Good morning and welcome to the Duluth Holdings Third Quarter 2018 Earnings Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Moira Conlon, Investor Relations for Duluth Holdings. Please go ahead.

Thank you, Jamie, and welcome to today's call to discuss Duluth Holdings' third 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 the call up to your questions. Before we begin, I would like to remind you that 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 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. Please refer to our SEC filings for additional information. And with that, I would now like to turn the call over to Stephanie. Stephanie, please go ahead.

Thank you, Moira, and welcome everyone to our third quarter of 2018 conference call. Throughout the year we have continued to execute on key initiatives that prepares for our peak selling season and position us to reach our goal of $1 billion in revenues over the next several years. In a few minutes, I will talk more about how those efforts are fortifying our omnichannel presence and enhancing our customers' experience. But first, I’m pleased to report that our team delivered a strong third quarter, achieved through our focus on innovative new and core products, increasing brand awareness through new product marketing and enhancing the customers experience in all channels. Net sales increased 27% to $107 million, which marks our 35th consecutive quarter of increased net sales year-over-year. Retail sales for the quarter had a 58% growth rate, largely driven by new stores opened in 2017 and 2018. And we opened four new stores this quarter that are now ready for holiday shoppers. Direct sales grew 10.5%. This number includes the four percentage point impact of revenue recognition. After that adjustment, our direct growth rate grew at 6.5% year-over-year and improved over the first and second quarter growth rate. We’re on track to meet an annualized direct growth rate in the mid-single digits. We saw strong results across all categories in our men’s and women’s division, with men’s growing 25% year-over-year and women’s growing 35%. Gross profit margin of 57.1% with 50 basis points over last year, driven primarily by less reliance on promotional activity this quarter. Core year-round product and seasonal categories performed very well and we ended the quarter in a clean inventory position reflecting ongoing efforts to improve terms, while maintaining a 95% or higher fulfillment rate in direct. While we achieved our goals for the quarter,…

Thank you, Stephanie, and good morning. Today we reported the third quarter net sales of $106.7 million, an increase of 27% compared to $83.7 million last year. Net sales growth was driven by both our retail and direct segments, with retail sales increasing 58% to $46.9 million and direct sales increasing 10.5% to $59.8 million. The adoption of the new revenue recognition standard added 3.9 percentage points to the direct growth rate. Within the direct sales, shipping revenues were $1.6 million in the quarter, down 13% from the same period last year. During the quarter, we opened in total four new stores, adding approximately 79,000 gross square feet to our retail footprint. In November, we opened additional three stores. Of the seven stores we've opened in the second half of 2018, six are in new retail market for us. Our growth strategy of converting direct to customer markets to omnichannel markets with physical stores continues to gain traction. After stores have been opened for a year, we see higher direct sales growth in customers in that market than market without stores. And those where we've had a store presence for more than two years, direct sales are growing 2x to 3x greater than markets without a store. Turning back to the financial results. Our third quarter gross profit was $61 million or 57.1% of net sales compared to $47.4 million or 56.6% of net sales last year. Excluding the impact of the lower shipping revenues in the quarter, gross profit increased 80 basis points as a result of fewer promotions, more full priced selling and improved margins in our women's line, which has become a bigger component of our business. Selling, general and administrative expenses increased 32% to $63.5 million compared to $48 million last year. This included an increase…

[Operator Instructions] Our first question today comes from Jonathan Komp from Baird. Please go ahead with your question.

Maybe just a couple of questions on the direct business to start. Just firs on the accounting change, could you just give a little bit more detail on what that is and any future impacts that we should think about?

Sure, Jon. The impact relates to the timing of our shipped orders with our recognition of a shipped order being booked as a sale at the time that we shipped the order at the doors. Where in the past, it was based on our estimation as to when customers would actually receive the order in their hands. And under the new revenue recognition standard, there is the ability for us to determine where the transition of control of that order is. And so the impact of this means, in the past, we would differ shipped sale at the end of the period into that next fiscal quarter whereas now we've recognized those shipped sales within the quarter that we actually ship the package at the door. So because this quarter, if you think about at the end of October, our sales are at really their peak period relative to the end of any other quarter, it had a bigger impact within the third quarter and then the other adjustment is the same affect at the front end of the quarter. On a full-year basis, the impact relates to just about two percentage points in terms of year-to-date direct sales growth. And for the full year, we expect it to have a nominal increase at the backend of the fourth quarter because at the end of January sales were simply at a lower level compared to the end of the third quarter. So won't be nearly the same level of impact that we have this period.

And then a broader question on the direct business, you said the underlying growth rate accelerated a little bit in the quarter and it sounded like there is some volatility guide for the systems within the quarter. So maybe you can share a little more color on your confidence in the trajectory, and then, obviously, for the fourth quarter I think we can apply something up roughly mid-single digits for that segment. So any color you had on drivers into the fourth quarter and how things there shake it up would be helpful.

Sure. In terms of third quarter and what happened in direct, we saw from a -- I will start with the system. We saw a slowdown in direct in the first several weeks of August and that was an expected flow down, Jon in a couple of things. Number one, we expected that we would need as we transition to the ECP sometime to refine some of the pathways for the customers to refine some of the inbound links to make sure that everything was optimized. The other thing that happened in August as it relates to the transition to the ECP was that we purposefully hold back on some of our digital marketing, some of our heavier promotional activity via email, because we wanted to make sure that the system was working very smoothly for our customers before we build up large traffic volume position, if you will, in terms of advertising or promotional. So that was part of the direct growth. Traffic in third quarter where we got deeper into the quarter though, we actually had a strong beginning to October. So we have this planned lull in August, September was okay, quite frankly, it was more of a transitional time for us. Beginning of October was very good for us. And so we view like the direct business overall was where we expected for the third quarter. As we entered into fourth quarter, we had a very strong holiday weekend, the Black Friday through Cyber Monday. Obviously, as I mentioned in my notes, we also see that customers are shopping later and later as it comes into the Christmas time period. We’re shipping three days longer or later into the Christmas time period this year than we did last year, so we’re anticipating that. And we’re watching…

And if I could maybe just the last one following up a bit Stephanie, in terms of the omnichannel capabilities you're beginning to rollout tying to some of those systems, I'd be curious just as you look at some of the initial learnings maybe what you think could be most incremental, especially in the next year as you expand the reach of some of those?

Yes, we're particularly excited about the buy online pick up in-store functionality that we have in the seven stores right now. We do plan to continue to roll that out through the first quarter and then throughout the year. The -- that kind of goes hand-in-hand with the shipped from store initiatives that we have because when we set up a background for one, it's already set up to be able to handle the other initiative that we have. So we will continue to roll both of those out through the stores as we go through 2019. Another thing that I'm actually quite excited for and I think we're going to learn a lot over the next several weeks, is with all of the new systems that we put in place, and I mentioned this in my comments earlier, we have the ability now to issue e-gift card, which is something that we weren't able to do with our old system. We've already seen a nice pick-up on that from our customers. And if that's growing every single week, I think it'll be very interesting and positive for us to see what happens in those last few days, in particular before Christmas when customers are looking for that last-minute gift. And one of the functionalities that we have see or that we have added to this is an ability to deliver that email e-gift card to a customer at a future date, any time. So it will give our customers a lot of flexibility around gift giving.

Our next question comes from Dylan Carden from William Blair. Please go ahead with your question.

I'm curious on the retail side. By my measure, it looks like sort of store productivity -- sales per store, sales per square foot was down, call it sort of mid-single digits. But in the prepared remarks, if I heard you right, there was maybe some disruption from the new systems as far as sort of store inventory delivery. I guess can you kind of speak to that and whether or not that might have influence that metric? And then more broadly on inventory management, you're doing a nice job here kind of controlling that. Can you just expand upon some of the tools you're using that allow you to do that? That.

Sure. Let me talk first about the inventory system that we've implemented because that flows through to what happened in the quarter and some of the remarks we've made, and to answer your questions on about what happened in the stores too over third quarter. So we have most recently implemented Phase 1 of our inventory and assortment planning system, which for this particular timeframe, allows us to pre-inventory stores, in other words, in the past, we would replenish stores based on what they sold the week prior. So we could be one to two weeks behind in having the inventory there and available for our customers. Today with the system that we put in place, we have the ability to replenish stores based on a sales forecast. So we’re looking forward two to four weeks, anticipating the needs for the stores and inventorying them in advance of those weeks. We think that’s going to be a really big win for us long-term. The next phase of that system, as an example, will give us additional abilities to localize assortments for our stores, which obviously as we continue to expand our geographic footprint is going to be very important. So this is a system that we’re really happy that we've taken a step forward and added for our stores and four our inventory team. What happened in third quarter was that we had a timeframe where we were transitioning our distribution center, specifically Belleville, because that's the distribution center that we replenish all of our stores from. We were transitioning that distribution center with a more automated pick-pack conveyor system. That automation went very well for us. The return to high-yield productivity was slower than the expected. So the transitions, again, the team up and running on that new process…

And then last one here, just maybe a little bit more gross margin pressure now than expected modestly albeit. Any comments on that Dave as per the new guidance?

Yes. Slightly more pressure that we’re anticipating in the fourth quarter, not that we set plans to be become more promotional. But that is one of the elements that becomes a bit out of our control as we get through the competitive pricing period. So in the interest of being cautious, wanted to provide an outlook on that note, but do see that we've offset it with SG&A and largely in the marketing side.

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

Couple questions from me. I understand some of the complications really to the systems implementation and inventory flow. I'm curious with the new web platform. Have you seen any quantifiable benefits to traffic, conversion, any metrics you can share on benefits you've seen from the new web platform development -- implementation?

Yes, on the immediate front, Jim, we saw a significant improvement, anywhere from 30% to 40% increase in site speed, particularly on our mobile site. And we know that, that's kind of the -- one of the first entry points to creating a good customer experience, allowing people to get through their shopping process faster and ultimately convert at a higher rate. We have also seen significant traffic increases year-over-year, driven more than 20% up -- more than 25% up actually in traffic to the website in third quarter, which is a really nice increase. We have not yet seen significant increases in conversion overall. Some of that though have to do with the fact that our traffic has increased so significantly. And we know that some of that traffic is prospecting traffic in these potential customers. So that's a longer term preposition as they continue to come back to us and get more comfortable with the brand. The other piece of conversion is that, as with almost every retailer out there right now, our mobile traffic has increased at a faster rate than desktop and tablet, and that traffic does convert at a lower rate. So our mix is continuing to evolve as well. We have seen, over the past couple of months, improvement in conversion, but we know that that's a longer term proposition, and we will continue to work on that, and fine tuning and improving on that as well. Some of that will also be informed by our marketing mix study that we've shared that we're looking on in prior calls.

Jim, I guess, I'd also add that one of the core elements of being on the new platform is simply having a stability where peak volumes really come into play. And I know we probably read in a couple other cases in some websites that had troubles with some of the volumes are Black Friday, Cyber Monday weekend volumes were significantly higher to us last year and we didn't realize or see any impact to the customer in that regard. So we're pleased with that as an initial outcome.

And I recognized its early and only in seven stores, but is there any statistics you can share on the uptick of buy online pickup in-store and any impact you are seeing there on retail productivity?

We have -- what we’ve seen so far -- and you're right Jim, it’s quite early buy. We have seen an increased number of the buy online pick up in-store orders every single week to the stores. Right now, we are seeing a little over 100 buy online pick up in-store orders per store, per week, which is, as I said, ramping up. We feel really good about that from the standpoint not only at bringing traffic into the store, but also we know from past initiatives with shipped to store that about quarter of those customers come in and purchase something else while they are there, and they tend to double their initial order in terms of the value that quarter of the people that are buying. So we expect that both as we continue to roll that out will be not only a traffic driver, but an incremental revenue driver for the customers coming in. The other thing that we’ve seen is, and we were out and about to fifth of our stores just last week, and talking to them about the buy online pickup store -- in-store initiative. One of the things that we found is that customers are using that function as a trip assurance, so they want to make sure that what they want in the store and they're willing to purchase that upfront to have it ready for them. So as we continue to rollout and get visibility, more visibility, I should say, to in store inventory by location, we think that’s going to be a big win for us. So that’s 2019 for us.

And then on the inventory, clearly very tight, is it where you guys want to be? Or are there some areas of assortment where you're lighter than you would like to be to capture anticipated demand?

I would say overall is where we wanted to be. The one phrase that we are a little bit light on inventory, quite frankly, is in some of our colder weather goods, lined pants, base layers. And that’s not necessarily a function of tightening up the inventory as much as it is. We've had several really warmth fall and winters the past couple of years. Now we've gotten some nice cold weather. And the customer demand is a little bit higher than we anticipated. But that’s the one place.

And ladies and gentlemen, with that we will conclude today’s question and answer session. I'd like to turn the conference call back over to Stephanie Pugliese for any closing remarks.

Thank you all for participating in today’s conference call. On behalf of all of us at Duluth, we wish you and your family a wonderful and safe holiday season. And we will see you in a few months.

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