Duluth Trading Holdings President and CEO Sam Sato said on a Thursday call with analysts that Fiscal 2022 was a “dynamic and challenging year” as the the retail industry was hit with a dramatic shift in consumer demand behavior earlier in the year as well as continued inflationary pressures and supply chain disruption. He said the company’s various teams remained agile and flexible, navigating the turbulent year with an unwavering focus on servicing customers day in and day out, while controlling the areas of the business that were in their control.

DLTH reported net sales of $241.8 million for the fourth quarter, down 10.7 percent compared to $270.8 million in the prior-year quarter. For the full fiscal year 2022, net sales were $653.3 million and were said to be within the range of recent guidance.

Direct channel sales were down 12 percent in the quarter versus the prior-year comparable quarter with “slightly better trends” for direct volume in-store markets versus non-store markets. The Retail channel was reportedly down 8.2 percent but turned to positive year-over-year growth in the month of January. The traffic conversion rate in stores increased over 200 basis points based on engaged selling efforts and better in-stock positions.

This past peak season, the stores fulfilled close to 20 percent of Direct sales demand during the quarter. Management said this omnichannel functionality is critical for “clearing through seasonal and clearance goods in the store’s inventory, making room for the transition to the new season,” and allows the customers who shop online to purchase items that may have been “stranded in the store and otherwise unavailable to them.”

Duluth’s women’s business grew 1 percent overall in the quarter, led by improvements in new product expansions, the launch of AKHG in the spring of 2022 and overall improvement in their inventory position. Their women’s first layer category, which includes the No-Yank Tank collection, was said to be up over 40 percent to the prior year’s business. The company’s bra collection, including the recently introduced Line Tamer bonded bra, grew 10 percent in the quarter, driven by new innovations in fabric and design, featuring soft and seamless construction to prevent lines and bulk.

Management believes the women’s AKHG apparel collection represents a sizable growth opportunity for Duluth expansion into the outdoor recreation space and the new fall/winter assortment was reportedly met with great response from customers.

The men’s apparel segment was down versus the prior-year fourth quarter, but management said they saw “pockets of strength” within their core offering, including their double flex denim pant, which was up in the high teens in the quarter, and the expanded offering of men’s underwear styles such as Armachillo, Dang Soft and Bullpen. They said the newest product release in men’s underwear Temp Tamer also did very well, as did their fit expansion within their Longtail T program.

Fourth quarter gross profit margin was 51.2 percent of sales compared to 53.8 percent in the prior-year quarter and reflects a higher mix of promotional and clearance sales. Additionally, to keep seasonal goods moving and minimize clearance overhang heading into 2023, management said they “proactively took action, ending the year in a healthy position.”

Looking forward, the company anticipates the mix of full price versus promotional business in the first half of 2023 will be relatively similar to what they experienced in the fourth quarter with an improving trend as they progress throughout the year. For the full year 2022, gross profit margin decreased 140 basis points to 52.6 percent of sales compared to 54 percent last year.

SG&A for the fourth quarter decreased 7 percent to $113.2 million, or 46.8 percent of sales compared to $121.4 million, or 44.9 percent, in the prior-year quarter. This included a decrease of $4.3 million in selling expenses, $4.1 million in advertising and marketing expenses and an increase of $200,000 in general and administrative expenses. Selling expenses as a percentage in net sales increased 10 basis points to 16.5 percent compared to 16.4 percent last year and was the result of a slightly greater mix of Retail store sales versus Direct sales during the quarter.

Advertising and marketing costs were $29.8 million in the quarter compared to $33.9 million in the prior-year period, and decreased 20 basis points as a percent of sales to 12.3 percent, compared to 12.5 percent in the prior-year fourth quarter. An increase in the paid digital media channels was offset by a reduction in national TV placements as they pulled portions of that awareness spend into the third quarter to align with more normalized inventory flow this year.

General and administrative expenses during the fourth quarter were $43.4 million, or 18 percent of net sales, compared to $43.2 million, or 16 percent of net sales in the prior-year quarter. Increased depreciation related to the technology and logistics projects as well as fixed costs for the new Southeast fulfillment center scheduled to go live in the third quarter were largely offset by lower personnel costs.

Adjusted EBITDA for the fourth quarter was $20.6 million, or 8.5 percent of sales, and $43.5 million, or 6.7 percent of net sales, for the full year in 2022. Net income for the fourth quarter was $7.5 million or 23 cents per diluted share and $2.2 million, or 7 cents per diluted share for the full year.

Management said a softer consumer backdrop evolved during the fourth quarter, which was exasperated by a retail sector that was over-inventoried, resulting in a highly promotional environment. And said the company was not immune to the sector-wide deep discounting and was more promotional than had been historically.

As the quarter progressed, Duluth saw the top-line trend improving, with January representing the strongest month in the quarter, and the improving trends continued into the first quarter. Management said they ended the year in a well-balanced inventory position, up 26 percent to last year, as they made a “purposeful planning decision” to bring spring goods in earlier to avoid any lingering supply chain constraints, which disrupted last year’s transition from winter to spring. Nearly half of the company’s inventory growth year-over-year is in Spring goods.

Store count currently stands at 65 with no planned store openings in 2023.

Management offered 2023 full-year net sales guidance of $645 million to $660 million, with the first half of the year “slightly down to flat compared to the prior year” and the back half “flat to slightly up” versus this past year. Duluth expects sales trends between their Direct channel and Retail channel to be similar, reflecting no change in the number of store locations and their omnichannel marketing approach designed to drive traffic in both channels.

Duluth expects gross profit margin for the full year to be up 20 to 40 basis points, with the gains beginning in the second quarter. Advertising expenses are planned at roughly 10.5 percent of sales for 2023 and leverage is gained throughout the year with flexible adjustments between traditional linear TV, streaming, audio and digital media. In aggregate, these media channels comprise roughly 80 percent of the company’s advertising and marketing expenses. Selling expenses comprised of outbound shipping costs and hourly labor in the stores, customer service and fulfillment operations are expected to leverage over 2022 in the range of 10 to 30 basis points as a percentage of total sales.

General and administrative expenses are expected to increase in 2023, primarily from incremental depreciation on technology and logistics investments, plus the fixed cost related to the new Southeast fulfillment center and additional personnel costs. As a percentage of sales, general and administrative expenses are expected to increase and is reflected in the total SG&A expenses de-leveraging up to 50 basis points.

Interest expense, which includes the cost of borrowings on a line of credit, as well as imputed interest on finance lease liabilities are expected to increase $700,000 to $1.3 million year-over-year. Depreciation and amortization expenses, including software subscription and implementation costs, is expected to be roughly $37 million.

Full-year adjusted EBITDA guidance is $47 million to $49 million and EPS of 2 cents to 8 cents per share for the year.

Photo courtesy Duluth Trading