Duluth Holdings, Inc., the parent of Duluth Trading, lowered its earnings guidance for the year after reporting a worse-than-expected loss in the second quarter. Sales were down 1.7 percent, impacted by weak store traffic. Duluth also noted that its CFO had stepped down to explore another opportunity.

The loss of 6 cents a share in the quarter compared to analysts’ consensus target of a 1 cent loss. Revenue for the quarter came in at $139.1 million versus the consensus estimate of $138.88 million.

Second Quarter Summary, Ended July 30, 2023

  • Net sales of $139.1 million compared to $141.5 million in the prior year second quarter;
  • AKHG sub-brand net sales increased 14.0 percent compared to the prior year second quarter;
  • Inventory composition healthy and well managed, down 4.5 percent compared to the prior year second quarter;
  • Adjusted EBITDA of $8.6 million, representing 6.2 percent of net sales; and
  • A new automated fulfillment center opened ahead of schedule and on budget.

President and CEO Sam Sato commented, “Customer demand for our spring and summer collections was healthy as we sold through our seasonal offerings and drove increases in units and order volume during the quarter. As we navigate what remains a dynamic macro environment in which customers continue to seek value, we are managing the business prudently, controlling what we can control while staying keenly focused on elevating our unique brand and sub-brand positioning. Our updated outlook for fiscal 2023 reflects a continuation of consumers remaining selective in their discretionary spending. Importantly, our inventory position is in good shape and ended the quarter below prior year levels due to strong seasonal sell-through and our disciplined efforts to appropriately plan our purchase and receipt flow.

“The continued success and momentum in our spring garden, landscaping and planting collection, registering a second-quarter sales increase of nearly 40 percent, combined with the expansion of our AKHG sub-brand for women with sales growth of more than 30 percent, fueled solid women’s second-quarter sales growth of roughly 3 percent. We saw strong overall AKHG sub-brand year-over-year sales growth in the quarter of 14 percent. With the large and growing consumer participation in outdoor recreation, our AKHG apparel collection for men and women represents a significant growth opportunity for Duluth.

“We’re also seeing a favorable response to our early Fall and Winter receipts and are particularly enthused about our core men’s Duluth assortment which is on an improving trend with the recent introduction of new colors and fits in the Long Tail T program and success in the Duluth Double Flex Denim pant program. We expect men’s pants to be a high-volume driver for us this Fall with the support of robust marketing plans over the next few months.”

Sato concluded, “We are incredibly excited to share the news that our new highly automated fulfillment center in Adairsville, GA is up and running ahead of schedule and on budget. The center represents a truly transformational advancement in our supply chain capabilities that moves us forward in meeting customers’ growing expectations for faster online deliveries and positions us to gain operational efficiencies as early as our peak selling season this year. The investment to automate and expand capacity in our logistics network is a key pillar of our Big Dam Blueprint and I would like to thank all the team members who contributed to realizing this major milestone.”

Second Quarter Operating Results, Ended July 30, 2023
Net sales decreased 1.7 percent to $139.1 million, compared to $141.5 million in the same period a year ago. Direct-to-consumer net sales increased by 1.8 percent to $86.8 million driven by higher traffic and conversion rates. Retail store net sales decreased by 7.0 percent to $52.3 million due to slower store traffic, which was partially offset by continued strong conversion rates.

Gross profit decreased to $71.5 million, or 51.4 percent of net sales, compared to $75.6 million, or 53.4 percent of net sales, in the corresponding prior year period. The decrease in gross profit margin rate was primarily due to a lower product margin rate amidst the continued promotional retail environment.

Selling, general and administrative expenses increased 1.7 percent to $72.9 million, compared to $71.7 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses increased to 52.4 percent, compared to 50.7 percent in the corresponding prior year period.

The increase in selling, general and administrative expenses was partially due to higher occupancy costs from the new automated Southeast fulfillment center, coupled with investments in new headcount to drive ongoing strategic initiatives.

The operating loss was $1.44 million against operating income of $3.9 million. Adjusted EBITDA declined 35.3 percent to $8.6 million from $13.,2 million a year ago. The net loss was $2 million, or 6 cents a share, against earnings of $2.4 million, or 7 cents a share.

Balance Sheet and Liquidity

  • The company ended the quarter with a cash balance of $11.1 million, net working capital of $84.6 million, and no outstanding balance on the Duluth Trading $200 million revolving line of credit.
  • End-of-period inventory of $157.1 million represented a 4.5 percent decrease compared to the prior period second quarter.

Updated Fiscal 2023 Outlook

  • Net sales in the range of $645 million to $660 million, same as previous guidance;
  • Adjusted EBITDA1 in the range of $40 million to $42 million ($47 million to $49 million previously);
  • EPS in the range of ($0.15) to ($0.08) per diluted share ($0.02 to $0.08 per diluted share previously); and
  • Capital expenditures, inclusive of software hosting implementation costs, of approximately $55 million, same as previous guidance.

Chief Financial Officer Announces Departure
The company announced that Dave Loretta decided to step down as senior vice president and chief financial officer on September 15. He accepted a position with another company. Duluth is conducting a formal search for his replacement. Until then, Michael Murphy, VP and chief accounting officer since 2019 will also serve as interim chief financial officer, effective September 15.

Before joining Duluth Trading, Murphy worked as the chief accounting officer at  First Business Financial Services, Inc. for three years. His employment experience also includes eight years at KPMG, LLP in several capacities, including as senior manager.

“We appreciate Dave’s commitment to Duluth Trading since he joined us in 2017,” said Stephen Schlecht, chairman of Duluth Trading. “I personally want to thank him for his contributions and wish him the best in his future endeavors.”

Sato said, “I would like to thank Dave for his many contributions and leadership at Duluth over these past six years. Under Dave’s leadership, Duluth has elevated and strengthened its finance organization, anchored on a talented team with extensive experience across all finance functions. I am confident this will be a seamless transition as we search for a permanent replacement for Dave. It has been an honor to partner with Dave at Duluth and I wish him well in his next role.”

“I’m proud of my time here at Duluth Trading Company,” commented Loretta. “It has been a privilege to work alongside Sam and the many talented individuals across the organization. I believe Duluth is well positioned to execute against the strategic pillars of the Big Dam Blueprint. I wish the team all the best of continued success in the future.”

Photo courtesy Duluth Trading