Duluth Holdings' Q2 2025: Contradictions Emerge on Promotional Strategy, Inventory Management, SG&A Savings, and Fulfillment Center Challenges

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 4, 2025

Financials Results

• Revenue: $131.7M, down 7% YOY (down 9.8% ex wholesale shipment shift)
• EPS: $0.04 GAAP; $0.03 adjusted, up $0.05 YOY
• Gross Margin: 54.7%, up 240 bps YOY

Guidance:

• Maintains FY2025 adjusted EBITDA guidance of $20M–$25M.
• Tariff impact estimated at ~$15M for FY2025; average rate ~12%; largely H2-weighted.
• Targeted price increases (late July/early August) are meeting elasticity expectations.
• On track for >$10M in FY2025 cost reductions (headcount and controllable expenses).
• Year-end inventory expected to decline double digits YOY; peak borrowings are behind.
• Managing timing of inventory receipts and vendor negotiations to offset tariffs.
• Capital expenditures maintained at ~$17M for FY2025 (2 new stores, omni software, maintenance).

Business Commentary:

• Promotional Cadence and Gross Margin Improvement:
• Duluth Holdings reduced the depth of its promotional activity, which led to a 7% year-over-year decline in sales, but resulted in a $1.5 million increase in adjusted EBITDA and gross margin improvement of 240 basis points to 54.7%.

• This strategy was aimed at elevating full-price sales and driving improved profitability, despite operating in a dynamic consumer environment.

• Cost Control and Tariff Mitigation:

• The company is on track to realize $10 million in cost savings in fiscal 2025, simplifying its cost structure and alleviating pressure from tariffs.

• Tariff mitigation efforts included negotiations with vendors, inventory receipt management, and strategic price increases in select categories to offset cost impacts.

• Inventory Management and Operational Efficiency:

• Duluth Holdings achieved a 12% reduction in inventory, with ending inventory at $148.1 million, a decrease of $20.7 million from the prior year.

• This was driven by enhanced enterprise planning, optimized inventory receipts, and a focus on rightsizing inventory levels to balance core product depth and reduced clearance goods.

• Retail Sales and Marketing Effectiveness:

• Retail store sales increased by 5.3% year-on-year, driven by improved traffic trends, increased conversion rates, and higher average order values.

• Successful marketing efforts included geo-targeted ads, connected TV campaigns, and the Big Dam van mobile retail experience, which helped drive traffic and sales.

• Focus on Core Products and Assortment Rationalization:

• The company reduced its SKU count by over 20% for spring/summer 2026, focusing on core products and innovative solutions to solve customer problems.
• This approach is aimed at driving higher sell-throughs, improved margins, and enhanced customer engagement with the Duluth Trading brand.

Sentiment Analysis:

• Management highlighted gross margin expansion (+240 bps YOY), adjusted EBITDA improvement, and maintained FY2025 guidance. Price increases are meeting expectations; inventory down 12% YOY with $73M liquidity. Quote: “We are encouraged by our Q2 results… maintaining our fiscal year 2025 financial guidance.” Tariff headwinds are being mitigated via pricing, vendor negotiations, and receipt timing.

Q&A:

• Question from Jonathan Komp (Robert W. Baird & Co.): What metrics guide the promotion pullback, and can you maintain discipline into fall/holiday?
  Response: Gross margin dollars are the key metric; they’re reducing discount depth (not frequency) to prioritize profitability and are confident this approach holds through Q3/Q4.

• Question from Jonathan Komp (Robert W. Baird & Co.): With tariffs ramping, can gross margin still expand in the back half, especially Q4?
  Response: Yes—two waves of price increases, vendor cost sharing, and receipt timing should offset tariffs; expect bigger tariff impact in Q4 but still meet gross margin goals.

• Question from Jonathan Komp (Robert W. Baird & Co.): How will the $10M SG&A savings flow through the year?
  Response: Savings are mainly from headcount and controllable costs; about one-third realized in Q2, and they remain on track for the full $10M in FY2025.

• Question from Jonathan Komp (Robert W. Baird & Co.): What’s needed before setting longer-term margin targets?
  Response: Complete expense rationalization and restore price integrity, then execute inventory rightsizing and ~20% SKU reduction in 2026 to drive SKU productivity and a stronger margin profile.