Duluth Holdings (DLTH) Q4 2020 Earnings Call Transcript

© Supplied by The Motley Idiot Duluth Holdings (DLTH) This fall 2020 Earnings Name Transcript

Duluth Holdings (NASDAQ: DLTH)

This fall 2020 Earnings Name

Mar 18, 2021, 9:30 a.m. ETContents:Ready RemarksQuestions and AnswersCall ParticipantsPrepared Remarks:

Operator

CONSTELLATION BRANDS, INC.

Good morning, and welcome to the Duluth’s Holdings fourth-quarter 2020 and fiscal-year earnings convention name. [Operator instructions] Please be aware, this occasion is being recorded. I’d now like to show the convention over to Donni Case, investor relations for Duluth Holdings. Please go forward.

Donni Case — Investor Relations

Thanks, and welcome to right this moment’s name to debate Duluth Buying and selling’s fourth-quarter and fiscal-year monetary outcomes. Our earnings launch, which we issued this morning, is accessible on our investor relations web site at ir.duluthtrading.com underneath press releases. I’m right here right this moment with Steve Schlecht, chief government officer; and Dave Loretta, chief monetary officer. On right this moment’s name, administration will present ready remarks, after which we’ll open the decision to your questions.

Earlier than we start, I want to remind you that the feedback on right this moment’s name will embody forward-looking statements, which might be recognized by way of phrases reminiscent of estimate, anticipate, anticipate and related phrases. Ahead-looking statements by their nature contain estimates, projections, targets, forecasts and assumptions and are topic to dangers and uncertainties that would trigger precise outcomes or outcomes to vary materially from these expressed within the forward-looking statements. Such dangers and uncertainties embody, however usually are not restricted to, these which are described in our most up-to-date annual report on Kind 10-Ok and different SEC filings as relevant. These forward-looking statements communicate solely as of the date of this convention name and shouldn’t be relied upon as predictions of future occasions.

This text is a transcript of this convention name produced for The Motley Idiot. Whereas we attempt for our Silly Greatest, there could also be errors, omissions, or inaccuracies on this transcript. As with all our articles, The Motley Idiot doesn’t assume any accountability on your use of this content material, and we strongly encourage you to do your individual analysis, together with listening to the decision your self and studying the corporate’s SEC filings. Please see our Phrases and Situations for added particulars, together with our Compulsory Capitalized Disclaimers of Legal responsibility.

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And with that, I will flip the decision over to Steve Schlecht, chief government officer of Duluth Buying and selling. Steve?

Steve Schlecht — Chief Government Officer

Good morning, and thanks, everybody, for becoming a member of right this moment’s name. It was one yr in the past nearly to the date that we introduced our first retailer closings, primarily within the northeast, because of COVID. At the moment, we did not know simply how far-reaching the impression can be, nevertheless it was clear that our plans for 2020 had been immediately disrupted. I will not go into all the small print of our COVID response because it was just about customary process for all accountable retailers: shield the employees and prospects and shield the monetary place.

What I feel is extra necessary are the teachings we realized from working in an altered retail actuality. First lesson, you do not know if your enterprise mannequin is resilient till it is stress examined. By the tip of March, all 62 of our present shops had been closed as a result of pandemic, and we had completely no concept after they may reopen. Within the prior yr, retail retailer gross sales accounted for 43% of whole revenues, so this circumstance offered a large mountain to climb to fill that income hole.

Fortuitously, we already had a powerful omni direct channel in place that allowed prospects who historically shopped in shops to shift their shopping for patterns on-line. When our shops closed, we additionally ramped up digital advertising and promotions to attract present and new prospects to our web site. And it labored. Direct gross sales closed the retail hole and ended the yr accounting for 72% of whole 2020 gross sales.

The second lesson was that the forex of the Duluth Buying and selling model was validated in a tough retail surroundings. When your total group is devoted to creating revolutionary, solution-based, high-quality merchandise and an excellent buyer expertise, you will have created a life-style model that may prevail in difficult instances. Our on-line exercise soared as each established and new prospects acknowledge that Duluth merchandise on the candy spot of their new regular at house and outside. As prospects discovered their approach to Duluth Buying and selling model, we noticed a 17% enhance in new consumers, the biggest proportion achieve in three years.

Our third lesson: by no means cease investing to make your organization stronger and extra aggressive. Have been it not for the substantial investments made during the last three years in distribution amenities growth and capabilities, and replatforming our e-commerce channel, and value-added companies like BOPIS, we’d by no means have been able to deal with the surge in direct enterprise. Fourth lesson: consider within the energy of newness. Through the previous yr, we expanded our playbook to deal with new methods to please prospects.

We made headway constructing out our household of manufacturers platform that celebrates the can-do spirit of Duluth. We developed 40 Grit, a no-frill primary workwear line to attraction to a youthful, extra price-sensitive buyer. We expanded our Alaskan Hardgear line with a brand new fishing assortment, and added the Greatest Made model of premium onerous items and workwear to our household of manufacturers. We proceed to drive revolutionary product improvement with new strains like swimsuits for women and men, Dang Mushy underwear, NoGA Naturale and extra pant sizes for males.

For all these causes and the challenges encountered in 2020, I am very happy with what our group achieved to ship web gross sales of $639 million, up practically 4% yr over yr; adjusted EBITDA of $55 million, up 7%; and free money circulate of $38.5 million. So what’s forward in 2021? As we mentioned earlier than, we’ve paused our retail retailer growth till there’s extra readability round client shopping for patterns post-pandemic. Proper now, we’ve just one signed lease for 2021. Wanting past this yr, we’ll be setting new retailer ideas to mirror the altering retail surroundings.

We’ll proceed to deal with new product improvements and potential line extensions, together with presumably including a ladies’s assortment to 40 Grits, Alaskan Hardgear and Greatest Made. We’ll proceed to make investments to broaden digital capabilities that can present extra personalized advertising, after which enhance our localized assortments in shops. And we’re exploring the advantages of partnerships. To start with of March, we entered right into a pilot check with Tractor Provide Firm to have Duluth shows of Buck Bare underwear in 13 of their shops.

Tractor Provide will not be solely one of many greatest successes in retail right this moment, additionally it is carefully aligned to the Duluth buyer base. The pilot is profitable. The idea will likely be rolled out to different Tractor Provide areas. I feel such a partnership is sensible for Duluth.

We see this as an awesome alternative to broaden our model consciousness with a top-tier associate. That mentioned, it is means too early to depend any chickens. In right this moment’s press launch, we introduced that board member Dave Coolidge has determined to retire on the time of our upcoming annual shareholder assembly. Dave has been concerned with Duluth for 20 years, having served on our earlier advisory board after which on our public board, offering invaluable recommendation and steering to our firm.

Brett Paschke has been slated to exchange Dave on our board. Brett is a associate and Managing Director of William Blair’s Fairness Capital Markets and was instrumental in bringing Duluth public. His deep expertise within the capital markets and public firm directorships will likely be a complementary profit to our board. I additionally need to point out that we’ve engaged a search agency to establish our subsequent chief government officer.

Once I reassumed the CEO position in September of 2019, I did not anticipate to remain on this lengthy. Nonetheless, COVID made the continuity of management a deciding issue. Frankly, leaping again into day-to-day administration gave me a larger appreciation for the expertise and dedication of our group. I am happy with the work we did collectively throughout essentially the most attempting of instances, and I’ve have extra confidence than ever in the way forward for the corporate.

Lastly, Duluth Buying and selling has all the time been dedicated to the rules of company social accountability, and lots of of its rules are embedded within the 10 wells that form our tradition of striving for larger function. Like we deal with prospects, coworkers and distributors like next-door neighbors. We attempt for progress, each personally and collectively. We construct lasting satisfaction into our merchandise.

And we obtain — we intention to realize a good revenue. I admit that we’ve been a laggard in speaking our dedication to CSR and ESG, however in 2021 we’re going to do a greater job. We’ve already fashioned an ESG Steering Committee and are including ESG to the oversight accountability of a nominating governance committee of our board of administrators. We perceive this is a crucial initiative for our many stakeholders, our prospects, staff, distributors, buyers, and the communities during which we’ve amenities.

With that, I will flip the decision over to Dave Loretta to cowl the small print of our monetary and working outcomes for the fourth quarter and full yr. Dave?

Dave Loretta — Chief Monetary Officer

Thanks, Steve, and good morning, everybody. I will start right this moment with a short overview of our fiscal-year outcomes. Then I will cowl our fourth-quarter efficiency and conclude with commentary on our outlook and steering for 2021. As Steve talked about in his feedback, the Duluth group rose to the problem and demonstrated agility and resourcefulness all through a tough yr, the energy of our omnichannel mannequin shining by means of as many shoppers shifted to on-line, whereas retail shops had been closed for as much as 10 weeks throughout the early levels of the pandemic.

We delivered web gross sales of $638.Eight million, a rise of three.8% over the prior yr. Our direct success community, together with the position our shops performed in transport orders and expediting BOPIS orders, dealt with the surge in on-line gross sales with minimal disruption because the direct enterprise general grew to signify 72% of full-year gross sales, in comparison with 57% in 2019. We entered fiscal-year 2020 with plans that mirrored an emphasis on rising our model in new and present markets, leveraging bills, and increasing bottom-line outcomes sooner than top-line gross sales. Whereas the pandemic altered our strategy, the actions we took popping out of our first quarter to extend monetary flexibility enabled us to generate money circulate from operations of roughly $84 million over the three quarters.

As well as, we grew pre-tax earnings by near 12%, in comparison with web gross sales progress of simply over 5% over that very same nine-month interval. In 2020, we opened solely 4 new shops versus an annual tempo of 15 retailer openings in prior years. Whereas new shops have been an efficient approach to entice new prospects, we had been very profitable in rising model consciousness and reaching new prospects by means of digital channels. In truth, 2020 delivered our largest achieve in buyer acquisition in latest historical past, with a 17% enhance within the variety of new consumers.

And we did this with out shedding sight of our present prospects, the place we have seen bettering charges of retention and reactivation all yr lengthy. One other year-long initiative was to rightsize our stock ranges and unencumber extra open to purchase for newness within the assortment. A yr in the past, we had been sitting on stock that was over 50% greater than the prior yr. This expanded by the tip of the primary quarter to 68% greater over the comparable interval.

By adjusting our future order circulate and being extra aggressive in our clearance technique all year long, we ended 2020 with inventories over roughly flat to final yr. Our gross margins had been impacted by these aggressive actions, however sequential enchancment every quarter and realizing a 20-basis-point year-over-year enchancment in This fall offers us the boldness that we have now turned the nook on our stock place. That being mentioned, we’re realizing some delays right this moment in stock receipts as a result of present challenged state of inbound transport channels and congestion brought on by record-high imports and COVID-related labor shortages. I will deal with the impression that is prone to have on our first and second-quarter gross sales developments shortly.

Total for fiscal 2020, we delivered $55.5 million in adjusted EBITDA, a rise of 6.8% over the prior yr. This displays larger operational efficiencies and a deal with optimizing the investments we have made during the last three years in know-how and infrastructure. These investments are boosting our capabilities to extend supply velocity, buyer spend and stock effectivity; and we anticipate this can proceed in 2021 and over the approaching years. Lastly, in 2020, we generated optimistic free money circulate of $38.5 million in contrast with a money burn of $22.Four million in 2019.

In consequence, we ended 2020 with a a lot stronger stability sheet and money circulate to fund our subsequent part of progress initiatives. Turning now to the fourth quarter. We reported web gross sales of $256 million, down 1.4% in comparison with the prior yr. As we talked about on our Q3 name in December, the vacation season started earlier this yr.

Peak gross sales volumes had been pulled ahead a number of weeks as many retailers inspired early vacation procuring to keep away from the pressure on supply networks. Our direct enterprise continued its optimistic progress development, up 15% within the fourth quarter, though down sequentially from third quarter’s plus-40% progress price. This mirrored the early vacation procuring and the shifting of key sale occasion from November into October to keep away from the elections. As we progressed by means of the height vacation interval, buyer visitors to our shops was impacted by reemerging issues with COVID lockdowns.

For the quarter, our retail retailer gross sales had been down 29% and reversed the bettering development we noticed from the third quarter. Our omnichannel initiatives helped to offset the tender visitors, with our shops fulfilling 22% of all direct demand in This fall. Additionally evident of the shifting shopping for patterns, our direct gross sales in retailer markets elevated 20%, in comparison with a rise of 13% in nonstore markets in This fall. Retailer visitors developments improved in January and continued into February, giving us confidence that 2021 will see a major rebound within the retailer gross sales channels, because the vaccines rollout continues and extra prospects return to shops.

With industrywide constraints on transport deliveries within the fourth quarter, pulling some peak vacation gross sales ahead did assist alleviate supply delays. Nonetheless, aggressive pricing and free transport gives weighed on our transport payment revenues, which had been down $1.9 million within the fourth quarter. Moreover, as talked about final quarter, we anticipated greater prices related to strains on the final mile community and heavier staffing wanted to satisfy direct orders. Total roughly $2 million of incremental prices associated to UPS transport surcharges and COVID pay premiums had been incurred in This fall.

Turning to our product replace for the fourth quarter. Total our males’s attire was down 2%, in comparison with final yr, and girls’s attire was down 3.5%. Softness in our button down woven tops and core males’s outerwear had been beneath final yr. Nonetheless, in each males’s and girls’s, our core bottoms, out of doors lively and workwear collections had sturdy efficiency.

Snug fundamentals proceed to be in excessive demand. Underwear, No-Yanks and the NoGA assortment. In males’s, holiday-themed underwear, DuluthFlex Fireplace Hose pants and flannels contributed to males’s quantity. A vibrant spot was Alaskan Hardgear merchandise, which elevated 9% to final yr.

In ladies’s, we had a powerful response to seasonal items like outerwear and sweaters and flannel. The plus enterprise is holding sturdy at 11% of the full attire enterprise and is responding nicely to the outerwear and the bottoms. Moreover, we added two new collections to our model lineup within the fourth quarter, 40 Grit and Greatest Made. 40 Grit noticed elevated momentum within the fourth quarter, representing our newest introduction for entry-level workwear at an on a regular basis low worth.

Greatest Made launched on our platform in October as our new digitally native premium males’s model, and we shortly offered out our best-selling colours and kinds inside the first few months. We’re excited concerning the potential of those two manufacturers underneath the Duluth Buying and selling umbrella. We consider the brand new model construction, together with Alaskan Hardgear and our core males’s and girls’s Duluth manufacturers, establishes Duluth as a vacation spot for like-minded out of doors and workwear stops, life. These rising high-growth manufacturers communicate extra on to focused prospects primarily based on their wants and needs and can profit from our scale and infrastructure platform in a means they could not obtain on their very own.

Turning to bills. SG&A for the fourth quarter elevated 1% to $105 million, in comparison with $104 million final yr. This included will increase of $4.Four million usually and administrative bills and $Four million in promoting bills, offset by a $7.2 million lower in promoting and advertising bills. As a proportion of gross sales, SG&A expense elevated 110 foundation factors to 41.1%, in comparison with 40% final yr.

This enhance was largely as a result of incremental prices incurred to satisfy buyer expectations in a singular vacation procuring surroundings and the upper mixture of direct gross sales as a proportion of the full. Promoting bills as a proportion of web gross sales elevated 170 foundation factors to 16.7%, in comparison with 15% final yr. The provider surcharges and heavier use of shops for direct order success pressured our price per unit metrics and elevated supply bills. On the promoting entrance, our continued funding in digital prospecting drove progress in cellular visitors, conversion and gross sales charges, though at a slower tempo than the third quarter.

Deliberate cuts to TV advertisements primarily throughout reside sports activities in October, November impacted website visitors and model search in subsequent months. Our model search and web site visitors had been up 9% in contrast with 30% in Q3 and a couple of% within the fourth quarter of final yr. Regardless of the slowdown in vacation visitors, we realized vital promoting leverage in This fall. Promoting and advertising prices as a proportion of web gross sales decreased 260 foundation factors to 10.6%, in comparison with 13.2% final yr, primarily because of lowered catalog and TV promoting spend, in addition to chopping billboards in native retailer markets, partially offset by greater digital promoting.

Normal and administrative bills as a proportion of web gross sales elevated 200 foundation factors to 13.8%, in comparison with 11.8% final yr, largely because of greater depreciation and amortization on new know-how investments. Our retailer depend stays steady at 65 shops throughout the fourth quarter. We’re on maintain at the moment for including new shops whereas we observe buyer procuring habits and the financial system begins to return to regular. Adjusted EBITDA for the fourth quarter was $38.7 million, a lower of $1.Three million versus the comparable interval.

We reported web earnings of $21.Eight million or $0.67 per diluted share, in comparison with $24.Four million or $0.75 per diluted share reported within the fourth quarter final yr. Shifting on to the stability sheet. We ended the quarter with web working capital of $115 million, together with $47 million in money and $48.Three million excellent on our time period line of credit score. Clearing by means of the elevated stock ranges from earlier within the yr and lowered capital spend relative to prior years helped generate optimistic free money circulate of $38.5 million in 2020.

Money circulate will fund future progress, will reduce our reliance on the credit score facility, and help the exploration of recent third-party distribution channels, as Steve articulated earlier than. As we start the brand new yr, we’re targeted on bettering profitability by means of elevated gross sales within the shops, cleaner stock administration, and larger automation in our distribution heart community. As well as, the initiatives to help our rising model platform are on observe. And our new buyer information warehouse and analytic instruments are ramping as much as allow deeper buyer segmentation and personalization.

All collectively, we’re very optimistic for what the long run holds at Duluth. That being mentioned, given the continued uncertainty with respect to COVID-19, we stay ready for a variety of situations to make sure we will maintain progress and proceed to speed up our working efficiencies. Primarily based on the idea that our shops will stay open over the course of the yr and vaccination charges will proceed to enhance, we anticipate to ship gross sales progress within the vary of 6% to 10% general for the enterprise. This consists of one new retailer opening in Cherry Hills, New Jersey at present slated for a November 2021 opening, and the closure of our Mall of America check idea retailer subsequent month.

The quarterly mixture of gross sales by channel will shift dramatically in 2021 given the easing results of the pandemic. We do anticipate some near-term stress within the first half of the yr as a result of delays in stock receipts. Our greatest estimate at the moment is that gross sales progress will likely be on the decrease finish of that gross sales vary within the first half of the yr and on the greater finish of the vary within the second half of the yr. With cleaner stock ranges, we anticipate to understand gross revenue p.c enchancment of 50 to 100 foundation factors.

This can drive working margin enchancment of at the very least 100 foundation factors for the total yr as we understand leverage in promoting bills and shops contribute as much as 35% of firm gross sales. We’re getting into the yr with various key investments in place which have added to our general depreciation and amortization estimate of $31 million to $32 million for 2021. The adjusted EBITDA is predicted to be $66 million to $70 million this yr, which represents progress of roughly 25% over 2020. Along with this wholesome progress in earnings, with just one new retailer within the pipeline, capital expenditures together with software program internet hosting implementation prices will likely be down barely yr over yr to about $15 million.

In consequence, we predict to generate optimistic free money circulate of at the very least $20 million in 2021. And with that, I will open the decision for questions.Questions & Solutions:

Operator

[Operator instructions] The primary query comes from Jonathan Komp of Baird. Please go forward.

Jonathan Komp — Robert W. Baird — Analyst

Yeah, hello, thanks. Good morning. Dave, possibly first, simply needed to get your ideas on the near-term surroundings. It sounds such as you’ve had begin to the primary quarter.

And also you’re about to cycle, if not already the previous few days, fairly vital disruption final yr. So how are you considering variety of the present trajectory and possibly the stability of Q1, Q2? And any ideas on how which may play out by channel can be appreciated.

Dave Loretta — Chief Monetary Officer

Yeah, certain, Jon. Sure, we’re in the course of a interval that is, in comparison with prior yr, gonna be vital shifts, proper? It was a yr in the past that we did begin to have to shut our shops. However our — so going towards these comparables is gonna look completely different than we’ve as of just lately, however the developments general within the enterprise are very encouraging. By February, for the month of February, our whole enterprise was up 13%.

By channel, that represented direct up a bit of over 40%; and the retail channel nonetheless detrimental, however obtained little higher than the fourth quarter, down minus 20%, 24%. In March, the primary two weeks of March, we’re seeing that enchancment proceed and stay within the mid- to even slight excessive teenagers general. This previous week is after we actually begin to see our shops comp positively over the prior yr as visitors was dwindling after which shops began to shut. So after we take a look at our first quarter, we’re anticipating the quarter to be within the mid-teens general for the enterprise.

And meaning direct is gonna be — it is gonna be barely down from its present development. As a result of final yr we had been very aggressive close to the tip of March and in April with some promotions, clearance occasions. So we’re not anticipating the direct to be as a lot, by the tip of the primary quarter, to be as optimistic. However retail ought to be considerably greater, 60% to 70% over final yr, which — so the mixture of these two get you to kind of a mid-teens for the Q1 outlook proper now.

Jonathan Komp — Robert W. Baird — Analyst

OK, nice. And possibly on margin, the full-year gross margin growth as nicely, it seems to be like a bit of little bit of implied G&A leverage for the yr. May you possibly simply differentiate among the drivers for each of these items, to the extent you are prepared?

Dave Loretta — Chief Monetary Officer

Yeah, actually. We do anticipate that gross margin, we’ll see some enchancment. Final yr, we had a major hit to our gross margin. So we’ll see some enchancment within the first quarter, seemingly a bit of over 100 foundation factors, and for the total yr, 50- to 100-basis-points enchancment in gross margin after we — primarily based on our promotional plans proper now.

However sure, our leverage is be coming from promoting prices and overhead. The large element of overhead is just having our shops open and with the ability to leverage the occupancy and the mounted prices in that channel. However by way of advert spend, we predict to be comparatively flat by way of our p.c of gross sales. We held some again final yr, and we’re gonna shift it round.

We’ll have vital leverage within the first quarter, however we’re simply transferring {dollars} into extra the again half of the yr. So full-year steering that we gave on earnings progress is kind of what these elements will get us to.

Jonathan Komp — Robert W. Baird — Analyst

OK, wonderful. And simply final one on the brand new pilot promoting and Tractor Provide, the handful of shops up to now, simply any broader ideas find out how to form the technique, the way it’s evolving round the place you could be prepared to promote Duluth product? And I do know it’s totally early, however simply given the present margin profile of the enterprise of promoting in your individual channels, in the event you did resolve to ever meaningfully enhance that portion that you simply is likely to be prepared to promote in different channels, any form of broad-stroke ideas on what which may imply from a from a margin contribution standpoint? Understanding it is early, any ideas there can be useful.

Dave Loretta — Chief Monetary Officer

Yeah, it is vitally early. And the product that we picked for that check is our most tried and true, well-known product, and it has — it carries a few of our greatest margins. So we anticipate that web, we’ll see some accretion in margin general from this exercise if it actually takes off the way in which we hope it’ll. We do not essentially want to use the identical stage of advert spend on that effort, so that you get some profit there.

After which, it is — the partnership is known as a one firm to a different, and it is a well-known firm. So we have no plans at this level to ramp up a wholesale division or inner prices to essentially handle a progress in that. However this was merely a primary try of us to see what our product would seem like in different retail locations that may achieve some buyer consciousness and choose up new prospects.

Jonathan Komp — Robert W. Baird — Analyst

Thanks. I sit up for seeing that.

Dave Loretta — Chief Monetary Officer

Thanks, yeah.

Operator

Thanks. The subsequent query is from Jim Duffy of Stifel. Please go forward.

Jim Duffy — Stifel Monetary Corp — Analyst

Thanks. So guys, yr all in all, superb progress on the stock. After progress in each the second quarter and the third quarter, the inflection of income declined, nevertheless, within the fourth quarter got here as a little bit of a shock. Given the brand new prospects acquired, know-how developments, new merchandise choices, we’d have thought the direct enterprise would have been stronger.

Was the direct deceleration bigger than your expectations within the fourth quarter? Do you guys assume that possibly you narrow promoting expense an excessive amount of within the fourth quarter? After which, Dave, I am curious what’s embedded for direct enterprise within the full-year outlook?

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