Good day and welcome to the Duluth Holdings Inc. First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I’d now like to turn the conference over to Donni Case, Duluth Trading and Investor Relations. Please go ahead.

Thank you and welcome to today's call to discuss Duluth Trading's first quarter 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, Chief Executive Officer; and Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we will turn 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 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 Steve Schlecht, Chief Executive Officer of Duluth Trading. Steve?

Good morning everyone and thank you for joining today’s call. When we last spoke on March 19, the COVID-19 pandemic was just starting to grip our country. In a matter of days, we went from 62 Duluth stores opened to 62 stores closed. To ensure financial resiliency, we immediately went to work to preserve liquidity, right-size our overhead, adjust future inventory purchasing and expand our borrowing capacity. We also decided to curtail capital expenditures by eliminating our new store build out to four locations this year. Dave will cover the details of these initiatives in his comments. With some states allowing businesses to reopen in early May, we quickly were able to reopen 20 stores in accordance with local regulations. As of today, all stores are open with a couple exceptions in full compliance with local regulations and employing heightened measures to ensure customer and employee safety. All stores offer curbside order pickup service for those using our BOPUS capabilities. Since our stores are not in shopping malls, our customers have easy access to them finding ample parking and plenty of space inside providing additional safety and comfort. Anecdotally, we are seeing that customers returning to stores are buyers, not just shoppers. Even so, it’s still too early to predict if there will be a major and permanent dislocation in consumer shopping trends. With all stores closed for seven weeks, we leaned heavily on our strong and long established digital direct-to-consumer business with its roots in the mail order catalog world. We had started the year thinking retail stores would represent half of our business with direct being the other half. In April, with all stores closed, direct alone carried the day. Direct sales were up 84% in April year-over-year, driving an increase in company net sales of 5% for April. We finished the quarter with net sales of 110 million or a decrease of only 3.8% year-over-year. This didn’t just happen. We have made considerable investments in technology, distribution, and digital marketing over the last two years that are coming together. As people sheltered in place, the surge we saw in online demand was enormous and it drove a 32% increase in our direct business during the quarter. Our April direct demand was equivalent to peak season holiday demand and we were challenged in our distribution centers to get orders out the door on a timely basis due to staffing issues. Yet, one of our initiatives last year was to develop a ship from store capability for situations just like this. In April, 20% of customer direct orders were shipped from inventory coming from the backroom of our stores by our store manager and his or her assistant while the stores were closed. Our enhanced website and mobile features, our ability to ship from store, our strong digital marketing campaigns, and the tireless efforts of our people all played key roles in fulfilling our brand promise to our customers during the quarter. Beyond the increased volume in direct sales, other favorable trends emerged this quarter. Our women’s direct business accelerated to 57% year-over-year growth. This is 10 times the growth rate we experienced in quarter one of 2019. We attribute this to a rebranding effort of our women’s business, TV advertising that resonated and compelling new products. It also indicates to us that our product offerings are squarely in the sweet spot of what people want while sheltering at home; comfortable, durable, solution-based apparel that can transition from work to leisure activities. And with our targeted digital marketing, we are very pleased that many new customers discovered the Duluth Trading brand during this time. In the first quarter, direct new buyer growth exceeded 113%. As people began to venture outside for a walk, for home repairs or some gardening, we are ready to serve our customers with a great lineup of spring and summer apparel and accessories. I’m pleased to report that the trends I just outlined continued in May of this year with direct providing the bulk of our sales. Total sales for May, on a preliminary basis, were essentially equal to last year. Direct sales were up 66% year-over-year and product gross margins are trending much better, and new buyer additions were 76% better than May 2019. The first quarter performance of our direct business may raise the question whether the store expansion model is still important to our future growth strategy. The answer is yes. However, the rate of new store additions will certainly slow down. Our stores play a key role, and this shock to the system confirmed that. Even with the temporary closing of all our stores, we saw increased customer activity in markets with a store. In fact, direct sales in all store market classes greatly exceeded the non-store market growth during the quarter. Another element of our growth strategy is the pursuit of newness in our product portfolio. For the past year, we have embraced the importance of newness with good results. Plus sizes increased to 10% of the overall women's business and our garden collection was up over 100% this quarter. We also recently rebranded our women's business and launched a new campaign celebrating inspirational women who forged their own way. There was continued success with men's newness as well, especially with the Dang Soft program, print underwear, and additional pant fits. We are also excited to launch 40 GRIT this October. We think we can capture wallet share of a no-nonsense, price-sensitive younger guy with this new line. It is an important step in attracting a younger generation to the Duluth Trading brand and we have other plans on the drawing board to maintain momentum in this direction. While we will continue to accelerate innovation and agility, there is still considerable uncertainty ahead of us. Recognizing that, we've taken several prudent measures to weather the unforeseen, including cutting our original 2020 plan for 10 stores to 4 stores. This reduces our capital expenditures by half and it also signals that we are focusing on a capital efficiency strategy while continuing to make critical yet reduced investments in our future growth. We have high conviction in the strength of the Duluth Trading brand and our omni-channel model. We have made some very important and timely investments over the past few years to enhance our brand presence and the customer experience, and they are beginning to bear fruit. Now is the time to focus on unlocking the full potential of these investments to deliver improved profitability and value creation. In closing, I want to thank our entire team for their commitment and dedication during these trying times. No doubt 2020 will test the mettle of all retailers, yet I feel more confident and excited about our future than ever. Now, I will turn the call over to Dave.

Thanks, Steve, and good morning, everyone. For the first quarter, we reported net sales of 109.9 million, down 3.8% compared to 114 million last year. The decline in net sales was the result of the temporary closure of our stores for approximately seven weeks leading to a 52% decrease in retail channel sales for the 13-week quarter. While people were required to shelter in place, many turned to online shopping and shifted focus to comfortable basics; garden and digging for good deals. As noted, our direct segment net sales increased 32% in the first quarter driven by the shift in store shoppers to online but also significant new buyer growth of 113% in direct. Our women's category especially benefited from the increased traffic to our digital channels. We saw total sales increased by 10% in the quarter. The overall men's business was down 9% in the quarter compared to last year, while women's increased its penetration to 32% of the mix compared to 28% last year. As Steve mentioned, the years of building our brand, as well as the investments we've made in our omni-channel model to get deeper penetration in markets where we have stores, are paying off. The strong direct business in the quarter offset much of the lost revenue resulting from store closures. We saw direct growth in store markets up 40% compared to 26% in non-store markets. As the pandemic hit, we quickly adjusted our advertising spend to increase pay digital prospecting to drive sales and pick up new customers. New buyer accounts were up in every category other than the stores and total new buyer growth increased 59%. Our enhanced web platforms were stable during the heavy volume days that compared to levels we usually see in the holiday peak season. Total website visits grew 43%, mobile traffic was up 67% and conversion was greater than last year in all digital channels. With a captive at-home audience and uncertainty about when stores might reopen, we seized the opportunity to convert inventory into cash. We offered deeper online discounts in several categories to continue moving inventory while the stores were closed. We also activated more inventory to be shipped from the stores in order to maximize the clearance sell-throughs. As a result of the more aggressive product promotions, gross margin for the quarter decreased 570 basis points to 47.6% compared to 53.3% last year. As I mentioned last quarter, we entered fiscal 2020 with inflated inventory levels that were going to take some time to work through. Facing the disruptions due to COVID-19, we initiated a number of actions to adjust inventory both to take advantage of strong online demand and to mitigate strains on cash flow. By working collaboratively with our manufacturing partners to balance the inventory flow while preserving a healthy supply chain, we've been able to adjust our fall and winter orders. We pushed some year-round orders into the spring of next year. We reduced the order size on slow-moving SKUs and we temporarily extended supplier payment terms. These actions will help mitigate the impact of disruptions to our sales channel and keep our inventory management objectives on track, but we still expect to see inventory balances higher through the end of 2020. The year-over-year increase in inventory at the end of the first quarter and projected end of the second quarter will be at the peak, then improving in the back half of the year. We also expect that this near-term pressure on gross margin will impact second quarter results. Turning to expenses. At the beginning of the pandemic, we were quick to take a number of actions to prepare the company for extended business disruptions. Measures to reduce expenses were implemented and with the stores closed, we cut our cash burn from the retail channel in half. That said, while the stores were closed to customers, we kept on a limited staff that was able to fulfill 20% of direct orders while the stores were shuttered. Overall SG&A expenses for the quarter increased less than 1% to 71.3 million compared to 70.6 million in the year-ago period. This included an increase of 1.2 million in selling expense and a 3.4 million increase in general and administrative expense, partially offset by a decrease of 3.9 million in advertising and marketing expense. As a percentage of net sales, SG&A increased 310 basis points to 64.9% compared to 61.8% in the first quarter last year. Included in SG&A was 1.6 million of nonrecurring personnel charges related to the COVID-19 disruption. Excluding the nonrecurring charges, SG&A decreased 2%. Selling expenses as a percentage of net sales increased 180 basis points to 18.4% due to an increase in shipping costs on the greater order volume and additional pay for store staff while the stores were closed and temporary increases in pay rate for the distribution center teams. General and administrative expenses as a percentage of net sales increased 400 basis points to 28.1% compared to 24.1% last year, largely due to the new store growth over the last 12 months and higher depreciation related to technology costs. We opened one new store during the first quarter in Short Pump, Virginia, a suburb of Richmond, and ended the quarter with 62 stores. As a percentage of net sales, advertising and marketing costs decreased 270 basis points to 18.4% compared to 21.1% in the first quarter of last year. The 270 basis point decrease was primarily driven by reduced catalog spend and national TV advertising, which was partially offset by an increase in digital advertising. Our adjusted EBITDA was negative 11.6 million compared to negative 4.4 million in the year-ago period. We recorded an income tax benefit of 5.1 million compared to 2.7 million in the first quarter last year with an effective tax rate of 25.2%. For the quarter, we reported a net loss of 15.1 million or $0.47 per diluted share compared to a net loss of 7.6 million or $0.23 in the first quarter last year. In our press release dated May 4, we outlined additional measures taken to help support liquidity through this crisis, including an increase of 20 million to our borrowing capacity. We ended the quarter with 9 million in cash and 84.8 million outstanding on our total line of credit of 150 million. While we're making every effort to preserve cash and build our financial resiliency to weather a prolonged downturn, we are still making critical investments for our company's long-term future. We’re moving forward with priority initiatives that include upgrades to our omni-channel point of sales system and customer data warehouse initiative to drive revenue growth. Our current plans are to proceed with 4 new store openings in fiscal 2020 instead of the original 10-store plan. This will cut overall capital expenditures by 50% which are expected to be 15 million this year. During the past year, we have made investments in our distribution center network with the result of improving efficiency and reducing costs. Automation enhancements in our Belleville facility, the addition and expansion of our Duluth DC, and the growth of our ship-from-store capabilities have allowed us to wind down the third-party logistics operations and realize cost savings starting this year. Because we just recently reopened our stores, the outlook for when traffic will return to previous levels is uncertain. As such, we are not in a position to give financial guidance for fiscal 2020. However, I can say that the strong results we saw in direct for the back half of Q1 have continued through today. In closing, we are in a solid financial position with sufficient liquidity to manage through these challenging times. We’re scrutinizing expenses while making key investments to continue building our brand and acquire new customers. From where we sit today, we believe this is the recipe for long-term value creation. With that, we’ll open the call for questions.

We will now start the question-and-answer session. Our first question today comes from John Morris with Davidson. Please go ahead.

Hi. Thanks. Good morning and good work in such a challenging time especially with really nice contribution from the DTC channel, the e-comp channel. A question for you, Dave, if you can give us a feel directionally on SG&A in the go-forward quarters, now it sounds like you’re incurring some of the additional costs associated with COVID, but at the same time it sounds like you’ve got some room to maybe cut some costs further, so maybe if you can give us a feel for year-over-year dollar change over the next couple of quarters, could that be down or continue to be down? That’s my first question.

Yes. Hi, John. Yes, we do expect that SG&A year-over-year will start to see some of the improvement decrease year-over-year. On a full year basis, where we’re looking at upwards of $20 million of reduced SG&A, a lot of that might be coming out of the advertising category. Certainly some of the G&A buckets that we talked about with the expense initiatives and some of the pay cuts that we’ve taken throughout the organization, so that’s kind of the full year goal number that we’ve got in front of us.

Okay, great. That’s super helpful. And we are hearing and seeing the pattern out there for companies to see new customer growth. Obviously, there has been the channel share shift, but I think a 59% increase is really commendable for you guys. It says a lot about the potential for future growth as you bring those new customers into the fold. Can you give us some context for what that trend would have looked like prior to this? Would new customer growth have been, I don’t know, single digits, low double digits, so we can kind of understand what that – how significant that increase is, which looks pretty significant?

I can respond to that, John. It’s Steve Schlecht. Good morning.

Yes. Good morning, Steve. Thank you.

These numbers are through May, so it’s more than just a quarter. It’s for four periods. At last year 2019 for the first four periods, we brought on 313,000 new customers. Now that’s in both channels. This year we brought in 511,000. That’s a 200,000 pickup for those four months. And the trend really kicked off in April – late March to April as people were sheltered at home.

Yes, go ahead, Dave or Steve.

We were seeing some strong new buyer acquisition even before the pandemic. It was slowing down in the first part of '19, but it started to reaccelerate even coming out of '19 and up to the point of February and through March we were seeing low-double-digit growth in new customers on that kind of a trend. So we did have some momentum going into it as well.

Right. And in terms of the mix, women’s versus men’s, has your growth in female new customers been higher than the – obviously you do more business with – or a growing amount of business with women’s anyway, so has that new customer female growth been faster than what the average otherwise would be for your growth in the female' business?

It absolutely has been greater in the women’s category as a rate of growth, like roughly double the rate of growth in women’s compared to men’s during the first quarter.

Sorry, Dave. That’s double the rate of men’s in terms of female new customers or just female business overall.

Well, customers that were coming in and buying in the women’s category.

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

Hi. Thank you. Good morning. Maybe just a follow up on the line of questioning there around the customer performance. I guess since you haven’t shared a lot of kind of customer cohort metrics in the past, can you maybe just expand upon maybe what the implication is that you’re seeing for existing customers? Are you seeing kind of lower engagement or is it coming back as the stores reopen, and any thoughts about how those customers hold up in an environment with higher unemployment here?

Well, certainly, Jon, the uncertainty in front of us around a prolonged downturn is going to drive some of that repeat business that we’re getting now. There was a portion of the new customer growth that came into the direct channel that were existing store customers who transacted with us without the details of their credit card information. So we know there’s been a transfer of that 59%; 10% to 20% of it was probably just customers who were already existing store customers and then they shifted pattern to buy online, but the majority of those new customers are new to the brand, and we started to see some early trends of repeat business that give us a good indication that over time they’ll be permanent customers of the brand. But there’s certainly an uncertainty around the coming months, and the back half of the year. But I think the investments we made between the marketing and some of the product promotions were going to serve us well with these new customers in our database.

Okay, great. And then maybe a related question, but when you think about gross margin implications, certainly with the higher promotional environment here as you’ve acquired new customers, just anything you can provide, any reason to think that the gross margin performance could get better here and certainly maybe relate that to inventory which still looks quite high coming out of the quarter?

Yes, we’re already seeing some improvement in that year-over-year contraction of gross margin rate. May has seen that rate improve as we lead up to a pretty good Father’s Day business that we’ve got. We are planning – typically we have some clearance activities in the back half of June and July when things get slow. But I wouldn’t look for the same decrease in gross margin rate that we had in the first quarter. I think it will moderate and then improve as the year goes on, but that’s going to be one of the levers that we certainly will be willing to pull more this year coming into it or now that we’re into it compared to where we thought we may be coming into this fiscal year.

Okay. And then maybe a last one if I could just on the SG&A comments, Dave. Were you speaking to expecting a $20 million net reduction this year, looking at the dollar level for last year? And then just as you think forward, how much of that maybe kind of sustainable layers versus cost that may come back looking to future years?

Yes, we do expect that net amount to be in the 20 million range and a lot of that is variable costs that we’re going to be able to flex up and down based on the sales volumes. So the permanent cuts or some of the temporary nonrecurring cuts, as I mentioned, we had about 1.6 million that we could attribute to this event where we’ve been in, but otherwise going forward it’s going to be mostly variable expenses that we’re able to cut. And to the extent that we – our new store growth will really dictate any future permanent expenses that get layered in.

Okay, that’s very helpful. Thank you.

Yes.

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

Thank you. Good morning. And thank you for all the details in the script. A couple of questions from me. First, can you guys talk more about how you’ve planned inventory receipts for the second half of the year including some specifics around merchandising strategies? Will you go deeper in core categories? With respect to the newness that you’ve planned, will you go deep there? And how are you planning more seasonal categories with respect to inventory receipt?

We came into the year with the receipt plan that focused on newness, that focused on the seasons. Women’s has more of a seasonal aspect to it than men’s. Over half of our greater than half of our inventory balance is in what we call year-round categories and men’s makes up a good portion of that. So when we think about adjustments we’re making for the fall, we’ve been able to make some reductions in some of those year-round but we’ve done our best to preserve the seasonal and the new because that’s really what gives us the most traction as of late. So making adjustments to preserve the newness and even give us some room to chase products as they’re doing well. But I don’t want to gloss over the fact that we realize we’re sitting on inventory levels overall that are elevated and will take some time to work through, meaning getting them back in line with the rate of growth of sales.

Okay. And then building on that last comment, Dave, you mentioned your margin rate has improved thus far in the second quarter. What are you expecting with respect to promotional cadence over the balance of the year? I understand that’s difficult to necessarily respond to given uncertain traffic patterns and so forth, but any high-level thoughts here would be appreciated?

Well, at this point I’d say the third and fourth quarter promotional plans will look similar to last year. We introduced a sale event in the third quarter last year that we’re going to repeat. And then we’ll also flex clearance activities in the third quarter based on how the selling plays out through the balance of the second quarter. But fourth quarter where we’re going to look to a similar pattern to what we did last year as a starting point and adjust as we go, I think we were pleased with the cadence that we had in the last fourth quarter and saw some improvement overall in operating margins. And so that’s what we’re really focused on. So at this point where we’re going to really flex to drive growth is in some of the advertising categories around the digital and placement of TV until the point that we’ve got to make decisions on whether those are running or not. But digital gives us the best near-term, kind of short-term lever to drive growth.

Okay. And then last one, just to follow up on the new customer growth. That’s encouraging. I’m curious. Can you attribute that back to certain marketing campaigns?

Yes. We can definitely attribute back to some of the broad marketing campaigns and then drilling certainly down to the digital spend activity; paid, prospecting on search terms; paid, prospecting on social media, that’s where we picked up a lot of new customers. And when we did it in times that featured some of the women’s product, for example that we also had new women’s book and women’s TV advertising around a rebranding effort there, that’s how we saw the women’s new customer growth accelerate. So we know down to obviously every city and location that the new buyers came from and they’re spread across the country in many locations with some store markets and non-store markets. So we captured that and we’ll be following up with more directed outreach and email campaigns with that file based on the new tools that we’re going to have as part of the data customer warehouse.

Steve, my understanding was that during April and even through May, advertising rates were very favorable for prospecting. Do the economics still work as rates perhaps reflect back to historical levels?

When you say rates, you’re talking about media costs?

Correct. Digital advertising rates.

Do you have any thought on that, Dave?

Yes, the thing about the pay-per-click model is we’ve got very short term and timely ability to throttle that up and down and we can set an ad ratio on what we want to do any given day. So as the costs start to increase, we can throttle it down and be very nimble on that point, if that’s what you’re referring to with the digital advertising. If you’re referring to maybe TV media, then that’s another aspect.

Maybe just last one following up on that, as you look back to the new customer growth, was that more driven by digital or driven by traditional media?

Well, the incremental growth was more driven by digital. Without it, I don’t think we would have seen the same numbers. We would have continued on a similar pace. But I think there’s an element of what was unusual during the pandemic and consumers’ time spent online that really changed that dynamic.

Thank you very much. Just curious here that the Alaskan Hardgear segment seems to be holding up pretty well here. To what you would attribute that strength? And I don’t know if you can give us a sense of kind of what percent of sales that makes up now and kind of where you project that to be maybe in a couple of years. And also curious, along the same lines of questioning, in the new product pipeline whether or not new product releases gets put on hold here or if we can expect to see kind of some new stuff coming out towards the end of the year? Thanks a lot.

Yes. Dylan, thanks. The Alaskan Hardgear is continuing to grow. The rate of growth did slow down a bit but it’s still an important category for us. The percentage that it really makes up of the overall men’s business is still small in the 10% to 15% range at the most. And as that grows, it grew roughly 10% in the first quarter. We’re expecting to continue to kind of feel that. It’s seeing even greater growth as of late as we head into the summer and some of the categories that we are featuring around lifestyle fishing is going to be a segment that’s doing well for us right now. So pleased with that. And new products we absolutely are going to continue to lean into new products. Steve mentioned the 40 GRIT line that we’re coming out with in the fall, that’s an entirely new line of lower price still a high quality but a good entry price point on workwear for men, and we expect that to potentially have some – potentially overreach into women’s future down the road. But we’re if anything really trying to take the overall assortment and call out some of the other core year-round items and focus on new as much as possible.

It brings up an interesting point around as many sort of activity, so to speak, are shut down. Maybe just anecdotally, do you know if you’re seeing kind of a support in business based on things like fishing, hiking, just outdoor activities, as those are kind of the only things that remain? Is that a significant part of your business?

Yes, it certainly is. And I’d add to that gardening. That was a big feature in our women’s side, a search term for overalls really drove that item for us this past quarter. We featured it on the cover of one of our catalogs and so outdoor activity that can be done not in large groups I think is having its moment right now and we’re playing into that really nicely.

Awesome. Thanks a lot, guys. Take care.

Yes.

And this will conclude our question-and-answer session, also concluding today’s conference. We’d like to thank you for attending today’s presentation. You may now disconnect your lines at this time.