Good morning and welcome to the Duluth Holdings First Quarter 2018 Earnings Conference Call. [Operator Instructions] Please also note that today's event is being recorded. At this time, I would like to turn the conference over to Donni Case, Investor Relations for Duluth Holdings. Please go ahead.

Thank you, Jamie and welcome to today's call to discuss Duluth Trading's first quarter 2018 financial results. Our earnings release, which we issued this morning, is available on our Investor Relations website 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 first fiscal quarter of 2018 conference call. In the first quarter net sales increased 20% to $100 million which marks our 33rd consecutive quarter of increased net sales year-over-year. Retail sales for the quarter delivered a 71% growth rate, largely due to having 13 new retail stores as compared to the first quarter of 2017. Direct sales grew 4% starting off stronger in February and March and then experiencing a slowdown in the latter part of April when weather impacted sales of our spring goods. This delayed purchase of warmer weather product was particularly evident with our buy now [male] [ph] customer and while April did not meet our expectations, the men's business still grew by an admirable 16% for the quarter. Women's supported by strength across all categories was less impacted by the cold weather and continued to deliver fast paced growth of 31% year-over-year. Gross profit margin declined 230 basis points, primarily due to clearance activity in the months of February and early March, and to a lesser extent by a continued decrease in shipping revenue which on a dollar basis was flat with last year's first quarter. You may remember that last year we missed opportunity for sales at the end of the season clearance due to lack of inventory. This quarter our clearance inventory levels as a percent of total were more in line with historical numbers and we were able to create some momentum in the early part of the quarter. Year round and core product performed very well throughout the period and overall gross profit rate improved as we finished April and through May. In all, the first quarter's gross profit rate was within our internal expectations. As I've indicated before, quarters that have seasonal transitions…

Thank you, Stephanie, and good morning, everyone. For the first quarter, we reported net sales of $100 million, up 20% compared to last year. Net sales growth was driven by both our retail and direct segments with retail sales increasing 71% to $34 million and direct sales growing 3.8% to $66 million -- excuse me, retail sales increased 71% and direct sales growing 3.8%. Shipping revenues of $2.4 million in the first quarter were flat to last year, and direct channel product sales grew 4% over last year. With our strategy of opening physical stores and markets with a high concentration of direct customers, we continue to see strong retail volume growth coming from those markets when the stores are new. As a result, our most established markets continue to realize high growth rates overall. Since the beginning of fiscal 2017, our omnichannel chain has grown from 16 stores in 12 markets to 37 stores in 13 distinct customer markets today which includes the 4 stores we've opened up in May. We're in the early innings of this market expansion strategy but it will be the driving force of topline growth this year and in the coming years, and the first quarter results are in line with our plans. As Stephanie mentioned, our overall direct segment growth in the first quarter was softer than expected in the mid to late April with a slow start to spring product season; in fact, total direct sales growth was up over 7% during the first 10 weeks of the quarter but temporarily slowed in the last three weeks. That trend reversed in May and is back in line with our plans. In addition, direct sales growth in the first quarter was slightly higher in markets with a store that's either new or established…

[Operator Instructions] Our first question today comes from Dan Wewer from Raymond James.

The fiscal year guidance of flat gross margin rate is quite a bit different than the experience -- the first quarter where margins were down 230 basis points. Can you remind us where you see the opportunity quarters going forward on gross margin rate? And why that is going to different than what happened in 1Q?

To kind of take you through first of all what happened in the first quarter and then give you some insights into where we see the balance of the quarters, first quarter gross margin decline was in a finite set of weeks of the quarter, it was specifically due to the end of winter clearance that we saw impacted our January gross profit rate, it also impacted the first six weeks or so of the quarter. The good news of the quarter and the gross profit and the promotional strategy is that one of the things that we pay very close attention to is global promotion; so that takes 20% off of your whole order for example. That portion of our business was less of a percent of the overall business than it was last year and we were on promotion around the same amount of days as we were last year. So getting past that end of winter clearance kind of section of time or segment of time around that the business was actually equivalent in gross profit and in some places better than last year. So we do see over the next -- we've seen so far in second quarter that our gross profit rate has normalized to last year, we'll still continue the pressure if you will on shipping revenues, we're still expecting some level of decline particularly as a percent of net sales over the year, we know that we have some downward pressure in gross profit with the freight to stores as we've articulated in the past. That said, our women's business is now equivalent to men's in gross profit rate, we've reached that critical mass point and we're seeing that our retail stores tend to sell more at full price and have on a product gross profit rate slightly higher rate than indirect. So that's where we see some of the offset as we go through for the balance of the year. And so we expect slight improvement quarter-to-quarter that will give us that flat scenario for the full year.

So you're expecting a slight improvement in the reported gross margin rate for the second, third and fourth quarter year-over-year?

Yes. And remember that first quarter is less than 20% of the total year, so in terms of the overall gross profit, we can make up quite a bit in the fourth quarter alone but as we keep going, we're -- as I said, we're expecting to see some small improvements quarter-to-quarter that will get us back to flat.

Second question I have regards the observation that your direct revenues are growing twice as fast as 8% and mature omnichannel markets -- can you remind us which markets you can now consider to be mature omnichannel markets? I'm assuming Minneapolis, maybe Chicago but -- if you could -- how many markets are making up that observation?

Sure, Dan. Really we're looking at seven markets that are mature and established and that's -- our Madison area here obviously [indiscernible] store, Milwaukee market, the Minneapolis Twin Cities market is one of the more larger establishments, Duluth, Minnesota, Des Moines, Iowa, Sioux Falls and even sort of the Oshkosh area with our outlet store up in Wisconsin. So those are the more established than before we get into the class of 16 stores which we would consider those to become more mature and established after two-year period and they are entering the beginning of their two-year period now.

I know that you will not provide same-store sales results but looking at the gap between retail revenue growth and the growth in the number of retail stores, it looks like comps are positive. Do they actually accelerate during the period from where they have been running?

Dan, the period from where they were running coming into this year?

Yes, if you look at the first quarter in the way you calculate your same-store sales did it accelerate or basically in line with what you achieved in 2017?

They were in line with 2017, the base of stores that are starting to enter their second year are still in that period where they are seeing more growth in the direct component of their market versus the store traffic because the store traffic is really at it's greatest during the year in the stores first fiscal year -- full year.

Our next question comes from Michael Kawamoto from D.A. Davidson.

So you opened some new stores in regions where you previously did not have any physical presence like the Pacific Northwest or Alaska. Can you talk about just any takeaways or things you've learned since being in some of these new markets with a physical presence?

So specifically we opened in the first quarter just to remind everybody in Anchorage and in Portland. We're seeing actually very similar results in the surrounding direct business where we do see a deceleration in those first 12 months or so, obviously these stores are only in their first couple of months. That said, we've been really pleased particularly in the reaction in Anchorage, that store has been doing very well for us. Portland has also exceeded our expectations but I think we've hit a very positive chord with the anchorage folks, particularly with our store within a store of Alaskan hard gear that we have in those shops, just overall have been very well received but very consistent in terms of just the market reaction on the direct side so far.

And then, I think on the last call you said you had the expectations for shipping revenues to be down 20% for this year, is that still the expectation?

Yes. The first quarter we were able to see that flat without any real impact because of pre-shipping offers that were the same year-over-year but conservatively we think the balance of the year is going to see some slip, most of that would really be the fourth quarter. And 15% to 20% less than the prior year is what we're forecasting.

Our next question comes from Jonathan Komp from Baird.

I wanted to start just by following up on the inventory and -- Dave, I was hoping just to ask more detail about the inventory reserve and the need to take that. And then also, I know you highlighted kind of a mid-teen inventory growth ex-retail, anymore color around that pretty specifically and kind of any remaining risks that you see within that inventory on-hand?

Sure. The inventory reserve increases continues to be a reflection of the growth of the retail channel and increasing from a shrink [ph] standpoint is what's driving that. The higher growth rate within the inventory unrelated to new stores is really a function of inventory that we came into this year on-hand with -- and that what's being worked down over the course of the first and second quarter. So orders that were -- that we put into place for the back half of this year, those are orders we put in latter part of last year and so that's where we'll see the slow growth in inventory, realized it's in the back half for the year but the reserve is simply a function of inventory levels that we have today and the growing retail presence of the store base.

And I would just add on the complexion of the overall rate of the overall inventory. We have more core and year round product -- it is higher percentage of that than we had last year. So while we want to get some of those numbers back in line and I think that one of the reasons that we are excited about putting our new inventory and assortment planning tool in place is that it will give us more flexibility and visibility to managing inventory across so many locations now including obviously the stores. But in terms of risks go-forward on the complexion of the inventory, it's quite low, our clearance and inventory was higher than last year as we came out of fiscal 2017 and into first quarter, we are more aligned coming out of first quarter and we don't have any large pockets of risk inventory that we think are going to be margin issues for us go-forward.

And then, maybe a different topic but I was hoping to hear a little more color on how you're thinking about direct growth for the year? I know you reiterated mid-single-digit growth for the year, Q2 looked like a pretty decent quarter last year but it sounds like you've accelerated despite that. And then as you think about some of the puts and takes, both on the disruption element but also maybe on the back and the sales opportunity from the ecommerce implementation, any more kind of granularity about how you're thinking about any quarter-to-quarter shifts there when you think of direct growth?

Sure. So second quarter so far we have seen the direct growth renormalize if you will from those last three weeks of April which just clipped us on the spring, on the selling of the spring goods and that's really what decelerated if you will -- the entire quarter. As Dave mentioned in his remarks, the first 10 weeks of the quarter, we were at a 7% growth rate in direct. We're seeing second quarter come back into that mid-single-digit kind of normalization if you will in terms of where we expected it. When we look out and -- look at the impact of both, the order management system as well as the ecommerce platform transition that we're about to make, what we have built into our expectations is -- some deceleration of the direct growth in the first four to six weeks of the ecommerce platform going live, a lot of that will have to -- has to do with an expectation that conversion rates might slow for a short period while customers are getting used to the new platform while we are fine-tuning some of the links and search terms etcetera that bring traffic into our sight, overall. So that will impact a little bit of the end of first quarter but we'll see probably most of that four to six weeks in the very beginning of third quarter. And then in terms of the upside on the ecommerce platform, you know, we have been fairly conservative as we go later into third quarter and into fourth quarter in terms of increasing expectations around direct growth overall. We want to make sure we get in there and fine tune, as I mentioned, some of those things before we speak to some really quantifiable upside that we've seen on the media front.

Last one for me; just looking at the men's and women's growth -- women's had stayed very strong, men's has slowed a little bit. It sounds like there is a weather element to that but when you look at men's, broadly, just wondering kind of your degree of focus there internally in terms of efforts to restart or kind of reinvigorate that growth rate there and if you had any specific initiatives to share that would be helpful as well.

Sure. On the men's side, specifically, we have just launched -- a couple of weeks ago we launched a new advertising campaign around one of our key product groups for second quarter which is the Breeze Shooter. Product grouping; we're actually launching a new underwear product group in just a couple of weeks that I think will be very well received by our men's customers. And as we go into fall, we focused in on that season-less kind of transitional type of product with a couple of new product introductions there. In addition, we're building out Alaskan hard gear and our better built business as we've talked about in the past because we think that we long-term have even greater opportunity in both of those kind of aspects of his closet if you were to expand our offering for men. But we do continue to look at our marketing and our outreach to customers whether that is increasing digital positioning, presence on social media, as well as some specific marketing that we've put in place to drive traffic to our store base.

Our next question comes from Jim Duffy from Stifel.

First question on the systems implementation. I'm curious, did you see any revenue consequence from the onboarding of the order management system in May and/or the associated expenses with that tracking to plan?

We did not see any revenue impact on a negative way with the implementation. We were quite pleased with the fact that we didn't have any significant issues that impacted either revenue or large customer based issues. So we're quite pleased with that and we're excited about launching the -- kind of Phase 1, if you will of ecommerce in just a couple of weeks with our employee base. Right now we are operating on the new order management system and our legacy ecommerce platform, so it would be great to get all of those kind of pieces in place and get those synergies going. In terms of the expenses of the order management system and the overall technology, we're on-track for that in terms of what we expected to spend this year.

And then based on your response to Jonathan's question, it seems like you have plans in the guidance -- some slowdown in the direct business associated with the onboarding of ecommerce platform, is that accurate?

Yes.

Dave, just looking at liquidity; where do you project line of credit usage in the third quarter and what are you thinking in terms of cash flow for this year?

The line of credit balance -- sort of it's peak period at the end of the third quarters is projected to be similar to last year but elevated by about $10 million to $20 million, so in total $70 million to $80 million. We'll likely have a balance on the balance sheet at the end of the fiscal year and a portion of that might be from a term standpoint. As part of the feature, the credit facility would allow us to take a portion of debt and assign some fixed rate nature to it so that was more permanent in nature, at least on the short-term. This year given the spend for the technology projects and the 15 stores -- cash flows will be slightly negative coming out of this year and that's the reason for a balance on the line of credit at the end of the year.

Last one for me Dave, I understand there was a carrying regulation change with respect to our recognition of catalog expense; can you help us think through the quarterly impact of that even if just directionally so?

Yes, sure. The impact within the first and second quarters are roughly $1 million in shifting from one quarter to the next. This quarter the catalog expense had a benefit in that regard but the biggest change would be in the third quarter where we would have $2 million that would have expensed in the fourth quarter as it did last year but it's being pulled into the third quarter, and that's a reflection of recognizing the expense at the time that we basically mail our catalogs versus over a demand curve of three to four months. So third quarter is where we would expect to see roughly $2 million of added expense but that's really being pulled in from the fourth quarter, so the fourth quarter is going to be reduced by that amount.

[Operator Instructions] Our next question comes from Dylan Carden from William Blair.

I wanted to clarify, in the prepared remarks the established omnichannel market is growing more than double the 4% direct revenue. It sounds like as you're talking about sort of two-plus year old legacy stores; do I have that right? And then I guess if so, what are you seeing kind of now that you're lapping the year on some of these newer locations and from a direct standpoint?

We are using a two-year mark as what we consider an established store market. We do Dylan see that -- we have some markets that are accelerating a little bit faster, some markets that are accelerating a little bit -- they are closer to that two-year mark. Overall though, the markets that we are kind of coming into that year and a half mark, I can give you an example, our Chicago market for example had a very strong quarter on the direct side. So we are seeing the indications of some of those stores opened in mid-2016 that they are starting to reaccelerate. But again, there is a little bit of noise in that last -- in that 18 to 24 months that in aggregate -- we're seeing them basically perform on-par with the company but once they hit that two-year established mark, it's more than double and this last quarter that growth rate was obviously in the double-digits. So we're very pleased with that.

And on the new stores, is there any thought to or change or -- and then the -- sort of strategy of where you open these stores or how you open these stores or is it more or less kind of what we've seen thus far? Are you adjusting I guess as start to rollout more stores I guess is the question.

We are continuing to use the foundational filters and principles that we have in what markets we're looking at, specifically where are our direct customers where there are high concentrations of them, and overlaying that with where are people that look a whole lot like our dilutive customers but have not yet experienced the brand. So that's first and foremost and that has not changed. We also still very much look for locations that have high visibility, high traffic roads, very closer that there is easy access for our customers to come in and out of the stores. We have similar adjacencies I would say although that's not a real strong part and that we look for a specific adjacency but we're finding that when we're closer to Home Depot or other stores that attract our customers -- we've got a few stores, like I said that are near our Home Depot or near Kabala's, for example, those have been -- have had some nice synergies. But I would say the biggest evolution in terms of the store prototype if you will is that we have added a new prototype to our build-to-suit stores, it gives us additional flexibility in areas where we have restrictions on height of buildings, for example, so that we continue to have that flexibility. We have added some stores with Alaskan hard gear shops in them to add to the presence of that sub-brand and those are the types of things that we're learning more of those internal -- how do we build the assortment and strengthen that than changing any of our core premise.

And I guess just one more. Shipping thresholds, look like they actually kind of improved even in the quarter and more or less as much of a drag. I guess it's probably too early to kind of call stability there but what allowed you to do that and are you sort of more hopeful going forward on that particular item?

I think that the biggest piece of it is that we were -- first of all up against a quarter where we had a significant increase of free shipping last year, and obviously last year we saw a significant drop in revenues over prior year. So certainly this past quarter we did see more stability than we have seen in the past four-five quarters or so. In terms of what we see go-forward, we still know that there is headwind and expectations around free shipping, so we're building that into our forecast for the go-forward. Is there a chance that it could stay more stable? Yes, because we are up against a lot of free shipping from last year. That said, I don't know that we've -- with one quarter under our belt really know where the stable place is just yet.

[Operator Instructions] And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over to Stephanie Pugliese for any closing remarks.

Thank you everyone for joining today's call. We look forward to seeing you in some of our upcoming June conferences.

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