Q3 2023 Duluth Holdings Inc Earnings Call
Participants
Nitza McKee; IR; ICR, Inc.
Sam Sato; President & CEO; Duluth Holdings Inc
Mike Murphy; Interim CFO; Duluth Holdings Inc
Janine Stichter; Analyst; BTIG
Jonathan Komp; Analyst; Robert W. Baird & Co., Inc.
Dylan Carden; Analyst; William Blair & Company
Presentation
Operator
Good morning and welcome to the Duluth Holdings, Inc. third quarter 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question. You may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nitsan McKee. Please go ahead.
Nitza McKee
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 dot Duluth Trading.com under Press Releases. I'm here today with Sam Saito, President and Chief Executive Officer, and Mike Murphy, Vice President, Chief Accounting Officer, and Interim 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 risks and uncertainties. It 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'll turn the call over to Sam Saito, President and Chief Executive Officer, and Sam,
Sam Sato
thank you for joining today's call, reflecting on what has remained a dynamic consumer environment in which we continue to see customers gravitating to value. Our third quarter performance was hampered by lower traffic in both our direct and retail channels as well as an underpenetrated position in spring summer goods following strong unit sell-throughs during the second quarter in addition to managing the business prudently on both the inventory and expense fronts, we strategically post a higher than planned level of events combined with select pull forward of Fall Winter receipts enabling us to maintain high levels of in-store shopper conversion as well as improve our conversion and retention rates in our direct channel. To be clear, we are not satisfied with our performance, and we've made adjustments to improve the trend in the business for the final quarter of the fiscal year. I'm pleased to report that we've experienced a solid improvement in business trends over the Black Friday through Cyber Monday period, which gives us confidence the tactical adjustments we are making are resonating with our customers.
Let me outline at a high level.
The actions we're taking to improve our business performance in the fourth quarter. We're introducing more new products than we ever have, as well as pulling forward select items from our spring 2024 assortments we're chasing and in some cases, expediting freight for targeted best sellers to capitalize on these winning products throughout the holiday season. And we've added back global events and post our Black Friday deals throughout November.
Despite the challenging third quarter results, we registered notable merchandising wins highlighting that our brand and sub-brands remained strong and our product innovation engine is creating winning assortments. Key wins for the third quarter included continued strength in our garden, landscaping and planting category, which now represents over 10% of our total women's business. Our heirloom garden collection posted triple digit growth in the quarter over last year, fueled by new prints and colors and expanding offering into extended sizes and a very successful line version of the heirloom gardening bib. The customer is loving the added warm from the line bib so she can wear her favorite overalls year-round. The heirloom gardening bib is our newest hero product in fact, this product is the first purchase for nearly 40% of all new female customers and is number one in organic search for the Garden overalls, a clear indication, but our apparel styles have a foothold in this space. We continued to see strength in women's bras, which posted another quarter of year-over-year growth of 50% is responding well to innovation in the broad category with an emphasis on soft fabrications and the seamless look and feel our top collections include our material flow suggest the bust and free range. Our newest brought our material T Lux, which leverages our Jade infused our material of fabric and first ever molded cut brought as quickly become our number one style. Women's HG. had another solid quarter of growth and increased by just under 20%. Customer continues to respond well to our melt water collection. And we're also seeing a strong start to outerwear sales driven by the pumpkin collection. We also introduced the first women's parka in a cage G and she's loving the added length and new waterproof innovation. Elite continues to show strength in its core programs within men's dilute flex fire hose and denim were up double digits, supported by our pants destination marketing. Our Duluth flex fire hose pants delivered solid growth in the quarter with notable strength in standard and slim fits and indication that these fits are attracting a younger customer.
Now a brief review of our third quarter results. Total net sales for the third quarter were $138 million, down 6.1% with our retail channel down 9% and our direct channel down 4%. As I mentioned, the third quarter was impacted by lower traffic across channels and our underpenetrated position in spring summer goods during the first half of the quarter to maintain brand integrity, we remain competitive with our offers but made the strategic decision to limit the depth of discounts in the third quarter. And while this may have also contributed to lower top line sales, we believe holding the line on price integrity is paramount to the long-term health of our business. Further, our product gross margin declines to last year stabilized considerably in the third quarter and the erosion that we did see was almost exclusively from mix as customers shopped less at full price and gravitated to maximizing their spend during periods in which we post events.
When looking across our full price, promotional and clearance sales buckets. Product gross margins were essentially flat to slightly up in each. We will continue to balance our efforts in the fourth quarter to stay competitive and drive the business while preserving the long-term price integrity of our brands. Mike will provide greater details on the P&L, but our net loss per share in the third quarter was $0.32 versus a loss of $0.19 in the third quarter last year as our teams continue to optimize efficiencies in our marketing spend and with customers gravitating to a greater mix of promotional sales. Throughout the quarter, we made the strategic decision to pull back on advertising spend and delevered ad leverage. In the third quarter. Our Q3 marketing spend effectively balanced brand awareness and high converting digital tactics within our media mix. Digital conversion media achieved strong year-over-year performance within both paid social and e-mail, which drove an 11% increase and reactivated customers. Importantly, our inventory is in a very healthy position with a significantly higher level of newness, coupled with a 30% decrease in clearance inventory. Our quarter-end inventory balance of $174 million was 15% below last year, with a strong mix of Fall Winter and year-round goods. Our continued focus on effectively managing our inventory will enable us to increase profitability, enhanced cash flows and better serve our customers both now and in the future.
As touched on last quarter, we're also excited about our pipeline of new and innovative products that we have begun to introduce during the fourth quarter. This includes newness in our core categories of Buck, Naked and fire hose, as well as within our sub-brand AKHG., our customer loves the performance of our Dry on the Fly technology. So we've added this to underwear and also to a new team. This high performance fabric has superior wicking and drying benefits that derives from the special fiber shape and fabric blend, which is unique to dilute the new team combines the performance of a technical fabric, the weight and hand feel of a cotton tee and comes in both long tail and on long tail silhouette. We will also be offering a new men's fire hose Carpenter pants featuring the strongest flex fabric on the marketplace, but still with a lighter weight than our original flex fire hose. We're confident this will be a hero product and another example of dilute DNA by offering customers innovative products that solve a problem.
In November.
We also delivered newness in no Yanuk. This is our favorite layering tank, and we're offering it in a new rib fabric in two different styles and also brought in a boat next silhouette in our core fabric. She's told us she loves this collection and now there will be even more options to complete her outfit.
And finally, as I mentioned earlier, women's AKG continues to deliver significant growth. We're very excited to announce this January, we will be launching a new women's HG. fitness apparel line, which will include an assortment of styles from tanks, shorts to hybrid jackets. And after sweat sweats, we're bringing in product for the new year as customers are focused on self-care and starting the new year off, right, given the strong start to the holiday season of our Black Friday through Cyber Monday, coupled with our strong assortment of new and innovative products. We're positioned well heading into the remaining weeks of peak holiday selling. There's still a lot of business in front of us and the trend we are seeing gives us confidence that our high quality solution based products will continue to resonate with our customers, gift givers and new-to-file consumers.
Looking forward, we remain resolute on executing critical foundational strategic investments and I'd like to provide updates on a few key components that represent cornerstones to our big dam blueprint. We're making great progress on several important initiatives that will serve as enablers for long-term profitable growth, including our global supply chain strategy, our sourcing and product innovation strategy as well as our technology roadmap.
First, as I shared during the second quarter call, our new highly automated fulfillment center in Adairs will Georgia went live in September with a ramp-up plan to process up to 60% of all online orders and store replenishment volume by the end of Q3. I'm pleased to report that we reached this goal and the facility is fully operational and exceeding output expectations thus far in the fourth quarter. In addition to shortening delivery times to keep pace with evolving customer expectations. The enhanced capabilities in this facility will provide both labor and shipping efficiency gains. In October, we already benefited from lower cost per unit to fulfill an order in this facility, which is less than half the cost of our three legacy fulfillment centers and will result in meaningful cost savings over time. We also continue to make progress with the growth of our sourcing and product innovation functions, which we believe is another critical strategic initiative to drive sustainable, long-term profitable growth. Several team members were onboarded in the second quarter, and I'm pleased to share that we have recently hired a new Vice President of Sourcing, someone with deep and extensive sourcing experience who previously led large sourcing functions, including at J. Crew. This initiative will enable us to further accelerate the introduction of high-quality innovative products more frequently while increasing our speed to market at a reduced cost. In fact, as we move into and throughout next year, we expect this initiative to deliver significant improvement in our initial markups across our assortments, and these will continue to build over time.
Finally, we have also made great strides with completing several foundational initiatives to execute our technology and transformation road map, which becomes the primary focus of our capital expenditure outlays in fiscal 2024. That said, total capital spend in 2024 will be down considerably compared to 2023, with the successful completion of Adairs will and the progress we've made on our sourcing and product innovation and technology initiatives. Our confidence only continues to grow in the investment strategy outlined by our big dam blueprint. I look forward to sharing more on our fourth quarter call. And we'll now turn it over to Mike to provide more details on our third quarter results.
Mike?
Thanks, Sam, and good morning for the third quarter, we reported total net sales of $138.2 million, down 6.1% compared to $147.1 million last year, which brings our year-to-date sales decline to 2.5% versus last year. Our direct channel sales declined 4.4% as lower web visits were partially offset by increased conversion of 70 basis points. However, sales on mobile devices increased roughly 2% with even greater improvement in conversion, up 80 basis points, indicating that our investments and continued focus on the mobile experience is paying off. Our retail channel sales were down 8.8%, driven by a store traffic decline of more than 6% compared to last year, coupled with a moderate decrease in shopper conversion.
Total men's division sales decreased 7% during the quarter, while women's was down 3%. Women's momentum from the previous three quarters slowed, but continued to grow as a percentage of our overall business as compared to the prior year. As Sam mentioned, the actions we are taking have resulted in improvements in business trends over Black Friday through Cyber Monday. We are pleased with our improved quarter-to-date sales trends, but we also recognize that we have many important selling days ahead of us leading up to Christmas. That said, we are lowering our guidance largely based on our Q3 results, which I will provide more details on shortly.
Our third quarter gross profit margin was 50.2% compared to 52.3% last year and reflects a lower mix of full-price sales this quarter versus last year, while gross profit dollars of $69.4 million declined 9.8% from last year. As mentioned last quarter, we started to see our year-over-year product gross margin decline stabilize at the end of Q2, and that remained consistent throughout Q3. However, as noted by Sam, we continue to see customers gravitate towards value and choosing to purchase during sale events more often Turning to expenses. Sg&a for the third quarter decreased 2.9% to $81.8 million or 59.2% of sales compared to $84.3 million last year or 57.3% of sales. This included an increase of $700,000 in general and administrative expenses, a decrease of $1.8 million in advertising and marketing expenses and a decrease of $1.4 million in selling expenses.
Selling expenses as a percentage of net sales increased 10 basis points to 17.2% compared to 17.1% last year, driven by higher outbound shipping costs that resulted from contractual rate increases as well as lower average order values on our direct channel orders within our selling costs, expenses related to variable labor across the store fleet and the fulfillment centers declined to last year and the year-over-year leverage gained as a percentage of sales in Q2 nearly doubled in Q3. This is a direct result of the efficiency gains we continue to realize from the investments made across our fulfillment center network, most notably, our new highly automated center in Adairs bill that went live in September, as Sam mentioned and worth repeating, the cost per unit we achieved in October at this new facility reflects savings of more than 50% compared to our other three centers. We expect the cost per unit benefits to be even more meaningful in Q4 and continue into fiscal 2020 for advertising and marketing costs were $17.8 million in the third quarter compared to $19.6 million last year. And as a percentage of sales decreased 40 basis points to 12.9% compared to 13.3% last year. Our investment in brand awareness through national ad channels and TV streaming increased slightly versus last year, while our digital media channel spend was reduced during Q4. We will continue to balance brand awareness and conversion marketing tactics with new cut-through creative concepts and a planned increase of digital media investments in digital media investments, focus on social media and influencers and online video and streaming, supplemented with a strong investment in search and shopping channels. We expect to deliver greater year over year advertising leverage in the fourth quarter compared to what we experienced in Q3.
General and administrative expenses during the third quarter were $40.3 million or 29.1% of net sales compared to $39.6 million or 26.9% last year. The increase in G&A expenses over last year reflect incremental costs associated with the aforementioned strategic initiatives, including depreciation and personnel expenses associated with the new Adairs whole fulfillment center, as well as additional personnel costs to support the growth of our sourcing and product innovation functions. We expect our fourth quarter overhead expenses to be slightly less than Q4 of last year. Adjusted EBITDA for the third quarter was negative $1.6 million or negative 1.9% of sales compared to a positive $1.7 million or 0.7% of net sales last year. Our net loss per share was $0.32 versus a net loss per share of $0.19 in the third quarter last year.
Moving on to the balance sheet. We ended the quarter with net working capital of $62 million, including $8 million in cash and $36 million outstanding on our $200 million line of credit. Our Q3 debt levels were in line with plans and importantly, we expect all outstanding debt balances to be fully paid off by the end of next week.
Our inventory balance ended the quarter down 15% compared to the third quarter last year. We planned inventories down year over year throughout 2023, which is reflective of our continued focus on being more efficient and driving increased inventory turns. Importantly, we feel good about the current mix between year-round and seasonal goods heading into the peak selling season, with total clearance units on hand down by more than 30% from last year. Driven by higher sell-throughs of spring summer items in Q2, we remain on track for our total capital expenditure plan of approximately $55 million this year, which will be funded by cash. And as we've shared on previous calls, the bulk of which relates to our new fulfillment center in Adairs, Bill Georgia.
Now moving on to full year guidance. We are updating as follows. Net sales in the range of $640 million to $655 million, EPS in the range of negative $0.25 to negative $0.15 and adjusted EBITDA in the range of $35 million to $39 million. These estimates reflect a full year gross profit margin decline of approximately 150 basis points and full year SG&A expenses as a percentage of sales to be roughly flat to up 70 basis points compared to last year. Our teams remain focused on prudently managing the business, controlling what's within our control and continuing to execute on a strong peak season.
On behalf of Sam and the entire leadership team, I'd like to wish everyone a happy and healthy holiday season.
With that, we'll open up the call for questions.
Question and Answer Session
Operator
(Operator Instructions) Janine Stichter, BTIG.
Janine Stichter
Hi, good morning and wanted to ask about Black Friday and Cyber Monday, specifically understanding it was very strong start to the holiday season. How do you think about extrapolating that into your go-forward outlook? Just knowing that I think for you and for the industry in general, we've seen consumers shopping more around promotions. And then I have a follow-up.
Sam Sato
Thank you, Jeanine, how are you from?
Yes. I mean, we're obviously pleased with the solid start to the holiday shopping period and saw a solid trend improvement in the business from Black Friday through Cyber Monday?
Yes.
Obviously, we continue to see the consumer sensitivity around around price and on certainly the Q. three results. As we look at it by price bucket, it is a clear indicator of that. And so while the trend certainly improved. We're taking a slight tempered look to the remaining in upcoming weeks, still a lot of business to do, and we're watching that that closely. I'm still think that there's there's some some consumer sensitivity, and we're watching that closely at the same time as we continue to take share. And while we've got to be promotional in the case of Q. three we post events more frequently than we have historically, we're not going to we're not going to chase bad sales, meaning we're not going to discount the product to the point where where it's not providing both top line and and from and flow through to the bottom line and damaging the brand position. So So while the trend change over the course of Black Friday weekend through Cyber Monday. It was it was during a highly promotional time. And so and so we're just being cautious in terms of extrapolating that throughout the rest of the quarter.
Janine Stichter
Okay.
And then also wanted to ask around the inventory and sounds like there's a fairly large bifurcation between some of the items that are really working some of the hero products and then kind of the balance of the assortment. So how does that inform how you think about SKU intensity and bringing product to market going forward? Is there an opportunity to kind of maybe shrink the SKU intensity and invest more deeply behind some of these clear winners?
Sam Sato
Yes, absolutely. So I mean, you know, it's a dynamic kind of fluid scenario. So we've got some some hero products, key year-round goods that we're on, we're on pretty fast recovery. So we're writing orders on a regular basis and flowing those goods, whether it's flex fire hose or on some of our key unders products. At the same time, we're looking at these opportunities of products and categories that we're starting to see greater growth and we're and we're working hard to not only ensure that we stay in stock at the right time, but that we're looking forward and exploiting those opportunities. I think what's interesting about some of the things we've got going on right now is the the continued innovation against franchise, like of like fire hose Carpenter pant that, um, that is coming in and then we identify new categories like RHG. and fitness line across women's and men's. No Yanuk has been a staple for us and the team worked hard to introduce a few new silhouettes and new fabrications.
And so it's kind of a we're looking at new opportunities within new categories that we are currently participating in, as well as and evolving expanding on kind of true blue categories and items that have that have really made dilute what we are today seeing.
Janine Stichter
Thanks so much and that's what I commented on it.
Sam Sato
Thank you. Very much.
Operator
Jonathan Komp, Baird.
Jonathan Komp
Yes, hi.
Good morning, Sam.
I just want to follow up on the topic of promotions and discounting and just understand the strategy, Tom, you highlighted clearance units down a lot. You're not intending to chase sales, but I think through yesterday you had 40% off everything. There's still more frequency of deals. Just could you maybe go a little more in-depth the strategy there, why you're why pursue those deals at all versus maybe a more profitable base of revenue? If you didn't? And then how should we think about the gross margin level you need going forward for this to be a healthy level of profitability for the total company?
Sam Sato
Yes, sure.
Thanks, Jonathan.
Yes.
I mean, it's a it's a complex and kind of tricky scenario when you're when you're balancing brand integrity with with market competitiveness and so on the whole house what we call whole-house global events that we have. We're comping those.
And actually we're not we're not adding a lot more of those.
We are pulsing in on certain item kind of promotions. And as I said, you know, it's it's considerably more price promotional out there than it has been over the last couple of years. And so in order to remain competitive?
Yes, we're having to promote a bit more frequently. But as I said, the depth of our promotion in terms of the discount discounting is not significantly deeper. And that's where we're going to draw the line a bit on. So yes, I mean, we're always thinking about how much is too much how much is too little, how do we ensure that we continue to drive on sell through brand awareness because all of those things have implications on into the future. And certainly certainly as it relates to kind of mind share, we could could we do less promoting?
Yes.
I mean, we always could come, does that necessarily improve or help us meet some of our other required measurements like sell throughs and market share. I know we probably give some of that back margin rate. The rate itself might increase, but but total profitability for the Company, both near term and in the immediate kind of future would be hurt. So I mean, it's tricky and I know I know the basis of your question, Jonathan, you you and I've talked about this a lot and I think just know that we're internally talking about the balance of promotions versus regular price.
Yes, the fact of the matter is when we look at our sales mix, as I shared in the prepared remarks, customers are just gravitating more greatly to value. And so when we do run these events, the that the sales numbers jumped during those events and they're just they're choosing to purchase less during regular price periods on the great news is in all of our buckets. Clearance included, although clearance is significantly down from a year ago, but all three of our buckets, regular-price promotions and clearance of our margin rates are actually slightly flat to slightly up in all three buckets. And so in totality versus a year ago and even when we look back a couple of years ago, margin rates by bucket aren't that far off, they're just the percentage of sales are being driven more by that promotional bucket right now than they are on than they are regular price or clearance.
So and we're sensitized to it.
We're trying to remain competitive, but at the same time, not jeopardize our brand position. But no, we also have to ensure that we're delivering sell through so that it doesn't come back to bite us next quarter.
Jonathan Komp
And just as a follow-up, is it right to think at some point in the future, getting back to your mid, maybe high 50s gross margin might be required to drive higher profitability for this business. Is that just sort of a reasonable expectation? And is there a path to get there or not the other path to drive better profitability?
Sam Sato
Yes, absolutely.
I think I think the way you're thinking about it is right.
Mike Murphy
And what I would point you to is, as I mentioned, the enablers to our big dam blueprint, specifically logistics vis a vis the Adairs, will that not only that are only benefits us from a consumer expectation perspective, but certainly from a speed and expense perspective on significantly more efficient than our legacy fulfillment centers.
Second part is our sourcing and product innovation initiative. Last call we mentioned we onboarded several new members. We just hired a new VP of sourcing and she's got unbelievable experience in the industry and she'll bring not only a greater depth of experience and expertise, but she's going to really help us on startup, optimize the team that we're hiring to bring more innovation more frequently quicker and quite frankly, with expansions in IMU. and so on. We're addressing how we structurally change the financial model of the organization from the top, meaning I am use through the P&L on expenses like variable related to our fulfillment centers. And then of course, we've got a whole technology transformation roadmap that will help us make better faster, more informed decisions that's more future looking than it is kind of review looking.
Sam Sato
So yes, I think I think numerically the way you're thinking about it is right.
Mike Murphy
And I think that we've got we've got a solid plan to deliver those things, and they're starting to starting to come to fruition.
Okay.
Jonathan Komp
And then could you just maybe talk about the factors in the fourth quarter guidance, it looks like the revenue range is somewhat wide, could be down slightly to maybe up mid-single digits year over year. So just how are you thinking about the factors embedded in that near-term outlook?
Mike Murphy
Yes. So I'll start at the top line. You know, the re-guide really was just was primarily driven by the actualization of the Q3 number from Q4 while we don't share quarterly numbers, what we had in our internal plans for the back half of the year, Q4 remains intact. And it's really it's really the Q. three actualization it does call for an improvement in trend from Q. three and year to date and on. We remain optimistic and bullish in that regard for a couple of reasons. One is as I mentioned in my prepared remarks, some of the things that our team has been working on more tactically to change that trend, including chasing in kind of hot hot sellers as well as fast forwarding, some new introductions into, um, into Q4. So things like I already mentioned it, but like AKG fitness, whole new category for us, the expansion of No yes, tanks, a big category for us and and we believe bringing in the new spring products will get us some upside as well.
As I talked about fire hose, HD. and then and then our double Flector denim program has really done well. And so we're chasing that into take advantage of that. During this, there's some big sales period. So So Q4 is largely intact.
Sam Sato
So that's part one.
Mike Murphy
Part two is again, while I don't want to lean too heavily on what we saw Black Friday through Cyber Monday, it was a solid enough business trend that it just affirms our confidence that Q4 is a deliverable quarter that that that then brings our year end too within that range.
Jonathan Komp
And holiday just last one for me. I'll try to ask it just given some of that activity that looks almost more like liquidation online that is best is best made still part of the ongoing plan? And should we think acquisitions are off the table until the core business is stable for longer? Just any thoughts on those two things against.
Sam Sato
Yes. So yes, so a couple of things.
Mike Murphy
Our intent is not not for it to look like kind of a liquidation. In fact, we're being purposeful, as I said, in the frequency of our global events and then and then really offering kind of post deals, I wouldn't say in reaction to the marketplace, but recognizing that the marketplace is significantly more price competitive and consumers are much more price-sensitive than they than they have been in recent years, best made actually, we announced the sale of best made three weeks ago or something like that. And so in fact, the original founder, we were we were talking with and ultimately he repurchased the brand from us. And the fact of the matter is as we continue to work hard on on growing of that dilute business AKHG. is starting to get a lot of traction as well as our women's initiative. And so our focus was to get our product development and merchandising teams really narrowly focused on making those brands kind of the winners in the near term. And so this was an intentional act to just narrow the focus on those two brands. And then the last thing I would say relative to acquisitions is we're still in the kind of vetting mode. We're vetting. We're vetting different on potential acquisitions. But as we've always talked we're not going to stray too far from where we are. We're going to remain focused on dilute NACHG. If an opportunity presents itself, we'll look more deeply, but I'll tell you right now, we're in the crawl stage. We're not we're not aggressively seeking out acquisitions as the next phase of growth. We think we've got some near-term opportunities with dilute NACHG.
Jonathan Komp
Okay, thanks and best of luck for holiday here.
Mike Murphy
Thanks, Jonathan.
Sam Sato
Sandy.
Operator
Dylan Carden, William Blair.
Dylan Carden
Thanks. I'm curious on the promotion, just following up with the I mean, I don't know if you can answer this per se, but one thought would be that you've kind of trained your customer overtime to sort of look for these rapid-fire promotions and the evidence of that potentially being that even if you pull back on promotions and mix shift still skews higher clearance, higher promo. Is that something that do you think is a valid concern? Or is this sort of more a reflection of the environment for value-seeking consumer?
Sam Sato
Yes, I'd say a couple of things, Bill, and one is we are highly highly sensitized to that and that's that's part, as I mentioned in my answer to Jonathan is internally, we talk about this balance, the balance of of being competitive with the broader marketplace with brand positioning.
Mike Murphy
And we have we have strategically well, while maybe it doesn't appear that way, we've strategically shied away from more and deeper at at the expense of driving greater top line. And we do that purposely because at the end of the day, that additional top line doesn't necessarily flow through. And importantly, it starts to, I think, wade into this area of training the customer to think about dilute as an off-price brand only. And so we're highly sensitized to that. I think candidly, that as as promotional as the marketplaces today and as sensitive to price and discretionary spend that the consumer is as well, that the level of promoting we're doing today is such that the brand it is not being compromised longer term. And importantly, I think that's why we're putting so much energy into the service we provide consumers, whether it's foot doorbell, speed or in our stores are our metrics in the stores continue to be solid on our measurable TPI.'s, whether it's conversion or units per transaction continue to be on positive year over year. Stores continue to be cash flow positive and four-wall profitable in the mid 10s on. And so we know that customers are coming to us on secondarily, the investments we're making in product innovation and sourcing on that, that's the core of who Duluth is, and that's at the heart of our DNA. And so we're going to continue to invest in bringing really high-quality problem-solving products and that are leading the marketplace to bring those to market. And we believe that the price value of the products we make our goods will withstand the test of time relative to price promoting.
Great.
Dylan Carden
Thank you. And then I'm kind of curious the drag from not having the inventory and spring summer goods in the front part of the quarter was that was that simply just poor management on inventory where you did you pull back too quickly? Was that weather related on just kind of trying to understand particularly if you can maybe even size the right, you estimate that that had?
Mike Murphy
Yes. So a couple of things. I'll say there again, Dylan, a pretty complex right answer to what seems like a simple question on at a high level. I'll start with saying philosophically, we've talked about this for a little while now. We're going to continue to so reduce inventories and get our stock to sales ratios in line. I think our turns are slower than I want them to be. And obviously, there's all kinds of benefit that comes with faster turns, you know, not least of which is greater greater profitability and cash flow, but also on the expectations around sell throughs and those types of things increase and so on at a high level that that's that's why the inventories are down and they'll continue to be down as we move into the next couple of years on in terms of spring summer goods or or previous seasons carryover. It was largely based on a greater sell-throughs during the season. So we typically have excess inventory that we carry over from season to season that will sell in the following season. And because of some of the price sensitivities that were happening and that shift, we started to see into this promotional bucket, we were selling more units. So if you go back and look at our our comments on the last couple of calls, unit unit sales were up and so we're selling through more goods. And at what ends up happening is the total sell-through for the season is just higher, which limits our carryover.
Sam Sato
So it's a little bit of a double-edged sword because in a perfect world, you'd want to sell everything at 100% at full price and not have any markdowns into the next season.
Mike Murphy
But simultaneously it then forces you to be better planning in terms of your receipts for the following seasons goods. And so one of the things we're starting to institute, as you've heard now a couple of fall seasons is we're starting to move or seasons. We're starting to move the next season's goods up earlier to start setting our floors earlier. So for instance, this fall, we started to receive goods in July. We typically will set up in late August, and we brought certain items in earlier. And I think that that's the right way to run the business, a little little early receipts on the next season's goods and not rely on carryover of previous seasons products.
Great.
Dylan Carden
And then final one for me. The new distribution capacity in Georgia, can you remind us as far as expanding out some of the wholesale and that's not part of this initiative right now and that would come later?
Mike Murphy
Well, it is connected so the capabilities of Adairs will allows us absolutely to expand in the wholesale.
The other component, though, is really about the work we're doing with product innovation and sourcing. So the ability for us to develop products on a faster time line with greater IMU efficiencies that plays a role. And then there's an organizational requirement to really, I think, optimize a wholesale opportunity. And so we're building the parts for it and ultimately will come together. But all of these things we're doing are with the broader intention of of wholesale acquisition expansion into more stores as an example of all of the technological and logistical things and then product development initiatives all are with those types of considerations in mind.
Dylan Carden
So could you see wholesale that relationship expand into next year or is that too early to?
Mike Murphy
Yes, I think that's probably a bit early. Never say never say never. In fact, what we are. We are now testing with Costco. We see that as an opportunity of two to come to provide key items to a company that's got very similar, but has a number of similar customers to dilute, then it becomes a bit of a gateway item to broaden our customer base on the initial test we ran was in some was in summer in a very small base did really well and they've come back for this period right now and then and then we're looking to expand with them as we go into next year there and their model requires, you know, a much less on reliance on a organizational structure to support them. And so given the way we're testing with them, we think that there's an opportunity for us to continue to build our brand awareness in a business with a retailer that's got, you know, millions of customers of which we see great overlap with the loop.
Dylan Carden
Tom, really appreciate and thank you.
Mike Murphy
Yes.
You bet.
Sam Sato
Thank you very much.
Operator
Conclude the question and answer session. The conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.
