While announcing second-quarter results, Duluth Trading unveiled its Big Dam Blueprint strategic plan that recently-appointed CEO Sam Sato expects will guide the apparel chain’s digital-first approach.

“Our Blueprint, we believe, will set the foundation to unlock our company’s full potential for long-term sustainable growth and is driven in part by meaningful shifts in consumer behavior,” said Sato, the former CEO of The Finish Line who has been leading Duluth for about 100 days.

The five pillars to the blueprint are:

  • Lead with a digital mindset
  • Intensify efforts to optimize owned DTC channels
  • Evolve a multibrand platform to enable long-term growth
  • Test and learn to unlock new channels of growth
  • Invest in the enablement and future-proofing of its enterprise

Begin with a digital-first mindset that integrates technology into all areas of the business, fundamentally changing how Duluth operates and delivers value to customers. A major focus will be shifting media spend beyond traditional channels in a more targeted, digital approach. Duluth has recently added brand trials such as localized digital, deeper behavioral-based social targeting, and tests in connected TV, which have helped drive new buyer growth and customer retention.

“Among younger consumers, shifts in content consumption can be seen through nearly all traditional media channels, including linear TV, terrestrial radio, and other channels moving to on-demand streaming and digital content,” said Sato. “As you know, these younger customers are predominantly digital-first audiences, and a shift to a digitally-led mindset makes our brands and our products more relevant to this important demographic.”

He further noted that with the pandemic accelerating the migration from offline to online, “our consumer experiences must be grounded in speed, ease, convenience and delivered as friction-free as possible through improved digital capabilities and logistics.”

Intensify efforts to optimize Duluth Trading’s owned DTC channels involves shifting focus away from stores to direct as the pandemic has driven online shifts. Said Sato, “This shift in consumer shopping preferences plays to our strength and leadership in direct and gives us the confidence to increase our focus and investments in our direct channel as our primary growth vehicle.”

Duluth still sees stores as “a critical piece of the omnichannel ecosystem,” supporting in-store pickup, returns as well as customer engagement. However, Sato said store layouts “need to be more flexible” to better capitalize on Duluth’s opportunity in women’s and its other brands and the focus will be on remodels rather than new stores in the near term.

Evolving the company’s multi-brand platform involves creating unique brand positions, across men’s and women’s, for Duluth, 40Grit, Alaskan Hardgear, Buck Naked, and Best Made to address customer needs for various occasions, including work, outdoor recreation, casual lifestyle, and the first layer. Said Sato, “With the Duluth and Buck Naked brands still representing 90 percent of the business, our emerging brands, Alaskan Hardgear, 40 Grit, and Best Made, provide a long runway for growth by gaining a greater share of wallet among our current customers, as well as attracting new customers.”

Fourth, Duluth will continue to explore new ways to engage existing and new customers to unlock long-term growth. Towards that end, different avenues of B2B are currently being evaluated as potential growth vehicles. Said Sato, “Our current partnerships are providing valuable learnings we can use to determine future needs across logistics, technology, and talent. These learnings will help steer our investment decisions and priorities as we work toward enabling a more flexible and integrated infrastructure and logistics network.

Finally, the fifth pillar involves in some cases accelerating investments in automation, technology and talent to future-proof and further scale Duluth’s business.

Sato said Big Dam Blueprint is designed to help Duluth meet its long-term growth objectives calling by the end of 2025 of at least $1 billion in sales, operating margins of high single to low double digits, earnings per share of at least $2, positive free cash flow and maintaining low balance sheet leverage. He added, “We believe our Blueprint is sound and necessary to continue to strengthen our relationship with our customer, lead as a competitive force and strengthen our position for sustainable long-term growth.”

The retailer unveiled the plan while reporting a “solid” second quarter. Total sales for the quarter grew 8.6 percent to $149.1 million and grew just over 22 percent on a two-year basis.

The direct channel continued to deliver strong results as sales expanded by 42 percent on a two-year basis. Year over year sales in its direct channel was down 15 percent to $85.2 million as the year-ago period’s sales were inflated as consumers were under stay-at-home orders and online shopping surged.

Sales in its retail channel continued to improve as store sales grew high double-digits versus last year and 3.5 percent to 2019. Meaningful improvements were seen in retail level metrics, including average order size, units per transaction, and conversion.

Sales growth was achieved across both men’s and women’s businesses, as well as across all brands. Men’s apparel net sales increased 6.5 percent driven by growth in knits and woven shirts. Women’s apparel net sales growth outpaced men’s for the quarter, increasing 10.0 percent driven by strength in woven shirts, bottoms, and footwear.

Gross margin improved 180 basis points to 54.6 percent. The improvement was driven by a higher mix of full-price sales, as well as improved gross margins, particularly within the Women’s division. SG&A expenses slightly increased to 45.8 percent of sales, compared to 45.6 percent in the corresponding prior-year period. Operating income gained 33.7 percent to $13.1 million.

Net income jumped 52.5 percent to $9.0 million, or 27 cents a share, compared to net income of $5.9 million, or 18 cents, the prior year. EPS was up 350 percent when compared to 2019. Adjusted EBITDA increased 29.0 percent to $21.6 million year-over-year.

“Our results affirm the relevance of our assortment and the underlying strength of our business,” said Sato. “Many of the positive trends that we saw in Q2, including sales and gross margin rates, have continued into Q3. Going forward, we will continue to focus on areas that are driving positive momentum. These include developing and delivering high-quality solution-based products; delivering relevant customer experiences through our own DTC channels to drive continued improvements in sales and profits; refining initiatives that increase our regular priced business as a percentage of total sales; and strategically intensifying our marketing investments to capture consumer interest and engagement, build brand awareness and loyalty and attract new customers.”

For 2021, Duluth’s updated guidance calls for:

  • Net sales in the range of $700 million to $715 million, up from $695 million to $710 million previously.
  • Adjusted EBITDA in the range of $70 million to $72 million, up from $68 million to $71 million previously;
  • EPS in the range of 71 cents to 76 per share, up from 66 cents to 72 cents previously

In 2020, sales were $638.8 million, adjusted EBITDA was $55.5 million, and EPS was 42 cents.

Looking to the back half, Sato said Duluth estimates that wage pressure for hourly associates and higher inbound receipts will lead to incremental costs of around $16 million to $17 million in the second half. Duluth expects these costs can be offset by reducing promotions and continuing efforts to sell more products at full price, which will result in back-half gross margins being flat with last year.

“We’ll continue to be prudent as we carefully monitor the fluidity of this situation, and we’ll take the appropriate actions to ensure that we are putting ourselves in the strongest position to succeed long term,” said Sato. “I’m excited about our results year to date and the momentum we are seeing.”

Photo courtesy Duluth Trading Company