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Jan 25
Duluth Trading Company – An Overview from the CEO

​Tuesday, January 16, 2018

Speaker: Stephanie L. Pugliese, President and CEO

1.    Duluth Trading Co as a brand -

  • Our customers are men and women who are hands-on, value a job well done and are often outdoors for work and hobbies.
  • The brand was founded in 1989 by two brothers-carpenters in Duluth, MN who invented the Bucket Boss, a soft sided tool carrier/organizer. In the next 28+ years the company invented and brought to the market a number of new product concepts that "solve the problem": from Buck Naked underware to Fire Hose workwear, becoming a nationwide retailer.
  • Business model: majority of business is done through direct channels to consumer (phone line, website, ~ 70% of 2017 total sales) and retail (31 stores as of end-2017, ~ 30% of total sales in 2017).
  • We own our channels (only website, phone call or store), which allows us to have direct relationship with our customers and gives an ability to take advantage of full margins.

2.    Three brand pillars - 

  • Solution-based design.
  • Humorous and distinctive marketing.
  • Outstanding & engaging customer experiences.

3.    Growth strategies - 

  • Build on brand awareness to continue customer base growth.
    • Advertising (TV, digital, catalogs) takes the largest share of total marketing expenses and accounts for about 20% of Duluth total sales.
    • Retail store expansion adds to brand awareness.
  • Extend retail store base and increase retail sales – now comparatively small part of our business (~35% of total sales in 3Q17) but rapidly growing.
    • Duluth Trading added 15 new stores in 2017 to 31 total number of branded stores by the end of the year. The company anticipates opening 15 more new stores in 2018 and sees a potential for a total of ~100 stores in identified markets.
    • In first twelve months of operation a new store attracts about 40%-50% of new customers.
    • Brand awareness is considerably higher in a market with operating store(s) increasing both retail and direct sales.
    • Average store has about 10,000 - 12,000 sq feet, CAPEX ~$2m, pre-opening expenses ~$0.6m, starting inventory ~$0.6m, and a payback period of less than 2 years.
    • Logistics and well-tuned retail team make sure that as we open new stores they will continue growing along that successful path.
    • Store strategy – renovations, build to suit, iconic restorations.
  • Create deeper and longer standing relationship with our customers through serving their needs while growing Women's business and broadening assortment in Men's categories.
    • Women's business is fast growing (+35% y-o-y in 2017) accounting for 23% of total sales or about $100m in 2017 (compared to only $4m eight years ago).
    • Continue to grow through customer acquisition and new product offerings (e.g. initiating Men's business line).

 

Q&A
1. You’ve talked about using retail stores as a base to build brand awareness and help convert people to first time buyers. When I look at the store map it seems to make sense in all the markets except for Wisconsin where you have a reasonable density of stores. Is Wisconsin an anomaly or the density of the stores in this state represent an attempt to ultimately be across all of your key markets? 
Some of the density in WI is explained by our historical ability to expand into certain stores trying new concepts in easily controlled locations and is not connected with the population density (as it is in other states going forward).
The positive sides of WI stores are: well done, payback is fast, good payoff.
We are learning how far customers are coming to reach us at certain locations.

2. How many SKUs are you managing? How do you manage them?
There are about 14,000-15,000 of active seasonal SKUs. About 70%-75% of our assortment carry forward.
In terms of management – every season our merchants analyze the core productive SKUs (“brand ambassadors”) looking for opportunities inside (color, size assortment etc) and right outside of the core, clean out unproductive SKUs (clearance events). 
Capture customer information and their shopping habits (from both direct and retail sales) and make decisions on what to sell and what to keep.

3. What is your customer demographics compared to customer demographics within your top markets? Is your customer getting older? What makes your brand relevant to younger demographic?
Going into a new market look at “our customer” density in that market. The average Duluth customer age is 54 years. It is 3-4 years younger for in-store customers and customers coming from the national advertising.
We do not chase millennials rather try to attract customers by solving a problem (e,g, No yank-tank).

4. Where is your product manufactured? Do you project cost going up? Is there going to be a bottleneck in you plans to scale up?  
Majority of our products are manufactured in Asia. We have long standing relationships with our primary manufacturing partners across multiple countries of Asia which gives us an ability and flexibility to navigate through any sort of challenges in manufacturing base. We dual source almost all of our core products so that we don’t stuck one way or another.
We purchase our products in US dollars, exchange rates could potentially have influence on us but we have not seen that issue in the past year. Moreover, because we are growing we can even see our manufacturers investing in themselves providing better cost of goods.
About 20% of products (e.g. leather accessories etc) are manufactured in the US.

5. How you ensure your associates maintain their passion and stay engaged and enthusiastic as you are?
Out of total 2500 Duluth employees across the US, about 200 are office workers and the remainder is ~ equally split between stores stuff and the customer support call and distribution centers.
Our office stuff, distribution centers’ and call centers’ leadership meets on a monthly basis to discuss business issues. Our store managers come in to our Mount Horeb office for management meetings on a quarterly basis. 
There is a continuing back and forth of communication between the offices and different parts of business (anonymous mailboxes with questions and suggestions, regular meetings, CEO visits stores etc).
6. What was the decision process to open office in Mount Horeb?
Steve Schlecht, our executive chairman and our primary shareholder, started his original business Gempler’s in Mount Horeb in 1980s and then moved to Belleville in 1997. In 2010, Duluth opened a store in downtown Mount Horeb. Three years ago the company opened Innovation Center in village’s downtown where Duluth’s marketing, creative and merchandising jobs are located. So when Duluth realized that it had outgrown its Bellville office, Mount Horeb was a natural choice to move the company’s headquarter. 


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