Duluth Holdings Inc. (DLTH) Q4 2017 Earnings Report, Transcript and Summary

Good morning. And welcome to the Duluth Holdings Fourth Quarter and Fiscal Year 2017 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 today's 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, Wacho. And welcome to today's call to discuss Duluth Trading's fourth quarter and fiscal 2017 financial results. Our earnings release, which we issued this morning, 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 Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks and then we will open up 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 risk 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. Please refer to our SEC filings 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, Donni, and welcome everyone to our fourth quarter and year end call for fiscal 2017. I'm very pleased to report that we ended the year on a high note. Fourth quarter total net sales were up 25% over last year at $218 million with both the direct and retail segments contributing to the strong top line results. Through net sales growth and management of expenses, we achieved a 26% growth rate in earnings per share and 31% growth rate in adjusted EBITDA for the quarter. For the full fiscal year, net sales grew 25% to $471 million with the direct segment achieving a 7% growth rate slightly ahead of our 5% to 6% range that we mentioned on previous call. Retail sales more than doubled for the fiscal year and we successfully opened five new stores during the fourth quarter. We ended the year with 31 stores and collectively they contributed 30% of the total net sales in fiscal 2017 up from 18% in 2016. Finally, we delivered $0.72 in GAAP earnings per diluted share which includes a $0.05 benefit from the Tax Act. Adjusted EBITDA increased 13% to $46 million and with a strong fourth quarter finish we continued our unbroken record of 32 consecutive quarters of increased net sales year-over-year. As I mentioned on our last call, we intentionally pulled back some digital and catalog marketing activity in the third quarter to have more dry powder moving into the holiday shopping season. In the fourth quarter as planned, we reinvested in digital and social media spend and accelerated TV advertising in both men's and women's to drive sales and brand awareness. Furthermore, we accomplished this with a more effective marketing mix that improved our ad ratio by 370 basis points. Turning to promotional activity, as we've talked about in prior calls, fourth quarter is our most competitive time of the year. We utilized promotions to drive our top line, convert new customers into the brand and capitalize on the increased traffic to our Web site and our stores. While our global promotions were basically flat for the fiscal year, we did add a couple of extra days during the quarter to drive sales momentum. We also gained a lot of traction with our flash sales that created some urgency with customers to buy seasonal products. While we did see a decline in product margins for this quarter, we were pleased with sales growth and customer acquisition levels. And we came into 2018 in a positive inventory position. Our entire team did a great job delivering on a number of our key initiatives for the year. In a few minutes, I'll share with you the progress that we made on our 2017 goals and what that means for our plans in 2018. But first, I'd like to turn the call over to Dave to discuss the details of our financial results and the outlook for 2018.

Thank you, Stephanie, and good morning, everyone. First I'd like to discuss the financial highlights of our fourth quarter. Then I'll discuss our capital initiatives and balance sheet followed by our outlook for 2018 and beyond. For the quarter, we reported net sales of $217.8 million up 25% compared to $174.7 million last year. The net sales growth was driven by both our retail and direct segments with retail sales volume doubling from $31.4 million to $62.5 million and direct sales growing 9% in the quarter. The growth in the retail sales can be attributed to having 15 more stores as compared to last year. Growth in our direct segment includes the impact of shipping revenue being down 24% as compared to last year. Excluding shipping revenue, direct product sales increased 10% during the quarter. We saw growth in all product categories in both our men's and women's business. Our fourth quarter gross profit was $116 million or 53.3% of net sales compared to $96.8 million or 55.4% of net sales last year. The 210 basis point decrease in gross margin rate reflects a 70 basis point decline in shipping revenues and a 40 basis point decline from the impact of supplying inventory to our retail stores. The remaining 100 basis point decline in product margins was due to increased global promotions compared to last year and higher clearance sales in the month of January. While the product margin decline was specific to the competitive environment in the fourth quarter that Stephanie talked about, it is transitory in nature, the reduction due to shipping revenues and retail inventory logistic cost will be an ongoing reduction in our growth gross profit rate. Selling, general and administrative expenses increased 17% to $86.5 million compared to $73.9 million last year. This included a slight increase of $600,000 in advertising and marketing expenses $6.7 million in selling expenses and $5.2 million in general and administrative expenses. As a percentage of net sales, SG&A expense decreased 260 basis points to 39.7% compared to 42.3% last year. Our fourth quarter retail store pre-opening expenses were $1.1 million compared to $700,000 in the prior year. As a percentage of net sales, advertising and marketing costs decreased 370 basis points to 16.4% compared to 20.1% in the fourth quarter of last year. The 370 basis point decline was primarily due to 160 basis point decline in catalog spending and a combined 200 basis point decline due to leverage gain from higher retail store sales. Selling expenses as a percentage of net sales increased 40 basis points to 14.1% compared to 13.7% last year. The 40 basis point increase was primarily due to the higher retail selling costs resulting from more stores partially offset by leverage in shipping expense due to the proportional increase of retail net sales. Selling and administrative expenses increased 70 basis points as a percentage of net sales to 9.2% compared to 8.5% last year primarily due to an increase in retail store occupancy depreciation expense and personnel expenses. We reported net income of $19.5 million or $0.60 per diluted share excluding the impact from the Tax Act, our net income was $17.6 million or $0.55 per diluted share a 26% increase compared to a net income of $14 million or $0.43 per diluted share last year. Adjusted EBITDA grew 31.4% to $32.4 million or 14.9% of net sales compared to $24.7 million or 14.1% in net sales last year. Turning to our balance sheet and liquidity, we ended the fourth quarter with a cash balance of $2.9 million and working capital of $51.5 million. And we had no borrowings on our $60 million revolving line of credit. Inventories increased 27% to $89.5 million compared to $70.4 million at the end of the fourth quarter last year approximately $7.6 million or 17% of the increase was due to having 15 stores in fiscal 2017. Our cash provided by operating activities during the fiscal 2017 period was $29.9 compared to 20.3 million last year. Our capital expenditures net of proceeds from finance lease obligations in fiscal 2017 was $42.8 million primarily attributable to opening of 15 new stores and investments in information technology. Now moving onto the 2018 financial guidance. We expect net sales to be between $555 million and $575 million. We expect our retail segment to account for up to 40% of our total net sales in 2018. Overall net sales growth will come mostly from retail square footage increase of 55% for the 15 new stores plus a positive growth in our direct segment of mid-single digits as compared to 2017. We expect our full year gross margin rate to be flat compared to prior year. We have forecasted a higher product margin due to improved initial markup and higher proportional full price sales compared to last year offset by a continuing decline in shipping revenues and increased costs to transport goods from our Wisconsin distribution center to our retail stores. We expect our 2018, selling, general and administrative expenses as a percentage of net sales to increase 50 to 100 basis points over last year. In addition to the growth in the retail channel, which drives this increase, we'll be making investments in the business and our people with an eye towards what is necessary to support long-term growth of the company. There is an investment include technology to support the new system, vendor partnerships to leverage our customer analytics and distribution center labor cost remain competitive during our peak hiring periods. Regarding our retail expansion, we expect our 2018 full year pre-opening expenses to be $6.5 million to $7 million compared to $7.5 million in 2017. We expect fiscal 2018 earnings per diluted share to be between $0.79 and $0.84. This assumes a full year weighted average diluted share count of 32.4 million shares and a tax rate of 26%. We expect adjusted EBITDA to be between $51 million and $54 million. With the adoption of a new revenue recognition accounting standard, we do not expect the change to have a material impact on our net sales. However, the cost of direct marketing catalogs will be recognized sooner, we will pull expenses into prior quarters and previously accounted for. In addition, our 2018 financial guidance is based on a 53-week period as compared to a 52-week period in 2017. Our 2018 capital allocation priorities reflect a concerted shift to investing more in technology and the foundational infrastructure we need to execute our omni-channel growth strategy. We expect the capital expenditures net of proceeds from finance lease obligations to be in a range of $45 million to $55 million. With the majority of the spend earmarked for 15 new retail stores most of which will be in new markets. As discussed on previous calls, our need to transition to a new order management system an ecommerce platform are of critical importance to support our long-term business plans and competitive growth of our Duluth's trading brand. To that end, we are increasing the capital investments and ongoing system support infrastructure in 2018 to ensure a successful systems conversion as well as enhancing our customer facing capabilities beyond the original scope of the projects. These projects are being led by our new CIO and we expect these two systems to be fully implemented in the first half of 2018. In addition to technology investments, we plan to upgrade our distribution network by expanding capacity in our Bellville, Wisconsin location. Adding capabilities to enable shipping from certain stores and enhancing our buy online and pick up in-store capability. In total, our five-year projected capital spend will be approximately $220 million and will lay the foundation for our business to reach a $1 billion in revenues within that timeframe. It is also our expectation that within that timeframe, our pretax operating margins will reach the high single digits and that business will be positioned for improvement beyond those levels. Before I close, I'd like to discuss our financing plans. Based on our 2018 budget and the capital plans we just discussed. We anticipate that the current $60 million revolving line of credit that expires in July of 2019 will not be sufficient to support our growth strategy. In the next few months, we plan to increase our borrowing capacity and extend lender commitments for longer term. In closing, we finished the year strong and have positive momentum heading into 2013. We have a solid plan to continue to grow while investing in our infrastructure and technology necessary to support future growth beyond 2018. With that, I'll turn it back over to Stephanie to share with you the progress we made in our 2017 goals and what that means for our plans for 2018 and going forward.

Thanks Dave. Two years ago when we transitioned to a public company and outlined strategies for growth there were four areas that we focused on. Our goals were to increase brand awareness, expand our retail store presence, become more meaningful to our men's customers through thoughtful assortment expansion and reach new customers and households with the rapid growth of the women's business. I'm pleased to report that we've made progress on all of these fronts. Let me start with the last of these strategies. Our women's business increased 37% in 2017 and exceeded the milestone of $100 million in annual revenues. Women's now represents 23% of the total business, a two point increase in penetration versus prior year. Through investments in marketing across all channels, TV, digital, print and stores, we have increased our brand awareness in women significantly in the last three years. This along with high customer satisfaction rates and growing retention of existing customers creates momentum for outsized customer file and revenue growth in the future. And as our customer base increases there is more age and size variety in the women who shopped Duluth. That is a key reason why I'm very pleased to announce that this fall we will launch our very first line of women's plus sizes. We believe that truly capable women aren't limited to a certain size and that we can continue to build relationships with new customers by expanding our offering to this part of the community. We also set out this year to capture more of our men's closets through growth in our assortment of solution based apparel and gear. We know that our guy appreciates the DNA that we put into all of our products, extra pockets, flexibility ease of care to name a few. And he has responded to being able to wear Duluth no matter what the occasion. Through expanded assortment in categories like Duluth's built business ware and Alaskan hardware, he can now where the brand no matter where work or rugged outdoor pursuits taken. Speaking of Alaska, we were so inspired by the stories that our customers there have shared with us that we opened our first store as of the New Year in Anchorage just a few weeks ago featuring a 1200 square foot shop within a shop devoted specifically to Alaskan Hardgear. With the success of these new product lines and continued strength in core products our overall men's business grew 22% in fiscal 2017. Now turning to our most broad reaching strategies. First, we committed to growing our business and customer base by continuing to increase our brand awareness. As I mentioned a moment ago, our women's brand awareness has increased substantially over the past several years and men's has seen a similar improvement. This has been achieved through our efforts in marketing as well as our expansion of retail stores, which I will speak about in just a moment. In addition to our increase brand awareness, our retention levels remain strong and in 2017, we saw a retention rate of existing customers increase. The combination of building awareness and retaining existing customers led to a 23% increase in our total customer file this year. A key component of increased awareness and customer acquisition is the continued rollout of our omni-channel strategy and specifically the expansion of our brick and mortar segment. Over the past several years a question that we're frequently asked is, why open stores when so many retailers are actively reducing their footprint in brick and mortar. Our answer is that the omni-channel model one where all the channels are interacting effectively achieve three things. First, we continue to increase brand awareness in established store markets to levels beyond those markets without stores. We break down barriers for trial to potential new customers and we continue to see that approximately half of the customers that shop in a store in its first year are new to the Duluth brand. We continue to acquire new customers via our retail stores long after the store's first anniversary and we retain existing omni-channel customers at a higher level than in direct alone. Second, having a retail presence in a market can more than double that market size beyond the direct channel alone. This has been proven in all of the markets where we have established stores and after a store is established in a market, the direct segment reignite and grows faster than in markets without stores. In 2017 direct growth in these store markets was more than double that of the growth rate in non-store market. Third, the customers that we acquire through our retail stores are strong profitable customers. They mirror our customers in direct income, education level and types of products that they gravitate toward. That said retail customers differ in that they shop more often they are more likely to cross over channels to purchase, they spend more on an annualized basis and they buy more across genders and categories. In short, we are confident that the business model that we created several years ago and that we continue to evolve is the one that will carry us into the future with strength, growth and profitability. We have achieved significant milestones in the key strategies that surround our omni-channel model and we are well positioned for 2018 and beyond. This year, our investments in the business focus on three critical areas. First, we will continue to open new stores in new markets. We anticipate opening 15 stores again this year for a total increase of approximately 240,000 to 250,000 gross square feet. The schedule of openings this year will flow a little differently with our goal of opening more stores by the end of the third quarter and allowing our team more time to prepare for and drive the business in the all important peak season. In addition to the stores that we've already opened in Anchorage, Alaska and this week in West Fargo, North Dakota, we will open a store in Portland, Oregon at the end of the first quarter. I'm also pleased to announce that we've added Colorado Springs, Colorado; Oklahoma City, Oklahoma; Canton, Ohio; and Golden, Colorado to our roster of stores that will open this year. The second area of investment this year is in our system. As Dave covered our new order management system an ecommerce platform will go live in the next several months. In addition, we will begin the implementation of a new assortment planning and inventory management system that will give our teams the ability to more accurately plan and distribute inventory in our increasingly complex business model. In the future, we will also have the ability to be more precise in creating localized assortments that respond to customers needs in each market and create opportunities for growth. We are upgrading our connectivity and processes between our DCs and the stores to more fully realize the benefits of an omni-channel model. Planned improvements for the peak season include a faster streamlined buy online pick up in-store process, shipping local orders directly from stores and improving our returns process across channels. We will also enhance the infrastructure platform of our distribution network to support future growth. The third area of investment is in our talent. We have expanded our resources and technology, analytics, retail and product development all of which are critical for the future success of our business. Expanding our bench of talent will help future proof, the foundational pillars of our success, delivering unique product, understanding and communicating with our customers in new ways and creating an amazing customer experience. We know that our greatest asset lies in the brains and hearts of the people who represent our brand and we want to ensure their continued commitment and success through supporting the team. I would like to leave you with this thought; we have a number of competitive advantages at Duluth from complete control of our channels of distribution, to a strong loyal and growing customer base. We have a tremendous amount of runway for the future and are continuing to prove that our omni-channel model provides the strongest connectivity with our customers both current and future. Our investments this year focus on maximizing that model as well as differentiating our brand. With that, we will now take your questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Dan Wewer of Raymond James. Please go ahead.

Thanks. In the prepared comments, you noted that the promotional activity would be transitory and the pressure on shipping would be permanent. Curious as to why you think the promotional activity is transitory I'm not really sure why it would change in 2018 or 2019 compared to the year just ended?

I'll take that one, Dan. When we talk about the promotional activity if you remember we also mentioned that from a global promotions perspective for the full year we were flat year-over-year. We had some additional promotional activity in fourth quarter that enabled us to drive some of the top line but more importantly convert that traffic that 20% plus growth in traffic that we saw in the Web site and in our visits to our stores. And so we took that opportunity as we generally do in fourth quarter to convert that traffic into revenue and as importantly customers for the future. As we entered this year, if you remember last year at this time or entering first quarter, we actually had a decline in sales relative to expectations because we didn't have a lot of end of season opportunity to create some promotional activity and clearance. This year we did that in January with our flash sales on some of the seasonal products. We did a little bit more of that than last year in February as well in order to capitalize on that kind of promotional seasonal change up. But that said, from an annualized basis, we were pretty flat to last year in overall promotions again with the exception of the shipping revenue that we've been talking about for the past couple of years. And that's why we see -- perhaps quarter-by-quarter it'll be a little bit different. But on an annualized basis we expect it to hold pretty consistent.

And then, this is a follow up on the five year, I guess was a five year plan that you're looking to achieve a high single-digit operating margin rate. How will the gross margin outlook change do that kind of gradually declines around 55% rate as shipping revenues continue to drop as a percent of revenues and the offset is lower SG&A rate, is that how we should be thinking about long-term outlook?

Dan, this is Dave. Yes. With the continued growth in mix of retail which has some additional cost of goods component to it, we would expect that along with the decline in shipping revenue to pressure gross margin closer to 55% and the benefit coming within SG&A leverage.

Okay, great. Thank you.

Yes.

Thanks Dan.

Then our next question today comes from Andrew Burns of D.A. Davidson. Please go ahead.

Thanks and good morning. Just curious about your new takeaways operating 31 store holiday season versus 16 last year what did you learn that you can improve up on for the next holiday. How did you handle the interplay between store promotion versus online? Thank you.

Sure. So I'll start with the last part of your question Andrew. In terms of the promotional activity in stores versus online. We were really consistent in fourth quarter with our -- the way that we look at promotions throughout the year and that is that our large scale promotions of things like a take 20% of your order perhaps a buck naked promotion for example where we run those over several days. Those promotions are very consistent between our direct business and our store business. The one place where we have a difference in promotions is on those hours long flash sale type of promotions or just a daily e-mail. And our approach there is that while we don't put those signs up in and create those promotions in the stores for just a few hours we do honor any customer that comes in either with an e-mail or showing that they have that promotional activity and we will honor that in the stores. And we did that for fourth quarter. Now kind of moving to really the bigger question and that is we had of course more stores than ever before in fourth quarter this year. We opened more stores than we ever had during the quarter. And I think some of the first -- on the very positive side, we're really pleased with the results that we saw not only in the stores that we opened during the quarter, but in the stores that you kind of hit their first holiday season with us this past year. We saw great response from traffic and customers entering the store and looking to kind of get that retail store experience with us. I think that a couple of the opportunities that we've identified really put to some of the investments that we're making this year. And that is we have more opportunity now that we have a larger and growing store base to utilize our stores more efficiently in creating a faster buy online pickup in store process for our customers and utilizing store inventory more effectively to fulfill those orders. We have opportunity to ship from certain stores to customers in that area to create a faster and more efficient delivery mode for our customers. And the last piece that I would say is, we mentioned in our prepared remarks that we are investing in an inventory and assortment planning tool. One of the things that we are [pulling] [ph] ourselves to get some ability to use it towards the end of this year is on the replenishment side and creating a more automated if you will and forward-looking replenishment model so that we can ensure that our stores are in stock and ready for the peak season this year.

Thanks for the color there. And just a quick one on the gross margin guidance for flat. Just curious what pace of shipping revenue decline is factored into that guidance, is it similar to 2017 levels. And then, how you plan to execute the strategy on the higher initial markups that sort of a category by category initiative or how you are thinking about that? Thanks.

Sure. So the -- in terms of the higher initial and product margins it's two-fold. Number one is we have been talking about for the past several years' kind of where the women's gross profit rate set versus men's. And it's traditionally been a little bit lower. But what we've talked about is as we continue to reach scale with women's we've seen that margin rate improve. We are currently equal in men's and women's margin rate so as our women's business continues to grow we're going to see that as more of a positive influence on gross profit rate as opposed to a drag that we've seen in several years past. And that's obviously a really good thing that we've achieved with the scale of the women's business and the strength of the growth there. The other piece of it is that we have very long standing relationships with our manufacturing base and they're continuing to look at efficiencies that they can provide us to help us to improve gross profit on our initial margins. The last piece is as we continue to rollout retail stores and build our brand awareness and our marketing base if you will. We do expect to get some benefit with our full price sales and grow that part of our business even a little bit more. In terms of the shipping revenue number that you asked about. We expect that the shipping revenue will decline somewhere in the range of about 20% or so this year on a dollar for dollar basis.

Thanks and good luck.

Thanks so much Andrew.

And our next question comes from Jim Duffy with Stifel. Please go ahead.

Thank you. Good morning. Hope you guys are doing well.

Good morning.

Few questions for me. First, Stephanie, I'm interested in the composition of the women's girls. Can you share some insights on the mix of that business between direct and retail? Are you seeing good up tick in the direct business as well?

Yes. We're actually Jim -- seeing a really strong up tick in the direct business. Our retail penetration just in a range of the stores has really stayed fairly consistent in the 25% to 30% range. So that penetration has held pretty close over the past several years. What we've seen is some nice growth in the penetration on the direct side of the business in women's. And a lot of that has to do with the marketing campaigns that we've put in place across TV, digital, social that's really building awareness across the country for the women's part of the brand.

Good to hear. And then, Stephanie, if you look back a couple of years ago, the expectation was for some operating leverage in the business. That hasn't materialized and it looks like that expectation is pushed out some. If you look back over the last six quarters or so what are some of the key factors that have changed that have -- let you to change that expectation?

I think that the primary thing Jim is that we are recognizing and evolving the omni-channel model and recognizing some of the investments that are critical for us to continue to grow and evolve that model. And what I specifically mean by that is, two and a half years ago or so as we were preparing for our IPO and building models out we had a tiny handful of stores as an example. And we were starting to learn some things about what a retail store base if you will could look like, but we didn't fully know at that time the benefits that retail could provide in terms of brand awareness, market growth, direct growth in those markets after an established time period. And we also -- so and not knowing some of those things early on, we didn't model fully what a 15-store a year expansion would look like. As we have learned not only the benefit of a retail store that with a four wall EBITDA of mid 20s and a two year or less payback on the initial capital investment could look like. But also what it means for the total marketplace direct included we have we've taken advantage of those learning's and moved forward with faster store opening pace than we anticipated about two and half years ago. So that's some of it for sure. On the direct side of the business and I'll call it direct, but really that's a misnomer because it's feeding all channels. The technology that we are investing in, we have --when you look at capital expenditures and what we've got in the P&L for this year for example in technology that's going to continue to enable the omni-channel model. We've got about $20 million of expense or of dollars that we're going to spend to enhance our technology. And that is an expense that we believe is critical to keep building the markets. When we see more than double the growth in the direct business and established store markets of the non-store markets, we know there's opportunity there and the important thing is to create connectivity between those two channels. So that's what we're investing in. Now obviously that has an impact on the P&L. But the foundational pieces of profitability of as I mentioned retail in the mid 20s, four wall EBITDA, the leverage that we saw this year on ad spend across the organization which was one of the key SG&A kind of aspects that we said long-term we could leverage. We've seen some of that leverage. And so those foundational pieces for long-term profitability growth are still absolutely in place. We're choosing to invest this year and in building some of those foundations around the connectivity.

Understood. Thank you. And then, Dave last one for me. Can you help us think about the timing of the earnings progress for the year? Should we expect that concentrated in the fourth quarter? And also can you quantify the impact of the extra week?

Sure. The progress will materialize. Majority of it in the fourth quarter definitely will -- probably a bit more than in 2017 just given the timing of when systems go live and some of that expense starts hitting in the second and third quarters. And then, the fourth quarter obviously is where we get a lot of leverage on advertising. The 53rd week is roughly a one or two pennies worth of value by our estimation for the full year.

Thank you.

Thanks Jim.

And our next question today comes from Jonathan Komp from Baird. Please go ahead.

Yes. Hi. Thank you. I want to follow up on the direct business if I could and Stephanie, if you could just talk a little bit more about the shape of the growth during the fourth quarter and the driver. And then, also I know you mentioned or Dave mentioned, mid single-digit growth for 2018, if you can just talk about how you see the trajectory there especially given the systems upgrades that you're planning here?

Sure. So I'll just start a little bit with 2018, Jon, and then, I'll ask you to just make sure I'm answering your fourth quarter question adequately at the end. So for 2018, on the direct side, we've got the mid-single digits is based on a couple of things. Number one is, it's fairly consistent with what we experienced and actualized for 2017. We do anticipate that on the kind of headwind side if you will a direct growth. We've got shipping revenue that is continuing to decline as we've mentioned just a minute ago. We do have 15 stores that for most of the year are still going to be in their new store phase where we know that direct growth decelerates to a certain level. And we've got the systems implementation that we're anticipating some level of lower conversion as would be expected in a systems change over, the ECP specifically that we've anticipated in -- towards the middle of the year. So those are the things that are factoring into our estimates for direct this year. We do expect that we will continue to see growth in women's overall outsized growth in women's and outsized growth in some of the areas of men's that I mentioned earlier better built business where for example Alaskan Hardgear as an example. And we're excited about the launch of plus sizes in the fall in women's. We think that's going to give us some nice momentum as well. In terms of fourth quarter what happened just a complexion of business in fourth quarter in direct very similar to what we talked about in terms of the genders, women's outpaced men's. We saw a nice pickup in core products overall. A lot of that being driven by some of the products that are growing rapidly in women's things like no-yank tanks, [indiscernible], daily denim, flex fire hose bottoms, the things the kind of usual suspects that you would expect looking at our stores and our catalogs. In terms of shipping revenue, our shipping revenue continued to decline in fourth quarter slightly lower decline than over the rest of the year in terms of a percent decrease year-over-year. But that's what we expected specifically because we had a lot of free shipping last year in fourth quarter. So we were up against slightly lower levels if you will. In terms of store base. As I mentioned earlier in the call, we continue to see that our non-store markets set in term in direct growth about at the average rate of direct growth, new store markets are lower than that. Although in fourth quarter, we do find that new store markets actually perform quite well and directly and see quite the deceleration that we see in other quarters. And then, our established store markets were more than double the growth rate of the average. So that's been very consistent quarter-to-quarter. Did that answer your question Jon?

Yes. It did. That was helpful. And I had a couple of others then on the five-year guardrails that you outlined. The first, Dave around the margin discussion and I know you talked about a high-single digit operating margin. I'm wondering, if you had any more color on when you think the trajectory will bottom out. Yes, I don't know, you think 2018 will be the low point here given the investments, or if there is additional pressure beyond just any kind of directional color there?

Sure. Certainly 2018 will be a year with the margin being pressured, but we would expect going into 2019 and by the back half of 2019 that to start to change course and see some margin expansion on the operating income basis. The only change next year that could pressure EBIT would be lease accounting change, which given our capitalized leases and operating leases may add a little bit of pressure on EBIT level, but we would expect that that margin expansion does kick in 2019 as we have it planned.

Okay. And then, last one for me, I just wanted to follow up on the discussion about securing additional financing capacity and just wanted to understand the rationale. First, off I guess the comfort on securing that. And then, just the rationale of moving forward with given all the other investments versus temporarily pulling back on the pace of store expansion or something like that.

Yes. Certainly a high level of confidence that the banking markets are receptive to our story and our business and that's pretty clear. Given our balance sheet composition today, we have more than ample capacity to absorb some leverage to help over the next couple of years with the capital investments. And at this stage even that 5 year capital plan that I articulated wouldn't require longer range permanent debt to be on the balance sheet at the end of the five year period it's really to kind of bridge over the next three to five years. So that's the sort of facility that we're looking at and we really have high level of confidence that we'll have a facility in place.

Understood. All right. Thank you.

Thanks Jon.

And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Stephanie Pugliese for any closing remarks.

I just want to thank you all for joining us for our call today. We wish you all a wonderful official first day of spring and we look forward to sharing our progress with everyone in the coming quarters. Thanks very much.

And thank you, ma'am. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.

Thank you.