DLTH

Duluth (DLTH) Q4 2023 Earnings Call Transcript

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Duluth (NASDAQ: DLTH)
Q4 2023 Earnings Call
Mar 07, 2024, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning and welcome to the Duluth Holdings Inc. fourth quarter 2023earnings 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 Nitza McKee. Please go ahead.

Nitza McKee -- Investor Relations

Thank you, and welcome to today's call to discuss Duluth Trading's fourth quarter and full year 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'm here today with Sam Sato, president and chief executive officer; and Heena Agrawal, senior vice president and 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.

Should you invest $1,000 in Duluth right now?

Before you buy stock in Duluth, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Duluth wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of February 26, 2024

And with that, I'll turn the call over to Sam Sato, president and chief executive officer. Sam.

Sam Sato -- President and Chief Executive Officer

Thank you for joining today's call. Before I share some of the details of our business performance and progress on key strategic initiatives, I'd like to first introduce Heena and welcome her to the Duluth family. Heena is joining us as our senior vice president and chief financial officer. And with more than 20 years of finance and leadership expertise, Heena brings a breadth of experience across different facets of global finance, accounting, and mergers and acquisitions.

Heena was recently with Kontoor Brands, holding the position of Global Wrangler and Global Kontoor supply chain chief financial officer. We're thrilled to have attracted such a seasoned executive to fill the important chief financial officer position at such a pivotal time for Duluth Trading. Heena's extensive experience and strong finance and leadership acumen will play a critical role in the evolution of Duluth's long-range plans as we remain steadfast on executing the pillars of our Big Dam Blueprint. As a brief review of our fourth quarter performance, net sales increased approximately 2%.

The quarter was highlighted by growth in both the Duluth and AKHG brands, driven by strong outperformance in our women's business, which registered year-over-year growth of 12%. We were particularly pleased with the continued momentum in our AKHG women's business, posting stellar year-over-year quarter growth of more than 20%. Product performance highlights in our women's business included positive momentum in our newest hero product, the Heirloom Gardening bib, in which we introduced a line version, making it suitable for year-round wear. Flannels and bras also played a significant role in our fourth quarter growth with both categories up strong double digits.

In flannels, our improved in-stock position benefited sales during the peak gift-giving period. In bras, the success we are seeing is a testament to our unique product innovation and growing brand loyalty, and our TeeLUXE bra was the No. 1 style in its launch season. The broad-based positive trends and exceptional customer responses across our women's business indicate continued growth potential.

In the fourth quarter, our men's apparel business was flat. Men's AKHG, first layer, woven tops, and bottoms grew as our unique product continued to resonate with our loyal customer base. This was partially offset by softer trends across our cold weather categories of outerwear, sweaters, and footwear, which was impacted by the warmer weather. Product performance highlights in our men's business included double-digit growth in underwear, Double Flex denim, and flannels.

Success with Double Flex denim was driven, in part, by the introduction of new elevated washes and was brought to market through our monumentally durable campaign. Men's underwear with humorous photoreal prints resonated with consumers, and flannels were bolstered by new pattern designs, color palettes, and a strong in-stock position. During the quarter, the industry saw consumers gravitate to promotional purchasing. We saw a significantly higher portion of our holiday sales occur during the Thanksgiving through mid-Cyber Week period when we ran our global event.

Our Black Friday sales were the strongest in our company's history, and we saw a pull forward of sales from the following weeks. In January, we introduced new product innovation and saw a sequential improvement with our full-price sales trend. Let me spend a few moments on our product innovation strategy. Within our core categories, as well as our AKHG brand, we introduced more newness than ever before.

Most of these introductions came in the form of soft launches, but the successful initial results and consumer excitement highlight our ability to develop, design, and deliver innovative and unique first-to-market fabrications and features that set Duluth apart in the marketplace. Key new offerings late in the fourth quarter included a new addition to our iconic Fire Hose pant collection, featuring the strongest flex work pant fabric on the market, with a lighter weight than our original Fire Hose. This product we've named Flex Fire Hose HD comes in two styles and truly represents the next generation of workwear. We also expanded our core Buck Naked category by offering men's Buck Smooth, which provides the same comfort and function as the fan-favorite Buck Naked, adding a smoother, more vibrant, and patterned construction.

Our quick-drying Dry on the Fly technology was expanded into tees and underwear across both men's and women's. And finally, we launched AKHG Fitness, our first-ever fitness apparel offer. The assortment built for nature's gym for both women and men includes tanks, shorts, hybrid jackets, and after-sweat sweats. Our fitness apparel includes features and technologies that stretch, wick, breathe, and dry in a flash and is offered in sizes up to 3x.

AKHG Fitness is off to a great start. And although a small contributor to the business today, we see this as a whitespace opportunity to build on our unique fabrics, features, and functions to create and support AKHG Fitness as a growing and year-round category. To bring awareness to our innovation and product offerings, our marketing and creative teams ramped up our investments in social influencers, which delivered meaningful engagement and strong growth from new younger consumers. We continue to balance brand awareness and high-converting digital tactics to optimize our return on investment and consistently deliver relevant content to both existing and new consumers with creative concepts across streaming video and audio, as well as cable TV.

Throughout the year, we strategically retargeted past consumers, leading to an 11% increase in reactivated buyers during the fourth quarter. Personalized content reengaged lapsed consumers, reinforcing the trust and loyalty they have in our brand. In addition, new buyers grew in Q4 as our high-quality solution-based product appealed to consumers who had not previously purchased from Duluth. Our strategic shift toward targeting a younger consumer is gaining traction as our new consumers are, on average, five years younger than our existing consumers.

Our previous investment in replatforming the duluthtrading.com website to the next generation of e-commerce, tailored for mobile usability, is paying off. Our goal is to enhance accessibility and provide a frictionless shopping experience. And because of our investment, we saw high single-digit direct channel growth, driven by higher traffic and conversion in mobile, more than offsetting retail softness. In fact, fourth quarter mobile sales increased over 20% from a year ago, and mobile now represents our largest channel for consumer interaction and purchases, accounting for over half of our total direct channel sales.

Shifting to the foundational drivers of the business, we remain steadfast on our commitment to the pillars outlined in our Big Dam Blueprint. As initially introduced in 2021, the five pillars of our Big Dam Blueprint include, one, lead with a digital mindset; two, intensify our efforts to optimize our own DTC channels; three, evolve the company's platform to grow into a multibrand and multichannel business; four, prioritize test and learn to unlock long-term growth; and lastly, five, future-proof the business through investments in capabilities and infrastructure. I'm extremely proud of the tremendous progress we've made on related key strategic initiatives. The benefits of these investments are reflected in a greater penetration of digital sales, especially mobile, lower variable fulfillment costs, and future gross margin expansion.

These investments will also enable us to drive revenue growth opportunities in the future. Let me update you on the progress we made in 2023. First, as mentioned on previous calls, we went live with our new highly automated fulfillment center in October and are achieving our plan to process up to 60% of all online orders and store replenishment volume through this facility. In addition to shortening delivery times to keep pace with evolving consumer expectations, the enhanced automation in this center drove lower variable costs per unit to fulfill an order in this facility, which was 42% of the average cost of our three legacy fulfillment centers during the last four months of the fiscal year.

As this approximately $55 million investment represented the largest individual capital expenditure in the history of Duluth, I'm proud of the cross-functional team's ability to execute and deliver the results we expected. This step change in logistic capabilities allows us to further optimize our owned DTC channels and serve as a significant enabler to future-proof and scale the enterprise. Second, we meaningfully advanced our sourcing and product innovation functions, which we believe is another critical strategic unlock, allowing us to bring to market high-quality innovative products more frequently, increase our speed to market, and significantly reduce our product costs. Several team members were onboarded during the year, including our new vice president of sourcing during the fourth quarter.

Our sourcing and product innovation team is accelerating this initiative, and the benefits will begin to materialize in 2024 and continue to build over time. Finally, we made great strides completing several foundational initiatives to execute our technology transformation road map, the continuation of which will become the primary focus of our capital expenditure outlays. These initiatives will enable the optimization of the business, focusing on a centralized data repository, customer data, and analytics, as well as tools to maximize the logistics network capabilities and strategic planning and assortment decisions. Our focus for 2024 will accelerate the operational improvements of the strategic road map by expanding our pipeline of new and innovative products, optimizing our marketing mix, improving gross margin rates, and controlling what we can control by prudently managing expenses and inventories.

In closing, I'm proud of the progress we've made on our foundational initiatives and remain steadfast in our strategic road map. With that, I'll turn the call over to Heena to discuss Q4 and the full year '23 financials and our 2024 outlook.

Heena Agrawal -- Senior Vice President, Chief Financial Officer

Thanks, Sam, and good morning. First, I'd like to express how thrilled I am to have joined the Duluth Trading family. In just shy of four weeks in my new role as CFO, I have had the pleasure of meeting with our board of directors and the entire leadership team. I visited several stores and toured our fulfillment centers in Adairsville and Belleville.

I'm impressed by the strength of our brands, consumer loyalty, innovative product design, engaging storytelling, and the strategic choice to invest in infrastructure to capitalize on growth opportunities. I look forward to partnering with Sam and the entire leadership team as we further pursue our growth initiatives. I firmly believe Duluth Trading is uniquely positioned to expand its reach, and I am excited to leverage my experience to drive our next phase of profitable growth. Let me begin with a review of our full year 2023 and Q4 financial results.

Today, we reported full year 2023 net sales of 646.7 million, adjusted EBITDA of 33.4 million, and EPS of negative $0.28. Our Q4 reported results were net sales of 245.6 million, adjusted EBITDA of 21.1 million, and EPS of $0.21. Starting with the top line. For the full year 2023, net sales were 646.7 million, down 1%.

In Q4, we saw a trend reversal from prior quarters as net sales grew 1.6% to 245.6 million, powered by acceleration in women's and AKHG. Women's business grew double digits across both Duluth and AKHG brands, driven by flannels, intimates, fitness, and garden selections. The men's apparel business reversed trend from prior quarters and was flat to last year, with growth in AKHG and growth in core Duluth categories of first layer, bottoms, and woven tops, offset by declines in cold weather categories of outerwear, sweaters, and footwear, impacted by warmer winter weather. From a channel perspective, our retail channel sales declined 12%.

This was more than offset by our direct channel sales growing 9% to higher conversions and greater penetration of mobile. As Sam mentioned, mobile grew 20-plus percent and moved up to our No. 1 sales channel for the quarter. Moving to gross margins.

For full year 2023, our gross margin contracted 230 basis points to 50.3%. Our fourth quarter gross margin was 48.2%, down 300 basis points as we saw our highest-ever Thanksgiving through mid-Cyber Week sales contribution in the fourth quarter, during which we ran our global event. I will provide fiscal 2024 guidance details shortly, but through acceleration of our sourcing and product innovation initiatives, I want to reiterate that we expect gross margin benefits over the next several years. Now, onto SG&A.

For full year 2023, SG&A decreased by 1% to 333.8 million and was flat to last year as a percentage of sales at 51.6%. For the quarter, SG&A decreased 3.8% to 108.8 million and leveraged 250 basis points to 44.3% of sales. The Q4 leverage was driven by lower fulfillment costs across the network, primarily due to efficiencies from Adairsville, further maximization of our marketing spend, and prudent management of our general and administrative expenses. Full year adjusted EBITDA was 33.4 million or 5.2% of sales.

Full year net loss was negative 9.4 million or negative $0.28 per diluted share. EPS was weighed down by noncash depreciation expenses from infrastructure investments. Q4 net income was 7 million, or $0.21 per diluted share, compared to net income of 7.5 million, or $0.23 per diluted share, last year. Fourth quarter adjusted EBITDA was 21.1 million, an increase of 2.4% over last year, and expanded slightly as a percent of sales to 8.6%.

Moving on to the balance sheet. We ended the year with 32.2 million of cash and no outstanding debt on our credit line, leaving us with liquidity of 232 million. Inventory was down 19% or 29.2 million. Our inventory composition is healthy with 90% in current products and a 30% decrease in clearance items.

Our capital expenditures for 2023 of 53.2 million were funded by cash and were primarily used to invest in strategic infrastructure initiatives, including our new fulfillment center in Adairsville, and digital capabilities as per our IT road map. Now, turning to our outlook for fiscal year 2024. Our full year net sales guidance is 640 million to 660 million, including the 53rd week, which is worth approximately 150 basis points of growth. We expect the first half to be down low to mid-single digits as we continue to navigate a dynamic macro environment.

We expect gross margin for the full year to be up 200 basis points, with improvement expected to begin in Q1 and builds throughout 2024, driven by our sourcing and product development initiatives. As I mentioned earlier, we expect further improvement in margins in the out-years as we continue to optimize our sourcing. We expect SG&A to deleverage by approximately 100 basis points in the coming year, mainly driven by higher fixed costs and depreciation from strategic investments, partially offset by improvements in variable cost benefits being realized from these investments. Advertising expenses are planned to be in line with sales growth and approximately 11% of sales as we plan to continue to invest behind our brands, support new product innovation, and drive omnichannel sales.

Variable expenses or selling expenses, which include outbound shipping costs, as well as labor across our contact center, fulfillment centers, and store fleet, will continue to leverage, driven by optimizing our logistics and fulfillment center network. Fixed expenses or general and administrative expenses will increase in 2024, primarily from annualizing depreciation and fixed costs from strategic initiatives. We expect our year-over-year EBITDA improvements to outpace net income and EPS growth as we bear the depreciation impact of strategic investments in our P&L. With that, our full year adjusted EBITDA guidance is 39 million to 45 million and EPS in the range of negative $0.22 to negative $0.07.

This includes estimated diluted shares of approximately 33 million and a tax rate of 25%. Our capital expenditure spend will be reduced by more than half to approximately 25 million, and the primary focus will shift from the logistics network to our strategic technology road map, enabling efficiencies and scalability. In closing, we are being prudent in our outlook for 2024 and are beginning to see the benefits from our foundational investments, fueling adjusted EBITDA growth. Our capital expenditures are normalizing and our liquidity remains strong.

With that, we will open the call for questions.

Questions & Answers:


Operator

We will now begin the question-and-answer session. [Operator instructions] And our first question will come from Janine Stichter of BTIG. Please go ahead.

Janine Stichter -- BTIG -- Analyst

Hi. Good morning, and welcome, Heena. I wanted to ask a bit about the promotional strategy. If we think about the past two quarters, it's been the fact that consumers are shopping more around the promotions than they have in the past that's been pressuring gross margins.

As you think about the gross margin expanding 200 basis points next year, is that entirely due to the sourcing initiatives? I'm curious what you're assuming for planned promotions and then the consumer shopping behavior around those promotions.

Sam Sato -- President and Chief Executive Officer

Yeah. Hi, Janine. So, maybe I'll just -- I'll answer at a top level, and then I know Heena has got some comments. You know, we expect there to be ongoing consumer headwinds.

And, you know, last year was heavily promotional, and, you know, we anticipate something similar this year. Having said that, you know, a lot of the strategic initiatives we've put in place, specifically around product development and sourcing, we believe will start to show benefits in this coming year, beginning with Q1. As Heena stated, gross margin improvement of 200 basis points is contemplated in our guidance over the course of the year. But we think that there's ongoing upside.

And so, you know, we're going to remain balanced in our approach to pricing and competitiveness with brand integrity and really rely, you know, more on our product development strategy to bring more newness more frequently. And, you know, as I said in my prepared remarks, we delivered more newness than ever before in the pipeline. As we go through Q4, it looks really strong.

Heena Agrawal -- Senior Vice President, Chief Financial Officer

Yeah. Thanks, Sam, and hi, Janine. Thanks for your question. So, you know, yes, we did see a significantly higher portion of our holiday sales occur during Thanksgiving through mid-Cyber Week period when we ran our global event, and our sales during this period were the strongest in our company's history.

We are evaluating the season's performance, and we will continue to monitor the macroeconomic and competitive environment. Our guidance for 2024 assumes AUR to be similar to what we experienced in 2023. We are being prudent in our sales outlook and inventory management for 2024. As Sam mentioned, our sourcing and product development initiatives are enabling greater and more frequent introduction of new products, which positions us to drive more full-price sales.

Our expectation on top line is to be down low to mid-single digits in the first half, and our guidance for the full year reflects gross margin up 200 basis points, as I said in my prepared remarks. And that is mainly driven by our sourcing and product development initiatives while maintaining AUR year on year. And as Sam mentioned, we expect further improvement in margin in the out-years as we continue to optimize our sourcing strategy.

Janine Stichter -- BTIG -- Analyst

Great. That's helpful. And maybe along the lines of some of the sourcing initiatives enabling quicker product development, can you talk about some of the soft launches that you mentioned in the prepared remarks, how quickly you can chase into a broader launch of those assortments?

Sam Sato -- President and Chief Executive Officer

Yeah. So, at a -- you know, as I said earlier, you know, items like Flex Fire Hose HD, you know, as we build on our iconic Fire Hose pant program, came in, and the reception to that was really strong. Buck Smooth is interesting. We've talked about Buck Smooth leading up to Q4 as being a new innovation in fabric that allows us to actually print kind of photoreal print on there.

And that was met with overwhelming success. I would also add, you know, our intimates program in women's, we've introduced some new bras. TeeLUXE bras being, you know, our No. 1 bra in its first season.

And then, you know, last call, we talked about the excitement around our AKHG Fitness category, and that came in the last week or so of December and really came out of the gate strong. And we think that across AKHG and in total, but specifically AKHG Fitness, that there's a long runway. So, you know, a lot of these things are not just about items. They're kind of strategic building blocks to some of our other key merchandising initiatives like our strategic focus on growing the women's business.

The women's penetration was 30%, and it increased 200 bps. And so, you know, we've mentioned in the past that we think the women's opportunity to be a larger business in total and a larger share of our business. You know, we're starting to see some traction in that regard. And, you know, women's, again, double-digit increase for the quarter, up high single digits for the year.

And so, you know, a lot of these soft launches were yes, item-driven but, you know, critically -- a critical component of the strategic building blocks to some of these other longer-term product initiatives.

Janine Stichter -- BTIG -- Analyst

Great. Thanks so much for the color and best of luck.

Sam Sato -- President and Chief Executive Officer

Thanks, Janine.

Operator

The next question comes from Jonathan Komp of Baird. Please go ahead.

Jon Komp -- Robert W. Baird and Company -- Analyst

Yeah. Hi. Thank you. Good morning.

I want to follow up. I know there was a reference to seeing an inflection in the business during the fourth quarter. If you could just maybe share a little bit more? Are there some underlying metrics or full-price selling or anything that you would highlight just because, from a reported perspective, still seeing gross profit dollars declining? You know, it's hard to see signs of the inflection. So, just hoping you could maybe share more insight there.

Sam Sato -- President and Chief Executive Officer

Yeah. Hi, Jonathan. Well -- so a couple of things I'll say. One is the holiday -- or the Black Friday weekend through the midpoint of Cyber Week was the strongest sales results we've seen in the history of the company.

It was -- you know, as we've fiercely done over that time period, you know, that's where we run our global event and, you know, there's competitive aspects to that. And, you know, because of the global event, plus the amount of demand, it drove a bit of the top line, but, you know, the flow-through clearly wasn't, you know, what we expected or what we've seen in the past. And so, you know, that was a bit of a drag on us. It also -- you know, as the holiday season played out, you know, it was clear that it pulled sales forward from the weeks leading up to Christmas where we typically do more business at higher margins.

And so, that was a bit tough. But then as we go back and, you know, we're assessing the business both today and during the quarter, we did see a sequential improvement in our regular price sales bucket as a percent of total sales, especially as we started to bring in early these new spring goods and launch them in, you know, the back end of the fourth quarter. And so, January, in particular, as, you know, all of those items I just mentioned to Janine, as those new items started to hit the last week of December, it really moved the needle for us from a regular price perspective in January. And so, we expect -- you know, while we expect kind of the headwinds to remain challenging, you know, as we go through the first half of this year, we're also optimistic about the sales on early launched goods, as well as what the product development and sourcing initiative is bringing us.

And so, we believe that while the top line will be challenged, we're going to get better flow-through over the course of the year.

Jon Komp -- Robert W. Baird and Company -- Analyst

Yeah. Thanks for that color. That's helpful, Sam. And just as a follow-up, could you maybe just speak to, you know, ideally or from a target perspective, what percentage of product would you like to sell at full price and how far off are you today? And then, you know, really a broader strategic question, just what needs to change in sort of the focus? You know, if you look at the guidance here for the year, still, you know, not profitable at a net basis, even though you're realizing benefits now from some of the multiyear supply chain initiatives.

So, you know, what needs to change, and if you could share any more insight on the strategy [Inaudible] full price?

Sam Sato -- President and Chief Executive Officer

Yeah. So, a couple -- yeah. Absolutely. So, a couple of things.

The product development and sourcing initiative, as you know, is about creating more newness, more new innovation more frequently, which, you know, this is now just kind of starting to ramp up. You know, we really started this initiative last year. And so, this is kind of the first full year, based on our order timeline, that the work that was done last year starts to come to retail. And so, you know, we expect that, as Heena mentioned, you know, gross margin improvements.

And yes, while today, it's still adding up to a negative, you know, you think about over the last year and a half or so with where our margins have moved toward from a competitive perspective, you know, this becomes kind of the starting point for us to move the margin upwards as we move, you know, through '24 and beyond. And then, you know, Adairsville really just kind of got up and running in Q4 of last year, really October. So, call it the end of Q3. And, you know, as I shared on the Q3 call, you know, we saw some benefits in some of the metrics, whether it was, you know, CPU or time delivery, in that last month of Q3.

And then Q4, you know, we saw lower variable cost per unit. And the actual number is it's about 42% of our average legacy FC cost per unit. So, as we go through this year, you know, we expect to see the variable costs coming out of that fulfillment center helping us leverage the total cost -- total variable costs of our FC network. So, I guess what I would say is, you know, a lot of the things we've invested in are now starting to show some benefit, and I think, you know, '24 becomes the year where, you know, we start to realize them over the course of the full year.

And as we start building on top of those, you know, you'll see incremental improvements in gross margin, for instance.

Jon Komp -- Robert W. Baird and Company -- Analyst

OK. And just last question for me, but I mean, would it make sense to maybe, you know, change focus? Instead of, you know, targeting top-line growth -- and it looks like you're embedding an inflection as the year goes on for total revenue. But would it make sense in the short term to focus back on profits instead of revenue in terms of how you're managing the organization or just any thoughts there? Thanks again.

Sam Sato -- President and Chief Executive Officer

Yeah. I think it's a combination of both. We have to be focused on the top line, and that's what's driving, you know, a big part of our product development and sourcing is how do we create, you know, a pipeline of more frequent new products because that also drives to your earlier question, greater full price sell-throughs, which then translates to greater, you know, bottom-line profits of the company. And so, I think it's a combination of both.

What I'll tell you is that the variable costs of our business will continue to improve as we move forward and leverage as a percentage to sales. Where our costs continue to grow a bit are on the fixed side of it because of the investments we've made in these strategic initiatives. So, you know, our P&L, as you know, is hampered a bit by the depreciation associated with those investments. But in terms of the manageable costs and the benefits we're getting out of these investments, that part of the expense structure is starting to lever, and that's what we're looking for right now.

And then there becomes this inflection point as we move forward. Specifically, you know, capex is now going to be less than half of its high last year, and that's largely going to be associated with our technology road map that should result in improved sales and margin because of our ability to better allocate by style, size, color, and location, as well as enable, you know, other opportunities for us. So, I think, you know, we're being prudent about how we're managing the business and we're doing it in a very intentional way, without cutting our nose off to spite our face. Heena, do you have anything you want to add to that?

Heena Agrawal -- Senior Vice President, Chief Financial Officer

Yeah. I would say, you know, our focus for 2024 will be to accelerate the operational improvements that we are seeing from the strategic road map by expanding our pipeline of new and innovative products, optimizing our marketing mix, improving gross margin through our sourcing initiatives, and controlling what we can control by prudently managing expenses and inventories. The other point I would make is, you know, as I said in my prepared remarks, we are seeing capital investment cut in half in '24, and we will continue to see EBITDA -- adjusted EBITDA outpace net income and EPS as we get through the depreciation that -- from the capital investment we've already made in the past years hit our P&L.

Jon Komp -- Robert W. Baird and Company -- Analyst

OK. Appreciate all the color. Thank you.

Sam Sato -- President and Chief Executive Officer

Thanks, Jonathan.

Operator

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

Dylan Carden -- William Blair and Company -- Analyst

Thanks. Yeah. Kind of similar line of questioning a bit. I guess, I'm trying to think about the decline in gross margin over the years, you know, 700 basis points, 600 basis points going back to 2015, 2016.

Is that all best understood as an increase in promotion? And then can you quantify or even directionally sort of the margin drag from the retail channel? Kind of over that same period, you've seen productivity in your stores effectively have. Just sort of taking those two things together to kind of think about how then you glide path back to above the line on profitability. If there's a risk around kind of having your customers now so used to higher promotions, etc., etc.? And sort of how you maybe get the retail chain back on some firmer footing? Thanks.

Sam Sato -- President and Chief Executive Officer

Thanks, Dylan.

Heena Agrawal -- Senior Vice President, Chief Financial Officer

Dylan --

Sam Sato -- President and Chief Executive Officer

Go ahead.

Heena Agrawal -- Senior Vice President, Chief Financial Officer

So, you know, on your long-term gross margin question, we've meaningfully advanced our sourcing and product development initiatives, and, as I mentioned in my guidance, we are expecting 200 basis points of improvement, which will continue to build over the coming years and get back to our pre-pandemic levels in a few years. So, we see a path forward to get back to those higher gross margins.

Dylan Carden -- William Blair and Company -- Analyst

But is that -- can I stop you there? But does that -- but -- the promotional impact. I get the sourcing and the benefits that that can do. But as far as how much you're embedding as far as being able to get back to a higher price point, higher initial mark on whatever -- however you want to quantify it, relative to what was --

Heena Agrawal -- Senior Vice President, Chief Financial Officer

So, for 2024, we are being prudent in our outlook and we are not assuming any AUR improvement in our guidance, but we are looking at what our seasonal performance is and how to optimize it and also how our new innovation can drive -- position us to drive more full-price sales.

Dylan Carden -- William Blair and Company -- Analyst

OK.

Heena Agrawal -- Senior Vice President, Chief Financial Officer

So, that's one thing. And then on the store question, you know, I've been able to visit several of our stores, which have a unique and engaging experience for the consumer. And they are part of our omnichannel strategy, along with digital and mobile. And they create an ecosystem where it helps us get consumers and retain them.

And so, they are a critical part of our strategy going forward. All of our stores are cash flow positive. Having said that, we do have an opportunity to, in the context of the omnichannel environment, look at the size, the format, the depth of assortment to make them even more efficient and profitable. So, we will be instituting more rigor as we think about new locations going forward.

Dylan Carden -- William Blair and Company -- Analyst

OK. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Nitza McKee -- Investor Relations

Sam Sato -- President and Chief Executive Officer

Heena Agrawal -- Senior Vice President, Chief Financial Officer

Janine Stichter -- BTIG -- Analyst

Jon Komp -- Robert W. Baird and Company -- Analyst

Dylan Carden -- William Blair and Company -- Analyst

More DLTH analysis

All earnings call transcripts

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Tags

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.