Release Date: August 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Duluth Holdings Inc (DLTH, Financial) reported a 1.8% increase in top-line sales for Q2 2024.
- Gross margin expanded by 90 basis points to 52.3%, driven by improved product costs from direct-to-factory sourcing initiatives.
- The women's business grew nearly 6%, with significant strength in the first-layer business and popular collections like Armachillo and Dry on the Fly.
- The company successfully launched new products and collaborations, including the Bullpen 3D underwear and new Duluth footwear collections.
- Duluth Holdings Inc (DLTH) paid off $11 million of outstanding debt, ending the quarter debt-free with a strong liquidity position of $210 million.
Negative Points
- Retail store sales declined by 4.4% due to challenging traffic trends, despite sequential improvements.
- The company incurred $7.4 million in restructuring expenses related to the exit of a legacy fulfillment center.
- Clearance inventory levels increased to 11% from 7% last year, indicating higher-than-planned clearance sales.
- SG&A expenses increased by 4.6% to $76.3 million, including a nonrecurring $2.4 million estimated sales tax expense.
- The company reported an adjusted EPS loss of $0.02, although this was an improvement from the previous year's loss.
Q & A Highlights
Q: Can you provide more details about the two new store sites planned for next year and the criteria for site selection? Also, how do the stores up for renewal compare in terms of performance and profitability?
A: The two new store locations have not been publicly announced yet. Our primary criteria for site selection include location, market share opportunity with our target customer, and financial metrics. We aim to ensure that the store fleet continues to be additive to the company's results. For the 15 stores up for renewal by 2026, we are evaluating options such as remodel, relocation, or exit to enhance productivity and profitability.
Q: Can you elaborate on the benefits from your sourcing initiatives and the consumer trends you're observing?
A: Our product development and sourcing initiatives are critical for bringing high-quality, innovative products to market more frequently and at lower costs. We are starting to see the benefits flow through. Regarding consumer trends, we are cautious but focused on maintaining clean and healthy inventories. Clearance inventories have ticked up slightly, but nearly 90% of our inventory is current season goods. We are addressing the clearance inventory swiftly.
Q: What do you make of the traffic declines in retail stores, and do you still expect the store base to be profitable this year?
A: Traffic trends in stores have been challenging but are improving sequentially. We are seeing benefits from a multichannel market strategy, with improvements in online business in those markets. We are also unlocking local in-store events that drive traffic. We are focused on ensuring the retail portfolio is profitable and are prepared to exit locations that do not meet our thresholds.
Q: Can you provide more color on the inventory increase and how you plan to manage it?
A: Coming out of Q4, we sold more units in a highly promotional environment, leading to a leaner inventory position. We reacted by placing additional orders, which arrived in April, cutting short our selling window and leading to higher clearance inventories. We are addressing this in the current quarter and expect sequential improvements in inventory levels.
Q: How do you plan to balance SKU proliferation with new category introductions?
A: We are focused on ensuring that our inventory remains clean and healthy. While we are introducing new categories, we are also taking swift action to manage clearance inventory. Our goal is to maintain a balanced approach to SKU management, ensuring that new products resonate with consumers while keeping inventory levels in check.
Q: What is your outlook for gross margin and promotional activity in the second half of the year?
A: We delivered a 90 basis point improvement in gross margin in Q2 and have line of sight to a 150 basis point improvement for the full year, net of inventory clearance issues. This tailwind is expected to continue for the next four to five years. Our approach to promotions is to stay competitive while maintaining brand integrity and balancing sales and margins.
Q: Can you provide more details on the structural improvements and cost efficiencies you are implementing?
A: We are seeing benefits from our product development and sourcing initiatives, as well as our fulfillment center optimization strategy. The closure of one of our legacy fulfillment centers will lead to annualized run rate savings of approximately $5 million. We are continuously looking for ways to optimize costs and improve profitability.
Q: How do you plan to manage the impact of higher freight rates?
A: The impact of higher freight rates is more of a 2025 story. We have contemplated various headwinds and tailwinds in our guidance and will continue to manage these factors as we move forward.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
