Good morning, and welcome to the Duluth Holdings Second Quarter Fiscal Year 2019 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 this event is being recorded. I'd now like to turn the conference over to Donni Case, Investor Relations for Duluth Holdings. Please go ahead.

Thank you, Carrie, and welcome to today's call to discuss Duluth Trading second quarter fiscal year 2019 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 Steve Schlecht, Founder and Chief Executive Officer; and Dave Loretta, Chief Financial Officer. On today's call, our 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, which can be identified by the use of the 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. Such risks and uncertainties include, but are not limited to those that are described in our most recent annual report on Form 10-K and other SEC filings as applicable. 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. And with that, I'd like to turn the call over to the Steve Schlecht, Chief Executive Officer of Duluth Trading. Steve, go ahead.

Good morning, and thank you for joining our second quarter 2019 conference call. We have a fair amount to cover on today's call, but before we begin, I want to acknowledge the contributions that Stephanie Pugliese has made to our company. As CEO, she worked tirelessly and enthusiastically to execute our strategy to build an omni-channel approach to marketing, she led the growth of our successful women's category, and oversaw the addition of 50 retail stores. Her talents and achievements did not go unnoticed and opened the door to a new opportunity with Under Armour. Everyone who has worked with Stephanie will miss her and we wish her the best success in her new endeavor. Following her unanticipated resignation, it was an easy decision for me to step back into the role of CEO. As Duluth's Founder, I'm very proud of what we've accomplished and I'm totally committed to ensuring the continuity of our vision, our culture, and our forward momentum. While I haven't been the public face of Duluth Trading for some time, I have been actively involved in all aspects of the business. With our talented and dedicated team, we have achieved a smooth transition without any disruption to our business and we remain totally focused on our all-important fourth quarter. That said, we have our work cut out for us. Our performance in the first half of the year was below our expectations, and it will definitely pressure the outcome for the full fiscal year. In response, we have taken down our guidance for 2019. Dave will address the details of our second quarter financial results, this revised guidance and the plans we have moving into 2020. Also, I want to recognize that we have had some growing pains over the last year-and-a-half. I want to see a slowdown in the pace of our retail expansion in 2020, and focus more on improving asset productivity and thus our operating margin rate. We have made a number of behind-the-scene improvements in our business that will bear fruit in 2020, which excite me. We have a strong team in place to execute our plans and to ensure the long-term success of the business. In general, our top priorities remain the same. First, is to drive top-line growth through new product offerings and targeted marketing that expands our brand awareness. Second, is to leverage our cost structure to drive profitability, while ensuring that we exceed customer expectations. And third, to achieve greater return on our investments. Our team is well underway to implementing these top priorities, and we expect to see signs of improvement in the second half of this year. And now, I will turn the call over to Dave.

Thanks, Steve, and good morning, everyone. For the second quarter, we reported net sales of $122 million, up 10%, compared to $111 million last year. Our Direct segment sales were essentially flat to last year at $60.3 million and our Retail segment sales grew 24% to $61.7 million. For the quarter, shipping revenues were $1.6 million compared to $1.9 million last year. The growth in Retail was primarily driven by new stores opened in 2018 and 2019. During the quarter, we added four new stores and over 60,000 gross square feet, with each of them being our first stores in the states of Arkansas, Connecticut, Alabama, and Georgia. We ended the quarter with a total of 55 stores, compared to the prior year of 39 stores. In the second quarter, we continued to experience the challenges we face in the beginning of the year. Sluggish sales trends in the direct channel and existing store markets deepened in the second quarter, especially in May, with traffic and overall sales volumes falling short of our expectations. In an effort to drive more store and web traffic, we extended our global promotions and took deeper markdowns on spring and summer products, particularly on core men's items. As a result, our gross margin for the quarter declined 310 basis points for a gross profit of $64.8 million. Our women's business continues to outpace men's, with an overall growth rate of over 20% for the quarter and mid-teens growth rate online. We expect this positive trend will continue in the back half of the year with a greater assortment of new women's items, the launch of our Workday Warriors collection, and an increased number of plus-sized skews. To address the more challenging men's business, we also have new product launches and an increased number of…

[Operator Instructions] The first question will come from Jonathan Komp from Robert W. Baird.

Yes, hi. Thank you. Steve, I just wanted to maybe start and just ask a broad question. Given that transitioned in place and your positioned back in the leadership role, can you just give an update on kind of what you see over time? Do you expect to initiate any type of search for a permanent replacement, or how long might you be committed to overseeing operations in the current role you are?

Good morning, Jon. Well, as I told our Board, I'm all in this and very willing to spend the time that it takes to complete the search, but also to make sure that we have a very successful fourth quarter this year and we build the roadmap for 2020. I really see us starting the search in early 2020. And our focus will be on someone who really has strong brand credentials, merchandising, marketing, retail and direct marketing. Those will be a lot of things we'll be looking for. So, hopefully, we'll have the search completed by mid-to-late 2020, Jon.

Okay, great. That's helpful. And maybe a question about the comments into 2020 and the decision that this moderate the retail growth, maybe just bigger picture conceptually, how you're thinking about that moderation. Is that more of a pause temporarily till the business gets back on more of a solid footing from an operating margin and earnings perspective? Do you think that's a longer-term shift? And maybe if you could just talk about some of the benefits you expect to accrue from just being able to focus more on the core business and maybe less on the rapid retail expansion?

Well, yes, it is somewhat of a pause. But we're still committed to a national footprint with our stores in the future. My objective here is to see us improve our operating ratio. And to do that, part of it is to slow down the growth of the business. We've digested a lot over the last two years, took on a lot of changes and whatnot, and I think it's time that we really focus on executing well and continue to build the brand. Dave, do you have anything else that you might add to his question at this point?

Yes, Jon. We don't have the longer-range plans detailed out yet. Moderating capital growth into next year is a combination of focusing on what we've already invested, but also some cautiousness on where the economy, where the industry might be going and just not getting too far ahead of ourselves in terms of deploying more capital. But it doesn't mean that we don't think the brand still has the same long-term growth opportunity that we've always articulated. So, nothing is really set in stone on that longer-range growth. We're still targeting the range of – our long-range objectives as we always have.

Okay. And maybe just one follow up, Dave. Following up on that and asking a little bit different, but when you look at the SG&A ratio this year, 48% to 49% would be a high mark for the company. Is there any sort of longer-term vision on where that could be and maybe just any broad stroke comments on the individual pieces where you could get some leverage over time, especially with less of a focus on the capital investment growth in the short term?

Jon, I guess, specifically on the SG&A rate, I mean, we know we've got the opportunity to leverage that and that's going to start to be realized this second half of the 2019. Getting our operating margins back to where they historically were in, high-single digit, low-double digit is still our objective. So, we think that's not coming at the expense of more capital. It's – they go hand-in-hand.

Okay. Appreciate the perspective. Thank you.

Thanks.

[Operator Instructions] The next question will come from Dylan Carden with William Blair.

Yes. Hi. Thank you very much. I was wondering either Dave or Steve, if you could talk about some of the behind-the-scenes investments that you alluded to in your prepared remarks and just sort of how those flow throughout sort of the balance of the year and into 2020, and when benefits from those at least from an operating margin standpoint are expected to really take hold?

Yes, Dylan, I guess what we've talked about from the investments in our infrastructure and logistics, I mean, those have been in place starting last year and the benefits that we're getting from those are materializing in our ability to leverage SG&A. So, I think that's been clear as to how we've articulated where some of the capital spend has been. If there's a specific area within that, that you were curious about, I'm happy to go deeper with you.

Yes, I guess maybe then sort of store functionality. I know POS rolling out next year, but some of the inventory management tools that you've implemented, any kind of early signs as to how those are helping sort of drive efficiencies?

Sure. Well, we definitely have the opportunity within the inventory planning and flow of goods to improve that, where we're going to see in this back half of the year is a better inventory positioning from the planning standpoint and from an open to buy. So, we expect that's going to be – that's already materializing in a better handling, better throughput of the inventory, better logistics coming down from having inventory in the right locations and having the goods in the right place and having them in the stores more timely. And that comes from both, use of the tools, but also our planning approaches to that. So, that's what's going to realize in the benefits.

Great. And then, sort of I guess, following from that, any sort of guidance you can give around on the flow, or particular around men's new product into the back half? Is that mostly a holiday event?

The flow is starting right now. I mean, we now have a new pants category that we're really excited about that expands sizing. And then we have some goods coming in our Alaskan Hardgear category that's going to be new, that will come out in the next month. But we're – we are resetting our store sets right now. And so, you'll see those on the floor starting this week and then more coming out in October.

Great. And then I just – last one for me, sorry. Thanks for taking all the questions. Women's now, as a percent of the business, is there any update to that, sort of where that's landed or will end the year?

It's still going to be trending a little bit under 30%, close to 27%, but it's got a lot of momentum, and that comes from both, the product set that we put together for it, but also the strong marketing behind it, some of the TV advertising and in – coordinated marketing behind women's campaign and upcoming our Workday Warriors collection is new for us. And so, there is potential to see that 27% where we sit today, start to creep higher because of that opportunity.

Great. Thank you very much.

Thanks Dylan.

And this concludes our question and answer session. And this also concludes today’s conference call. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.