Duluth Holdings Inc. (DLTH) Q2 2023 Earnings Call Transcript

Good morning, and welcome to the Duluth Holdings Second Quarter 2023 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Nitza McKee. Please proceed.

Thank you, and welcome to today's call to discuss Duluth Trading's second 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'm here today with Sam Sato, President and Chief Executive Officer; and Dave Loretta, Senior Vice President and 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'll turn the call over to Sam Sato, President and Chief Executive Officer. Sam?

Good morning, and thanks for joining today's call. Before I review our second quarter results, I'm thrilled to share an update on two of our key strategic initiatives that are cornerstones to our Big Dam Blueprint. I'll start with the exciting news that our newest highly automated fulfillment center located in Adairsville, Georgia has, as planned, begun fulfilling customer online orders and replenishing our store inventories. The scheduled ramp-up is on time and gives us confidence that our October target date for being fully operational is achievable. Representing a significant investment to future-proof our business, this upgrade to our logistics network will support meaningful long-term growth, address our customers' expectations for faster delivery, and immediately generate cost efficiencies that will build over time. I'll share more about this shortly, but first, I'd like to thank all our team members and vendor partners responsible for delivering on this key milestone. In addition to going live in our highly automated fulfillment center, I'm equally excited to share on the growth of our sourcing and product innovation functions with the onboarding of several new team members that have deep and extensive experience in apparel design and manufacturing. This team accelerates our efforts to develop and bring to market innovative products that serve a purpose or solve a problem for our customers. Duluth has a long track record of bringing first-to-market fabrications and features to our customers, representing a strong price value proposition, supported by cut-through marketing that is fun and memorable. The sourcing team will augment and strengthen this competitive advantage, allowing us to enhance the pipeline of new products while improving our speed to market, fueling greater full-price selling and sub-brand loyalty while generating significant product cost savings over time. This strategic initiative, coupled with the go-live of our highly automated fulfillment center, sets the stage for meaningful and sustainable long-term profitable growth. Now turning to our second quarter performance and the current consumer environment. Customer demand for our offer remains strong as evidenced by continued growth in units sold, increased buyer counts, and online visits, all with higher conversion rates. We shipped more orders in the second quarter compared to last year, as demand for our spring and summer collections were healthy. As we navigate what remains a dynamic macro environment in which customers continue to seek value, we are managing the business prudently, controlling what we can control while staying keenly focused on elevating our unique brand and sub-brand positioning. Importantly, our inventory position is in good shape and ended the quarter below prior year levels due to strong seasonal sell-through and our disciplined efforts to appropriately plan our purchases and receipt flow. Total net sales for the second quarter were $139 million, which was down 1.7% from last year and can largely be attributed to lower store traffic in the month of May, which subsequently trended flat to slightly positive beginning in June. We were very pleased by our strong online performance, which grew by nearly 2% in the quarter. Importantly, our second quarter conversion rate improved year-over-year, both in-store and online, as our assortments and marketing efforts resonated with our broadening customer base. Double-clicking on our online performance, visits to our website were up in the quarter, driven by higher volume on mobile traffic, which accounts for nearly 70% of all online visits. Sales transactions through mobile devices increased roughly 8% and accounted for 55% of direct channel sales. We continue to realize the benefits from last fall’s web platform upgrade, which enables faster load times on mobile devices and easier navigation, contributing to an increase of 50 basis points in our mobile conversion rate. With our direct channel representing 62% of the total, an increase of 200 basis points from last year, our results continue to prove that our digital-first strategy balanced with an omnichannel service model is delivering on our customer shopping expectations with Duluth. Moving down the P&L, we delivered adjusted EBITDA of $8.6 million for the second quarter. And while we're not satisfied with the bottom line EPS results, the investments we are making now in technology, supply chain, and product innovation are keys to unlocking and fueling longer-term profitable growth. Our balance sheet strength with no drawings on our $200 million line of credit at second quarter end and none expected at year-end, supports our multiyear strategy to invest in the key growth drivers of the business while being funded by operating cash flows. We have strategically managed our inventories to support the programs that have momentum and minimize end-of-season clearance, which is in a healthy position and below last year. As I mentioned, demand for our spring and summer collections was strong, and we continue to deliver great results in key collections like Garden and Landscaping and Planting. These collections delivered a sales increase of nearly 40% in the second quarter. Our women's heirloom gardening bib overall was again the number one style for the quarter. Our plans are to make this hero product a year-round item, which we've designed with a soft fleece lining option to add warmth and comfort during cooler months. Our total women's business grew almost 3% during the quarter, with increases in Duluth branded collections like heirloom garden, but also in the base layer unders and the newer AKHG collections. Growing our women's apparel segment, which now represents 35% of total apparel sales, is a key strategic initiative and continues to gain momentum. Success in the women's business is being derived from a combination of outstanding product design, expansion into relevant categories, and our secret sauce of utilizing proven fabrications across styles and uses. The women's bra collection was up nearly 50% in the quarter and represents a significant growth opportunity engineered with unique comfort, fabrics, and features in a wide range of fits and sizes. We're seeing great response from the newly released Armachillo TeeLUXE Bra, which is infused with Made-in-the-Jade technology that features soft-touch, seamless comfort, and all-around support elements. As we continue to respond to last year's launch of women's AKHG, we're pleased to see continued interest and demand for our outdoor recreation offering. We saw notable success in our lightweight Access Point collection made for ultimate endurance on the trails and the Stone Run collection, which provides the same functionality with a more structured and durable design. For fall, we're introducing new soft and cozy cross-layer styles in the AKHG nightwear program and Bamboo programs. We're also expanding our use of sherpa and fleece linings within AKHG, which broadens our assortment during seasonal transition periods. And our long success in flannel shirts continues as we expand new styles, colors, and prints. Overall, the AKHG sub-brand grew 14% in the second quarter, and we expect a similar growth rate in the back half of 2023. AKHG represents a significant growth opportunity for Duluth. We draw so much inspiration and product design ideas from our loyal Wayforger community, sharing their stories of work and play and the apparel they love that helps enable their passion. I encourage you to visit our Duluth Wayforger web page to view the imagery and read about the folks that help shape our brand offering as they embrace and live the true spirit of our family of brands. We're pleased with the favorable response to our early fall and winter collections and are particularly enthused about our core men's Duluth assortment with the recent introduction of new colors and fits in the Longtail T program as well as the increased demand for our Duluth Ballroom Double Flex denim pants, which features new combinations of styles, washes, and fits. We expect men's pants to be a high-volume driver for us this fall with the support of robust marketing plans over the next few months. We've also recently launched a new men's collection called Powercord, which strikes the right balance between business casual and job site utility. Designed with abrasion-resistant Cordura nylon twill, the pants combine durability with sharp styling that pairs well with button-down long sleeve shirts, polos, or even a long sleeve henley. The new Powercord collection is off to a great start and addresses the needs of our customers who are transitioning back to the office more regularly. Excitingly, our pipeline of new and innovative products is full this year, and we still have several key items that we’ll be launching in the fourth quarter. This includes a new addition to our Buck Naked underwear collection that features a soft and smooth fabric, allowing for more extensive pattern printing, including photo images. A new Fire Hose carpenter pant featuring our strongest, most durable Flex Fire Hose fabric to date and a new women's AKHG fitness apparel assortment launching in January just in time for New Year's resolutions. We've also been busy rolling out new pattern and printed underwear styles for men and women. Our Buck Naked collaboration with Pabst Blue Ribbon was a customer favorite and is being followed up with several additional collaborations with favorite beer brands dropping in September. Product newness, combined with data-driven marketing strategies, is proving to effectively increase customer retention rates and increased brand awareness. Our year-to-date retention rate on prior year customers is up 200 basis points with much of that driven by our longer-term and most loyal customers. Our active buyer file overall is up year-over-year and orders per customer are up mid-single-digits, driven by increased purchase frequency. Within the paid social channels, our return on ad spend was up over 60% in the quarter from retained customers and new customer acquisition rates have been on an improving trend all year long. Our marketing strategy provides nimble and informed shifts when appropriate, and we're looking to realize efficiency gains in the back half of 2023. New customer acquisition will continue to be a focus, and an expanded reach of new influencers and online content creators will be powerful sources of new buyers. As I mentioned in my opening comments, the go-live of our newest, highly automated fulfillment center in Adairsville, Georgia represents a significant milestone within our strategic roadmap. This facility is the largest and most efficient within our fulfillment network, and we remain on track to process up to 60% of online customer orders and store inventory replenishment through this new facility by the end of Q3. The efficiency gains will help us realize healthy reductions in cost per unit processing as well as faster delivery times to a greater portion of our direct customer base. We're poised to fulfill our customers' needs and meet the peak demands as it builds towards the holiday selling season. Our inventory is in great shape. We're accelerating the receipt of new product innovation. Our marketing plans are as sharp as ever. And our customer service teams are prepped to deliver superior omnichannel experiences. With the critical investments we've made and will continue to make, we're well positioned to meet the needs of our customers and drive sustainable long-term growth and profitability. I look forward to sharing more on our third quarter call and will now turn it over to Dave to provide more details on our second quarter results and outlook for the year.

Thanks, Sam, and good morning. For the second quarter, we reported net sales of $139.1 million, down 1.7% compared to $141.5 million last year, and brings our year-to-date sales close to flat to last year. Sales in our direct channel were up 1.8% in the quarter, driven by an increase in web visits of roughly 1% and increased conversion of nearly 50 basis points across both mobile devices and desktop. Sales on mobile devices increased high single digits and continues to become the digital channel of choice for our customers with enhancements made to site speed, navigation, and product information. Our retail channel sales were down 7% with store traffic down 2% compared to last year, which is an improvement from the trend traffic in the first quarter. The store teams are also continuing to drive increases in the conversion rate on the store visits with outstanding customer service and compelling assortments and targeted offers. As Sam mentioned, the demand for our seasonal and year-round offerings was strong, generating positive growth in items sold and orders shipped. The slight decrease in net sales was largely attributed to a lower average retail and order value due to lower levels of full-price selling and a higher level of promotional and clearance sales. Our quarter-end inventory position is healthy with spring and summer goods down to high-single-digit penetration to the total from low-teens last year. Clearance is down more than 300 basis points year-over-year to roughly 7% of the total. As planned, we began to receive and offer new fall and winter seasonal items sooner than last year, and the customer response has been strong. We have also improved the flow of our core year-round items and are experiencing demand build for some of the largest programs, spanning men's pants, tops, and underwear. Total men's division sales during the quarter were down 3.5%, while women's was up nearly 3%, with increases for women's in Duluth, AKHG, and the First Layer categories. We drove higher sell-through rates in part through the use of incremental events and targeted offers, enabling us to keep our inventory turning. Our second quarter gross profit margin was 51.4% compared to 53.4% last year and reflects a lower mix of full-price sales. Gross profit dollars declined 5.5% from last year. We did see stabilization in product gross margins relative to last year, near the end of the quarter. Turning to expenses. SG&A for the second quarter increased 1.7% to $72.9 million or 52.4% of sales compared to $71.7 million last year or 50.7% of sales. This included an increase of $2.8 million in general and administrative expenses, an increase of $1.1 million in selling expenses, and a decrease of $2.7 million in advertising and marketing expenses. Selling expenses as a percentage of net sales increased 100 basis points to 16% compared to 15% last year and was the result of higher outbound shipping costs from rate increases as well as a greater volume of direct orders shipped with lower average order values. Within selling expense, costs related to variable labor in our stores and fulfillment centers declined compared to last year and leverage as a percent of sales due to efficiency gains made from scheduling and continuous improvement initiatives across our fulfillment network. Advertising and marketing costs were $11.9 million in the quarter compared to $14.6 million last year and as a percentage of sales decreased 180 basis points to 8.5% compared to 10.3% last year. Our investment in brand awareness through national ad channels and TV streaming was flat compared to last year, and our digital media channel spend was reduced along with lower creative costs. We saw stronger results with increased web traffic from organic search and email activities that focused on new product arrivals and clearance messaging that helped drive the increase in retention and reactivation rates. We also continue to realize a high return on media spend through social channels when we highlight product innovation, features, and benefits. Overall, customer counts increased mid-single-digits during the quarter, while maintaining roughly flat sales per customer productivity. General and administrative expenses during the second quarter were $38.8 million or 27.9% of net sales compared to $36 million or 25.4% last year. Similar to the first quarter, the increase over last year reflects the incremental fixed costs for the new automated fulfillment center that is now operational and additional personnel expenses associated with the new facility and our corporate functions in the area of product development, sourcing, and stock compensation costs. Adjusted EBITDA for the second quarter was $8.6 million or 6.2% of sales compared to $13.2 million or 9.4% of sales last year. Our net loss per share was $0.06 versus a profit per share of $0.07 in the second quarter last year. Moving to the balance sheet. We ended the quarter with net working capital of $85 million, including $11 million in cash and zero outstanding on our $200 million line of credit. The healthy inventory flow during the second quarter lifted free cash flow and increased our cash balance by $2 million from the end of the first quarter. We remain on target for overall capital expenditures of $55 million this year funded by cash with the lion's share of that spend associated with the new fulfillment center in Adairsville, Georgia. As Sam mentioned, we're pleased to see this project go live and ramp production up over the course of Q3 to begin realizing efficiency gains on our selling costs related to fulfillment center activities as well as faster delivery times to a greater portion of our direct customer base. Our inventory balance ended the quarter down 4.5% from the same period last year and is in a healthy position with a mix of seasonal goods weighted to more fall-winter versus spring-summer, reflecting the strong sell-through on spring-summer and planned earlier receiving on fall-winter goods. Total clearance units on hand are down over 10% from last year as a result of actively managing markdowns during the season to optimize sales and inventory turnover. We are confirming our net sales guidance for the year of $645 million to $660 million, but have reduced the EPS and adjusted EBITDA estimates, reflecting our first half results and a second half outlook in which we see consumers remaining somewhat price sensitive. We now expect full-year adjusted EBITDA of $40 million to $42 million and a loss per share of $0.15 to $0.08. We expect full-year gross profit margins will be down 50 to 100 basis points and SG&A to be flat to up 50 basis points. Before I turn it back to Sam, I want to take a moment to address my decision to step down as Senior Vice President and Chief Financial Officer on September 15th. I have accepted an employment opportunity outside the Company, but I want to emphasize that it's been a privilege and an honor to work alongside Sam and the many talented individuals across this organization. I believe Duluth is well-positioned to execute against the strategic pillars of the Big Dam Blueprint, and I wish the team all the best and continued success in the future. I'll now pass it back to Sam.

Thanks, Dave. I can't thank Dave enough for his many contributions and leadership at Duluth over the past six years. Under Dave's leadership, Duluth has elevated and strengthened its finance organization anchored on a deep bench of talent with extensive experience across all finance functions. I have the utmost confidence this will be a seamless transition as we search for a permanent replacement for Dave. I'd like to take this opportunity to welcome Mike Murphy, our current Vice President and Chief Accounting Officer, who will serve as Interim Chief Financial Officer. Mike has been in his current position since 2019. Prior to joining the Company, Mike served for three years as Chief Accounting Officer at First Business Financial Services as well as eight years at KPMG. In closing, it's been an honor to partner with Dave and I wish him much success in his future endeavors. And with that, we'll open the call for questions.

Our first question will come from Janine Stichter with BTIG.

I was hoping you could elaborate a bit more on the cadence of what you saw throughout the quarter. It sounds like May was the weakest and I think you said you saw some improvement in June. So maybe just some thoughts on what changed there? How much of it's been maybe some stabilization in the environment versus some of the product initiatives that you spoke to versus just customers shopping around key events like Father's Day. And I'd love to hear about it both from a top line standpoint and then also from a margin standpoint, where I think you mentioned some product margin stabilization towards the end of the quarter. Thank you.

Yes, hi Janine. This is Dave. The quarter was challenging, with May being the toughest month for us, as both retail and direct sales were down. However, we began to see improvements in June, with Father's Day being a significant event that contributed to our growth into July. July turned out to be our strongest month, showing increased foot traffic in stores and a notable growth rate in our direct sales channel. Overall, when we look at the results, they were down just under 2%. We did experience margin pressure, which affected our performance as we continue to seek ways to increase traffic and transactions. Specifically, margins decreased by 200 basis points compared to last year. As I mentioned earlier, as we moved past July, we began to compare against last year’s figures, where gross margin pressures first began to affect the business. So far in August, our gross margins are improving compared to last year, although the top line remains slightly down. Overall, while we are noticing a continuing trend on the top line, the margins have stabilized and begun to improve positively.

Great. And then on the promotions or some of the pricing actions that you've been taking just to keep the product flowing through, maybe speak to the potential for product cost reductions or sourcing benefits as you seem like you might need to keep these more promotional prices in place for longer?

Yes. Janine, this is Sam. Yes. So, we're going to be and continue to be targeted with our offers. We try to balance consumer sensitivity with the integrity of our brand and pricing strategy. So, we're not going to have a fire sale, so to speak. There's a balance there. As I said in my prepared remarks, we've now onboarded several new members to our sourcing group with the intent of, over the long term, creating a structural change to our pricing model and ultimately gives us more flexibility when business is a bit more challenged. And so, we think the ramp-up will occur over the next couple of years, but certainly see a tremendous opportunity for us to drive increased gross product margins over the long term.

Our next question will come from Jonathan Komp with Baird.

I want to follow up on the guidance, holding the full year revenue, but lowering the margin again and participating in the promotional environment. Can you just maybe elaborate a little further thoughts on the strategy to participate in the price promotions you're seeing and why that's the right move to the brand here?

Yes, I'll start there, Jon. We are experiencing pricing pressure from consumers, but demand remains strong. We shipped more orders and sold more units. However, consumers are indicating that they need better value to make purchases. We're confident in our brand's momentum, particularly in the men's category, which showed a decline of about 3.5% this quarter, but this is an improvement compared to the last two quarters. As we move into our third quarter, we're seeing positive developments with new styles and innovations in the men's category. We have a significant number of new products launching in the second half of the year that we believe will support our revenue. However, pricing pressures are still affecting our margins and impacting our bottom line results.

And maybe just a follow-up, Sam. When I think of the Big Dam Blueprint, this year being a transition year still, you're not guiding to much profitability in terms of the EBIT dollars. So, can you maybe talk about what's temporarily impacting the business that might benefit future years? And are you pursuing the right strategies, growth at the current margin levels that you have today?

Yes. Thanks, Jonathan. Yes. I mean, as I talked at the beginning of my remarks, two really exciting pillars to the Big Dam Blueprint are our highly automated fulfillment center and our sourcing group. And so, when you think about that relative to the structural change of the business and mid- and long-term implication of that from sustainability in both sales growth and profitability, they are two really critical unlocks. So from a fulfillment perspective, it's not only about cost efficiencies and being much more efficient from a CPU perspective but also delivers on the consumers' expectations, not just from us, but in general, of faster deliveries, especially click to doorbell, and the online part of our business is the majority of how we sell products. And so, that has real application to not only scaling our current business, but as the business continues to grow and we consider other avenues for growth, be it wholesale or anything else, that fulfillment center as the key part of our network becomes an unlock from a delivery and fulfillment perspective. The sourcing piece, last year, we announced the hiring of our first Director of Material Innovations. And as a vertical operation, that's a critical component, not just in terms of design and product development, and at the core of who Duluth is, it's about bringing high-quality, well-priced products that are innovative and solve a problem. And so, investing in a more dynamic and experienced sourcing group will also bring a change to our pricing model and allow for longer-term greater profits and flow-through. So yes, I think that in the near term, some of these challenges in the P&L are really related to two things. One is the investment in our enablers, what we're calling our enablers for the enterprise. And then two, the choppy macro conditions and the sensitivity that consumers are still showing, but we've been through these times in the past. And ultimately, our brand loyalty and the affinity consumers have for Duluth ultimately lead back to higher full-price selling based on our innovative products and what we bring to market. So, I'm confident that that part will occur. And then, it's about us ensuring that we've got the right infrastructure in place to take advantage of that and scale the business in a more cost-efficient way that's sustainable.

Okay. That's helpful. Just one last question for me, Dave. When I look at the current inventory in relation to annual sales, it appears to be in the mid-20% range compared to full year sales. Before COVID, it was more like 18% to 19%. Is there something about the business today that requires more inventory compared to several years ago, or what other factors are you considering in relation to your comfort with the current inventory levels? Thank you.

Yes. In the long term, some of the sourcing and logistics initiatives will help us turn inventory faster, reduce lead times on new products, and allow us to maintain lower inventory levels relative to sales. Given the current environment, we are focused on ensuring our product assortment is complete and relevant to customers, particularly as we navigate some lingering supply chain challenges from the past two years. I believe that inventory turnover will improve this year as we are heading in the right direction. However, our priority is not to reduce inventory at the expense of customer demand. Instead, our primary goal is to keep the brand strong with new products. We are confident that inventory turnover will return to and even surpass levels we've seen in previous years due to these investments.

Our next question will come from Jim Duffy with Stifel.

Dave, thanks for all the help all these years. Dave, I'm going to let you off easy and I think focus most of my questions to Sam. Sam, can you please just speak to marketing strategies for the second half of the year? I'm specifically interested in media mix and messaging as it relates to branding versus specific products? And then, I'll have some follow-ups. Thanks.

Yes, absolutely. As you know, marketing is a dynamic and complex aspect of our business, and we are continually learning about the best ways to engage our customers. At a high level, we are focused on maintaining relationships with our loyal current customers while also improving new customer acquisition trends. Building upon our new customer base is crucial for us. We have seen success across various strategies, particularly through brand-building efforts, which we often achieve via streaming. For example, when we make significant advertising investments during specific times of the year and around certain programs on traditional television, we observe a notable increase in visits to our site. For our existing consumer base, we engage them mainly through social media and owned platforms by discussing our products and features, such as the Wayforger stories, which generates a substantial boost in engagement, including through video content on our YouTube channel and other platforms. We are working with a wide range of media, and streaming audio has become an essential focus for us. This approach is shaped by our goals of enhancing visibility and brand awareness. Moreover, as we attempt to improve customer education and understanding of our product innovations that drive transactions, we are applying a much more targeted and personalized approach.

Okay. The follow-up and related question, the gains you're seeing in women's and AKHG suggest that the core men's offering is in decline. I understand you have a lot of newness coming for the second half of the year. But can you speak to how you're allocating marketing spend to recruiting new consumers through women's or AKHG versus stabilizing that core men's offering or trying to drive growth in that?

Yes. So the men's business for the quarter was down 3.5%, but it was an improved trend from Q1. And I think what's exciting is what we're seeing is some of our core offer for men's that we're bringing newness to whether it's new colors and fits in our big Longtail T program or we're really starting to see increased demand for our Double Flex denim pant, and we're bringing additional styles, washes, and fits. So, some of that core program, as we're evolving it a bit, I talked in my prepared remarks about new items like the new Fire Hose pant, which is our most durable Flex Fire Hose fabric to date. Those are things that we're doing to renew and evolve many of our core programs, which we believe over the long term, we will bring that core business back to growth. Specific to women's, we're really excited, and we talked a year and a half ago about the women's opportunity, not only being a really great white space for us but it has become one of our internally focused strategic initiatives. And we continue to see season-over-season not only growth in top-line sales and profitability, but we're getting more and more feedback from her and really allowing us to extend our brand and our offer into adjacent categories. As an example, base layer, women's intimates, it's a really competitive market. And yet as we've introduced it and have gotten feedback and learned more about what she wants and potentially what's missing in the marketplace, our product development and design team has done a great job of bringing that to market and having it be a part of our assortment. And that business just continues to grow and expand. And so, I think that we've got a tremendous opportunity to really optimize a women's offer, which today, while it's much larger than it was a year and a half ago, it's 35% of our total. And so when you think about that in the scheme of things, we got a long way to go in terms of building that business. And then lastly, specific to your question around marketing, we really don't look at it as an either/or. We're going to invest in those businesses for him and for her. And we're going to do it in a way that's appropriate, not only from a brand position, but in terms of frequency and the types of stories that we tell. And so, we don't look at it as trading off dollars. We allocate certain monies at the beginning of the year, but our brand and creative teams really have the flexibility throughout the year to change and rebalance and refocus initiatives based on some of the things that we're seeing relative to consumer demand or consumer feedback.

That's helpful. Thanks. And Sam, just from a standpoint of allocation of capital, can you speak to any differences in cohort, your behavior that you're seeing between men and women? I'm curious whether she is a higher lifetime value or has a higher repeat purchase frequency than your male consumer.

Yes, it's interesting. At a high level, what's always been fascinating to me at Duluth and something that I think is it's hard to develop. And so when you have it, you have to make sure you keep your eyes on that. And that is we've talked about we have a 50-50 ratio of women and men buyers. And while our business isn't 50% women's and 50% men's, we have a lot of female buyers that are buying for him. And so, that's also what's led to our belief that there's an opportunity for us to better assort our stores and provide a more compelling offer specifically for her because she's shopping our brand. And so, what we're seeing is as we're expanding the women's business, we're seeing frequency, and with our most loyal customers, basket size increases. I wouldn't say it's necessarily more men than women. I would just say in totality, as we've expanded into women's and added additional categories, we're seeing, for sure, more frequency in shopping.

Our next question will come from Dylan Carden with William Blair.

I just want to make sure I understand kind of the balance of the guidance here. You're coming out of the second quarter with a nice, least inflection here, seemingly in sales of cleaner inventories. But the incremental downside to margins on the year is still kind of a promotional overhang. Do I have that right?

That's right, Dylan. That's really the update that we made was an overhang, given the pricing pressures that we think will continue.

So, the question here is whether you believe that your increased promotional activity has contributed to this change. Has there been a noticeable increase? You've been asked this in various ways during the call, but why not maintain prices instead of sacrificing margins?

We haven't observed significant increases; in fact, things have improved over the last six months compared to the previous year. We see stabilization but not a full recovery from the initial pressures we faced at the beginning of the year. We expected that the second half would show signs of recovery and allow for more full-price sales, but we are not counting on that and are preparing for ongoing pressure. For the latter half of the year, our guidance suggests a decrease in gross profit margins by 20 to 50 basis points to meet the full-year targets I mentioned. This represents a notable decline from the early part of this year, especially the first quarter. Our goal remains to keep inventory moving and to engage customers throughout this period.

Dylan, I'll add to that because I think that there is an important distinction here. The frequency of events and promotions were reducing. The issue becomes the customer is responding in terms of their purchases when we do run targeted promotions or a couple of our big events. They're just spending more and purchasing more during those periods, thus driving our full-price selling down. And so we're going to be balanced and targeted in the amount of offers that we put out there and the degree that we discount our products, but ultimately, when we do those things, just what we're seeing is customers are just responding to a greater degree and purchasing more during those periods than not.

Got it. As you analyze the negative operating margin, considering the potential for recovering full-price sales on gross margin while maintaining it in the low-50 range, how should we approach the efficiencies or the opportunity for SG&A leverage with new distribution? Is there a way to quantify that as we look ahead to next year?

At this stage, it’s probably not appropriate for me to discuss next year. We’ll provide that information on a fourth-quarter call coming up. However, you can look at the latter part of this year and into our fourth quarter, where we anticipate incremental sales growth. Even a small increase can lead to immediate leverage on SG&A. We expect this leverage in the fourth quarter and throughout the second half of the year. It doesn’t take much top line growth to start seeing an impact, which reflects our current business model.

Okay. The new distribution allows for a bigger wholesale business. Do I have that right? How are you thinking about the expansion of wholesale?

Yes, it enables a larger overall business. The plan is for that facility to handle about 60% of our online and retail store inventory replenishment by the end of Q3. This creates an opportunity for us to grow the business, whether through our existing retail and direct-to-consumer channels or by adding a wholesale business. Additionally, as we've discussed, the potential for an acquisition in the future also exists. That network not only has the capacity to support this growth but will do so in a highly cost-effective way.

This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.