quarter and what we're seeing in the.
First quarter.
The one transitory item that's weighing on that as the freight cost that we had from expediting goods in and and that's in the neighborhood of $4 million that that will absorb in in the first half of this this year.
So absent that we would certainly see more gross profit margin flow through in.
In 2022, but but as it is we're looking at 50.
50 basis points on a full year and.
And thats with healthy.
Selling through margins as well.
SG&A.
We know we've got.
<unk> of cost that will.
Lap this first half of the year and Thats, creating some deleverage.
But as we talked about some of the investments.
Those those will.
Layer in over the course of 'twenty, 'twenty, two and see slight deleverage our commitment though.
As operating margin expansion and that's that's what the guidance suggests.
So that gives you some color.
Yes.
Okay, Great and maybe just one more bigger picture question. When you think about the 2025 targets, but do require some <unk>.
Acceleration in the revenue growth and in the rate of margin expansion compared to what you're guiding for in 2022. So could you maybe just highlight.
Your broader thinking on sort of how 'twenty two fits within the next three to four year targets and at this stage are you more confident in the sales target or in the margin target or how should we think about balancing.
Growth in showing leverage over time.
Yes, Jonathan I'll talk a little bit at a high level from a strategic perspective, and then I'll turn it over to Dave to address some of those financial questions.
Yeah, when we think about our roadmap to $1 billion.
As you know, it's not going to be it's not going to be linear.
Going to be some.
Some ups and downs.
So some growth that increases over the years largely driven by some of the investments we're making in.
Three three key areas. So the first being our continued.
<unk> and investment in our product development group I talked about it in the prepared remarks, we've got internal folks that are doing a great job that's their focus.
They are incredible and we don't believe that that should be outsourced.
As we talk about a lot.
<unk> is part of our secret sauce, and and we're going to continue to invest in product development materials sourcing all of those types of things. The second is the investment that we're making to beginning this year with our logistics network and really excited about this additional fulfillment center in Georgia.
It'll be fully automated, which obviously increases not only.
Speed and accuracy, but is much more cost efficient.
And from a capacity perspective gives us.
Significantly more room to grow.
As we move forward and that creates a pretty incredible value for us.
And then the third component that I mentioned in my in my prepared remarks was our investment in ERP and just continuing to stay on top of.
Some technology some systems some of the things we're doing around consumer insight and data analytics all of those things will help us make better more informed and better decisions as we move forward, which we believe will continue to drive not only the top line, but will continue to drive.
Improved inventory decisions that translate to greater margins and greater inventory turns.
Yes.
John I'll just add.
Between top line and margin growth.
Obviously, they are both important to us.
There are factors that will impact the top line that might be out of our control like we're experiencing with supply chain today, but but we've got maneuverability.
Below that to continue to drive the operating margin. So I mean I think our.
Vince is balanced between both of those.
And picking up 300 basis points of operating profit margin between now and then as is going to come probably one third of it from gross profit margin expansion in two thirds from from SG&A leverage.
That will gain the efficiencies from the investments, we're making today so.
High level of confidence that it's that it's achievable.
That's our commitment.
Yeah, that's very helpful. Thank you and best of luck.
Thanks, Jonathan.
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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