Duluth Holdings (DLTH) Q3 2025: Gross Margin Expands 150bps as Promotions Halved, Inventory Down 17%
Duluth Holdings delivered a third consecutive quarter of profitability improvement, led by a 150 basis point gross margin gain and a 17% inventory reduction as the company executed a decisive promotional reset. Management’s focus on price integrity, assortment simplification, and operational discipline is stabilizing the business, but sales remain pressured as the reset continues. Investors should watch for the next phase: tighter SKU counts and further cost actions aimed at sustainable profitability.
Summary
- Margin Expansion Outpaces Sales Decline: Focused promotional discipline and price increases drove higher per-unit profitability even as revenue fell.
- Inventory and Cost Structure Realigned: Rightsizing initiatives cut inventory by 17% and SG&A by 14%, improving cash flow and liquidity.
- Turnaround Phase Two in Focus: Management signals deeper assortment rationalization and continued promotional recalibration for 2026.
Performance Analysis
Duluth Holdings’ third quarter results highlight a business in active reset mode, with management prioritizing gross margin and cost discipline over top-line growth. Net sales declined nearly 10% year-over-year, reflecting the deliberate reduction in promotional activity and a strategic pullback on discounting. Direct channel sales fell 16%, largely due to lower web traffic, but were partially offset by double-digit growth in average order value and units per transaction, signaling a shift toward higher-value customer engagements.
Retail store sales, comprising a growing share of the business, were stable, aided by two new store openings and robust in-store conversion. Gross margin expanded 150 basis points to 53.8%, a direct result of halving promotional days, raising prices on tariff-impacted items, and pursuing more full-price selling. SG&A costs dropped 14%, reflecting both headcount and advertising discipline, while inventory was reduced by $39 million year-over-year, improving cash and liquidity. The company exited the quarter with $88 million in liquidity, and post-peak, fully paid down its credit line, reaching $125 million in liquidity.
- Promotional Reset Drives Margin: Shallower, less frequent promotions and targeted price increases more than offset volume declines in margin terms.
- Retail Outperforms Digital: Store channel sales stabilized, while digital sales contracted amid lower web traffic and promotional pullback.
- Inventory and Expense Discipline: Inventory down 17% and SG&A leverage improved by 330 basis points, supporting free cash flow and liquidity gains.
Despite lower sales, Duluth’s operational reset is clearly improving the underlying economics of the business, setting a platform for future growth if the customer base can be reinvigorated.
Executive Commentary
"Building upon the momentum we established in the second quarter, we saw success with our pricing strategies by focusing on the balance of promotional frequency and depth. We reduced our global promotional days by more than half compared to last year. And while year-over-year sales declines were consistent with our Q1 and Q2 results, we experienced higher profitability per unit sold."
Stephanie Pugliese, President and Chief Executive Officer
"By staying disciplined on these goals throughout the year and mitigating macro headwinds with agility, this team has delivered consecutive quarters of gross margin expansion and SG&A leverage. In addition, we have maintained healthy liquidity and lowered borrowing costs by effectively managing working capital and moving to an asset-based lending facility."
Hina Agarwal, Senior Vice President and Chief Financial Officer
Strategic Positioning
1. Promotional Reset and Price Integrity
Duluth’s largest lever this quarter was a decisive reduction in promotional intensity, cutting promotional days in half and shifting to shallower, more targeted discounts. This move restored price integrity, improved gross margin, and repositioned the brand for higher-value transactions, but at the cost of short-term sales volume. The company aims to make full-price selling a core premise outside of key promotional periods.
2. Inventory and SKU Rationalization
Inventory management was a standout operational win, with a 17% reduction in inventory driven by tighter receipts and a 5% cut in fall-winter SKU count. The company is targeting a 20% SKU reduction for spring-summer 2026 and further double-digit reductions for fall-winter 2026, aiming for faster inventory turns, better cash utilization, and a clearer product message to consumers.
3. Store Channel as Brand Engine
Retail stores are emerging as a source of stability and customer acquisition, with new locations exceeding traffic expectations and driving higher average order values. The in-store experience continues to deliver high conversion and satisfaction, reinforcing the importance of physical retail to Duluth’s omnichannel model.
4. Cost Structure Realignment
SG&A discipline and headcount management have delivered $10 million in annualized cost savings, with expectations to reach $12 million for the year. Advertising spend is being strategically rebalanced between brand and conversion, while overhead and variable costs are being tightly managed to match the company’s current scale.
5. Tariff Mitigation and Sourcing
Tariff headwinds were offset through targeted price increases and direct-to-factory sourcing, limiting tariff-related costs to $3 million for the quarter. The company expects full-year tariff impact to be $12 million, down from $15 million initially projected, reflecting effective vendor negotiations and receipt management.
Key Considerations
Duluth’s third quarter confirms that its reset strategy is gaining traction on margin and cash flow, but the company remains in transition as it works to stabilize sales and reinvigorate the brand. The next phase will test Duluth’s ability to drive growth from a simplified, more profitable base.
Key Considerations:
- Assortment Tightening Accelerates: Planned 20% SKU reduction for spring-summer 2026 and additional double-digit cuts for fall-winter 2026 will clarify brand positioning and support higher sell-through.
- Retail Store Channel Gains Emphasis: New stores and enhanced in-store experience are driving higher conversion and average order values, supporting omnichannel strategy.
- Liquidity and Debt Position Strengthened: Post-peak, Duluth exited its credit line with $125 million in liquidity, reducing financial risk and enabling future investment.
- Promotional Reset Still in Progress: Management sees further opportunity to reduce markdowns and deepen full-price selling, especially in early 2026 as clearance events are cycled.
Risks
Sales declines remain the central risk, with direct channel softness and lower customer counts offsetting gains in margin and operational efficiency. Ongoing promotional recalibration could further challenge traffic and conversion, especially if consumer demand weakens or competitors become more aggressive. Tariff exposure, while mitigated, remains a cost headwind, and execution risk around SKU rationalization and inventory management will be critical as Duluth enters the next phase of its turnaround.
Forward Outlook
For Q4, Duluth expects:
- Continued improvement in gross margin and adjusted EBITDA, with Q4 adjusted EBITDA projected to nearly double year-over-year.
- Sales to remain pressured as promotional reset continues, but with higher quality revenue and profitability per unit.
For full-year 2025, management raised adjusted EBITDA guidance to $23-25 million (from $20-25 million) and reaffirmed a sales range of $555-565 million (down from initial $570-595 million). Inventory is expected to end the year down double-digits, with capital expenditures held at $17 million.
Management highlighted:
- Ongoing focus on core product, price integrity, and cost structure as foundational to 2026 growth plans.
- Further promotional reset and assortment simplification to drive higher-margin, sustainable sales.
Takeaways
Duluth’s margin and cash flow gains validate its reset strategy, but the path to top-line stabilization is ongoing.
- Margin Over Volume: The company is prioritizing profitability and quality of sales over short-term revenue, with clear gross margin gains and cost reductions.
- Operational Foundation for Growth: Inventory, liquidity, and SKU discipline provide a stronger base for future growth, but execution on customer acquisition and brand reinvigoration will be key.
- Next Phase Watchpoints: Investors should monitor the impact of assortment tightening, further promotional recalibration, and digital channel trends as Duluth transitions into 2026.
Conclusion
Duluth Holdings’ third quarter demonstrates that disciplined margin management and cost control can offset sales declines in a turnaround context. As the company enters the next phase of its reset, the focus will shift to reigniting customer growth from a leaner, more profitable foundation.
Industry Read-Through
Duluth’s quarter underscores a broader retail trend: margin restoration and inventory discipline are now prioritized over sales growth as brands recalibrate post-pandemic. Promotional intensity across apparel retail is being reassessed, with more players likely to follow Duluth’s path toward fewer, shallower discounts and tighter product assortments. Retailers with physical store leverage and the ability to drive higher-value transactions are best positioned to weather ongoing demand volatility, while digital-only and highly promotional operators may face greater margin and cash flow headwinds in 2026.