Good morning, and welcome to the Duluth Holdings Third Quarter 2020 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 would now like to turn the conference over to Donni Case of Investor Relations. Please go ahead.

Thank you, and welcome to today's call to discuss Duluth Trading's third quarter financial results. Our earnings release which we issued this morning is available on our Investor Relations website. I’m 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'll 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 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 prediction of future events. And with that, I'll 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. I’m pleased to report that net sales for the third quarter grew 13% to $136 million, largely driven by a 40% growth in direct sales year-over-year. Our e-commerce business continues to grow at the same pace as the second quarter with 15 million site visits, up 30% compared to last year. All 65 of our retail stores are open during the quarter. Sales in the stores declined just 16% year-over-year, which was the best store performance we've seen since the pandemic began. Throughout this year, COVID-19 has unfortunately remained an unpredictable challenge in the retail landscape. It has tested the agility and resolve of our entire organization. I'm very proud of our team's efforts in delivering the best customer experience regardless of the challenges. Right now the recent surge in the virus case load is creating new concerns around holiday shopping beyond the usual apprehension that all retailers experience. That said, we've done everything within our control to be prepared for peak season. We're fully staffed across all our operations to handle the early shopping that has been driven by pre-season promotional activity. Our inventory levels are in good shape. And we're fortunate to have customer-centric technologies in place, like buy online, pick up in-store. In fact, the pandemic has really accelerated the adoption of BOPUS, which handled over 33,000 orders in the third quarter. We expect that order level might triple in the fourth quarter. This quarter we also added text messaging for curbside pickup to further ensure an easy and safe retail shopping experience for our customers. So far, our early Black Friday sale event was effective at pulling some business forward with direct sales in November, increasing 30%. Regarding retail, all of our stores were closed on Thanksgiving, and store traffic on Black Friday was below what we initially anticipated. There's still a lot of distractions out there. The resurgence of COVID is a concern regarding in-store shopping, and it also clouds the outlook for consumer spending. We know that delivery providers are working around the clock to handle increased volume and shipping deadlines. Even so, research indicates that 47% of consumers are more interested in shopping online than last year, which puts added pressure on the delivery network. Well, these big question marks are outside our control, we've been busy looking beyond this very different holiday season. During the quarter, we launched two new brands. In early October, we introduced our new entry-level workwear for Men, 40 Grit, and in late October, we launched Best Made, which is a premium offering with design-focused hard goods and apparel. With Alaska Hardgear, 40 Grit, and now Best Made, we’re building a portfolio of distinct brands within the Duluth Trading ecosystem. We’re both enthusiastic and confident that we can apply our winning formula of innovative solution-based products, memorable storytelling, and strong customer relationships to build out the next phase of our direct-to-consumer platform. In doing so, it's important to know that our process is very deliberate and totally connected to the Duluth brand reputation for quality products that support hands-on work, active hobbies, and the modern self-reliant lifestyle. Our goal is to expand brand recognition with a wider and younger audience, as well as offering an extended range of options across the good, better, best price categories. Fortunately, we also started to pivot toward digital marketing even before the pandemic, and now are rapidly scaling the learning curve. Our investments in digital tactics continue to drive sales and strong new customer growth, which was more than 20% in the third quarter. We’ll continue to expand our testing and learnings in this space and expect that our new customer data tools will realize additional efficiencies in our overall marketing program. Finally, I want to wish you and your families a wonderful and safe holiday season. I'm grateful to our team that has worked so hard for our customers in the greater community. Due to the successful efforts of our paint Buck Naked campaign, we were able to donate $120,000 to the American Cancer Society. We’re also the proud sponsors of the Ideal National Championships that honor the hard work and talent of tradespeople across our nation who faced the challenges of 2020 to make our daily lives a little easier. With that, I'll turn the call over to Dave to discuss our financials and operations.

Thanks, Steve, and good morning, everyone. As Steve mentioned, we're pleased with our third quarter performance. We reported net sales of $136 million, up 13% compared to $120 million last year. Effective and timely brand messaging, coupled with strong product lines drove top-line sales momentum during the third quarter. As expected, the holiday shopping season began early this year, kicking-off in mid-October. Our second annual Big Dam Birthday sale event ran September 24 through October 5, and beat last year's event overall by 5%. We also pulled forward a key sale event into late October to finish the quarter strong and avoid the busy Election week. Within non-store markets, direct sales grew 37% and even more encouraging, within store markets direct sales grew 46%, reflecting the strong brand awareness that in-market stores can generate even while shopping shifts to our digital channels. As Steve mentioned, all of our stores were open during the third quarter. Store traffic was lighter than last year, as expected. Our store sales improved throughout the quarter and ended down 16% compared to last year. Most recently, store traffic has fallen off roughly 30% compared to last year, coinciding with rising COVID cases and renewed pandemic restrictions to minimize non-essential activities. Our investment in digital tactics continues to fuel sales and new customer growth during Q3. Customer traffic through digital channels repeated the volume of the second quarter with 15 million site visits, up 30% compared to last year. In addition, improving conversion rates led to digital product sales growth of 42%. Digital prospecting continues to drive significant new buyer growth and help convert our high brand awareness into a first purchase. We leveraged social media to prospect for new customers, driving a third of the sales on our site. We also completed the first phase of our Adobe CRM initiative and began introducing targeted email campaigns at the end of the third quarter. We've just started leveraging the power of this tool, and we've identified opportunities to generate growth in 2021. The strong demand we experienced in the first half of the year for our functional, comfortable apparel continued throughout the third quarter. Overall, our Men's business was up 12%, driven by strength in the core Men's categories including underwear, fire hose pants, denim, and long tail tees. Alaskan Hardgear was up over 50% compared to last year fueled by our Spring/Summer clearance styles. We were also excited to launch two new brands, 40 Grit and Best Made, in time for the holiday shopping and are very optimistic about the future potential both lines represent. Our Women's business delivered very strong growth this quarter, increasing 15% over last year, driven by comfortable basics and the new collection. Strength in workwear essentials like flex fire hose and overalls continued from the Spring/Summer with sales increasing 50% from last year. Our plus line continues to grow and now represents 11% of the total women's apparel business. Cold weather gear like baselayers, lined bottoms, sweaters, and outerwear is off to a strong start with cooler temps across the country. Third-quarter strong sales momentum further improved our inventory position, which ended the quarter up 17% compared to Q3 last year, which is more in line with our current sales trend. Our gross margin rate declined 220 basis points year-over-year to 52.4%, reflecting deeper discounts on clearance goods. However, the third quarter year-over-year product margin decline was much improved compared to the trend in the first half of the year, which was down 330 basis points. We do expect the gross margin rate in Q4 will be lower than last year, but not to the same degree as the Q3 decline. SG&A expenses for the third quarter increased 6.5% to $68.2 million compared to $64 million in the comparable period. This included an increase of $4.1 million in selling expense and a $5.4 million increase in general and administrative expense, partially offset by a decrease of $5.3 million in advertising and marketing expense. As a percentage of net sales, SG&A decreased 320 basis points to 50.3% compared to 53.5% in the third quarter last year. The improvement was largely driven by reduced advertising spend, offset by increased shipping costs and costs to support website sales, higher retail overhead costs driven by new store growth, and increased depreciation expense associated with technology investments. Selling expenses as a percentage of net sales increased 120 basis points to 16.7% due to greater shipping costs from the higher mix of direct sales as a percentage of total sales. In the fourth quarter, we expect this expense deleverage will continue with strains on the last-mile network adding costs and heavier staffing needed to fulfill direct orders. Our stores are also continuing to support direct order volumes, either through buy online, pickup in-store or ship from store. General and administrative expenses as a percentage of net sales increased 140 basis points from last year to 23.4%. In dollars, G&A expenses increased $5.4 million, largely due to new store growth over the last 12 months. Higher depreciation related to technology and logistics investments, and a one-time credit last year related to a restricted stock forfeiture. We opened three new stores during the third quarter in Florence, Kentucky, a suburb of Cincinnati; Orland Park, Illinois near Chicago; and Springfield, Oregon near Eugene. This brings our total store count to 65. There will be no additional store openings for the remainder of the fiscal year, but we still have one planned for next year. As a percentage of net sales, advertising and marketing costs decreased 580 basis points to 10.2%, primarily driven by a reduced catalog and TV advertising, as well as cutting billboard spend in local store markets, partially offset by higher digital spend. During the fourth quarter, we plan to continue driving direct traffic with increased targeted and prospecting digital spend, but the overall amount will be down 15% to 20% from last year's Q4, due to less TV ads and fewer catalogs. Our adjusted EBITDA for the third quarter increased $4.2 million or 57% to $11.4 million and represented 8.4% of sales and 230 basis points of EBITDA margin expansion. For the quarter, we reported net income of $900,000, or $0.03 per diluted share compared to net income of $200,000 or $0.01 in the third quarter last year. Moving on to the balance sheet, we ended the quarter with net working capital of $136.6 million, including $12.8 million in cash and $91.9 million outstanding on our total line of credit of $150 million. Our cash flow initiatives have continued through the third quarter, and we expect to be free cash flow positive by year-end. Given the continued uncertainty with rising COVID-19 cases and the impact that is having on store traffic, we’re not in a position to give financial guidance for fiscal 2020. While there are macroeconomic factors outside of our control, we have made every effort to ensure peak preparedness for the most critical quarter of our fiscal year. We’re confident in our brand, the strength of our omnichannel model, and our team's ability to provide exceptional customer service in this holiday season. I join Steve in wishing you all a safe and healthy holiday and a happy much anticipated New Year. With that, we'll open the call for questions.

Thank you. We’ll now begin the question-and-answer session. Our first question is from Jonathan Komp from Robert W. Baird. Please go ahead.

Yes, hi. Thank you. Good morning. I wanted to just start out with more of a near-term question. I know Dave, you highlighted some of the trends quarter-to-date that you're seeing, but could you maybe just expand a little bit more on the trends across direct and retail? And any thoughts on factors that might impact the balance of Q4, both thinking about sales as well as any shipping constraints? And any associated costs there if you could give a little more color?

Yes, sure Jon. As Steve mentioned, direct business for the month of November was pretty healthy, up 30%. It certainly was an interesting month, the first couple weeks were much lighter; direct was positive in all that period. But we accelerated coming out of that period and had our first global event kicked-off two weeks ago, with a lot of success. So we're pleased with how the direct business continues to trend, now our stores are in the 30% range down from last year. And that's I think a reflection of just softer foot traffic and hesitancy of shopping in-store. And so we've pivoted to a lot of our store staff helping with direct orders in that period of time. Overall, though we’re thinking that we were able to manage the expenses, between store fulfillment and direct fulfillment fairly effectively haven't had a significant problem with the shipping at this stage, we worked proactively with our shipping partners to make sure that we had ample capacity and haven't had any delays in pickups. So feel good about that. But, we're expecting it to be a pretty healthy business continuing through the next two weeks. And, I think we'll see where that translates into store versus website. But clearly online shopping is the preferred form of shopping this year.

Yes, that's really helpful. Appreciate that. Maybe switching to margin. I know you've had a couple quarters now of encouraging margin improvement and inventory also improving while that's happened, so maybe just broader context, if you could about kind of the progression of margin when you think about some of the areas of savings you're getting, and the sustainability going forward, if you could just talk more about your outlook for margin and the ability to continue the improvement you've seen?

Yes, beyond this year, we certainly expect our gross margin or product margin to be a big contributor to operating margin expansion. I did articulate that we're going to expect our fourth quarter gross margin to still be a bit below last year, but not to the near degree that we've had it year-to-date. And that's reflected of the cleaner inventory positions that really helped manage the product gross margin. Now, we've got a logistics network that's now all under our control, and we pulled out of third-party logistics over the summer, we're ramping-up a new facility in Dubuque that is going to provide productivity and efficiency improvements for us going forward. That will certainly help with our variable expense and be able to leverage that into 2021. And, simply the fact that we've rationalized a CapEx spend from fewer new stores. We're not going to see the additive fixed costs from depreciation, and so we expect to be able to leverage that into the future as well. Advertising has been a big contributor of leverage for us this year. And that's been somewhat of a shift from national marketing and advertising primarily through TV to digital, and that allows us to be more targeted and more nimble with how we spend those dollars. So we expect that to continue as well.

That’s helpful color. Thanks, Dave.

Thank you.

The next question comes from Jim Duffy from Stifel. Please go ahead.

Good morning, guys. Hope you do well.

Good morning.

First, congratulations on great execution through challenging times. You've done a particularly nice job with the inventories in the cash flow. I'm curious how you're planning inventory receipts as you look into Spring, maybe what are some of the prevailing strategies behind your buys and the assortment planning?

Yes, Jim, we started our Spring assortment planning six months ago, and focused it on a sales plan that we knew was going to be more realistic without some of the new stores that we had been on the pace of, so it's more reflective of the sales forecast that we have going forward which means we'll be able to buy to those levels. But we're also using the learnings from the prior Spring season to adjust the categories within the assortment with an eye towards what's really working. Our Spring/Summer event was strong on the Women's side with garden as a key focus. Our Men's saw a lot of great success with some of the warmer weather summer items that we introduced with lighter weight fabrics. So all of that learning goes into our assortment for next year. And, it gives us enough capacity to chase some of the items that are going to work really well, and even some year-round items that do well in the first half of the year, we can re-up and chase in the back half of the year. So it gives us more nimble ability to do that without the overhang of a large inventory position that we spent a good part of this year working down. But we're well on to adjusting our buys for fall winter right now for next year. And that's being informed by success and items that we're seeing sell right now.

Great. And then a follow-up question on the marketing efficiency. Really nice leverage from reduced spending to legacy media forms like catalog, TV, Billboard. Do you guys see that as permanent savings or is that more circumstantial given the COVID backdrop? Should we take this to be reflective of a more permanent shift to digital marketing spend and more marketing efficiency? Or are there dollars coming back into the model as business starts to normalize?

No, I mean, we think these are permanent shifts. We’ll always have some presence on TV, that is an important aspect of our brand awareness program. So that'll be there, but not to the heavy degree that we've had in the past, digital has proven to be much more efficient and flexible near-term. So we'll continue to learn there. And it's also been a tremendous new buyer acquisition tool for us through prospecting on social media, so we'll continue to do that, catalog will also continue to have a presence in those specific times of year, but we've been reducing that for the last few years as it is. And, I think the efficiency that we're at today is the big improvements are largely behind us now; it's a lot of fine-tuning. And using our customer data tools to be as targeted and personalized as possible because we think that that's really what's going to be the big improvement for us going forward.

Okay, great. And then last one for me, just on the multi-branded strategy with 40 Grit and Best Made, what are you guys seeing in terms of average selling prices? Are you seeing 40 Grit bring in a new consumer, is this actually mixing average selling prices down and you just see more units?

It's pretty early on with 40 Grit and Best Made. 40 Grit certainly is designed to attract a more cost-conscious, younger customer. And that is what we're seeing. The average ticket is lower than the Duluth Trading core items. But our objective is to keep that at everyday low price and not have to use it as a markdown clearance vehicle. So we’ll maintain a constant margin on that. But it's still growing, and we're just now starting to see a lot of the product reviews on our website that feel interest as we go. And we're adjusting some of our marketing tactics around that. But it'll be a slightly lower price point, average ticket size than the core Duluth goods, but we're expecting that we're going to see some volume through that category as it gains more traction and more awareness; Best Made is more of the higher ticket, fewer items, but premium. And again, that's still very new. We haven't really introduced any of the new products yet that we want to bring to the brand that will start coming next year. And we'll give our higher-end customers something to aspire to and a little premium level as well.

Great, that's all I have. Thank you, guys.

Thank you.

The next question is from Dylan Carden from William Blair. Please go ahead.

Yes, thank you very much. Dave, I just want to clarify two points on the model. When you're talking about gross margins for the fourth quarter sequential improvement, are you expecting kind of promotional activity, at least the depth of it to improve relative the way your inventory levels are such that you should see kind of a sequential improvement? And then on the advertising costs, is 10% or so low double-digits, kind of the new level that you anticipate being able to hold even in a more normalized environment?

Yes, I mean, starting with the advertising. We do think low double-digits is what we'll be able to hold to that going forward, so that is the assumption for us. On the gross margin, what we're going to see in the fourth quarter is a level that's comparable to the third quarter in terms of its gross margin rate. But, that's still going to be down a bit from last year. And going forward, we're expecting that to start to improve in the first quarter in 2021, with the inventories as clean as they will have been in a while. So yes, that's what we're looking at.

Great, and then maybe for both of you just on the sort of the portfolio approach here, I'm just kind of curious sort of your thinking, as far as rolling some of these brands directly onto the Duluth platform, is there an opportunity longer-term to kind of incubate and maybe spin some of these off? How do you think about their presence in stores? And just given kind of the environment that we're in, is this something where you can maybe add a couple more tuck-ins to kind of sort of further the strategy, just would be curious about your thinking around all that?

Yes, Dylan, we definitely think that our portfolio approach can sustain more sub-brands. We're not actively out there looking for them, but when they come our way or we do see something that may be attractive, we'll certainly consider it, it needs to fit the criteria within the overall Duluth umbrella brand position, but if it's allowing us to extend into a different demographic or category that we think is complementary and can drive some additional business for existing our customers, then we're going to look at that. We haven't really thought about spin-offs or being heavily transaction-oriented business. So far, what we've got with Alaskan Hardgear, our development of 40 Grit, our purchase of the Best Made brand, we're committed to those going forward. And, we don't necessarily see that they would need to leave, but where we could see growth is if there's a store format that might make sense for those brands on their own, and that I would say that's a ways away; we don't have anything on the drawing board, but that's certainly a longer-term strategic potential as these gain some scale and really can stand on their own. And this is the first phase of having them stand on their own is just a presence on our website as a separate tab. So that's going to be the big learning for us as we nurture these brands.

Yes, and that's more what I meant. Yes, and I guess maybe, to that kind of same vein, the new customers that you're seeing kind of, and I think you called this out last quarter as well, would you attribute I know, you're doing some more innovation on the sort of core Duluth side as well. But would you attribute some of that at least to these newer brands as well? And then I was just curious, I know we're kind of early days here. But have you seen kind of a stickiness of that new customer, maybe sort of coming back to purchase around holiday or anything that kind of gives you some comfort, as sort of the acquisition that you've seen in this environment that makes sense?

Yes, from the new buyer, stickiness we're seeing that it continues to play out as we have in the past. And so the surge of new acquisition this year does give us confidence that they're going to be retained at least at the same level, if not better than we've had in the past. Part of our confidence in the ability to do that is having tools that will allow us to personalize outreach to those first-time buyers and make them a second-time buyer. In the past, we haven't really been able to do that effectively at all, and so with our new CRM model, that is a major benefit that will allow us to see some higher retention rates from this new buyer group. So yes, very positive with the fact that our new buyer file is going to be fueling some of the growth for us in the coming years where new stores were a growth vehicle for us in the years past.

Great, thank you very much. Have a great holiday.

Thank you.

Thank you.

The next question is a follow-up from Jonathan Komp from Robert W. Baird. Please go ahead.

Yes, thanks. Just two more follow-ups if I could, one, just on the store strategy; you have seen only one lead sign for 2021? Could you maybe just follow up and share a little more perspective on what you're thinking for the store strategy here and any pivots going forward?

The store strategy was started to formulate a year and a half ago when we really started to understand the maturity curve of the stores. Our focus has been getting the most out of our existing stores, but we understand that they do have a role to grow our market; we still think that's an important element to brand growth long-term. So a physical presence in markets where we don't have stores is still an objective of ours. But we want to give ourselves the time to evaluate the nature, the shape, and the cost of the stores. And really, the sites that we think are going to be most fruitful for those new geographies we're going to explore for a physical presence. So we're giving ourselves time right now to do that; I'd say more to come down the road as we design some concepts of store future and start to test some concepts with that. But 15 stores a year at two plus million in build-out cost is we don't have that on the roadmap today. And so we're looking for other ways to have some physical presence to complement the online presence because we know that that's really what helps the brand the most.

Yes, great. Maybe just one more broader question on operating margin, given the slower pace of retail growth, along with the advertising saving and Dave, your comments about product margin improvements in the years ahead, just how are you thinking about operating margin? And maybe, yes what might it take to get back to high single-digit type levels or higher over time? How are you thinking about that?

Yes, we do certainly have our sights set on operating margins that we're at the levels we previously enjoyed, high single-digits operating margin, low double-digit EBITDA. In fact, I think longer term, we can get to mid double-digit EBITDA margins, given the leverage that we have with the scale now with stores and logistics and systems in place, what's going to get us there is certainly going to be some product margin expansion. We in the past were in the mid-50% range higher than that when you include the shipping revenue, which we're not assuming we're going to get back in the future. But more sustainable product margin that's based on some full price selling, it's based on a mix of goods that are really relevant to the season that they're in, and markdown strategies that are informed by some automated systems versus a very manual approach today. All of those will lead to gross margin improvement for us. And on top of that, I think where we're going to see leverage is on some of the overhead and a bit on the variable expense, where we're going to land this year on advertising is probably a good spot for us in terms of feeling enough marketing across the brands, especially some of the newer brands, that sometimes require a higher amount of ad spend. But gross margin, variable expense and leveraging the fixed cost is what's going to get us back to those high operating margin levels.

Understood, very helpful. Thanks again.

Yes, thank you.

Hi, just a couple of number questions. Do you have a number for CapEx for 2021?

We haven't released that yet. But what we talked about is it's going to be a similar level to where we are this year. We only have one store planned for next year. But we do have some initiatives in technology and logistics that will require some additional capital, but should be at a comparable spend to what we're going to do this year, which is $16 million to $17 million in CapEx.

Excuse me a second. In the quarter, I'm just trying to reconcile the variation in the stock-based compensation, had a swing of $1.1 million or $0.03 a share pre-tax, is that included in gross profit, or cost of goods sold?

No, that's in the SG&A.

SG&A and what sort of numbers should we see going forward that was pretty big swing for the quarter?

Well, versus year-over-year? The normal amount is what we expense this year. What we're comparing against to last year was an unusually low stock expense, because we had a forfeiture last year, when our CEO left the company and so that was a one-time credit last year. So that's why it looks like a big variance year-over-year.

Okay, thank you.

Okay.

This concludes our question-and-answer session as well as the conference. Thank you for attending today’s presentation. You may now disconnect.