Q4 2024 Duluth Holdings Inc Earnings Call
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Dr. Duluth, Tradings Dot com under press releases I'm here today, with Sam Sato, President and Chief Executive Officer, He Niagara Ball Senior Vice President and Chief Financial Officer, and Steven L. Schlecht founder and chairman of the board.
Speaker Change: On today's call management will provide prepared remarks.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: With that I will turn the call over to Sam Sato, President and Chief Executive Officer Sam.
Thank you Anita and thank you all for joining today's call.
Speaker Change: Let me begin by sharing our fourth quarter results, starting with the significant challenge we faced in fulfilling orders, which we addressed with immediate corrective action.
Speaker Change: And highlight the foundational progress we made in 2024 on our Big Dam blueprint initiatives strategic work designed to transform the business and unlock our full growth and profit potential.
Speaker Change: After reviewing our key focus areas for fiscal 2025, I'll turn it over to Hana to provide a detailed financial update and our outlook for the year ahead.
Speaker Change: Our fourth quarter results fell short of expectations due to processing delays at our legacy fulfillment center.
Net sales declined one 8% to $241 million with direct channel sales remaining flat with increased mobile penetration, while retail store sales decreased six 9% as traffic decline and shopper conversion held steady.
Speaker Change: Adjusted EBITDA for the quarter was approximately $9 million.
Speaker Change: Although we experienced improved performance leading into black Friday week through cyber Monday, resulting in record sales during that period, we subsequently reduced promotional depth and frequency to address the order backlog and maintain sales quality.
Speaker Change: This decision, while operationally necessary constrained our topline growth.
Speaker Change: Let me address the processing delays at our legacy Belleville fulfillment center.
Speaker Change: Following the surge in unit demand over the Black Friday weekend, we significantly depleted inventory units housed in our highly automated data center.
Speaker Change: This resulted in a higher level of orders being routed to our Belleville facility.
Speaker Change: Belleville order processing capacity is considerably less than a darris Ville, which ultimately resulted in a significant backlog in orders being filled.
Speaker Change: We have since implemented enhanced operational protocols and planning processes to ensure that we have optimized unit inventory distribution across our fulfillment network.
Speaker Change: Moving onto our full year 2024 results net sales were $627 million and adjusted EBITDA of $15 million.
Speaker Change: While we saw benefits from our sourcing initiatives. These gains were offset by lower average unit retail prices.
Speaker Change: We maintained our strategic investment in marketing supporting our focus to attract new customers and strengthen relationships with existing ones.
We continue to make progress against our strategic initiatives, which we believe are critical to driving growth and profitability.
Let me start by elaborating on the progress we've made on our ongoing transformation journey.
Speaker Change: Our product development and sourcing initiatives are delivering meaningful benefits exceeding our initial expectations the shift to direct to factory sourcing is not only reducing our product costs, but fundamentally changing how we bring products to market.
Speaker Change: We are now able to introduce innovative products more frequently and get them to our customers faster.
Speaker Change: This is a critical strategic unlock for our business that improves both our financial performance and our ability to serve customers with fresh innovative products more often.
Speaker Change: The challenges from the fourth quarter underscore the importance of continuing to advance our logistics and fulfillment capabilities are.
Speaker Change: Our state of the art adheres Bill fulfillment center has become the cornerstone of our optimization strategy now processing more than 60% of total volume at a cost per unit that is 66% lower than that of our legacy facilities.
Speaker Change: This investment has yielded tangible customer benefits through faster click to delivery times, while significantly expanding our network capacity.
Speaker Change: We've also successfully completed the planned closure of our Dubuque facility generating approximately $5 million in annual cost savings and we are improving cross functional processes to maximize our network investments.
These strategic initiatives represent structural improvements to our business model that will deliver incremental value.
Speaker Change: Our mobile first digital strategy is delivering strong results and continues to be a key growth driver.
Speaker Change: Mobile now accounts for nearly 70% of our site visits and 58% of our digital sales with both metrics growing year over year.
Importantly, our mobile conversion rates remained significantly above industry averages.
Mobile is our customers' primary gateway to the brand and we're seeing the benefits of meeting them, where they prefer to shop.
Speaker Change: In 2025, we will continue to invest in enhancing our mobile experience, while seamlessly extending it to desktop and retail stores, creating a holistic omni channel customer experience.
Speaker Change: We're making significant progress on revitalizing our retail store portfolio with a comprehensive strategy focused on both existing and new locations across our 65 store fleet and as we evaluate new locations, we've established higher productivity hurdle rates.
As we approach lease renewals for about 25% of our stores through 2026, we are thoroughly evaluating each location for remodel relocation or exit based on these enhanced performance standards.
Speaker Change: Regarding new store locations, we've identified priority markets to meet our target customers where are they currently shop and are on track to open two new stores in the second half of 2025.
Speaker Change: The Omnichannel strategy is crucial to our business as evidenced by the fact that our customers who shop across multiple channels make purchases over twice as often as those who shop through a single channel.
Speaker Change: Our physical stores remain central to our Omnichannel strategy.
Speaker Change: Let me update you on the progress of our technology roadmap.
Speaker Change: Our initial focus is on building foundational platforms for data and e-commerce, which have been completed.
Speaker Change: In 2025, we are implementing the product information platform mobile site redesign and completing the warehouse management system.
Speaker Change: Connecting these platforms will optimize omnichannel fulfillment and inventory management.
Speaker Change: The final phase requires a unified promotion engine loyalty program enablement and our core ERP replacement.
Speaker Change: For 2025, we're committed to building on the progress we've made on strategic initiatives and structural improvements, while enhancing our operational execution.
Speaker Change: Key focus is on enhancing our inventory management approach, ensuring we have the right products in the right place and at the right time.
Speaker Change: Our assortment decisions are leveraging deeper customer insights and linked to the strategic growth categories.
Speaker Change: These changes fundamentally improve how we operate and set us up to deliver stronger financial results.
Speaker Change: As he and I will walk through shortly we are resetting our business model to support higher full price sales.
Speaker Change: Higher gross margin flow through.
Speaker Change: And cash generation driven by working capital improvements.
Speaker Change: Moving on to the current year, we have exciting new product innovations launching across our brands in Duluth men's we're expanding our successful are mature low cooling technology with new double flex pants in our backyard line expanse, including our new barbecue shirt that is 100% cotton and <unk>.
Speaker Change: Breathe easy when behind the grill.
Speaker Change: Continuing to build upon our successful collaborations we're excited to be partnering with lightning Google's. This spring.
Speaker Change: Our outerwear offering expands as well with the new Northwester, a soft shell transitional jacket that takes you from Winter's chill to spring showers.
Speaker Change: Within a cage Gee, our new wanted to wear bottoms uppers stretch and sweat wicking performance, which is just what you need from a dependent we'll pair of active pants when you're on the moon.
Speaker Change: We're also introducing an additional new pant named Alpine flex, which offers versatility comfort and practicality for any outdoor adventure with its ultra stretchy and quick drawing fabrications.
Speaker Change: And the expansion of our successful after sweat Fleece collection continues with an improved fabric, that's even easier to care for.
Speaker Change: We're elevating our first labor business with an improved bullpen construction, featuring greater comfort and support as well as the new Buck naked cotton offering which brings the no pitch no stink and no sweat our customer of.
Two are naturally breathable cotton black.
Speaker Change: In women's we continue to build on the success of our hero Heirloom collection by extending the offering we're excited about our new coveralls, which provide a bit more coverage that our heirloom overall for those sticky and prickly situations out in the garden.
Speaker Change: Within our famous Noga collection, we've introduced noga are designed to reduce heat buildup as you move this new technology features a feathery like fabric with moisture wicking odor fighting properties to keep you feeling fresh all day.
Speaker Change: Okay.
Speaker Change: Additionally, our newly introduced French Terry collection has been met with Great response from our customers.
Speaker Change: We're really excited about our robust innovation pipeline. This year, which is the result of our strategic focus on product development.
Speaker Change: In addition, our new media agency is bringing fresh thinking to our consumer centric strategy with a refined focus on full funnel media efficiency of spend and traffic driving initiatives.
Speaker Change: Through this partnership we can now measure brand lift monthly to track awareness consideration and purchase intent among both existing and new customers.
The holiday campaign was successful with aided awareness up nine points overall visits were up 2% in first time visits were up 19%.
Speaker Change: Strategic partnerships and product collaborations, including Yellowstone. Good morning America Bush light and Hans drove brand metrics like awareness and purchase consideration higher attracted new customers and drove social commerce growth.
Speaker Change: We will build on this momentum in 2025 with fresh collaborations partnerships and social initiatives that engage consumers and drive sales.
Speaker Change: These efforts balanced brand building and immediate sales impact attracting more of our target audience and staying true to our authentic can do spirit.
Speaker Change: Let me update you on our inventory and financial position with.
Speaker Change: With the strong unit sales between Black Friday, and cyber Monday, combined with our strategic decision to pack and hold certain core fall winter products, our sequential inventory position at the end of February improve with high in stock on year round items.
Speaker Change: Higher newness levels in our Assortments and percentage of clearance inventory in line with last year.
Speaker Change: Looking ahead to fiscal 2025, we're focused on driving higher quality sales, which means reduced unit sales matched with lower inventory receipts driving improved inventory turns.
Speaker Change: <unk> and margin.
Speaker Change: Importantly, we finished 2024 in a strong financial position debt free with positive cash and $103 million in liquidity, which gives us the flexibility to manage the business.
Speaker Change: As I said earlier, we're not satisfied with our most recent results I want to reiterate the team's commitment to improving our results and are steadfast in executing our strategic initiatives.
Speaker Change: These initiatives are beginning to yield measurable benefits and while there is much work ahead of US we've made significant progress on our foundational investments.
Speaker Change: We are seeing tangible improvements in our logistics network product development capabilities and digital experience.
Speaker Change: I remain incredibly proud of our team's unwavering dedication to operating with excellence agility and a customer first mindset always celebrating the can do spirit that defines our brand.
Speaker Change: We will continue to focus on driving operational excellence maximizing returns from our strategic investments and prudently managing our business for profitable growth.
Speaker Change: Before I turn it over to Hana as you might have read in this morning's press release I've announced my retirement, as President and Chief Executive Officer, and as a board member effective April 25 2025.
Speaker Change: To assist with a seamless transition, Steve Schlecht founder and chairman of the board will take over the day to day operations effective March 14th 2025.
Speaker Change: It has been a privilege to serve as president and CEO and member of the board of directors of Duluth trading.
Speaker Change: <unk> and proud of what our team has accomplished and the progress we have made working with such talented and passionate team members has been an honor and I believe the future of the company is bright.
Speaker Change: Finally, I want to thank Steve sincerely for his support and partnership over the course of my tenure.
Hana: Now I'll turn the call over to Hana.
Hana: Thanks, Anne and good morning.
Hana: We'd like to thank Sam for his partnership over the last year and I wish him all the best in his retirement.
John: As John discussed our fourth quarter results did not meet our expectations promotional adjustments after cyber Monday, and then do a stoplight, while limiting gross margin pressure.
John: However, we finished the quarter with highest quality inland study no debt and 100 million in liquidity.
John: Looking ahead to 2025, we will leverage the advancements made to our strategic initiatives and are sharpening our focus on execution.
John: Our operational performance.
John: Now providing further details on our Q4 results.
John: Today, we reported fourth quarter 'twenty 'twenty four with net sales of 241.3 million down one 8% as reported EPS loss is 17 sets and adjusted EPS losses for certain adjustments to EPS include female and software impairment charges and.
John: 1.8 million valuation allowance on our deferred tax asset.
John: Adjusted EBITDA for the quarter was $8 5 million.
John: Starting with the topline.
John: Q4, 'twenty and 24 net sales declined 1.8% to 241.3 months yet.
John: Including a benefit of 230 basis points from the 50 <unk> week.
John: Direct channel sales were flat as a decrease in that traffic was offset by a 30 basis point increase in site conversion and 10% growth in E. L D.
John: Retail sales declined six 9% driven by lower foot traffic and lower L. E that shopper conversion flat to last year.
Well those days grew 4% year over year, driven by a 15 basis point improvement in conversion more.
Well also continues to be a top sales channel with the valuation increase over last year.
John: Moving onto gross margin for the fourth quarter, our gross margin contracted 410 basis points driven by an AUR decline of eight 9% as we drove unit sales and reduced inventory levels importantly to direct from factory cost.
Initiative, we continue to realize improved product costs.
John: SG&A expenses in the fourth quarter increased one 5% to 110.7 month yet.
John: Excluding 3 million software impairment charges, adjusted SG&A decreased 1.3% to $107 7 billion of that $109 1 million in the same period a year ago.
John: As a percentage of net sales SG&A expenses increased to 45, 9% and adjusted SG&A increased to 44, 6% compared to 44, 1% last year, primarily driven by lower advertising spend offset by deleverage and overhead.
John: Got it.
John: Q4, adjusted net loss was one 5 million or four cents per diluted share some back to the net income of $6 8 million yet on 21 cents per diluted share last year.
John: Adjusted EBITDA was positive $8 5 billion.
John: Inventory increased by 41 million year over year, ending at $166 5 million and 32% increase we are comfortable with the quality and level of our inventory position entering the new fiscal year with 90% in court and current products. The key drivers of the year.
John: The increase was 68% or 28 million of the increase wasn't God urology products and 7 million wasn't in transit inventory due to a strategic shift from using a sourcing agent buying directly from factories.
John: And then with a healthy and improved clearance inventory mix of 10% some back to 11% last year.
John: We invested $4 4 million in capital expenditures this quarter, primarily for systems infrastructure down significantly from $8 8 million in the prior year.
John: We ended the quarter with zero borrowing on our line of credit we had $3 3 million of cash and cash equivalence at the end of the quarter, we amended our revolving credit facility from 200 million to 100 million to match agony for seasonal inventory builds and a more normalized rate of Cabot.
John: Extended cash on balance sheet remains strong with liquidity of 100 entry point 3 million.
John: Now turning to our full year 'twenty 'twenty four it gives us.
John: We delivered sales of $626 6 million down three point bandwidth then versus prior year, including approximately benefits of 90 basis points from the 50 technique and 70 basis points from Costco.
John: Full year gross margin ended at 49, 2% down 110 basis points as improvements in product cost frontline direct to factory sourcing initiatives was more than offset by the bulk in motion to reduce excess seasonal inventory.
John: I suppose your SG&A as reported was $337 6 million at 53, 9% of sales onetime adjustments included a 3 million software impairment write off.
John: As a result, adjusted SG&A for the year was $334 6 million and 53% of sales deleveraging by 117 basis points.
John: Advertising as a percent of sales de leveraged by 10 basis points to 10, 8% of sales like shipping and fulfillment costs were favorable by 40 basis points from improved mix and savings from the a dangerous sentiment center. This was offset by higher fixed costs from strategic.
John: Investments.
John: Our capital expenditures were $17 4 million driven by investments in technology infrastructure, including Manhattan Omni for spending some of that.
John: We had a net loss of $43 7 million and adjusted net loss of $23 6 million compared to a net loss of $9 9 million in the prior year.
John: Adjusted net loss of $23 6 million excludes $7 7 million of restructuring expense for the Dubuque for settlement.
John: Center closure 11.8 million valuation allowance on our deferred tax asset and 3 million of stock that impairment write off.
John: Sales tax from previous years, whereas if he stays at those years and reflect it in the 'twenty 'twenty four beginning retained earnings ballots leader.
John: We reported EPS loss of $1 31, and adjusted EPS loss of 71 sets.
John: Adjusted EBITDA was $14 6 million at two 3% of net sales.
John: Our balance sheet remains strong with no debt on our revolving credit facility and liquidity of 100 empty one 3 million.
John: Now turning to our outlook.
John: 2025.
John: Full year net sales guidance for 'twenty 'twenty five is projected to be between 570, and 595 million. This projection considers several factors, including natural economic and consumer uncertainty adjustments to promotional strategies to enhance brand and price.
John: Integrity.
John: Oh, one store in the first half of the year.
John: The opening of two new stores in the second half and an expanded order from Costco for father's day compared to the previous year. Additionally, it is important to note that 20 to 25 is a 52 week year compared to 53 weeks in the prior year.
John: We anticipate approximately 300 basis points of gross margin expansion due to a combination of factors, including increase direct sourcing from factories less frequent and more targeted promotions and improved inventory control. It we expect inventory levels to normalize in the second half.
John: The rebalancing of sales and inventory needed to see SG&A.
John: SG&A is projected to deleverage by up to 200 basis points as improvements in shipping and fulfillment costs and reduced fixed costs from the Dubuque center closure I offset by overhead deleverage from lower sales.
John: We have planned capital expenditures of approximately $20 million to fund store openings and systems infrastructure.
To summarize our full year outlook.
Projecting net sales of approximately 572 595 million and adjusted EBITDA of 20 to 25 million.
John: Duluth is undergoing a multi faceted transformation encompassing strategic priorities structural enhancements and operational improvements in 'twenty 'twenty four we continue to realize benefits from our Nashville investment and direct from factory sourcing initiatives. Additionally, we compete.
We did a comprehensive benchmarking study defined as you get to that stage portfolio strategy implemented fulfillment Center network optimization phase twos and enhanced enterprise lending. However, we faced operational challenges with inventory and logistics in 2024 D I try.
Speaker Change: Oh, hey, guys into key areas resetting the death, Penn Sequencer, Oh promotions to enhanced inventory management and improving operational execution. These efforts will enable us to fully realize the benefits of the progress we are making on our strategic initiatives and structural enhancements.
Speaker Change: To summarize we are transforming our business to achieve sustainable profitable growth in 'twenty 'twenty four the team made significant progress on strategic and structural initiatives ending the year with no debt strong liquidity and high quality of inventory I focused in 'twenty 'twenty.
Speaker Change: Five <unk>.
Speaker Change: On resetting price integrity, and hunt inventory management and operational execution.
Steve Schlecht: I will now turn the call over to Steve.
Steve Schlecht: Thank you Hannah.
On behalf of the board of directors I want to thank Sam for his years of service and dedication and wish him the absolute best in his upcoming retirement.
Steve Schlecht: Sam his career in retail began more than 30 years ago as a young sales associate on the Nordstrom shoe floor.
Steve Schlecht: His passion for people with customer experience product knowledge and operational excellence have served him well throughout his career.
Speaker Change: Sam and I share a deep commitment to Duluth trading company success and I appreciate Sam's many contributions to our company, including his leadership in creating and advancing the Big Dam blueprint.
Speaker Change: These efforts have established important foundation foundational building blocks for our company's future.
Speaker Change: As Sam mentioned earlier to assist with the seamless transition I will be stepping in to take over the day to day operations, while we move forward with our permanent CEO search.
Speaker Change: Thank you Sam and Hannah and thank you all for joining today's call.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.