Duluth Holdings, Inc. Class B Stock

[Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Chris Steffes with Duluth Trading Company Investor Relations. Please go ahead.

Thank you and welcome to today's call to discuss Duluth Trading Company's second quarter financial results. Our earnings release, which was issued this morning, is available on our investor relations website at ir.duluthtrading.com under news releases. I'm here today with Stephanie Pugliese, President and Chief Executive Officer, and Heena Agrawal, Senior Vice President and Chief Financial Officer.

On today's call, management will provide prepared remarks and then open the call for 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-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 will turn the call over to Stephanie.

Good morning everyone, and thank you for joining us to discuss our second quarter fiscal 2026 results. I'm incredibly proud of our team for delivering another quarter of improved profitability and free cash flow. This accomplishment is a direct reflection of the team's commitment to operational rigor and financial discipline. By staying focused on our core priorities, we have not only stabilized our margins, but also generated the financial flexibility required to accelerate our strategic initiatives.

Our goals for Q2 were clear. We aim to drive improved profitability, maintain strength in our operational execution, deploy a marketing strategy focused on driving brand awareness and consideration, reduce our promotional reliance, and achieve a clean, healthy inventory position. I am pleased to report that we executed against each of these pillars effectively. Our operational excellence this quarter was most visible in our margin improvement and inventory management.

We executed a deliberate cleanup of clearance inventory, which is now down 43% compared to last year. This wasn't just about liquidating old stock. It was a reflection of the fundamental shift in our merchandising philosophy over the past year and a half. We have moved away from a broad assortment, discount-heavy approach toward a hero core product strategy. By reducing the total number of SKUs and focusing our buys on proven winners, we have created a leaner, more agile inventory position. This reduction in clearance reliance has a double benefit. It cleans up our balance sheet and protects our brand equity by reducing the need for the deep site-wide discounts that characterized previous years.

And the reduction in deep discounting this quarter allowed us to deliver nearly 500 basis points of operational gross margin improvement year over year. Turning to our marketing efforts. During the quarter, we saw strong response across our paid media channels such as Connected TV, Meta, and Search. In addition, our premium audio integrations, including host read spots with Conan O'Brien, drove significant engagement and last-click revenue. We also continued our [ Max Gluteus ] campaign, tailored specifically for the folks who work their butts off while leveraging key sports partnerships, including investments in the NHL playoffs.

And this coming month, to showcase our expansive Fire Hose collection, our marketing campaign will be featured across linear and CTV broadcasts during upcoming college football matchups. No fabric embodies the Duluth DNA quite like Fire Hose. And we're proud to reinforce our legacy, engage our customers, and spotlight the unmatched durability of these products. We continue to apply input from marketing results to go-forward actions. Key learnings from Mother's Day and Prime Week enforced the critical need for full funnel media coordination and continuous brand messaging.

And we are applying these insights to the second half of the year. Maintaining top of funnel brand presence ensures our hero products remain visible across all channels and create sales momentum leading into key promotional moments. We are ramping up our upper funnel brand investments in the third quarter to prime demand ahead of peak and capture early transitional shoppers. This will be coupled with amplified product storytelling across key events like Fall Grind Days and our Big Dam Birthday. Further, we are investing in AI capabilities across organic and paid media to maximize our discoverability and optimize our digital footprint.

All of these efforts center on growing our brand presence and ultimately increasing the customer fan base. As previously shared, our total customer base has contracted as we've reset promotions. We are investing in the underlying health of our customer file, and we have some proof points that we are building on. In Q2, customer average order value and sales per customer continue to improve over prior year, and through the first half of the year, retention rates increased and our Net Promoter Score is up 11%. Our reactivation campaigns are working and we re-engaged 9% more lapsed buyers in the quarter versus last year.

In addition to our efforts in our own stores and e-commerce to build awareness and engagement, our growth initiatives, like the Amazon wholesale launch, are showing positive early results, giving us confidence in growing awareness and acquisition in the long term and in new ways. Central to our continued success is our Build to Last strategic roadmap. We have completed the Seal the Foundation phase, which focused on stabilizing the business through rigorous margin protection and cost control. We addressed structural inefficiencies, right-sized our overhead, and established a leaner operating model that can better weather macroeconomic volatility.

As we move to Frame the Structure, we have more work to do, and we are shifting our focus to scalable growth. This next phase involves continuing the discipline we have put in place while investing in our customers, our core products, and our brand reach. We are beginning to build the systems and channels, leaning into our store performance, improving our own e-commerce experience, and piloting a wholesale presence that will create long-term profitable growth. We are no longer just fixing the basics. We are constructing the framework for Duluth's future as a multi-channel, durable, and functional work apparel leader, and it all starts with the products that our customers love.

Our focus on Core First is anchored in our product innovation and technical design philosophy. Core products like Flex Fire Hose, Heirloom Bibs, and Buck Naked Underwear continued to outperform the overall pace of the business last quarter. And new products like our [ Hellbent ] work pants and [ No Quit ] utility shirts are not just additions to the assortment. They represent the importance of our functional design. Our philosophy is built on solution-based workwear, identifying a specific pain point for the person who works their butts off and solving it with superior fabric and construction.

The [ Hellbent ] line, for instance, utilizes advanced abrasion-resistant materials and articulated patterning that allows for maximum mobility without sacrificing durability. These innovative, durable products justify a premium price point and reinforce our value equation. Duluth gear is an investment that lasts longer and performs better than the competition. To support this product-led growth, we are continuing to evolve our marketing into a more sophisticated, full-funnel engine. We are balancing top of funnel brand awareness through high impact professional and college sports partnerships and premium audio integrations with lower funnel conversion efforts.

We are investing in AI-driven search capabilities so that when customers ask for items like the best work pants, Duluth will ultimately be the first answer they see. Furthermore, our [ Duluth DieHards ] pilot is providing us with a wealth of actionable data, learning how our most valuable customers interact with us across channels, allowing us to personalize content and offers to drive higher lifetime value and retention. Now looking toward the back half of the year. We are excited about the opportunities in front of us to improve our sales trends and strengthen our customer file. Early sell-throughs from our fall lineup are strong.

Equally important, demand for our core products remains robust at higher margins. While we expect last year's heavy volume of low margin clearance sales will temporarily weigh on Q3 top line results, we are reiterating sales guidance for the full year. Our priority for Duluth Now is to increase our voice in the marketplace through full funnel marketing, reaching new brand fans via new channels, and by delighting our customers at every interaction. For this reason, through the remainder of this year, we will invest some of the additional cash from tariffs on the customer experience, improving our visibility with AI Search, strengthening our store team's ability to serve customers well, and telling our story of functional, durable workwear throughout the full funnel.

These investments are not just about the remainder of 2026. They are about positioning Duluth for sustained profitable growth for years to come. We are focused on delivering the back half of the year while setting our eyes on the Raise the Roof phase of our strategy in 12 to 18 months. We will continue to explore and invest in setting the stage for additional customer reach, specifically understanding our store potential and wholesale opportunities, and we will report on our progress in quarters to come.

In closing, we are prepared and energized to deliver on the balance of the year, to delight our customers this holiday season, to continue along our Build to Last strategic path, and to bring long-term profitable growth to this amazing brand. I'm grateful for the talented team we have to bring this to fruition. I will now pass the call over to Heena to provide more detail on our financial performance.

Good morning everyone, and thank you, Stephanie. I am pleased to report our financial performance for the second quarter of fiscal 2026. Over the past 18 months, our team has successfully restored price integrity by completing a promotional reset. Through disciplined inventory and cash management, alongside enhanced integrated planning and execution, we have established operational stability. Our strategic focus, operational consistency, and agility in navigating macroeconomic headwinds have now driven 5 straight quarters of year-over-year gains in both net income margin and free cash flow.

Our results this quarter demonstrate continued underlying margin expansion, structural profitability, and a more robust balance sheet. Let me share our financial results and provide our updated outlook for the full fiscal year, starting with our results for the second quarter of 2026 with comparisons to prior year. As we continued our promotional reset and annualized price increases from 2025, we reported net sales of $121.4 million, down 7.8%. With improving quality of sales, underlying gross margin, excluding tariff refunds, expanded by 1,810 basis points, including the impact of refunds.

Our net income improved by $17.1 million to $18.4 million. Our reported and adjusted diluted EPS was $0.50. These results include $16.3 million in tariff refunds received during the period, contributing $0.44 per share. Adjusted EBITDA was $27 million, an improvement of $15 million compared to $12 million in Q2 of last year. Excluding the impact of tariff refunds, Adjusted EBITDA was $10.7 million at 8.8% of sales, driven by our continued focus on profitable sales coupled with lower overhead and enhanced variable cost productivity, partially offset by fuel cost increases and higher advertising investments.

Looking closer at our top line metrics for the quarter, as we continued our promotional reset and annualized our pricing strategy, net sales declined 7.8% to $121.4 million. Excluding the impact of wholesale, net sales decreased 5.4%. During the first half, net sales decreased by 6.2%, which was at the high end of our guidance range of minus 6% to minus 10%. Our direct-to-consumer net sales, excluding wholesale, were $69.5 million, a decrease of 7.6% as we completed our promotional reset and annualized price increases, resulting in lower conversions.

However, a 2.4% gain in average order value and 10% higher site traffic driven by increased marketing investment partially offset this decline. In addition, mobile sales penetration increased by 90 basis points. Our network of 66 retail stores delivered net sales of $51.3 million, a decrease of 2.4%. Retail store sales were impacted by lower traffic and conversion, partially offset by improved inventory availability and 6% higher average order values. Retail continued to outperform the direct channel, delivering flat year-on-year sales for the first half.

Regarding our newest distribution channel, Amazon, Duluth products have gained strong momentum since our mid-July launch, generating consistent week-over-week acceleration in sales. Men's product sales increased 0.5%, driven by strong cold demand in first layer and woven bottoms, including DuluthFlex Fire Hose and Double Flex Denim. Women's product sales declined 15%, driven largely by strategic SKU rationalization and reduced clearance sales, while gross margin continued to expand. AKHG brand sales declined 26% as we exited low margin categories such as swimwear to improve gross margin, while cooling UPF selections and Shoreside woven bottoms delivered strong sell-throughs.

With fewer promotions and increased average prices, gross margin rate expanded across product categories and sales channels. In addition, excluding the impact of tariff refunds, underlying gross profit dollars grew in both the second quarter and the first half of 2026. Gross margin rate expanded by 1,810 basis points to 72.8% of net sales. Excluding $16 million of tariff refunds, our Q2 gross margin was 59.6%, expanding by 490 basis points. This expansion was driven by our pricing and promotional reset, with average unit retails increasing by nearly 6%, along with cost savings from our direct factory sourcing initiative.

These gains were partially offset by the impact of fuel price increases and carrier surcharge costs for the first half of the year, underlying gross margin excluding tariff refunds was 58.7%, an expansion of 520 basis points versus prior year. Selling, general, and administrative expenses in the second quarter were $69.5 million, up $0.7 million or 1.1% compared to last year, deleveraging by 510 basis points to 57.3% due to a decline in sales. Advertising costs represented 10.9% of sales, an increase of 200 basis points, with an investment in increasing brand awareness.

Shipping and variable costs deleveraged by 60 basis points driven by higher fuel costs and carrier surcharges partially offset by continued savings from consolidating the fulfillment center network with the closure of Salt Lake City Fulfillment Center and store labor efficiencies. Corporate expenses were flat and deleveraged by 250 basis points, largely due to the decrease in sales and acceleration of incentive compensation accruals. Our ongoing operational discipline demonstrated by structural gains in fulfillment efficiency and prudent overhead management helped moderate deleveraging pressures and provided the flexibility to accelerate our brand-building initiative.

Inventory at the end of the second quarter was $125.2 million, a reduction of $22.9 million or 15.5% compared to prior year. Our inventory mix at quarter end was also healthier with 85.4% in current products and 14.6% in clearance goods versus 22.2% in the second quarter last year. Overall clearance inventory dollars were down 43.1%, while units decreased 46.6%, primarily driven by right-sized buying and higher sell-through rates in seasonal spring-summer clearance items. Year-over-year inventory improved for the fifth straight quarter due to enterprise planning and SKU rationalization.

In addition, prioritizing inventory at our Adairsville Hub and retail stores improved in stock levels by over 600 basis points. Our capital expenditures for the first half were $5.7 million compared to $9.7 million in the prior year, with investments primarily in the final phases of Manhattan Active Omni fulfillment software. We ended the second quarter with a stronger balance sheet and liquidity position. Cash and cash equivalents stood at $26.8 million with 0 debt on our asset-based lending facility versus $32.5 million of debt on the facility at the same time last year. This resulted in a net liquidity position of approximately $96.1 million.

Combined with our improved profitability, continued working capital discipline, and capital expenditure guidance, the business generated free cash flow of $13 million by the end of the second quarter, an improvement of $41 million compared to the same period last year. We continue to optimize our store fleet to maximize omni-channel sales in priority markets and improve profitability of the overall store portfolio. We have finalized 5 of our 7 store lease renewals for this year, with the remaining 2 under negotiation. Looking ahead, 10 store leases are scheduled for renewal in 2027.

Productivity across our store portfolio continues to trend upward, marked by an 80 basis point expansion in Q2 Adjusted EBITDA margin and a 290 basis point gain year-to-date. Building on the 360 basis point expansion, achieved in the first half of last year, this reflects a cumulative 650 basis point margin expansion over a 2-year period across the first 6 months. Looking ahead to 2028 and beyond, as we lay the groundwork for our Raise the Roof growth phase, we are investing to refine and optimize the size and layout of our next-generation store format. Our supply chain transformation continues to deliver structural cost savings.

In the last 2 years, we have consolidated the logistics network from 4 fulfillment centers to 2. This has allowed us to maximize the return on our investments in the fully automated Adairsville Fulfillment Center, which crosses 75% of total units in Q2, an increase of 230 basis points from last year, while reducing our overall network variable cost per unit by nearly 25%. At the same time, optimizing our carrier network has allowed us to sustain nationwide click-to-delivery speed while partially offset the impact of rising fuel expenses and surcharges.

Looking ahead to full year fiscal 2026, we are updating our financial outlook by raising our Adjusted EBITDA guidance while maintaining our overall net sales expectations. We are increasing our full year Adjusted EBITDA expectations to between $38 million and $42 million, up from our prior outlook of $28 million to $32 million. This updated projection includes the $16.3 million gain from tariff refunds, partially offset by strategic growth investments and increased fuel expenses. We are reaffirming our full year net sales guidance of $540 million to $560 million. First half net sales were minus 6.2%, finishing at the top end of our targeted minus 6% to minus 10% range.

While overall second half sales performance is projected to be between minus 2% to plus 2%, we expect sales in the third quarter to moderate as we lap prior year clearance events that generated lower margin revenue. Our tariff rate for the second half of the year is assumed at approximately 15% to 16%, reflecting 2% of 12.5% for Q3 and back to the higher rates in Q4. Within SG&A, we anticipate marketing spend to accelerate in Q3 compared to last year due to earlier holiday shopping demand, and we expect continued headwinds in transportation costs. We are affirming full-year capital expenditures of $12 million behind investments in Manhattan Active Omni fulfillment software, Apple Pay, and maintenance.

We are allocating capital and strategically reinvesting our cash flow and tariff refund proceeds across key priorities. First, we are fueling brand growth with incremental second half marketing investments across connected TV, college football, and high conversion search channels. Second, we are funding long-term strategic initiatives, including retail store growth and wholesale partnerships to support the Raise the Roof stage of our Build to Last strategy for 2028 and beyond. Finally, we are being prudent in maintaining a reserve to counter macroeconomic and supply chain headwinds.

In closing, validated by 5 consecutive quarters of expanding margins and improving cash flow, our Q2 results demonstrate the success of our turnaround. Driven by margin discipline, optimized inventory, and strong cash generation. With the Seal the Foundation phase complete, we are focusing on Frame the Structure, capitalizing on our enhanced financial strength to invest in growth initiatives that drive strategic customer engagement and broader distribution.

Having transitioned our financial model towards higher structural growth margins, decreased fulfillment costs, and greater working capital efficiency, we are maintaining a disciplined approach to capital allocation and have clear financial levers to drive sustainable, profitable growth as outlined in our Build to Last strategy. With that, I will turn the call over for questions.

[Operator Instructions] Our first question comes from Dylan Carden with William Blair.

I'm curious if you can kind of spell out in guidance expectations for third quarter, why that takes a step back and maybe in that understanding kind of the drag of the Alaskan Hardgear business. In other words, sort of 2 quarters into that. Inventory reset, I don't think you've ever quantified it as a percent of sales, but just how big of a headwind is that versus sort of the core Duluth business?

So Dylan, this is Stephanie. Good morning. I can start with the Alaskan Hardgear conversation, then I'll hand it over to Heena on your other question around third quarter and guidance. Alaskan Hardgear is a relatively small part of our assortment overall. What we're finding is that we've got some specific core products in Alaskan Hardgear that are doing really well. It was an area of the business that over the past several years, kind of fell victim, if you will, to the over-assortment, over-SKU situation that the total business had. And so we've pulled that business back to the essence, things like Stone Run pants, for example. And we're rebuilding into that. But think about it as a small part of the business, something that we think has opportunity in the long term, but it's really not an overall significant drag to what we're trying to do with the core men's and women's apparel.

Yes, and good morning, Dylan. On Q3 guidance, we expect the trend in Q3 to be better than Q2. However, we are not repeating some of the clearance events. As I mentioned in the call, our clearance inventory is down over 40%, both in dollars and units. And so that's the reason for moderating our expectations on Q3, but it will be an improving trend versus Q2.

And I would categorize it, Dylan, as our reset really has been highly focused on the promotions that we turn on or trigger during specific time periods. And we're starting to lap that as we come into the back half of the year. That said, last year at this time. We were so heavily impacted by clearance and the negative from the standpoint of our inventory and our balance sheet and ultimately the margins. But it did generate short-term top-line volume for us, specifically in the month of August and third quarter, that is a headwind for us in third quarter.

Understood. So if I'm thinking about back half down 2, up 2, is third quarter worse than that? And I guess if so, help me understand the inflection then in fourth quarter. Is that... lapping clearance activity, is that sort of a marketing lagged effect?

Yes, so if you think about the minus 2 to plus 2 and the timing of the different quarters, every quarter improves versus the prior quarter. So Q3 better than Q2, Q4 better than Q3, and that is what gets us to the minus 2 to plus 2 for the full year. The second half versus the first half. Okay, but Q3, yes, lags Q4. Q4 will be better because there will be even more evenness versus last year when it comes to the amount of promotions, the pricing impact, the marketing impact, and the inventory situation.

And would you expect the recovery to be kind of led? I know it's further impaired versus the retail channel, but if you're doing all this marketing, wouldn't you expect the sort of the impact there to be mostly in the online channel, particularly as you lap the clearance activity? I know that's a higher clearance channel.

Yes, we expect the improvement in both channels. And like you said, the improvement is greater in the online channel versus the retail channel, especially in Q4.

And sorry, last one for me. On inventory terms, if I kind of take the trailing 4 quarters are still kind of below 2. And I'm just kind of curious as you right-size the inventory here, the opportunity embedded in getting more efficient in turn.

Thanks. Yes, this is Stephanie. I'll take that, Dylan. We do definitely see opportunity in the long term for improving inventory turns and to continue to SKU rationalize the business. That said, the other thing that was very important to us is, as you know, our core product. I believe we still have opportunity in that core product to be in a never-out inventory situation so that when our customers come either online or in the stores, we know that we are satisfying that demand at the time of need. So we're also looking at how we right size and flow our core product in a way that satisfies our customer and just creates that better experience where we're in stock all the time. So it's a play on the inventory around SKU rationalization, tightening down the or improving the sell-throughs, particularly on non-core products, and then an always in-stock position on core. Thank you very much.

Thank you. That will conclude today's question and answer session. This concludes today's conference call. Thank you for participating. You may now disconnect.

Good morning, everyone, and welcome to Duluth Trading Company's 2026 Investor and Analyst Event. My name is Chris Steffes and I'm the Senior Director of FP&A and Investor Relations at Duluth. It's great to see many of you here in person in New York and I'm glad to have those of you joining us via webcast as well.

And on behalf of the entire Duluth team, thanks for spending part of your day with us. Today is about giving you a closer look under the hood at Duluth. How we're thinking about the business, where we're focused and how we're working to build a stronger company for the long haul. But before we begin, I want to remind everyone that today's presentation contains forward-looking statements which can be identified by words such as estimate, anticipate, expect and similar phrases. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Please refer to our most recent annual report on Form 10-K and subsequent SEC filings for a full description of those risks. The forward-looking statements made today speak only as of this date, and the company assumes no obligation to update them.

Just a few housekeeping items before we get started. First off, rest [indiscernible] are located right up the stairs here on your right. We do have WiFi available here in the room, and there are cards on the tables with the network name and password. And finally, our presentation slides are available on our IR website at ir.duluthtrading.com.

Today, you're going to hear from Stephanie Pugliese, our President and Chief Executive Officer; and Heena Agrawal, our Chief Financial Officer. Stephanie will kick things off with a look at our strategy, our culture, our customers and how we see the brand and the business evolving. And Heena will follow with a look at our financial performance, our long-term plan and how we get there. The presentation will run approximately 45 minutes, and we'll go straight into Q&A before breaking for lunch.

If you are attending via webcast, we'll provide instructions on how to submit questions during the Q&A. And with that, I am very pleased to introduce Stephanie Pugliese.

Thanks, Chris. Thank you, everyone, for being being here today. For those of you who are here in person, thank you and for those of you who are joining us via the webcast. Also thank you. I am so excited being here today back at Duluth and in front of our investor community again. It has been just an absolute thrill to be back with the brand. And I know that some of you may know a little bit about me, many of you may not. So I wanted to give just a quick brief overview of my time with Duluth and my time in the industry. I have been in the retail and brand industry for my entire career. So just a little over 35 years. And I've had the privilege of being part of some really powerful brands in that time. But none of them are as exciting as as what we're doing at Duluth right now.

I've been with this brand for a long time. It's been part of my life for a long time. I led the organization and the brand through early stages of growth, all the way at 1 point through our IPO in 2015 and then after a few years of being a public company, I left the brand for a few years. And last year, a little over a year ago came back. And what I'd say to you is the reason that I came back to Duluth was really at the end of the day for one simple reason, belief, belief in the brand, belief in what we do and belief in the team and the ability to create value longer term. It hasn't been easy. In the past, the company had made some mistakes and made some strategic decisions that stretched the business too far. And then we lost some focus that ultimately made Duluth what it is and what makes dilute so special. But in the past 12 months or so, we've reset. It shows in both the financial results and ultimately, I hope you'll see in the future strategy.

So before we get into those numbers and the strategy, let's dig in and talk a little bit more about what makes Duluth so special. First, an introduction who we are. We are the official outfitter of doers. We exist to champion a hands-on way of life. And what sets us apart is our unique blend of problems and solutions for our customer resulting in solution-based products that are infused with 4 brand attributes, authentic, humorous, humble and hard-working.

Our products and our brand evoke that emotional connection, that's distinctive, I believe, in today's retail landscape. Our customer buys on quality and value, first and foremost, not ultimately on just a price. That's why durability and that problem solving design are the foundation of everything that we make. And our Noble guarantee is not just a marketing slogan. It's about doing what we say we're going to do. And when we don't do it, making things right immediately. And ultimately, when we say we poke average in the eye because it's a fun and interesting phrase, what we really mean is that we find a better way to do things, whether that's through our products, our experience or our customer service. And then just a little bit about the numbers that you see here on the slide.

Last year, we did $565 million in revenues at a 53.4% gross margin, a little under $17 million of free cash flow and 66 stores across 32 states helped us to create an omnichannel experience for our customers. And let's talk a little bit about those customers. So our customers are people who do real work whether that's by their profession or their passion, Think about the contractor, the Gartner, the person who does weekend projects. They bring a combination of both seriousness about their work and enjoy in what they're doing to everything that they do.

They are defined by how they live, not necessarily how old they are or where they live. And what that means for us is that we are a brand that transcends generation, we're speaking to a value system ultimately. Last year, we had 2.8 million active buyers on our file, 50% of them are women. The majority of them shop online, as you would expect, and they have an average household income of $131,000. They buy quality because they know, ultimately, that's the right value because it lasts.

A lot of times, we get questions about Duluth as being just a Midwest brand. This map shows that we have reach far beyond just the Midwest. We have an expansive customer base across all states with concentrations in both coasts, Texas and across the states that we're in, in our store base. The addressable market is national for us. Now let's pivot a little bit and talk a little bit about our culture. Why is that important? Well, we believe our culture is our strategic and competitive advantage. In short, we call them the wells because they're what connects us with strength. And they're important to us because they base us in everything that we do. I'm going to talk a little bit about some of these in-depth starting with our product.

Our product is our passion. Why is that? It's because what we offer to our customer is our product, and it's also what sets us apart. When we create something that helps our customers do what they do and continue with their joy of doing, we win. And what those core products do for our customers are creating solutions to their products. And that's what we're getting back to more and more. It's what allows us to introduce ourselves to a new audience and create deeper connections with our long-standing fans. It's also the rationale behind why we went to SKU rational rationalization, excuse me, just this past year. The more that we can cut to the chase and get back to what we stand for, the clearer that we can stand for those products, and we know that we win. And that's how you get things like Buck Naked Underwear, no young tanks, Duluth Flex firehose, 75% of our 2025 revenue was driven by our core solution-based products.

It's not a brand chasing trends. It's a brand that's devoted to finding a better way. And who are we serving? We're serving ultimately our customers and our customers are Encompass. We know that we're doing our jobs well when our customers tell us. They're more loyal than many and they actively write in to tell us how we're doing. Well, a little bit about how we're doing. We have 16,000 5-star reviews on Buck Naked alone, 90% of our reviewed products online are our 4 or 5 star reviews and our Net Promoter Score was 72 in Q1 of this year. But that doesn't mean that we always get it right. And when we don't get it right, our customers tell us, we have disappointed them in the past and our NPS score suffered. But when we righted the ship, NPS scores came back, retail results in our stores improved and our core product grew. And how do we bring all of this core product to market to engage more deeply with our customers.

Well, we do it through marketing that stands out. Our advertising has always been different. We don't just describe what a product does. We tell a story about it. And hopefully, we do it in a way that makes people laugh. That has been a deliberate part of the brand since day 1. The Giant Angry Beaver Buck and now more recently, Max Gludias, these characters stick. Humor gives our product a personality and makes the shopping experience feel more like a connection and less like just a transaction. And on the women's side, our women of grit and substance are real women, not models. They work hard they inspire and they show the true value of what Duluth stands for, for our women's customers.

Our customers respond to that authenticity. So here's the deeper truth behind it all. The hard work that we do, the hard work that our customers do is really important. But ultimately, none of us take our work or ourselves too seriously. It brings us joy, and that's the foundation of the differentiation of Duluth in the marketplace, bringing joy to their lives is an emotional contract. So I want to talk a little bit about the evolution of marketing because I think that's really important in how we are going to market, but also how we're thinking about leveraging marketing in the future. Ultimately, our marketing over the years has evolved away from the direct consumer print heritage to a more full funnel approach. And that full funnel approach today includes TV advertising, digital video, creative partnerships and still includes, of course, local marketing to drive traffic to our stores. For most of the past several years though, the company was focused towards last click conversion, paid search, promotional e-mails, discount-driven digital spend. Those tactics were important in driving transactions, but ultimately, they didn't build the brand, and they reinforced ultimately a promotional mindset with our customers.

So over the past 12 to 18 months, we've been deliberately focused on rebalancing the approximately 70% of the conversion-based marketing that we were spending to more of a 50-50 balance today. And why that's important is that as we are doing that, we are seeing proof points that brand awareness and consideration are improving, and our traffic trends are beginning to recover. We are being deliberate about the pace of this shift because if you remember, we're also in the process of resetting our promotional cadence and restoring full-price business back into the business. So we knew that moving too aggressively about around balancing all of this would have compounded the top line pressure? that the business was already managing. Marketing and customer acquisition is a place where we're still learning and where we have ultimately the most to prove coming up. We're encouraged, though, by what we're seeing, and those proof points are giving us confidence and making more investments to ultimately improve the customer file.

So now you know about the brand a little bit. You know a little bit about the customer. Hopefully, you know more about the products that we create. Let's talk a little bit more and go back a little bit further around our history and talk a little bit about what we got right what we learned and ultimately, how all of that is informing where we're going from here -- so our growth story, our story, our brand story over the past 25 years has really been around certain catalysts that have driven the next stage of growth and in the next stage of development as a business.

We know that we are consistency is -- has been in finding a way to move forward and ultimately, moving forward through those different stages of growth has brought us to where we are today. That growth has come in distinct phases. Number 1 was our solution-based product focus. The decision, the active decision that we made to solve problems with our product for the people who do real work, became the foundation of everything that has come since and is still a critical piece of what we do today. The second phase of the business and the growth was around national advertising, which transformed us from a catalog-based business into a national business that had reach far beyond where we could just mail books. And then the third phase of the business and growth was in omnichannel. And what happened there was we proved something really important, that the combination of having stores and an online business in markets proved more powerful than just having an online presence alone or stores alone and that ability to leverage both aspects of our brand has become very important and stays very important to us.

But ultimately, and you can see in some of these phases, -- some of that growth created some challenges for the company. The big dam blueprint, which was a framework for building a multi-brand platform through extensive infrastructure investment added complexity that ultimately compressed our margins and stretched the business beyond what it had grown to and what it could sustain profitably. Our revenue, as with many retailers peaked in 2021 and then declined over the next 3 years. We began the reset in 2025. Our foundation is now more solid, and now this is our next inflection point. So what did we exactly learn from those phases and the different points in our strategy? What worked -- what works is when we build product that was problem solving and connect with our customers. foundationally, that's the most important thing.

The second thing that worked is some of the structural improvements that we put in place, like, for example, our direct-to-factory sourcing, gave us margin improvements got us closer to the production of our product and gave us more control ultimately. And the multichannel model, I just mentioned it a moment ago, stores plus Web creating synergies for our customers. Some of the things that didn't work, early in rapid store expansion outpaced the company's ability ultimately to create significant comp growth year-over-year. the SKU proliferation diluted our focus and led to a more promotional environment at the time. And then ultimately, the business fell into a promotional cycle that compounded with customers expecting promotions and us having to spend the marketing, as I mentioned earlier, around that last click attribution and the infrastructure investment over the past couple of years ran ahead of the returns that the company had to justify it.

So at the end of the day, with the big idea or the big lesson here is that when the company and when we focus on core product serving our customer well and operational discipline we win. When we chase short-term volume for its own sake or we let strategic investments get ahead of our growth, we know that, that doesn't work the way we need it too. So this is now the lens that we're applying to everything that we do go forward. Let's talk about how we build from here. We've got the clarity that's driving the plan and here's how we're putting it to work. First, let me introduce the Build to -- last framework. You can see that this comes in 3 separate phases, 1 of which we have mostly completed -- in 2025, we deployed all of our efforts and our talent to sealing the foundation.

Ultimately, it was about operational and financial discipline getting the operations stable, improving discipline overall and restoring the financial health of the business. That work is largely done. 2026 and 2027, obviously, where we are right now is about framing the structure. It's reenergizing the core customer. I'll talk a little bit more about that in just a moment focusing on core product. I've already mentioned that. Again, I'll go deeper in that, reducing reliance on promotions, work that we started about a year ago and testing new distribution. The goal ultimately is to prove out the pieces of this model until -- before we scale it. And then ultimately, 2028 and beyond is where we raise the roof once the core is stable, and healthy and the unit economics are proven. We add loyalty at scale, growth in women's and additional points of distribution. We prove out the model and then we scale. Each phase builds on the last and the financials will show it.

Let me talk you through now what this looks like in practice, our 2026 priorities how we're marketing behind them and the strategic vision ultimately for where we take the brand. 2026 priority -- these are pretty straightforward. They're all pointing in the same direction, and that is go forward with what works. First, we're returning to core work-focused product that our customers love and the customers who built this brand respond to fewer SKUs, deeper investment in what we know sells and bigger, bolder marketing stories around that product told more consistently.

Second, we are rebuilding the e-commerce experience to build into and match how our customers actually shop. This means things like better search ability. Apple Pay, better discovery, we saw that improvement begin to show up in our Q1 online trends. And then third, we're focused on reversing the leaks in our customer file. That means, first and foremost, reactivating lapsed high-value customers, not chasing price-sensitive customers with clearance activity. full-price relationships, sustainable acquisition. We're still learning here, but the proof points are building. And last and fourth, we are carefully testing new distribution.

Our Amazon launch will go live this quarter. There are already 1 million searches for Duluth on Amazon. Our customers are looking for us there, and we're meeting them where they shop without compromising our pricing or our brand. Let me talk a little bit more deeply about the marketing strategy that I've mentioned over the past couple of slides. So for the past several years, we've built our marketing budget around trying to convert people who were already actively shopping. And we did that through things like paid search, promotional e-mails, discount-driven spend, lower funnel activities. It worked in the short term, and it buffered some of the shortfall in the customer file.

However, it didn't build the brand long term. And ultimately, it taught a lot of our customers to wait for a sale. That's what we're rebalancing. We've shifted from approximately 70% of lower funnel activity to close to a 50-50 split between upper and lower at this point. The idea is to move away from last click attribution that buys a customer in the moment and building brand marketing that builds a lifetime value long-term customer. We need both but we have been underinvested in brand for a long time. What does that look like then in practice? It means more time, money, devotion, focus in things like national television, high affinity podcast distinctive digital video, campaigns like Max gluteus or dibs on the bids. They are driving real growth in product categories like men's underwear and women's gardening. That's the full funnel that ultimately works the way it should. And we're focused heavily on bringing customers back -- our active customers have been -- have a household income of $131,000. They buy on quality, not on price, reactivating that customer base not only continues to bring high customers back into the active file, but it's also a very cost-effective way to begin to bring our customer file back into health.

Because reactivation and retention cost us roughly 1/3 of new customer acquisition. Those are the economics that we're building going forward. And then ultimately, we get to the phase of raising the roof. Phase 3 is where everything that we are building yesterday and today gets to scale. Once that core is healthy, the unit economics are proven and the customer file is growing, we begin to raise the roof. And what that means practically, loyalty at scale, returning to real growth in women's, select new stores and additional distribution channels. We expand our customer base and drive steady positive comps across our retail and our direct networks, brand integrity, pricing power still stays at the core of the decisions that we ultimately make. And structurally, this model is designed to create consistent free cash flow and improved margins.

So speaking of improved margins and consistent free cash flow, I'm going to now turn it over to Heena, who will take you more deeply through the financials.

Thank you, Stephanie, and good morning, everyone. The strategy you just heard is driving the financial transformation. Over the past several quarters, we've done the heavy lifting required to reposition our financial model by moving past the operational complexities that previously weighed our bottom line we have built a leaner of a far more structured fairly profitable business. In this section, I will walk you through the evolution of our business model. detail the specific big operational levers and margin drivers behind our targets and share our long-range financial road map through 2028.

Our financial turnaround is substantially complete. We have successfully shifted away from a capital-heavy infrastructure phase and into an agile cash-generative model designed to maximize our return on invested capital. As we outlined how we are building our future, let's look at some concrete operational milestones achieved during fiscal 2025. Our seal the foundation phase was about executing hard choices to restore long-term health to dilute trading. At the start of last year, we set 4 clear goals: one, to restore our price integrity through resetting our promotional cadence, improve inventory and cash management, streamline our operations and restore the health of our store portfolio.

We delivered on all four. First, we reset our promotional strategy to restore brand and price integrity. We shifted away from margin-dilutive deep, site-wide discounts to targeted events increasing our average unit retail and average order value by double digits. Full price selling drove higher quality revenue across both our channels. and we delivered 3 consecutive quarters of gross margin expansion. Second, we rightsized our inventory and assortment. At the end of 2025, our inventory was down 21% and with sequential year-on-year improvement every single quarter. We focused our assortment on coal products with stronger in-stock positions and lower clearance penetration.

Our SKU count was down 20% in 2026 spring, and we are on track to have another double-digit reduction by fall of 2026. Third, we implemented our enterprise planning system, which is an integrated process that connects merchandising stores and our supply chain, improving our forecast accuracy. We consolidated our logistics network, we took it down from 4 fulfillment centers to 2, and this helps us maximize our automated Adairsville hub, and we saw that our click-to-ship time reduced in half versus prior year. We also reduced our cost by more than what we had planned and forecast instead of $10 million, we delivered $12 million in cost reductions through head count reductions, controllable expense cuts, and streamlining our fulfillment network. And finally, our retail real estate strategy is working we combined local marketing and optimized our inventory to have the first year of positive comp sales, along with 550 basis points of store level profitability improvement in 2025. Every store in the fleet is profitable. And our 2 new stores are on track to be pay back in 3 years. These operational improvements directly translated into a financial step change for fiscal 2025, while our disciplined promotional pullback created a top line revenue decline, the quality of our revenue improved. This focus on profitable transactions expanded our full year gross margin by 420 basis points to 53.4%, successfully absorbing an $11 million tariff headwind. This change is structural, not cyclical.

On the expense side, we exceeded our cost reduction targets, reducing SG&A by $27.1 million year-over-year. As a result, our full year adjusted EBITDA scaled by $10.3 million to $24.9 million. Most importantly, our working capital improvements and capital discipline reversed years of cash consumption generating $16.6 million in positive free cash flow, a meaningful $41.8 million improvement compared to fiscal 2024. We ended the year with zero debt on our asset-based lending facility and net liquidity of $141 million. These results reflect structural changes as to how we operate the business. how we manage inventory, how we plan, how we price and how we manage costs. As many of you may have seen this morning, we announced our first quarter 2026 results and they came in better than expected. And we raised full year adjusted EBITDA guidance. Here are a few highlights. Our performance in the first quarter confirms that our structural turnaround is taking hold ahead of plan. Our fourth -- this Q1 represents our fourth consecutive quarter of year-over-year net income margin and free cash flow improvement. With the annualization of our promotional reset and price increases from last year, net sales of $98.6 million declined 4% year-over-year. However, the underlying top line trends continue to gain momentum across both channels. Retail posted another quarter of positive comp sales and online trends improved materially versus prior year.

Growth in coal products serves as another proof point that our assortment strategy is working. Gross margin expanded by 540 basis points to 57.4%. This is a structural improvement driven by higher average unit retail, greater full price penetration and our direct-to-factory sourcing savings. We cut SG&A dollars by 5.2% to $61.8 million, leveraging expenses by 70 basis points through consolidation in our distribution network, and disciplined management of overhead expenses. This combination drove adjusted EBITDA to a positive $2.6 million, marking a $6.4 million improvement versus last year. and our balance sheet continued to strengthen.

Total on-hand inventory was down by 24.8%. We ended the quarter with a robust net liquidity position of approximately $100 million and lifted our first quarter free cash flow by $42.6 million versus prior year. This turnaround is tracking ahead of plan with tangible proof points, which is why we have raised our adjusted EBITDA guidance for the full year.

Our strategic turnaround required a reimagining of the business model. Under the previous big dam Blueprint framework, the company chased capital-intensive expansion to create a multi-brand platform. It created an expensive complex assortment excessive inventory and a heavy reliance on deep promotions to clear the product. Our marketing spend was inefficiently skewed toward the lower funnel and our capital allocation was heavily weighed down by multiyear infrastructure over bills. We have replaced that model with our Build to -- last framework. We are hyper-focused on our core hero products. and our core self-reliant customer profile. We are committed to a truly omnichannel model, serving our most valued customers where they are across optimized digital channels, are profitable physical stores and selective wholesale distribution. Through integrated planning and disciplined pricing, we have cleared excess inventory and streamlined our assortment -- as you can see in our results, we are now able to realize the structural benefits of buying directly from factories versus going through agents.

Our capital model continues to be self-funded with guardrails and a more balanced allocation directed towards both growth and infrastructure investments. So our 2028 financial targets are anchored by a clear operational driver and across 4 key levers. For the first lever, revenue we are targeting a 1% to 3% compounded annual growth rate, driven by a focus on core products, steady comp growth, the maturation of our loyalty pilot, growth in women's and measured distribution extensions.

Our second lever is gross margin expansion of 200 to 300 basis points over fiscal 2025 levels. This structural improvement is expected to flow from inventory rightsizing, reduction in promotions and markdowns and ongoing sourcing optimizations through our direct-to-factory initiative. Our third lever is leveraging SG&A by 200 to 300 basis points through distribution network optimization, store fleet rationalization and enhanced technology productivity from systems like Manhattan Omni. These initiatives are in execution phase, and they are already contributing to our 2025 and first quarter results.

Our fourth lever is capital discipline. Our capital expenditures are expected to be capped between 2% and 3% of sales, funded out of internal cash generation. This ensures we remain free cash flow positive without requiring external capital. Each lever is grounded in work that is already in progress. And together, these 4 levers get us to $50 million to $60 million in adjusted EBITDA by 2028, more than double the 2025 levels and representing a compounded annual growth rate of approximately 30%.

Our financial road map outlines a clear trajectory from stabilization to high-margin growth. In fiscal 2025, we successfully sealed the foundation intentionally removing margin-dilutive top line to deliver 420 basis points of gross margin expansion, combined with SG&A reduction of $27 million we delivered a 4.4% adjusted EBITDA margin. Inventory reduction and capital discipline added to this profitability to deliver the first year of positive free cash flow since 2021.

As we move through the '26 to '27 frame the structure phase, we anticipate near-term top line stabilization. For the first half of 2026, sales are expected to decline as we complete our promotional reset and lap nonrecurring wholesale orders. In the second half of 2026, sales are projected to stabilize between negative 2% to positive 2% as pricing adjustments anniversary. Adjusted EBITDA is expected to expand to 5% to 7% of sales as gross margin benefits accumulate and operating leverage kicks in. By 2027, net sales are planned to transition to low single-digit growth, with adjusted EBITDA expanding to 5% to 7%.

We are being cautious in our top line expectations as we navigate macro and consumer uncertainty. We are relying on what we can control and proof points we have seen across channels, products, customers to support these targets. By 2028 and beyond, as we raise the roof, our model is expected to unlock mid- to high single-digit revenue growth with loyalty at scale. Women's expansion, select new stores and additional distribution. Combined with structural gross margin and SG&A improvements, this is expected to translate to an 8% to 10% EBITDA margin and a compounding free cash flow profile.

A little bit about our approach to capital allocation. It is designed to maximize shareholder returns and derisk our business model. First, our plan is entirely self-funding, thanks to our structural gross margin expansion and tight working capital management we do not anticipate requiring external capital, equity or debt to execute this strategic growth road map. Second, we have established guardrails Total capital expenditures are capped between 2% and 3% of sales, aligning us with industry standards and ensuring that we are investing sustainably and driving a return on invested capital.

In 2026, we reduced our CapEx to $12 million. Third, we maintain a balanced allocation. Capital is allocated between growth initiatives and infrastructure efficiencies and maintenance. Every growth dollar is funneled into proven avenues ensuring measurable returns above and beyond the base plan, we have the flexibility to be opportunistic. And that optionality grows as cash accumulates and we will make sure that we are disciplined about it.

So let me share my perspective on why we think the story of Duluth is worth your attention. We have spent the last several quarters transforming this business. We have confronted our challenges directly implemented rigorous operational discipline and dismantled the inefficiencies of the prior cycle. Today, we are leaner, more agile and structurally profitable. We possess a uniquely differentiated brand and an extremely loyal consumer base.

So here is the investment case for Duluth Trading Company. It rests on 3 powerful pillars. First is our brand strength. We serve a highly resilient high-income demographic with solution-based apparel that commands premium price points and inspires strong customer loyalty. This brand has 2.8 million active customers, a Net Promoter Score of 72, and 16,000 5-star reviews on a single product. Second is our proven management track record. Every commitment we made in 2025 was met expanding gross margins, cutting SG&A, reducing inventory, overcoming the tariff challenge, as evidenced by our Q1 results, our 2026 initiatives are tracking ahead of plan.

Third, our self-funding model turned free cash flow positive in 2025 and will scale significantly by 2028. Looking at these numbers, we are positioned to expand adjusted EBITDA from 4.4% to between 8% and 10% by 2028 to $50 million to $60 million at a compounded annual growth rate of 30%. Our thesis is supported by our results and execution. Today, we are in a stronger financial and operational position with strong liquidity, improved inventory levels a more focused assortment and 4 consecutive quarters of improved profitability.

So for the webcast, I'll just step back here for 1 second. I just want to say thank you again for your attention over the past 40, 45 minutes. I hope this gives you a sense for those of you who aren't as familiar with Duluth a sense out of who we are, the history of this brand and business the hard work that's been done, particularly over the past 12 months and a sense of where we're going from here.

So with that, I think we will free to open it up to questions. Excited to have some conversation.

Great presentation. I would love any more color you can give on Amazon that seems fascinating and really potentially meaningful new initiative. I'd love to just hear kind of open-ended your thoughts, but I guess 3 specific questions. One would be, is it going to be a fairly narrow SKU count, maybe the Hero products like Buck Naked at first. Second, are we fulfilling that using Amazon's fulfillment or you using [indiscernible] And then third, how do you expect the unit economics of an Amazon transaction to compare to our direct e-commerce sales through the ARM channel?

Just for a quick second. I'll start for a quick second on how we think about Amazon, number one, as we mentioned earlier. Oh, is this not on, they didn't turn it on. Okay. So we'll jump back and forth behind the podium for a second. So the -- as we mentioned before when we started exploring this, the data around having 1 million searches for Duluth on Amazon annually was compelling as a proof point for our customers are there, they're looking for us there. So it kind of falls under the idea of meeting our customers where they are in enhancing their shopping experience where they're shopping.

So that was kind of the first piece of it. From the standpoint of how we're going to show up at Amazon, 2 things. Number 1 is we know we've done some level of wholesale partnerships in the past, whether that was Tractor Supply, we actually had some product on Amazon several years ago. Costco, those were very narrow product assortments. In the case of Tractor Supply and Costco, just our underwear business, and then 40 Grit within Amazon several years ago. And one of the things that we learned from that is without being able to present the Duluth reason for being, there was opportunity to make that presence more power and that's what we've done with Amazon go forward. It's a select group of our core products. So we've got the pricing integrity there. And it tells kind of a holistic story of our solution-based product heritage.

We will have a dilutive shopping store within Amazon as many brands do. And I would call it a more traditional wholesale relationship in that we are shipping to them through -- for fulfillment through Amazon. The last thing that I would just mention about when I talk about core products, it was also important for us to continue to maintain within our own channels, additional product, obviously, that customers can only get out of Duluth store or only get through our Duluth website. So that balance was something that we looked at closely when we desire to do this. And i'll swap with Heena for any other information on economics.

I think you covered it. I would just emphasize that this is a much broader core assortment versus a single product. which gives it longevity. And it's a traditional wholesale model, which means Amazon picks up the product from our fulfilment center. They own the inventory, they own the prime shipping, they own the returns and then they order as they sell-through product. So it's a much different model than what we had done previously with [indiscernible]

Thank you. I wanted to come back to the point you made about your average household in customer average household income, 131,000. In terms of how your demographics have skewed over the last 10 to 15 years, given since you kind of hit peak in '21, is your average customer getting older, getting younger. How does that change? And then when you think about your marketing strategies, you still do a lot of linear TV advertising.

How are you adjusting to a kind of digital media world, digital channels for marketing and whether or not you're planning to use social media influencers. How are you attacking that path.

So on average, our customer over the past several years has gotten a little bit younger. And that is through a lot of the efforts to do exactly what you just asked about around how do we evolve our media strategy. It also is a proof point around what I said earlier that what we're doing is serving a way of life and the idea of the person who is doing -- great weekend projects or has passion projects is kind of age agnostic in many ways. That said, the media plan obviously directs our message to certain demographics, and that's something that we've been evolving over the past couple of years.

What I can say to you is if I look back to when I was at Duluth in 2019 and prior, if you looked at the way that we divided our marketing, if you will, you would have seen a lot of the traditional media buys, things like national TV catalogs out-of-home for store-based traffic driving. If you look at how we're thinking about it now, while we are doing TV, there's the digital streaming that we pay a lot of attention to, addressable TV, where we can reshow and create more frequency with people that are more -- that are more likely to engage with us.

So there's nuance even within the kind of TV advertising, if you will, and the other pieces that you'd see are kind of new slices of the pie, if you will, around in Fluence strategy, other digital strategies to bring customers into our brand in the way that they are, again, already shopping, meeting them where they are. We know that our customers around our stores love having both the store experience and the digital experience. So we cater to them in a slightly different way. And for example, we're testing again a light print run of post cards in our store environment in our store like a radius sub, think -- it's about 60 miles or so from each of our stores to drive traffic specifically that..

So we're always testing and learning in addition to evolve how we spend marketing overall. But the most important thing that I want to leave everyone with is the upper funnel, lower funnel split. Because as we got so focused in on driving immediate transactions -- that's where we got unbalanced, and that's the balance that we're creating again.

And what is the average age of your male versus your female customer?

Low 50s.

I just wanted to ask, so I believe your sales penetration for women's was about 20% at IPO, and now you're saying it's 50%. So can you...

Just to clarify 50% of our buyers are women. It's not 50% is the women's business.

What was that at IPO then? What was the percent of buyers?

You know what, Mark, I'm sorry, I don't know that. I don't remember that from the IPO. I can tell you that the percent of the women's business has increased since the IPO, but we still have a lot of women that are buying for met.

Got you. So I was just curious, actually, just you called it out as being a category for growth as a growth driver. So is there like a penetration level that you're targeting for that? Or what's the next fiscal '28 plan?

He know just that she will answer. So I'll step out of the way. So 50% of our shoppers are women, but only 30% of our sales are women's sales. So that's where we see the upside and the gap versus the number of women shopping only for men or other people in the household versus themselves. So that's kind of one of the tenets of that women's expansion and we've done a lot of work in the physical stores where a lot of our physical stores now have men's and women's equally split in the store, whereas previously, it used to be a much smaller section.

Thanks, Stephanie and Heena for a wonderful presentation. My 1 question is regarding the like overall gross margin in and the net EBITDA margin. This quarter, we delivered 57% gross margin, and you are anticipating that over 2028, that is where our annual gross margin would like sort of pivot towards -- what I'm trying to understand is why are we still in that 8% to 10% adjusted EBITDA range when some of your peers and competitors like to just name one like Colombia, they do low teens of EBITDA margins at like 42%, 43% gross margin or even lower than that.

So I would love if you can tell us more about like our cost structure and also -- if there is a meaningful difference in profitability between our store sales and online sales, and is that driving some of our adjusted EBITDA margin to the lower side. Because I would expect that 57% gross margin, we should have absolutely no problem doing let adjusted EBITDA margin when our competitors are able to do that similar adjusted EBITDA margin in like high 30s or low 40% gross margin.

Yes. So I can take that. On gross margin, like we said, we've made assumptions that are proven and that we are seeing proof points for. And so if you go back A little bit in history in 2019 when we did not have all these promotional issues that we are now resetting -- it translates to out to 300 basis points better than 2019, which shows as the impact of direct-to-factory sourcing initiative coming to life. What we have not assumed and this is -- because of the uncertainty, we are assuming the higher tariff rates that have been eating into some of these gains in recent years. So that could be potential up side, but we cannot predict that. So we are going to maintain, like I said, things that we can control and see and see proof points on, on the gross margin piece.

On SG&A, we've made a lot of capital investments in the big dam blueprint era. Some of those we have reversed -- but some of those have longer lasting impacts, and we may see more SG&A leverage beyond the '28 period that we are presenting today. So we don't think about -- we think about online as our biggest to. It has -- we have 2/3 of our sales online. We have a lot of synergies between online and our stores because our stores provide buy online, pick up in store return services. We see that our omnichannel customer is 2.5x more valuable than a single channel customer.

So we look at it from a total synergy standpoint. Even the 2 new stores that we've put in place last year. We see the impact not just from incremental sales in that store but also the online channel improving for that whole market. So it's the best way to look at it is from a synergy and omnichannel customer perspective versus trying to break it out specifically by channel alone.

The other piece that I would add to this is, when I spoke earlier about the kind of 25-year history and those inflection points that created growth opportunities for us, One of them was around national TV advertising, which took us away from being wholly dependent on where we mailed catalogs and the people that we reached through a book. And then when you think about what Heena just described with store expansion and creating the omnichannel synergies. When you look at both of those, the core idea behind this is how do we create more opportunities for customers to come and buy Duluth. And in the past, that was very specifically focused in and perhaps limited to where we could put a store or where we could mail a book. Then with the online business to kind of create that reach and talk to our existing and future customers through national advertising, that allowed us to kind of spread our wings, if you will. As we look forward, that is the idea behind the additional points of distribution. It's the idea behind going on to Amazon shortly to create that additional net to capture customers that we know have the same affinity, have the same desire for solution-based products and high-quality products and cast that wider net. When you look at businesses like Colombia that you mentioned earlier, their structure is totally different when you think about where they get their revenues from.

They are primarily wholesale partnerships and so if you think about that and those points of distribution, I'm not suggesting that we're suddenly going to have that many wholesale relationships in the time frame that we're talking about, but creating that ability to reach customers is how we're looking.

Got it. Those are the structural things that we are testing and learning and then ultimately going to build on. That's how we're thinking about the business [indiscernible]

A few questions. One is you talked about reducing the amount of SKUs. How does AKG fit into this whole of reducing SKUs and other pieces? You've tried to run it before, I think it's kind of a separate brand. How should we be thinking about that as it fits into this flow [indiscernible]

I would start and if there's anything you want to add, Heena. One of the challenges that the company had the past several years was the idea of siloing in essence, parts of the brands. So the underwear sub-brand, Duluth as its own thing, Alaskan Hardgear as its own thing. And 1 of the things that was learned in that was that while the Hunt was to give each business more focus, if you will, and more ability to shine. The real [indiscernible] became that the limited resources around marketing or store space, et cetera, ended up competing. And we actually lost the halo of what Duluth can do for all of the components of the business. So the way that we're looking at Alaskan Hardgear, we have SKU reduced an Alaskan heart here. I'm AHG. Most recently, just like we have in the rest of the business, we've more dramatically decreased our SKUs in women's AKG because of the performance there. But we are rebuilding into core within AKG over the -- next 12 to 24 months and serving the part of our customers' lives that really is outdoor and our customers need high-quality, again, solution-based product for that part of their lives without siloing it as its own kind of stand-alone idea.

Okay. I kind of want to switch over to stores. So you've closed a few stores. You've talked about how this year about or have leases come due and you're going to figure out what to do with them. What makes a good store, what makes a bad store? And in this model here -- what should we be thinking about in terms of store growth now? And what is the potential that you see longer term for how many stores there could be?

So what I would say in terms of what makes a good store is and/or a bad store is, first and foremost, we look at the financials. And we have thresholds of our 4-wall. EBITDA as well as our sales per square foot that we are judging the store fleet -- the really good news is that over the past 12 months, we've turned all of our stores profitable. Heena mentioned it earlier improved 4-wall EBITDA significantly by over 500 basis points. And I would attribute that, number one, to being smart about the product and the inventory that we put in the stores, whether that was not over-inventorying them, but also in a lot of cases, making sure that we were in stock in our stores when our customers came in to buy. We've elevated the management teams in all of our stores. I give a lot of credit to that team and quite frankly, to our team overall. And we have -- we did close 1 store last year. We opened 2 new stores in the fall of last year. And so we're learning in the 2 new stores that we opened there in a more highly trafficked shopping center location.

So we're learning about that. We're pleased with the amount of traffic that we're getting in those stores. And so we're starting to kind of morph if you will, how the store fleet looks and doing so as the leases come up. The successful stores, the stores that we have actually. It's kind of an interesting range around the success of our stores. Some of our top stores are stores in historic downtown locations that represent the brand.

Other stores or stores that we have as freestanding stores that are in parts of the markets that have grown kind of with us. We might have entered that part of the market, as that area was growing. And so we've been able to contribute and benefit from growth in those areas. Generally speaking, though, what our stores have suffered from in the last several years is obviously, a promotional environment that, quite frankly, the stores didn't need in some ways, that when people are coming to us for that experience.They are more likely to pay either full price or at a very shallow discount relative to online. But the other piece of it was just the operations of the business and making sure that we're in stock and ready for the inventory when the stores get there. Eric to answer the last piece. And then Heena, if you have anything to add, happy to share the podium here. The last piece of it is how do we look at stores for the future. It's why we've put a pause on opening new stores this year and next because we are -- not even -- we're about months open in the 2 new stores and the new types of locations. And we want I want to make sure that we are proving out some unit economics before we open stores go forward. And the expectation is that will be a measured opening as opposed to 10 to 15 stores.

Yes. I'll add a couple of things. In the model, specifically, we have not assumed any new stores in '26 and '27, and it picks back up in '28 with a couple of stores, nothing on a large scale. The other thing I would say in addition to looking at the profitability of the store itself, we also look at how it impacts the market there. So including digital sales and store sales, what is the market -- the priority markets that we've established. What does the sales look like in that omni market area.

We'll also take questions from the webcast after in-person end.

I'd love to hear a little bit more about the product and innovation strategies. So for example, on today's call, you talked about pulling back from some categories like swim, some categories like lower margin outerwear. Obviously, a lot of the focus today is also in the presentation on the core products. But if we think about the history of the business, right? A lot of it has grown through innovation. So we were kind of early to market with Buck Naked right? And then obviously, some copy cats have kind of come into the market, that's not as innovative a category, I guess, as it used to be. But then there have been -- there have certainly been areas like swim, maybe that have done so well, but there have been areas like gardening that have kind of been home runs, right?

And then particularly, Stephanie, like you were talking about with the women's business growing and bringing innovative product in there. So how does a big heritage part of Duluth is that innovative product development. So I'd just love to hear more about how you think about that in the context of having a narrower more focused SKU count and focusing more on the core products.

Sure. So first and foremost, at the end of the day, innovation is a partnership, if you will, between our customers and our innovation team and we have a super talented group of product developers, designers and merchants. That is their hyper focus. Now how did they do that? And why is the SKU rationalization important? And how do you make room for like the really big innovations.

So first and foremost, the SKU rationalization was to do 2 things. Number 1 was to allow our customers to understand and focus on what we stand for because that kind of plethora of choices did not adequately share our message when you walk into a store, go to the website, et cetera. The second piece of it and just as important, quite frankly, was to allow us to refocus our resources.

Some of that is actually, as I mentioned earlier, some of that is marketing dollars, right? And we know what we're going to spend on and be in market more consistently with the products that resonate and a lot of it is our innovation and product development resources. So if we have a -- and PS that also balances SG&A, right? So if we have the time, if we have a team that's focused on 10 products instead of 15 or 20 products. They can put that much more effort into each of those 10 products.

We've reinvigorated being out in the market talking to our customers, our team just a few weeks ago, did deep dives with what we call our trades panel. They are experts users of our products and people like landscape architects or general contractors, et cetera, that are using our product every day and putting it to the test talking more directly to them, but also not just getting from our customers because kind of our contract with the customers is we're thinking ahead.

So they are using insights that they have in the marketplace, whether that is other pieces of the market like outdoor active fabric shows, trade shows, et cetera, that inform new developments that are coming into the market. So you can kind of blend market information with customer need and create an interesting and innovative solution, and that's what we're doing. We just launched our -- no [indiscernible] utility shirt, which has a ton of flexibility, all of the Duluth DNA with underarm gussets and pockets and flexible fabric. That's an example of how we think about innovating product.

Great. Thank you, Stephanie and Heena. I'd like to take time now to go over our webcast questions. So the first question is, why wouldn't Duluth continue to own inventory when it is sold on Amazon what benefit is there to selling wholesale to Amazon versus retaining ownership of the inventory while selling on Amazon?

So we've tried the model before where we owned the inventory. I think the reason some of our customers are going to Amazon is for some of the access Amazon [indiscernible] and some of the conveniences of prime shipping, free returns and all of those things that they have built the infrastructure over. So the best way for us to leverage their expertise and our product is to use the benefit -- is that come with being an Amazon customer versus doing that hard work ourselves. So that it gives us more free time to to service our own online channel and our stores.

So we are trying to use the best of both, best of what Amazon offers and best of what we offer in that partnership.

Thank you. And as a follow-up to that question, is the SKU selection for Amazon mostly underwear and T-shirts or do you see Amazon as a customer acquisition channel to drive traffic to the higher-priced items available exclusively from Duluth's website and stores.

Absolutely, the second one. So I think like Stephanie mentioned earlier, we will have a full assortment of our core products available on Amazon. It won't be just 1 or 2 products. And then the goal is that, that will be the entry point of trial for a lot of customers who already shop there, and then they discover Duluth and then come to our website for an even more expanded assortment around new prints, new innovation and so on.

Any other questions?

I guess I'll jump back or we have one last late breaking.

Yes. One last question. How far along this SKU rationalization process? How far along is the SKU rationalization process? And when do you anticipate this process will be optimized.

I would say that the SKU rationalization process will be ongoing forever in that we're always going to be looking at maximizing our SKU productivity and effectiveness. Now in terms of 20% reductions season-over-season, year-over-year, we've gotten ourselves into a much better place than we were even a year ago. And we will see naturally that level of reduction start to taper. But that said, ultimately, our goal as product developers as merchants bringing great product to our customers is to also always validate that what we're bringing to market is what our customers value most, and we'll continue to do that ongoing.

There are no more further questions.

Well, I just want to say thank you again to all of you, everyone on our webcast. It's been an absolute pleasure being able to stand here and chat with you today. Thanks.

Good day, and welcome to the Duluth Holdings First Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Steffes. Please go ahead.

Thank you, and welcome to today's call to discuss Duluth Trading's first quarter financial results.

Our earnings release, which was issued this morning, is available on our investor relations website at ir.duluthtrading.com under news releases.

I'm here today with Stephanie Pugliese, President and Chief Executive Officer; and Heena Agrawal, Senior Vice President and Chief Financial Officer. On today's call, management will provide prepared remarks and then open the call for 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-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.

With that, I will turn the call over to Stephanie.

Good morning, everyone, and thank you for joining us to discuss our first quarter fiscal 2026 results. I am pleased with our strong first quarter performance. Over the past several quarters, we have committed ourselves to a rigorous strategic pivot, one centered squarely on serving our customers and restoring profitability through focusing on what makes our products special, resetting promotional cadence, driving operational excellence and expense control. The deliberate actions we took throughout the past year and into the first quarter directly led to an enhanced gross margin, reduced inventory levels, improved overall profitability and stronger net liquidity. We are a leaner, more efficient business that now prioritizes brand equity and long-term value over short-term volume with low profitability.

Coming off of a successful fourth quarter, we continued to tighten both the frequency and depth of our promotional cadence in Q1. We reduced our total global promotional days by over 50%. We also reduced our depth of discount by 700 basis points, allowing full price sales to grow by almost 14% and our average unit retail by 17% year-over-year. All of these actions resulted in a gross margin expansion of over 500 basis points to 57.4% of net sales. While our intentional pullback on promotions led to improved profitability, in the near term, it has created a decline in top-line revenues. This impact is more acutely felt in our direct channel, which declined by 6%, excluding wholesale. Retail, on the other hand, recorded another positive quarter with store net sales increasing 3% year-over-year, driven by higher average order values in our comp stores and the addition of the 2 new stores that opened in fall of last year. Overall, this quarter, sales actualized at $98.6 million, a decline of 4% to last year and an improvement in the trend line from prior quarters.

Turning toward marketing. Our initiatives in Q1 served as an accelerator to brand awareness and consideration. The introduction of our newest campaign for folks who work their b**** o**, along with the launch of our Max Gluteus creative campaign is resonating with our core audience. This creative asset was highly successful, surpassing our previous underwear trade-up events, and it catalyzed positive year-over-year sales growth for our men's Buck Naked collection. Given this success, we have an extended plan for the folks who work their b**** o** campaign. We will expand this messaging platform across other legendary product lines such as Fire Hose and utilize it as a sign-off across podcasts, video and social channels.

What also made Q1 uniquely effective was our ability to put 2 strong category messages out in the market simultaneously. While men's leaned into Max Gluteus, our women's digital channel deployed the Dibs on the Bibs campaign. This approach drove consumer engagement and elevated brand consideration. Another example of this was our vibrant poppy print launch across the funnel, which created an immediate halo for our entire gardening category. In addition to brand awareness and consideration, the full funnel marketing approach impacted traffic in the quarter. February was expectedly tough as we went up against last year's Big Dam Clearance event. However, traffic trends improved into March and April, an encouraging signal given that we were simultaneously annualizing strategic price increases and lower promotional days.

We know that our most important assets are our customers. As previously shared, our total customer base has experienced some contraction over the last several years. Improving our customer base through marketing spend allocation and other initiatives is showing proof points that reflect a more resilient, higher-yielding demographic profile. The quality of our revenue has strengthened. Sales per customer increased by 10% year-over-year, and this spending growth was uniform across age, income and gender segments.

Most importantly, our Q1 Net Promoter Score increased 16% over last year, reflecting the hard work the team has done to improve operations and keep our promises to our customers, delivering the experience and products that they have come to expect from Duluth. And great product is at the heart of everything we do. Our core collections represented approximately 2/3 of our overall sales and grew 7% compared to the prior year. Our customers are consistently voting yes for high-quality solution-based apparel that justifies a premium price point. Standing out this quarter was our women's garden collection centered on our Heirloom Gardening bibs. This year, we also introduced a new version of our short overalls and our garden dress, both of which have contributed to sales and a healthy gross margin. On the men's side, Buck Naked was a strong performer and our No Quit Utility Shirt was a new addition to our workwear collection with both long and short sleeve options. Look for them in our upcoming Father's Day ads. We have also continued to operate with discipline throughout the business, and our progress on the bottom line is a result of those efforts.

In Q1, we successfully captured variable expense leverage. Efficiencies across our fulfillment center network, paired with a reduction in corporate personnel expenses allowed us to lower SG&A by more than $3 million or 5%. Our turnaround is taking hold as planned. We are focused on core product and lead with our solution-based apparel in all of our messaging and customer outreach. Our SKUs have been reduced by over 20%, allowing the focus product to shine. Our brand and product messaging is resonating with existing and new customers, and we continue to invest more in upper funnel marketing and reduce our reliance on promotional last-click spend. Our stores are well stocked and serving our customers well. Margin is expanding as we reduce promotions. Costs are controlled and financially, we are in a solid position. We have successfully rightsized our balance sheet, ending the first quarter with total inventory down 25% or $44 million compared to the prior year.

As we look forward to the remainder of fiscal 2026, we are maintaining a disciplined strategic road map. We are pleased with how far we've come, and we know that we still have important work to do. This year, we will transition from fixing the balance sheet to strengthening the team, processes and investments that will drive sustainable growth in the long term, and our customers are at the center of our efforts. Our primary focus is to strengthen our customer file and solidify our position as the official outfitter of doers. Through continued investment to drive traffic and balance our marketing spend, we are investing in future customer file growth and spending less in lower funnel promotional spend. We are continuing our rigorous SKU rationalization and improving sell-throughs by ordering the right amount of inventory. By intentionally narrowing our assortment and buying smarter, we ensure that our capital and floor space are hyperfocused on the core high-margin hero product lines that resonate most deeply with our self-reliant audience. And we clarify the message for repeat and new customers around our brand attributes and solution-based product.

In closing, Q1 was a validation of our strategic discipline. We protected our margins, streamlined our operations, dramatically improved our inventory health and strengthened our net liquidity to approximately $100 million. We are a leaner, more agile business, and I have the utmost confidence that our talented team will continue to drive sustainable long-term value for our shareholders. We look forward to sharing more information about our future plans at our investor presentation later today.

With that, I'll pass it over to our CFO, Heena Agrawal, to discuss our Q1 financials and 2026 outlook in more detail.

Thank you, Stephanie, and good morning, everyone.

I am pleased to share our first quarter fiscal 2026 results, which reflect how our team is building on the strategic wins of the prior year, fixing our promotional strategy, restoring price integrity, achieving operational excellence and disciplined inventory and cash management. As a result of focus and consistency, combined with our agility in responding to macroeconomic conditions, we have achieved 4 consecutive quarters of improved year-over-year net income margin and free cash flow. Our results this quarter demonstrate a healthier margin profile, structural profitability and a more robust balance sheet.

Let me share our financial results, deeper insights into our operational metrics and provide our updated outlook for the full fiscal year starting with our results for the first quarter of 2026 with comparisons to prior year. As we continued our promotional reset and annualized price increases from 2025, we reported net sales of $98.6 million, a decline of 4%. With improving quality of sales, gross margin expanded by 540 basis points to 57.4% of net sales.

Our net income improved by $5.2 million to negative $10 million. Our reported EPS was negative $0.29 and our adjusted EPS was negative $0.20 compared to negative $0.44 last year. Adjustments to EPS included $2.7 million in asset impairments and $1.4 million in restructuring expenses related to the closure of Salt Lake City fulfillment center at the end of 2025. Adjusted EBITDA was positive $2.6 million, an improvement of $6.4 million compared to negative $3.8 million in Q1 last year. Our shift back to profitability was fueled by a 6.1% rise in gross profit dollars from margin expansion, coupled with lower overhead and enhanced variable cost productivity.

Looking closer at our top line metrics, as we continued our promotional reset and annualized our pricing strategy, our total net sales decreased by $4.1 million or 4%. Excluding the impact of wholesale, net sales declined 2.6%. Direct-to-consumer net sales, excluding wholesale, decreased by 6.4% to $57.1 million. This decline was primarily driven by lower web traffic and conversion in February and early March as we intentionally moved away from low-margin clearance events. This was partially offset by a 16% lift in total average order value as full-price item penetration grew. Our retail store network delivered another quarter of positive comps with net sales increasing 3.3% to $41.5 million. Growth was driven by higher average order values across comparable stores, combined with the annualization of our 2 new stores opened in the back half of 2025.

Men's product sales decreased 1%, driven by the impact of the promotional reset. This was partially offset by double-digit growth in first layer and underwear collections following the Max Gluteus campaign. While total women's product sales declined 12% due to strategic SKU rationalization, Heirloom Gardening collection sales grew. AKHG brand sales declined 17% versus last year as double-digit growth in men's woven tops and bottoms was offset by exiting the swim category and rationalizing low-margin outerwear programs.

With fewer promotions and increased average prices, profitability improved across product categories and sales channels. Notably, profitability of the store portfolio continued to improve over prior year. We are pleased with our gross margin expansion for the first quarter of 540 basis points to 57.4% of net sales versus 52% in the prior year first quarter. This structural improvement of our margin profile was driven by 3 strategic pillars. First, our continued promotional reset by prioritizing price and brand integrity over margin-dilutive volume, our pullback on broad-based promotions and the elimination of deep markdowns drove rate expansion. Second, we captured benefits from our direct-to-factory sourcing initiative with a structural improvement in product cost. And finally, these levers, combined with strategic pricing actions and vendor negotiations, fully offset the impact of tariff costs.

Selling, general and administrative expenses decreased by $3.4 million or 5.2% to $61.8 million. As a percentage of net sales, SG&A leveraged by 70 basis points to 62.7% compared to 63.4% in the prior year first quarter. Advertising costs represented 9.6% of sales, a 20 basis points improvement due to a more effective balance between upper and lower funnel spend. Shipping and variable costs leveraged by 130 basis points as we realized the benefits of further consolidating the fulfillment center network and maximizing the Adairsville location. In the last 18 months, we have now consolidated the logistics network from 4 fulfillment centers to 2. Overhead expenses were down by 2% and deleveraged by 80 basis points, largely due to the decrease in sales. This cost improvement highlights year-over-year efficiencies across our fulfillment center network, combined with disciplined management of personnel expenses.

Inventory at the end of the first quarter was $132.4 million, a reduction of $43.7 million or 24.8% compared to prior year. This marks the fourth consecutive quarter of year-over-year improvement driven by our enterprise planning process and strategic SKU rationalization. Through the integrated planning process, we successfully synchronized inventory levels with our sales projections and optimized the scheduling of receipts. In addition, our inventory allocation prioritized availability at our automated Adairsville fulfillment center and stores, resulting in more than 900 basis points of improvement in store in-stock levels. Our inventory mix at quarter end was healthy and consisted of 90.2% in current products and 9.8% in clearance goods versus 9.5% in the prior year quarter. We achieved a 42% reduction in spring/summer seasonal inventory by rightsizing buys and successfully clearing surplus inventory. Overall, clearance inventory dollars were down 17.4% and units decreased 22.3% versus last year.

Our capital expenditures for the quarter were $3 million compared to $4.9 million in the prior year, with funds allocated primarily to investments in the final phases of Manhattan Omni for the website and stores. We ended the first quarter with a stronger balance sheet and liquidity position versus at the end of the first quarter last year. Cash and cash equivalents stood at $6.1 million with $6 million outstanding on our asset-based lending facility. This resulted in a net liquidity position of approximately $100 million versus net liquidity of $45 million last year. Combined with our improving profitability, continued working capital discipline and capital expenditure guardrails, our free cash flow improved by $42.6 million compared to the same period last year.

Fiscal 2026 Guidance. Based on our results in the first quarter and our visibility into the rest of the year, we are updating our full year outlook. On the top line, we are affirming our previously issued full year fiscal 2026 net sales guidance range of $540 million to $560 million. This is a minus 1% to minus 5% decline versus prior year, driven by the continued promotional reset to restore price integrity and annualization of price increases from 2025.

Regarding our first half outlook, we are reaffirming our projection of a sales decrease between minus 6% and minus 10%. This forecast accounts for the decision not to repeat a wholesale order from the previous year, which represented a 230 basis point impact. Following this, we anticipate sales will stabilize during the latter half of 2026, projected within a range of minus 2% to plus 2% as we anniversary our pricing adjustments and promotional reset. Reflecting our structural gross margin gains and SG&A savings, we are raising our full year adjusted EBITDA guidance range to $28 million to $32 million, up from the previous outlook of $26 million to $30 million provided last quarter. We are affirming our capital expenditure guidance at approximately $12 million or 2.2% of sales.

Let me confirm our tariff assumptions for this year and treatment of tariffs paid in the prior year. We are maintaining our tariff rate assumptions as per prior guidance. For the IEEPA tariffs of approximately $12 million paid last year, we have applied for refunds but have not included any potential benefit in the results this quarter or in the full year guidance.

To conclude, our financial turnaround is substantially complete. By reinstating price integrity through our promotional reset and maintaining discipline across inventory management, costs and capital allocation, we have made structural improvements to profitability and secured a strong balance sheet. Our financial model has successfully transitioned toward improved working capital efficiency, reduced fulfillment costs and higher structural gross margins. With a clear understanding of our financial levers and a disciplined approach to capital, we are positioned to drive profitable long-term growth for the company.

With that, we look forward to our investor event at 11 a.m. Eastern today, which will also be available via webcast.

[Operator Instructions] Our first question for today will come from Dylan Carden with William Blair.

I'm just curious, Heena, in the outlook for the year, maybe you can give some color on what's embedded in gross margin. And I guess kind of the root of that question is it seems like you're accounting for the degradation in top line from pulling back on promo, but maybe not the benefit? Start there, I guess.

Yes. Thanks, Dylan, for your question. So when we gave guidance a quarter ago, we said we would improve gross margin by about 100 basis points for the full year from 53.4% last year to 54% for this year. And what we've seen in the first quarter is an acceleration, and we are tracking ahead of that gross margin delivery, which is why -- that's what is guiding our base for adjusted EBITDA from $26 million to $30 million to $28 million to $32 million. So we are accounting for another 30 basis points for the full year coming through from the higher benefits, like you said, that we're seeing from that promotional reset.

And then just the stabilization in the back half. I guess I'm curious, you mentioned there -- I think maybe it's the first time, just that the customer base is impacted. Any insight into how much -- and as you lose these sort of maybe more promo-driven customers who you're acquiring and sort of the confidence you have -- I know you're about to do your analyst event, but any sort of sneak peek at sort of how you engage a new customer, re-engage that existing customer without promotions?

Yes. This is Stephanie. So when we think about the customer file and how we are going forward in re-engaging, a couple of things to note. Number one is that the customer file reengagement is not terribly dissimilar from the promotional reset that we're doing. In that, it is a reset back into higher quality interactions and transactions. We've seen that our average order value, our sales per customer has gone up. And those results are the result of the efforts that we've made around the promotional reset primarily. As we look forward through the balance of this year, and we've already started these efforts, we've done a couple of things. Number one is we've reset the balance of how we spend marketing dollars and moved further away from lower funnel last click promotional-based payments type marketing spend and more into upper funnel brand awareness, brand consideration spend to build higher value long-term relationships.

The second piece of this is that as we look at the customer file, we know that we have some high-value customers that have been with us for a long time that we have the opportunity to re-engage with, reactivate and doing that costs us about 1/3 of what it costs for new customer acquisition. So not only is it a re-engagement with customers that we know love the brand, but it's also a really effective and efficient way to use our marketing dollars to reinvigorate and bring health back to the customer file. That said, we know this is a place where we have more work to do. The proof points are starting. We're building into them, but this is a place that we're focusing on heavily for this year and beyond.

And Dylan, what I'll add to that is in the second half is when we lap all our promotional reset as well as the price increases we took last year, which gives us a little bit more confidence on being able to stabilize the revenue given we won't have these one-time events showing up in the second half.

Got it. And then just last one, the impairment charge, can you walk through what that was for, $2.7 million?

Yes. So we closed our Salt Lake facility in February this year, one of the fulfillment centers. So the impairment charge is related to the lease or the building cost of that specific fulfillment center that we are no longer using.

And this will conclude our question-and-answer session as well as our conference call for today. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to Duluth Trading's Fourth Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Chris Steffes, Senior Associate, Duluth Investor Relations. Please go ahead.

Thank you, and welcome to today's call to discuss Duluth Trading's fourth quarter financial results. Our earnings release, which was issued this morning, is available on our Investor Relations website at ir.duluthtrading.com under News Releases.

I'm here today with Stephanie Pugliese, President and Chief Executive Officer; and Heena Agrawal, Senior Vice President and Chief Financial Officer. On today's call, management will provide prepared remarks and then open the call for 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-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 will turn the call over to Stephanie.

Good morning, everyone, and thank you for joining us today to discuss Duluth Trading Company's Fourth Quarter and Fiscal 2025 results. I am extremely proud of the team's continued discipline in managing promotional resets, controlling expenses, streamlining operations and optimizing inventory. This strong execution led to the third straight quarter of enhanced gross margin, lower costs, reduced inventory and improved profitability.

Adjusted EBITDA for the full year rose more than $10 million to $24.9 million, and we delivered almost $17 million in positive free cash flow, a $42 million improvement over fiscal 2024. Our business reset is well underway. We continue to work diligently on simplification, expense control and productivity. Our SG&A decreased by $5 million in the fourth quarter. We also ended the year with inventory down $35 million or 21% versus last year.

Looking specifically at this past holiday season, we successfully executed our operational goals. This represents the culmination of a year's worth of effort by the team to focus on and improve the customer experience. Better forecasting and effective positioning of inventory across our fulfillment centers cut the average click to ship time in half compared to last year, and our wait times for customer service were dramatically reduced. We were in stock in our stores and we were able to deliver with higher conversion as customers came to shop in our retail locations.

Throughout the peak season, we stayed the course on our more disciplined promotional strategy, offering 30% off discounts coupled with select Dam Busters versus last year's 50% off across the board. This approach continued through December with giftables and a final 30% off promotion, expanding gross margin and delivering customer satisfaction.

Overall, in the fourth quarter, men's and women's apparel drove strong margin improvements despite year-over-year sales declines. We saw key wins in outerwear and the Souped-Up Sweats collections across both genders, with men's Souped-Up more than doubling in sales versus last year. We drove margin gains from holiday Unders inventory and strong giftable products. And finally, AKHG grew in sales and margin across both men's and women's.

Our marketing success in the quarter was driven by an effective balance of brand awareness and conversion efforts. By running our national advertising spots for extended durations, we achieved significant improvements in ad recall and overall brand lift. High affinity podcast reads and December Good Morning America integration, increased brand sentiment, new customer conversion and direct site visits. We focused on high-value retargeting during Black Friday and Cyber Week, and localized college football buys increased retail foot traffic and sales.

After the key holiday selling period, we pivoted to clearance messaging in order to maximize post-season demand. Looking ahead, we are continuing to build brand awareness with a full funnel marketing approach, which includes exciting new spots running during March Madness and NHL games.

Now turning specifically to our channel performance. Our efforts in digital to reduce reliance on promotions while building brand acceptance and revenue per customer improved profitability year-over-year despite reduced traffic. Overall, conversion was strong. Sales per customer increased 4% and average order value improved by 10% for the full year.

Our retail portfolio was a continued bright spot with net sales growing 4.7% to $71.6 million in the fourth quarter. This performance was fueled by the opening of 2 new stores, an increase in average order values and improved in-stock levels, allowing us to capitalize on key traffic moments like Black Friday and throughout December. And our improved operational results impacted not only retail stores, but our entire network.

In the third quarter, we moved decisively to position Adairsville at the center of our fulfillment operations. And in Q4, we strategically held 69% of our inventory there, a marked increase over last year. This positioning allowed us to fulfill the majority of peak orders from this single facility, demonstrating efficiency that will enable us to rationalize further our distribution network in 2026.

In addition to the current year improvements, we have made progress on our longer-term initiatives, starting with our logistics network. We have now completed the first 2 phases of streamlining and the consolidation of fulfillment operations by closing Dubuque in October of 2024, and now Salt Lake City in February of 2026. Concurrently, we are enhancing the fully automated Adairsville fulfillment center's efficiency and capacity. And for 2026, we plan to further boost Adairsville's productivity with investments in cross-dock capabilities and improved labor management.

Next, our efforts to improve our retail portfolio results driven by targeted local marketing in priority areas and engaged and energized team and better inventory allocation for higher in-stock positions have successfully delivered positive comp store sales for the fourth quarter and the full year. We saw lower price sensitivity following the promotional reset and achieved more favorable lease renewals, driving a 550 basis points improvement in 4-wall profitability year-over-year.

Every store in our current fleet is profitable. And both of our recently opened new stores are projected to achieve payback in 3 years or less. In 2026, an additional 10% of our fleet will be due for lease renewals. We will proceed with these renewals only if they meet our predetermined profitability requirements.

Third, the enterprise planning process is driving an integrated business plan by connecting forecasts across various functions, including marketing, merchandising, supply chain and stores. This integration is continuing to deliver significant benefits, such as higher forecast accuracy, rightsized inventory buying, receipt time management, and optimal allocation across locations to best serve our customers across all channels.

Lastly, our direct-to-factory sourcing initiative has matured. Currently, almost 60% of our product is sourced directly from factories with the remainder coming through our 2 primary vendor agents. We continue to scale with our current vendors to deliver cost savings, diversify our sources to enhance supply chain agility and maintain our focus on innovation and quality.

As we move into 2026, we still have work to do in this turnaround, and it remains our primary focus, particularly in continued disciplined efforts in the first half of the year. Our ongoing priorities are building pricing and margin integrity through promotional reset, efficient inventory management, SKU reduction and maintaining rigorous cost discipline in part to offset the now annualized impact of tariffs.

But we are not stopping there. This year, we are intensifying our focus on strategic brand initiatives, reinforcing the brand identity around our core product assortment, strengthening our leadership in workwear, delivering a memorable experience through our unique storytelling and our actions to reengage and attract valuable customers, and further embedding operational excellence across the organization.

While we expect that these efforts will benefit us more heavily in the back half of the year, we have begun to see some green shoots from our focus on core product and are pleased with the trend that we are seeing so far this quarter. Products like Flex Fire Hose, Double Flex denim and Souped-Up Sweats are resonating in a positive way as we tell our story of innovation and long-lasting durability to both new and renewed customers. In addition, new product launches like our lightweight Fire Hose shirt and the poppies print that just landed for women are getting strong initial responses.

Our marketing has become more effective at driving higher levels of traffic to our site and to our stores. We are executing a full funnel approach to marketing this year with the intent to reactivate our customer base, build retention and attract new fans to the brand. As an example, we are running our new [ Max Gluteus ] ad featuring our best selling underwear in March Madness and NHL games while supporting core product visibility and sales in lower funnel efforts like SEO and branded search. We continue to monitor response in traffic, conversion and brand sentiment to optimize our spend with agility.

To fuel the second half of the year, we are making targeted investments and creating synergies with our product and marketing. These include customer-facing improvements such as integrating Apple Pay on our website to streamline the checkout process and fully leveraging our comprehensive full funnel marketing strategy. Our product assortment is stronger year-over-year with tighter SKU counts and a focus on core products that speak to our customers' hands-on hard-working lifestyle and our stores will be supported to deliver another year of increased sales. We have confidence that we will see the results of these efforts with improved sales trends and profitability in the second half of the year.

In closing, I want to extend my thanks to the entire Duluth team for a year of significant progress that positions us for future success. We have entered 2026 in a stronger financial and operational position with better liquidity, improved inventory levels, a more focused assortment and positive team momentum. We have a complete and highly capable leadership team prepared to execute our plan, and we look forward to presenting a detailed multiyear strategy during our first quarter earnings call in June.

With that, I'll pass it over to our CFO, Heena Agrawal, to discuss our financials in more detail.

Thank you, Stephanie, and good morning, everyone. I am pleased to share our fourth quarter and full year fiscal 2025 results, which reflect the incredible progress our team has made in executing our strategic turnaround. We successfully achieved the goals we set at the beginning of the year, fixing our promotional strategy, restoring price integrity, improving cash and inventory management and strengthening operations. We effectively handled tariffs through targeted price increases and cost mitigation.

We delivered a full year adjusted EBITDA of $24.9 million, an increase of $10.3 million versus last year. As a result of focused and disciplined effort combined with our agility in responding to macroeconomic conditions, we have achieved 3 consecutive quarters of improved year-over-year net income margin and free cash flow. We ended the year in a strong liquidity position of over $141 million as we reduced inventory by 21.1% and had 0 debt on our asset-based lending facility. We generated $16.6 million in free cash flow for the full year, a $41.8 million improvement over the prior year as a result of improved profitability and working capital management.

Let me now review our fourth quarter results followed by a more in-depth review of the full year. Starting with our results for the fourth quarter of 2025 with comparisons to prior year. We reported net sales of $215.9 million, a decline of 10.5%. When excluding the 53rd week from the prior year, the sales decline was 8.3%. Gross margin expanded by 890 basis points to 53%. We delivered net income of $7.8 million, an increase of $13.4 million.

As a result, our reported EPS is $0.22 and adjusted EPS is $0.23, an increase of $0.33. Adjustments to EPS include net restructuring expenses of $0.3 million for the closure of Salt Lake City fulfillment center. To note, we have not adjusted EPS for tax valuation allowance, which would have reduced adjusted EPS by $0.04 this quarter. Adjusted EBITDA reached $17.5 million, marking an $8.9 million improvement. This represents a margin increase of 460 basis points to 8.1%.

Moving on to full year 2025 with comparisons to last year. Net sales were $565.2 million, a decline of 9.8%. Excluding prior year's 53rd week and wholesale, net sales declined 9.4%. Gross margin for the year expanded by 420 basis points to 53.4%. Our reported EPS loss is $0.47 and adjusted EPS loss is $0.43, an improvement of $0.63. Adjustments to EPS include $0.9 million of net restructuring expenses and $0.4 million of net impairment expenses. To note, we have not adjusted EPS for tax valuation allowance, which would have improved adjusted EPS by $0.11 for the full year. Adjusted EBITDA for the year is $24.9 million, an improvement of $10.3 million, representing an increase in margin of 210 basis points.

When discussing the top line, it's important to note that all comparable sales figures exclude the effects of both the prior year's 53rd week and wholesale. Full year net sales declined 9.4% as a result of our promotional reset and pricing strategy. The direct channel was impacted throughout the year by the pullback on promotions, resulting in a 16% decline for the full year. This was primarily driven by a decrease in web traffic partially offset by double-digit growth in average order values from higher average unit retail prices.

Mobile sales penetration increased by 160 basis points. In contrast, the retail channel grew sales by 3.5%, fueled by comparable sales growth and the launch of 2 new stores late in the third quarter, partially offset by 1 store closure in the second quarter.

The retail channel outperformed the direct channel as retail customers showed lower price sensitivity to the promotional reset. The in-store experience continues to drive a high conversion rate among new and existing customers who report 5-star reviews on satisfaction and continue to purchase at higher year-over-year average order values. The promotional reset resulted in a decline in both men's and women's sales with drops of 9.2% and 9.7%, respectively. However, sales grew in key categories for both genders, including outerwear, AKHG and our Souped-Up Sweats collection.

With fewer promotions and increasing average prices, profitability improved across product categories and sales channels. Notably, the full year profitability of the store portfolio improved by 550 basis points with every store in the fleet being profitable. Gross margin rate for the full year was 53.4%, expanding by 420 basis points, driven by restoring price integrity through reduced depth of discounts, the flow-through of lower product costs as a result of our direct-to-factory sourcing initiatives and tariff mitigation, overcoming a tariff impact of approximately $11 million.

Average unit retail increased by 12% over last year, driven by a pullback on the depth and frequency of promotions, targeted price increases in the back half of the year and a higher mix of full price sales. Gross margin expanded by 640 basis points in the second half despite tariff costs.

SG&A expenses for the year were $310.5 million, which is $27.1 million or 8% lower than last year. We successfully exceeded our target of $10 million in expense savings this year as we took actions to rightsize our cost structure. SG&A as a percentage of sales increased by 100 basis points, primarily due to the drop in sales.

Advertising costs represented 10.3% of sales, a 50 basis point improvement due to a more effective balance between upper and lower funnel spend. Variable costs were lower in dollars, driven by lower unit sales partially offset by reticketing labor to execute price increases. Costs deleveraged as a percentage of sales by 50 basis points with a greater penetration of retail sales this year. Overhead expenses were down by over 4% and deleveraged by 170 basis points, largely due to the decrease in sales.

Inventory at year-end was $131.3 million or $35.2 million or 21.1% reduction compared to prior year. This follows a 17% reduction in Q3 and 12% reduction in Q2, marking the third consecutive quarter of year-over-year improvement. This performance was achieved through 2 key factors: the enterprise planning process and SKU rationalization. The planning process successfully aligned inventory with sales plans and balanced the timing of receipts. In addition, our inventory allocation strategy maximized stock at the automated Adairsville fulfillment center and significantly improved store in-stock position by over 500 basis points during the peak season.

Our inventory mix at year-end consisted of 82% in current products and 18% in clearance goods compared to 11% in clearance at the end of last year. We have since reduced the mix of clearance inventory, which stood at 13% at the end of February 2026 compared to 11% in the previous year.

Our capital expenditures for the year were $17.8 million compared to $17.4 million in the prior year, with funds allocated primarily to investment in the Manhattan warehouse management system, the opening of 2 new stores and ongoing maintenance.

The transition to an asset-based lending facility in 2025 resulted in both lower borrowing costs and greater flexibility. Our net liquidity position has strengthened sequentially over the past 3 quarters, culminating in $141.3 million in net liquidity at the end of fiscal 2025. This includes no outstanding debt on the ABL facility and $16.3 million in cash and cash equivalents. Due to improved profitability, better working capital management and a disciplined approach to capital allocation, we generated positive free cash flow of $16.6 million for the year. This represents a material improvement of $41.8 million compared to 2024.

Now turning to our outlook for fiscal year 2026. Our full year guidance is as follows. Net sales are projected in the range of $540 million to $560 million. This forecast anticipates that the first half decline will be similar to the prior year's trend followed by stabilization in the second half of the year. Adjusted EBITDA in the range of $26 million to $30 million for the full year. Capital expenditures of $12 million allocated between growth, infrastructure and ongoing maintenance.

Starting with the top line projection and assumptions. Full year sales are projected to be approximately minus 1% to minus 5% compared to 2025, driven by the continued promotional reset to restore price integrity and annualization of price increases from 2025. This outlook does not assume additional headwinds from changes in the geopolitical environment.

In the first half of 2026, we anticipate a sales decline in the range of minus 6% to minus 10%, similar to 2025 due to a combination of factors. The declines are driven by ongoing adjustment of our promotional depth and frequency, the annualization of price increases implemented in the second half of 2025 and the decision not to repeat the Big Dam clearance event in February and the wholesale program. These are expected to be partially offset by strength in sales of core items, higher average unit retails, a greater mix of full price sales and annualization of new store sales.

For the second half of 2026, we anticipate sales stabilizing within a range of minus 2% to plus 2% as we anniversary the promotional reset and price increases. We will continue to realize the benefits of a higher mix of full price sales from rightsized inventory purchases. This will be further complemented by our edited assortment focused on core products our customers value most and a healthy return on our full funnel marketing investment.

Moving on to gross margin assumptions. We anticipate gross margin for the full year to expand by approximately 100 basis points to 54.4% from continued promotional reset, annualization of price increases, greater mix of full price sales and sourcing savings, partially offset by annualization of tariff impact. With the ongoing uncertainty regarding the timing and rates of alternative tariffs, our outlook assumes the tariff rates in effect prior to the Supreme Court ruling and does not include recovery of previously paid tariffs.

We expect SG&A to reduce in dollars versus prior year, but deleveraged by approximately 50 to 100 basis points as a percent of sales, driven by structural fixed overhead costs and continued investment in advertising. This is partially offset by efficiencies from streamlining the logistics network and store portfolio. We expect optimization efforts to drive greater efficiency moving forward. We are focused on continuing to rightsize our inventory, targeting a 5% to 10% reduction driven by a double-digit decrease in our SKU count and disciplined planning to align receipts with the sales plan.

We have planned capital expenditures of approximately $12 million, a reduction of almost $6 million versus 2025 capped at 2.2% of sales. This capital is allocated across growth initiatives, infrastructure improvements and ongoing maintenance. Key investments include the final phases of Manhattan Omni for the website and stores, growth capabilities like Apple Pay that drive higher conversion online and investments in receiving and cross-dock capabilities in Adairsville to fully maximize its utilization.

In closing, fiscal 2025 was a defining year for the company, marked by the successful implementation of our strategic turnaround, leading to more robust operations and financial stability. Moving into 2026, we will build on this strong base characterized by a disciplined promotional strategy, stronger operations, leaner inventory and enhanced cash flow. Our focus will be on stabilizing sales through increased assortment productivity, ensuring healthy returns on our full funnel marketing investments and strengthening our brand to retain valuable existing customers while successfully acquiring new ones. We are confident that we have established a resilient foundation capable of delivering sustainable, profitable growth. We look forward to providing a comprehensive overview of our long-term strategy and vision during our first quarter conference call in June.

With that, we will now open the call for questions.

[Operator Instructions] Our first question comes from Dylan Carden with William Blair.

I'm just curious on -- just curious on the retail channel holding up better than online. Can you remind us, was that because you started kind of your promotional pullback earlier in that channel? Or I guess, to what do you attribute the strength? Maybe it's just sort of being in stock? Any sort of further commentary there would be helpful.

Dylan, this is Heena. Thanks for the question. Yes, I think there are a few key factors that have helped the retail channel. The promotional reset was started at the same time. We have the same pricing online and in stores. But what we see is a greater resilience and less price sensitivity for customers who come to our stores with higher conversion. And so they are looking for more full-priced product, willing to pay the better prices and higher average order values.

In addition, we had a strategic inventory allocation strategy where we made sure that there was greater in-depth assortment available in stores, and that's why we also saw in-stock go up by over 500 basis points during the peak season. In addition, we have a fabulous store team that is really serving our customers, as you can tell from our 5-star satisfaction reviews, and we have very high conversion rates. So all those factors helped the stores not only increase sales, have positive comps, but also improve profitability for the total portfolio by over 550 basis points.

Dylan, this is Stephanie. The one thing that I would add to what Heena just shared is our marketing efforts. We've seen really positive results in driving traffic to retail locations, both through the full funnel approach. So even our upper funnel marketing is driving that awareness that then drives the traffic to the stores. But we've also coupled that with more localized marketing in our retail store locations.

So then why pace the year sort of down more in the front half, sort of a stabilization in the back half if you're kind of carrying -- theoretically carrying that momentum in that channel? Is it just the direct suffers more early on from the sort of promotional reset?

Yes, that's absolutely right. So we are assuming positive comps for retail stores for the full year. The reduction is really coming from digital channel, especially in the first half.

Great. And then just on inventory, Curious, do you think you need to be -- your turns are kind of 2x a year. Do you think -- is the sort of the efficiency that you can foresee in the model getting you to 4x? Or is there some further reset there on that?

Yes. I think there are a couple of factors, Dylan, that will improve our turns over time. One is the reduction in SKUs, so allowing us to be more focused on the products and be able to create more productivity per product or per SKU that we have in the assortment.

The second piece of it is as we continue to become more efficient and productive in our supply chain, and that's all the way through the supply chain from our vendor base to the distribution centers. As we mentioned, Adairsville, we've been more and more focused on creating a hub there throughout the pipeline so that we can move faster, getting our product through the pipeline out to our stores, and that all cuts days and weeks off of the turn assumptions that we have.

So as we look forward, we'll see improvement this year, but it won't stop there as we become more efficient, not only in the supply chain, but how we think about our SKU counts and what we focus on in the assortment.

This concludes our question-and-answer session and Duluth Trading's Fourth Quarter Financial Results Conference Call. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to the Duluth Holdings Third Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Steffes with Duluth Investor Relations. Please go ahead.

Thank you, and welcome to today's call to discuss Duluth Trading's third quarter financial results. Our earnings release, which was issued this morning, is available on our Investor Relations website at ir.duluthtrading.com under News Releases.

I am here today with Stephanie Pugliese, President and Chief Executive Officer; and Heena Agrawal, Senior Vice President and Chief Financial Officer. On today's call, management will provide prepared remarks and then open the call for 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-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 will turn the call over to Stephanie.

Good morning, everyone, and thank you for joining us today. Earlier this year, we outlined a plan to reset the business, focusing on improving gross margin through reducing promotional depth, controlling costs and inventory levels and being more effective operation, all with the goal of delivering on our responsibility to our customers and shareholders. I am proud of the team's commitment to these efforts, and as evidenced by our Q3 results, they are yielding benefits. We are pleased to have delivered a consecutive quarter of improved profitability, building upon our earlier progress from Q2. Let me elaborate further on the areas of improvement.

Building upon the momentum we established in the second quarter, we saw success with our pricing strategies by focusing on the balance of promotional frequency and depth. We reduced our global promotional days by more than half compared to last year. And while year-over-year sales declines were consistent with our Q1 and Q2 results, we experienced higher profitability per unit sold.

Furthermore, to mitigate the impact of tariffs, we raised prices on select products in July and August. And in Q3, we maintained the sales volume on those styles, further reflecting our improving ability to strategically balance demand and retail.

Now let me provide an update on some of our third quarter product wins. Within men's, denim was a strong performer for us, and our decision to amplify this Duluth core product through national advertising led to a 9% growth in sales at higher margins. Men's AKHG was also positive, driven by innovations like After Sweat, AlpineFlex Pants and Renew Bamboo. Within women's, our Heirloom Garden collection continues to be a foundational part of our wardrobe. And we were also pleased with the results of our relaunch of another core Duluth staple, women's denim featuring asset management heritage denim and our Double Flex work silhouette.

At Duluth, we take the quality and functionality of our products very seriously, but we also like to have fun, and our customers love it when we put our own Duluth personality into the season. Our Highland Cows print was featured in October and was one of our most successful prints across several product categories. More recently, our November Hasbro collaboration put Mr. and Mrs. Potato Head, Tonka trucks, Tinkertoys and Lincoln Logs on to our best-selling Buck Naked underwear, bralettes and socks. Customers love the nostalgia leading into the holiday shopping season as it became one of our fastest selling collaborations ever.

Turning to our marketing efforts for the quarter. We saw success with a full funnel approach, highlighted by our Q3 men's denim branding efforts, anchored by strong creative on our Double Flex denim and coupled with the strategic linear TV plan that focused on premier college football games within priority store markets. We saw a significant lift in brand consideration. Further, our sponsorship and investments in other media like Spotify and targeted podcasts have increased our brand perception and moved a new audience toward trial of Duluth.

Our new mobile retail experience, more affectionately known as the Big Dam Van, visited the Sturgis Motorcycle Rally and NASCAR Cup Series event at the Kansas Speedway, and our 2 new store openings this quarter. In its first 3 months, we've engaged with 650,000 customers and the initial response has been overwhelmingly positive.

And speaking of our customers, while total customer counts were down in the quarter compared to last year, primarily as a result of our strategic pullback on promotions, we are seeing key customer metrics remain strong. Sales per customer and margin dollars per customer are up year-over-year as our average order values and units per transaction, reflecting our shift towards higher value customer engagement.

Moving on to our retail portfolio. Store sales increased slightly year-on-year, driven by the opening of 2 new stores in priority markets, Kansas City, Kansas and Maple Grove, Minnesota. In those stores, our traffic has exceeded our expectations, and we are seeing a nice flow of new customers who are discovering the brand for the first time. Our retail stores are vital to both our brand identity and the customer experience. The in-store experience continues to drive a high conversion rate among new and existing customers who report 5-star reviews on satisfaction and are purchasing with increasing average order values.

Now moving on to our operational improvements. We are dedicated to ongoing process improvements to optimize both current and future productivity while reducing costs. I am pleased to report that we are on track to exceed $10 million in cost savings in fiscal 2025.

In addition to cost reductions, our sustained focus on inventory management and enterprise planning has resulted in more streamlined operations. A key outcome of this cross-functional initiative is a 17% reduction in our Q3 ending inventory, primarily achieved by rightsizing receipts. We expect these continued efforts combined with planned reductions in SKU and style counts for upcoming seasons to drive more clarity in the assortment, more efficient cash utilization, stronger inventory turns and improved margins.

And now I would like to turn to our fourth quarter and the results we have seen to date. The holiday season is our most important period, driving customer engagement, revenues and profitability. Leading into this time frame, our focus remains on our turnaround efforts and executing with a clear sense of urgency. Through rigorous preparation and the alignment across all functions of the business including our marketing and merchandising strategies, inventory positioning, systems and supply chain preparedness and customer communication, we entered peak poised to exceed our customers' expectations.

First, we implemented enhanced operational protocols and planning processes to optimize unit inventory distribution and depth across our fulfillment center network. This approach has allowed us to capitalize on efficiencies and meet customer demand, specifically by maximizing the output of our fully automated facility in a day or so, which has shipped over 60% of units to customers thus far in Q4, over a 20-point increase from last year's peak season. In addition, we increased our in-store inventory levels, improving availability and enabling healthy conversion rates on foot traffic over the Black Friday weekend and in the weeks leading up to Christmas.

Regarding our merchandising plans, we have continued with a disciplined approach that we established over the last several quarters. This means offering focused promotions through more impactful events and maintaining shallower discounts to enhance margin performance. Our commitment to inventory discipline will continue into next year with an enhanced focus on product that is core to Duluth.

We have also made adjustments to our advertising mix, strategically rebalancing our marketing spend between branding and conversion. This refinement has improved our traffic and conversion trends in addition to brand awareness, consideration and purchase intent. And on an exciting note, we appeared a few weeks ago on Good Morning America as part of their season of gifting. It was the first time we were live in the GMA studio, which allowed us to highlight some of our best gifts of the season during Cyber Week and drove over 200,000 first-time visits to our website.

I am pleased with our holiday performance to date, and I am so proud of the team who has worked together to get us here. Our sales are in line with our expectations. Our gross margin has greatly improved and our operations are smoother. The team continues to serve our customers with a spirit that makes Duluth great, treating each transaction as unique and each person as a valuable part of our family and brand.

In summary, we are pleased with our Q3 results and our peak performance to date. These outcomes reflect the initial phase of our turnaround efforts and are a direct result of the actions the team has been executing on. As we look forward, we are committed to building on this momentum by focusing on the core durable products our customers love and deepening our relationship with long-standing Duluth loyalists while attracting new brand fans. And we will continue to restore price integrity, rightsize our cost structure and most importantly, deliver with excellence on our promises to our customers.

Now I'll hand it over to Heena to discuss our financial results for the third quarter and our outlook for fiscal year 2025.

Good morning, everyone. Echoing Stephanie's comments, we are pleased with our Q3 and peak results. At the beginning of this year, we set clear goals to reset our promotions, restore price integrity, improve cash and inventory management and strengthen operational execution. In addition, we successfully mitigated the impact of tariffs through a combination of targeted price increases and cost reduction. By staying disciplined on these goals throughout the year and mitigating macro headwinds with agility, this team has delivered consecutive quarters of gross margin expansion and SG&A leverage.

In addition, we have maintained healthy liquidity and lower borrowing costs by effectively managing working capital and moving to an asset-based lending facility. This quarter, our inventory balance improved sequentially and is down 17% versus last year. We ended the third quarter with a strong liquidity position of over $88 million. I couldn't be prouder of the team's unwavering commitment to our goals and their agility in developing solutions to navigate tariff pressures. We are successfully executing Phase 1 of our turnaround, significantly improving our financial position with enhanced profitability, free cash flow and liquidity.

Building on this strong foundation, our turnaround strategy will continue its momentum focusing on 2 key areas: reinvigorating our customer base and streamlining our product selection to emphasize our core offerings.

Now to provide a more in-depth update on our third quarter results and peak performance. Today, we reported third quarter 2025 net sales of $114.9 million, down 9.6%, with gross margin expansion of 150 basis points versus last year to 53.8% and SG&A leverage driven by cost reductions. Our reported EPS loss is $0.29 and adjusted EPS loss is $0.23, favorable to last year by $0.21. Adjustments to EPS include tax valuation allowance of $2 million. Adjusted EBITDA for the quarter is negative $0.7 million, an improvement of $5.5 million versus last year.

Starting with the top line. As we reset our promotional depth to drive greater profitability, our Q3 net sales declined 9.6% versus last year and declined 10.1% excluding wholesale. Direct channel sales excluding wholesale saw a 16% decrease, primarily due to a decline in web traffic, partially offset by double-digit growth in average order value from higher AUR and units per transaction. Mobile sales penetration increased by 70 basis points versus last year.

Retail store sales increased slightly by 0.4% as we opened 2 new stores late in the quarter and saw growth in average order value driven by both a higher average unit retail price and more units per transaction. As we reset promotions, men's sales declined by 8.7%, partially offset by growth in fall transitional outerwear, denim and AKHG. Women's sales declined by 12.8%, partially offset by strength in the Heirloom Garden collection. Profitability improved across channels and product categories with shallower promotions and higher average prices.

Gross margin rate for the quarter was 53.8%, expanding by 150 basis points compared to last year, driven by a rebalancing of promotions to restore price integrity by reducing the depth of discount, the flow-through of lower product costs resulting from our direct-to-factory sourcing initiative and tariff mitigation actions. Average unit retail increased 6% this quarter as we implemented targeted price increases at the beginning of the quarter in addition to shallower promotions and a greater penetration of full-price sale. Average unit cost increased as tariffs offset the benefit of direct-to-factory sourcing. The cost of tariffs was limited to $3 million this quarter with proactive receipt management and cost negotiations with vendors.

SG&A spend was $70.7 million, which is $11.6 million or 14.1% lower than last year. SG&A as a percentage of sales improved by 330 basis points to 61.5% compared to last year. Advertising costs were 11.8% of sales in Q3 compared to 9.3% of sales in the first half as we ramped up spending ahead of our peak selling season. This was favorable to last year by 340 basis points, driven by the timing shift of college football media spend from Q3 to Q4.

Variable costs were higher and deleveraged by 150 basis points, driven in part by reticketing labor to reflect price increases coupled with a greater mix of retail sales in the quarter. Overhead leveraged by 150 basis points from reduced personnel and depreciation expenses. As Stephanie mentioned, we are on track to exceed our target of $10 million in cost savings this year as we rightsize our expense structure.

Inventory at quarter end was $192.2 million, a 17% or $39.2 million reduction compared to prior year. This decrease follows a 12% year-over-year reduction in Q2, and is the result of better balancing of inventory receipts. The improvement was driven by a 15% decrease in year-round products and a 7% decrease in fall/winter goods. This was partially offset by a 27% increase in spring/summer goods. In addition, effective inventory allocation drove a 300 basis point improvement in in-stock position in stores and maximization of inventory in our fully automated Adairsville fulfillment center heading into peak. Key actions included raising minimum presentation levels in stores and responding with additional replenishment to backfill high-velocity SKUs. Enhanced processes like enterprise planning have instituted greater discipline in optimizing inventory receipts to manage cash and inventory positioning to drive greater availability.

At the end of the third quarter, our inventory mix included 92% in current products and 8% in clearance goods compared to 3% in clearance last year. This compares to 22% in clearance at the end of July and 16% at the beginning of September. To build upon the progress, as Stephanie mentioned, we are focusing our assortment to reflect more of our core durable products. We reduced SKUs by 5% in fall/winter 2025. We are on track to reduce SKUs by more than 20% in spring/summer 2026, and are targeting an additional double-digit SKU reduction in fall/winter 2026.

Our capital expenditures through Q3 were $14.3 million compared to $14 million in the prior year, primarily driven by the opening of our 2 new stores. We ended the quarter with net liquidity of $88.6 million and net debt of $36.4 million. Our cash and cash equivalents were $8.2 million with borrowing on our credit facility at $44.6 million. As we actively manage our inventory levels, we have improved our net liquidity sequentially in the last 2 quarters. As of this week, post the majority of the peak selling season, we are out of the credit facility with a net liquidity of approximately $125 million.

Now turning to our outlook for fiscal year 2025. We are affirming our 2025 adjusted EBITDA guidance range to the higher end of our previous guidance of $20 million to $25 million to now $23 million to $25 million. This takes into account several factors. Sales range for the full year of $555 million to $565 million versus an initial range of $570 million to $595 million. This reflects the impact of our pricing actions, promotional strategy and our commitment to the long-term quality of sales. Tariff impact for the full year is now projected to be down from $15 million to $12 million. This is planned to be offset by targeted price increases implemented at the end of the second quarter, management of inventory receipts and cost negotiations with vendors.

Cost savings from rightsizing our overall expense structure with the current scale of our business is now expected to exceed the $10 million target and be closer to $12 million. We plan to maintain our investment in advertising above 10% of sales.

Regarding our balance sheet and capital expenditures. First, we are maintaining our projection for a double-digit decrease in inventory levels at year-end compared to the previous year, driven by ongoing SKU reduction and rightsizing of receipts. Second, we are maintaining our capital expenditure plan at approximately $17 million for the year. This includes investment in the 2 new stores, Manhattan omni fulfillment software and regular maintenance. Finally, our asset-based lending facility remains a key resource for increased flexibility and access to cash.

In closing, we are encouraged by the significant progress we've made in key areas, restoring price integrity, enhancing inventory management and strengthening our operational execution. We've implemented comprehensive measures to offset the impact of tariffs, are making decisive moves to optimize our expense structure, and under Stephanie's direction, are keenly focused on refining our product assortment and strategic brand marketing investments. We have successfully navigated an uncertain environment, emerging in a stronger financial position across free cash flow, profitability and liquidity. With 2025 coming to a close, this team has built a solid foundation, both operationally and financially as we lead into 2026.

With that, we will now open the call for questions.

[Operator Instructions] The first question today comes from Jonathan Komp with Baird.

Yes. Stephanie, maybe stepping back, a bigger picture question. You referenced some encouraging customer and profitability metrics. How are you assessing the progress on your strategy to be more profitable and prioritize higher-value transactions? What are the key metrics that you focus on the most? And how do you expect that to play out into the holiday period, which typically is more promotional for the industry?

Jon, thanks for the question. So we look at some metrics that I think everyone would be familiar with around order transactions. So average order values being up year-over-year, our gross margin rate being up year-over-year. And we're also looking at longer term, our sales per customer or revenue per customer over a period of time. And so what we're seeing and we're encouraged by is our average order values continue to be stronger year-over-year. We are achieving the sales that we have with relatively fewer units. And so it's making the whole machine, if you will, more efficient.

When we look at customers and how we are thinking about them or how we're -- what the reaction we're seeing in fourth quarter, you're right, fourth quarter tends to be and is more promotional than other quarters. But we're seeing those same dynamics kind of play through quarter-to-quarter. So we're encouraged by the fact that at the end of the day, while our revenues are down and they've been consistently tracking, if you will, to the down 10% or so year-over-year, it continues to be at a higher quality rate of sale, both on the customer level and on the order metrics.

And maybe one follow-up. I know last year, there was some execution and operational challenges. Just any thoughts as you cycle over some of those periods, how the business is performing? And then maybe stepping back, how long are you thinking that roughly down 10% type run rate continues? Or said differently, when do you start to cycle some of the factors that could start to mitigate those sales declines?

Sure. So let me start with some of the proof points, if you will, that we have around our operations. And the comment that I made in our prepared remarks about being smoother, right, in Q4. So just to highlight some numbers, our Adairsville fulfillment center has shipped over 60% of our units to customers so far in this quarter, which is a 20-point increase in terms of percent of total to last year. And we know that when we ship from that facility, we're more efficient and are able to get the packages to our customers faster in many cases and fulfill that obligation that we have to our customers.

We have -- our on-time delivery this year has been above 90%. Wait time in our call center calls has been less than 5 minutes on average. And our retail in stocks on Black Friday were 97%. So all of those numbers are numbers that the team is really proud of, most importantly because they serve our customer better than we have in prior years.

So those are the places where when I talk about fulfilling promises to customers, it's about building relationships and long-term credibility with the people that we serve. And those numbers, I think, really exemplify the work that the team has done to build that relationship with our customers long term.

To answer the second part of your question around the sales declines, we're in this -- for the past 2 quarters since I've been back, the focus of the business has really been around creating a more stable base for long-term growth. And that has been focused around things that we've already talked about, the promotional reset and creating higher value customer interactions as well as orders, cutting costs in the other parts of the business so that we can be more efficient and productive on the bottom line longer term, smoother operations that I just mentioned.

And then as we look forward, we know that in order to build the -- continue to build the base for long-term growth, the next part of this is focusing our assortment. As we've talked about before, we have -- we are planning in both spring and fall of 2026 a 20% reduction in our SKUs and styles so that we can be more effective in our messaging, and we can be clearer to our existing customers and future customers what this business stands for and we're able to continue to invest in marketing to help us stand out in the marketplace.

So those are the things that we are focusing on right now. I'm proud of the fact that we have strengthened the base and the cost, kind of the cost structure of the business is coming more in line, certainly still have work to do there. But I think that it gives us at least the platform for the future growth that we can build on.

And I would add that as we look at our last 2 quarters' performance, our retail portfolio, we saw a positive comp in Q2 and flat to slightly positive in this quarter. So we see a more stable environment in retail as we reset the promotions.

On the online side, there is a greater elasticity with the promotional reset. But we are continuing to see the impact of various marketing efforts around increased traffic that we hope to capitalize on as we move forward.

Okay. Great. Maybe just 2 last ones from me then, Heena. On the fourth quarter implied adjusted EBITDA looks significantly higher year-over-year, maybe as much as double year-over-year. Could you just highlight the factors driving that improvement?

Yes. As we've been doing the promotional resets, the biggest reset is really coming from the Black Friday Cyber Week, 50% off that we had last year that we did not comp this year, and it was down to 30%, with some 50% Dam Busters. And that's really what's driving the gross margin improvement and gross margin dollar improvement.

In addition, because of the smoother operations and how the team has worked on positioning inventory, leveraging and maximizing Adairsville, we are also seeing a greater flow through on the contribution line. And on top of that, the cost savings estimate that we had of $10 million is expected to exceed and be at $12 million.

So all of those factors are coming together, and the greatest impact is in Q4 that we are seeing, which is driving that higher adjusted EBITDA in the Q4 estimate versus last year.

Okay. Great. And then just last one, balance sheet. I might have missed this in your remarks, Heena. Did you mention having fully paid down the line of effectively 0 debt currently in the fourth quarter here? Just to clarify that. And then any commentary you have looking forward on capital needs.

Yes, we are -- we have had a successful peak and it's been more profitable and smoother, and that's helped us pay down our debt fully. As of this week, we are out of our credit line, and we have liquidity of approximately $125 million. So we are looking forward to continuing that momentum through the end of the fiscal.

The next question comes from Dylan Carden with William Blair.

This is Marcus Belanger on for Dylan. During the quarter, I believe you said you cut days of sales in half. So can you tell us the overall depth of promotional activity or maybe what your percentage of full-price sales were? And then how far do you think you are from an optimal level of promo?

So I will -- I'll take the second part first, Marcus, around how far we think we are from optimal promotion. At the end of the day, this has been a huge reset for the business. And I just want to highlight one number when you look at the gross margin improvement year-over-year that we saw in Q3, considering the fact that as we reported in last quarter, we came in with significantly more clearance inventory coming out of Q2, and it was the first quarter where tariffs were a part of the gross margin. For the team to be able to achieve 150 basis point improvement, I think, is kind of shows how far along the journey that we've come so far.

We do still think there's continued promotional reset as we go into early next year, for example, in the February time period, we were up against a very heavy promotional time or clearance time in our Big Dam Birthday event last year. So that's a place that you will continue to see promotional resets, and we'll be tweaking that along the way. So our goal ultimately is to provide the best value for our customer to recognize that there are times of the year where value is a driver, like fourth quarter that we talked about just a few minutes ago, but to really build back in full price as a core premise of our business outside of those big promotional kind of milestone moments, if you will. So that's how we're looking at the business overall. And we'll continue to refine and tweak those as we go forward.

And Marcus, just to add, to clarify the number of days of promotion we were on in Q3 is what was cut in half. And to Stephanie's point, we are looking to continue resetting promotions. And this time, as we look forward, it's going to come more through reduction in markdowns as we've improved our assortment and inventory buying receipts. We expect to have higher sell-throughs on our products, which will reduce the markdowns and the discount that you see on our products. So we will continue on the promotional reset, but entering kind of Phase 2 where we have greater emphasis on markdowns and higher sell-throughs through a tighter assortment and buying.

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.