Duluth Holdings Inc (NASDAQ:DLTH) reported third-quarter earnings that fell short of analysts' expectations, leading to a significant drop in its stock price. The company posted an adjusted earnings per share (EPS) loss of $0.41, wider than the forecasted loss of $0.32. Revenue also missed expectations, coming in at $127.1 million compared to the anticipated $134.9 million. Following the announcement, Duluth Holdings' stock fell by 8.68% in pre-market trading.
Key Takeaways
- Duluth Holdings missed both EPS and revenue forecasts for Q3 2024.
- The stock price dropped by 8.68% following the earnings release.
- The company reported a year-over-year decline in net sales by 8.1%.
- Inventory levels increased by 33%, raising concerns about potential overstock.
- Mobile sales continue to be a significant channel, accounting for 57% of total sales.
Company Performance
Duluth Holdings experienced a challenging third quarter, marked by an 8.1% decline in net sales compared to the same period last year. Despite a difficult retail environment and unseasonably warm weather affecting seasonal sales, the company achieved a gross margin expansion of 210 basis points to 52.3%. The increase in inventory, however, suggests potential challenges in aligning supply with demand, which could impact future profitability.
Financial Highlights
- Revenue: $127.1 million, down 8.1% year-over-year
- Earnings per share: Loss of $0.41, compared to a forecasted loss of $0.32
- Gross margin: 52.3%, an increase of 210 basis points
- Adjusted EBITDA: Loss of $6.8 million
- Inventory: Increased by 33%
Earnings vs. Forecast
Duluth Holdings reported an EPS loss of $0.41, missing the forecasted loss of $0.32 by 28.1%. This marks a continuation of the company's trend of underperformance compared to analyst expectations. Revenue also fell short of the forecast by $7.84 million, contributing to the negative market reaction.
Market Reaction
The stock price of Duluth Holdings dropped by 8.68% in pre-market trading following the earnings announcement. This decline reflects investor disappointment with the company's financial performance and its failure to meet market expectations. The stock is currently trading near its 52-week low, indicating broader concerns about the company's future prospects amid a challenging retail landscape.
Company Outlook
Despite the disappointing quarterly results, Duluth Holdings reaffirmed its full-year sales guidance of $640 million. The company anticipates a reduction in gross margin by approximately 125 basis points and aims to end the year with zero debt and $200 million in liquidity. Key strategic initiatives include enhancing its omni-channel strategy and focusing on operational excellence.
Executive Commentary
CEO Sam Sato stated, "We are taking swift action on structural initiatives," highlighting the company's efforts to optimize its fulfillment network and improve operational efficiency. CFO Hina Agarwal emphasized the importance of managing inventories, stating, "We are committed to taking actions to end the year clean on inventories."
Q&A
During the earnings call, analysts inquired about the potential for store closures or relocations, given the current retail challenges. The management discussed the inventory build-up, attributing it to strategic receipts and weather impacts, and reiterated their commitment to enhancing store productivity.
Risks and Challenges
- High inventory levels could lead to increased markdowns and pressure on margins.
- The retail sector faces challenges from promotional pressures and changing consumer preferences.
- Macroeconomic factors, including consumer spending trends and economic uncertainty, may impact future sales.
- The company's reliance on mobile sales requires continuous investment in digital capabilities.
- Competitive pressures from other retailers and brands could affect market share and profitability.
Full transcript - Duluth Holdings Inc (DLTH) Q3 2025:
Conference Operator: Good morning, and welcome to Duluth Trading's Third Quarter Financial Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Nitza McKee, Senior Associate, IR at ICR. Please go ahead.
Nitza McKee, Senior Associate, IR at ICR, ICR: Thank you, and welcome to today's call to discuss Duluth Trading's 3rd 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 Hina Agarwal, 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 ks 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?
Sam Sato, President and Chief Executive Officer, Duluth Trading: Thank you, Nitsa, and thank you all for joining today's call. Our Q3 performance did not meet our expectations. We felt the impact of a highly promotional environment and unseasonably warm weather resulting in a net sales decline for the quarter of 8.1% with our direct and retail channels delivering similar year over year top line results. Despite the macro and weather related impacts, we are pleased to see growth in our average order value and a double digit increase in digital traffic. That said, these were not enough to offset the year over year contraction in transactions.
We ended the quarter with inventory levels higher than planned driven by a combination of early planned receipts of core products to ensure we are in stock for the holiday selling season and cold weather goods in which sales were impacted by warmer weather. As a result, we began taking the necessary actions to increase our unit selling velocity beginning in late October, and I'm pleased to report that our top line trends have meaningfully improved leading into the all important Black Friday week and continuing through Cyber Monday. As we enter the final peak selling weeks of the holiday season, we are committed to prudently managing our inventory and ending the fiscal year in a clean, high quality position. In what remains a highly competitive market, we have an unwavering commitment to delivering value to our customers, while also positioning our business for continued success in the future. Looking past fiscal 2024, leveraging our advanced sourcing and product innovation functions and in partnership with our new Chief Merchant Eli Getzen, we are significantly enhancing our go forward assortment and inventory management.
As we look ahead to 2025 and beyond, we are building upon the success of our strategic initiatives, making meaningful progress on structural improvements and embarking on enterprise planning and end to end cross functional initiative to significantly enhance our operational effectiveness and strategic planning processes. There is much work ahead of us and we are laser focused on improving our financial performance while driving operational excellence over both the near and long term. I'd like to provide you with an update on the key initiatives tied to our Big Dan Blueprint, the foundation of our omni channel consumer strategy, which are on track with expected benefits materializing. 1st, an update on our sourcing and product innovation efforts, which remain a critical strategic unlock for the business. As a direct result of this initiative, we registered another quarter of gross margin expansion with over 200 basis points of improvement over Q3 last year.
We continue to have line of sight to multiple years of significant product cost benefits. In addition to reducing product costs, this initiative enables us to bring to market high quality innovative products more frequently with increased speed to market. Regarding our fulfillment center network optimization plan maximize service, capacity and cost, we continue to leverage Adairsville's fully operational and highly automated fulfillment center capabilities. It's enabled structural improvements like exiting the Dubuque facility successfully on time and with a smooth transition of the volume into the remaining network. As we enter the peak holiday selling season, we are on track for Adairsville to process the majority of online orders and replenishment volume.
In fact, over the Thanksgiving weekend through Tuesday, Adairsville processed 64% more units compared to last year with a significant reduction in our click to delivery time. Importantly, in Q3, we registered another quarter of cost per unit fulfillment benefits with the variable CPU in Adairsville 73% lower than the legacy facilities. With the elimination of fixed costs from the exit of the Dubuque fulfillment center, we continue to anticipate annualized run rate savings of approximately $5,000,000 with expected benefits starting in the Q4 of this year. And we're evaluating further network optimization opportunities. Shifting to our channel strategy to serve our predominantly and growing omni channel consumer, the mobile device is our number one and most important digital customer touchpoint and represents a gateway to the brand.
We continue to build on our success with our mobile first strategy, fueling mobile penetration growth as a percentage of total across both visits and sales on our website. In the quarter, 71% of visits and 57% of sales came through a mobile device. We saw 15% growth in visits on mobile and our conversion remains significantly higher than the industry average. Retail stores play a critical component of our omni channel strategy. 2 thirds of new consumers prefer shopping in store.
In addition, our omni channel consumers spend more on average per order and shop at more than twice the frequency of our single channel consumers. Stores also offer services like returns, buy online, pick up in store and fulfilling online orders creating a seamless consumer experience. Combining a digital strategy with a relevant and productive store portfolio is critical to winning in an omni channel ecosystem. And as part of our structural improvements, we are making great progress to revitalize our store portfolio. We're on track to open 2 new stores in priority markets in the second half of twenty twenty five.
We've identified a handful of stores which no longer meet our higher hurdle rate requirements and our potential targets for closure or relocation. And additionally, we've launched local marketing campaigns in priority markets to drive retail traffic. With respect to our go to market brand and marketing strategy, we've switched our media marketing partner and we're thrilled with the new enhancements to our next generation of consumer centric capabilities they are bringing. We remain focused on upper funnel brand building and driving more traffic and conversion with target consumers. The underpinnings of our brands and sub brands remain strong and our level of newness in the quarter increased by 60 basis points over last year.
Despite the challenging third quarter results, we registered several merchandising and product innovation wins. While our women's business declined this quarter, we continue to see strength across the 1st layer category up 22% and in AKHG with growth of 6%. Our heirloom garden collection continues to perform well. Growth in 1st layer was driven by our Buck Naked and Armacello collections as well as newness offered in our pajama and loungewear business. We expanded our plus sized assortments, including our successful Adjusta Buss, a bonded zip front bra with a sleek silhouette and crisscross back offering extra support and security.
Coupled with continued popularity of our T Luxe bra, our bra business grew by 20% this quarter. Within the women's AKHG business, customers continue to respond well to our signature knit tops and bottoms, which drove overall AKHG quarter growth of 6%. Growth was driven by strength in several key collections including Renew Bamboo, Roadless and Trail Tech. These collections support our ongoing focus on outdoor recreation through performance attributes. Our heirloom garden collection continues to be a favorite for her as evidenced by growth over last year of nearly 70%, bolstered by a variety of new prints.
Heirloom Garden was the number one women's apparel collection for every week in Q3. Our strategy of refreshing core colors with the introduction of multiple exciting prints continued to prove successful. Our men's business was more heavily impacted by unseasonably warm weather. However, we did see continued strength in our Drying to Fly technology as recent expansions into tees and unders continue to resonate. Further, we intentionally extended the summer season with a focus on Drying to Fly shorts, showcasing one of our key cooling technologies that resonated with the warmer temperatures throughout the quarter.
We launched our new souped up sweats collection early in Q3, the loose version of your basic sweats souped up with unbeatable comfort and durability, allowing for easier movement while working and even better for lounging. This beefier fabrication made for both him and her is resonating well with our customers and fleece will continue to be a major focus for us moving forward. Our new t shirt flannel, which is the perfect blend of your favorite flannels warmth and your most comfortable t shirt softness performed well this quarter. We saw further positive response in men's woven tops driven by additional newness with our men's indigo twill and brushed oxford shirts, both of which are lighter weight casual offerings in the standard fit. As we move into Q4, we're focused on driving volume with our largest seasonal categories including flannels, shirt jacks and line bottoms.
We're excited about introducing new innovation in the outerwear category with our men's insulator jackets, which contain revolutionary solar ball insulation that transforms the sun's infrared energy into instantaneous warmth. No battery pack needed. And as the gift giving season approaches, we will focus on cart builders with unders, socks and hard goods and lean into cozy loungewear and pajama sets, which are performing well, especially for her. As mentioned earlier, we onboarded our new advertising agency this quarter and increased our upper funnel media spend with an enhanced focus on our target customer. The result was a double digit increase in website traffic driven by first time visitors.
We were pleased to see the significant increase and have shifted our focus on optimizing our lower funnel conversion tactics and retargeting efforts to capitalize on this traffic. We're excited about several key branding moments including a featured gift guide segment that aired last week on Good Morning America, a strong presence in this year's college football playoff games and continuing our partnership with Yellowstone. As many of you have likely seen, Duluth Trading returned for a 3rd year in partnership with Yellowstone to celebrate its highly anticipated 5th season, which premiered on November 11. Fan favorite Stories from the Bunkhouse offers a behind the scenes look at Jefferson White's journey as Jimmy. Jefferson White embraces our belief in taking on life with your own two hands in some of our most innovative Duluth products, while sharing candid behind the scenes stories from life on set.
He embodies the authenticity and resilience that define both the brand and Yellowstone's iconic characters. Reflecting the hardworking spirit of the American frontier, Duluth products are designed for the tenderer lifestyle capturing the grit, endurance and timeless style that resonates with fans everywhere. The partnership spans all Duluth channels, website, paid social and more amplifying the shared values of quality and authenticity. In summary, we're realizing benefits from our long term strategic initiatives including product development and sourcing, logistics and supply chain, our mobile first efforts and go to market initiatives. We're delivering a high level of product newness and innovation, which is resonating with both existing and new customers.
We are taking swift action on structural initiatives like completing Phase 2 of our fulfillment center network optimization plan and have made great progress on our retail store portfolio strategy. And we're embarking on a significantly enhanced end to end cross functional enterprise planning process to drive operational excellence. Importantly, we remain in a strong financial position with quarter end liquidity of $165,000,000 Finally, we're making great strides in our long term strategic initiatives that will help us unlock the full profit potential of the enterprise, setting us up for future success. I look forward to sharing more on our Q4 call and will now turn it over to Hina to provide more details on our Q3 results. Hina?
Hina Agarwal, Senior Vice President and Chief Financial Officer, Duluth Trading: Thanks, Sam, and good morning. In the Q3, we expanded our gross margin by 2 10 basis points. However, top line sales declined 8.1%. Unusually warm weather impacted fallwinter seasonal sales, and as a result, our inventory levels increased at the end of the quarter. As Sam mentioned, we are taking swift actions to end the year clean on inventories and as trends have improved, our second half to date top line is now tracking at minus 3%.
We are pleased with the progress of our strategic initiatives as we saw a 2nd consecutive quarter of gross margin expansion from our sourcing initiative and reduction in fulfillment and transportation costs from the logistics network. Our structural improvements are on track. In Q3, we successfully completed Phase 2 of our fulfillment network optimization and exited 1 of our legacy fulfillment centers announced last quarter. As stated on the last two calls, our primary focus is to unlock the full profit potential of the enterprise and to strategically deploy capital to unlock growth opportunities. Realizing savings from Phase 2 of the fulfillment network, revitalizing the store portfolio to increase productivity and profitability and allocating capital to omni channel growth are key steps towards making structural changes to drive sustainable profitable growth.
In addition to our strategic initiatives and structural improvements, as Sam mentioned, we have launched Enterprise Planning, an end to end cross functional initiative to significantly enhance our operational and planning processes. Providing an update to Phase 2 of our fulfillment center network, we completed the closure of our Dubuque, Iowa facility at the end of October. This incurred restructuring expenses of $7,700,000 which was spread between 2 quarters with $1,600,000 recognized in Q2 $6,200,000 in Q3. We have begun to realize savings in Q4 for a full year annualized run rate savings of $5,000,000 in 2025. Leveraging our most efficient and cost effective Adairdel fulfillment center, we are now evaluating the next phase to continue to maximize network capacity and cost.
We are pleased to share the progress on our retail store portfolio strategy. We have identified priority markets and are on track to open 2 new sites in the back half of twenty twenty five. As it relates to our existing fleet, we have established higher hurdle rate requirements to renew leases to enhance the productivity and profitability of our portfolio. As mentioned previously, almost 25% of our current store portfolio is coming up for renewal by 2026. We have also renewed our store marketing efforts in priority markets, launching local advertising, experiential events and targeted digital marketing to drive traffic, brand awareness and store awareness.
Providing more color on the enterprise initiative Sam mentioned, there are 4 key areas of focus to impact outcomes on a go forward basis. 1st, streamlined end to end cross functional processes to drive operational excellence. 2nd, assortments driven by target customer insights with a focus on the largest category opportunities. 3rd, inventory management will be optimized through improved in stock and productivity metrics that are directly tied to our financial goals. And lastly, activating a holistic go to market strategy to launch key product stories.
Now speaking to our Q3 results. Today, we reported Q3 2024 net sales of $127,100,000 down 8.1% with gross margin expansion of 2 10 basis points versus last year to 52.3 percent. Our reported EPS loss is $0.85 and adjusted EPS loss is $0.41 Adjustments to EPS include $6,200,000 in restructuring charges related to the exit of 1 of our legacy fulfillment centers as announced previously and a $10,100,000 valuation allowance on our deferred tax asset. Adjusted EBITDA loss for the quarter was $6,800,000 Starting with the top line, our Q3 2024 net sales declined to $127,100,000 as fewer transactions were partially offset by higher order value fueled by higher units per transaction. Sales in the first half of the quarter were flat to last year.
In the second half, unusually warmer weather impacted sales of our fall winter goods. Direct channel sales declined 8.3% in the quarter. Mobile penetration of site visits and sales continued to increase over last year. Retail store sales declined 7.8%, driven by traffic decline, partially offset by increased conversion rates. Our women's business declined 4%, impacted by fallwinter seasonal goods.
However, we continued to see strength in women's first clear, up 22%, AKHG up 6% and her all time favorite garden heirloom collection up nearly 70%. Men's business declined 10%, primarily driven by colder weather categories, including flannels, outerwear and sweaters. However, our dry on the fly technology and our new Souped Up Flex (NASDAQ:FLEX) collection resonated well. Moving to gross margin. For the Q3, our gross margin expanded 210 basis points to 52.3%, driven by improved product cost from our direct to factory sourcing initiative.
Having sourced through the older higher cost inventory, our gross margin year to date is 90 basis points higher than last year, partially offsetting the improvement in product costs was a lower AUR. Moving to 3rd quarter SG and A expenses. SG and A expenses increased 1.2% to $82,900,000 As a percentage of sales at 65.2%, it deleveraged by 600 basis points to last year, driven by a decline in sales. The continued efficiencies across logistics and fulfillment center network were offset by higher fixed costs and depreciation from foundational investments. For the quarter, advertising expenses increased to 15.3 percent of sales, deleveraging by 2 40 basis points, driven by lower sales.
Variable or selling expenses, which include outbound shipping costs as well as labor across our customer contact center, fulfillment centers and store fleet continued to improve leveraging by 100 basis points. The favorable leverage was driven by optimizing our outbound shipment network, new parcel agreements and efficiencies across the fulfillment center network, particularly at Adairsville. Fixed expenses or general and administrative expenses increased 6.7%, deleveraging by 4.60 basis points, primarily from annualizing depreciation and fixed costs from strategic initiatives like the Adairsville investment initiated in Q3 of 2023, partially offset by cost savings initiatives. As mentioned earlier, we recognized $6,200,000 in restructuring expenses from the exit of 1 of our legacy fulfillment centers and a $10,100,000 valuation allowance on our deferred tax asset. Our Q3 adjusted net loss was 13,800,000 dollars or $0.41 per diluted share compared to net loss of $10,500,000 or $0.32 per diluted share last year.
Importantly, adjusted EBITDA year to date is positive $5,700,000 dollars Our inventory balance was up 33 percent or approximately $57,000,000 97 percent of the inventory is in current products and clearance inventory improved to 3% versus 4% last year. There were 3 main drivers of the increase year on year. The first was in transit inventory, which accounted for a third of the increase as we moved from agents to buying directly from factories. Another third of the increase was driven by higher inventory receipts on core year round products to mitigate low in stock post Black Friday week, a key learning from last year. The final third relates to fallwinter inventory, where sales were impacted due to unusually warmer weather, resulting in higher seasonal inventory levels at the end of the quarter.
To reiterate, we are taking necessary and prudent actions to end the year clean on inventories. Our capital expenditures for the quarter were $5,000,000 versus $9,900,000 in the prior year, primarily used to invest in strategic digital capabilities as per our technology roadmap. We ended the quarter with $44,000,000 of outstanding debt on our line of credit. We had $9,300,000 of cash and cash equivalents at the end of the quarter. Our balance sheet remains strong with liquidity of $165,000,000 Now turning to our outlook for fiscal year 2024.
We are reconfirming our full year top line sales guidance of $640,000,000 which includes 60 basis points from the COSCO order and approximately 150 basis points of growth from the 53rd week. We expect to continue to benefit from lower year over year product costs. However, driven by higher promotional activity and our commitment to end the year clean on seasonal inventory levels, we are now projecting full year gross margin reduction of approximately 125 basis points versus prior year. Our product sourcing and innovation efforts are expected to continue to reduce product cost and expand margins for the next several years as we increase the percentage of products sourced direct from factory. This combined with the enterprise planning initiative, will significantly enhance our assortment and inventory management to not just fully capture the cost benefits of the sourcing initiative, but also enable gross margin expansion.
We expect SG and A, excluding the sales tax contingency, to deleverage by approximately 80 basis points versus prior year as we partially offset the increase in expenses from strategic investments with additional savings from efficiencies in fixed expenses like services and contracts and benefits from our fulfillment center network optimization initiative beginning in Q4. Advertising expenses are planned to be at approximately 10% of sales as we realize savings from our move to the new ad agency and refocus spend to drive shopper conversion. Variable or selling expenses will continue to leverage by approximately 50 basis points driven by transportation savings from diversification of outbound carriers and continuing addressable efficiencies. Fixed expenses or general and administrative expenses are expected to deleverage by approximately 170 basis points versus last year as higher depreciation and fixed costs associated with strategic initiatives are partially offset with cost savings efforts. With that, to summarize our full year outlook, net sales of approximately 640,000,000 full year gross margin reduction of approximately 125 basis points versus prior year SG and A expenses excluding the sales tax contingency to deleverage by approximately 80 basis points versus prior year.
Our capital expenditures are on track to be reduced by more than half to approximately $23,000,000 Our liquidity remains strong. We expect to end the year with no debt and liquidity of over $200,000,000 In closing, we are committed to taking actions to end the year clean on inventories, maximizing return from our strategic investments, delivering on structural initiatives to improve our business model and implementing significantly enhanced enterprise planning processes to unlock growth and profitability. With that, we will open the call for questions.
Conference Operator: We will now begin the question and answer session. The first question comes from Dylan Carden with William Blair. Please go ahead.
Dylan Carden, Analyst, William Blair: Thanks. Sorry if I missed this. You mentioned 25% of the fleet comes due by 2026. Do you have a sense of what falls under your new thresholds as far as sort of the even if it's a range, the magnitude of closures from here?
Sam Sato, President and Chief Executive Officer, Duluth Trading: Hey, Dylan. Yes. So as we said, we've got about 25% that come due. We have through our process that Keane has been working on, recalibrated our hurdle rates for profitability. And we're really assessing those store by store as we get into the timeframe to renew or renegotiate.
So we continue to have our eyes on those 25. And as we get closer to renewal dates, we're vetting those much deeper in anticipation of either renewing, closing or relocating.
Dylan Carden, Analyst, William Blair: Got it. And if I'm looking at the model, as far as I appreciate everything you've done on production and distribution efficiencies from a gross margin standpoint. What's sort of the primary driver to get you back above the line from an SG and A perspective?
Sam Sato, President and Chief Executive Officer, Duluth Trading: Yes, I think well, a couple of things I'll say. One is, I'm really pleased with the progress and traction our teams are making on those key initiatives tied to our Big Damn Blueprint. And as you know, some of it is timing in terms of when we start to realize those benefits clearly around our product development and sourcing initiative. We're starting to see that the logistics strategy with Adairsville, I'll take a moment just to celebrate. We're now lapping on about a year since Adairsville came online.
It has processed something like 64% more units than a year ago at this time over the Black Friday weekend. And its CPU variable CPU costs are actually exceeding what we initially targeted. It's 73% lower than the legacy fulfillment center. So a lot of those things we're starting to see come into play now. It's enabled us to rationalize our fulfillment center network and we were able to close the Butte and that on an annual run rate is about $5,000,000 in savings.
So I think over the next candidly over the next handful of years, you'll continue to see the benefits of that work in addition to some of the other structural things that Hina has been charged with. And over the next handful of years, I think you'll see our SG and A come closer into line where we expect it to be and importantly allow the benefits of these other initiatives like the product development and sourcing initiative to really flow through to the bottom line.
Hina Agarwal, Senior Vice President and Chief Financial Officer, Duluth Trading: Yes. And I would add, in addition to the structural changes, which is around fulfillment center optimization as well as improving overall store portfolio profitability, we are our CapEx this year was half of what less than half of what it was last year. And that's kind of the going run rate we are looking at, which will also improve the depreciation costs that flow into SG and A. So in addition to the structural, the equilibrium of CapEx to depreciation will help with the overall SG and A costs.
Dylan Carden, Analyst, William Blair: Got it. It also feels like it's a store productivity issue. I think you kind of just blessed that there in your comments. I mean, where productivity is, if you start closing stores, presumably you get some of the productivity overall fleet productivity to improve. And I would think that that should help and not insignificant amount given where kind of sales per square foot are at present?
Hina Agarwal, Senior Vice President and Chief Financial Officer, Duluth Trading: Yes. Like we said, we've established higher hurdle rates when we renew, which gives us leverage in our negotiating for lease renewals with options to either relocate or close as the case might be. And as we do that, it improves the overall health of the portfolio with the new sites meeting much higher hurdle rates, the older sites that are being renewed also being held to those same standards improves our overall productivity and our focus on omni channel marketing for those priority markets to improve traffic to those stores.
Sam Sato, President and Chief Executive Officer, Duluth Trading: Yes. And Dylan, I'll add to that because I want to be clear that, that you all understand strategically retail stores, as we've always said, are an important part of our omni channel ecosystem. And I think that's really important to understand. Our stores, since at the end of 2023, all stores were 4 wall profitable. This is really about to your point exactly as productivity is within our fleet of stores and as we begin to open new stores, we're holding them to a higher productivity hurdle rate, so that we're ensuring that we're getting the returns that we need and that those investments are aligned with our longer term strategy.
So I think in that regard, we're in a really good position because we've got 65 stores today. It's not as though we've got 500 that we've got to rationalize. And we think that we'll make good progress on that front combined with some of the things I mentioned in my prepared remarks around our go to market strategy and localizing some of that. I think that we'll continue to see improvements in our retail store portfolio both as we kind of renew and or rationalize some locations in addition to then adding some new locations with higher hurdle rates.
Dylan Carden, Analyst, William Blair: Great. Last one for me. The cool weather year that you couldn't sell in September October, is any of that can you pack any of that away? Or do you have to kind of clearance it by year end?
Sam Sato, President and Chief Executive Officer, Duluth Trading: Yes. No. So part of our strategy is exactly that. And again, I want to make sure that we're clear about what led to the current inventory scenario. And as Tina said, it's really 3 buckets.
There's a timing issue relative to the in transit bucket that we recognize ownership. That's about a third. There's a third that is tied directly to a planned early receipt of core goods because as you know, we're writing these things further out. And last year, we went into Q4 a little lean and came out essentially out of stock and that led to depressed inventory levels throughout Q4. And then the third is really based on our receipt of fall and winter goods.
We didn't sell it in Q3 largely because of some weather issues. And so as we look at going through Q4, there's 2 components that we're focused on. 1 is ensuring that the seasonal carryover of those receipts don't hurt us into next year, meaning they don't transition into clearance inventory levels. By the way, our clearance inventory levels currently are at about 3% of total, which is 100 bps less than a year ago and sequentially improved from 11% last quarter. But we want to ensure that as we go into next year, this carryover fallwinter doesn't impact our clearance level, which then continues to put further pressure on our margins.
And so the seasonal things that are unique to this season, we will mark down and we'll sell through that this quarter. There is core kind of seasonal products like black down puffer jackets that whatever we don't sell through, we're going to pack those away because we buy them every season and it's a small amount of inventory, but inventory nonetheless that we really don't need to mark down as we move into next year. So long answer to your question, but I think important articulation is yes, there is goods within fallwinter that we will not have to mark down and we'll be able to pack away for a short period of time.
Dylan Carden, Analyst, William Blair: Excellent. Thank you.
Conference Operator: This concludes our question and answer session and Duluth Trading's 3rd quarter Financial Results Conference Call. Thank you for attending today's presentation. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.