Q2 2022 Duluth Holdings Inc Earnings Call
year with a delta to our total dollar increase reflecting higher average costs and a shift in the mix of balances with growth in our AKHG sub-brand. As a reminder, delays on the inbound receipts we experienced last year resulted in an inventory decrease of 20% compared to the prior year. Our capital expenditures here today of $19 million, including the cost of software implementation, is in line with our plans. Our outlook for the full year, CapEx, remains at $40 million and reflects the investments we're making in logistics automation, the expansion of our fulfillment network with the new facility in Adairsville, Georgia, and technology upgrades. We now expect pre-cash flow for 2022 will be flat to slightly positive. Consistent with our big dam blueprint, the investments we're making across the business will facilitate an expanded and more automated distribution capacity, product 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 positioning our business to support continued organic growth and consider strategic acquisition opportunities down the road. To summarize our outlook for the third and fourth quarters, we expect sales in our direct channel to be up high single digits in the third and fourth quarters. For retail sales, we expect to be down to prior year mid single digits in the third and fourth quarters.
We expect gross profit margin to be down roughly 120 basis points in the third quarter and down 50 basis points in the fourth quarter with the full year gross profit rate close to flat year-over-year. We plan to increase advertising expense in the third quarter by roughly two million dollars and decrease in the fourth quarter by roughly three million compared to last year.
With selling expenses, we expect the third and fourth quarters to be flat to up 30 basis points as a percentage of sales.
Overhead expenses in the third quarter will increase as a percentage of sales by roughly 180 basis points.
and be down 150 to 200 basis points in the fourth quarter relative to last year as we gain leverage on sales growth.
We are updating our full year guidance with net sales of $680 to $705 million.
Adjusted EBITDA of $69 to $73 million, and EPS in the range of $0.61 to $0.71.
In closing, while we recognize that consumer uncertainty has challenged our original business plans for 2022, we recognize that consumer uncertainty has challenged our original business
We remain committed to driving demand and awareness in our multi-brand positioning.
as well as committed to the capital investments necessary to unlock the company's full value creation potential.
Our teams remain focused on what is in our control and making the adjustments needed to navigate a dynamic consumer environment.
And with that, we'll open the call for questions.
Thank you. 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 are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
And the first question will be from Jonathan Komp from Robert Baird. Please go ahead.
Yeah, hi, thank you. Good morning.
I want to just start on the changes to the guidance for the year. Could you maybe just break out how you've thought about roughly the $50 million reduction and the revenue guidance for the year? And as we think about the plans you just outlayed for the second half and the sequential acceleration in both of your channels, can you just share more how you're thinking about modeling that in light of some of the uncertainties out there? If you would like to talk in the audience tonight, well that is something we would absolutely want to touch on earlier. But for me being able to change all of my
Yeah, hi, John . This is Dave. You know, certainly the back half of the year, as we look at it, always had a significant opportunity.
from year over year standpoint, given the inventory shortages that we had last year. So, despite some of the kind of macro headwinds that we know we're facing, we really...
feel like we're in a position with the inventory to recapture.
lost sales that were missed last year and some of it was
in a good part of Q3, where we know we didn't have an inventory and we dial down marketing in response to that. And then continued with a greater delay in inventory in Q4.
Those are, that's the primary driver for saying some of the inflection on sales.
growth rates heading into the back half of the year.
I'll say, you know, quarter to date, we're trending similar to the overall Q2, down slightly in aggregate.
Low single digits.
but direct is outperforming retail, and retail has improved relative to where it was at the end of the second quarter. So momentum is improving, and the inventory position is really what's gonna be a big driver of that sales growth in addition to,
putting into place out of the marketing tactics that we held off last year in doing.
And just as a follow-up, could you maybe share what you're seeing in terms of promotions across the industry and just how you think about competitive promotional intensity impacting your business, especially as you shift your focus to more high-value customers?
You know, I mean, we.
we're pretty happy with our gross margin performance. And despite the write-off that we talked about in the second quarter, our product margins are holding pretty.
pretty strong, especially you think about, you know, year to date, you take out some of the isolated items, we're up significantly year over year on gross margins on product selling. So, while we're seeing some customers shift to more promotional periods, we're holding our margin rates fairly healthy on that front. Average transaction value in the retail channel is strong and holding.
holding where we've been at, conversion rates continue to be better than in prior years.
And, you know, we're just in a better in-stock position as well throughout this period of time now that the supply chain is released. I say on top of that we're excited about the women's collections that are showing a lot of momentum.
with the launch of AK-HG and base layer categories. So I think, you know, competitively we're feeling like we're in a good spot.
Last one for me, bigger picture question on the margin. The adjusted EBITDA margin for this year I think now is guided a little bit below 2021. Just thinking more broadly longer term, I know you have your long-term targets for 14 to 15% adjusted EBITDA margins. Are those still viable and realistic in this environment or are there...
changes in the degree of spending or the intensity of some of the investments or other efficiencies you see that still keep those as relevant targets out to 2025. Thank you.
Yes, John , I mean, we're still seeing a high, you know, receptiveness for our products and selling performance. So I don't think that holds down some of our longer-term goals at this point. We'll see how the back half of the year goes and we'll...
We'll refresh our long-term goals when we come out of this back half of this year and share our perspective there, but but we don't see any underlying signs of...
of not being able to achieve those operating margins in that timeframe.
Okay, fair enough. Thanks again.
And the next question will be from Jim Duffy from Stevell. Please go ahead.
Thank you. Good morning.
Guys, because so much of the earnings...
Good to speak with you. Guys, because so much of the earnings power is in the fourth quarter there's going to be a lot of focus on trajectory momentum and the assumptions in the guide. I wanted to dig in some about just trends across the quarter and into the 3Q. You spoke about things slowing around Father's Day. Was that true for both retail and direct-to-consumer or was that more of a retail comment?
Yeah, Jim, you know, that was really more of a retail foot traffic.
situation where direct was coming out of the first quarter much stronger and and pretty healthy now that you know direct
I think also was impacted a bit by the slowdown, but relative to the trend it was on, it was much better. So it split traffic to the stores is where we saw.
the slowdown materialized the most.
Presumably, maybe some link with gas prices there. I'm curious as gas prices came down into the third quarter, did you see any improvement in traffic trends in the retail locations?
Yes, we have seen, you know, since August and through this past month.
the trend improve from from what it was on whether that was gas prices or
or not, but when we do look at our customers, those that live further away from the stores is where the impact was most and those that are closer to the stores had a better performance. So I think that's probably a connection to possibly driving in gas prices.
Okay and then the guide for the second half it seems to improve
imply improving retail productivity in 3Q and 4Q.
And it sounds like
Much of that is your belief that you're better in stock and in a better inventory position and that should help conversion. What's assumed for traffic in this?
Well, the assumption is that we'd still be down slightly to last year, but we're talking mid-
single digits versus you know the the mid teens that it was in the second quarter and so you know continuing at the pace that that we're now on right now where retail foot traffic is down again mid to high single digits instead of double digits and that that's that's what we're going to assume is going to continue through the back half of the year.
And then from a technical standpoint guys should store traffic remain challenged or be more difficult than you'd anticipated? What's the philosophy around promotion? Do you see promotion as a tool to to drive traffic or given your focus on acquiring consumers at full price is?
That's something you hope to avoid.
Yeah, I mean, you know, Jim, at a high level, you know, we want clearance.
and promotions really to be, you know, just a necessary evil, so to speak, and continue to drive.
greater regular price business and importantly, you know, drive engagement through, you know, our highest value most loyal consumers. And so while while we're watching carefully the competitive landscape, you know, we're watching some of the macroeconomic investment headwinds.
like gas prices.
You know, we're also going to make sure that we're prudent prudently managing our cost but also You know ensuring that we're we're making the right pricing decisions to help Help our consumers, but also not not compromise our longer-term brand position And so as as I said in my prepared remarks, you know The consumer purchasing behavior has shifted a bit more heavily towards our promotional timeframes
But, you know, when you do the math and you look at the reduction of clearance sales at those really low margins, our gross product margins are remaining, you know, pretty healthy and near flat for the quarter. And we expect that, you know, it will be, you know, similar as we get through the back half of the year. So, you know, we're going to be really thoughtful and purposeful about our pricing and promotion.
Thanks a lot. Just kind of continuing on that same vein of sort of the outlook here, and I agree with Jim that's kind of the crux of this.
The deleverage or the reduction of 3 million in marketing spend in the fourth quarter, I'm just trying to kind of track that with
having the inventory back in stock and having pulled back in marketing last year. I guess what am I missing? It would stand to reason then that you would increase the dollar amount. I guess what's the nuance in that outlook?
Yeah, some of that is really just a shift from the amount of dollars we had allocated last year in response to the inventory delays. So we are increasing our marketing in Q3 knowing that we're in a better position heading into the back half of the year. And so the reduction in Q4 is really just a shift.
The minor decline is coming out of some of the TV, national brand awareness areas of advertising that's not as efficient in the short term. What is efficient in the short term is the digital spend and that's where we are increasing quite a bit in both quarters. So digital, social and paid search are where we're seeing the most near term.
traction and driving traffic and sales and so that's so it's more of a mix opportunity in our in our overall spend to get to those sales.
Got you. And then just kind of – I don't know the best way to ask this question.
Is having the inventory enough here? I mean, it seems like we're kind of almost in a similar position that we were in, you know, coming into the second quarter where there was sort of anticipation acceleration sales predicated on having certain, you know,
inventory backed up by marketing and I get all the enhancements to marketing and I agree with them but it is the guidance now reflective of simply just having core basic items that you didn't have last year and kind of that customer you know is going to show up or is there a certain amount of kind of recovery still necessary in the broader economy.
to kind of hit the new targets. Does that make sense?
Yeah, Dylan and Sam, I would say a couple things. One is when you look at our year-over-year comps, you know, last year, we had a year-over-year comp.
as we analyzed our business, you know, we were pretty short on a big chunk of our core products. And that represents over half of our business. And so the fact that we are going to be or are and will continue to be in a much better in stock position relative to our needs and certainly when you look at it year over year, that absolutely gives us, you know, greater confidence in the back half of the...
the early reads we're getting on new products for fall in some big categories for us like flannels as an example, and then the continued escalation of our women's business.
continues to give us confidence that, you know, the back half we've got some opportunity for some expansion there relative to not only our current trends but in equally important, you know, relative to the year-over-year comparisons.
Okay. And then finally, you're just enclosing any sort of update on how wholesale's
I'm just enclosing any sort of update on how wholesale's performing in this environment.
Yeah, well, if specifically tractor supply, you know, our results there, we continue to see positive momentum. In fact, we're in the process now of expanding our test to an additional 70 stores ahead of the peak holiday season. So we'll now be in 180 stores and then online. We recently partnered with them.
on an offer through their loyalty club membership and that that resulted in thousands of new Buck Naked customers from Tractor Supply. So you know we continue to work closely with them they've been great partners and continue to look forward to to expanding that business.
Does that customer, how does that customer match up with that kind of core customer you're kind of speaking to, talking to, speaking with directly to some of these new engagement tactics? Is that a
more I guess agricultural working class customers that line up pretty closely with who you are trying to get on the other side of the retail business. Yeah, I think at a high level lines up really well with us. It's a segment of that consumer so to your point around this agricultural
farming industry, you know, that's only a subset of, you know, the more high level consumer we're focused on. But certainly, you know, within demographic, sociographic, you know, economic standings and whatnot, it fits really nicely within where, you know, Duluth continues to, you know, target our engagement and customer journey strategy.
Very good. Awesome. Thanks guys.
Thank you. Thanks, John .
Ladies and gentlemen, this concludes our question and answer session and thus concludes Duluth Holdings' second quarter 2022 conference call. Thank you very much for joining today's presentation. You may now disconnect. Take care.
Thank you. Thank you.