Duluth (DLTH) Q1 2026 Earnings Transcript

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Date

Monday, June 8, 2026 at 9:30 a.m. ET

Call participants

• Chief Executive Officer — Stephanie Pugliese
• Chief Financial Officer — Heena Agrawal

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Risks

• Management acknowledged continued contraction in the total customer base in recent years, with CEO Pugliese stating, "our total customer base has experienced some contraction over the last several years," which may pressure revenue growth if not reversed.
• Women's product sales declined twelve percent, attributed to strategic SKU reductions; ongoing rationalization could continue to weigh on segment revenues.
• Guidance for a one percent to five percent sales decline reflects management’s expectation of ongoing near-term top-line pressure from reduced promotions.
• Impairment and restructuring charges totaling $4.1 million impacted quarterly results, resulting from the closure of the Salt Lake City fulfillment center.

Takeaways

• Net sales -- $98.6 million, a four percent decrease, offset by a stronger gross margin and improved topline trend compared to prior quarters.
• Gross margin -- Expanded by 540 basis points to 57.4 percent of net sales, driven by reduced promotions, direct-to-factory sourcing, and vendor negotiations.
• SG&A expense -- Decreased by $3.4 million or five point two percent to $61.8 million; seventy basis point improvement as a percentage of net sales from the prior year.
• Adjusted EBITDA -- Positive $2.6 million, improving by $6.4 million versus negative $3.8 million in the prior year period.
• EPS -- Reported negative $0.29, adjusted negative $0.20 compared to last year's negative $0.44; adjustments reflect $2.7 million asset impairment and $1.4 million restructuring from facility closure.
• Net income -- Improved by $5.2 million to negative $10 million, showing ongoing turnaround efforts in profitability.
• Inventory -- Ended the quarter at $132.4 million, a $43.7 million or twenty-four point eight percent reduction year over year; reflected in a forty-two percent decline in spring/summer seasonal goods and healthier in-stock mix.
• Store network sales -- Retail store sales rose three point three percent to $41.5 million, benefiting from higher average order value and two new stores opened last fall.
• Direct-to-consumer net sales -- Declined six point four percent to $57.1 million as web traffic and conversion slowed in February and March following pullback on clearance events.
• Men's product sales -- Down one percent, with growth within underwear and first layer collections offset by the impact of reduced promotions.
• Women's product sales -- Decreased twelve percent due to strategic SKU reduction, though Heirloom Gardening collection delivered growth.
• AKHG brand sales -- Fell seventeen percent as gains in specific men's apparel were offset by exits from swimwear and low-margin outerwear.
• SKU count -- Reduced by over twenty percent, allowing greater merchandising focus on high-margin core products.
• Customer spend -- Sales per customer rose ten percent, with spending growth consistent across demographics.
• Q1 net promoter score -- Increased by sixteen percent from the prior year, indicating improved customer satisfaction and execution.
• Free cash flow -- Improved by $42.6 million versus the same quarter last year; result of inventory and capital discipline.
• Liquidity -- Net liquidity reached approximately $100 million, up from $45 million in the prior year period.
• Capital expenditures -- $3 million; primarily invested in Manhattan Omni website and store platform rollout.
• Fiscal 2026 guidance -- Net sales projected at $540 million to $560 million, a one percent to five percent decline, reflecting fewer promotions and annualized price increases.
• Adjusted EBITDA guidance -- Raised to $28 million–$32 million, an increase from last quarter’s outlook of $26 million–$30 million, reflecting expected gross margin and cost efficiencies.
• Wholesale order decisions -- Not repeating prior year wholesale order, negatively impacting first half sales by 230 basis points.
• First half sales outlook -- Anticipated decrease of six percent to ten percent, with stabilization projected at minus two percent to plus two percent for the back half of the year as price and promotion resets are annualized.
• Tariffs -- No refund benefits from $12 million IEEPA tariffs paid last year included in financials or guidance; applications for refunds have been submitted.
• Fulfillment network -- Logistics network reduced from four to two fulfillment centers over eighteen months, driving efficiencies in SG&A and shipping costs.
• Clearance inventory -- Decreased seventeen point four percent in dollars and twenty-two point three percent in units, contributing to gross margin gains.
• Marketing strategy -- Investments shifted toward brand awareness and upper-funnel campaigns, reducing lower-funnel promotional spend.

Summary

Duluth Holdings (NASDAQ:DLTH) delivered a quarter marked by significant gross margin expansion, improved bottom-line metrics, and heightened operational efficiency through targeted promotional cuts and inventory management initiatives. The company increased its net liquidity and free cash flow while raising adjusted EBITDA guidance for the year, despite year-over-year declines in both total and direct-to-consumer sales. Management reaffirmed full-year sales guidance, projecting continued topline pressure in the first half with expectations for revenue stabilization as price and discount resets fully annualize.

• CFO Agrawal stated, "Our results this quarter demonstrate a healthier margin profile, structural profitability and a more robust balance sheet," highlighting confidence in the completed turnaround phase.
• The fulfillment center consolidation and reduced advertising costs drove structural SG&A improvements, while capital investment priorities focused on digital integration and store platform upgrades.
• CEO Pugliese outlined a forward strategy prioritizing customer file re-engagement and high-margin product focus, shifting marketing to long-term brand-building versus near-term promotions.
• Management provided detail that re-engaging existing high-value customers is materially more cost-effective, costing "about one third of what it costs for new customer acquisition," supporting the investment focus going forward.

Industry glossary

• SKU rationalization: Systematic reduction of the company's stock-keeping units to focus on high-performing, core products and improve inventory turnover.
• IEEPA tariffs: Import tariffs imposed under the International Emergency Economic Powers Act, which impacted prior-year product costs for Duluth Holdings.
• Upper funnel marketing: Brand-building marketing activities aimed at increasing consumer awareness and consideration rather than immediate conversion or promotion-triggered sales.

Full Conference Call Transcript

Stephanie Pugliese: Good morning, everyone, and thank you for joining us to discuss our first quarter fiscal 2026 results. I am pleased with our strong first quarter performance. Over the past several quarters, we have committed ourselves to a rigorous strategic pivot, one centered squarely on serving our customers and restoring profitability through focusing on what makes our products special, resetting promotional cadence, driving operational excellence and expense control. The deliberate actions we took throughout the past year and into the first quarter directly led to an enhanced gross margin, reduced inventory levels, improved overall profitability and stronger net liquidity. We are a leaner, more efficient business that now prioritizes brand equity and long-term value over short-term volume with low profitability.

Coming off of a successful fourth quarter, we continued to tighten both the frequency and depth of our promotional cadence in Q1. We reduced our total global promotional days by over 50%. We also reduced our depth of discount by 700 basis points, allowing full price sales to grow by almost 14% and our average unit retail by 17% year-over-year. All of these actions resulted in a gross margin expansion of over 500 basis points to 57.4% of net sales. While our intentional pullback on promotions led to improved profitability, in the near term, it has created a decline in top-line revenues. This impact is more acutely felt in our direct channel, which declined by 6%, excluding wholesale.

Retail, on the other hand, recorded another positive quarter with store net sales increasing 3% year-over-year, driven by higher average order values in our comp stores and the addition of the 2 new stores that opened in fall of last year. Overall, this quarter, sales actualized at $98.6 million, a decline of 4% to last year and an improvement in the trend line from prior quarters. Turning toward marketing. Our initiatives in Q1 served as an accelerator to brand awareness and consideration. The introduction of our newest campaign for folks who work their b**** o**, along with the launch of our Max Gluteus creative campaign is resonating with our core audience.

This creative asset was highly successful, surpassing our previous underwear trade-up events, and it catalyzed positive year-over-year sales growth for our men's Buck Naked collection. Given this success, we have an extended plan for the folks who work their b**** o** campaign. We will expand this messaging platform across other legendary product lines such as Fire Hose and utilize it as a sign-off across podcasts, video and social channels. What also made Q1 uniquely effective was our ability to put 2 strong category messages out in the market simultaneously. While men's leaned into Max Gluteus, our women's digital channel deployed the Dibs on the Bibs campaign. This approach drove consumer engagement and elevated brand consideration.

Another example of this was our vibrant poppy print launch across the funnel, which created an immediate halo for our entire gardening category. In addition to brand awareness and consideration, the full funnel marketing approach impacted traffic in the quarter. February was expectedly tough as we went up against last year's Big Dam Clearance event. However, traffic trends improved into March and April, an encouraging signal given that we were simultaneously annualizing strategic price increases and lower promotional days. We know that our most important assets are our customers. As previously shared, our total customer base has experienced some contraction over the last several years.

Improving our customer base through marketing spend allocation and other initiatives is showing proof points that reflect a more resilient, higher-yielding demographic profile. The quality of our revenue has strengthened. Sales per customer increased by 10% year-over-year, and this spending growth was uniform across age, income and gender segments. Most importantly, our Q1 Net Promoter Score increased 16% over last year, reflecting the hard work the team has done to improve operations and keep our promises to our customers, delivering the experience and products that they have come to expect from Duluth. And great product is at the heart of everything we do.

Our core collections represented approximately 2/3 of our overall sales and grew 7% compared to the prior year. Our customers are consistently voting yes for high-quality solution-based apparel that justifies a premium price point. Standing out this quarter was our women's garden collection centered on our Heirloom Gardening bibs. This year, we also introduced a new version of our short overalls and our garden dress, both of which have contributed to sales and a healthy gross margin. On the men's side, Buck Naked was a strong performer and our No Quit Utility Shirt was a new addition to our workwear collection with both long and short sleeve options. Look for them in our upcoming Father's Day ads.

We have also continued to operate with discipline throughout the business, and our progress on the bottom line is a result of those efforts. In Q1, we successfully captured variable expense leverage. Efficiencies across our fulfillment center network, paired with a reduction in corporate personnel expenses allowed us to lower SG&A by more than $3 million or 5%. Our turnaround is taking hold as planned. We are focused on core product and lead with our solution-based apparel in all of our messaging and customer outreach. Our SKUs have been reduced by over 20%, allowing the focus product to shine.

Our brand and product messaging is resonating with existing and new customers, and we continue to invest more in upper funnel marketing and reduce our reliance on promotional last-click spend. Our stores are well stocked and serving our customers well. Margin is expanding as we reduce promotions. Costs are controlled and financially, we are in a solid position. We have successfully rightsized our balance sheet, ending the first quarter with total inventory down 25% or $44 million compared to the prior year. As we look forward to the remainder of fiscal 2026, we are maintaining a disciplined strategic road map. We are pleased with how far we've come, and we know that we still have important work to do.

This year, we will transition from fixing the balance sheet to strengthening the team, processes and investments that will drive sustainable growth in the long term, and our customers are at the center of our efforts. Our primary focus is to strengthen our customer file and solidify our position as the official outfitter of doers. Through continued investment to drive traffic and balance our marketing spend, we are investing in future customer file growth and spending less in lower funnel promotional spend. We are continuing our rigorous SKU rationalization and improving sell-throughs by ordering the right amount of inventory.

By intentionally narrowing our assortment and buying smarter, we ensure that our capital and floor space are hyperfocused on the core high-margin hero product lines that resonate most deeply with our self-reliant audience. And we clarify the message for repeat and new customers around our brand attributes and solution-based product. In closing, Q1 was a validation of our strategic discipline. We protected our margins, streamlined our operations, dramatically improved our inventory health and strengthened our net liquidity to approximately $100 million. We are a leaner, more agile business, and I have the utmost confidence that our talented team will continue to drive sustainable long-term value for our shareholders.

We look forward to sharing more information about our future plans at our investor presentation later today. With that, I'll pass it over to our CFO, Heena Agrawal, to discuss our Q1 financials and 2026 outlook in more detail.

Heena Agrawal: Thank you, Stephanie, and good morning, everyone. I am pleased to share our first quarter fiscal 2026 results, which reflect how our team is building on the strategic wins of the prior year, fixing our promotional strategy, restoring price integrity, achieving operational excellence and disciplined inventory and cash management. As a result of focus and consistency, combined with our agility in responding to macroeconomic conditions, we have achieved 4 consecutive quarters of improved year-over-year net income margin and free cash flow. Our results this quarter demonstrate a healthier margin profile, structural profitability and a more robust balance sheet.

Let me share our financial results, deeper insights into our operational metrics and provide our updated outlook for the full fiscal year starting with our results for the first quarter of 2026 with comparisons to prior year. As we continued our promotional reset and annualized price increases from 2025, we reported net sales of $98.6 million, a decline of 4%. With improving quality of sales, gross margin expanded by 540 basis points to 57.4% of net sales. Our net income improved by $5.2 million to negative $10 million. Our reported EPS was negative $0.29 and our adjusted EPS was negative $0.20 compared to negative $0.44 last year.

Adjustments to EPS included $2.7 million in asset impairments and $1.4 million in restructuring expenses related to the closure of Salt Lake City fulfillment center at the end of 2025. Adjusted EBITDA was positive $2.6 million, an improvement of $6.4 million compared to negative $3.8 million in Q1 last year. Our shift back to profitability was fueled by a 6.1% rise in gross profit dollars from margin expansion, coupled with lower overhead and enhanced variable cost productivity. Looking closer at our top line metrics, as we continued our promotional reset and annualized our pricing strategy, our total net sales decreased by $4.1 million or 4%. Excluding the impact of wholesale, net sales declined 2.6%.

Direct-to-consumer net sales, excluding wholesale, decreased by 6.4% to $57.1 million. This decline was primarily driven by lower web traffic and conversion in February and early March as we intentionally moved away from low-margin clearance events. This was partially offset by a 16% lift in total average order value as full-price item penetration grew. Our retail store network delivered another quarter of positive comps with net sales increasing 3.3% to $41.5 million. Growth was driven by higher average order values across comparable stores, combined with the annualization of our 2 new stores opened in the back half of 2025. Men's product sales decreased 1%, driven by the impact of the promotional reset.

This was partially offset by double-digit growth in first layer and underwear collections following the Max Gluteus campaign. While total women's product sales declined 12% due to strategic SKU rationalization, Heirloom Gardening collection sales grew. AKHG brand sales declined 17% versus last year as double-digit growth in men's woven tops and bottoms was offset by exiting the swim category and rationalizing low-margin outerwear programs. With fewer promotions and increased average prices, profitability improved across product categories and sales channels. Notably, profitability of the store portfolio continued to improve over prior year. We are pleased with our gross margin expansion for the first quarter of 540 basis points to 57.4% of net sales versus 52% in the prior year first quarter.

This structural improvement of our margin profile was driven by 3 strategic pillars. First, our continued promotional reset by prioritizing price and brand integrity over margin-dilutive volume, our pullback on broad-based promotions and the elimination of deep markdowns drove rate expansion. Second, we captured benefits from our direct-to-factory sourcing initiative with a structural improvement in product cost. And finally, these levers, combined with strategic pricing actions and vendor negotiations, fully offset the impact of tariff costs. Selling, general and administrative expenses decreased by $3.4 million or 5.2% to $61.8 million. As a percentage of net sales, SG&A leveraged by 70 basis points to 62.7% compared to 63.4% in the prior year first quarter.

Advertising costs represented 9.6% of sales, a 20 basis points improvement due to a more effective balance between upper and lower funnel spend. Shipping and variable costs leveraged by 130 basis points as we realized the benefits of further consolidating the fulfillment center network and maximizing the Adairsville location. In the last 18 months, we have now consolidated the logistics network from 4 fulfillment centers to 2. Overhead expenses were down by 2% and deleveraged by 80 basis points, largely due to the decrease in sales. This cost improvement highlights year-over-year efficiencies across our fulfillment center network, combined with disciplined management of personnel expenses.

Inventory at the end of the first quarter was $132.4 million, a reduction of $43.7 million or 24.8% compared to prior year. This marks the fourth consecutive quarter of year-over-year improvement driven by our enterprise planning process and strategic SKU rationalization. Through the integrated planning process, we successfully synchronized inventory levels with our sales projections and optimized the scheduling of receipts. In addition, our inventory allocation prioritized availability at our automated Adairsville fulfillment center and stores, resulting in more than 900 basis points of improvement in store in-stock levels. Our inventory mix at quarter end was healthy and consisted of 90.2% in current products and 9.8% in clearance goods versus 9.5% in the prior year quarter.

We achieved a 42% reduction in spring/summer seasonal inventory by rightsizing buys and successfully clearing surplus inventory. Overall, clearance inventory dollars were down 17.4% and units decreased 22.3% versus last year. Our capital expenditures for the quarter were $3 million compared to $4.9 million in the prior year, with funds allocated primarily to investments in the final phases of Manhattan Omni for the website and stores. We ended the first quarter with a stronger balance sheet and liquidity position versus at the end of the first quarter last year. Cash and cash equivalents stood at $6.1 million with $6 million outstanding on our asset-based lending facility.

This resulted in a net liquidity position of approximately $100 million versus net liquidity of $45 million last year. Combined with our improving profitability, continued working capital discipline and capital expenditure guardrails, our free cash flow improved by $42.6 million compared to the same period last year. Fiscal 2026 Guidance. Based on our results in the first quarter and our visibility into the rest of the year, we are updating our full year outlook. On the top line, we are affirming our previously issued full year fiscal 2026 net sales guidance range of $540 million to $560 million.

This is a minus 1% to minus 5% decline versus prior year, driven by the continued promotional reset to restore price integrity and annualization of price increases from 2025. Regarding our first half outlook, we are reaffirming our projection of a sales decrease between minus 6% and minus 10%. This forecast accounts for the decision not to repeat a wholesale order from the previous year, which represented a 230 basis point impact. Following this, we anticipate sales will stabilize during the latter half of 2026, projected within a range of minus 2% to plus 2% as we anniversary our pricing adjustments and promotional reset.

Reflecting our structural gross margin gains and SG&A savings, we are raising our full year adjusted EBITDA guidance range to $28 million to $32 million, up from the previous outlook of $26 million to $30 million provided last quarter. We are affirming our capital expenditure guidance at approximately $12 million or 2.2% of sales. Let me confirm our tariff assumptions for this year and treatment of tariffs paid in the prior year. We are maintaining our tariff rate assumptions as per prior guidance. For the IEEPA tariffs of approximately $12 million paid last year, we have applied for refunds but have not included any potential benefit in the results this quarter or in the full year guidance.

To conclude, our financial turnaround is substantially complete. By reinstating price integrity through our promotional reset and maintaining discipline across inventory management, costs and capital allocation, we have made structural improvements to profitability and secured a strong balance sheet. Our financial model has successfully transitioned toward improved working capital efficiency, reduced fulfillment costs and higher structural gross margins. With a clear understanding of our financial levers and a disciplined approach to capital, we are positioned to drive profitable long-term growth for the company. With that, we look forward to our investor event at 11 a.m. Eastern today, which will also be available via webcast.

Operator: [Operator Instructions] Our first question for today will come from Dylan Carden with William Blair.

Dylan Carden: I'm just curious, Heena, in the outlook for the year, maybe you can give some color on what's embedded in gross margin. And I guess kind of the root of that question is it seems like you're accounting for the degradation in top line from pulling back on promo, but maybe not the benefit? Start there, I guess.

Heena Agrawal: Yes. Thanks, Dylan, for your question. So when we gave guidance a quarter ago, we said we would improve gross margin by about 100 basis points for the full year from 53.4% last year to 54% for this year. And what we've seen in the first quarter is an acceleration, and we are tracking ahead of that gross margin delivery, which is why -- that's what is guiding our base for adjusted EBITDA from $26 million to $30 million to $28 million to $32 million. So we are accounting for another 30 basis points for the full year coming through from the higher benefits, like you said, that we're seeing from that promotional reset.

Dylan Carden: And then just the stabilization in the back half. I guess I'm curious, you mentioned there -- I think maybe it's the first time, just that the customer base is impacted. Any insight into how much -- and as you lose these sort of maybe more promo-driven customers who you're acquiring and sort of the confidence you have -- I know you're about to do your analyst event, but any sort of sneak peek at sort of how you engage a new customer, re-engage that existing customer without promotions?

Stephanie Pugliese: Yes. This is Stephanie. So when we think about the customer file and how we are going forward in re-engaging, a couple of things to note. Number one is that the customer file reengagement is not terribly dissimilar from the promotional reset that we're doing. In that, it is a reset back into higher quality interactions and transactions. We've seen that our average order value, our sales per customer has gone up. And those results are the result of the efforts that we've made around the promotional reset primarily. As we look forward through the balance of this year, and we've already started these efforts, we've done a couple of things.

Number one is we've reset the balance of how we spend marketing dollars and moved further away from lower funnel last click promotional-based payments type marketing spend and more into upper funnel brand awareness, brand consideration spend to build higher value long-term relationships. The second piece of this is that as we look at the customer file, we know that we have some high-value customers that have been with us for a long time that we have the opportunity to re-engage with, reactivate and doing that costs us about 1/3 of what it costs for new customer acquisition.

So not only is it a re-engagement with customers that we know love the brand, but it's also a really effective and efficient way to use our marketing dollars to reinvigorate and bring health back to the customer file. That said, we know this is a place where we have more work to do. The proof points are starting. We're building into them, but this is a place that we're focusing on heavily for this year and beyond.

Heena Agrawal: And Dylan, what I'll add to that is in the second half is when we lap all our promotional reset as well as the price increases we took last year, which gives us a little bit more confidence on being able to stabilize the revenue given we won't have these one-time events showing up in the second half.

Dylan Carden: Got it. And then just last one, the impairment charge, can you walk through what that was for, $2.7 million?

Heena Agrawal: Yes. So we closed our Salt Lake facility in February this year, one of the fulfillment centers. So the impairment charge is related to the lease or the building cost of that specific fulfillment center that we are no longer using.

Operator: And this will conclude our question-and-answer session as well as our conference call for today. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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