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Duluth Holdings Inc. (DLTH 1.74%)
Q4Â 2019 Earnings Call
Mar 19, 2020, 9:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Duluth Holdings Incorporated Fourth Quarter and Fiscal Year 2019 Conference Call.
[Operator Instructions]
I would now like to turn the conference over to Donni Case, Investor Relations for Duluth Holdings. Please go ahead.
Donni Case -- Financial Profiles, Investor Relations
Thank you, Gary, and welcome to today's call to discuss Duluth Trading's fourth quarter and fiscal year-end 2019 financial results. Our earnings release which we issued this morning is available on our Investor Relations website at ir.duluthtrading.com under Press Releases. I am here today with Steve Schlecht, Chief Executive Officer, and Dave Loretta, Chief Financial Officer.
On today's call management will provide prepared remarks and then we will turn 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 the 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'd like to turn the call over to Steve Schlecht, Chief Executive Officer of Duluth Trading. Steve?
Stephen L. Schlecht -- Executive Chairman and Chief Executive Officer
Good morning and thank you for joining us today. We are now in unprecedented times as a result of the coronavirus pandemic. Like companies across all sectors here at Duluth, we are taking precautionary measures to ensure the health and well-being of our employees, customers and suppliers. This situation is very fluid and changing rapidly and no one can predict its ultimate outcome. Our plans for fiscal 2020 made just a few weeks ago are already out of date and under review. For example, we are actively evaluating temporary store closures and will fully comply with all federal, state and local regulations. To date, we have closed eight stores, primarily in densely populated areas in the Northeast.
With our omnichannel model, we are fortunate to have a strong online business, which accounts for over 50% of our sales. That said, we know that many customers are experiencing financial uncertainty that could have a significant impact on direct channel sales. This is definitely a time that challenges all retailers, but in Duluth 25-year history, we have been through difficult times before and have emerged stronger. I think our resilience rests on our foundational three brand pillars, solution based products manufactured with high quality craftsmanship, humorous and distinctive marketing and an outstanding customer experience. We have created a lifestyle brand that speaks directly to the modern self-relying American will always prevail regardless of challenging times. Our response to all this uncertainty is to take a very conservative approach to our business across all categories of spending. We're reviewing the store opening plans, and have already made adjustments that Dave will discuss in more detail.
We are closely monitoring our supply chain to keep our inventory in line and we have adequate financial resources to weather the storm. While we are moving forward with a great deal of caution, we do not want to impair all the initiatives we have in place that are important for our long-term growth while moderating our store build-out pace, there is no doubt that our retail stores are very important in delivering topline growth, attracting new customers to the brand and expanding overall market penetration. While overall new customer growth was up 20% in 2019, approximately 40% came from our retail stores. Even with these benefits, we know that store productivity needs to show improvement. Frankly it's been a steep learning curve that initially we did not anticipate. So we're getting smarter and we now have more technology enabled tools to work with.
When the retail environment stabilizes, my number one priority for fiscal 2020 is to unlock the greater potential of our current fleet of 62 stores. Store initiatives include the steady flow of newness and product and visual feel, supported by targeted and localized promotions to drive traffic and regional assortment of product that's locally appropriate. Before turning the call today to Dave to provide details on our fourth quarter results and operations, I'd like to share some color on fourth quarter performance. Like other retailers, we faced headwinds that limited our fourth quarter potential. The most impactful was the shortest holiday selling season since 2002. There were 26 shopping days versus 32 in the previous year which was the longest selling season possible. It also triggered some of the earliest and heaviest discounting that we've seen in quite some time. This was further complicated by some of the warmest weather on record in several parts of the country. That said, we entered the fourth quarter well prepared. Thanks to the tremendous efforts of our entire team, net sales grew 7% on a comparable 13-week basis and reported operating margins improved 80 basis points year-over-year. Regardless of current and unsettling environment, I am confident that the investments we've made over the last few years will indeed create long-term value. However, I also know we must prove ourselves to the market. Everyone at Duluth understands this and is on board to optimize our investments and drive profitability.
With that I will turn the call over to Dave.
Dave Loretta -- Senior Vice President and Chief Financial Officer
Thanks, Steve and good morning everyone. For the fourth quarter, we reported net sales of $259.6 million, up 4% compared to $250.5 million last year. On a comparable 13-week basis, sales grew 7% overall and was in line with our updated expectations. Fourth quarter EPS was $0.75 compared to last year of $0.64 that included a benefit of roughly $0.02 from one-time tax credits. Pre-tax earnings for the quarter grew 14% and marks the second quarter in a row of operating margin expansion. This was consistent with what we shared on our call this time last year, which was our goal to see operating margin expansion in the back half of the year as we cycled past a heavy period of investments in new systems, upgraded logistics and new stores. Our adjusted EBITDA was $39.9 million, up 13.7% compared to $35.1 million last year.
Despite some of the sales headwinds in the quarter as Steve mentioned, we successfully executed plans to improve customer service through all our channels. We flowed inventory for better in-stock positions and we manage expenses that improve the bottom line results. While the customer response to our holiday offering was robust, we do see further opportunities to refine our execution and drive additional efficiencies. We will apply these learnings to improve our results for the next holiday season. Within our sales channels, direct product sales were up 1.5% on a 13-week basis compared to last year and shipping revenues were up 42% or $4.7 million compared to $3.3 million last year. Store sales grew 15.5% driven by new stores opened in 2018 and 2019. We added three new stores in the fourth quarter and roughly 29,000 gross square feet to our retail footprint. We ended the quarter with a total of 61 stores compared to 46 stores in the prior year. During the holiday period, sales were healthy day by day from Black Friday through Christmas. The period after Christmas beat our expectations four out of the last five weeks.
Our sales in the quarter overall were not enough to make up for six lost shopping days between Thanksgiving and Christmas. Momentum in our omnichannel initiatives continued, shipping 11% of online orders from our stores and customers increased their use of BOPIS in all locations. Additionally, we are pleased to see that direct sales growth in the markets with a store continued to outpace non-store markets. In our most established markets, we saw direct growth in the low teens. Gross margin rate for the fourth quarter increased 40 basis points compared with last year for gross profit dollars of $137 million due to higher shipping revenues and stabilized merchandising margins. Relative to the first three quarters of the year, where merchandise margins were down over 200 basis points, our balanced approach to competing at a very promotional season helped us maintain that improved margins in many key product categories. While we doubled in the number of days and clearance events, we avoided the flash sale activity and overall discounting was not as steep as last year. Our exposure to the China tariffs impacted our fourth quarter gross profit by roughly $1 million. We've shifted the remaining production to other countries and we expect minimal margin impact in 2020 due to the tariffs. With respect to any supply chain disruptions due to the coronavirus, let me first say that our hearts go out to those in the US and overseas who have been affected by this pandemic. We continue to monitor our supply chain and have seen minimal impacts on our spring and summer deliveries. The full extent of impacts to our fall and winter seasons are being evaluated now, but at this time, we do not expect that production delays will be immaterial.
Back to the fourth quarter results. Our women's business continues to outpace men's with an overall growth rate of 12% for the quarter and low double-digit growth rate online. The growth in the women's business was driven by fall and winter gear and the expansion of the women's plus line, which now represents 12% of total women's apparel sales. The men's business grew 5% over last year, driven by the successful launch of new products such as Dang Soft underwear and growth in Alaskan Hardgear.
Turning to expenses. We continued to carefully manage our cost structure in the fourth quarter, including an ongoing effort to focus on the most productive advertising spend. Additionally, the steps we've taken to leverage fixed costs and gain variable expense efficiencies resulted in an improved operating margin of 80 basis points. Selling, general and administrative expenses increased 2.7% to $104 million compared to $101 million last year. This included an increase of $5.8 million in general and admin expenses, offset by a decrease of $1.4 million in selling expenses and a decrease of $1.6 million in advertising and marketing expenses. As a percentage of net sales, SG&A expense decreased 40 basis points to 40% compared to 40.4% last year. As a percentage of net sales, advertising and marketing costs decreased 120 basis points to 13.2% compared to 14.4% last year, primarily due to leverage gain from reduced catalog circulation. Selling expenses as a percentage of net sales decreased 110 basis points to 14.9% compared to 16% last year. The decrease is attributed to savings from better shipping rates and less split shipments on orders, efficiencies gained in our DC network and improved store labor productivity.
General and admin expenses as a percentage of net sales increased 190 basis points to 11.9% compared to 10% last year, primarily due to higher depreciation and amortization from technology projects as well as increased store occupancy costs. At the end of the year, net working capital was $83 million and we had $39 million outstanding on our $130 million line of credit. Inventories at year end increased 51% to $148 million compared to $98 million last year. The increase in inventory is primarily due to original orders being placed on higher sales plans from over 12 months earlier as well as incoming receipts for the spring 2020 season arriving earlier than they did last year. We made the decision earlier in 2019 to pull forward inventory receipts to smooth the retail floor resets and also to minimize potential impacts from port congestions due to industry shipments arriving before tariffs would take effect. That approach continues as we head into 2020 and it will help to realign our inventory position in the back half of the year, but I will caution, this will be dependent on our recovery and customer demand, which today is challenged by the health crisis and uncertain economic factors.
With regards to the markdown goods on hand at the end of the year, it represented 18% of total inventory, compared to 11% at the end of 2018. Roughly 50% of markdown units are in styles that are considered year around, which allows us more room to optimize the sell-throughs. Capital expenditures for 2019 were $31 million, down 42% from prior year. The decrease reflects the one-time capital spend related to our corporate offices in 2018, lower spend on distribution center initiatives in 2019 and our plans to open fewer stores in early 2020 which would typically impact the end of the prior year. The major technology investments made to date, including the new website, enhanced mobile functionality and replacement of the Order Management System have resulted in systems that are more stable, flexible and scalable. The primary initiatives we're working on now and expect to rollout in 2020 will be customer-facing enhancements at the store level and the use of customer data for deeper analytics and personalization of our marketing strategies.
In addition, we are designing plans for the next generation of our merchandise lifecycle planning systems. Given the complexities of nurturing and growing multiple sub-brands and operating with a nationwide omnichannel presence, the investments we make in technology now to support our customer growth plans are critical to our long-term competitive position. While we entered 2020 with plans that reflected a continued emphasis on growing our brand with customers in new and existing markets, leveraging fixed and variable expenses and growing bottom line results faster than topline sales, the current health crisis and consumer environment that we're operating in casts an era of uncertainty that makes it difficult to estimate where we'll land at year-end on our financial objectives. As of this week, we have seen traffic to our stores slow significantly, but demand through our online channels year-to-date have generally been up from last year other than the days that we were going against last year's 60% off clearance event. That said, if consumer spending over the coming weeks and months show significant weakness, we do expect the impacts will materially affect our sales. As such, we are suspending financial guidance and hope to provide updates on our next earnings call. In response to the expected sales impacts, we have refocused our attention to measures that will curtail expenses and capital spending. As of today, we have five new store locations planned in 2020 that we're proceeding with, four with signed leases, but we're holding off on any additional locations. We have certain technology and infrastructure projects that will be deferred.
We are scrutinizing our marketing programs and other discretionary spend to preserve dry powder. To help support liquidity, there is extending capacity in our bank line of credit that is available if needed. All told, we are taking action to respond to this dynamic business environment and are confident we can manage through this difficult time. With that, we'll open the line for questions. Operator?
Questions and Answers:
Operator
We will now begin the question-and-answer session.
[Operator Instructions]
The first question is from John Morris with D.A. Davidson. Please go ahead.
John Morris -- D.A. Davidson -- Analyst
Hi, thanks. Good morning everybody. Hope everybody is doing well there and holding up given the circumstances. Dave, question for you. I guess on the inventory, can you give us a feel for what that would have looked like excluding the early receipt that you wisely took in to avoid some of the delays in the ports and everything, but what would it have been excess receipts. So that's my first question.
Dave Loretta -- Senior Vice President and Chief Financial Officer
Yes, sure, John. What it would have been was I'd say roughly a third of the of the increase is related to pulling in receipts for the spring and summer earlier into the year-end.
John Morris -- D.A. Davidson -- Analyst
And with respect to the cost control programs that you could put into place in terms of your expense line, your SG&A and I know you're revisiting the budget now. And I'm sure everything is quite fluid. I'm just wondering directionally, could it be that SG&A dollars could actually be down as opposed to continuing to increase, even with those expense curves in the coming year?
Dave Loretta -- Senior Vice President and Chief Financial Officer
Yes, certainly there is enough control within our expense structure to maintain the level of spend. We do have increase in fixed costs related to the stores we opened up last year and planned this year, but obviously there is enough flex in our marketing, our variable expenses are very flexible on a sales line. So we certainly could see SG&A flat under that scenario just given the circumstances that the timing of when we think business is going to revive. So I think that's a possibility.
John Morris -- D.A. Davidson -- Analyst
Okay, great. And then my final question, really kind of in two areas. I wanted to get a little bit more color on in terms of your investments of the new systems, talking about the customer enhancement at the store level, can you tell us a little bit more about that, what you expect maybe the timing of what that is, some examples, the timing of it and what kind of benefits you could get and then, same with the adjustments to your new planning system? Thanks.
Dave Loretta -- Senior Vice President and Chief Financial Officer
Sure. At the store level, the investments that we're working on now include an upgrade of our POS system, and this has been under under way for a number of months. Beginning in late 2019, we are on the path for having an omnichannel platform within our stores that makes the experience a lot more seamless for our customers, both when they come to the store to return items and we're able to attribute the return to the original order. If it was online or in another store, we're able to fulfill goods within the same transaction at the POS system if that good is not in the store, but maybe it's going to be shipped to the customer's home. So we're able to put into our sales associates' hands information at the register to much more quickly and seamlessly make that transaction and have it visible across the chain so that the order information and the inventory information is real time. The other aspect to our POS system is simply upgrading off an older platform that wasn't going to be scalable for us and it's not a requirement for new hardware, but it's a software that is being run on the registers. And then I think you asked about the planning systems. That's also in the works. Our merchandise planning tools that we've integrated today have allowed us to be more nimble on store replenishment, but we haven't reached the point where we can truly get to store level assortment planning and streamline a lot of the back office activities around all the way up from product development to managing the lifecycle of that item through its through its life. So a merchandise lifecycle planning tool is what we're developing now. But honestly that's on hold, given the current environment and something that we will pick back up when we have clear visibility. The other system that we are continuing to proceed with is our customer data warehouse replatform and that's been under way for a number of months and we are proceeding with that and we know that that's going to be able to give us our marketing aspects much more personalized and make it more efficient. So that initiative is well under way and we're proceeding with that.
John Morris -- D.A. Davidson -- Analyst
Great, thanks. Appreciate it.
Operator
The next question is from Jonathan Komp with Baird. Please go ahead.
Jonathan Komp -- Baird -- Analyst
Yes, hi. Thank you, Dave, could you maybe just start maybe if you won't mind walking through the balance sheet, the major items and the available liquidity either at year-end or even currently, if you have any current views on just kind of where things stand and kind of more detail there.
Dave Loretta -- Senior Vice President and Chief Financial Officer
Sure, Jon. Obviously, the inventory levels are the first area that we think about. And given my comments around setting receipts based on earlier plans, that is an issue that we will work through this year. As I said, a lot of our goods are year-round and don't require markdowns to really hit seasonal period. So we feel good about that. But at the end of the day, they are higher than we ideally like to be at. We do see that we can get by the year end under a conservative sales plan, inventories closer to in line with sales. But we'll have that as an ongoing factor. We think about the funding, our line of credit today is $130 million of total capacity where we're evaluating the increase of that. We do have an incremental facility feature within our line of credit that will allow us to increase the capacity and that's in discussions right now with our bank group and whether we need to tap into that extra amount or not is really dependent on how much we can pull down our capital spend in our expenses. So we're making those decisions right now. I guess that I also want to stress on our balance sheet, when you look at the total debt component, the $28 million of long-term debt that relates to our corporate offices here is the tri-organization that we consolidate, that's not our obligation but it is on our balance sheet and reflects in the total debt picture, but we do see that through the course of the short-term here, we've got ample capacity to fund our business and our evaluated increase in that, in the very short term here.
Jonathan Komp -- Baird -- Analyst
Okay, that's helpful. And maybe a follow-up to that. Dave, if there is any, if you're willing to, maybe talk about either the quarterly or either monthly type kind of cash burn rate to think about, more just trying to get a sense if you could help kind of shore up any concerns about obviously a lot of unknowns out there and certainly the duration of what's going on as a key variable but just how to think about in the current environment, how long everything you just mentioned that you still have some margin for error from a cash burn rate?
Dave Loretta -- Senior Vice President and Chief Financial Officer
Yes Jon, I hesitate a little to get into some short-term projections, just given the dynamic nature of where we're at, as I kind of articulate on the previous question about expenses and what we have in our control there, there is quite a bit of discretionary spend that we can take action on and we've already prioritized those actions today and are going to be very vigilant about it. So, today we don't have concerns that over the next few months that would have any cash issues, we would certainly hope that as we come into the third quarter and fourth quarter of the year, if there is continued economic impacts, then we'll go to another layer of taking action on our expense and capital spend. But we are confident over the short term here that we've got ample capacity of liquidity to whether through that period.
Jonathan Komp -- Baird -- Analyst
Okay, thank you. And maybe just last one from me, I guess, you just addressed some of the internal actions you could take. But I'm curious, just given the unprecedented nature of what's going on, I mean, when you think about either the committed leases, you mentioned or even the current rent that you're paying, I mean is there any scenario that you would envision where you'd be able to get some additional flexibility in the short term for those types of payments just given the type of nature we are, [Phonetic] any more flexibility? Curious your thoughts there?
Dave Loretta -- Senior Vice President and Chief Financial Officer
Well, John when we establish our store lease structures, we purposely do it with a fairly low occupancy cost unlike I'd say other kind of mall-based or specialty center-based retailers. So we feel pretty good about the occupancy and lease structure that we go into these with. We do original plans, we were targeting 10 stores to open in 2020 and we are cutting that in half. Until we open a store, we feel good that the ones we've got are going to be excellent locations, but at this stage, we don't have plans to go back to existing leases and ask for any accommodations there. We don't think that that's necessary at this stage.
Jonathan Komp -- Baird -- Analyst
Okay. I appreciate you taking all the balance sheet questions and best of luck. Thanks.
Operator
[Operator Instructions]
The next question is from Jim Duffy with Stifel. Please go ahead.
Jim Duffy -- Stifel -- Analyst
Thank you. Good morning. Guys, my question around the composition of the inventory, what's the mix of that spring-summer goods versus fall holiday and then inventories there obviously a potential source of cash, what are the strategies to manage through the inventory position?
Dave Loretta -- Senior Vice President and Chief Financial Officer
Jim the composition of the inventory leans obviously heavily to the spring-summer where we're in today, I'd say, greater than 70%. We do have fall-winter goods that we always maintain because of they are core and they are year-round. And then to the extent that some we put on markdown are generally year round as well. So we look at the composition and know that we're not tied to strictly clearing out of fashion oriented or tight seasonal aspects of our apparel, gives us more room to work through it. We can, as we proceed through the months here, take deeper action to clear through inventory. And I'd say, last year was sort of the low point on gross margins. We set the bar that still I think gives us room to maneuver and strike some discounts, if needed. But we feel pretty confident about the inventory levels and we're evaluating false winter receipts in terms of cancelling some but not starving the business for the fourth quarter, which at this stage, we still have hopes that we're going to see a good holiday period. But everything is in our ownership and our control unlike inventory that might be spilling into wholesale channels since we don't operate in those.
Jim Duffy -- Stifel -- Analyst
Thanks. Dave, that's a good segue to my next question. I was curious how you're thinking about offense versus defense. It's a dynamic environment, but as you look toward the back half of the year, how are you planning receipts, for the third quarter, you mentioned, fourth quarter you're planning for more normalization, at what point can you make adjustments and cancellations for those two? You just kind of regulate your inflow of inventory as appropriate for the business.
Dave Loretta -- Senior Vice President and Chief Financial Officer
Well, we're making those decisions right now, Jim and the closer we get to the receipt time then we do lose flexibility because we placed orders directly with our manufacturers. So there is not a third party wholesaler that we can go back to. So it does require further upfront assessment of what the sell-throughs are going to be, but I'd say we would be certainly in a better position to be beyond the offense, if there is a, the visibility in the business comes through and we're able to be well positioned within our stores and online. I think the other aspect that we want to call out is we still are better than 50% in online and direct retailer. So that gives us some flexibility even today that I think other primarily store store-based retailers are stuck with. So, yes, not sure if that helps give you any more color Jim, but that's where we're at.
Jim Duffy -- Stifel -- Analyst
It does. Thank you, guys and good luck.
Operator
[Operator Closing Remarks]
Duration: 35 minutes
Call participants:
Donni Case -- Financial Profiles, Investor Relations
Stephen L. Schlecht -- Executive Chairman and Chief Executive Officer
Dave Loretta -- Senior Vice President and Chief Financial Officer
John Morris -- D.A. Davidson -- Analyst
Jonathan Komp -- Baird -- Analyst
Jim Duffy -- Stifel -- Analyst
