2026 Q3 Earnings Call: Contradictions Emerge on Promotional Strategies, Inventory Management, and Profitability

Date of Call: December 16, 2025

Financials Results

• Revenue: $114.9M, down 9.6% YOY
• EPS: Reported EPS loss of $0.29; adjusted EPS loss of $0.23, favorable to last year by $0.21
• Gross Margin: 53.8%, up 150 basis points YOY

Guidance:

• Affirmed FY2025 adjusted EBITDA guidance to $23M–$25M.
• Full-year sales expected $555M–$565M (down from prior range $570M–$595M).
• Tariff impact now projected ~$12M for the year (vs $15M prior).
• Cost savings expected to exceed $10M and approach ~$12M.
• Capital expenditures ~ $17M for the year; maintain advertising >10% of sales.
• Targeting a double-digit year-over-year inventory decrease at year-end.

Business Commentary:

• Profitability and Gross Margin Improvement:
• Duluth Trading reported gross margin expansion of 150 basis points to 53.8% in Q3, driven by reduced promotional depth and tariff mitigation actions.
• The improvement was achieved by rebalancing promotions, increasing average unit retail, and implementing direct-to-factory sourcing.

• Inventory Management and Reduction:
• The company reduced its inventory levels by 17% to $192.2 million, primarily by rightsizing receipts and focusing on core products.

• This was due to better inventory management and allocation, with a shift towards more disciplined receipt optimization and increased in-store inventory levels.

• Sales and Promotion Strategy:

• Net sales declined by 9.6%, partially offset by higher average order values, as the company focused on higher value transactions.

• The strategy involved reducing global promotional days by more than half and implementing targeted price increases, leading to improved profitability per unit sold.

• Operational Efficiency and Cost Management:

• SG&A spend was reduced by 14.1%, contributing to a 330 basis point improvement in SG&A as a percentage of sales.
• Cost savings were achieved through right-sizing expenses, reduced personnel, and depreciation expenses, with expectations to exceed the target of $12 million in savings for the year.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted "consecutive quarter of improved profitability," gross margin expansion of 150 bps, improved operations (Adairsville shipped >60% of units, on-time delivery >90%), net liquidity of ~ $125M post-peak, and affirmed higher-end adjusted EBITDA guidance of $23–$25M, signaling constructive momentum.

Q&A:

• Question from Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division): How are you assessing progress on becoming more profitable and prioritizing higher-value transactions; what key metrics do you focus on and how will this play out into the holiday period?
  Response: Core metrics are average order value, gross margin rate and sales per customer; AOV and gross margin are up despite ~10% Y/Y sales declines, indicating higher-quality sales that are expected to persist through a promotional Q4.

• Question from Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division): Any thoughts on operational execution versus last year and how long you expect the ~10% run rate to continue or when sales declines might moderate?
  Response: Operations have materially improved (Adairsville shipped >60% of units, +20 pts; on-time delivery >90%; retail in-stock 97%); the promo reset and planned SKU reductions (~20% in spring/fall 2026) are expected to stabilize and create a platform for long-term growth, though near-term sales remain down.

• Question from Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division): Q4 implied adjusted EBITDA looks much higher year-over-year; what factors are driving that improvement?
  Response: Improvement is driven primarily by shallower promotions (less 50% Black Friday discounting vs prior year), operational leverage from better inventory positioning and Adairsville fulfillment, and incremental cost savings now expected nearer $12M.

• Question from Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division): Did you fully pay down the credit line in Q4 and any commentary on future capital needs?
  Response: Yes—post-peak the company is out of the credit facility with net liquidity of ~ $125M and no outstanding borrowing on the line; capex guidance remains ~ $17M for the year.

• Question from Marcus Belanger (William Blair & Company L.L.C., Research Division): You cut promotional days in half—what was the depth of promotional activity/full-price mix and how far are you from optimal promo levels?
  Response: Q3 promotional days were cut ~50%; management plans further promo resets (notably around February clearance events), shifting focus to reducing markdowns via tighter assortment and higher sell-throughs to rebuild full-price mix over time.

Contradiction Point 1

Promotional Strategy and Margin Impact

It involves the inconsistency in the approach to promotional activities and their impact on gross margins, which are crucial for financial performance and profitability.

How will your strategy perform during the typically promotional holiday season? - Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division)

2026Q3: While fourth quarter tends to be more promotional, we are seeing the same dynamics play through quarter-to-quarter. We are experiencing higher profitability per unit sold and focusing on the quality of sales rather than the quantity. - Stephanie Pugliese(CEO)

What are you observing about consumer behavior as you reduce promotions? What price increases are expected, and how do you anticipate consumers will respond? - Janine Marie Hoffman Stichter (BTIG, LLC, Research Division)

2025Q1: We're seeing a lot of green shoots, especially as we reduce the depth of the offers. We are seeing positive trends in conversion, in higher full price sales and especially on our store channel, we are seeing better trends, both in terms of top line and profitability. - Heena Agrawal(CFO)

Contradiction Point 2

Inventory Management and SKU Reduction

It affects the company's ability to manage costs and maintain profitability by effectively managing inventory levels and product offerings.

What are your thoughts on cycling through last year's periods, and when do you expect mitigating factors to start offsetting the sales declines? - Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division)

2026Q3: Retail has a stable inventory of fewer SKUs and sub-styles, which drives more productivity and efficiency. - Stephanie Pugliese(CEO)

What criteria are needed to reestablish margin targets for sharing long-term expectations on profitable sales and annual profitability? - Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division)

2025Q2: We believe that by the end of this year, we'll have a fairly good feel as to what are the key styles in the business that drive a disproportionate amount of the sales and what are the non-core items that either need to go away or be de-emphasized. - Stephanie Pugliese(CEO)

Contradiction Point 3

Promotional Strategy and Profitability

It involves changes in the promotional strategy and its impact on profitability, which are crucial for understanding the company's revenue and pricing strategies.

How will the strategy perform during the holiday period, given the industry's typical promotional focus? - Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division)

2026Q3: While fourth quarter tends to be more promotional, we are seeing the same dynamics play through quarter-to-quarter. We are experiencing higher profitability per unit sold and focusing on the quality of sales rather than the quantity. - Stephanie Pugliese(CEO)

Can you summarize the fourth quarter results and discuss the challenges encountered? - Nitza McKee (ICR)

2025Q4: Our strategic focus for the quarter was to improve our financial performance by focusing on margins rather than volume. We reduced the depth and frequency of promotions in the quarter to focus on improving gross margin and profitability. - Heena Agrawal(CFO)

Contradiction Point 4

Inventory and Cost Management

It involves changes in inventory management and cost control strategies, which are essential for operational efficiency and profitability.

How are you evaluating progress on your strategy to increase profitability and prioritize high-value transactions, and what key metrics do you focus on? - Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division)

2026Q3: We are working to stabilize our inventory levels as we continue to improve our demand forecasting and use Valeo as a potential solution to our inventory issues. - Stephanie Pugliese(CEO)

What are your 2025 plans, and how will you execute them? - Nitza McKee (ICR)

2025Q4: Our full-price business is more productive than promotional which means we are testing some new strategies there and we are committed to reducing promotional activity, improving promotional efficiency and focusing on full-price sales. - Sam Sato(CEO)

Contradiction Point 5

Promotional Strategy and Discipline

It involves the company's approach to promotional activity, which directly impacts revenue and profitability.

How do you expect the strategy to execute during the holiday season, which is typically promotional? - Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division)

2026Q3: While fourth quarter tends to be more promotional, we are seeing the same dynamics play through quarter-to-quarter. We are experiencing higher profitability per unit sold and focusing on the quality of sales rather than the quantity. - Stephanie Pugliese(CEO)

Can you outline the specific metrics for determining the appropriate pullback in promotional activity? How confident are you in maintaining promotional discipline during the key fall holiday selling period? - Jonathan Komp (Robert W. Baird & Co. Incorporated, Research Division)

2025Q2: Gross margin dollars are the primary measure for determining promotional pullback levels. The success in the first two quarters has given us confidence in maintaining discipline in promotional depth for the balance of this year and into the fourth quarter. - Stephanie Pugliese(CEO)