Good morning and welcome to the Duluth Holdings Third Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Nitsa McKee, ICR. 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 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 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 Sam Sato, President and Chief Executive Officer.

Sam?.

invest in the enablement and future proofing of our enterprise. Circling back to our first pillar, maximizing our customer-first commitment, will require investments in expertise and capital to support the brand growth potential and meet the customers’ expectations. The most significant capital investment we see are in our supply chain network.

We'll invest in the improvement of our capabilities by expanding our distribution capacity and further build upon the automating of our processes. These investments will improve inventory management and better enable us to adapt to shifts in channel or sales mix.

Today's consumer places a high value on frictionless and timely delivery of orders, and trip assurance that product will be available in the stores. We expect that our supply chain investments will improve 1. distribution center productivity, 2. increase inventory efficiency in turn, 3. improve the speed and accuracy of order fulfillment, which 4.

supports higher customer retention, 5. higher full-price selling, and 6. an overall better experience. We're pleased with the progress we've made on developing our Big Dam Blueprint, and the work streams that have already kicked off to execute initial elements of the plan.

As we move through the balance of 2021, and provide clear milestones for 2022 and beyond, I do want to emphasize that the strength of our core business today will continue to inform and direct the timing of investments.

Our stated long-term objective of reaching $1 billion in sales by 2025, representing a 40% growth over our current year outlook and returning to previous best operating margins of high-single to low double-digit levels, are intact.

Now, let me turn to our third quarter performance, highlighting progress we've made on executing this year's plans and giving us confidence to increase our EPS outlook for the balance of fiscal 2021. Total sales for the quarter grew 7.2% versus last year, and 21% versus 2019.

While this was in line with our outlook, we realized strong momentum in the category that had better in-stock positions and the sales results would've been even stronger, had inventory flow constraints not been an issue.

Where we have been proactive in prioritizing and expediting inbound receipts, sales were healthy and in-stock levels are positioned well for the peak season business. Our men's pants and highest volume underwear items were either brought in through airfreight or transloaded onto trucks to bypass the railroad congestion.

In addition, we expedited all our holiday-themed products to ensure that we are in a solid position to maximize the gift-giving shopping window. I'm confident we are poised to deliver strong holiday results. Our direct channel continues to close the gap from last year's exceptional pandemic-fueled surge and ended up 38% versus 2019.

More near-term, direct sales in October and November grew mid-single-digits over last year. Web visits during the quarter increased 8% year-over-year, driven by incremental brand awareness investments and a successful Big Dam birthday sales event during September, which grew sales 10% over last year.

The strong momentum in building back our retail channel continued in the third quarter, with sales growth of 22% over 2020 and 3% over 2019. The average order value in stores increased 8% over last year, and we continue to see improvements in our store traffic.

Our conversion rates continue to grow significantly, driven by our store leadership efforts to heightened engagement with customers.

We also attribute the improvements at the store level to shifting digital ad spend focused on driving local store traffic, as well as an improved inventory position in total, and the better quality of mix compared to last year.

We had great success with the grand opening of our 65th store in Cherry Hill, New Jersey, placing the store in our top 10 for new store sales in the first month. This is our second store in the Philadelphia market, and it's off to a fantastic start.

A significant bright spot in our business today and is contributing to the expanded operating margin, is our gross profit margin, which increased 520 basis points over last year, to 57.6%, and marks the highest gross profit margin for a third quarter since Duluth has been a public Company.

Several contributing factors are driving the strong trends, namely our clean inventory position and strategic promotional stance compared to prior years.

The silver lining of the pandemic and related supply chain challenges is the accelerated structural view that we can manage the business with less inventory and more precisely, target promotions, which not only supports higher gross margins, but supports brand and product health.

Additionally, we are seeing our customers respond exceptionally well to cord year-round items at full-price, particularly in our women's division, a key driver to our Big Dam Blueprint and long-range sales target of $1 billion.

While the healthy improvement in product margins allowed more gross profit to drop to the bottom line, we are also managing our costs well, leading to the improvement in net income of over 200% compared to last year.

Earnings per share of $0.09 for the quarter represents a strong result for a period, when we're typically ramping up marketing investments to build top-of-funnel awareness and support for our important peak selling period.

This year, we're adding back a sizable amount of marketing outreach to support our brand growth and maximize customer engagement through a shifting mix of media channels that still include linear national television, where viewership is up 15% but is combined with a larger amount of connected TV and streaming placements, where viewership is up 50%.

We're also increasing our investments into social channels and leveraging the exposure we have through sponsorship of the highly-viewed Yellowstone TV show. We're pleased with the business momentum and customer response to our offering, giving us confidence to raise our full-year estimates for earnings, which Dave will provide more details on.

As we look to finish 2021 strong and set plans for 2022, our key areas of focus remain the following.

Developing and delivering innovative, high-quality solution-based products, delivering relevant customer experiences through our own DTC channels to drive continued growth in sales and profits, refining initiatives that increased our regular price business as a percent of total sales, and strategically intensifying our marketing investments to capture consumer interest and engagement, build brand awareness and loyalty, and attract new customers.

I'd like to touch on a few noteworthy updates related to these focus areas. During the quarter, we introduced a number of new products that have been received well by our customers. In men's, we introduced a new flannel shirt named the Oysterous Flannel.

We've taken our outdoor shirt with the great functional benefits you've come to expect and reinvented it using fabrics made with recycled oyster shells, to keep you cool and dry when you're active, while doing Earth a favor. We also brought back an improved version of our men's Duluth Flex Firehose Brighter Pants.

This pant is a great example of the ingenuity and end-use features we designed into our outdoor workwear with high abrasion resisting fabrications, with stretch and flex in its movement. In women's, our new Folklore Flannel comes in several comfortable fitting styles and provides the durability along with extra soft fabric feel.

We also rolled out the genetics high-rise, slim legged jean that combines comfort with a slimming fit. We use our scratchiest four-way flex material that feels like your favorite leggings.

And lastly, adding to our industry-leading men's underwear collection, we introduced the Funk No! copper boxer briefs made with Cupron Copper Polyester technology to kill odor causing bacteria. Innovation in our product design and development is interwoven in our brand ethos and will continue to be a source of competitive advantage for Duluth.

I mentioned the new store opening in Cherry Hill, New Jersey, which is another example of our ongoing commitment to serve communities, with elevated in-store services, including buy online, pickup in-store, buy online, ship from store, and curbside pickup.

We're also in the process of rolling out point-of-sale capabilities to facilitate seamless mixed-cart purchasing, which opens the availability of items not in the store to a customer shopping cart while at the register.

As well, we're piloting mobile handheld point-of-sale devices in stores this holiday that gives our store teams more flexibility to ring up transactions anywhere in the store and help manage through high-traffic periods.

Within the third area of focus, we know that combining exclusive innovative products with leading omni -channel capabilities lead to a compelling proposition for our customers, which contributes to higher full-priced selling.

However, our ability to plan the business and be disciplined in managing inventories, can also lead to an even higher mix of full price sales. We're embarking on a multi-phased implementation of a merchandise and assortment planning tool.

This will replace the collection of disparate systems we use for inventory finding today and will infuse artificial intelligence and machine learning into both in-season product management and long lead time inventory planning.

From a marketing analytics standpoint, this year has been notable for standing up a suite of customer data tools from Adobe that has elevated our ability to become more personalized and targeted in our marketing outreach. The tool set has proven to provide measurable ROI for our email campaigns and management of our digital audience.

Using predictive modeling, we now have the capability to develop and use propensity scores based on customer buying patterns and web browsing behavior. These insights inform and will drive the allocation of our digital advertising spend to supplement the broader brand awareness media for overall marketing spend efficiency.

This is the time of year where we had the largest reach in our marketing program and acquire the greatest number of new buyers. Our success in acquiring new buyers more recently, has been through compelling product stories and prospecting tactics informed by analytics.

Traffic to our stores is close to returning to levels comparable to 2019 with Black Friday weekend sales for our retail channel up 55% to 2020. We are pleased with the direct channel performance through Cyber Monday, which was up nearly 10%.

With a few critical weeks still to go in our holiday business, we're encouraged with the customer acceptance to this year's offering and provides us confidence in closing out the year strong. With that, I'll turn it over to Dave to provide more details on our third quarter results and initial thoughts for 2022..

Thanks, Sam and good morning, everyone. For the third quarter, we reported net sales of $145.3 million, up 7.2% compared to $135.5 million last year and up 21.3% compared to the same period in 2019.

Our direct channel sales grew 38% over 2019, while the retail channel was up 3% over 2019, driven largely by a 9% increase in average transaction value in the stores.

We experienced a strong uptick in store traffic compared to last year's COVID slowdown and drove a 22.3% increase while direct channel sales were down slightly by 1.4% compared to last year as expected.

Growth in visits to our website turned positive in the third quarter, up 8% to last year, compared to declines in the first half as we began strategically increasing the brand awareness marketing, and investing deeper in digital prospecting.

This increased marketing fueled a nearly 30% increase in first-time visitors to our website, positioning us well to capture incremental demand during the peak holiday selling season, and setting the stage for longer-term customer file growth.

Since mid-September, our Direct Channel sales have been trending up to 2020 in the mid to low single-digit range on higher-quality margin sales and grew roughly 5% on Cyber Monday.

For the balance of the year, we expect the retail channel will continue to outperform Direct, as we cycle past the period last year that was impacted by the lower store foot traffic due to COVID.

Additionally, with a strategic decision to shift and increase advertising in the back half of the year, we do expect direct channel sales growth to be positive over last year in the fourth quarter. Back to the third quarter.

Our results demonstrate the healthy customer demand for our products and effectiveness of our marketing programs that are better informed by customer data and more flexible digital ad spend. The underlying strength of our offering and resulting benefits to operating margins are being realized in our business today.

During the quarter, average order value and sales per customer overall increased mid-single-digits due to the 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 new acquired buyers compared to the first half of the year, as we invested deeper into digital awareness tactics beginning in September that drove lift in brand search traffic.

Our men's apparel business was up 8% compared to last year in Q3, while women's apparel was up 5%. As Sam mentioned, both divisions realized strong demand in the core year-round categories and benefited from selling new seasonal items as soon as the inventory was received.

We do know that customers are responding well to our Fall-Winter offering, but inventory delays impacted our ability to meet all the demand.

During the third quarter, gross profit margin improved 520 basis points, to 57.6%, as we purposefully dialed back promotional offers and balanced sales was significantly less clearance and a higher quality mix of inventory. We ended the quarter with roughly 3% of our inventory marked as clearance compared to 14% in the same period last year.

As we stated on our second quarter call, we plan $12 million of incremental expense to expedite merchandise and reduce the impact of the supply chain bottleneck.

The costs related to expediting certain products is partially reflected in the third quarter's gross profit margin, although roughly 75% of the expected $12 million expense will be realized in the fourth quarter. As such, we expect our fourth-quarter gross profit margin will be down as much as 100 basis points compared to last year.

As to the incremental freight costs, our gross profit percent in the fourth quarter. would likely be up as much as 200 basis points over prior year, driven by higher full price selling and being strategically less promotional during the sale events.

Turning to expenses, SG&A for the third quarter increased 16% to $78.8 million compared to $68.2 million last year. As a percentage of net sales, SG&A expense increased to 54.2% compared to 50.3% last year.

This included increases of $5.5 million in general and administrative expenses, $3.9 million in advertising and marketing expenses, and an increase of $1.2 million in selling expenses.

Selling expenses as a percentage of net sales, decreased 30 basis points to 16.4% compared to 16.7% last year, driven by shipping cost leverage from retail, comprising a greater percentage of the total business, as well as improved shipping expense leverage on direct orders with higher average order sizes.

As we spoke about on our last call, higher hourly wage rates in our distribution center staff and retail stores have pressured labor expenses overall.

Our teams have done a great job of absorbing the incremental costs and driving efficiencies in both the direct fulfillment operations and store productivity measures to support the overall selling expense leverage in Q3.

We expect the improved efficiencies will minimize the expense deleverage or closely offset entirely the higher wage rates in our fourth quarter and result in over 100 basis points of selling expense leverage for the full year. Advertising and marketing costs as a percentage of net sales increased 200 basis points to 12.2% compared to 10.2% last year.

As we discussed on prior calls, our plans were to shift and increase advertising spend in the back half of 2021 compared to last year.

While those actions are still in play, we did dial back some national TV and catalog advertising in our third quarter, in response to the strong productivity of our digital advertising initiatives, and in response to the delays on inbound inventory.

Roughly 3 million in marketing expenses originally planned for our third quarter have now shifted into our fourth quarter. The full breadth of our advertising program is now end market and helping drive higher-margin sales.

The overall spend in the back half of this year represents an increase of roughly 25% over last year, and is building brand awareness and driving new buyer acquisitions with the long-term retention of the new buyers expected to be much stronger than new buyers acquired during periods last year.

General and administrative expenses as a percentage of net sales increased 220 basis points to 25.6% compared to 23.4% last year due to the additional personnel and technology costs as well as comping against last year's temporarily reduced salaries from our COVID response actions.

We expect the deleverage in G&A will continue in our fourth quarter, largely due to incremental incentive compensation and depreciation from investments we've made in logistics and technology. During the quarter, we opened our third distribution center located in Salt Lake City.

This DC is 230,000 square feet in size and greatly expands the direct order fulfillment capacity, particularly during our busiest peak periods like we're in now, while allowing us to reach customers in the Western U.S. with shorter delivery times.

Longer term, this site will be critical to serving our growing business in the Western states for store replenishment, customer returns, and diversifying our sources of labor during peak hiring periods. I'll touch on, shortly, our supply chain roadmap contemplates an additional distribution center in the Southeastern U.S.

to be opened as early as 2023 and will provide our business with complete reach to customers and the contiguous states within 3 to next-day delivery times.

As Sam mentioned, investing in our supply chain capabilities are an important component of our Big Dam blueprint to enable growth through multiple channels and meet customers ' expectations for speed and accuracy of direct orders.

As of today, our store count stands at 65, with the grand opening of our new store in Cherry Hill, New Jersey in November. As we discussed previously, we do not have new stores in the pipeline for 2022 but we are reevaluating locations for potential stores in 2023.

We're currently underway with research to better inform site selection, high potential white space for new customers, and store formats to support decisions on additional stores and alignment with strategic priorities.

Adjusted EBITDA for the third quarter was 13.2 million, a 15.3% increase over last year, and 70 basis points of Adjusted EBITDA margin expansion. Our net income was $2.8 million or $0.09 per diluted share compared to net income of $900,000 or $0.03 per share reported in the third quarter last year. Moving onto the balance sheet.

We ended the quarter with net working capital of $90 million, including $20 million in cash and $0 outstanding on our line of credit. Compared to the same period last year, we had $92 million outstanding on the line. Managing with clean inventories have certainly contributed to our healthy balance sheet position.

The delays in many falls and winter season receipts have also benefited our cash flows and highlighted the opportunities for us to further optimize the management of inventory. In other words, despite being under plan on the overall inventory position, we've been able to flex the assortment and marketing tactics to still drive increases in sales.

Our capital expenditures, including the cost of software implementation, is expected to be $18 million in 2021. We expect to end fiscal 2021 with $50 million to $60 million in cash and zero outstanding on our line of credit.

This end-of-year balance sheet position, suggests full-year free cash flow of roughly $60 million, which is 50% greater than fiscal 2020. This leads me to share some initial thoughts for fiscal 2022 in terms of sales and earnings growth, as well as the capital investments contemplated in line with our long-range strategic objectives.

While uncertainty persists with supply chain congestion, and we have not yet completed our 2022 planning process, we see the underlying strength in our product offering, marketing effectiveness, and customer health continuing into 2022 and can support net sales growth of up to 10%.

Both the direct and retail channels are in line with that full-year growth rate, although we expect the retail channel to exceed that sales growth rate in the first quarter then moderate to mid-single-digit growth in the back half of the year. At this point, we expect the direct channel growth will be more balanced across the year.

Looking at gross profit performance, we expect the leaner inventory levels, selective price increases, and avoiding the current level of expedited freight costs will allow for an improved gross profit margin in 2022.

We're facing cost increases in raw materials and expect transportation costs will remain elevated, limiting the gross profit margin expansion to roughly 100 basis points to 150 basis points improvement.

SG&A expenses will be a mix of efficiency gains in our variable selling costs, offset by deeper investments in new and additional skill sets and capital projects that will increase the general and administrative expenses.

For marketing, we intend to maintain a similar level of marketing spend on a percentage of sales to this year and in between 10% and 11% of sales. Overall, we expect SG&A as a percentage of sales to increase roughly 100 basis points to 48%.

The investments we're planning to make across the business will facilitate expanded distribution capacity, heightened products, and brand development to build scale in the emerging brands and to add to our data analytics capabilities, all with an eye towards transitioning the business to be more digitally led as outlined in the Big Dam blueprint.

The investments are informed by insights to set a foundation for long-term growth in the business, but our commitment to generate bottom line growth annually is also a priority. As such, we expect operating margin expansion and an earnings growth rate in the mid-teens for 2022.

Our capital expenditures for next year are tentatively planned to be up to $60 million, with the majority of this spend centered around the distribution center expansion I mentioned earlier.

Our initial thoughts for a new facility in the southeast contemplate a level of fulfillment automation that will be a first for our business and sets the stage for a measured upgrade in distribution of operations that may extend to the other sites over time.

Lastly, I will note that while we're still evaluating the alternatives for funding the capital plans, our interest expense line will be at least in the $4 million to $5 million range, due to existing capitalized lease accounting treatment that partially flows through interest expense.

Turning back to fiscal 2021, and to summarize our outlet for the fourth quarter, we expect direct sales growth to be up low single-digits, and retail sales growth up roughly 35% over prior year. We expect gross profit margin to be down 100 basis points due to the incremental expedited freight expense of roughly $9 million.

We plan to increase advertising expense by roughly $7 million in Q4 over last year, which represents deeper brand awareness opportunities but we'll deleverage by up to 150 basis points. Selling expenses as a percentage of sales are expected to be flat compared to last year, with the higher wage rates being offset by more efficient shipping expenses.

Overhead expenses will increase by roughly $8 million over last year due to technology and logistics projects that are now in service and personnel expenses from the add-back of temporary expense cuts last year.

Our full-year guidance on sales remains at $700 million to $715 million, updated adjusted EBITDA of $73 million to $75 million, an EPS in the updated range of $0.81 to $0.86, which doubles our bottom-line results from last year.

In closing, the strong third quarter results and full-year outlook reflects the sharp focus and efforts of our team, and demonstrates the sizable growth opportunity for our multi-brand platform. We're excited to finish the year strong and share more about the longer-term growth plans on our next call. With that, we'll open the call for questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jonathan Comp of Robert W. Baird. Please go ahead..

Hi. Thank you. Maybe first question, if I could just ask a little more directly on some of the recent trends, you're seeing both with respect to the underlying demand in any volatility from the consumer.

And then also just the availability of product, how that's flowed and if that's allowing you to capture some of the seasonal sales that you missed last quarter. I know you gave total color on the ranges you expect for fourth quarter, but just hoping for a little more detail behind what you're seeing..

Yeah. Hi, John. We are seeing strong demand from the customer and haven't really seen much of a drop as the quarter has progressed. But as you mentioned, the inventory flow does continue to weigh on our ability to meet all of that demand.

So, as we called out in the third quarter that some sales, we think we left on the table continues into the period so far through November. On top of that, we expect in Q4 that not all the sales are going to be totally lost, but it's factored into the outlook that is represented in our sales guidance..

Understood. And then maybe thinking forward to 2022 and up to 10% top-line growth you mentioned, could you rank order the biggest drivers? You have a lot going on with product innovation, the marketing efficiency and the enhanced targeting and digital effort.

So how are you thinking about the contribution from each of those pieces? Neither in absolute, their rank ordered, what could be the biggest drivers as we look to next year?.

I think you touched on some of the major points there.

The momentum that we are really seeing in some of the ad spend effectiveness and particularly the digital channels, is what's I think a big improvement in the year that we're in right now and that's what we expect will even elevate further because we really had just started to test some of the functionality with our new customer data capabilities and allowing us to direct digital awareness and prospecting and also repeat purchase activity much more targeted and that's just going to continue to grow in 2022.

We also have product innovation and product launches, including rolling out women in our Alaskan hard gear line for next year, re-launch of Best Made, and so we've got some exciting things in the product pipeline that will also support that. So, I think those are the 2 top items..

I would add, John, our store productivity continues to improve, although still a little behind 2019 as we both stated in our prepared remarks. We're making really great progress there and we think that 2022 will continue to improve upon our current trends, and so that becomes another driver for us as well..

Great. Maybe the last one if I could. The broader profitability outlook and the 2015 targets for a billion of revenue and back to high single, the low double-digit operating margin, that implies an acceleration in the margin improvement after '22.

So, I'm wondering if you could discuss at a higher level how you're viewing the progression along, the operating margin target that you set out to and what are some factors that would cause the progress to come sooner or not, relative to some of the reinvestment opportunities?.

Yes, you mentioned 2015. I think you meant 2025..

Yes. Thank you..

The progress we made in operating margins this year is very healthy and I'd say probably greater than the incremental annual improvement that we're going to need over the next 5 years to get to that target.

But it's going to be a combination of gross profit, rate improvement from product margin, and just better management of our inventory plans and markdown cadence and productivity of the assortment will come down through the gross profit margin rate, but also leveraging selling expenses with some of the investments we're contemplating in the supply chain, leveraging some of the cost structure in our store infrastructure as the stores are able to grow sales annually over prior years.

And while we're talking about investments in our capabilities that hit the G&A line, there are also investments that are a step change now, but not every year. We're going to see leverage in G&A as we progress through the next five years as well.

So, I think those are all the opportunities to get us to that operating margin target of high single-digit, low double-digit range, which is where we've been at the past. But as a much smaller Company..

Yeah, that makes sense. Thanks again and best of luck..

Thanks, John..

Thank you..

The next question is from Jim Duffy of Stifel. Please go ahead..

Thank you. Hi, Dave. Hi Sam. Sounds like the team's been hard at work, a lot of encouraging progress. So, congratulations for that..

Thank you..

A couple of near-term questions and then some bigger picture questions. Sam, you mentioned you're in a good stock position to maximize holiday in your prepared remarks. Our visits to the stores, employees were talking about air-freighting product to get it to the stores.

Is there inventory available for holiday that isn't reflected in the quarter-end balances that we're seeing with this print?.

Jim, your question, we aren't sure how you are asking that question.

Can you rephrase?.

Where I'm going, Dave, is you have what looks to be very lean inventory balances out of October. We're hearing from people in the stores that there's airfreight product coming in.

Is some of that -- are there good amounts of balances that are arriving in November or maybe even early December that can help you capitalize on any holiday demand that's there or is the balance we're looking at in -- at the end of October really what you're dealing with as your stocks for the holiday season?.

Inventory continues to flow in, no question, and it will continue through the month here to satisfy. So, as we're selling through these peak periods, we're replenishing, but still below the ideal levels that we want to be at. Most of the airfreight product is already in our hands.

Certainly, the holiday items are in place and then some of the core categories that we really wanted to be deeper in are in place. But what we're still chasing is some of our fall, winter seasonal items, outerwear items, and those are coming in day by day here and as soon as we do, we get it into the stores and on our website as quickly as we can..

Okay. Maybe framed another way.

Do you think you have inventory positions such that you can deliver upside to that fourth-quarter guidance if the demand is there, or is the inventory to such a gating factor that that's not possible?.

Yeah, I think as we stated in our prepared remarks that we've done our best to contemplate the puts and takes into our updated guidance and we remain comfortable with where our current sales guidance is..

Okay. And then you saw really nice improvement in average order value in your retail stores in the third quarter. Retail top 2019 levels in the third quarter sounds like traffic trends have been improving.

Would that be your expectation that fourth quarter retail could be above the fourth quarter '19 levels as well?.

From the average order size, yes. But from a total sales opportunity, I think we're still looking to be close to where we were trending coming out of our third quarter.

So, we still expect that the higher conversion of store traffic is going to be continuing right through the fourth quarter compared to 2019, and that's really what's growing the store basis is, capturing a higher conversion rate on slightly lower foot traffic..

Got it. Okay.

This next question is set up from my bigger picture question, but can you speak to the full-price percent of sales currently versus what you may have historically run at pre - COVID 2019 and before?.

We have seen higher -- slightly higher full-price selling in years past. I'd say going back before 2019. But the ground that we've made up this year has closed a lot of that gap. So, what we're looking forward to is going back to even the historical highs and exceed it even from there.

But a big part of that gap has been closed over the last 2 years with the percentage of full-price..

Okay..

Yeah. I think year-over-year, we're running about 800 basis points better than a year ago..

And that's still not to historical peak levels?.

That's correct..

Okay. Interesting. So big picture, you've got the market discounting the stock less than 7 times the EBITDA guidance, less than 6 times the implied outlook in '22. That suggests that the market doesn't believe those margins are sustainable or that you can deliver on the growth.

Across the industry, promotion's been minimal, margins been making new highs.

What gives you guys’ confidence that you can continue to drive the growth in the business at full-price and refrain from reverting back to promotions?.

Yeah, I think there's a lot we can do. And certainly, a lot of progress has been made to-date. So, when I think about some of the key drivers, I think about the work we're doing around retaining our very best customers and continuing to acquire new customers. I think about the amount.

of knowledge and efficiencies, we're really beginning to gain through our marketing initiatives especially as we shift from more traditional media, to digital media, which is both more flexible, which gives us the opportunity to flex up and flex down based on results we're getting.

I think we're in the infancy of really developing our brands beyond the Duluth brand, but really Alaskan Hard Year and Best Made, as Dave mentioned, this spring we are anxious to launch women's in AKHG.

And so, we're really at the beginning stages of developing those brands, as well as the continuation of innovative development against the Duluth brand.

I think about the amount of effort we're putting into automating our logistics network, which will bring not only efficiencies and leverage from an expense perspective, but will continue to allow us to scale with maybe less constraints around the labor pool as an example.

But I think more important than that is meeting the expectation of the customers. We talked already about the percentage of our total business that's being driven by regular price. We think that there's still substantial amount of upside in that regard.

And then really, it's the continued investments we're making to help us better manage our inventories both in terms of how we're planning and buying it to the overall amount in total which allows us to become more efficient and ultimately results in less markdowns and less clearance as a percentage of our total..

Excellent. Okay. Thanks so much for that perspective, Sam..

Yeah. You bet. Thanks, Jim..

The next question is from Philip Blee of William Blair, please go ahead..

Hi, everyone. This is Phillip Blee on for Dylan Carden. The expansion of Tractor Supply partnership is encouraging.

Do you guys have any plans to continue to expand or launch similar partnerships and how important is this type of sales channel in achieving your longer-term revenue growth target, both from an incremental top-line perspective and just in general from brand awareness and attracting a new customer base? Thank you..

Hi, Philip. We're excited about what's happening with Tractor Supply. As I mentioned in my prepared remarks, we've just recently expanded to their online channel. I think importantly, we're starting to gain some pretty good learnings around what it will take operationally for us to scale this as a longer-term opportunity.

We're also testing a couple of things with Danner Boot in 3 of our stores and we're looking at new ways to leverage that partnership as well.

And so, all of these things ultimately, are leading us to, I think importantly, where we need to make investments into the future and I think the great news is our current long-range plans really doesn't at this point contemplate this being a substantial part of the business.

And so actually, to Jim's earlier question, this becomes another element of growth for us that is not currently part of our long-range plan, and so we think that there's some upside here as well. Well, I think that wraps us up. I just wanted to thank everyone for participating.

We look forward to speaking with you at the end of the year and wish you-all happy holidays. And thanks again..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..

Thank you..