Q1 2022 Duluth Holdings Inc Earnings Call
[music].
Good day and welcome to the Duluth Holdings first quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on a touchtone phone.
To withdraw your question Press Star then.
Two. Please also note. This event is being recorded and now I'd like to turn the conference over to meet the Mckee. Please go ahead.
Thank you and welcome to today's call to discuss Duluth, Trading's first 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.
Dave Loretta Chief Financial Officer on today's call management will provide prepared remarks, and then we will open the call to your question.
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.
Piece 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.
With that I'll turn the call over to Sam Sato, President and Chief Executive Officer Sam.
Thank you Lisa and thanks for joining today's call.
We made tremendous progress on key strategic initiatives over the course of the first quarter and I'm excited to share some of the details.
We know that our customers demand well designed products that are grounded and durability functionality and our solution based for the intended end use our customers take on life was around two hands and embrace a can do attitude in both work and play.
To address our customers' various needs and attract new customers, we set out to create distinct positions for each of our sub brands with product assortments that resonate and deliver against their expectations.
I'm pleased to highlight that during the first quarter, we introduced our new Duluth Duluth trading company brand logo. The Duluth brand is focused on the lifestyle of Americana workwear.
The first quarter also marked the transition of our Alaskan hard gear brand to AK HG and we launched our women's collection in April .
H H G is focused on more technical products needed to support outdoor activities as well as the lifestyle and enjoying the outdoors.
And importantly, our first layer business has undergone many updates we've elevated our assortments through the creation of new innovative products and intensified our focus on growing categories.
Collectively these updates are meaningful steps forward to position, our overall Duluth trading company business under a common umbrella that will enable each sub brand to serve our customers desire for being active in their work and their recreation.
I'll share more shortly how we see the evolution of our business and brand positioning to address the growing active lifestyle of our target customers, but first I'll touch on our recent results.
Today, we reported first quarter net sales of nearly 123 million.
Net income loss of $1 3 million and earnings loss per share of four cents.
These results were better than our internal plan as was our early projections and demonstrate our continued operational effectiveness in the face of a dynamic macro environment.
With inventories, reaching a healthier position at quarter end and digital marketing tactics that draw on elevated data analytics. We are meeting the needs of our customers and executing our strategies for long term brand growth.
The efficiency of our Omnichannel model is producing a consistently strong gross profit margin, which for Q1 was 54, 6% an increase of 470 basis points over last year.
We continue to fund our strategic brand development initiatives with an increase in creative asset investments supporting our Duluth by Duluth trading company in 8-K, H G sub brand launches.
Our new brand positioning features seasonally relevant items for active outdoor categories and swim gardening and hiking.
And that's our receipts improve the customers' response to our offering overall is strong and led to high single digit sales growth in April .
With the support of new brand awareness campaigns, but momentum continued through the memorial day weekend with customer demand exceeding last year.
Our reported net sales for the first quarter were nearly 123 million and were planned to be down to the prior year due to expected inventories delays and our strategic shift to carry meaningfully lower levels of clearance inventory.
In fact, we ended the quarter with clearance goods, making up 3% of total inventory compared to 8% last year.
Our overall inventory position at quarter end is 6% higher than last year, a significant improvement from the beginning of the quarter, we were down 18%.
Importantly, the makeup of our inventory is significantly healthier compared to last year.
The positive outcome of our strategic transition and inventory mix is that we are generating significantly higher gross product margins fueling gross profit dollar growth, while absorbing higher than normal transportation costs.
Our reported gross profit margin of 54, 6% includes the additional expense of roughly $4 million in airfreight costs associated with inbound inventory from last fall.
Absent these incremental freight costs, our gross profit margin is the strongest we've seen in the last five years and a direct result of inventory management and pricing disciplines put in place.
Our strategies continue to yield results that support improved operating margins, which Dave will go into further.
Our EPS loss for the quarter of <unk>.
Flex the impact of the $4 million in airfreight costs I, just mentioned, but also sound operational expense management.
Absent the airfreight costs, our earnings per diluted share in Q1 would have been a positive five cents.
Our business is not immune to the inflationary pressures in fuel labor markets and commodity prices.
We will continue to make adjustments to our model to keep the momentum going across the business and continue to execute our strategic playbook.
Our teams put many actions in place to address some of the headwinds we identified last year.
For example, we've been selective in raising retail price points on certain core items and expect further adjustments to prices in our fall and winter assortment.
We established early delivery dates from our manufacturers to account for our continued supply chain congestion and.
And we also plan to air freight orders on certain new fall and winter products to meet key offer dates.
We anticipate being well positioned with merchandise to meet customer demand during the important sales periods, beginning with father's day and into the fall and winter seasons.
We were able to flex our variable expenses below last year and realized expense leverage relative to our plans that support the continued investments, we're making in our brand portfolio.
These investments take advantage of the broader trends, we see in our target customers to live an active lifestyle and are designed to unlock tremendous growth opportunities, while mitigating the impact of near term macroeconomic factors.
To that end, we purposely held back some customer acquisition dollars in our first quarter marketing spend given the lighter inventory levels that benefit of being more selective on attracting new buyers is we've seen a higher average order size on their first purchase.
As receipt flow improved we dialed up digital prospecting in the back half of the quarter and as a result, new buyer growth increase with much of the activity driven by our enhanced brand messaging and introduction of the womens collection in 8-K H G.
New buyers, who are motivated by the new assortment focused brand messaging and product stories are significantly more valuable to us.
Net sales in our retail store channel for the first quarter was up versus last year, 0.4% driven by a higher average transaction value that is up 6% compared to last year.
More recently an improvement in our conversion metrics indicate that our heightened focus on store associates' product knowledge training and assisting customers to build their basket along with better inventory position are paying off quarter to date sales in the retail channel are trending up to last year.
<unk>.
Net sales in our direct channel was down for the quarter or 12% largely reflecting the heavy clearance volume and last year's direct sales, but also our purposeful decision to run lighter in working media in February and March.
With a better inventory position by April we leaned into digital advertising and social media and paid search to accelerate the direct channel growth.
In April direct sales were up low teens to last year.
Our rebranding efforts are paying off we introduced our new Duluth Duluth trading company brand logo and have ramped up the messaging, providing a more unified voice across mens and womens.
Customer response has been amazing Duluth.
Duluth favorites, such as flex fire hose pants for men and classic Noga performance stretch pants for women are great. Examples of products designed to support an active get it done lifestyle with features that durability that stand up to a wide range of work activities.
This spring we built upon the Duluth brand success, we've had in our garden collection by introducing a short version of the womens heirloom gardening overall and new styles that leverage our other well known fabrications such as dry on the fly.
Double flex denim.
And fire hose callbacks.
These are innovative led products that are seasonally relevant and provide real benefits such as moisture wicking cooling and comfort.
Our brand realignment of AK H G focuses on outdoor recreation for our customers, who embraced the work or play addressing their needs for high performance apparel and gear that can stand up to the conditions they face while Lindsay elements.
Formally Alaskan hard gear, we've always infuse this brand's identity with high quality innovative clothing in outerwear and is functional and allows for comfort and movement, while outdoor conditions change.
While we know the collection can stand up in these conditions. We also know that most of our customers simply want to trail hike or fly fish in the stream.
This brand positioning opens up 8-K, H G to a much wider consideration set and expands the brand's potential for the everyday outdoor adventure that may be closer to home.
Our rebranding of AK HG coincided with the introduction of our women's collection.
Since then the 8-K HG womens segment as quickly reached a similar level of penetration as women's has for the Duluth brand at roughly one third.
The five star reviews are quickly, adding up for the new collection and our live action branding allows for a broader aspirational imagery of women and men together and highly photogenic in real life settings. We're excited for the long run potential of H H G and growing our women's segment.
Our first layer products outperformed and remains core to our business, serving both men and women, we consider our offering to be America's most comfortable under <unk> and have collected over 40005 star reviews that being said, we see greater potential particularly in.
The women's assortment.
Included in this collection is the perennial favorite no yank tank.
The expansion of our base layer Thompson Brause for women has seen significant growth of close to 40% in the first quarter.
Lastly, within our family of brands is best mate, which realized a healthy 30% growth rate in the first quarter, albeit still small relative to the other brands.
The curated offering within best made allows for great storytelling about the source and craftsmanship behind the products, but also unique individuals that live and work the lifestyle embodied in the best made spirit.
Our men's summer collection features when in tops and bottoms swimwear and beach accessories inspired by the Pacific coastline and tropics of Hawaii.
In partnership with the iconic brand Kahala, we offered two exclusive aloha shirt styles.
On our last call we shared details about our capital investment plans for the year and in support of our Big Dam blueprint.
I'm pleased to report that we are on track with the early stages of our logistics expansion and automation project and we've kicked off core technology initiatives that serve to advance our internal capability and build the foundation to support long term growth.
Within our existing fulfillment centers, we are implementing capabilities that will be fully operational in advance of our peak season. This year.
These capabilities increase the speed accuracy and capacity of inbound receipts with sortation equipment and expands daily capacities.
The quicker we can receive inventory into our system. The faster we can make it available to our customers.
In addition investments are underway to automate sortation and scanning equipment on outbound orders facilitate quicker replenishment of our store inventory and shipping cost savings through automated carton labeling.
The investments, we're making in merchandising tool sets will ground our capabilities to continue driving efficiencies in how we plan buy and seamlessly move from one season to the next.
The enhanced systems will allow for quicker and more insightful assortment decisions ultimately our merchandise planning tools will generate automated recommendations based on deeper trend analysis and allow our teams to focus on higher value merchandise activities.
The utilization of customer insights and data analytics will better enable our merchandising strategies and long range brand growth decisions.
<unk> been engaging in a number of deeper reviews of our customer base. The interactions, we have with them and measuring the opportunities for greater market and channel penetration.
These reviews are informing our plans as well as the technology, we're investing in to activate our plans.
In summary, despite the external environment posing challenges, we continue to see healthy underlying demand from our customers for products and shopping experiences that meet their needs. We are in a strong financial position with ample access to liquidity positive cash flow and earnings power.
Our strategic growth plans.
With that I'll turn it over to Dave to provide more details on our first quarter and our outlook for the balance of the year.
Thanks, Sam and good morning.
For the first quarter, we reported net sales of $122 9 million down seven 9% compared to $133 4 million last year.
11, 8% compared to the same period in 2020.
The decrease in clearance sales between this year and last was roughly $11 million and was the contributing factor in our sales declining year over year.
Our direct channel sales were down 12, 1% from last year, while the retail channel was up.
4% driven largely by a 6% increase in average transaction value in the stores.
As we shared on our last call we anticipated softer sales in the first quarter due to the heavier clearance position. We were in last year and continued transportation delays on new seasonal and core year round products.
Because of these two factors, we focused much of our business on selling at regular price and preserving some of our traffic driving media spend until later in the quarter when inventory reached a better position and our new sub branded collections were enhanced.
By April our customers responded well to the new spring assortment, the new brand messaging and better in stock positions on core items.
Customer traffic and conversion through both our store and digital channels improved in the back half of the quarter.
As Sam mentioned total net sales for April increased high single digits and the momentum has continued with strong customer demand through the memorial day weekend.
During the quarter average order value and sales per customer overall increased mid single digits, driven by the demand strength of our core offering and being strategically less promotional compared to last year.
The higher customer sales productivity is combined with an improving trend on retaining customers, who have shopped with us more than once and where new buyers prior to last year.
Buyers, who renew and purchase primarily full price items spent significantly more on their first purchase and are returning more often.
Our retention rates in the first quarter are much stronger for these conventional buyers and the spend per customer is higher by roughly 30% versus price driven buyers.
With these insights we are adjusting our marketing mix and customer segmentation to strategically target the conventional buyer, which leads to higher customer lifetime value.
The amount of clearance inventory was down almost 70% at the beginning of the quarter relative to last year driving significant improvement to our product gross margins and an increase of 470 basis points in our reported gross profit margin to 54, 6% compared to <unk>.
Nine 9% last year.
Our first quarter gross profit amount of $67 1 million compared to last year of $66 5 million included nearly $4 million and expedited freight expense that was spent last year to airfreight certain items in to bypass the shifting towards.
Those items represent our best selling year round core items, such as men's fire hose pants, and Buck naked briefs and we're we strive never to be out of stock.
Okay.
Absent the incremental freight costs, our first quarter gross profit margin would have matched a historical high for our first quarter at nearly 58%.
We do anticipate some expediting activity this year, although not to the same magnitude as last year and it is factored into our guidance.
Turning to expenses SG&A for the first quarter increased five 2% to $68 million compared to $64 6 million last year.
As a percentage of net sales SG&A expense increased 55, 3% compared to 48, 5% last year.
This included increases of $2 8 million and general and administrative expenses $1 1 million in advertising and marketing expenses.
And the decrease of 500000 and selling expenses.
Selling expenses as a percentage of net sales increased 80 basis points to 15 eight.
Compared to 15% last year, driven by the higher hourly wage rates implemented across our historically and fulfillment center network in the back half of 2021.
Additionally, fuel surcharges on our outbound customer shipments contributed to the selling expense deleverage.
We expect to realize a similar deleverage and selling expenses in the second and third quarters before annualizing, the wage rate increases and realizing efficiency gains to offset the higher costs.
In terms of the field charges, we are anticipating the elevated levels will continue throughout the year.
As planned advertising and marketing costs as a percentage of net sales increased 160 basis points to 10% compared to eight 4% last year as a result of the development of creative content for our new brand positioning of Duluth, and 8-K H G.
These investments represent roughly 30% of the total cost this quarter and will support brand messaging and feature products and future awareness and customer acquisition campaigns.
In addition, we reduced the direct mail catalog portion of our working media by roughly 50% and our continued strategy to leverage more flexible digital media targeting a higher return on ad spend.
Our paid digital media spend represented about 40% of the total advertising spend this quarter and we expect that to increase to close to 60% in the second quarter, representing the largest component increase in our marketing mix.
Additionally brand awareness investments designed to develop new customer audiences represent roughly 25% of the total spend and are strategically important to establish momentum in the subsequent quarters.
Overall, we expect the second quarter advertising and marketing cost will increase and deleverage 80 to 100 basis points.
General and administrative expenses as a percentage of net sales increased 440 basis points to 29, 5% compared to 25, 1% last year.
The $2 8 million increase from last year represents additional personnel and technology costs as well as fixed costs for our Cherry Hill, New Jersey store and Salt Lake City fulfillment center that opened in the back half of last year.
We expect additional deleverage in our second quarter for similar reasons, but to a lesser extent.
For the back half of the year, we expect to realize expense leverage in G&A expenses in connection with anticipated sales growth.
As of today, our store count stands at 65 with no planned store openings for the balance of the year.
As we discussed previously we are evaluating locations for potential store sites in 2023, and we will share more details once we have signed leases.
<unk> EBITDA for the first quarter was $7 9 million, a 17, 5% decrease from last year and 80 basis points of adjusted EBITDA margin contraction.
Our net loss was $1 3 million or a loss of four cents per diluted share compared to a net income of $500000 or two cents per diluted share reported in the first quarter last year.
Excluding the expedited freight expense from last year, our EPS would've been a positive five cents per diluted share.
Moving on to the balance sheet.
We ended the quarter with net working capital of $106 million, including $40 million in cash and zero outstanding on our line of credit.
Compared to the same period last year, we had $26 million in cash and $17 6 million outstanding on the line.
We anticipate minimal borrowings on our available line of credit, which stands today at $150 million.
Our inventory level is roughly 6% higher than last year at quarter end.
And isn't a significantly healthier position than where we were at the beginning of the quarter.
Spring and year round receipts that were delayed as of year end have arrived over the course of the quarter supporting the sub brand relaunch is effectively.
Our current mix of clearance inventory as 3% compared to 8% last year and is at the appropriate level for where we are in the spring and summer season.
Yeah.
Our capital expenditures, including the cost of software implementation is expected to be $40 million in 2022 versus our previous guidance of $57 million.
The lower amount represents timing of progress payments for our new fulfillment center facility.
On the heels of our lease fighting for the building and a dairies Bill, Georgia, we finalized the contract with our automated storage and retrieval systems provider and have reflected the updated cash flows and our projections.
The shift in timing of progress payments will impact early 2023 and benefit our 2022 year end cash position.
We now expect free cash flow for 2022 will be roughly $15 million to $20 million.
As we shared the investments we're planning to make across the business will facilitate expanded and more efficient distribution capacity.
<unk> and brand development capabilities and add to our customer insights and data analytics to better inform our assortment and marketing mix.
These investments are all focused on being more digitally led as a business and are key components of our big Dam blueprint.
To summarize our outlook for the second quarter and back half of 2022.
We expect sales in our direct channel to be up mid single digits in the second quarter and up low teens in the back half of the year.
Our retail sales, we expect sales to be up mid single digits in the second quarter and through the back half of the year.
We expect gross profit margin to be flat to slightly up in the second quarter and down roughly 50 basis points for the back half of the year.
We plan to increase advertising expense by roughly $2 million in the second quarter over last year and spend roughly the same amount in the back half of the year compared to last year.
With selling expenses, we expect the second and third quarters to be similar to the first quarter and the increase as a percent of sales.
In the fourth quarter to be roughly flat to last year as a percentage of sales.
Overhead expenses in the second quarter will increase as a percent of sales by 150 to 200 basis points.
And be down 50 to 100 basis points in the back half of the year as a percent of sales relative to last year as we gained leverage on sales growth.
We are reaffirming our full year guidance with net sales of $730 million to $755 million adjusted.
Adjusted EBITDA of $84 million to $88 million.
And EPS in the range of 93.
Two $1 two.
In closing, we're pleased with the great start to the year, particularly given the dynamic environment.
Our teams remain focused on the needs of the business and our customers and executing on our strategic plans.
And with that we'll open the call for questions.
Okay.
Well now begin the question and answer session to ask a question Press Star then one on your Touchtone phone.
You're using a speakerphone you may need to pick up your handset before pressing the keys and to remove yourself from the question queue Press Star then two.
And your first question comes from Jonathan Komp with Baird. Please go ahead.
Yeah, Hi, good morning. Thank you I wanted to start by following up on the brand realignment and I think Sam you walked through pretty clearly the rationale, but I'm curious if you could share more on the consumer reception, so far and if if you know what are the differences are being noticed and any feedback you've gathered and then you know as you look for.
Or sort of any any changes in brand character positioning or or sort of a product approach as a result of the realignment that you see going forward.
Yeah. Thanks, Jonathan.
I appreciate the question yeah. So at a high level. You know this was this was part of our initial work within the Big Dam Blueprint and it was it was to create this are.
These really purposeful and distinct positions.
For each of the sub brands and and it allows us not only from a product development perspective to be really narrowly focused on all of the performance and benefit features in developing and designing the products, but but then gives our brand marketing team the ability to.
To really lean in heavily.
And capture the intended use of each product so.
At the start of our strategic work that was one of our priorities to create distinction and.
In a unique position.
Two I will say that yeah, we've seen some pretty incredible response, and and I would point you back to our prepared remarks around a cage G. In particular.
We've created some clearer separation relative to what that represents in comparison to Duluth, and best made and and really we saw it as we as we launched the women's piece in April .
Immediately went to.
A similar penetration point as as <unk>.
Women's has for the much larger Duluth brand so.
But the combination of of distinct positions front of product development and from a brand marketing perspective, I think is serving us well and importantly is creating a clear understanding by our customers.
Okay.
Great. That's really helpful perspective, and then maybe a follow up on that on the full year outlook I know.
You mentioned that Q1 exceeded the internal plans you've maintained the outlook for the year understanding. It's early in the year, but are you are you baking in any additional conservatism in your outlook for the balance of the year or just trying to understand your thinking and your confidence level after a better than expected Q.
One result.
Yeah.
Yeah. So I'll just I'll answer quickly and then I'll, let I'll, let Dave maybe provide a little bit more color you know one of the things where we were thinking about all along as we planned.
Our receipt flow this year and in part with.
With supply chain constraints that we that we faced last year with our team took some really purposeful and intentional action.
Like Oh scheduling earlier receipt dates to ensure that we accounted for you know these multiple weeks of delay and so I think that's starting to show in the receipt flow as we went through Q1.
And expect that to be the case doesn't go through Q2, and then and then importantly through the buildup in Q3 and into the <unk>.
Peak holiday season in Q4, as a reminder, last year.
You know we were talking about coming out of Q3, how are inventories were now dipping into the mid 20% below 2020 levels and that continued through Q4, so part of our forecast and our planning for this year.
Includes.
What we what we expect was or what we what we thought was projected was some demand we left on the table last Q3 and Q4 in particular because of the lack of inventory.
Yeah.
That makes sense and I guess when you look at April specifically.
Could you maybe further isolate some of the some of the tailwind that you saw and maybe relate that to the.
The discussion about some of the marketing reallocation and the strategies for the balance of the year and whether or not you could carry forward. Some of the successes that it looks like you you may have seen in April .
Yeah, I think you know what what has what has impressed me since joining the company a year ago, Jonathan is the flexibility in our in our ability to target.
And and increase or decrease.
Purposeful AD spend and so you know this is unlike anything we've experienced in terms of supply chain and its impact on availability of inventory and so the great news is when inventory flow isn't what we needed to be we can dial that back and then as we start to see.
Inventory blow wind at a at a higher rate, we can dial that up pretty quickly and part of that is because we made a strategic shift over the last couple of years.
Two to a more digital.
Marketing strategy, which which is much more flexible than.
The the linear.
Advertising vehicles, we would use in the past where you had to do you have to commit to contracts you know well in advance and then youre locked in so our brand marketing team is doing an unbelievable job of pulling levers throughout the.
The months in the weeks quite frankly, and so in the case of April as inventory started to flow in and especially things like.
The H H G women's launch that was initially planned to launch in March and because of the receipts wondering here we've pushed it out and as soon as we saw that stuff start to hit our fulfillment centers.
They ramped up their plans on really targeted marketing.
Marketing initiatives and that drove a lot of business to both the stores and to our digital site.
Yeah, Jonathan I'll just add back.
Balance of year.
Is still a lot of business ahead of us I mean, our first quarter only represents 16 or 17% of the total Asia sales.
Quarter to date.
True.
Memorial Day weekend, where the business is up in the low single digit range and obviously you know needs to.
To continue to accelerate to get to the back half of the growth rates that we have so I think it's just early in the year still end and.
And that's that's reflective of our.
Get guidance that we're reaffirming.
Okay.
Great. That's helpful color I'll pass it on thanks again.
Yeah.
Thanks, Jonathan.
The next question comes from Jim Duffy with Stifel. Please go ahead.
Thank you good morning.
I wanted to do.
I wanted to ask about some comments you.
Made it.
In your response to the last question I'm curious about the <unk>.
Indications on the return on incremental marketing spend during the first quarter you pulled back on some marketing if you had the inventory to do so.
Set out the scale of business do you have.
The initiatives you can invest behind that you believe would drive growth.
Yeah, absolutely as I said, you know as <unk>.
As the inventory flows in against our planned launches or new collections were able to flex that marketing spend up or down depending on the choppiness of receipt flow and so today. We've got we've got some unbelievable new products that were launched.
We're excited about.
I'll give you a couple of examples.
We've got a hunting capsule in partnership with Mossy Oak, which.
Which is unbelievable brand that broad kind of this new age of camouflage to the market.
Where we're excited about that and we'll wrap up advertising against that as it comes in we've got I've mentioned in my prepared remarks that.
Raws as a category within women's first layer is delivering some some outsized.
Outsize growth and so we've got this whole new womens.
Offer called line Tamar and it's it's seamless.
Lying disguising first later first layer for her and so we've got a pretty good marketing campaign against that and so really as Dave mentioned in his prepared remarks, where we're increasing our AD spend in Q2, because we're seeing the receipt flow of some of these new goods and new collections and will continue to flex that as.
You know our receipts well win but.
But we absolutely have some really incredible and exciting new products new innovation in the pipeline that that are coming it's just working through that the choppiness of the receipt flow.
Understood that wanted to dig.
Hey, Ian to another level of detail there.
Is this established proof of concept with new customer acquisition efforts you can use to grow the customer file or is this simply.
The compelling products that you're using to reengage the existing customer base.
Yeah, I think it's a couple of things one is you know us.
We've always had a rich treasure trove of consumer data and as we've mentioned over the last handful of calls.
As we continue to invest in and stand up.
Our data insight and customer insight tools, you know were gaining a lot of really good actionable information and in fact, we recently hired a new director of customer insight and brings an unbelievable amount.
The amount of experience and has already shown us the way he can chop that data up and add really great perspective, and where we should target.
Our customer acquisition strategies, one of the things that he that he has shown us and Dave mentioned it in his prepared remarks is this difference between consumers that we acquire primarily through price versus what we call conventional spenders are those that are coming to us and over time, Oh I have come to us.
Because of the product needs they have and over time.
They are significantly more valuable to us because not only in the size of their basket, but the frequency of their of their interaction with us. So.
We're targeting look alike customers through different types of channels largely through digital acquisition.
And that that's even making our AD spend that much more effective because we can narrow in and be selective on who it is we're trying to attract and retain.
That's great the full price selling penetration is super encouraging and.
This dimension of a shift to focus on the conventional buyer versus the price driven buyer.
It seems colorful I'm curious how does that change the addressable market and potential size of the revenue basis that narrow the potential size of the revenue base, but improves the margin structural margin opportunity for the business.
How do you think about that.
Yeah, No I don't think so I think listen I think you know.
Whether you're in kind of inflationary times like we are now or or not even in our in our.
An expanding market you know everybody's everyone considers price.
When they make choice, but I think ultimately the size of the market for where we served and the types of product and price value the durability the build of our products.
<unk> is a large opportunity for us and we're just not we're just scratching the surface in terms of market penetration.
Great. Thank you guys.
Thanks, Jonathan.
Oh, Jim I'm, sorry, Thanks, Jim.
Yeah.
The next question comes from Dylan Carden with William Blair. Please go ahead. Thanks.
Thanks, a lot.
Kind of continuing on.
Some of the same vein I guess.
Further up the P&L, you're floating around sort of peak gross margin, our underlying gross margins kind of back out some of the.
Artificial cost headwinds and so I'm curious you know you were speaking a lot more towards full price selling.
Being more.
Efficient with your marketing your promotional cadence, which is something you've long talked about is there kind of a structural level of gross margin that sort of underpins. The blueprint and is there any consideration here from a mix shift standpoint for some of these other portfolio brands, it's kind of embedded in that conversation.
Yes.
Start they're dealing with the.
<unk>.
I guess foundational gross profit margin.
That we see can continue is certainly in the kind of in the mid fifties long term.
And so there is there room to continue to grow there.
It is driven by strategically more full price regular price with the appropriate pre.
Promotional activity the big benefit that that hopefully we.
We will continue to deliver on is inventory levels are in control and that prevents the clearance activity that that we really had in the last two years. So it's about managing that level of that mix of the product that that's going to support the consistent gross.
And gross profit margin delivery on us but.
In terms of the product categories and a mix shift.
Strive.
All of the sub brands to be added at a comparable.
Gross margin when we're selling to the.
To the end customer, which is what we do we look for that opportunity on the value of the cost.
And the price competitiveness.
To have a consistent.
Initial markup and kind of gross margin on after selling so we don't see a big impact to due to the sub brands growing in and having that kind of alter our gross profit margin activity.
But it's as pure I guess, what I'm getting at is sort of mid fifties as where you've been.
Looking back at least you know in pre pandemic history, maybe a little bit above.
You sort of floating around high Fifty's, you know is it crazy to think that you're growing up a high 50 kind of underlying margin from here is what you're saying that toward the core business structurally still runs at kind of that mid fifties level.
Yeah, I mean I guess.
Talk about high Fifty's.
You know our product margin so at that kind of level and then and then we have other costs that are baked into our gross profit margin.
So yeah, I think that that's that's definitely achievable to maintain on them.
On a rolling 12 month basis.
Okay.
And then across the brands I guess.
Where are you Duluth core Duluth legacy versus sort of the the combined portfolio brands much revenue penetration standpoint, and then the opportunity to kind of cross sell amongst those brands or are you kind of early days are you sort of exploring some of that opportunity I know the customer profiles are going to be different but there's gotta be.
Some overlap and just kind of curious.
Any commentary there.
Yeah. So just at a high level Duluth, Alright, AKG and best May represent.
Just under 10% of the business with the blue being the balance.
And you know our plan is to continue to grow.
H H G and best made a much faster rate than we our duluth to have that be a.
A larger share of the percentage as we as we move forward.
In terms of crossover as I was saying earlier to Jonathan.
We've set out to work really hard to create these distinct positions for end use in <unk>.
And use intended and and and.
And and and geared for a like consumers. So we're working hard from an assortment.
My perspective, not to have intentionally not to have a lot of crossover products because its end use focus and so we believe that that allows us to build the basket size because customers aren't making a choice between.
Panel shirt in Duluth versus a flannel shirt in eight Gage G that they are in fact buying them for different needs and.
We've seen.
Some of that happen in terms of.
Average order value in particular.
Sorry, so that would mean that there is high crossover potential right because if I'm buying a flannel shirt for one use case on buying a rain jacket for another by total basket as you know the combination of both of those are not cannibalize each other right.
That's correct not cannibalize not cannibalizing each other and so are you actively out there kind of marketing to those sort of distinct customers that might be a customer of one brand and not another or is that sort of something that's yet to come.
Yeah distinct end uses first and foremost okay, similar customer, but as we learn more about <unk>.
Different consumers and how they are engaging with us theres opportunities for us to to market for instance, someone that is buying primarily AK G to market.
Some some potential consideration.
Within Duluth or best mate.
Alright.
Okay.
And then so I know we've talked about it a lot on the call are still a little bit less so.
Pulling back on marketing when you didn't have the inventory they call the sense in the World Tonight, but yet marketing actually delever, if I understood it right.
And so I'm, just curious and it sounds like did I hear what you're you've gotten rid of some of the the catalog.
As well I'm, just kind of trying to understand the go forward outlook for marketing sort of rest of round or maintain the sort of low double digit percent of sales.
Level.
Yeah, Yeah. So two things there one is over the last couple of years we've been.
Pulling back on the catalog. So we're still investing in catalogs, it's still a great brand building piece for us and importantly.
As we rebranded Duluth, and repositioned AK G. It gives us an opportunity to really do it across genders.
We're doing it over T timeframes like fathers day for instance, our fathers day catalog is hitting this week.
It will take those key moment to tell though those family our family of brands and full family stories.
In terms of of the deleverage, partly you know part of it is.
And maybe we just have to explain it a bit better we've got working media and non working at not working is really creative brand building. So.
It has for instance, as we launched women's decades G.
And the repositioning of Duluth, Duluth trading company, we spent money in creating brand messaging and brand positioning.
Marketing versus targeted.
Commerce driven market.
Got you.
That makes more sense.
And so and also I kind of rescue level of of that spend should be kind of high single low double and I guess, maybe you probably wont commit to that right now, but just had a curiosity if I can get you too [laughter].
Historically, it's kind of been in this low double digit range in and I'm comfortable in saying that that today, we're probably in the range of where we will be as we move forward somewhere in that low double digit range.
Good.
Thanks, guys for taking all the questions patchwork.
Yep. Thanks, Bill appreciate it thank you.
Okay.
This concludes our question and answer session, which also concludes today's conference call. Thank you very much for attending today's presentation and you may now disconnect.
Yeah.
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