Q3 2022 Duluth Holdings Inc Earnings Call
Good day and welcome to the Gilead Holdings, Inc. Third quarter 2022 conference call.
Participants will be in listen only mode.
Should you need assistance. Please signal conference specialist that got you can start Keith.
Right.
After todays presentation, there will be an opportunity to ask question.
Can I ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please no cause to that is being recorded.
I would now like to turn the conference diabetes.
Please go ahead.
Thank you and welcome to today's call to discuss Duluth, Trading's third 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 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 here.
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 for joining today's call. We're in the midst of our peak season, when direct order volume and store traffic are at the highest levels. So I look forward to providing insights on the trends, we're experiencing and the great work our teams are doing to deliver against evolving consumer expectations.
And execute on our strategic playbook.
I'm also excited to share updates on our brand positioning and critical investments, we're making to position our business for long term growth.
We're committed to staying the course on our Big dam blueprint initiatives in the face of many macroeconomic headwinds that we're experiencing today and expect to continue into 2023.
While the current environment does pose some near term challenges for the business. Our efforts remain focused on unlocking the company's full potential for sustainable growth.
We're all in on the commitment to support scalability and further enabled Duluth to deliver long term growth and profitability.
I will share further detail on some of the key initiatives shortly but at a high level, we will continue to execute against our commitments on leading with a digital first mindset.
Supported by investments in our logistics and technology infrastructure.
And in product development, and new innovation well.
Driving brand awareness across our evolving portfolio of sub brands.
But first regarding our current business I'm pleased to share that we've seen several key trend reversals that point to progress in the areas that have been our focus.
Notably total net sales for the company grew one 3% in the third quarter a.
The sequential improvement of 770 basis points, when compared to the first half of the year.
Driving that growth was our direct channel, which was up 7% in Q3 versus down 6% in the first half of the year.
I'll share more regarding the positive initiatives around inventory management marketing execution, and new product introductions that are supporting this growth.
But I would be remiss to not mention upfront that we're seeing the impacts of the inflationary environment on our core consumer with a higher level of price sensitivity.
This is resulting in a reduction in the overall basket size and lower levels of full price selling in both our direct and retail channels.
The good news is we saw consistent and strong shopper conversion a clear indication of our brand sub brands and products are resonating.
In high core inflationary environments like we are in where many consumers face strains on their pocket book.
The price value balance in their discretionary purchase decisions can tilt in the direction of value.
In response to the customers need to balance their own spend decisions, we have strategically and selectively increase our mix of discounted offers and extended some sale event periods to meet these adjusting their expectations.
Our product offering is centered around fulfill a customer's needs for durable long lasting gear and apparel that meets our high quality standards with an appropriate price value proposition.
But we understand for some trade offs are made between the need to cover the rising cost of staple items and investing in their apparel and accessories.
The demand for Duluth trading product has remained strong.
That said to address the evolving consumer and macro environment, we focused on critical levers to maximize opportunities.
For example to minimize supply chain risks like we experienced last year, we plan to receive inventory sooner to ensure improved in stock positions as we headed into Q4.
We adjusted the mix of our marketing tactics to maximize efficiencies.
And we strategically post promotional activity to capitalize on consumer demand, while maximizing profitability.
These efforts materialize in the third quarter as we realized a 9% increase in units sold and customers who have been with us the longest where the highest retained group of customers.
These results speak to our flexibility and agility as we continue to read react and adjust to the rapidly changing consumer and macro conditions.
As a result of the price sensitivity, we are seeing from the customer we took appropriate actions aligned with the ship, resulting in contraction in our selling gross margins impacting the bottom line results.
Today, we reported a net loss of 19 cents per diluted share and positive adjusted EBITDA of $1 $7 million.
While we are not satisfied with these results we are confident that keeping our inventory clean generating cash flow and continuing to meet the customers' evolving expectations will serve us well and allow us to continue investing in the strategic priorities, we have set for the business.
We can flex our position in these categories in shorter timeframes and make the adjustments relative to quarterly demand trends.
Dave will share more about how we expect inventory flow and year end position to play out.
Importantly, our current overall inventory is in a healthy position to support peak holiday shopping.
From a seasonal merchandise standpoint, our fall winter offering is off to a great start sales of seasonal styles were up 8% in the third quarter, driven by flannels fleece shirt jacks and lined pants.
It took a little longer for the whether it's it turned colder this year, but when it did our mix of transition and cold weather items took off.
In Duluth Womens the folklore final collection, featuring several styles and patterns has seen standout performance.
As has the frosts late collection of fleece tops, featuring Super soft anti pilling fabric and cut shaping that is suitable for wearing alone, whereas an extra layer.
Knowing the Duluth women's business. The season is the shiftless sweater collection that we've designed with the classic V neck crew neck, and turtleneck options as well as the Kartik industrial style with extra length for comfort and freedom of movement that our customers expect.
Overall, our women's business increased 10% in the third quarter with positive gains in the Duluth branded collections. While we also continue to see strong momentum within the 8-K H G sub brand.
After a successful introduction of AK HG womens in the spring.
Our fall winter assortment is being led by the meltwater first layer program and then midnight Sun Flannel program.
Combined our women's business increased to 31% of total sales in Q3 compared to 28% last year and.
And it has grown significantly up 35% since 2019.
The investments we've made in product innovation and great brand marketing to build out our women's assortment is paying off by cementing Duluth trading company as truly a co gender lifestyle brand.
<unk> the proportion of new buyers is closely approaching a 50 50 split between men and women with the number of female shoppers at the highest peak in the past three years.
With the great success, we are seeing in our women's business. We're excited to have recently launched a reconfiguration and 20 of our stores that expands our women's footprint.
The expansion is informed by customer research and focus group insights highlighting the desire to allocate more space to our women's assortment and balanced the shopping experience.
These stores have already produced better than average results. So far this holiday season.
We see great opportunities in women's and will continue to focus on this segment of our business as a strategic pillar.
Within our men's business, we realized growth in apparel across the three sub brands of Duluth, H H G and best mate.
Our men's pants program continues to be a dominant category for our company, where many of our top volume items live and where it works where innovation is integral to our success.
A good example is the men's ballroom double flex relaxed fit Carpenter gene.
A top new product performance this quarter by a wide margin.
While we introduced Duluth double flex denim several seasons ago, we leveraged our double flex denim innovation into a carpenter style, which blends proven innovation with updated styling and functionality and has quickly become a customer favorite.
Another Great example of driving success by offering more choices is in our men's long tailed T collection.
We reintroduced an additional style called the long tailed T that shortens the length.
Just the fit and provides more color choices to further enhance our staple work shirt offering.
Complemented by a new intuitive web selection guide our customers can more easily browse the many options and find the perfect mix of size color and features.
Overall, the long tailed T program drove a mid single digit increase during Q3.
Yeah.
We did experience some softness in our men's underwear business this quarter and while unit sales in the overall <unk> business was up high single digits average unit prices were down due to the higher promotional actions leading to a low single digit decline in net sales.
We're seeing the men's underwear customer become increasingly more price sensitive and value driven.
This trend has been the opposite in women's however, with net sales in the category up high single digits, driven by high growth in underwear bras and our famous no yank tanks.
We also introduced our new line Tamar collection in Q3, offering an innovative seamless solution for women's bras and underwear.
Newness in our <unk> business is just as critical as other categories highlighted by another top new product this quarter.
Mens sunk no bullpen boxer brief was among the top new items this period and demonstrates that innovation and uniqueness will breakthrough.
Of the recently introduced collaboration with the Green Bay Packers for co branded Packers themed clothing, the men's Buck naked cheese pattern boxer brief has been our top selling items. So far this season.
We're also excited to see the success that broadening our 8-K H G sub brand to womens has had on the overall brand growth.
<unk> increased nearly 45% in the quarter due in large part to the introduction of women's.
Men's AK HG also saw healthy growth of mid single digits in the quarter driven by new programs, such as Blackburn and cross layer, which features Pullovers hoodies and best.
And then meltwater base layers.
Dramatically improved in stock positions compared to last year helped drive increases in our board's Ness and cross all collections, which feature sweat pants sweatshirts and flannels.
Overall, we see a K H G, having outsized growth potential and can aggressively compete in the sizable outdoor recreational apparel space.
And to support this growth opportunity, we plan to increase our brand building investments in AK HG in future seasons.
More near term, our marketing focus to drive brand growth has been to prioritize digital channels with paid advertising and personalized communication across our own channels email and brand followers and influencers.
During the third quarter, we realized a mid single digit increase in total customer counts and repeat buyers with success in reactivating customers that haven't purchased in more than a year.
Tactically, we were able to increase the segment of lapsed buyers in the quarter by over 30%.
We increased our working media investments in Q3 by roughly 15%, which helped drive an increase in web visits in the quarter by 6% and mid single digit sales growth in September and October .
In addition, we tested digital messaging to drive store traffic and 15 local store markets that led to increases and we have broadened the investment in all of our store markets for the holiday season.
The increase in web visits and direct sales in the third quarter came through a mobile device with desktop and tablet essentially flat.
Not coincidentally, we saw outsized customer growth coming from the younger age cohorts, who are more apt to transact on their mobile device.
As we've shared in our Big dam blueprint targeting a younger customer and the age range of 40 to 50 year old with our product offering and marketing mix is gaining traction.
With our average customer reach today in the mid fifties, we are actively balancing our mix of advertising to both target and build visibility with our 40 to 50 year old target customer, while maintaining visibility within media channels that index well with the older demographic.
In Q3, we observed at the content consumption behavior of our target 40 to 50 year old customer is becoming more fragmented meaning that they consume content in multiple channels, including most streaming platforms cable TV Youtube and streaming.
<unk>.
As such building awareness with the customer must be selective focused and intentional by channel.
For example, within digital channels, social platforms index, well with a female buyer and proved to be successful in driving sales from new younger female buyers in the quarter.
You too specifically index as well with males age 40 to 50, along with social channels.
Our success long term will be driven by the learnings, we're gaining now about our target customers media consumption and how to appropriately best reflects the mix of working media investments.
Related to the investments we make in working media I'm excited to share news about our recent website re platform that has meaningfully improved the user experience and transactional performance of the Duluth trading dotcom site.
In October we successfully relaunched our website using headless site architecture known as a progressive web application.
The improvements to site speed upon launch had been meaningful and customers are taking notice.
We believe this investment will drive a lift in site conversion and engagement going into peak, especially for those customers who choose to shop on their mobile device.
Next year this new platform will allow us to progress our digital experiences faster than ever before by enabling more rapid enhancements, Richard digital storytelling and quicker upgrades for third party tools, such as new site search functionality.
We have recently completed key investments in our logistics operations and critical milestones in our southeast fulfillment Center project beats.
Between our existing Belleville and Dubuque facilities, we have increased the speed and capacity for sorting and rowing inbound inventory and we have automated scanning and manifest printing on outbound orders that will save freight cost.
The efficiencies we are seeing in managing fulfillment costs are directly related to the value of these investments are bringing.
In addition, our inventory position between fulfillment centers and stores is in great shape and has contributed to the outstanding work. Our store teams are doing to convert traffic to sales by having the right inventory in the right place.
In the southeast fulfillment Center project in <unk>, Georgia, we are on schedule with the facilities infrastructure in place and the delivery of the auto store material equipment is ahead of schedule.
Our plans are to go live during Q3 of next year.
Regarding our technology strategy under the direction of our new Chief Technology Officer, we have strategically redirected our technology investments and have prioritized a new warehouse management system to advance our southeast fulfillment center capabilities and have paused on the upgrade of our current ERP.
System.
The upgraded cloud native version less warehouse management system will provide end to end supply chain and logistics process orchestration, resulting in vastly improved inventory management and turns.
The prudent management of expenses is always heightened in our business, but in the inflationary environment and uncertain consumer outlook that exists today.
Acutely focused on ensuring that operating and capital outlays, we make are core to supporting our strategic priorities.
With that the heightened levels of macro and consumer uncertainty that weighed on our business in 2022 is impacting our plans for 2023.
That said I want to again emphasize we will continue to control our cost and conservatively plan, our inventories, but we remain steadfast on carrying out our big dam blueprint, which serves as the foundation for Duluth trading company's long term success and value creation.
Now I will turn the call over to Dave to provide more details on our third quarter results and discussion of our year end outlook Dave.
Thanks, Sam and good morning.
For the third quarter, we reported net sales of $147 1 million up one 3% compared to $145 3 million last year and up eight 6% compared to the same period in 2020.
Our direct channel sales were up six 8% from last year, which included online sales growth and store markets of low double digits, and then non store markets of low single digits.
Our retail channel was down six 6% in the quarter, representing a significant improvement to the trend in the second quarter of over 500 basis points and benefited from outstanding conversion of the store traffic to sales of over 300 basis points.
Traffic to our stores is still below the prior year, but has improved to being down mid single digits versus mid teens in the second quarter.
Total net sales growth was strongest in our established Midwest southeast and northeast markets.
As we shared on our last call better supply chain flow and targeting earlier receipt dates on our inbound inventory positioned us well during the third quarter and better supported our transition into the fall and winter season.
Sales turned positive in early September and continued through October up mid single digits to last year.
As planned we increased the marketing investments during the quarter to align with the inventory position and focused our messaging on new seasonal products are women's AK HD launch and driving traffic for our annual Big Dam birthday sale event and our preseason global sale about at the end of October .
As we entered the fourth quarter holiday shopping was slow to get started relative to last year's industry push to get consumers to buy early.
The first two weeks of November during the midterm elections sales were down mid teens.
For the last two weeks of November sales were down high single digits to last year and that trend continued for the four day period of Black Friday through cyber Monday.
We are seeing a more near term ramp up of gift, giving shopping supported by a healthier inventory position that is helping to convert traffic into sales in both our store and direct channels.
We are beginning to lap easier sales growth comparisons in the months of December and January .
That said given broader consumer headwinds and impact on discretionary spending we are lowering our fourth quarter and full year sales and earnings outlook.
As Sam shared the strategic targeting actions to retain and reactivate customers produced healthy results and our buyer file where we are now realizing an increase in the year to date retention rate compared to last year, which is being driven by customers, who had been with us for greater than one year.
Our third quarter gross profit margin was 52, 3% compared to 57, 6% last year.
This represents an 8% decline in gross profit dollars to $76 9 million in the third quarter, which was the result of a shift in mix from full price to promotional price selling and indicative of the customer being impacted by the inflationary environment and responding to price promotions more than in the past.
Yeah.
Importantly, as we took action to be in stock on seasonal items coming out of the summer.
We ended the quarter up roughly 40% and our fall winter assortment that has supported the sales growth and filled our stores with the necessary inventory to drive holiday shopping.
Additionally, we're keeping our eye on our merchandise mix and taking markdown actions on slow moving items to prevent the end of season buildup.
Our level of clearance inventory currently at mid single digits as a percentage of total is in a good spot for where we are during the season.
Turning to expenses SG&A for the third quarter increased 7% to $84 3 million compared to $78 8 million last year.
As a percentage of net sales SG&A expense increased to 57, 3% compared to 54, 2% last year.
This included an increase of $2 4 million and general and administrative expenses.
One 8 million in advertising and marketing expenses.
And an increase of $1 $3 million and selling expenses.
Selling expenses as a percentage of net sales increased 70 basis points to 17, 1% compared to 16, 4% last year and was driven entirely by higher shipping cost an outbound customer shipments due to fuel surcharges and a greater mix of direct sales.
Versus store sales during the quarter.
We managed our variable costs very well during the quarter with our store and fulfillment center operations, delivering labor efficiencies and flexing their controllable costs.
We expect to realize slight deleverage in selling expenses in the fourth quarter due to the higher outbound shipping costs related to ongoing fuel surcharges and the expected mix of sales weighted more towards the direct channel.
Advertising and marketing costs were $19 6 million in the quarter compared to $17 7 million last year.
And as a percentage of sales increased 110 basis points to 13, 3% compared to 12, 2% last year.
An increase in the paid digital media channels and shifting some catalog circulation back into the third quarter drove the higher marketing spend.
As Sam noted, we are making purposeful adjustments to the media channel mix in the interest of gaining more visibility to our target customer of 40 to 50 year olds.
While maintaining presence with our existing customers in the traditional linear TV channels.
And traditional television media flights, we measure the spikes in brand search volume and new website visits during the high impact placements, particularly during sporting events.
In addition, we launched our first Tictoc takeover placement on National underwear day in early August and realized over 50 million impressions and awareness that drove visit store underwear collection online.
We.
Our advertising and marketing costs will be below last year in the fourth quarter, but will it include a greater mix of digital media tactics up nearly $2 million focusing on new product arrivals and innovation.
We expect to realize slight deleverage in Q4, given the increase in the Q3 spend and the shifts we made in the prior year to better align with our inventory position in the back half of the year.
Okay.
General and administrative expenses as a percentage of net sales increased 130 basis points to 26, 9% compared to 25, 6% last year.
The $2 4 million increase from last year represents personnel and technology costs as well as fixed costs for our new southeast fulfillment center that is scheduled to open in the third quarter of next year.
Additionally related to the decision to re prioritize technology initiatives and pause the ERP upgrade we have taken a one time write down of $1 1 million related to the implementation costs incurred in the early stage of the project.
We expect our fourth quarter overhead expenses will be below last year as we realized savings in personnel and incentive costs due to the expected lower full year sales and earnings would be roughly flat on a percentage of sales in Q4 compared to last year.
As of today, our store count stands at 65% with no planned store openings for the balance of the year.
Adjusted EBITDA for the third quarter was $1 7 million.
Our net loss for the third quarter was $6 2 million or <unk> 19 per share compared to <unk> <unk> per diluted share profit reported in the third quarter last year.
On a year to date basis, our operating income absent the ERP capital project right now and associated operating expenses as well as expedited freight costs totaling approximately $6 3 million would have been positive.
With our year to date sales down three 8% generating positive operating income, while we're making the strategic investments to support long term growth highlights the underlying health of our business model.
Moving on to the balance sheet, we ended the quarter with net working capital of $98 7 million, including $9 4 million in cash and $10 million outstanding on our line of credit which has since been paid off.
The increase in inventory compared to last year and related decrease in cash and use of the line of credit were driven by the strategic decision to improve our inventory flow.
Our inventory level is 24% higher than last year at quarter end and is in a healthier position with more timely receipt of both year round and seasonal goods.
Compared to two years ago inventories are slightly down and reflect our objectives of being more efficient and driving increased inventory turns.
The increase in total inventory units is roughly 19% over last year with the Delta to our total dollar increase reflecting higher average costs and a shift in the mix of balances with growth in our women's collections in 8-K HG sub brand.
At the midpoint of our revised sales guidance, we would expect to end the year with inventories up mid teens compared to last year and down low double digits compared to 2020.
Our capital expenditures year to date of $24 million, including the cost of software implementation is in line with our plans.
Our outlook for the full year Capex is reduced to $35 million, reflecting the re prioritize technology initiatives, but continued investments in logistics automation and.
The expansion of our fulfillment network with the new facility and that Theres real, Georgia, and retail store test and learn initiatives such as the women's footprint expansion that Sam discussed.
We remain confident that the strategic priorities outlined at our Big Dam blueprint and resulting capital investments are the keys to driving growth longer term in our business.
Yeah.
Since the introduction of our strategic roadmap a little over a year ago we.
We've made many strides and completed key initiatives such as.
The re platforming of our website, enabling the progressive web App technology.
The launch of phase one of our merchandising lifecycle management suite of tools.
The expansion of our marketing technology that has allowed us to identify and leverage customer data analytics and adjust our marketing mix to drive digital traffic.
And the completion of our customer journey mapping to inform actions that elevate the in store experience.
In addition, we have completed the remodel of our St. Charles Missouri store to test, a new customer informed design, including our new floor plan fix shrink and signage package.
And we've expanded the women's footprint in 20 of our stores to elevate growing women's business.
Moving to our outlook for the fourth quarter and full year.
We now expect sales in our direct channel to be down mid single digits in the fourth quarter.
For our retail sales, we expect to be down to prior year high single digits in the fourth quarter.
With the higher promotional sales environment, we expect gross profit margin to be down roughly 350 basis points in the fourth quarter with the full year gross profit rate down year over year 180 to 200 basis points.
Advertising expense in the fourth quarter will be roughly $3 million less than last year as planned.
With selling expenses, we expect the fourth quarter to be flat to down 30 basis points as a percentage of sales.
Overhead expenses will be roughly $2 million less than last year in the fourth quarter.
We are updating our full year guidance with net sales of $650 million to $680 million.
Adjusted EBITDA of $42 million to $49 million in.
And EPS in the range of five to 20.
Reflecting a wider range due to the heightened uncertainty with consumers' holiday spend activity and impact from heavier promotional pricing environment.
Our teams remained focused on executing a great peak season push and managing what is in our control.
Sam I and the entire leadership team would like to wish all a happy and healthy holiday season.
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 youre using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jonathan Komp with Baird. Please go ahead.
Yeah, Hi, good morning, Thank you.
Just maybe gauge your overall sense of the trends you're seeing in your business I know you highlighted the third quarter. Some of the sequential improvement you saw in both channels, but it looks like the fourth quarter Youre embedding the.
The opposite the returned a negative year over year performance for both direct and retail so what what what do you make them sort of the trends you're seeing and then given some of the commentary do you think it's going to be hard not to still show sales declines going into the first half of next year.
Yeah, Hi, John .
You know, where where we were seeing some of the trends that I that I mentioned on the call are coming out of our third quarter November .
The first two weeks in particular, where we're kind of the toughest and and we attribute.
A portion of that to the.
The early shopping as last year, and so earlier in November going up against tougher comps.
Last year, our November we posted an increase over the prior year of low low teens and so were comp. It was the toughest month for us to comp, but going into December and January were comping easier periods relative to last year both from.
The sales trends shopping behavior in our in our inventory position was was really tough as we as we move through December so.
So as I mentioned, the more near term trend of down kind of high single digits that we saw coming through the back half of November in through through cyber Monday.
Is is really where we expect some of the rest of the period to play out, but but with with more upside in the coming weeks than than what we felt in the first.
First part of the quarter.
But that being said.
I think we're looking into next year and we're still planning it.
We had inventory issues in the first half of last year in the first quarter particular in so so I think we'll see some momentum because of that.
But the overall consumer backdrop at least as we're seeing it isn't going to drive a significant growth.
And over that over the next few months.
Thanks.
Helpful and maybe a follow up then to understand how you're planning in the organization.
The margin for.
For the business this year will be the lowest.
As in our model looking backward.
I'm just curious if if if.
Net sales.
We're not according to your plan and stayed negative.
How long would it take or how much.
Much pressure, what do you need to see incrementally on the top line before you took a different approach to the operating structure of the cost structure of the business.
Maybe anything more drastic than the current actions you've outlined to you.
Slow some of the incremental spend.
Yeah.
Yes, Jonathan the Sam How're you doing.
Yes, so a couple of things we've got we've got some.
<unk> expense flexibility within within Opex, specifically, our intentions at this stage.
While while the near term.
Challenges certainly our.
Are impacting our results.
We're currently.
Focused on on unlocked unlocking the company's full potential.
Longer term and as we talked last year.
Just really beginning the journey of <unk>.
Infrastructure and technology investments.
And we've got a number of things that are in the works and certainly we're excited about.
Where we are with <unk> and what value that that will create.
The pivot to a.
A different warehouse management system that will allow us to optimize that investment in a derisk Vale is exciting and in fact.
I think you had lowered our capex spend next year to $35 million or something like that or this year yeah.
So as we think about next year, you know, while while at a high level.
We're going to stay the course on our investment strategy for the long term we also recognized.
The importance to.
To manage the business as well and so.
As we've always said, we're we're acutely focused on managing.
Expenses.
We're being highly critical of investments that are.
Outside of kind of.
The must haves to deliver our strategic initiatives.
And.
As we think about next year and as Dave said, we'll share more on our next call is where we are.
We're finalizing the plans for 'twenty three we're going to take a really conservative approach not just to sales and margins, but also expenses.
Capital.
But but also not.
Not take a short short term look necessarily in in.
In our strategic initiatives and what what investment requirements will be necessary to unlock that.
Understood. Thanks for sharing the color.
Yes, you bet.
Okay, and if you'd like to ask a question. Please press Star then one at this time.
Our next question comes from Jim Duffy with Stifel. Please go ahead.
Oh. Thank you good morning, Thanks for taking my question.
You guys gave a lot of detail on categories on the call. It sounds like you're having good success with women, you're having some success with new products men's core product. However has been a challenge.
Sam can you speak to customer acquisition dynamics, you're turning to promotion to reengage existing customers is that improving customer acquisition as well.
Yeah, Hi, Jim Thanks.
Yeah. So we're obviously.
Excited about the continued traction we're gaining with with women's.
Total business was up 10% obviously the success, we're starting to see with the introduction of <unk> and.
And we're supporting that with investments like the 20 store.
Reconfiguration, we've done in order to give womens.
Greater.
<unk> space and improved shopping experience and an equally important as 8-K G starts to grow.
It requires its own dedicated space.
In the stores as well so those are all good things and.
Bob.
Our customer acquisition, new new customers are reaching this.
<unk> 50, 50, now between men and women, which is exciting for us.
Our current female shoppers are are at its highest peak.
Over the last three years and so that's again exciting for us.
So we remain confident in our product strategy, and our and our marketing strategy to not only engage the female shopper, but also.
As we as we discussed.
A few calls ago and continue to our target consumer that 40 to 50 year old we're getting traction there, which is a good sign and we want to be careful that we don't alienate our core consumer who is in their mid fifty's, but at the same time recognized the need to build.
Our business for the future based on slightly younger consumer that that really is is.
In the in the spending kind of tight of their of their lives and career. So.
Both of those elements to to our marketing strategies and customer acquisition strategies. We continue to see really good progress there and we're pleased with with what we're seeing.
Okay and then.
Step backwards and promotion from previous strategies I am curious how are you.
You see the balance between promoting support sales and moving inventory versus conditioning. The consumer that the brand is always on sale.
Perhaps related to that.
Was wondering if maybe this causes you to rethink your pricing architecture. It sounds like Youre, having success engaging new consumers with core products, but if I interpret your comments it sounds like new consumers aren't coming back to where I'm sorry.
<unk> consumer base isn't coming back to core products unless they're on sale.
Yes, so really important question.
So a couple of things I'll say, one is we're always going to balance and take a strategic approach.
So how we balance.
Price and brand integrity, we want to be really careful about that.
In this heightened promotional period we're in.
Everyone is faced with inflationary issues in.
It clearly has.
Taken a toll on the consumer and we're not immune from that.
Having said that we think that the products we build.
To deliver against solutions.
And durability needs.
And expectations that our consumers have our price value relationship is really good. It's just we're faced with a highly promotional volatile environment right now and so.
While we've got to be more promotional than we are historically we're also.
Making sure that we're not having a fire sale so to speak and I think in certain areas of the business specifically again back to.
Women's and AKG in some of the new innovation like our no men's underwear.
The success in those areas continue to show that our brand strength is as good as it's ever been it's just we're competing with.
Highly promotional activity that that now is about share of wallet in and that share of wallet.
Or the spend has reduced because of.
Inflationary issues, so I wouldn't say so much that we are rethinking our pricing our regular pricing strategy, we're going to build products that that satisfy the needs of our customers through the lens of durability and performance and solution based.
But we also recognize that at times, we've got to be competitive we've got to make sure that we're strategically.
Taking the appropriate actions to not allow our inventories to backup and then that creates a whole different dynamic as we experienced two years ago.
But having said that we're investing heavily in innovation and we recognize that innovation with the right price.
This value relationship is critical and so our teams continue to think about that and think about other areas of the business, whether it's price or.
Or adjacent categories that we can continue to innovate into.
Okay. Thank you for that perspective, maybe one last one should we interpret your comments on the cautious approach to 2023.
Right.
Perhaps you're backing away from planned store openings.
Yes, not necessarily I would just say.
As we laid out in our Big Dam blueprint.
Big chunk of our investments are based on a digital first.
<unk> digital first business and really you think about.
For example, our our traffic and.
And transactions coming coming from a mobile device.
At their highest levels that they've ever been and we're consistently holding to those levels and in fact continue to grow as a percentage to our total online business. So we recognize that our investments have to be about enabling a digital marketplace. So to speak.
Having said that we recognize stores are really important piece of our omni channel customer experience.
And it's about it's about <unk>.
Gaining in garnering new consumers, we recognize that it's a place to provide.
Incredible service opportunities for the consumer whether it's buy online and pickup in store or even return or exchange product we.
Recognize the importance of that hence we just completed our remodel in our St. Charles Missouri store to a new format, which was based on a lot of work we did with the consumer in terms of what they want and expect out of a modern.
Customer experience journey, and so we've done that.
And so we're going to continue to look for opportunities to open stores, but we're going to be highly opportunistic.
<unk> about that given.
The backdrop of what we what we are expecting in 2023 and some of the priorities we have around technology and logistics investments, we want to be really prudent about where our capital outlays go in and again building for the long term.
Value and and growth benefits of the company.
Understood. Thank you Sam and best of luck.
The team through the holiday season.
Appreciate it happy holiday Thanks, Jim.
Our next question comes from Harding <unk>.
Blair. Please go ahead.
Thanks.
Point of clarification did you indicate that inventories would be up mid teens by year end did I hear that right.
That's right.
That's the estimate.
And so I guess the the disconnect there the spread between kind of the implied guidance for sales was actually the the actual guidance for sales.
Would suggest potentially that the gross margin pressures persist into the front half of next year, which I imagine you're not going to bless necessarily but maybe it will help us out as far as modeling when does freight at least turn into a tailwind.
How are you thinking you were asked kind of about pricing, but one.
What's sort of the currency of the inventory and the risk of additional promotions kind of into the front half of the year and anything you can say around that thanks, yeah absolutely.
Ah well inventories my land up mid teens.
Compared to last year it.
It would still be on par or slightly below two years ago, and that's really a function of where our inventory was last year.
Unfortunately below where it needed to be so we just we're getting back to the level thats that's necessary to enter our spring summer season.
We expect while clearance levels today are.
Mid single digits, we would end up maybe high single digits as we look forward to the back to the end of the fourth quarter and Thats.
That's not unusual for where we end the season and.
So we don't see that the margin pressure will be there.
We do have a tailwind on freight expense in the first quarter of next year.
That.
Roughly almost $4 million that will.
That will lapse and get the benefit on the gross profit margin for.
But product.
Product margins will probably still be tougher than they were last year.
But not not due to an overhang of inventory, but just simply due to.
Competitive competitive pricing environment, we're in.
So we're not we're not concerned with the higher inventory levels, just compared to prior year.
Awesome. Thank you Dave.
And then kind of just curious.
From an outsider's perspective here it seems like the.
The the sales from the blueprint and aren't necessarily materializing, but the costs are.
And sort of pausing the ERP.
Deployment is a little bit telling in that same regard.
What's the capacity here to kind of.
It sounds like as far as the guidance in the fourth quarter pull back on some of the costs here that maybe we are building out too bill.
Billion in sales or whatever the ultimate target might land.
That's something that we should see a steeper reduction in SG&A in particular.
Next year.
Yes, maybe I'll answer the first part of that deal and the Sam.
So as you know as I said in my prepared remarks.
The current environment.
It's posing near term challenges for the business for sure and and we're going to.
We're going to <unk>.
Prudently focus on managing expenses.
Having said that.
We're focused on unlocking the full potential long term.
And so.
Yes are there is some there is some.
Some flexibility in our Opex as we move into next year for sure, but but we're not going to necessarily cut our nose off despite our face meaning.
There are certain things that we believe we've got to invest in in order for our business to scale and continue to grow sustainably long term and that's largely around technology and logistics and so while we may depending on what next year looks like we may extend the.
<unk> frame of those capital investments the investments themselves will will will ultimately have to be made in order for us to deliver against our longer term value proposition.
Specific to the pause on the ERP.
That was really more about <unk>.
As our new CTO came in and looked at our infrastructure and our and our current course and speed said.
We really should prioritize that we would get greater near term value out of.
A more optimized warehouse management tool than ERP and so he really advised us that made the call as we expected him too.
To give us kind of a re prior to the nation.
Through his expert lens on.
Not only where we would get greater value, but importantly in these conditions.
Where we could potentially get greater near term value and so I think that was the appropriate call and we eventually are going to replace the ERP system, we're going to have to do that.
But it's now moved down the priority list because.
AJ believes there is other areas that take greater priority and we will deliver greater results for us faster.
Thanks, Sam I appreciate that and best of luck for sure.
I appreciate it.
Yes.
This concludes our question and answer session as well as our conference for today. Thank you for attending today's presentation. You may now disconnect.