Duluth Holdings Inc. (DLTH) Q1 2022 Earnings Report, Transcript and Summary

Good day, and welcome to the Duluth Holdings First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded. And now, I'd like to turn the conference over to Nitza McKee. 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 Web site, at ir.duluthtrading.com under Press Releases. I am here today with Sam Sato, President and Chief Executive Officer; and Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we will open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified by the use of words such as estimate, anticipate, expect, and similar phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts, and assumptions, and are subject to risk and uncertainties that could cause the 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 Sam Sato, President and Chief Executive Officer. Sam?

Thank you, Nitsa, and thanks for joining today's call. We made tremendous progress on key strategic initiatives over the course of the first quarter, and I'm excited to share some of the details. We know that our customers demand well-designed products that are grounded in durability, functionality, and are solution-based for the intended end use. Our customers take on life with their own two hands, and embrace a can-do attitude in both work and play. To address our customers' various needs and attract new customers, we set out to create distinct positions for each of our sub-brands with product assortments that resonate and deliver against their expectations. I'm pleased to highlight, that during the first quarter, we introduced our new Duluth by Duluth Trading Company brand logo. The Duluth sub-brand is focused on the lifestyle of Americana workwear. The first quarter also marked the transition of our Alaskan Hardgear brand to AKHG, and we launched our women's collection in April. AKHG is focused on more technical products needed to support outdoor activities as well as the lifestyle of enjoying the outdoors. And importantly, our first layer business has undergone many updates. We've elevated our assortments through the creation of new, innovative products and intensified our focus on growing categories. Collectively, these updates are meaningful steps forward to position our overall Duluth Trading Company business under a common umbrella that will enable each sub-brand to serve our customers' desire for being active in their work and their recreation. I'll share, more shortly, how we see the evolution of our business and brand positioning to address the growing active lifestyle of our target customers. But first, I'll touch on our recent results. Today, we reported first quarter net sales of nearly $123 million, net income loss of $1.3 million, and earnings loss per share of $0.04. These results were better than our internal plan as well as our early projection, and demonstrate our continued operational effectiveness in the face of a dynamic macro environment. With inventories reaching a healthier position at quarter-end, and digital marketing tactics that draw on elevated data analytics, we are meeting the needs of our customers and executing our strategies for long-term brand growth. The efficiency of our omni-channel model is producing a consistently strong gross profit margin, which for Q1 was 54.6%, an increase of 470 basis points over last year. We continue to fund our strategic brand development initiatives with an increase in creative asset investments supporting our Duluth by Duluth Trading Company and AKHG sub-brand launches. The new brand positioning features seasonally relevant items for active outdoor categories in swim, gardening, and hiking. And as our receipts improve, the customers' response to our overall is strong, and led to high single-digit sales growth in April. With the support of new brand awareness campaigns, the momentum continued through the Memorial Day weekend, with customer demand exceeding last year. Our reported net sales for the first quarter were nearly $123 million, and were planned to be down to the prior year due to expected inventory delays and a strategic shift to carry meaningfully lower levels of clearance inventory. In fact, we ended the quarter with clearance goods making up 3% of total inventory, compared to 8% last year. Our overall inventory position at quarter-end is 6% higher than last year, a significant improvement from the beginning of the quarter, where we were down 18%. Importantly, the makeup of our inventory is significantly healthier compared to last year. The positive outcome of our strategic transition in inventory mix is that we are generating significantly higher gross product margins, fueling gross profit dollar growth, while absorbing higher-than-normal transportation costs. Our reported gross profit margin of 54.6% includes the additional expense of roughly $4 million in airfreight costs associated with inbound inventory from last fall. Absent these incremental freight costs, our gross profit margin is as strong as we've seen in the last five years, and a direct result of inventory management and pricing disciplines put in place. Our strategies continue to yield results that support improved operating margins, which Dave will go into further. Our EPS loss for the quarter, of $0.04, reflects the impact of the $4 million in airfreight costs I just mentioned, and also sound operational expense management. Absent the airfreight costs, our earnings per diluted share in Q1 would have been a positive $0.05. Our business is not immune to the inflationary pressures in fuel, labor markets, and commodity prices. We will continue to make adjustments to our model to keep the momentum going across the business, and continue to execute our strategic playbook. Our teams put many actions in place to address some of the headwinds we identified last year. For example, we've been selective in raising retail price points on certain core items, and expect further adjustments to prices in our fall and winter assortment. We established early delivery dates from our manufacturers to account for continued supply chain congestion. And we also plan to airfreight orders on certain new fall and winter products to meet key offer dates. We anticipate being well-positioned with merchandise to meet customer demand during the important sales periods, beginning with Father's Day, and into the fall and winter seasons. We were able to flex our variable expenses below last year, and realize expense leverage relative to our plans that support the continued investments we're making in our brand portfolio. These investments take advantage of the broader trends we see in our target customers to live an active lifestyle, and are designed to unlock tremendous growth opportunities while mitigating the impact of near-term macroeconomic factors. To that end, we purposefully held back some customer acquisition dollars in our first quarter marketing spend given the lighter inventory levels. The benefit of being more selective on attracting new buyers is we have seen higher average order size on their first purchase. As receipt flow improved, we dialed up digital prospecting in the back-half of the quarter. And as a result, new buyer growth increased with much of the activity driven by our enhanced brand messaging and introduction of the women's collection in AKHG. New buyers who are motivated by the new assortment, focused brand messaging, and product stories are significantly more valuable to us. Net sales in our retail store channel for the first quarter was up versus last year 0.4% driven by a higher average transaction value that is up 6% compared to last year. More recently, an improvement in our conversation metrics indicate that our heightened focus on store associate product knowledge training and assisting customers to build their basket along with better inventory position are paying off. Quarter-to-date sales in the retail channel are trending up to last year. Net sales in our direct was down for the quarter 12% largely reflecting the heavy clearance volume in last year's direction sales but also our purposeful decision to run lighter in working media in February and March. With a better inventory position by April, we leaned into digital advertising and social media and paid search to accelerate the direct channel growth. In April, direct sales were up low teen to last year. Our re-branding efforts are paying off. We introduced our new Duluth by Duluth Training Company brand logo and have ramped up the messaging providing a more unified voice across men's and women's. The customer response has been amazing. Duluth favorite such flex Fire Hose pants for men and classic NoGA Performance Stretch pants for women are great examples of product design to support an active get-it-done lifestyle with features and durability that stand up to a wide range of work activity. This spring, we built upon the Duluth brand's success we have had in our garden collection by introducing a short version of Women's Heirloom Garden Overall and new styles that leverage other well-known fabrication such as Dry on the Fly, Double Flex Denim, and Fire Hose CoolMax. These are innovative led products that are seasonally relevant and provide real benefit such as moisture wicking, cooling, and comfort. Our brand realignment of AKHG focuses on outdoor recreation for our customers who would brace the work and play addressing their needs for higher performance apparel and gear that stand up to the conditions they face while in the elements. Finally, Alaskan Hardgear we have always infused this brand's identity with high quality innovative clothing and underwear that is functional and allows for comfort and movement while outdoor conditions change. While we know the collection can stand up in these conditions, we also know that most of our customers simply want to trail, hike, or fly fish in the stream. This brand positioning opens up AKHG to a much wider consideration set and expands the brand's potential for the everyday outdoor adventure that may be closer to home. Our re-branding of AKHG coincided with the introduction of our women's collection. Since then, the AKHG women's segment has quickly reached a similar level of penetration as women's has for the Duluth brand abruptly one-third. The five star reviews are quickly adding up for the new collection and our live action branding allows for a broader aspirational imaginary of women and men together in highly photogenic and real-life settings. We are excited for the long run potential of AKHG and growing our women segment. Our first layer products outperformed and remains core to our business. Serving both men, we consider our offering to be America's most comfortable unders and have collected over 40,000 five-star reviews. That being said, we see greater potential particularly in the women's assortment. Included in this collection is the perennial favorite No Yank Tank. But expansion of our base layer tops and bras for women has seen significant growth of close to 40% in the first quarter. Lastly within our family of brands is Best Made, which realized a healthy 30% growth rate in the first quarter, albeit still small relative to the other brands. The curated offering within Best Made allows for great storytelling about the source and craftsmanship behind the product but also unique individual that live and work a lifestyle embodied in the Best Made spirit. Our men summer collection features women tops and bottoms, swimwear, and beach accessories inspired by the Pacific coastline and tropics of Hawaii. In partnership with the iconic brand Kahala, we offered two exclusive Aloha shirt styles. On our last call, we shared details about our capital investment plans for the year and in support of our Big Dam Blueprint. I am pleased to report that we are on-track with the early stages of our logistic expansion and automation project. And we have kicked off core technology initiatives that serve to advance our internal capability and build the foundation to support long-term growth. Within our existing fulfillment centers, we are implementing capabilities that will be fully operational in advance of our peak season this year. These capabilities increase the speed, accuracy, and capacity of inbound receipts with sortation equipment that expands daily capacity. The quicker we can receive inventory into our system, the faster we can make it available to our customers. In addition, investments are underway to automate sortation and scanning equipment on outbound orders that facilitate quicker replenishment of our store inventory and shipping cost savings through automated carton labeling. The investments we are making in merchandising toolsets will ground our capability to continue driving efficiencies on how we plan, buy, and seamlessly move from one season to the next. The enhanced systems will allow for quicker and more insightful assortment decision. Ultimately our merchandized planning tools will generate automated recommendations based on deeper trend analysis. And allow our teams to focus on higher value merchandized activities. The utilization of customer insights and data analytics will better enable our merchandizing strategies and long range brand growth decision. We have been engaging in a number of deeper reviews of our customer base, the interactions we have them, and measuring the opportunities for greater market and channel penetration. These reviews are informing our plans as well as the technology we are investing in to activate for plans. In summary, despite the external environment posing challenges, we continue to see healthy underlying demand from our customers for products and shopping experiences that meet their needs. We are in a strong financial position with ample access to liquidity, positive cash flow and earnings power that support our strategic growth plans. With that, I'll turn it over to Dave to provide more details on our first quarter and our outlook for the balance of the year.

Thanks, Sam, and good morning. For the first quarter, we reported net sales $122.9 million, down 7.9% compared to $133.4 million last year and up 11.8% compared to the same period in 2020, a decrease in sales between this year and last was roughly $11 million. And was the contributing factor in our sales declining year-over-year. Our direct channel sales were down 12.1% from last year, while the retail channel was up 0.4%, driven largely by a 6% increase in average transaction value in the stores. As we shared on our last call, we anticipated softer sales in the first quarter due to the heavier clearance position we are in last year and continue transportation delays our new seasonal and core year around products. Because of these two factors, we focused much of business on selling at regular price and preserving some of traffic driving media spend until later in the quarter when inventory reached a better position and our new sub branded collections were enhanced. By April, our customers responded well to the new spring assortment, the new brand messaging, and better in-stock positions on core items. Customer traffic and conversion through both our store and digital channels improved in the back-half of the quarter. As Sam mentioned, total net sales for April increased high single digits, and the momentum has continued with strong customer demand through the Memorial Day weekend. During the quarter, average order value and sales per customer overall increased mid-single digits driven by the demand strength of our core offering and being strategically less promotional compared to last year. The higher customer sales productivity is combined with an improving trend on retaining customers who have shopped with us more than once, and were new buyers prior to last year. Buyers who renew and purchase primarily full price items spent significantly more on their first purchase and are returning more often. Our retention rates in the first quarter are much stronger for these conventional buyers and the spend per customer is higher by roughly 30% versus price driven buyers. With these insights, we are adjusting our marketing mix and customer segmentation to strategically target the conventional buyer, which leads to higher customer lifetime value. The amount of clearance inventory was down almost 70% at the beginning of the quarter, relative to last year driving significant improvement to our product gross margins and an increase of 470 basis points in our reported gross profit margin to 54.6% compared to 49.9% last year. Our first quarter gross profit amount of $67.1 million compared to last year of $66.5 million included nearly $4 million in expedited freight expense that was spent last year to airfreight certain items in to bypass the shipping ports. Those items represent our bestselling year round core items such as men's fire hose pants, and Buck Naked briefs, and where we strive and never to be out of stock. Absolutely incremental freight cost, our first quarter gross profit margin would have matched a historical high for our first quarter at nearly 58%. We do anticipate some expediting activity this year, although not to the same magnitude as last year. And it is factored into our guidance. Turing to expenses, SG&A for the first quarter increased 5.2% to $68 million compared to $64.6 million last year. As a percentage of net sales SG&A expense increased 55.3% compared to 48.5% last year. This included increases of $2.8 million in general and administrative expenses, $1.1 million in advertising and marketing expenses and the decrease of $500,000 in selling expenses. Selling expenses as a percentage of net sales increased 80 basis points to 15.8 compared to 15% last year, driven by the higher hourly wage rates implemented across our store fleet and fulfillment center network in the back-half of 2021. Additionally, fuel surcharges on our outbound customer shipments contributed to the selling expense de-leverage. We expect to realize a similar de-leveraging selling expense in the second and third quarters before analyzing the wage rate increases and realizing efficiency gains to offset the higher costs. In terms of the field charges, we are anticipating the elevated levels will continue throughout the year. As planned advertising and marketing costs as a percentage of net sales increased 160 basis points to 10% compared to 8.4% last year, as a result of the development of creative content for our new brand positioning of Duluth and AKHG. These investments represent roughly 30% of the total cost this quarter. And we'll support brand messaging and feature products in future awareness and customer acquisition campaigns. In addition, we reduced the direct mail catalog portion of our work in media by roughly 50% and it continued strategy to leverage more flexible digital media targeting a higher return on ad spend. Our paid digital media spend represented about 40% of the total advertising spend this quarter, and we expect that to increase to close to 60% in the second quarter, representing the largest component increase in our marketing mix. Additionally, brand awareness investments designed to develop new customer audiences represent roughly 25% of the total spend and are strategically important to establish momentum in the subsequent quarters. Overall, we expect the second quarter advertising and marketing cost will increase, and de-leverage 80 to 100 basis points. General and administrative expenses as a percentage of net sales increased 440 basis points to 29.5% compared to 25.1% last year. The $2.8 million increase from last year represents additional personnel and technology costs, as well as fixed costs for our Cherry Hills, New Jersey store and Salt Lake City fulfillment center that opened the packet last year. We expect additional de-leverage in our second quarter for similar reasons, but to a lesser extent. For the back-half of the year, we expect to realize expense leverage in G&A expenses in connection with anticipated sales growth. As of today, our store count stands at 65 with no plans or openings for the balance of the year. As we discussed previously, we are evaluating locations for potential store sites in 2023 and we'll share more details once we have signed leases. Adjusted EBITDA for the first quarter was $7.9 million, the 17.5% decrease from last year and 80 basis points of adjusted EBITDA margin contraction. Our net loss was $1.3 million or a loss of $0.04 per diluted share, compared to a net income of $500,000 or $0.02 per diluted share reported in the first quarter last year. Excluding the expedited freight expense from last year, our EPS would have been a positive $0.05 per diluted share. Moving on to the balance sheet, we ended the quarter with net working capital of $106 million, including $40 million in cash and zero outstanding on our line of credit. Compared to the same period last year, we had $26 million in cash and $17.6 million outstanding on the line. We anticipate minimal borrowings on our available line of credit, which stands today at $150 million. Our inventory level is roughly 6% higher than last year at quarter end and is in a significantly healthier position than where we were at the beginning of the quarter. Spring and year round receipts that were delayed as of year-end have arrived over the course of the quarter supporting the sub brand re-launches effectively. Our current minutes of clearance inventory is 3% compared to 8% last year, and is at the appropriate level for where we are in the spring and summer season. Our capital expenditures, including the cost of software implementation is expected to be $40 million in 2022 versus our previous guidance of $57 million. The lower amount represents timing of progress payments for our new fulfillment center facility. On the heels of our lease fighting for the building in Adairsville, Georgia, we finalize the contract with our automated storage and retrieval systems provider and have reflected the updated cash flows and our projections. The shift and timing of progress payments will impact early 2023 and benefit our 2022 year-end cash position. We now expect free cash flow for 2022 will be roughly $15 million to $20 million. As we shared, the investments we're planning to make across the business will facilitate expanding and more efficient distribution capacity, product and brand development capabilities and add to our customer insights and data analytics to better inform our assortment and marketing mix. These investments are all focused on being more digitally led as a business and our key components are a Big Dam Blueprint. To summarize, our outlook for the second quarter and back-half of 2022, we expect sales and our direct channel to be up mid-single digits in the second quarter and up low teens in the back-half of the year. For retail sales, we expect sales to be mid-single digits in the second quarter and through the back-half of the year. We expect gross profit margin to be flat to slightly up in the second quarter and down roughly 50 basis points for the back-half of the year. We plan to increase advertising expense by roughly $2 million in the second quarter over last year and spend roughly the same amount in the back-half of the year compared to last year. With selling expenses, we expect the second and third quarters to be similar to the first quarter in the increase as a percent of sales, and the fourth quarter to be roughly flat to last year as a percentage of sales. Overhead expenses in the second quarter will increase as a percent of sales by 150 to 200 basis points, and be down 50 to 100 basis points in the back-half of the year as a percent of sales relative to last year as we gain leverage on sales growth. We are reaffirming our full-year guidance with net sales of $730 million to $755 million, adjusted EBITDA of $84 million to $88 million, and EPS in the range of $0.93 to $1.00 or $2.00. In closing, we are pleased with the great start to the year, particularly given the dynamic environment. Our teams remain focused on the needs of the business and our customers, and executing on our strategic plans. And with that, we'll open the call for questions.

We'll now begin the question-and-answer session. [Operator Instructions] And the first question comes from Jonathan Komp with Baird. Please go ahead.

Yes, hi, good morning. Thank you. I wanted to start by following up on the brand realignment. And I think, Sam, you walked through pretty clearly the rationale. But I'm curious if you could share more on the consumer reception so far, and if the differences are being noticed, and any feedback you've gathered. And then as you look forward, sort of any changes in brand character or positioning or sort of the product approach as a result of the realignment that you see going forward?

Yes, thanks, Jonathan, appreciate the question. Yes, so at a high level, this was part of our initial work within the Big Dam Blueprint, and it was to create these really purposeful and distinct positions for each of the sub-brands. And it allows us, not only from a product development perspective to be really narrowly focused on all of the performance and benefit features in developing and designing the products, but then gives our brand marketing team the ability to really lean in heavily and capture the intended use of these products. So, at the start of our strategic work, that was one of our priorities, to create distinction and a unique position. Two, I will say that, yes, we've seen some pretty incredible response. And I would point you back to our prepared remarks around AKHG in particular. We've created some clear separation relative to what that represents in comparison to Duluth and Best Made. And really -- we saw it as we launched the women's piece, in April; it immediately went to a similar penetration point as women's has for the much larger Duluth brand. So, the combination of distinct positions from a product development and from a brand marketing perspective, I think, is serving us well. And importantly, is creating a clear understanding by our customers.

Great, that's really helpful perspective. And then maybe a follow-up on the full-year outlook, I know mentioned that Q1 exceeded the internal plans, you've maintained the outlook for the year. Understanding it's early in the year, but are you baking in any additional conservatism in your outlook for the balance of the year, just trying to understand your thinking and your confidence level after better-than-expected Q1 results?

Yes, so I'll just -- I'll answer quickly, and then I'll let Dave maybe provide a little bit more color. One of the things we were thinking about all along as we planned our receipt flow this year, and in part with supply chain constraints that we faced last year with -- our team took some really purposeful and intentional action, like scheduling earlier receipt dates to ensure that we accounted for these multiple weeks of delay. And so, I think that's starting to show in the receipt flow as we went through Q1, and expect that to be the case as we go through Q2, and then, importantly, through the buildup in Q3, and into the peak holiday season, in Q4. As a reminder, last year we were talking about coming out of Q3, how our inventories were now dipping into the mid-20% below 2020 levels. And that continued through Q4. So, part of our forecast and our planning for this year includes what we expect was -- or what we thought was projected was some demand we left on the table last Q3, and Q4 in particular, because of the lack of inventory.

Yes, that makes sense. And I guess when you look at April specifically, could you maybe further isolate some of the tailwinds that you saw, and maybe relate that to the discussion about some of the marketing reallocations and the strategies for the balance of the year, and whether or not you could carry forward some of the successes that it looks like you may have seen in April?

Yes, I think what has impressed me, since joining the company a year ago, Jonathan, is that the flexibility in our ability to target and increase or decrease purposeful ad spend. And so, this is unlike anything we've experienced in terms of supply chain and its impact on availability of inventory. And so, the great news is when inventory flow isn't what we need it to be, we could dial that back. And then as we start to see inventory flow in at a higher rate, we can dial that up pretty quickly. And part of that's because we made a strategic shift, over the last couple of years, to a more digital marketing strategy, which is much more flexible than the linear advertising vehicles we would use in the past, where you had to commit to contracts well in advance, and then you're locked in. So, our brand marketing team is doing an unbelievable job of pulling levers throughout the months and the weeks, quite frankly. And so, in the case of April, as inventories started to flow in, and especially things like the AKHG women's launch, that was initially planned to launch in March, and because the receipts weren't here, we pushed it out. And as soon as we saw that stuff start to hit our fulfillment centers, they ramped up their plans on really targeted marketing initiatives. And that drove a lot of business to both the stores and to our digital site.

Yes, Jonathan, I'll just add, balance of year is still a lot of business ahead of us. I mean, our first quarter only represents 16% or 17% of the total annual sales. So, quarter-to-date through Memorial Day weekend, where the business is up in the low single-digit range, and obviously needs to continue to accelerate to get to the back-half of the growth rates that we have. So, I think it's just early in the year still. And that's reflective of our guidance that we're reaffirming.

Great, that's helpful color. I'll pass it on. Thanks again.

Thanks, Jonathan.

The next question comes from Jim Duffy with Stifel. Please go ahead.

Thank you. Good morning.

Hi, Jim.

I wanted to ask about some comments you made in your response to the last question. I'm curious about the indications on return on incremental marketing spend. During the first quarter, you pulled back on some marketing. If you had the inventory to do so and set out to scale the business, do you have [high ROI] [Ph] initiatives you could invest behind that you believe would drive growth?

Yes, absolutely. As I said, as the inventory flows in against our planned launches or new collections, we're able to flex that marketing spend up or down depending on the choppiness of receipt flow. And so, today, we've got some unbelievable new products that we're launching, we're excited about. I'll give you a couple of examples. We've got a hunting capsule in partnership with Mossy Oak, which is this unbelievable brand that brought kind of this new age of camouflage to the market. We're excited about that; we'll ramp up advertising against that as it comes in. We've got -- I mentioned in my prepared remarks that bras, as a category within women's first layer is delivering some outsized growth. And so, we've got this whole new women's offer called [Line Tamer] [Ph], and its seamless line disguising first layer for her. And so, we've got a pretty good marketing campaign against that. And so, really as Dave mentioned in his prepared remarks, we're increasing our ad spend in Q2 because we're seeing the receipt flow of some of these new goods and new collections. And we'll continue to flex that as our receipts flow in. But we absolutely have some really incredible and exciting new products, new innovations in the pipeline that are coming; it's just working through the choppiness of the receipt flow.

Understood. And I want to dig in to another level of detail there. Is this established proof of concept with new customer acquisition efforts that you could use to go to customer file or is this simply compelling product that you're using to reengage the existing customer base?

Yes, I think it's a couple of things. One is as -- we've always had a rich treasure-trove of consumer data. And as we've mentioned over the last handful of calls, as we continue to invest in and stand-up our data insight and customer insight tools, we're gaining a lot of really good actual information. And, in fact, we recently hired a new Director of Customer Insight, who brings an unbelievable amount of experience. And has already shown us the way he can chop that data up and add really great perspective and where we should target our customer acquisition strategies. One of the things that he has shown us, and Dave mentioned it in his prepared remarks, is this difference between consumers that we acquire primarily through price, versus what we call conventional spenders or those that are coming to us, over time -- or have come to us because of the product needs that have. And over time, they are significantly more valuable to us because, not only in the size of their basket, but the frequency of their interaction with us. So, we're targeting look-alike customers through different types of channels largely through digital acquisition. And that's even making our ad spend that much more effective because we can narrow in and be selective on who it is we're trying to attract and retain.

That's great. Your full-price selling penetration is super encouraging. And I think this dimension of a shift of focus on the conventional buyer versus [the price to a purer buyer] [Ph] seems powerful. I'm curious, how does that change the addressable market and potential size of the revenue base, does that narrow the potential size of the revenue base but improve the structural margin opportunity for the business? How do you think about that part?

Yes, no, I don't think so. I think -- listen, I think whether you're in kind of inflationary times, like we are now or not, even in an expanding market, everybody's -- everyone considers price in -- when they make choice. But I think, ultimately, the size of the market for where we serve and the types of produce and price value, the durability, the built of our products is a large opportunity for us. And we're just not -- we're just scratching the surface in terms of market penetration.

Great. Thank you, guys.

Thanks, Jonathan. Oh, Jim, I'm sorry. Thanks, Jim.

The next question comes from Dylan Carden with William Blair. Please go ahead.

Thanks a lot. Kind of continuing some of this same vein, I guess kind of further up the P&L, you're flirting around sort of peak gross margin or underlying gross margin to kind of back out some of the artificial cost headwinds. And so, I'm curious, you're speaking a lot more towards full-price selling, being more efficient with your promotional cadence, which is something you've long talked about. Is there kind of a structural level of gross margin that sort of underpins the blueprint? And is there any consideration here from a mix shift standpoint for some of these other portfolio brands that's kind of imbedded in that kind of recession?

Yes, I'll start that, Dylan. The, I guess, foundational gross profit margin that we see can continue is certainly kind of in the mid-50s long-term. And so, there's room to continue to grow there that is driven by strategically more full-price, regular price with the appropriate mix of promotional activity. The big benefit that, hopefully, we will continue to deliver on is inventory levels are in control, and that prevents the clearance activity that we really had in the last two years. So, it's about managing that level of the -- that mix of the product that's going to support the consistent gross margin and gross profit margin delivery on us. But in terms of the product categories and mix shift, we strive all of these sub-brands to be at a comparable gross margin when we're selling to the end customer, which is what we do. We look for that opportunity on the value of the cost, and the price competitiveness to have a consistent initial markup and kind of gross margin on -- after selling. So, we don't see a big impact due to the sub-brands growing and having that kind of alter our gross profit margin opportunity.

But is -- as per -- I guess I'm getting at is sort of mid-50s is where you've been, looking back at least in pre-pandemic history, maybe a little bit of both, you're sort of flirting around high-50s. Is it crazy to think that you're growing up a high-50 kind of underlying margin from here is what you're saying that sort of the core business structurally still runs at kind of that mid-50s level?

Yes, I mean and when I, I guess, talk about high 50s, our product margins sell at that kind of level. And then we have other costs that are baked into our gross profit margin. So, yes, I think that that's definitely achievable to maintain on a kind of rolling 12-month basis.

Okay. And then, across the brands, I guess where are you, Duluth core, Duluth legacy versus sort of the combined portfolio brand from a revenue penetration standpoint? And then the opportunity to cross-sell amongst those brands, are you kind of early days, are you exploring some of that opportunity? I know the customer profiles are going to be different, but there's got to be some overlap, I'm just kind of curious if there's any commentary there?

Yes, so just at a high level, Duluth or, say AKHG and Best Made represent just under 10% of the business, with Duluth being the balance. And our plan is to continue to grow AKHG and Best Made at a much faster rate than we are Duluth, to have that be a larger share of the percentage as we move forward. In terms of crossover, as I was saying earlier to Jonathan, we've set out to work really hard to create these distinct positions for end use intended, and geared for alike consumer. So, we're working hard from an assortment perspective not to have -- intentionally, not to have a lot of crossover products because it's end-use focus. And so, we believe that that allows us to build the basket size because the customers aren't making a choice between a flannel shirt in Duluth versus a flannel shirt in AKHG, that they are, in fact, buying them for their different needs. And we're actually seeing some of that happen in terms of average order value in particular.

Sorry. So, that would mean that there is high cost over potential, right, because if I am buying a flannel shirt for one use case and I am buying a rain jacket for another, my total basket is the combination of both of those and not cannibalize each other, right?

That's correct. Not cannibalizing each other.

And so, you are actively out there kind of marketing to those sorts of distinct customers that might be a customer of one brand and now another, is that sort of something that's yet to come?

Yes, distinct end use is first and foremost, similar customer. But as we learn more about different consumers and how they are engaging with us, there is opportunities for us to market, for instance, some of that's buying primarily AKHG to market some potential consideration items within Duluth or Best Made.

All right, okay. And I am still -- I know we talked about it lot on the call. I am still little bit lost. So, the pulling back on marketing when you didn't have the inventory makes all the sense in the world to me. But yet marketing actually de-levered if I understood it right. And so, I am just curious and it sounds did I hear you right? You have gotten rid some of the catalog as well. I am just kind of try to understand the go-forward outlook for marketing sort of rest around or maintain sort of low double digit percent of sales level?

Yes, so two things there. One is over the last couple of years we've been pulling back on catalog. So, we're investing in catalog. It's still a great brand building piece for us. And importantly, as we re-brand it Duluth and repositioned AKHG gives us an opportunity to really do it across genders. We're doing it over to key timeframes like Father's Day for instance. Our Father's Day catalog is hitting this week. So, we'll take those key moments to tell those family brand and full family stores. In terms of the de-leverage, part of it is -- and maybe we just have to explain it a bit better, we've got working media and nonworking. Nonworking is really creative brand building. So, for instance, as we launched women's AKHG and the repositioning of Duluth by Duluth Trading Company, we spent money in creating brand messaging and brand positioning marketing versus targeted commerce driven marketing.

Got you. That makes more sense. And so, -- and ultimately kind of resting level of ad spend should be kind of high-single low-double. I know I guess maybe you probably won't commit to that right now, but just out of curiosity and if I can get you too.

Historically, it's kind of been this low double digit range. And I am not comfortable in saying that today we are probably in the range of where we will be as we move forward somewhere in that low double digit range.

Very good. Thanks guys for taking all the questions. Nice work.

Thanks, Bill. Appreciate it.

This concludes our question-and-answer session, which also concludes today's conference call. Thank you very much for attending today's presentation. And you may now disconnect.