Duluth Holdings Grows Q2 Profit Margins

Duluth Holdings(NASDAQ:DLTH) reported second quarter 2025 results on July 22, 2025, posting adjusted EBITDA of $12 million despite a 7% year-over-year decline in net sales to $131.7 million. Management reaffirmed full-year adjusted EBITDA guidance of $20 million to $25 million for fiscal 2025, highlighting progress in margin expansion, inventory reduction, and cost containment. The following insights detail the company’s strategic execution on promotional discipline, inventory rationalization, and tariff mitigation.

Margin discipline lifts Duluth Holdings’ profitability

Gross margin expanded by 240 basis points year-over-year to 54.7%, even as net sales contracted 7% YoY, reflecting a deliberate reduction in promotional activity. Retail store sales grew 5.3% YoY in the second quarter of 2025, driven by improved traffic, conversion, and higher average order value, while web traffic declined due to fewer promotions.

"As we reduced the depth of promotional activity, we anticipated that our top-line revenue would contract year over year. Yet despite a sales decline of 7% versus last year, we delivered gross margin improvement and SG&A leverage, which drove a $1.5 million increase in adjusted EBITDA, reaching $12 million or 9% of sales. We concluded the quarter with a strong liquidity of $73 million reduction in inventory compared to last year, meeting our expectations of sequential inventory improvement each quarter."
-- Stephanie L. Pugliese, President and Chief Executive Officer

This margin-focused strategy signals a successful pivot from volume-driven promotions to profitability, strengthening the company’s earnings quality and resilience.

Inventory and SKU cuts enhance operational agility

Quarter-end inventory fell 12% YoY to $148.1 million, and year-round inventory levels dropped 6% YoY, as management executed a multi-season SKU rationalization targeting a 20% SKU count reduction for spring/summer 2026. Store in-stock rates improved by 200 basis points YoY, supporting a more focused product assortment.

"As Stephanie mentioned, we have also reduced SKUs and inventory levels for the upcoming fall/winter season. At the end of the quarter, our inventory mix included 78% in current products and 22% in clearance goods compared to 11% in clearance last year, primarily due to slower than expected sell-throughs of our spring/summer merchandise. To address this, we activated the Big Dan clearance event, reducing our clearance inventory to 16% of the total as of the September. For spring/summer 2026, we've adopted a more sustainable approach, reducing our SKU count by over 20%, creating a more focused and relevant assortment to ultimately drive higher sell-throughs."
-- Heena K. Agrawal, Senior Vice President and Chief Financial Officer

These inventory and SKU reductions lower working capital needs and markdown risk, positioning Duluth Holdings for improved cash flow and product mix efficiency.

Duluth Holdings offsets tariffs with targeted pricing

Management expects $15 million in tariff expense at an average 12% rate for fiscal 2025, with most impact in the second half, and has responded with selective price increases in late July and early August, alongside vendor negotiations and inventory timing adjustments. These actions are reported to be meeting sales elasticity expectations and are designed to offset rising input costs.

"We have offset the majority of these additional costs by strategically increasing prices in select categories. These price increases implemented in late July and early August are currently meeting sales expectations in terms of elasticity. In addition, we have partnered with our vendors to share in the cost impact and continue to actively manage the timing of inventory receipts."
-- Heena K. Agrawal, Senior Vice President and Chief Financial Officer

This multi-pronged tariff mitigation approach demonstrates the company’s pricing power and operational flexibility, supporting margin protection in a challenging cost environment.

Looking Ahead

Management maintained adjusted EBITDA guidance of $20 million to $25 million for fiscal 2025, with year-end inventory expected to decrease by double digits YoY and capital expenditures budgeted at $17 million. Tariff impact is forecast at $15 million, largely offset by targeted pricing, vendor cost sharing, and inventory timing. No additional explicit top-line or margin guidance was provided for the second half, but a 20% SKU reduction and ongoing expense control remain central to Duluth Holdings’ strategic priorities for fiscal 2026.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.