Good afternoon and welcome to the Duluth Holdings Fourth Quarter 2015 Earnings 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 Julie MacMedan, Investor Relations for Duluth Holdings. Please go ahead.

Thank you, Laura, and welcome to today's call to discuss Duluth Trading's fourth quarter and year-end 2015 financial results. Our earnings release which we issued this afternoon is available on our investor relations Web-site at ir.duluthtrading.com, under Press Releases. I'm here today with Stephanie Pugliese, Chief Executive Officer, and Mark DeOrio, 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. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect, and similar words and 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. 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. Duluth Trading expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made today to reflect any change in Duluth Trading's expectations with regard thereto or any other changes in the events, conditions or circumstances on which any such statement is based, except as required by law. Please refer to our SEC filings and our investor relations Web-site for additional information. And with that, I would like to turn the call over to Stephanie Pugliese, Chief Executive Officer of Duluth Trading. Stephanie?

Thank you, Julie, and welcome everyone to our fiscal 2015 fourth quarter and year-end conference call. To say the least, 2015 has been a whirlwind year for Duluth Holdings and I am proud to report that our team's high-performance level throughout the year positioned us for both a successful IPO and record financial results this year. Despite the challenges of the holiday selling season, I am especially pleased to report that our net sales for the fourth quarter increased 27.5% to $140 million, with gross margins increasing 40 basis points to 56.1%. Adjusted EBITDA of $20 million was up 35.3% compared to last year. Executing on our key initiatives is what drove our success in 2015, and they continue to provide the foundation for our long-term growth and value creation. I would now like to review how we executed against those key initiatives in the fourth quarter. They are, building brand awareness, expanding our retail store presence, growing our men's and women's businesses and investing in our infrastructure to support our rapid growth. Starting with building brand awareness in our direct segment, we were very pleased with the impact of our advertising and marketing efforts in the fourth quarter. As I mentioned last quarter, we launched some distinctive TV advertising campaigns that we believe were instrumental in accelerating brand awareness to a larger audience. We focused our advertising spend around our core products such as Fire Hose pants, Flannel Shirts, Longtail T and Buck Naked underwear. These products are long-standing favorites and exemplify our commitment to providing solutions for our customers. By focusing on these core products and responding to our third quarter advertising test result, we had a more effective and productive allocation of ad spend across TV, print and digital and this resulted in a lower ad ratio…

Thank you, Stephanie. We closed fiscal 2015 on a high note with strong fourth quarter net sales of $140.4 million, up 27.5% compared to $110.1 million in the fourth quarter of last year. Net sales growth was driven by a 24.6% increase in direct net sales and a 57% increase in the retail segment, with growth achieved across the vast majority of product category. Building brand awareness and acquiring customers is an important growth strategy for us and we are pleased to report that our marketing efforts drove an increase of 28.1% in Web-site visits year-over-year and more sales through our call center. In 2015, our direct business which includes catalog and online sales accounted for 87.6% of total sales. Opening new retail stores is a key growth strategy for Duluth. During 2015, we opened two new retail stores and one outlet store which helped drive retail sales growth this quarter. Total store sales accounted for a $5.5 million increase in net sales compared to fourth quarter a year ago. We are very pleased with the performance of the new retail location. The average payback on our stores continues to be less than 24 months and we are refining our store opening process with each new location. Q4 gross profit increased 28.5% to $78.8 million, or 56.1% of net sales, compared to $61.3 million or 55.7% of net sales last year. The $17.5 million increase in gross profit was primarily a result of increased net sales in the fourth quarter. The 40 basis point increase in gross margin rate reflected a strong product mix and improved product costing. Turning to SG&A, selling, general and administrative expenses increased 26.5% to $59.8 million compared to $47.3 million in the same period a year ago. This included an increase of $5.8 million in…

[Operator Instructions] Our first question will come from John Morris of BMO Capital.

Let me be the first to congratulate you all on a really terrific execution in the fourth quarter, which obviously was a pretty challenging period. Really nice work. It's sort of a Q4 question and into Q1 since we are so well into the first quarter, and obviously you chose just to give kind of annual guidance here, but first of all kind of thinking about how well you navigated through the fourth quarter, Stephanie, to what degree did the weak cold weather product being impacted and have an impact on the gross margin? Clearly it was a little bit better than expected but I'm thinking back to last quarter when you guys did indicate that there were some additional days where you opted to do some things like 20% off total order promotions. Did you have to kind of continue to increase that a little bit? I'm just wondering how much of an impact – could the gross margin have been higher? And then sort of segue that into Q1, were you seeing any of the need to do that thus far in Q1 in terms of respond or deviate from your promotional plan and any kind of color you can give us thus far, since Q1 is so well underway?

Sure. So I'll try to address that, John, in kind of a couple of sections. First, thinking about the promotional cadence and as it applied to cold weather specific product, we really looked at promotional cadence in fourth quarter and even through into the beginning of first quarter not only as I mentioned a way to stay competitive in a particularly challenging, to reiterate your words, environment in fourth quarter in particular, but more importantly for us in fourth quarter it was about there were a lot of people seeing our ads, there were a lot of people getting our catalogs, a lot of people shopping on Web-sites and in stores, and we wanted to be able to capture that, particularly the prospecting traffic and to convert them into brand stand because we knew that they were shopping in a highly competitive environment and we wanted to make sure that we captured their interest so that we could continue to keep them as customers on the go forward. As you know, our brand awareness and bringing new customers into the brand is one of the initiatives that we have, is one of our growth strategies and it's what we've been using to build the brand. So that really was the filter through which we put a lot of the promotional decisions in fourth quarter, and even in first quarter. What I would say about cold weather gear is, certainly we saw that. As an example, our cold weather accessory business was probably one of the softer areas of the business in fourth quarter and early first quarter, but at the end of the day that business is less than 5% of our total, and while that specific area was impacted, it really didn't have a negative impact on the business…

Great, thank you all very much.

The next question will come from Jonathan Komp of Robert W. Baird.

If I could ask maybe the first question just related to the marketing outlook for 2016 and if you could give any more color? I know you talked a little bit about some plan to continue to expand the women's marketing effort and I'm just curious at kind of a big picture level what your plans are, a little more detail for the marketing side?

On women's specifically, Jon?

On women's and overall, if you could?

Sure. I would say that the overall point of view around marketing is that we absolutely believe in a multi-pronged omni-channel approach to marketing, and we believe that TV advertising works with digital, works with catalog, works with store, works with Web, et cetera. And so we will absolutely continue to have that mix out there in order to continue to build our brand awareness and to convert new people into the brand and to remind our existing customers that we've got great stuff and to continue to be the amazing loyal customers that they are to us. On the women's side of the business, there is also an attention that we are paying to some additional testing around women's advertising and types of advertising, and that really has to do with the fact that women's is relatively young in its trajectory relative to men's. So you'll see a little bit more new testing in the women's area than perhaps you might see in men's, but overall what I would say is, the importing thing to note is that it is an omni-channel strategy and that's the strategy that we're going to continue.

Okay, great. And just as a follow-up, Stephanie, I know you said the first quarter revenue tracking similar to the full-year guidance level in terms of growth. In terms of the marketing calendar for the remainder of the year, are there any shifts year-over-year or anything notable that would maybe cause a meaningful shift in the revenue growth rate or anything worth calling out?

Not at this point, no.

Okay, great. And then one more for me just on the retail side, I know on the Web-site the Omaha and the La Crosse locations are listed as 'opening soon' and I think they mentioned 'by the summer' in terms of timing, but I'm just curious in terms of the timing of some of the openings, if you have any more insight, specifically what quarter, kind of any more detail, when some of the openings might fall?

Sure. We are looking at Omaha and La Crosse in second quarter and the Chicago stores will be in the fall season.

Okay. And any insights in the potential fifth location? It sounds like you don't have a lease for it yet, but still might be a possibility for the year?

We are very close on that lease, but at this point we are still in negotiation. More to come on that though.

Okay, great. Thank you.

Our next question comes from Dan Wewer of Raymond James.

First question I wanted to ask was on the timing of the expenses for the distribution center and the software investment, will that be fairly equal as a percent of revenues throughout 2016 or would you expect that to be back-loaded?

Dan, I would expect that those expenses will be more back-loaded.

Okay. And then second on the forecast of a slightly lower EBITDA rate in 2016, is that all coming from higher expenses or are you expecting gross margin rate to drop a bit in 2016?

Dan, that is due to the SG&A expense rate. We are expecting to maintain gross margin rate.

Okay. Some of the large retail accounts have been talking about returning excess inventory to their vendors and talking about brands such as Under Armour and Carhartt and North Face, given those are competitors of yours, what do you think those brands are going to do with that inventory and does that pose a promotional risk in this sector perhaps later this year when you get back into the fall and winter season?

That's a good question, Dan. I think my first reaction to that comment is, that is why I'm very, very happy that we control our own distribution and that we are the only place to go for Duluth Trading merchandise. I think that that element of protection will be again a benefit for us in that our product is unique. Our customers come to us for that unique product. Now all of that said, we know that last fourth quarter was a tremendously competitive environment, and I think that we, like we do every quarter and particularly every fourth quarter, will be watching what's going on in the competition and we will be monitoring that activity. But that said, I think that what we saw just this past fourth quarter is that we do have resilience, where other retailers that are either selling a lot of different brands or competing against other retailers that have a lot of different brands, they become a little bit less resilient in that environment.

Okay. Mark, I had a question on the 3PL cost. You noted that the labor component was 80 bps higher year over year and it was higher than expected. Can you talk about where did the deviation take place, was it more hours that was needed to support 3PL or was it just the cost per area was higher? And then also, I'm having a little bit difficulty I guess understanding how the role of two 3PL facilities changes going forward. Is it going forward they are only involved with the direct channel?

Okay, two things, Dan. To your first question, the issue was really not ours. It was the expense rate. I think as we mentioned before, the 3PLs do carry a higher variable expense rate than our own internal operations. And so it was that expense rate that really caused the change in expenses. In terms of how we are going to change the utilization of the 3PLs, the change is that in the past we had considered utilizing them to do some inventory receiving and bulk breaking and inventory transferring, and what Stephanie described is, going forward we're going to focus them on the outbound shipments to our customers and let the receiving and the break-bulk take place in Belleville which is the lower cost operation.

And Dan, the one thing that I would add to Mark's comment is, the second piece of 3PL cost that we have incurred is the storage of product. So as the 3PLs were breaking bulk shipments, there was some component of them they were storing, a larger amount than quite frankly they needed to. So the DC expansion in Belleville will also give us more storage capacity to hold those goods.

The last question, I promise, do you think that having the larger facility in Belleville and this other facility in the Madison, Milwaukee area, is that going to reduce your needed inventory investment going forward?

On the shorter term, no, because we still will be holding that inventory in Belleville but then allocating it to the 3PLs closer to need. Ultimately, as we go forward with our order management system implementation as an example, one of the goals we have is to look to increase our inventory turn and the return on that investment.

Okay, great. Thank you.

Our next question comes from Amy Noblin of William Blair.

Let me add my congratulations on a great year in a tough environment. I wanted to start first, thanks for all the color on the DC and systems investments, sorry if I missed this, but I didn't hear you mention the Web or e-platform. Is that still in the works and wondering if you could talk about that? And then you mentioned you don't expect to leverage distribution near term, but given the added investment, can you talk about your ability to still lever SG&A in total? I know there are some puts and takes there in terms of marketing leverage that you should see. So maybe just comment on SG&A in total. Looks like the guidance assumes a flat rate at least for 2016.

In terms of leverage, our expectations, as we discussed before, is we do continue to believe that we will see leverage on the advertising expense spend, primarily as the retail business continues to grow and takes benefit of the investment we make in the advertising, primarily in the direct business. We do continue to expect to see that leverage. Similarly, as the retail business continues to grow, that will have the effect of leveraging the shipping expense, which as you know is a direct business expense.

And then I'll just jump in, Amy, on your question around the e-commerce platform, the expectation is that this year our order management system will do all of the heavy-lifting there for the implementation next year. E-commerce platform, the beginning of scalping that project and moving forward with that will happen at the kind of tail end of this year, to be implemented after the order management system next year.

Okay, thanks. And then just one more question. Stephanie, you talked about kind of using free shipping and tinkering with that as the promotional tool. Can you just let us know where shipping revenue actually ended the year as a percent of sales? I know you expect that to continue to trend down, but I guess how rapidly do you expect that to kind of trend down from these levels?

Amy, I don't have the exact number on that in front of me. What I can tell you though is that shipping revenue overall, it did decline slightly as a percent of sales, but again it was very similar to what we've been talking about in that we've seen a decline but it hasn't been a cliff kind of falloff of that revenue. So it's pretty similar to our expectations that we have talked about over the past couple of months. I don't have the exact number in front.

Okay, thanks so much.

Thank you everybody for joining us today for our call. We look forward to talking with you all again in June for our first quarter earnings report.

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