Good afternoon and welcome to the Duluth Holdings First Quarter 2016 Conference Call. All participants are 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 Donni Case, Investor Relations for Duluth Holdings. Please go ahead.

Thank you, Denise, and welcome to today's call to discuss Duluth Trading's first quarter 2016 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 am 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 material and information. And with that, I would like to turn the call over to Stephanie Pugliese, Chief Executive Officer of Duluth Trading. Stephanie?

Thank you everyone for joining our first quarter 2016 conference call. We are off to a strong start this fiscal year and I am pleased to report that net sales for the first quarter increased 21% to $68.6 million, with gross margins increasing 30 basis points to 57.8% compared to the first quarter of 2015. Our GAAP net income increased 20% to $3.2 million and adjusted EBITDA grew 41% to $6.6 million versus the same period a year ago. We are on track to achieve our annual guidance. Now I will take a few minutes to give you more color on the quarter and update you on our strategic initiatives. Net sales growth in both our direct and retail segments contributed to another record quarter and marked our 25th consecutive quarter of increased net sales year-over-year. Retail sales as a percentage of total omni-channel sales continued to climb and grew 52% year over year. This growth correlated to the opening of two new retail stores and one outlet during 2015 as well as positive comps from existing stores. Direct sales grew 18% year-over-year, which reflected strong growth in core products in men's and women's and customers buying winter product well into the first half of the quarter. That said, our shipping revenues declined as a percent of overall net sales and the momentum that we usually see in men's summer product lines, like Armachillo and Dry on the Fly, was impacted by cooler weather in April. We know that our men's customer has always been a 'buy now, wear now' type of guy and the weather plays a factor in his buying patterns, especially in transitional times of the year. I am pleased to report that once we moved past the cool weather in April, we saw May sales begin…

Thank you, Stephanie. We reported first quarter net sales of $68.6 million, up 20.8% compared to $56.8 million in the first quarter of last year. Net sales growth was driven by a 17.5% increase in direct net sales and a 52.4% increase in the retail segment, with growth achieved across virtually all product categories. Customer acquisition continued to be a key driver of our net sales growth in the direct business. Customers responded positively to our marketing efforts which drove an increase of 14.7% in Web-site visits year-over-year and more sales through our call center. Our retail net sales growth was driven primarily by the opening of two new retail stores and one outlet store in 2015 as well as growth in comparable store sales. In the first quarter, our direct business, which includes catalog and online sales, accounted for 87.9% of total sales. As we continue to execute on our retail store growth strategy, we expect retail sales to increase as a percentage of total net sales over time. Total store sales accounted for a $2.9 million increase in net sales, compared to the first quarter a year ago. We are very pleased with the performance of our new retail locations. 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. Q1 gross profit increased 21.5% to $39.7 million, or 57.8% of net sales, compared to $32.7 million or 57.5% of net sales last year. The 30 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 14.8% to $34.4 million, compared to $29.9 million in the same period a year ago. This included an increase of $900,000 in…

[Operator Instructions] Your first question will come from Dan Wewer of Raymond James. Please go ahead.

Stephanie, in the past you've talked about the Minneapolis market as an example of how e-commerce revenues can actually benefit from the addition of retail stores. Now that there is a number of stores opened in other markets, can you make any comments about whether or not there has been cannibalization on your direct business from the retail rollout?

Sure. So the stores that we opened just in the past 12 months are still in that early phase, particularly when you look at Ankeny and Sioux Falls. They are still in the early phase where we have seen that the direct business in those areas is still growing, not growing at quite the same rate as the rest of the country, but if they react like the Minneapolis, St. Paul market reacted, or quite frankly like the other markets where our stores have been longer standing, we expect that we will soon start to see the direct part of those markets grow at the same rate as the Company. So in short, Dan, while we have new stores opening that we're still reading, the stores that have been opened for more than 12 months, including the Twin Cities example, have shown very similar results to the Twin Cities.

And then also related to the retail expansion, you noted that King of Prussia and Hoffman Estates will be build-to-suits. Can you talk about how that template compares to the other acquired locations and what differences we may see in sales volumes, operating margins, CapEx, et cetera?

Sure. Just to clarify, Hoffman Estates is a build-to-suit, the Independence, Missouri site will be a build-to-suit store. King of Prussia is a renovation of a current building. And to give you a sense of the build-to-suits in Hoffman Estates and Independence are the same footprint, the same prototype. They will be about a little over 11,000 selling square feet. And that fits right in the sweet spot of the 10,000 to 12,000 that we've talked about before and in terms of it allows us to fully express the brand, fully express the current assortment and create the experience that we know our customers have come to love from us. The King of Prussia store, while a renovation actually still fits in that larger format footprint. So we expect that in that store as well we will be able to fully render the assortment, similar to what you would see at Bloomington or Fridley, or of course as I just mentioned, these build-to-suits. The renovated stores in general do range in square footage. As we've talked about that 7,000 to kind of 12,000 square feet, and some of that depends on the building that we can find in markets that we think are important to us. So we will continue to have a range of square footage as we go forward, but the build-to-suits will be pretty consistent in that 11,000 or so selling square feet.

And then just the last question that I have, there's a lot of volatility with the expense rate from quarter to quarter. Mark, I just want to see if you could maybe tighten up a bit the SG&A expectations? I know you said it would increase as a percent of revenues. Are you thinking that the increase in the second quarter would be offsetting the leverage that you achieved in the first quarter, is that the type of magnitude we should be thinking about?

You should definitely think about that degree of magnitude, Dan, as you say offsetting the improvement you saw in Q1, but in fact I would expect the magnitude to exceed the Q1 impact, particularly in the second quarter.

Okay, great. Thank you.

Our next question will come from John Morris of BMO Capital Markets. Please go ahead.

Congratulations on great results to the team. Obviously pretty tough environment and really congrats on good results. Couple of parts to the question. Mark, first of all, you gave us the guidance for revenues for the full year, so that's very helpful to kind of reaffirm that. Can you give us a feel for what you expect in that assumption around the growth rate expectations for the direct business?

John, relative to what we've seen so far?

Yes, I'm just thinking, we've got the growth in Q1 of 18%, but Stephanie, then you talked about the pickup or the rebound that you've seen in May. And so I'm thinking on the full year, what's baked into your forecast guidance for the $370 million to $380 million as far as the growth rate for direct outlook is? What kind of a growth rate level would you be assuming there?

I would say, John, overall in direct our growth rate for the balance of the year is going to look fairly similar to what we saw in first quarter. The one thing that I would say is, as I mentioned just a little bit earlier on here in the call, we did see some impact of cooler April, and even a little bit cooler into the first part of May, where we saw an impact on our summer goods, particularly on the men's direct side of the business. Now as we've gotten a little further into May and the weather has improved, we've definitely seen some momentum building. But that's one part of first quarter that's suppressed a little bit, the direct side of the business, particularly in men's, and again, none of us has the weather crystal ball, I think every retailer in the world would pay high premiums for that, but assuming that, we have some kind of normalization of that. We would expect that the direct growth is going to be sitting right around that range.

Okay, so that's up 18% or 18% to 20% or so for the year?

Yes.

And then secondly, just talking about the advertising campaign, particularly on the women's side, I don't know if I'm reading this correctly, it sounds like you made a strategic decision to move some of the women's advertising from Q1 and do it in Q2. I'm wondering if that was revolving around women's. Why you were thinking about the spend coming in Q2 timing strategically, and Stephanie, any kind of input that you can give us on what you're seeing in terms of the results of women's? I mean clearly this sounds like you're stepping it up, you're kind of moving out of test, you must like what you see, what measures were you seeing from the testing of women's? So it's kind of a multipart question but if you can try and field that?

Let me talk first about the decision to move the advertising a little bit later in the year, really by a month. It crosses the quarters but it's a month. That was primarily driven by the decision to, number one, do live action advertising in women's. We saw some nice results in fall when we started that type of advertising in women's that focused in on Flannel. And so we made the decision to continue with the live action. And particularly as you probably know with the current advertising, we focused in on our Dry on the Fly product, which is a customer favorite. And it's an outdoor wicking water kind of repelling type of fabric which you can do a lot of great things outside. We felt that from a timing perspective, focusing in on that product, it was smarter for us to be a little bit later in the season because it's a little bit more 'wear now' in most of the country at that point. That was one of the primary reasons of shifting the timing. In terms of what we are seeing from women's advertising, I really think about it along two fronts. Number one is, qualitatively we're getting phenomenal feedback on social media, from our customers writing in to us via e-mail, calling in, through our stores, that our women's customers, the advertising is very much resonating with them and with their lifestyle. And on a quantitative basis, obviously we are looking at things like Web visits, like conversion, like the sales of that particular product. And on all of those fronts, we are very pleased with the results of the decision that we made for the advertising.

Great. Again, congrats and good luck.

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

Maybe just starting with a follow-up question on the direct business, I don't know that you previously have given granularity on the sales growth for the year, but has your outlook for the year changed meaningfully for that business at all? It sounds like you've had a few tougher weeks of weather and the business is rebounding. Do you expect to make up some of those sales as you progress through the summer or how should we think about that?

We don't see the outlook meaningfully changing for the direct business. So we are holding very close to what we had expected at the very beginning of the year. One of the things that I think is important to note on the quarter that we just finished is that when we look at the overall business, but the direct business specifically, and even more specifically the men's direct business, our perennial core product, so kind of taking out the spring summer product factor for a moment, if you look at the base of our business, things like Ballroom jeans, Longtail Ts, et cetera, the growth in those products was exactly at the same rate as the growth we saw last fourth quarter. So when you're talking about what our business is founded on and what we are basing our growth strategies on go forward, that segment of the business is just as strong as it was in fourth quarter and just as strong as it ever has been. So we feel pretty good about the outlook go forward.

And then maybe a follow-up question, Stephanie, just more conceptually, how do you think about balancing your cadence and promotions in a period where you want to drive short-term traffic to help overcome things like weather, on the same front you don't have retail partner. So maybe there's less pressure to discount products that otherwise would be in different selling channels. Maybe just talk about how you think about managing that dynamic.

Sure. So again, we feel that it gives us great benefit and power to fully control those channels of distribution and be able to control the messaging, the promotional cadence. And so when we look at a promotional cadence, as I mentioned just a few minutes ago, certainly we are aware, cognizant of the competitive environment, and we want to make sure that we are competitive within kind of an overall retail industry, if you will. That said, the most important thing for us as we are building a promotional cadence is how are we continuing to convert and bring new customers into the brand, break down barriers, and particularly in times where weather might not be in our favor, and you know what, there are a lot of times that it's just going to be that way, while we are highly protected around certain things, we're certainly not bulletproof. And so we do react and respond and give future customers, existing customers some additional reasons to buy. But generally speaking what I'd say is, our promotional cadence is certainly not driven obviously by pressure from retailers. And the other thing that it's not driven by is any fear of having to relieve massive amounts of perishable inventory, because our business model of continuing to slow goods or having perennial favorites, if you will, allows us to be smart about our promotions and not have to panic, if you will.

Okay, great. And maybe one more on the direct business, it looks like the year ago the second quarter growth rate for the direct revenue was up in the high 30% range, and I'm just wondering if there's anything specific to point to in terms of either the cadence of what that comparison looks like or any kind of tough overlap, if you will, within that full quarter growth rate being so strong last year?

I'm sorry, Jon, could you repeat that?

It looks like the second quarter of fiscal 2015, the direct business, the growth rate was up 38% and quite a bit above the other quarters. So I'm just wondering if there's anything within the second quarter of last year or any month or any specific product that looks like a particularly tough comparison within the full quarter last year.

A big part of second quarter growth last year had to do with advertising cadence and adding additional television advertising into that quarter, where we didn't have it the year prior, and that drove a lot of the incremental growth that we saw. That said, from a product perspective, our summer products last year were very well received, and things like Armachillo, Dry on the Fly, were very important to us. As we enter into second quarter this year, we have expanded on areas of that business, things like Armachillo Knits, we've added silhouettes and additional pieces to that, Dry on the Fly Knits, things that have kind of taken those concentric circles of core products and built them out that we feel is going to set us up for a good second quarter again this year.

Okay, that's helpful. Thank you very much.

The next question will come from Amy Noblin of William Blair. Please go ahead.

It's actually [indiscernible] on for Amy. Just going back to the promotional bit, I take your bit about the retail and the pressures there, but over holidays you guys did a pretty good job managing your promotional cadence, there was that inventory hangover that kind of still persist in the industry, is that something that still is influencing you or still an issue or are you able to just kind of move past that? And then sort of in line with that, the 30 basis points you got on gross margin seems to be more of a product mix, if I heard you guys correctly, but then you also said you had higher margin on promotional activity. I'm just trying to sort of square that circle and sort of what the benefit or drag might have been from promotional activity in the quarter, if you can speak to that?

Sure. So to start with the hangover of fall goods, again the good news is that with our business model of carrying product forward and focusing in on core, we have much less risk in that area than other retailers might. That said, we actually in the beginning of first quarter continued to sell that fall and winter product very nicely, and that was a benefit in continuing to own some of that product and be able to offer it to our customers while the weather stayed cold. On the question around margin, so just to clarify, the team did a great job and our partners, we've had long-standing partners on the manufacturing base, continued to work closely with us to create efficiencies and we did see an increase in our initial margins this year. Some of that not only has to do with the partnerships I just mentioned but also with the fact that as our women's business grows, we see improvement, we have continued to see improvement year-over-year on margins in that part of the business. So we started out with higher initial margins this year than prior year, and so kind of just mathematically when we are discounting off of that, we tend to have higher margins in even our promotional pricing buckets, if you will. The other thing that we found is that the mix of product that our customer is going for, core product is an example of this, tend to be higher-margin products. So as we continue to focus on that core and bring that to life season over season, we are seeing margin benefit from that as well.

Okay, great. Thank you.

The next question will come from Jim Duffy of Stifel. Please go ahead.

Stephanie, the marketing return on investment improved nicely during the first quarter. It seems the core product continued to perform. Is it fair to presume that some of the colder weather product and core product performed without dedicated marketing support in the quarter?

Yes, absolutely. Especially, Jim, if you're thinking about dedicated marketing support of television advertising, because that's certainly very visible to a lot of our audience, so when we are running as an example, when we're running national TV advertising for men's, we may run two or three products at any given time. And what we found is that even those products that might not have been in that rotation were doing quite well in the quarter. We certainly support all of our core products across all of our channels. So while it might not be on TV, a lot of them are in very prominent places in our retail stores, so they might be on covers of catalogs. But overall what we found is that our entire core product assortment continued to sell very, very well.

Great, that's good to hear. And then just so I better understand the operating philosophy and inter-quarter strategies, can I ask you to speak a bit more about the dynamic adjustments to marketing spend that you made during the quarter, did you specifically back off of some investments that you had planned in some of those non-core and seasonal product offerings?

No, we didn't back off of any advertising. If anything, we had originally in the plan for the year, we had already anticipated the shift in the women's advertising, which is the biggest chunk of that dollar shift. We did and will continue to in the quarter make more real-time adjustments, if you will, within things like digital marketing or what we're featuring in our stores or what we're putting on our Web-site. Those types of things are more reacting to the business in, as I said, real-time. But in terms of overall spend, we didn't contract any spending that we had planned to.

Okay, so you may react with different treatments but spend within a fairly tight planned budget?

Correct. Particularly Jim when you're looking at on an annual basis, the advertising, we have been very good at holding to our planned spend. Now that said, there are quarters where we may make decision that it's more appropriate to spend in one quarter versus another and we make shifts during the year at that time. As you can imagine, we have kind of different trigger points for different types of marketing to spend or to shift and we are constantly evaluating the ROI of the advertising spend, because as you know that is the biggest part of our SG&A spend and we want to make sure that we are being the most effective that we can be.

Very good. Thanks. And then shifting gears to the retail business, you mentioned positive comps. Can you speak to the relative productivity you saw during the first quarter from the class of 2015 stores?

The stores that we've just opened in 2015 or the ones that – you're talking about comps?

Not comps, the new stores, those which wouldn't be in the comp base, how did that look relative to the comp base, some of the stores that had a longer operating history?

Sure. The new stores that we opened in the past 12 months have performed very nicely. They are all performing in payback period, as we've seen in the balance of the stores, so that two year or less payback. They are profitable for us and they are hitting our sales per square foot that we have modelled to, at least that amount. So we feel really good about the new stores we just opened.

Very good. I'll leave it at that. Thanks.

Ladies and gentlemen, that will conclude our question and answer session. I would like to turn the conference back over to Stephanie Pugliese for any closing remarks.

We look forward to seeing many of you at the upcoming Robert W. Baird and William Blair conferences. Again, thank you for joining today's call and have a good evening everyone.

Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.