Duluth Holdings Inc. (DLTH) Q1 2016 Earnings Report, Transcript and Summary

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 to reflect more typical buying trends in our summer merchandise. Our women's category, while still small relative to men's, grew substantially over the comparable quarter last year. We plan to build on this momentum in the second quarter with a national TV advertising campaign for women's that launched at the beginning of May. With strong sales of our core product lines and advertising campaigns to support both men's and women's wear, we are feeling good about our second quarter. Now turning to gross margin, we were up 30 basis points in the first quarter, primarily due to higher initial margins on our products and a higher-margin sales mix. While we continued to deploy promotion throughout the quarter, particularly via e-mail, we were able to do so at higher margins than in previous years. As you may recall, we utilize promotions for two primary reasons; to convert new customers into the brand during our national TV advertising and heavy marketing campaigns, and to remain competitive in times of industry-wide promotions. Relative to expenses, we continue to be sharply focused on controlling cost through greater efficiency across all categories. SG&A decreased 270 basis points to 50% versus the year ago period of 52.7%. This was largely attributed to a decrease in advertising and marketing costs based on strategic decisions we made to defer some marketing campaigns into the second quarter. As I mentioned earlier, we launched our national TV campaign for women's in May and have also planned a flight of men's advertising for the second quarter that promotes the message of 'wear now' goods. We continually analyze the results of advertising campaigns throughout the year to understand the effectiveness and productivity and will actively make changes to produce the greatest ROI for our marketing spend. The change in women's advertising from the prior year is an example of this. Mark will cover SG&A in greater detail, so now I will move on to our strategic initiatives starting with retail store expansion. As we have previously discussed, our initial target for 2016 was to open four to five new stores and we are on track to meet that goal with five stores planned for this fiscal year. We have scheduled the grand opening of our La Crosse, Wisconsin store on June 16, and we expect our Omaha, Nebraska store to open in July. Hoffman Estates and Downers Grove, our entries into the Chicago metro market, are scheduled to open mid-September. I am also pleased to announce that our fifth store will be in King of Prussia, Pennsylvania and this will be our first store to serve our large customer concentration in the East. As you may know, King of Prussia is a major shopping destination in the Philadelphia metro market that draws customers from a large geographic span. Like our location in Bloomington, Minnesota, we have chosen to locate our store near the mall but not in it. This allows for more personalization of our store layout and merchandising and gives our customers easier access directly into our store. We are targeting to have this store opened in the fall, shortly before the holiday shopping season. The King of Prussia store slightly accelerates our communicated strategy to start opening out East in 2017. Starting this eastern expansion now gives us the advantage of having all of 2017 to learn and to grow this important region where we have a large and loyal customer base. I am also excited to announce that we have just finalized a lease for a store in Independence, Missouri, which is a suburb of Kansas City. Based on customer feedback on where the store should be located, we have decided that this will be our second build-to-suit Duluth store. We have secured a great location that has visibility off I-70 and we will use the same prototype as the store being constructed in Hoffman Estates. We expect the Independence, Missouri store to open in early fiscal 2017. One final comment on our retail expansion; our team scouts potential store locations as far out as two years and this can create some local buzz. While we are thrilled that communities get excited about the potential for a Duluth store, we will only officially announce the new store location once permitting is completed and the lease is signed. Turning to our infrastructure initiatives, all projects are going as planned. Our Belleville distribution center, which we are expanding by 75,000 square feet, is progressing on schedule and we expect it to be completed and operating by the third quarter. Our leased facility near Madison is already up and running and handling all returns from the direct business across the nation. I am pleased to add that there has been no business disruption to date as a result of these distribution center projects. Regarding our technology investments, we have engaged Demandware to implement our e-commerce solution. Once this system goes live, our customers will enjoy an enhanced Web-site experience, including a more robust mobile site and the ability to see if the merchandise they want is available at a nearby store. This will give our customers the option of reserving their purchases in store and picking them up within hours of ordering online. From a Company perspective, the e-commerce system will also improve our ability to more effectively personalize the shopping experience for our customers and segment our marketing efforts, improving the overall efficiency and effectiveness of our digital marketing campaigns. We expect our previously announced order management system to be online by the first quarter of 2017 and our e-commerce platform to be up and running in late second quarter of 2017. Before I hand the call over to Mark, I want to reinforce that we feel very confident about achieving our guidance for the year. Clearly we have a long way to go before our critical holiday quarter, and while no retail business is bulletproof, we have built a company with many advantages. We have a unique brand and a highly desirable customer base, our direct business is strong and proven, and our retail business is successfully growing in a disciplined way. We have total control over our distribution and plenty of room to grow. While we may be a new public company, we have a long history of being innovative merchants who are driven to delight our customers. We know that this is the key to delivering strong, sustainable results and returns to our shareholders. And now Mark will take you through more details on the financials.

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 advertising and marketing expenses, $1.7 million in selling expenses and $1.8 million in general and administrative expenses. As a percentage of net sales, SG&A was 50% for the first quarter of 2016, compared to 52.7% in the prior year period. This improvement was primarily due to a 310 basis point decrease in advertising and marketing costs to 22%, compared to 25.1% in the first quarter of 2015. This was largely attributable to less spending on women's television advertising in the first quarter in comparison to last year. As a percentage of net sales, selling expense increased 10 basis points to 13.8%, compared to 13.7% in the corresponding prior year period, primarily due to an increase in distribution labor driven by higher 3PL utilization, which was partially offset by a decrease in shipping expense as a result of favorable shipping rates and closer proximity to our customers through our regional 3PLs. The $1.8 million increase in general and administrative expenses was principally due to increases in consulting and professional fees, which were primarily related to our infrastructure projects and public company expenses. I wanted to take a few minutes to walk through how we expect SG&A to flow throughout the remainder of 2016. In our upcoming second and third quarters, we expect our SG&A expenses to increase as a percent of net sales on a year-over-year basis. This is due primarily to new store preopening expenses, such as preopening rent expense, store inventory preparation cost, and wages and training expenses for newly hired personnel. It is also due to having two fully deployed 3PL providers in 2016 compared to one in 2015. As we have previously reported, our 3PL providers carry a higher variable expense than our internal distribution center. In addition, depreciation expense will increase due to the warehouse management system which was implemented late in the second quarter of last year and our Belleville warehouse expansion which will be completed in July this year. In our fourth quarter, we expect SG&A expense to decrease as a percent of net sales year-over-year since we will have an apples-to-apples comparison for our 3PL providers and we will start to gain some cost savings from our expanded Belleville distribution center. For the full year, we expect SG&A expense to be up modestly as a percent of net sales. Our SG&A expense levels are as planned and reflects the healthy growth of our business. Adjusted EBITDA was $6.6 million, or 9.6% of net sales, compared to $4.7 million or 8.2% of net sales in the prior year period. This represented a 41% increase in adjusted EBITDA. We reported GAAP net income of $3.2 million or $0.10 per diluted share, compared to $2.7 million or $0.11 per diluted share in the prior year period. Our pro forma net income in the prior year period, which includes an adjustment for income tax expense at an assumed combined federal, state and local effective tax rate of 40%, was $1.6 million or $0.07 per diluted share. Turning now to the balance sheet and liquidity, we ended the first quarter with a cash balance of approximately $30.3 million and working capital of $70.4 million. We had no borrowings on our $40 million revolving line of credit. Inventory increased 37.7% to $58.2 million, compared to $42.3 million at the end of the first quarter of fiscal 2015. The composition of our inventory is very good, with the majority in high-quality, core and go forward products. Our goal is to maintain sufficient stock to fulfill orders complete at least 97% of the time, and we exceeded this goal in the first quarter. Turning now to our financial guidance, we are reaffirming our outlook for 2016. We expect to report net sales in the range of $370 million to $380 million, reflecting a 23.3% growth rate at the midpoint. We expect adjusted EBITDA to be in the range of $40 million to $42.5 million or a 21.3% growth rate at the midpoint. We are forecasting GAAP EPS in the range of $0.66 to $0.70 per diluted share. This assumes a fully diluted share count of approximately 32.2 million shares and a tax rate of 39%, and reflects an increase in net income of 26.8% at the midpoint compared to 2015 pro forma net income. We are also reaffirming our long-term growth targets of roughly 20% net sales growth, 25% adjusted EBITDA growth and 25% net income growth. As Stephanie mentioned, we plan to open five new retail stores in 2016, adding 55,000 to 65,000 additional selling square feet. In addition, we are expanding our Belleville warehouse operations and are making steady progress on the design and implementation of a new order management system and e-commerce system, both of which we expect to fully implement in the first half of fiscal year 2017. As a result of these important investments in future growth, we expect capital expenditures of $24 million to $25 million in fiscal 2016. This includes approximately $10 million for the warehouse expansion, $10 million to $11 million for new retail store expansion and $4 million for software infrastructure investments. Our retail store forecast reflects our plan to spend $2 million to $2.6 million in capital expenditures and starting inventories on each new store. In closing, we delivered strong top line growth and gross margin expansion this quarter. We are on track to achieve our growth objectives in 2016 and we are investing in infrastructure and new retail stores that will support our growth over the long term. With that, I will open the call for questions. Operator?

[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.