Duluth Trading said it sees a strong response to its new brand positioning, with the introduction of The Duluth by Duluth Trading and AKHG sub-brands. However, overall earnings in the second quarter fell below analyst targets due to macroeconomic pressures, and Duluth Trading lowered its guidance for the year.

In the quarter, sales decreased 5.1 percent to $141.5 million, below analysts’ consensus estimate of $156.2 million. Direct-to-consumer sales increased slightly, up 0.1 percent to $85.3 million. Retail store sales decreased 12.0 percent to $56.2 million due to slower store traffic, partially offset by continued strong conversion rates.

Sales in store markets decreased 6.3 percent to $100.4 million, also driven by slower store traffic than the prior year’s second quarter. Net sales in non-store markets fell 1.9 percent to $39.9 million.

Gross margin was down 120 basis points to 53.4 percent compared to 54.6 percent in the prior year’s second quarter. Excluding a non-recurring $1.3 million inventory write-down, most of which came from underwear product damaged in transit, the current quarter gross margin would have been 54.4 percent, a decline of 20 basis points.

SG&A expenses increased 5.0 percent to $71.7 million and grew as a percent of sales to 50.7 percent from 45.8 percent in the corresponding prior year period. The increase in SG&A expenses was primarily due to increased digital advertising to drive brand awareness and store traffic, investments in new headcount and increased depreciation from continued capital investments.

Net income plunged 73.3 percent to $2.4 million, or 7 cents per share, and missed the consensus analyst estimate of 15 cents. Adjusted EBITDA, which excludes stock-based compensation, fell 61.8 percent to $13.2 million from $21.4 million a year ago.

On a call with analysts, Sam Sato, president and CEO, said, “While these results fell short of our internal plans as we were not immune to the heightened level of macro uncertainty and inflationary pressures impacting discretionary spending, we’re encouraged by the healthy momentum in our direct channel, which posted a slight year-over-year increase in the quarter and improved sequentially when compared to the 12 percent decline in Q1.”

Additionally, a cleaner inventory position this year weighed on its top-line sales growth, with sales of clearance goods down roughly $13 million compared to the second quarter of last year. Excluding clearance goods, net sales in the quarter were up approximately 5 percent over last year.

While consumer spending softness was reflected with store traffic down to the prior year and customer purchase behavior influenced more by promotional events, product selling gross margins were nearly flat to last year and average transaction size for the retail channel also held firm. Additionally, store conversion rates increased from the prior year.

Duluth’s inventories were up 22 percent versus last year and ahead 13 percent, excluding in-transit inventory. Sato said, “Importantly, nearly 90 percent of the increase in inventory is made up of year-round goods; with our total inventory in a much better position and with an improved flow of new seasonal receipts, we believe our better in-stock positions will support overall sales growth. We are managing expenses well in the face of inflationary headwinds and remain committed to the investments we previously discussed in support of our Big Dam Blueprint to build out our infrastructure and technical skill sets while also investing in our teams.”

The increase also reflects depleted year-ago inventory levels. Duluth ended the prior year’s second quarter with inventory levels down 20 percent year over year, leading the retailer to miss sales in the second half due to shipment delays. The inventory position further reflects a reduction in end-of-season clearance to roughly 8 percent of total inventory compared to 10 percent last year. Sato said, “We are entering the fall selling season clean and well-positioned to capture demand.”

Sato added that Duluth had seen a “strong” response to its updated brand positioning, including the introduction of The Duluth by Duluth Trading and AKHG sub-brands and the launch of its AKHG women’s technical outdoor collection.

“The brand positioning directly addresses our customer’s desire for apparel and gear that meet their active work and outdoor recreational activities while staying true to the Duluth Trading heritage of standing for quality, durability, and problem-solving functionality,” said Sato. “The customer response to our brand positioning has been strong and confirms our view of long-term growth potential embedded in our strategic plans.”

In particular, Sato sees women’s apparel categories across its sub-brands as having outsized expansion opportunities. During the second quarter, women’s grew nearly 4 percent over last year and represented a nearly 30 percent increase from the pre-pandemic period in 2019.

“By focusing on both fit and function, our broad size-inclusive options and trusted technical designs continue to build loyal brand consumers.,” said Sato. “Moving to a more balanced assortment across men’s and women’s expands our addressable market potential and leverages the technical and logistics investments we’re making to support product offerings that appeal to a broader customer base.”

The updated outlook calls for:

  • Net sales in the range of $680 million to $705 million, previously $730 million to $755 million;
  • Adjusted EBITDA in the range of $69 million to $73 million, previously of $84 million to $88 million;
  • EPS in the range of $0.61 to $.71 per diluted share; previously 93 cents to $1.02; and
  • Capital expenditures, inclusive of software hosting implementation costs, of approximately $40 million, the same as under previous guidance.

Photo courtesy Duluth Trading Company/AKHG