Duluth Holdings Inc. (NASDAQ: DLTH) First Quarter 2022 Earnings Conference Call June 2, 2022 9:30 a. m. m. ET
Participating companies
Nitsa McKee – Investor Relations
Sam Sato – President and Chief Executive Officer
Dave Loretta – Chief Financial Officer
Conference Call Participants
Jonathan Komp – Robert W. Baird
Jim Duffy – Stifel Nicholas
Dylan Carden-William Blair
Operator
Hello and welcome to the call from Duluth Holdings’ first quarter 2022 earnings convention. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, you will have the opportunity to ask questions. [Operator Instructions] Please note that this occasion is being recorded lately.
And now I’d like to talk to Nitza McKee.
Nitsa McKee
Thank you and welcome to today’s call to discuss Duluth Trading’s first quarter monetary results. Our earnings release, which was released this morning, can be found on our online investor relations page in ir. duluthtrading. com, under Press Releases. I’m here today with Sam Sato, President and CEO; and Dave Loretta, Chief Financial Officer.
During today’s call, the controller will provide ready feedback and then we will open the call to your questions. Before we begin, I would like to remind you that comments on today’s call will come with forward-looking statements, which can be known through the use of words such as estimate, anticipate, expect and expressions. Forward-looking statements, by their nature, involve estimates, projections, objectives, forecasts and assumptions, and are subject to hazards and uncertainties that may cause actual effects to differ materially. of those expressed in the forward-looking statements.
These dangers and uncertainties include, but are not limited to, those described in our most recent Annual Report on Form 10-K and other documents filed with the SEC, as applicable. These forward-looking statements relate only to the date of this convention convening and should not be construed as predictions of long-term events.
And with that, I’ll pass the floor to Sam Sato, president and CEO. Sami?
sam sato
Thank you, Nitsa, and thank you for participating in today’s call. We made great progress on key strategic projects during the first quarter, and I’m excited to share some details. We know that our consumers demand well-designed products, based on durability, capacity and solutions, based on the use of intterminated finishes. consumers take life into their own hands and adopt a positive attitude in painting and leisure. To satisfy the varied desires of our consumers and attract new consumers, we have made the decision to create separate positions for each of our sub-brands with assorted products that resonate and meet their expectations.
I am pleased to report that in the first quarter we brought our new Duluth logo through the Duluth Trading Company logo. Duluth’s sublogotype concentrates on the American workwear way of life. AKHG, and we announced our women’s collection in April. AKHG concentrates on more technical products needed to aid outdoor activities as well as the way of life of enjoying the outdoors. And most importantly, our top-tier business has undergone many upgrades. we expand our assortments through the creation of new cutting-edge products and intensify our focus on category development.
Taken together, those updates are significant steps in positioning our overall Duluth Trading Company business under a non-unusual umbrella that will allow each sublogotype to satisfy our clients’ preference to be active in their paintings and leisure. I will be consistent with the percentage, more briefly, how we view the evolution of our business and the positioning of our logo to meet the developing active lifestyle of our target customers. But first, I will mention our recent effects. Today, we reported net sales of nearly $123 million in the first quarter, a net source of lost revenue of $1. 3 million and a loss of profit consistent with a consistent percentage of $0. 04. of a dynamic macroeconomic environment.
With actions achieving a healthier position at the end of the quarter and virtual marketing tactics that rely on superior knowledge analytics, we fulfill our clients’ wishes and execute our long-term logo expansion strategies. The power of our omnichannel style produces a still strong gross income profit margin, which for the first quarter was 54. 6%, a cumulative of 470 basic problems compared to last year. We continue to fund our strategic logo progression projects with enhanced investments in artistic assets supporting Duluth through Duluth Trading Company and AKHG sub-logo launch. The new logo positioning provides seasonal pieces applicable for active outdoor categories in swimming, gardening and hiking.
And as our earnings improve, visitor reaction to our package is strong and led to a top single-digit sales expansion in April. With the help of awareness campaigns for the new logo, the momentum continued on Memorial Day weekend, with the call from visitors surpassing last year. . Our reported net sales for the first quarter were close to $123 million and were expected to be lower than last year due to expected stock delays and a strategic replacement to particularly reduce customs clearance stocks. In fact, we ended the quarter with goods cleared for 3% of the total stock, compared to 8% last year.
Our overall trading position at the end of the quarter is 6% higher than last year, a significant improvement over the beginning of the quarter, when we were down 18%. The positive outcome of our strategic transition in combination of stocks is that we generate particularly higher gross margins on products, which drives the expansion of gross earnings in dollars, while absorbing higher-than-normal transportation prices. Our reported gross profit margin of 54. 6% includes additional expenses of approximately $4 million in air freight prices related to last fall’s incoming stocks.
In the absence of those additional transportation prices, our gross profit margin is the highest we have experienced over the past five years and is a direct result of stock control and price disciplines in place. forward with constant margins, which Dave will talk about in more detail. Our EPS loss for the quarter of $0. 04 reflects the effect of the $4 million on air freight prices I just mentioned, as well as solid control of ongoing expenses. Excluding air transportation expenses, our first quarter diluted earnings consistent with the constant percentage would have been positive up to $0. 05. Our company is not immune to inflationary pressures in the markets for fuel, labor and uncooked fabrics.
We will continue to make changes to our style to drive the entire company forward and continue to execute our strategic playbook. Our groups have put in place many moves to deal with some of the headwinds we experienced last year. For example, we have been selective in expanding retail prices for some fundamental parts and expecting additional value changes in our fall and winter range. We have set early delivery dates for our brands to account for ongoing supply chain congestion. winter products to meet key offer dates.
We hope to be well placed with products to meet visitor demand during peak sales periods, starting with Father’s Day and during the fall and winter seasons. We were able to adjust our variable expenses compared to last year and take advantage of our plans that help the ongoing investments we are making in our portfolio of brands. These investments leverage the broader trends we see in our target clients to lead active lives and are designed to open up opportunities for massive expansion while mitigating the effect of short-term macroeconomic factors. .
To this end, we intentionally withheld a few visitor acquisition dollars from our first-quarter marketing spend, due to declining stock levels. The merit of being more selective in attracting new buyers is that we discovered a higher average order duration when they made their first purchase. As reception improved, we stepped up virtual prospecting in the current part of the quarter. And as a result, the expansion of new buyers increased, and much of the business was driven through our enhanced logo message and the advent of the women’s collection at AKHG. New buyers motivated by the new assortment, specific logo messages and product stories are much more valuable to us.
Net sales from our retail store network during the first quarter increased 0. 4% year-over-year, driven by a higher average transaction value, up 6% from last year. Education for in-store affiliates and helping consumers build their cart as well as a larger stock position are paying off.
Since the beginning of the quarter, sales in the retail channel have followed last year’s trend. Net sales from our direct sales decreased 12% during the quarter, largely reflecting the significant volume of customs clearance in executive sales last year, but also our planned resolution to reduce our media sales in operation in February and March. With a higher stock position in April, we looked at virtual advertising, social media, and paid advertising to drive the expansion of direct channels.
In April, direct sales were lower than last year. Our logo change efforts are paying off. We brought our new Duluth logo through Duluth Training Company and stepped up messaging by offering a more unified voice for men and women. The reaction from consumers has been incredible. Duluth’s favorite Fire Hose and NoGA Performance Stretch women’s flexible pants are perfect examples of product design for an active lifestyle with features and durability that face a wide diversity of painting activities.
This spring, we took advantage of the good fortune of the Duluth logo we had on our lawn collection by introducing a short edition of Women’s Heirloom Garden Overall and new styles that take credit for other well-known constructions like Dry on the Fly, Double Flex Denim and Fire. CoolMax Hose. These are state-of-the-art LED products that adapt to the seasons and offer genuine benefits such as moisture absorption, cooling and comfort. through assembly their desires for more clothing and acting devices that resist the situations they face when they are in the elements.
Finally, Alaskan Hardgear infused the identity of this logo with avant-garde, high-quality garments and underwear that are functional and allow for comfort and movement when outdoor situations change. While we know the collection can withstand those situations, we also know that most of our consumers just need to hang out, walk, or fly fish in the creek. This logo positioning opens up AKHG to a much broader set of considerations and broadens the logo’s perspective for the daily outdoor adventure that may be closer to home.
Our rebranding of AKHG coincided with the advent of our women’s collection. Since then, AKHG’s women’s segment has temporarily reached a women-like penetration point for the Duluth brand, through a third party. Five-star reviews are temporarily piling up for the New Collection and our live branding allow for a broader mental view of women and men in combination in highly photogenic and real-world environments.
We are excited about AKHG’s long-term outlook and the expansion of our women’s segment. Our top-tier products have outperformed and remain at the core of our business. At the service of men, we offer to be the most comfortable. in the United States and have collected more than 40,000 five-star reviews. That said, we see a greater perspective, especially in the assortment of women. Included in this collection is the eternal favorite No Yank Tank. But the expansion of our women’s blouses and bras grew particularly through only about 40% in the first trimester.
Finally, within our circle of brand relatives, is Best Made, which achieved a healthy expansion rate of 30% in the first quarter, although still down compared to other brands. correct narrative about the source and knowledge of the product, but also an exclusive user who lives and works a way of life embodied in the Best Made spirit.
Our men’s summer collection includes women’s tops and bottoms, swimwear and beach accessories recommended on the Pacific Coast and the Tropics of Hawaii. In partnership with the iconic Kahala brand, we present two exclusive models of Aloha shirts. During our last call, we shared the main points about our capital investment plans for the year and in our giant dam master plan. I am pleased to announce that we are on the right track with the first steps of our automation and logistics expansion project. And we have introduced central generation projects that serve to enhance our internal capacity and lay the foundation for long-term growth.
Within our existing distribution centers, we are building features that will be fully operational before our peak season this year. These functions increase the speed, accuracy and capacity of incoming receipts with sorting devices that increase daily capacity. The faster we can get stock into our system, the faster we can make it available to our customers.
In addition, investments are being made to automate the devices to classify and digitize outgoing orders, which will facilitate a faster replenishment of the stocks of our stores and a saving in shipping prices through the automatic labeling of boxes. more effective in the way we plan, shop and move smoothly from season to season. Advanced systems will allow for a faster and more insightful collection decision.
Ultimately, our commodified manufacturing plans team will generate automated recommendations based on in-depth trend analysis. And it will allow our teams to carry out commercialized activities with a higher added value. logo expansion decisions. We have engaged in a number of deeper reviews of our visitors, the interactions we have with them and have measured the opportunities for greater market and channel penetration.
These reviews inform our plans as well as the generation we are investing in to get the plans in place. In short, despite the challenging external environment, we continue to see a healthy underlying demand from our consumers to purchase products and groceries. reports that meet your needs. We are in a strong monetary position with ample access to liquidity, positive cash flow and earning capacity than our strategic expansion plans.
With that, I’ll turn over to Dave to give you more highlights about our first quarter and the outlook for the rest of the year.
David Lorette
Thank you Sam and good morning. For the first quarter, we reported net sales of $122. 9 million, down 7. 9% from $133. 4 million last year and up 11. 8% from the same era in 2020, with sales down from this year through last year of approximately $11 million. This is due to the drop in our year-on-year sales. Sales from our direct channel decreased by 12. 1% over the previous year, while the retail channel increased by 0. 4%, basically due to a 6% increase in the average transaction. price in stores.
As we shared in our last call, we expect sales to decline in the first quarter due to the heavier customs clearance position we found ourselves in last year and for delays in transporting our new core and seasonal products to continue throughout the year. Two factors, we focused much of our business on promoting at normal costs and preserving some of the spending on traffic-generating media until later in the quarter, when stocks reached a higher position and our new collections of sub-logos took a step forward. In April, our consumers reacted well to the new spring assortment, the new logo message and increased stock positions on core items. Customer traffic and conversion through our retail outlets and virtual channels took a step forward in the current part of the quarter.
As Sam mentioned, April’s overall net sales rose to single digits, and the momentum continued with a strong visitor call for Memorial Day weekend. digit thanks to the strength of demand from our core providing and being strategically less promotional compared to last year. The increase in productivity of sales to consumers is related to a trend towards retaining visitors who have acquired more from us. more than once and they were new buyers before last year. Consistent buying Those who basically renew and buy full-price parts have spent much more on their first acquisition and return more often.
Our first quarter retention rates are much more consistent with those of traditional shoppers and consistent spending with visitors is about 30% more consistent with price-oriented buyers. With this information, we adjust our marketing mix and visitor segmentation to strategically target the traditional shopper, resulting in a higher lifetime price for the visitor. Customs clearance stock decreased nearly 70% at the beginning of the quarter, from last year, resulting in a significant improvement in our gross margins on products and an accumulation of 470 basis points in our gross reported profit margin to 54. 6% from 49. 9% last year. year.
Our first-quarter gross profit of $67. 1 million compared to last year of $66. 5 million included nearly $4 million in expedited freight that was spent last year on air freight of certain parts to bypass shipping ports. These pieces make up our best-selling staples of the year, like men’s fireplace hose pants and Buck Naked underpants, and where we try to never be out of stock. Absolutely incremental transportation cost, our gross profit margin in the first quarter would have reached an all-time high for our first quarter at only about 58%. We expect activity to increase this year, but not to the same extent as last year. And this is taken into account in our advice.
In terms of expense, first-quarter general and administrative expenses increased 5. 2% to $68 million, up from $64. 6 million last year. As a percentage of sales, SG expenses
Selling expenses as a percentage of net sales increased across 80 core issues to 15. 8% from 15% last year, due to the higher hourly wage rates implemented in our store fleet and central distribution network in the current part of 2021. In addition, fuel surcharges on our outbound visitor shipments contributed to the deleveraging of promotional expenses. We expect to deleverage promotional prices in the present and third quarter before analyzing wage increases and knowing the power gains to offset the higher prices.
In terms of much on the ground, we expect top titles to continue the year. Unsurprisingly, advertising and marketing expenses as a percentage of net sales increased across 160 editions of the foundation to 10% compared to 8. 4% last year. due to the progression of artistic content for the positioning of our new Duluth logo and AKHG. These investments constitute approximately 30% of this quarter’s total charge. And we will help with logo messages and featured products in long-term visitor engagement and awareness campaigns.
In addition, we reduced the percentage of the direct mail catalog of our media paintings by approximately 50% and continued our strategy to leverage more flexible virtual media through a higher return on ad spend. Our investment in paid virtual media accounted for approximately 40% of total ad spend this quarter, and we expect it to increase to approximately 60% in the current quarter, representing the largest build-up in our marketing mix.
In addition, investments in logo awareness designed to expand new visitor audiences account for approximately 25% of total spending and are strategic to build momentum in the coming quarters. to one hundred foundation points.
General and administrative expenses as a percentage of net sales increased through 440 foundation issuances to 29. 5% compared to 25. 1% last year. The $2. 8 million accumulated over the past year represents an additional body of workers and generation prices, as well as consistent pricing for our Cherry Hills, New Jersey store and the Salt Lake City distribution center that opened the package last year.
We expect additional deleveraging in the current quarter for reasons, but to a lesser extent. During the current part of the year, we expect to achieve leverage on general and administrative expenses in line with expected sales growth. To date, our number of retail outlets is 65 with no plans or openings for the rest of the year. As we discussed earlier, we are comparing the locations of potential store sites in 2023 and will account for more percentage points once we sign leases.
Adjusted EBITDA for the first quarter $7. 9 million, down 17. 5% from last year and an 80 basis point contraction in adjusted EBITDA margin. $500,000 or $0. 02 consistent with the consistent diluted percentage recorded in the first quarter of last year. Excluding last year’s accelerated freight expenses, our EPS would have been positive at $0. 05 consistent with the consistent diluted percentage.
Returning to the balance sheet, we ended the quarter with net current capital of $106 million, adding $40 million in cash and not remarking on our credit facility. Compared to the same time last year, we had $26 million in money and $17. 6 million in traffic on the line. We expect a minimum loan from our available line of credit, which now amounts to $150 million.
Our trading point is approximately 6% higher than last year at the end of the quarter and is in a particularly healthier position than at the beginning of the quarter. Spring and year receipts that were delayed at the end of the year came into the quarter, supporting the relaunch of the sub-brand well. Our existing liquidation mine stockpiles are down 3% from 8% last year, and are at the right point for where we are in the spring and summer.
Our capital expenditures, adding the software implementation charge, are expected to be $40 million in 2022, up from our previous forecast of $57 million. The decreasing amount represents the progressive payment schedule for our new distribution center.
In the wake of our struggle for construction leasing in Adairsville, Georgia, we are finalizing the contract with our automated garage and recovery formula provider and have reflected updated cash flows and projections. Updating and scheduling progress bills will have an effect on the start of 2023 and you’ll gain advantages on our year-end 2022 monetary position.
We now expect the loose money for 2022 to be about $15 million to $20 million. As we share, the investments we plan to make across the company will facilitate the expansion and power of distribution capacity, product and logo progression features and load our visitor with insights and knowledge analysis to better tell our collection and marketing mix. All of these investments are destined to be more digitally driven as a company and our key parts are a Big Dam Blueprint.
To summarize, our outlook for the current quarter and the current part of 2022, we expect sales and our direct channel to increase in the first digits in the middle of the current quarter and down in the current part of the year. For retail sales, we expect sales to be in the single-digit average in the current quarter and in the current part of the year.
We expect gross profit margin to be solid or higher in the current quarter and to be down approximately 50 basis points during the current portion of the year. We expect to increase ad spend by around $2 million in the current quarter compared to last year and spend about the same amount in the current part of the year compared to last year.
With promotional expenses, we expect the timing and third quarter to be similar to the first quarter in percentage increase in sales, and the fourth quarter is more or less flat compared to last year as a percentage of sales. Second quarter overhead will be increasing as a percentage of sales through 150 to 200 basic issues and minimizing through 50 to 100 core issues in the current part of the year as a percentage of sales compared to last year as we gain momentum in sales growth. We reaffirmed our full-year direction with net sales of $730 million to $755 million, adjusted EBITDA of $84 million to $88 million and EPS between $0. 93 million and $1. 00 or $2. 00.
Finally, we are satisfied with the start of the year, especially given the dynamism of the environment. Our groups continue to focus on the wishes of the company and our customers, and on the execution of our strategic plans.
And with that, we will open the question forum.
Q&A session
Operator
Now we will start the response and response session. [Operator Instructions] And the first is Jonathan Komp with Baird. Continue.
jonathan komp
Yes, hello, bonjour. Merci. Je looked to start following the realignment of the logo. And I think, Sam, you’ve explained the reasoning quite clearly. But I’m curious to know more about customer reception. now, and if you notice the differences, and the comments you have obtained. And then, into the future, adjustments in the character or positioning of the logo or in the technique of the product as a result of the realignment you see in the future?
sam sato
Yes, thank you, Jonathan, I appreciate the question. Yes, on a higher level, it was part of our initial paintings within the Big Dam Blueprint, and it was about creating those useful and distinct positions for each of the sublogotypes. And it allows us, not just from a product progression perspective point of view, to focus very closely on all the functionality features and benefits in product progression and design, and then provides our logo marketing team with the ability to lean heavily and capture intent. Use of those products. So, at the beginning of our strategic cadres, it was one of our priorities, to create a difference and an exclusive position.
Secondly, I will say yes, we have noticed a rather incredible response. And I would like to refer you to our ready comments on AKHG in particular. We have created a transparent separation of what this represents of Duluth and Best Made. – we saw it when we presented the women’s game in April; It immediately reached a women-like point of penetration for the much larger Duluth logo. Therefore, I think that the combination of different positions from the point of view of product progression and from the perspective of logo marketing serves us well. And most importantly, it creates a transparent understanding through our customers.
jonathan komp
Great, it’s a useful perspective. And then maybe a follow-up to the outlook for the full year, I know the first quarter exceeded internal plans, you kept the outlook for the year. You perceive that we are at the beginning of the year, but are you being more cautious in your outlook for the rest of the year, just looking to perceive your way of thinking and your point of confidence after results of the first quarter better than expected?
sam sato
Yes, so I’ll just go to. I’ll respond quickly and then let Dave maybe get a little more color. In component with the supply chain constraints we faced last year, our team has taken some really useful and intentional steps, such as scheduling previous receipt dates to make sure we’ve taken into account the multiple weeks of delay. And so, I think that’s starting to show up in the reception flow in the first quarter, and I expect that to be the case in the current quarter, and then, more importantly, through the buildup in the third quarter and during the peak holiday season, in the fourth quarter.
As a reminder, last year we were talking about the exit of the third quarter, how our inventories were now down 20% below 2020 levels. And that continued into the fourth quarter. So the component of our forecast and making plans for this year includes what we expected, or what we projected a request that we left on the table last quarter, and in the fourth quarter in particular, due to a lack of inventory.
jonathan komp
Yes, it makes sense. And I guess when you look at April in particular, maybe you’ll further isolate some of the tailwinds you’ve noticed, and maybe relate that to the discussion about some of the reassignments and marketing methods for the rest of the year, and yes or not, you can bring back some of the successes you seem to have noticed in April?
sam sato
Yes, I think what has inspired me, since I joined the company a year ago, Jonathan, is the flexibility of our ability to target and develop or minimize targeted ad spend. Therefore, it is unlike anything we have experienced in terms of the chain of origin and has an effect on the availability capacity of stocks. So the smart news is that when the flow of stocks is rarely what we need, we can go backwards. And then when we start to see the flow of stocks at a higher rate, we can build that pretty quickly. And that’s partly because we’ve made a strategic shift, in recent years, to a more virtual marketing strategy, which is much more flexible than linear advertising cars. that we used in the past, where you had to dedicate yourself to contracts well in advance, and then you were locked up.
So frankly, our logo marketing team does an amazing job of pulling levers for months and weeks. And so, in the case of April, when the shares started to rise, and especially things like the launch of AKHG for women, which was originally intended to be introduced in March, and because the receipts were not there, we rejected it. And as soon as we saw those things start happening in our distribution centers, they stepped up their plans into targeted marketing initiatives. that generates a lot of business both at the points of sale and on our virtual site.
David Lorette
Yes, Jonathan, I’ll just go up that the rest of the year we still have a lot of paintings ahead of us. I mean, our first quarter is only 16% or 17% of total annual sales. So from the beginning of the quarter to Memorial Day weekend, when activity is in the low-singles singles digit range, and you clearly want to continue to rise to succeed on the back of the expansion rates that we have. So I think we’re still at the beginning of the year. . And this reflects our orientations that we reaffirm.
jonathan komp
Great, it’s a useful color. I’ll have a hard time. Thanks again.
sam sato
thanks jonathan
Operator
The next one comes from Jim Duffy with Stifel. Continue.
jim duffy
Thank you. Hello.
sam sato
Hi Jim.
jim duffy
I wanted to ask you about some of the comments you made in your response to the last question. I’m curious about indications about additional marketing expenses. In the first quarter, you stopped some marketing. you had the actions to do that and scale the business, do you have any [high ROI] [Ph] projects that you can invest in and that you think would drive growth?
sam sato
Yes, absolutely. As I said, as stocks increase relative to our planned releases or new collections, we need to increase or minimize those marketing expenses based on the instability of the receiving flow. And so, today we have some amazing new products that we’re launching. , we are delighted. I’ll give you some examples. We have a hunting pod in partnership with Mossy Oak, which is this amazing logo that has brought a kind of new era of camouflage to the market. We’re very happy with that; We will increase the exposure against this as it happens. We have commented in my prepared comments that bras, as a category within the first layer of women, are experiencing an excessive growth.
And so, we have this new logo for women called [Line Tamer] [Ph], and its line continues to hide the first layer for it. And so, we have a pretty clever marketing crusade that opposes that. And so, actually as Dave discussed in his ready comments, we’re expanding our ad spend in the current quarter because we’re looking at the possibility of receiving some of those new products and collections. And we will continue to adapt as our income comes in. surprising and exciting new products, new inventions in preparation; it’s just a matter of managing getArray instability
jim duffy
I need to delve into some other point of detail there. Is this established evidence of the concept with new visitor acquisition efforts that you can use for visitor registration or is it just an attractive product that you use to re-engage visitors?visitor base?
sam sato
Yes, I think it’s a couple of things. One is: we have had a great treasure trove of customer knowledge. And as we discussed during the last few calls, as we continue to invest and expand our team to analyze visitor knowledge and data, we get a lot of genuine information. very intelligent quality data. And in fact, we recently hired a new Customer Insight manager, who brings an amazing experience. And he has already shown us how he can shred this knowledge and carry a very intelligent attitude and where we deserve to direct visitor acquisition strategies. One of the things he showed us, and Dave discussed it in his ready comments, is this difference between customers we earn primarily through price, compared to what we call traditional spenders or those who come to us, over time, or have come to us because of the product desires they have.
And over time, they are much more valuable to us, not only because of the length of your cart, but also because of the frequency of your interaction with us. Therefore, we target similar consumers through other types of channels, largely through virtual acquisition. And it even makes our ad spend much more effective, as we can target and be selective about the other people we seek to attract and retain.
jim duffy
It’s great. Its total value sales penetration is very encouraging. And I think this time of shifting the focus to the traditional customer rather than [value to a purer customer] [Ph] is powerful. I am curious about how this adjusts the addressable market and the expected duration of the profit base, does it decrease the expected duration of the profit base and the structural margin opportunity for the company?What do you think of this part?
sam sato
Yes, no, I don’t think so. I think. . . Look, I think whether in an era of inflation, as we are now or not, even in an expanding market, everyone. . . everyone considers the value. . . when they make a decision. But I think at the end of the day, the length of the market where we serve and the types of products and the cost of the values, the sustainability, the structure of our products are a wonderful opportunity for us. And we just aren’t, we’re just scratching the surface in terms of market penetration.
jim duffy
Super. Thanks guys.
sam sato
thanks jonathan Jim, sorry. Thanks Jim
Operator
The next one comes from Dylan Carden with William Blair. Continue.
Dylan Cardon
Thank you so much. More or less in the same vein, I guess a little higher up in the P
sam sato
Yes, I’ll start with that, Dylan. Je let’s assume that the basic gross profit margin that we think can continue is in fact in the mid-50s in the long run. So, there is room to continue growing there, thanks to a more strategically complete and normal value with the right combination of promotional actions. The great merit that we hope to continue to offer is that stock levels are under control, and that prevents the customs clearance activity that we have had for the last two years. So, it’s about managing that point of: this combination of products that goes towards the constant delivery of gross margin and gross profit margin for us.
But in terms of product categories and changes combined, we try to make all those sub-brands have a comparable gross margin when we sell to the end customer, and that’s what we do. We look for this opportunity in charge and value competitiveness. have a constant initial margin and a type of gross margin after the sale. So, we don’t see a big impact due to the expansion of sub-brands and this kind of replacement on our gross profit margin opportunity.
Dylan Cardon
But it’s, according to, I guess I’m going to get to the mid-50s, that’s where you’ve been, at least in the pre-pandemic story, maybe a little bit of both, you’re flirting. Is it crazy to think that you’re coming in at some kind of underlying margin above 50 from here, that’s what you’re saying that the main type of business is still functioning structurally at that mid-50s level?
sam sato
Yes, I mean and when, I guess, I’ll communicate about 50 years, our margins on products are sold at that kind of level. And then we have other prices that are integrated into our gross profit margin. So, yes, I think it’s quite imaginable to keep on some kind of 12-month mobile base.
Dylan Cardon
It is ok. And then through logos, I guess what their position is, duluth’s core, Duluth’s legacy as opposed to some kind of combined portfolio logo from a profit penetration perspective. And then the opportunity to cross-sell between those logos, are you just getting started, are you exploring some of those opportunities?I know that the profiles of the visitors will be different, but there will have to be some overlap, I am just a little curious to know if there are any comments.
sam sato
Yes, only at a higher level, Duluth or, say, AKHG and Best Made account for just under 10% of the business, with Duluth being the rest. And our plan is to continue to expand AKHG and Best Made at a much faster rate. of what we are Duluth, so this is a higher percentage of the percentage as we go along. In terms of crossover, as I said before Jonathan, we set out to work very hard to create those distinct positions for the intfinished end use and tailored to the same consumer. So, we’re striving not to have a collection, intentionally, not having a lot of cross-products because it focuses on end use.
And so, we believe it allows us to build cart length because consumers don’t decide between a flannel blouse in Duluth or a flannel blouse in AKHG, but rather buy them, in fact, for their other needs. And we’re seeing some of that happen in terms of average order price in particular.
Dylan Cardon
So that would mean there’s a higher charge compared to potential, right, because if I buy a flannel blouse for one use case and buy a rain jacket for another, my overall basket is the mixture of the two and doesn’t cannibalize the other, right. ?
sam sato
It is ok. Cannibalize yourself.
Dylan Cardon
And so, actively marketing to those different types of consumers who may just be visitors to one logo and now another, are this kind of thing still to come?
sam sato
Yes, a separate end use is primarily a similar customer. But as we learn more about other consumers and how they interact with us, we have marketing opportunities, for example, some of them basically buy AKHG to market certain potential pieces within Duluth or better done.
Dylan Cardon
Good, good. And I’m still – I know we talked a lot about that the call. I’m still a little lost. So cutting off marketing when you didn’t have the shares makes sense to me. But still, marketing has really gone deleveraged if I understood correctly. So, I’m just curious, and it turns out that I heard you well. You were also given to get rid of a catalog component. I’m just looking to figure out long-term customers for marketing, resting, or maintaining some sort of double-digit percentage of the sales level.
sam sato
Yes, then two things there. First, in the last two years, we have withdrawn the catalog. So we invested in the catalog. It’s a wonderful logo building detail for us. And most importantly, as we change the name of Duluth and change the position of AKHG, we are giving the opportunity to do so in all sexes. We do this in key periods like Father’s Day, for example. Our Father’s Day Catalog arrives this week. So let’s take advantage of those key moments to tell the story of those circles of relative logos and those stores of the entire circle of relatives.
In terms of deleveraging, the component is, and maybe we just want to do a little better, we have means that work and don’t. Non-work is, in fact, the creation of an artistic logo. So, for example, when we introduced AKHG for women and the repositioning of Duluth through Duluth Trading Company, we spent cash to create logo messages and logo positioning marketing instead of marketing aimed at trading.
Dylan Cardon
Gotcha. It makes more sense. And so, and ultimately, the remaining point of ad spend is some kind of high-single-low-double. I know you probably wouldn’t have interaction on this right now, but just out of interest and if I can have you too.
sam sato
Historically, it was a kind of double-digit low diversity. And I’m not shy about saying that today we’re probably in the diversity that we’ll be in as we move forward in that double-digit diversity.
Dylan Cardon
Very well. Thanks guys for answering all the questions. Good job.
sam sato
Thank you, Bill. Enjoy.
Operator
This concludes our question-and-answer session, which concludes today’s convention call. Thank you so much for attending today’s presentation. And now you can sign out.