Yahoo Finance Duluth Holdings Inc. (NASDAQ:DLTH) Q4 2023 Earnings Call Transcript
Duluth Holdings Inc. (NASDAQ:DLTH) Q4 2023 Earnings Call Transcript March 7, 2024
Duluth Holdings Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Duluth Holdings Inc Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nitza McKee. Please go ahead.
Nitza McKee: Thank you, and welcome to today's call to discuss Duluth Trading's fourth quarter and full year financial results. Our earnings release, which was issued this morning, is available on our Investor Relations website at ir.duluthtrading.com under Press Releases. I'm here today with Sam Sato, President and Chief Executive Officer; and Heena Agrawal, Senior Vice President and 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. 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. And with that, I'll turn the call over to Sam Sato, President and Chief Executive Officer. Sam?
Sam Sato: Thank you for joining today's call. Before I share some of the details of our business performance and progress on key strategic initiatives, I'd like to first introduce Heena, and welcome her to the Duluth family. Heena is joining us as our Senior Vice President and Chief Financial Officer. And with more than 20 years of finance and leadership expertise, Heena brings a breadth of experience across different facets of global finance accounting and mergers and acquisitions. Heena was recently with Contour brands holding the position of Global Wrangler and Global Contour Supply Chain, Chief Financial Officer. We're thrilled to have attracted such a seasoned executive to fill the important Chief Financial Officer position at such a pivotal time for Duluth's trading.
Heena's extensive experience and strong finance and leadership acumen will play a critical role in the evolution of Duluth's long-range plans as we remain steadfast on executing the pillars of our Big Dam Blueprint. As a brief review of our fourth quarter performance, net sales increased approximately 2%. The quarter was highlighted by growth in both the Duluth and AKHG brands driven by strong outperformance in our women's business, which registered year-over-year growth of 12%. We were particularly pleased with the continued momentum in our AKHG women's business posting stellar year-over-year quarter growth of more than 20%. Product performance highlights in our women's business included positive momentum in our newest Hero product, the Heirloom Gardening bid in which we introduced align version, making it suitable for year-round wear.
Flannel and bras also played a significant role in our fourth quarter growth with both categories up strong double digits. In flannels, our improved in-stock position benefited sales during the peak giving period. In bras, the success we are seeing is a testament to our unique product innovation and growing brand loyalty, and our TeeLUXE bra was the number one style in its launch season. The broad-based positive trends and exceptional customer responses across our women's business indicate continued growth potential. In the fourth quarter, our men's apparel business was flat. Men's AKHG, first layer, woven tops and bottoms grew as our unique product continued to resonate with our loyal customer base. This was partially offset by softer trends across our cold weather categories of outerwear, sweaters and footwear, which was impacted by the warmer weather.
Product performance highlights in our men's business included double-digit growth in underwear, Double Flex denim and flannels. Success with Double Flex denim was driven in part by the introduction of new elevated washes and was brought to market through our monumentally durable campaign. Men's underwear with humorous photoreal prints resonated with consumers and flannels were bolstered by new pattern designs, color pallets and a strong in-stock position. During the quarter, the industry saw consumers gravitate to promotional purchasing. We saw a significantly higher portion of our holiday sales occur during the Thanksgiving through mid-Cyber Week period when we ran our global event. Our Black Friday sales were the strongest in our company's history, and we saw a pull forward of sales from the following weeks.
In January, we introduced new product innovation and saw a sequential improvement with our full price sales trend. Let me spend a few moments on our product innovation strategy. Within our core categories as well as our AKHG brand, we introduced more newness than ever before. Most of these introductions came in the form of soft launches, but the successful initial results and consumer excitement highlights our ability to develop design and deliver innovative and unique first-to-market fabrications and features that set Duluth the part in the marketplace. Key new offerings late in the fourth quarter included a new addition to our electronic fire hose pant collection featuring the strongest flex work pant fabric on the market with a lighter weight than our original fire hose.
This product, we've named Flex Fire Hose HD comes in two styles and truly represents the next generation of workwear. We also expanded our core Buck Naked category by offering men's Buck Smooth, which provides the same comfort and function as the fan favorite Buck Naked adding a smoother, more vibrant and pattern construction. Our quick drying Dry on the Fly technology was expanded into teas and underwear across both men's and women's. And finally, we launched AKHG Fitness, our first ever fitness apparel offer. The assortment built for Nature's Gym for both women and men includes tanks, shorts, hybrid jackets and aftersweat sweats. Our fitness apparel includes features and technologies that stretch, wick, breathe and dry in the flash and is offered in sizes up to 3x.
AKHG Fitness is off to a great start. And although a small contributor to the business today, we see this as a white space opportunity to build on our unique fabrics features and functions to create and support AKHG fitness as a growing and year-round category. To bring awareness to our innovation and product offerings, our marketing and creative teams ramped up our investments in social influencers, which delivered meaningful engagement and strong growth from new younger consumers. We continue to balance brand awareness and high converting digital tactics to optimize our return on investment and consistently deliver relevant content to both existing and new consumers with creative concepts across streaming video and audio as well as cable TV.
Throughout the year, we strategically retargeted past consumers, leading to an 11% increase in reactivated buyers during the fourth quarter. Personalized content reengage lapsed consumers reinforcing the trust and loyalty they have in our brand. In addition, new buyers grew in Q4 as our high-quality solution-based product appeal to consumers who have not previously purchased from Duluth. Our strategic shift towards targeting a younger consumer is gaining traction as our new consumers are, on average, 5 years younger than our existing consumers. Our previous investment in replatforming the duluthtrading.com website to the next generation of e-commerce tailored for mobile usability is paying off. Our goal is to enhance accessibility and provide a frictionless shopping experience and because of our investment, we saw high single-digit direct channel growth driven by higher traffic and conversion in mobile more than offsetting retail softness.
In fact, fourth quarter mobile sales increased over 20% from a year ago and mobile now represents our largest channel for consumer interaction and purchases accounting for over half of our total direct channel sales. Shifting to the foundational drivers of the business. We remain steadfast on our commitment to the pillars outlined in our Big Dam Blueprint. As initially introduced in 2021, the 5 pillars of our Big Dam Blueprint include one, lead with a digital mindset; two, intensify our efforts to optimize our own DTC channels; three, evolve the company's platform to grow into a multibrand and multichannel business; four, prioritize test and learn to unlock long-term growth; and lastly, five, future proof the business through investments in capabilities and infrastructure.
I'm extremely proud of the tremendous progress we've made on related key strategic initiatives. The benefits of these investments are reflected in a greater penetration of digital sales, especially mobile, lower variable fulfillment costs and future gross margin expansion. These investments will also enable us to drive revenue growth opportunities in the future. Let me update you on the progress we made in 2023. First, as mentioned on previous calls, we went live with our new highly automated fulfillment center in October and are achieving our plan to process up to 60% of all online orders and store replenishment volume through this facility. In addition to shortening delivery times to keep pace with evolving consumer expectations, the enhanced automation in this center drove lower variable cost per unit to fulfill an order in this facility, which was 42% of the average cost of our three legacy fulfillment centers during the last 4 months of the fiscal year.
As this approximately $55 million investment represented the largest individual capital expenditure in the history of Duluth, I'm proud of the cross-functional team's ability to execute and deliver the results we expected. This step change in logistic capabilities allows us to further optimize our own DTC channels and serve as a significant enabler to future proof and scale the enterprise. Second, we meaningfully advanced our sourcing and product innovation functions, which we believe is another critical strategic unlock, allowing us to bring to market high quality, innovative products more frequently, increase our speed to market and significantly reduce our product cost. Several team members were onboarded during the year, including our new Vice President of Sourcing during the fourth quarter.
Our sourcing and product innovation team is accelerating this initiative and the benefits will begin to materialize in 2024 and continue to build over time. Finally, we made great strides completing several foundational initiatives to execute our technology transformation road map, the continuation of which will become the primary focus of our capital expenditure outlays. These initiatives will enable the optimization of the business, focusing on a centralized data repository customer data and analytics as well as tools to maximize the logistics network capabilities and strategic planning and assortment decisions. Our focus for 2024 will accelerate the operational improvements of the strategic road map by expanding our pipeline of new and innovative products, optimizing our marketing mix, improving gross margin rates and controlling what we can control by prudently managing expenses and inventories.
In closing, I'm proud of the progress we've made on our foundational initiatives and remain steadfast in our strategic road map. With that, I'll turn the call over to Heena to discuss Q4 and the full year '23 financials and our 2024 outlook.
Heena Agrawal: Thanks, Sam, and good morning. First, I'd like to express how thrilled I am to have joined the Duluth Trading family. In just shy of four weeks in my new role as CFO, I have had the pleasure of meeting with our Board of Directors and the entire leadership team. I visited several stores and toured our fulfillment centers in Adairsville and Belleville. I'm impressed by the strength of our brands, consumer loyalty, innovative product design, engaging storytelling and the strategic choice to invest in infrastructure to capitalize on growth opportunities. I look forward to partnering with Sam and the entire leadership team as we further pursue our growth initiatives. I firmly believe Duluth's trading is uniquely positioned to expand its reach, and I am excited to leverage my experience to drive our next phase of profitable growth.
Let me begin with a review of our full year 2023 and Q4 financial results. Today, we reported full year 2023 net sales of $646.7 million, adjusted EBITDA of $33.4 million and EPS of negative $0.28. Our Q4 reported results were net sales of $245.6 million, adjusted EBITDA of $21.1 million and EPS of $0.21. Starting with the top line. For the full year 2023, net sales were $646.7 million, down 1%. In Q4, we saw a trend reversal from prior quarters as net sales grew 1.6% to $245.6 million, powered by acceleration in women's and AKHG. Women's business grew double digits across both Duluth and AKHG brands, driven by flannels, intimates, fitness and garden collection. The men's apparel business reversed trend from prior quarters and was flat to last year, with growth in AKHG and growth in core Duluth categories of first layer, bottoms and woven tops, offset by declines in cold weather categories of outerwear, sweater and footwear impacted by warmer winter weather.
From a channel perspective, our retail channel sales declined 12%, this was more than offset by our direct channel sales growing 9% through higher conversion and greater penetration of mobile. As Sam mentioned, mobile grew 20-plus percent and moved up to our number one sales channel for the quarter. Moving to gross margin. For full year 2023, our gross margin contracted 230 basis points to 50.3%. Our fourth quarter gross margin was 48.2%, down 300 basis points as we saw our highest ever Thanksgiving to mid Cyber Week sales contribution in the fourth quarter, during which we ran our global event. I will provide fiscal 2024 guidance details shortly, but through acceleration of our sourcing and product innovation initiatives, I want to reiterate that we expect gross margin benefits over the next several years.
Now on to SG&A. For full year 2023, SG&A decreased by 1% to $333.8 million and was flat to last year as a percentage of sales at 51.6%. For the quarter, SG&A decreased 3.8% to $108.8 million and leveraged 250 basis points to 44.3% of sales. The Q4 leverage was driven by lower fulfillment costs across the network primarily due to efficiencies from Adairsville further maximization of our marketing spend and prudent management of our general and administrative expenses. Full year adjusted EBITDA was $33.4 million or 5.2% of sales. Full year net loss was negative $9.4 million or negative $0.28 per diluted share. EPS was weighed down by noncash depreciation expenses from infrastructure investments. Q4 net income was $7 million or $0.21 per diluted share compared to net income of $7.5 million or $0.23 per diluted share last year.
Fourth quarter adjusted EBITDA was $21.1 million, an increase of 2.4% over last year and expanded slightly as a percent of sales to 8.6%. Moving on to the balance sheet. We ended the year with $32.2 million of cash and no outstanding debt on our credit line, leaving us with liquidity of $232 million. Inventory was down 19% or $29.2 million. Our inventory composition is healthy with 90% in current products and 30% decrease in clearance items. Our capital expenditures for 2023 of $53.2 million were funded by cash and were primarily used to invest in strategic infrastructure initiatives including our new fulfillment center in Adairsville and digital capabilities as per our IT road map. Now turning to our outlook for fiscal year 2024. Our full year net sales guidance is $640 million to $660 million, including the 53rd week, which is worth approximately 150 basis points of growth.
We expect the first half to be down low to mid-single digits, as we continue to navigate a dynamic macro environment. We expect gross margin for the full year to be up 200 basis points with improvement expected to begin in Q1 and build throughout 2024, driven by our sourcing and product development initiatives. As I mentioned earlier, we expect further improvement in margins in the out years as we continue to optimize our sourcing. We expect SG&A to deleverage by approximately 100 basis points in the coming years, mainly driven by higher fixed costs and depreciation from strategic investments, partially offset by improvements in variable cost benefits being realized from these investments. Advertising expenses are planned to be in line with sales growth and approximately 11% of sales as we plan to continue to invest behind our brands, support new product innovation and drive omnichannel sales.
Variable expenses or selling expenses, which includes outbound shipping costs as well as labor across our contact centers, fulfillment centers and store fleet will continue to leverage driven by optimizing our logistics and fulfillment center network. Fixed expenses, our general and administrative expenses will increase in 2024 primarily from annualizing depreciation and fixed costs from strategic initiatives. We expect our year-over-year EBITDA improvements to outpace net income and EPS growth, as we bear the depreciation impact of strategic investments in our P&L. With that, our full year adjusted EBITDA guidance is $39 million to $45 million and EPS in the range of negative $0.22 to negative $0.07. This includes estimated diluted shares of approximately $33 million and a tax rate of 25%.
Our capital expenditure spend will be reduced by more than half to approximately $25 million, and the primary focus will shift from the logistics network to our strategic technology road map, enabling efficiencies and scalability. In closing, we are being prudent in our outlook for 2024 and are beginning to see the benefits from our foundational investments fueling adjusted EBITDA growth. Our capital expenditures are normalizing, and our liquidity remains strong. With that, we'll open the call for questions.
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