Duluth Holdings Inc. Class B Common Stock 2027 Q2 Earnings Call

Please go ahead. 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 News Releases. I am here today with Stephanie Pugliese, President and Chief Executive Officer, and Heena Agrawal, Senior Vice President and Chief Financial Officer. On today's call, management will provide prepared remarks and then open the call for 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. With that, I will turn the call over to Stephanie.

Good morning, everyone, and thank you for joining us to discuss our second quarter fiscal 2026 results. I am incredibly proud of our team for delivering another quarter of improved profitability and free cash flow. This accomplishment is a direct reflection of the team's commitment to operational rigor and financial discipline. By staying focused on our core priorities, we have not only stabilized our margins, but also generated the financial flexibility required to accelerate our strategic initiatives. Our goals for Q2 were clear. We aim to drive improved profitability, maintain strength in our operational execution, deploy a marketing strategy focused on driving brand awareness and consideration, reduce our promotional reliance, and achieve a clean, healthy inventory position. I am pleased to report that we executed against each of these pillars effectively. Our operational excellence this quarter was most visible in our margin improvement and inventory management.

We executed a deliberate cleanup of clearance inventory, which is now down 43% compared to last year. This wasn't just about liquidating old stock. It was a reflection of the fundamental shift in our merchandising philosophy over the past year and a half. We have moved away from a broad assortment, discount-heavy approach toward a hero core product strategy. By reducing the total number of SKUs and focusing our buys on proven winners, we have created a leaner, more agile inventory position. This reduction in clearance reliance has a double benefit. It cleans up our balance sheet and protects our brand equity by reducing the need for the deep sitewide discounts that characterized previous years. The reduction in deep discounting this quarter allowed us to deliver nearly 500 basis points of operational gross margin improvement year over year. Turning to our marketing efforts.

During the quarter, we saw strong response across our paid media channels such as connected TV, Meta, and search. In addition, our premium audio integrations, including host-read spots with Conan O'Brien, drove significant engagement and last-click revenue. We also continued our Max Gluteus campaign, tailored specifically for the folks who work their butts off, while leveraging key sports partnerships, including investments in the NHL playoffs. This coming month, to showcase our expansive Fire Hose collection, our marketing campaign will be featured across linear and CTV broadcasts during upcoming college football matchups. No fabric embodies the Duluth DNA quite like Fire Hose, and we are proud to reinforce our legacy, engage our customers, and spotlight the unmatched durability of these products. We continue to apply input from marketing results to go forward actions.

Key learnings from Mother's Day and Prime Week enforced the critical need for full funnel media coordination and continuous brand messaging, and we are applying these insights to the second half of the year. Maintaining top-of-funnel brand presence ensures our hero products remain visible across all channels and create sales momentum leading into key promotional moments. We are ramping up our upper funnel brand investments in the third quarter to prime demand ahead of peak and capture early transitional shoppers. This will be coupled with amplified product storytelling across key events like Fall Grind Days and our Big Dam Birthday. Further, we are investing in AI capabilities across organic and paid media to maximize our discoverability and optimize our digital footprint. All of these efforts center on growing our brand presence and ultimately increasing the customer fan base.

As previously shared, our total customer base has contracted as we've reset promotions. We are investing in the underlying health of our customer file, and we have some proof points that we are building on. In Q2, customer average order value and sales per customer continued to improve over prior year. Through the first half of the year, retention rates increased and our net promoter score is up 11%. Our reactivation campaigns are working, and we re-engaged 9% more lapsed buyers in the quarter versus last year. In addition to our efforts in our own stores and e-commerce to build awareness and engagement, our growth initiatives, like the Amazon wholesale launch, are showing positive early results, giving us confidence in growing awareness and acquisition in the long term and in new ways. Central to our continued success is our Build to Last strategic roadmap.

We have completed the Seal the Foundation phase, which focused on stabilizing the business through rigorous margin protection and cost control. We addressed structural inefficiencies, right-sized our overhead, and established a leaner operating model that can better weather macroeconomic volatility. As we move to Frame the Structure, we have more work to do, and we are shifting our focus to scalable growth. This next phase involves continuing the discipline we have put in place while investing in our customers, our core products, and our brand reach. We are beginning to build the systems and channels, leaning into our store performance, improving our own e-commerce experience, and piloting a wholesale presence that will create long-term profitable growth. We are no longer just fixing the basics.

We are constructing the framework for Duluth's future as a multi-channel, durable, and functional work apparel leader, and it all starts with the products that our customers love. Our focus on core first is anchored in our product innovation and technical design philosophy. Core products like DuluthFlex Fire Hose, Heirloom Gardening Bib Overalls, and Buck Naked underwear continued to outperform the overall pace of the business last quarter. New products, like our Hell Bent work pants and No Quit utility shirts, are not just additions to the assortment. They represent the importance of our functional design. Our philosophy is built on solution-based workwear, identifying a specific pain point for the person who works their butt off, and solving it with superior fabric and construction. The Hell Bent line, for instance, utilizes advanced abrasion-resistant materials and articulated patterning that allows for maximum mobility without sacrificing durability.

These innovative, durable products justify a premium price point and reinforce our value equation, that Duluth gear is an investment that lasts longer and performs better than the competition. To support this product-led growth, we are continuing to evolve our marketing into a more sophisticated full funnel engine. We are balancing top of funnel brand awareness through high impact professional and college sports partnerships and premium audio integrations with lower funnel conversion efforts. We are investing in AI-driven search capabilities so that when customers ask for items like the best work pants, Duluth will ultimately be the first answer they see. Furthermore, our Duluth Diehards pilot is providing us with a wealth of actionable data. We are learning how our most valuable customers interact with us across channels, allowing us to personalize content and offers to drive higher lifetime value and retention.

Now, looking toward the back half of the year, we are excited about the opportunities in front of us to improve our sales trends and strengthen our customer file. Early sell-throughs from our fall lineup are strong. Equally important, demand for our core products remains robust at higher margins. While we expect last year's heavy volume of low-margin clearance sales will temporarily weigh on Q3 top-line results, we are reiterating sales guidance for the full year. Our priority for Duluth now is to increase our voice in the marketplace through full-funnel marketing, reaching new brand fans via new channels, and by delighting our customers at every interaction.

For this reason, through the remainder of this year, we will invest some of the additional cash from tariffs on the customer experience, improving our visibility with AI search, strengthening our store team's ability to serve customers well, and telling our story of functional, durable workwear throughout the full funnel. These investments are not just about the remainder of 2026. They are about positioning Duluth for sustained, profitable growth for years to come. We are focused on delivering the back half of the year while setting our eyes on the Raise the Roof phase of our strategy in 12 to 18 months. We will continue to explore and invest in setting the stage for additional customer reach, specifically understanding our store potential and wholesale opportunities, and we will report on our progress in quarters to come.