Contradictions Emerge on Promotional Discipline and SG&A Savings in Q1 2025 and Q2 2026 Earnings Calls

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

Date of Call: None provided

Financials Results

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

Guidance:

• Maintains FY2025 adjusted EBITDA guidance of $20M–$25M.
• Tariff impact ~$15M in FY2025; average tariff rate ~12%; impact weighted to 2H (largest in Q4).
• Targeted price increases (late July/early Aug) meeting elasticity expectations; vendor negotiations and receipt timing help offset tariffs.
• On track for >$10M SG&A cost reductions in FY2025.
• Year-end inventory expected to be down double digits YOY; peak borrowings are behind.
• Capex maintained at ~$17M (two new stores, Manhattan Omni, maintenance).
• Marketing investment maintained as a percent of sales.
• ABL facility provides liquidity flexibility.

Business Commentary:

• Promotional Reset and Gross Margin Improvement:
• Duluth Trading reduced promotional depth, resulting in a 7% decline in sales, but delivered a $1,500,000 increase in adjusted EBITDA to $12,000,000 (9% of sales), with a gross margin improvement of two forty basis points to 54.7%.

• This was driven by a shift towards higher quality sales, increased average unit retail, and improved profitability.

• Inventory Management and Cost Control:

• Q2 ended with a 12% reduction in inventory levels compared to the prior year, and a $20,700,000 decrease in inventory.

• The company achieved this by optimizing receipts, rightsizing inventory, and reducing SKU and style counts, leading to improved cash use and inventory turns.

• Tariff Mitigation and Pricing Strategy:

• Duluth Trading implemented price increases on targeted products, offsetting tariff impacts anticipated at approximately $15,000,000.

• The company worked with vendors to share costs and managed inventory receipts to mitigate tariff impacts without compromising product quality.

• Store Sales and Marketing Efforts:

• Store sales grew by 5.3% year-over-year, driven by increased traffic, higher conversion rates, and optimized inventory allocation.

• This success was supported by targeted marketing efforts, including geo-targeted ads and connected TV campaigns.

• Cost Savings and Expense Rationalization:

• The company is on track to achieve $10,000,000 in cost savings this year, with a significant portion coming from headcount reductions and controllable expenses.
• These savings are a result of strategic restructuring and a focus on improving operational efficiency.

Sentiment Analysis:

• Management highlighted a 240 bps gross margin expansion to 54.7%, $1.5M YOY increase in adjusted EBITDA to $12M (9.1% margin), and 12% lower inventory, while acknowledging a 7% sales decline and tariff headwinds concentrated in 2H. They maintained FY2025 EBITDA guidance and cited price actions and cost cuts to offset tariffs.

Q&A:

• Question from Jonathan Komp (Baird): What metrics guide the promotional pullback and how confident are you in maintaining discipline through fall/holiday?
  Response: They prioritize gross margin dollars; reduced promo depth (not frequency) is working, supported by SG&A discipline, and they are confident maintaining this approach through 2H.

• Question from Jonathan Komp (Baird): How will tariffs affect back-half gross margin, especially Q4?
  Response: Targeted price increases (effective late July/Aug), vendor negotiations, and receipt timing are mitigating tariffs; impacts build in 2H with a larger Q4 effect, but they still expect to meet gross margin goals.

• Question from Jonathan Komp (Baird): Provide detail on the $10M SG&A savings cadence.
  Response: Savings come mainly from headcount actions and controllable expenses; benefits began in Q2 with roughly one-third realized, tracking to $10M for FY2025.

• Question from Jonathan Komp (Baird): What’s needed to reestablish longer-term margin targets?
  Response: Reset price integrity and optimize inventory/SKU productivity; executing a ~20% SKU reduction in 2026 and rationalizing expenses should support a stronger long-term margin profile after 2H execution.