Good morning and welcome to the Duluth Holdings Third Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Nitsa McKee, ICR. Please go ahead.

Thank you and welcome to today's call to discuss Duluth Trading's third quarter financial results. Our earnings release, which was issued this morning, is available on our Investor Relations website at ir.duluthtrading.com under Press Releases. I am here today with Sam Sato, President and Chief Executive Officer, and Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks and then we will open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified by the use of words such as estimate, anticipate, expect, and similar phrases. Forward-looking statements by their nature involve estimates, projections, goals, forecasts, and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on Form 10-K and other SEC filings as applicable. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. And with that, I will turn the call over to Sam Sato, President and Chief Executive Officer. Sam?

Thank you for joining today's call. We're pleased to report strong third quarter results that reflect healthy brand performance, growing customer appetite for our core collections, and nimbleness in our business model that has allowed us to maneuver unprecedented disruptions within the supply chain. Our customers are responding well to our assortment and showing signs of eagerness for seasonal and early holiday shopping. Before I touch on the third quarter results and current holiday trends, I would like to reaffirm our commitment to the strategic framework I outlined on our last call and provide a few updates. Our Big Dam Blueprint represents an outline for Duluth's future and the foundation we will build on to address where the customers' expectations are today and where they are heading. The building blocks of the blueprint will inform critical, long-term investments in our business, many of which are underway today and will be embedded in our near-term plans. Importantly, the investments we make will be thoughtful and purposeful, matching the growth and needs of the business. Dave will provide directional insights for fiscal 2022, but it's important to reiterate that we expect to maintain our operating performance objectives of improving operating margins while growing sales over the next several years. We are focused on investing in efficiency for growth, which will drive operating margin expansion long-term. On our last call, I outlined the five pillars of our Big Dam blueprint: live with a digital mindset; intensifying our efforts to optimize our own DTC channels; evolving our multi-brand platform to enable long-term growth; testing and learning to unlock new channels of growth; and investing in the enablement and future-proofing of our enterprise. We're pleased with the progress we've made on developing our Big Dam Blueprint, and the work streams that have already kicked off to execute initial elements of the plan. As we move through the balance of 2021, and provide clear milestones for 2022 and beyond, I do want to emphasize that the strength of our core business today will continue to inform and direct the timing of investments. Our stated long-term objective of reaching $1 billion in sales by 2025, representing a 40% growth over our current year outlook and returning to previous best operating margins of high-single to low double-digit levels, are intact. Now, let me turn to our third quarter performance, highlighting the progress we've made on executing this year's plans and giving us confidence to increase our EPS outlook for the balance of fiscal 2021. Total sales for the quarter grew 7.2% versus last year, and 21% versus 2019. While this was in line with our outlook, we realized strong momentum in the category that had better in-stock positions and the sales results would have been even stronger, had inventory flow constraints not been an issue. Where we have been proactive in prioritizing and expediting inbound receipts, sales were healthy and in-stock levels are positioned well for the peak season business. Our men's pants and highest volume underwear items were either brought in through airfreight or transloaded onto trucks to bypass the railroad congestion. In addition, we expedited all our holiday-themed products to ensure that we are in a solid position to maximize the gift-giving shopping window. I'm confident we are poised to deliver strong holiday results. Our direct channel continues to close the gap from last year's exceptional pandemic-fueled surge and ended up 38% versus 2019. More near-term, direct sales in October and November grew mid-single-digits over last year. Web visits during the quarter increased 8% year-over-year, driven by incremental brand awareness investments and a successful Big Dam birthday sales event during September, which grew sales 10% over last year. The strong momentum in building back our retail channel continued in the third quarter, with sales growth of 22% over 2020 and 3% over 2019. The average order value in stores increased 8% over last year, and we continue to see improvements in our store traffic. Our conversion rates continue to grow significantly, driven by our store leadership efforts to heighten engagement with customers. We also attribute the improvements at the store level to shifting digital ad spend focused on driving local store traffic, as well as an improved inventory position in total, and the better quality of mix compared to last year. We had great success with the grand opening of our 65th store in Cherry Hill, New Jersey, placing the store in our top 10 for new store sales in the first month. This is our second store in the Philadelphia market, and it's off to a fantastic start. A significant bright spot in our business today and contributing to the expanded operating margin, is our gross profit margin, which increased 520 basis points over last year, to 57.6%, and marks the highest gross profit margin for a third quarter since Duluth has been a public Company. Several contributing factors are driving the strong trends, namely our clean inventory position and strategic promotional stance compared to prior years. The silver lining of the pandemic and related supply chain challenges is the accelerated structural view that we can manage the business with less inventory and more precisely target promotions, which not only supports higher gross margins but supports brand and product health. Additionally, we are seeing our customers respond exceptionally well to core year-round items at full price, particularly in our women's division, a key driver to our Big Dam Blueprint and long-range sales target of $1 billion. While the healthy improvement in product margins allowed more gross profit to drop to the bottom line, we are also managing our costs well, leading to the improvement in net income of over 200% compared to last year. Earnings per share of $0.09 for the quarter represents a strong result for a period, when we're typically ramping up marketing investments to build top-of-funnel awareness and support for our important peak selling period. This year, we're adding back a sizable amount of marketing outreach to support our brand growth and maximize customer engagement through a shifting mix of media channels that includes linear national television, combined with a larger amount of connected TV and streaming placements. We're pleased with the business momentum and customer response to our offering, giving us confidence to raise our full-year estimates for earnings, which Dave will provide more details on. As we look to finish 2021 strong and set plans for 2022, our key areas of focus remain the following: developing and delivering innovative, high-quality solution-based products, delivering relevant customer experiences through our own DTC channels to drive continued growth in sales and profits, refining initiatives that increased our regular price business as a percent of total sales, and strategically intensifying our marketing investments to capture consumer interest and engagement, build brand awareness and loyalty, and attract new customers. I'd like to touch on a few noteworthy updates related to these focus areas. During the quarter, we introduced a number of new products that have been received well by our customers. In men's, we introduced a new flannel shirt named the Oysterous Flannel. We've taken our outdoor shirt with the great functional benefits you've come to expect and reinvented it using fabrics made with recycled oyster shells, to keep you cool and dry when you're active, while doing Earth a favor. We also brought back an improved version of our men's Duluth Flex Firehose Brighter Pants. This pant is a great example of the ingenuity and end-use features we designed into our outdoor workwear. In women's, our new Folklore Flannel comes in several comfortable fitting styles and provides the durability along with an extra soft fabric feel. We also rolled out the genetics high-rise, slim-legged jean that combines comfort with a slimming fit. And lastly, adding to our industry-leading men's underwear collection, we introduced the Funk No! copper boxer briefs made with Cupron Copper Polyester technology to kill odor-causing bacteria. Innovation in our product design and development is interwoven in our brand ethos and will continue to be a source of competitive advantage for Duluth. I mentioned the new store opening in Cherry Hill, New Jersey, which is another example of our ongoing commitment to serve communities, with elevated in-store services, including buy online, pickup in-store, buy online, ship from store, and curbside pickup. We're also in the process of rolling out point-of-sale capabilities to facilitate seamless mixed-cart purchasing, which opens the availability of items not in the store to a customer shopping cart while at the register. As well, we're piloting mobile handheld point-of-sale devices in stores this holiday that gives our store teams more flexibility to ring up transactions anywhere in the store and help manage through high-traffic periods. Within the third area of focus, we know that combining exclusive innovative products with leading omni-channel capabilities lead to a compelling proposition for our customers, which contributes to higher full-priced selling. However, our ability to plan the business and be disciplined in managing inventories can also lead to an even higher mix of full-price sales. We're embarking on a multi-phased implementation of a merchandise and assortment planning tool. This will replace the collection of disparate systems we use for inventory finding today and will infuse artificial intelligence and machine learning into both in-season product management and long lead time inventory planning. From a marketing analytics standpoint, this year has been notable for standing up a suite of customer data tools from Adobe that has elevated our ability to become more personalized and targeted in our marketing outreach. These insights inform and will drive the allocation of our digital advertising spend to supplement the broader brand awareness media for overall marketing spend efficiency. We're encouraged with the customer acceptance of this year's offering and confidence in closing out the year strong.

Thanks, Sam and good morning everyone. For the third quarter, we reported net sales of $145.3 million, up 7.2% compared to $135.5 million last year and up 21.3% compared to the same period in 2019. Our direct channel sales grew 38% over 2019, while the retail channel was up 3% over 2019, driven largely by a 9% increase in average transaction value in the stores. We experienced a strong uptick in store traffic compared to last year's COVID slowdown and drove a 22.3% increase while direct channel sales were down slightly by 1.4% compared to last year as expected. Growth in visits to our website turned positive in the third quarter, up 8% to last year, compared to declines in the first half as we began strategically increasing the brand awareness marketing, and investing deeper in digital prospecting. This increased marketing fueled a nearly 30% increase in first-time visitors to our website, positioning us well to capture incremental demand during the peak holiday selling season, and setting the stage for longer-term customer file growth. Since mid-September, our Direct Channel sales have been trending up to 2020 in the mid to low single-digit range on higher-quality margin sales and grew roughly 5% on Cyber Monday. For the balance of the year, we expect the retail channel will continue to outperform Direct as we cycle past the period last year that was impacted by the lower store foot traffic due to COVID. Additionally, with a strategic decision to shift and increase advertising in the back half of the year, we do expect direct channel sales growth to be positive over last year in the fourth quarter. Our results demonstrate the healthy customer demand for our products and effectiveness of our marketing programs that are better informed by customer data and more flexible digital ad spend. The underlying strength of our offering and resulting benefits to operating margins are being realized in our business today. During the quarter, average order value and sales per customer overall increased mid-single-digits due to the strength of our core offering and being strategically less promotional compared to last year. The higher customer sales productivity is combined with an improving trend on newly acquired buyers compared to the first half of the year. We expect our fourth-quarter gross profit margin will be down as much as 100 basis points compared to last year. As to the incremental freight costs, our gross profit percent in the fourth quarter would likely be up as much as 200 basis points over prior year, driven by higher full-price selling and being strategically less promotional during the sale events. Turning to expenses, SG&A for the third quarter increased 16% to $78.8 million compared to $68.2 million last year. As a percentage of net sales, SG&A expense increased to 54.2% compared to 50.3% last year. This included increases of $5.5 million in general and administrative expenses, $3.9 million in advertising and marketing expenses, and an increase of $1.2 million in selling expenses. Selling expenses as a percentage of net sales decreased 30 basis points to 16.4% compared to 16.7% last year, driven by shipping cost leverage from retail, comprising a greater percentage of the total business.

Hi. Thank you. Maybe first question, if I could just ask a little more directly on some of the recent trends you're seeing both with respect to the underlying demand in any volatility from the consumer. And then also just the availability of product, how that's flowed and if that's allowing you to capture some of the seasonal sales that you missed last quarter. I know you gave total color on the ranges you expect for the fourth quarter, but just hoping for a little more detail behind what you're seeing.

Yeah. Hi, John. We are seeing strong demand from the customer and haven't really seen much of a drop as the quarter has progressed. But as you mentioned, the inventory flow does continue to weigh on our ability to meet all of that demand. So, as we called out in the third quarter that some sales, we think we left on the table, continues into the period so far through November. On top of that, we expect in Q4 that not all the sales are going to be totally lost, but it's factored into the outlook that is represented in our sales guidance.

Understood. And then maybe thinking forward to 2022 and up to 10% top-line growth you mentioned, could you rank order the biggest drivers? You have a lot going on with product innovation, the marketing efficiency and the enhanced targeting and digital effort. So how are you thinking about the contribution from each of those pieces? Neither in absolute, their rank ordered, what could be the biggest drivers as we look to next year?

I think you touched on some of the major points there. The momentum that we are really seeing in some of the ad spend effectiveness and particularly the digital channels is what's I think a big improvement in the year that we're in right now and that's what we expect will even elevate further. We also have product innovation and product launches, including rolling out women in our Alaskan hard gear line for next year, re-launch of Best Made, and so we've got some exciting things in the product pipeline that will also support that. So, I think those are the 2 top items.

I would add, John, our store productivity continues to improve, although still a little behind 2019 as we both stated in our prepared remarks. We're making really great progress there and we think that 2022 will continue to improve upon our current trends, and so that becomes another driver for us as well.

Thank you. Hi, Dave. Hi, Sam. Sounds like the team's been hard at work, a lot of encouraging progress. So, congratulations for that.

Thank you.

A couple of near-term questions and then some bigger picture questions. Sam, you mentioned you're in a good stock position to maximize holiday in your prepared remarks. Our visits to the stores, employees were talking about air-freighting product to get it to the stores. Is there inventory available for holiday that isn't reflected in the quarter-end balances that we're seeing with this print?

Jim, your question, we aren't sure how you are asking that question. Can you rephrase?

Where I'm going, Dave, is you appear to have very lean inventory balances as of October. We've heard from people in the stores that airfreight products are arriving. Are there substantial amounts arriving in November or perhaps early December that could help you take advantage of any holiday demand, or is the inventory at the end of October what you're working with for the holiday season?

Inventory continues to flow in, no question, and it will continue through the month here to satisfy. So, as we're selling through these peak periods, we're replenishing, but still below the ideal levels that we want to be at. Most of the airfreight product is already in our hands. Certainly, the holiday items are in place and then some of the core categories that we really wanted to be deeper in are in place. But what we're still chasing is some of our fall, winter seasonal items, outerwear items, and those are coming in day by day here and as soon as we do, we get it into the stores and on our website as quickly as we can.

Okay. Maybe framed another way. Do you think you have inventory positions such that you can deliver upside to that fourth-quarter guidance if the demand is there, or is the inventory to such a gating factor that that's not possible?

Yeah, I think as we stated in our prepared remarks that we've done our best to contemplate the puts and takes into our updated guidance and we remain comfortable with where our current sales guidance is.

Okay. And then you saw really nice improvement in average order value in your retail stores in the third quarter. Retail topped 2019 levels in the third quarter sounds like traffic trends have been improving. Would that be your expectation that fourth quarter retail could be above the fourth quarter '19 levels as well?

From the average order size, yes. But from a total sales opportunity, I think we're still looking to be close to where we were trending coming out of our third quarter. So, we still expect that the higher conversion of store traffic is going to be continuing right through the fourth quarter compared to 2019, and that's really what's growing the store basis is, capturing a higher conversion rate on slightly lower foot traffic. We have experienced higher full-price selling in previous years, particularly before 2019. This year, we have made significant progress in closing that gap. Our goal is to not only return to historical highs but to surpass them. A substantial portion of the gap has been closed over the last two years with an increased percentage of full-price sales.

Okay. Interesting. So big picture, you've got the market discounting the stock less than 7 times the EBITDA guidance, less than 6 times the implied outlook in '22. That suggests that the market doesn't believe those margins are sustainable or that you can deliver on the growth. Across the industry, promotion's been minimal, margins been making new highs. What gives you guys confidence that you can continue to drive the growth in the business at full-price and refrain from reverting back to promotions?

Yeah, I think there's a lot we can do. And certainly, a lot of progress has been made to date. So, when I think about some of the key drivers, I think about the work we're doing around retaining our very best customers and continuing to acquire new customers. I think about the amount of knowledge and efficiencies, we're really beginning to gain through our marketing initiatives especially as we shift from more traditional media, to digital media, which is both more flexible.

I think we're in the infancy of really developing our brands beyond the Duluth brand, but really Alaskan Hard Gear and Best Made. I think we're really at the beginning stages of developing those brands, as well as the continuation of innovative development against the Duluth brand. I think about the amount of effort we're putting into automating our logistics network, which will bring not only efficiencies and leverage from an expense perspective, but will continue to allow us to scale with maybe less constraints around the labor pool. But I think more important than that is meeting the expectation of the customers. We talked already about the percentage of our total business that's being driven by regular price. We think that there's still substantial amount of upside in that regard.

Hi, everyone. This is Phillip Blee on for Dylan Carden. The expansion of Tractor Supply partnership is encouraging. Do you guys have any plans to continue to expand or launch similar partnerships and how important is this type of sales channel in achieving your longer-term revenue growth target, both from an incremental top-line perspective and just in general from brand awareness and attracting a new customer base? Thank you.

Hi, Philip. We're excited about what's happening with Tractor Supply. As I mentioned in my prepared remarks, we've just recently expanded to their online channel. I think importantly, we're starting to gain some pretty good learnings around what it will take operationally for us to scale this as a longer-term opportunity. We're also testing a couple of things with Danner Boot in 3 of our stores and we're looking at new ways to leverage that partnership as well. And so, all of these things ultimately are leading us to, I think importantly, where we need to make investments into the future and I think the great news is our current long-range plans really don't contemplate this being a substantial part of the business. And so actually, to Jim's earlier question, this becomes another element of growth for us that is not currently part of our long-range plan.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.