Duluth Holdings Inc (DLTH) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Duluth Holdings' second-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Donni Case, Investor Relations for Duluth Holdings. Please go ahead.

Thank you, Gary. Welcome to today's call to discuss Duluth Trading second-quarter 2016 financial results. Our earnings release, which we issued this afternoon, 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 Mark DeOrio, Chief Financial Officer.

On today's call, management will provide prepared remarks and then we will open the call to your questions. Before I begin, I would like to remind you that the comments on today's call will include forward-looking statements. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect and similar words and 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.

Duluth Trading expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made today to reflect any change in Duluth Trading's expectations with regard thereto or any other changes in the events, conditions or circumstances on which any such statements is based, except as required by law.

Please refer to our SEC filings and our Investor Relations website for additional information. And with that, I would like to turn the call over to Stephanie Pugliese, Chief Executive Officer of Duluth Trading. Stephanie?

Good afternoon and thank you, everyone, for joining our second-quarter 2016 conference call. I am proud to report that all parts of our business: direct, retail, men's and women's were strong this quarter. This performance across channels and product categories resulted in net sales increasing by over 27%, adjusted EBITDA by 14%, and gross margin increasing 20 basis points over last year to 59.1%. Although we still have our biggest selling periods ahead of us, second-quarter solid performance puts us squarely on track to achieve our 2016 guidance.

Now, let's take a few minutes to cover the key highlights for the quarter. Second quarter set another record for sales and marked our 26th consecutive quarter of increased net sales year over year. Both of our segments performed well, with direct sales growing 24% and retail sales growing 44% year over year. Our men's business, which had a slower-than-anticipated start to spring selling last quarter, gained momentum around Memorial Day and closed out the second quarter on a high note.

Once the summer weather hit, our buy now/wear now male customer didn't disappoint. Our women's business, once again, delivered outpaced results compared to the year-ago period. Women's is a smaller part of our business than men's and we are very pleased that the Duluth brand is gaining greater awareness with women. We look forward to its continued momentum.

Our core products, which are evergreen and provide a reliable sales foundation regardless of external factors, remained consistent as a percentage of total product sales year over year. Our marketing campaigns were very successful in driving sales in seasonal product categories like cooling products and quick dry. Our women's TV advertising, which focused on our Dry on the Fly collection launched in mid-May and was important in the overall growth of the women's business this quarter.

Dry on the Fly is a good example of our brand building product line and we continue to find that women respond very favorably to solution-based apparel designed specifically for their active lifestyles. Our increased gross margin rate was due to improved initial margins as well as the team's successful management of promotional activity in the quarter.

Our global promotions were consistent in the number of days relative to last year and we continue to test various offers to keep the message fresh to our customers and to test results in advance of the key fall and holiday seasons. In addition we know that delivering a consistent, omni-channel experience is a high priority. We keep a sharp eye on making certain that we stay true to our customers across all channels. This is a very important strategic component to building our brand awareness and converting new people into brand fans.

And of course, we want our promotions to be different, proactive and flexible and not reactive to what other retailers may be doing. At the end of the day, the main objective of carefully and successfully managing promotional activity is to win over customers while protecting our gross margin.

Briefly, on infrastructure, the 75,000 square foot expansion of our Belleville distribution center was completed on budget and on time and is now fully operational. Most importantly, there has been no disruption in business or customer service. We are also starting to see some cost savings as a result of consolidating and streamlining certain operations at Belleville. Mark will cover the details of our inventory and SG&A in his comments so now I will update you on our retail store expansion.

As you know, we originally projected four to five store openings in 2016. It now looks like we will close out the year with seven new stores, if everything goes according to plan.

Here is how we expect the stores to roll out. This quarter, we open two new stores in La Crosse, Wisconsin, and Omaha, Nebraska, and both stores are exceeding initial sales expectations. Our Hoffman Estates store in the Chicago metro area opened last week and we will celebrate the grand opening celebrations for that store and our second Chicago area store in Downers Grove next week.

As I have mentioned before, Hoffman Estates is our prototype for build-to-suit so we are especially excited about this opening. We previously announced that we signed leases in King of Prussia, Pennsylvania, and Independence, Missouri, which will be our second build-to-suit store. We expect King of Prussia and Independence to open in the fourth quarter, which slightly accelerates our initial plans to open Independence in early 2017.

I can also confirm that we have signed a store lease in Manassas, Virginia, a suburb of Washington, DC, and are moving ahead to build out that location in the fourth quarter. King of Prussia and Manassas will be our points of entry into the eastern market, where we have the greatest concentration of customers. They will form the initial hub of our East Coast operations and we will have feet on the ground market intelligence to expand from there.

Also looking ahead to 2017, we just signed a store lease in Noblesville, Indiana, a suburb of Indianapolis. This will be our third build-to-suit location and we anticipate it will open late in the first quarter of 2017. With the Indiana location, we will have a cluster of 15 stores in the Midwest. And while there is still ample room to grow in this region, we anticipate that expansion eastward will be our top priority in 2017.

Before turning the call over to Mark, I want to emphasize a couple of key points. We were firing on all cylinders this quarter and this translated into strong results for a quarter that is, historically, our smallest of the year. However, while we may be a new public Company, we are seasoned merchants and we know the absolute reality that more than 60% of our revenues and EBITDA are yet to come.

We are comfortable with that reality and stand by our 2016 guidance. And we can promise you that we won't take our eyes off the ball. We have a great team at Duluth and they've worked very hard to deliver the results to this point. We are engaged and excited to kick off the fall season.

I think it is also important for you to know that we are comfortable with the slight acceleration in our store opening plans for 2016. Since we opened our first store in 2010, we have learned a lot. We have become very effective at identifying great locations and more efficient in building, stocking, recruiting and training for new store openings.

That said, the exact timing of the stores we plan to open in the fourth quarter is subject to many variables, including possible construction delays during the winter months. Another promise I can make is that we will scale our retail operations in a careful and deliberate way that benefits both our customers and our shareholders. With that, I will turn the call over to Mark.

Thank you, Stephanie. We reported second-quarter net sales of $65.8 million, up 27.4%, compared to $51.7 million in the second quarter of last year. Net sales growth was achieved across virtually all product categories and we were especially pleased by the growth in our women's line, which benefited from a national advertising campaign that ran in May.

We had strong net sales growth across both business segments, with a 24.2% increase in direct net sales and a 43.8% increase in the retail segment. The sales growth in our direct channel reflects continued new customer acquisition, which we largely attribute to our marketing efforts.

This positive customer response drove an increase of 19.6% in website visits year over year, along with increased conversion rates and average order values. Our retail net sales growth was driven primarily by new store openings over the last few quarters. We benefited from the addition of our Oshkosh, Wisconsin outlet store and the Sioux Falls, South Dakota store, which opened in the third and fourth quarters of last year as well as initial contributions from La Crosse, Wisconsin, and Omaha, Nebraska, which opened in this quarter. Both of these newer stores are performing very well.

We are continuing to achieve average pay back on our stores in less than 24 months and we see room to further refine our store opening process with each new location. As we've stated before, we expect retail sales to play an increasingly greater role in driving total net sales over time as we open more stores and build greater awareness for the brand.

In the second quarter, retail stores represented 18.2% of consolidated net sales compared to 16.1% a year ago. As Stephanie mentioned, we have plans to open five new stores in the third and fourth quarters, and are looking forward to our eastward expansion, starting later this fall.

Gross profit for the second quarter increased 27.8% to $38.9 million, or 59.1% of net sales compared to $30.5 million, or 58.9% of net sales last year. The 20 basis point increase in gross margin rate reflected a strong product mix and improved product costing. And as Stephanie discussed, strategically managing our promotional activity also had a favorable impact on gross margin during the quarter.

Turning to selling, general and administrative expenses, as we noted in our conference call last quarter, we anticipated that our SG&A expenses would increase as a percent of net sales in both Q2 and Q3 relative to Q1 due primarily to ongoing investments to support our growth. These investments included having two fully deployed 3PL providers in 2016 compared to one in 2015 as well as new store pre-opening expenses.

As it turned out, our second-quarter expense control was better than expected, with SG&A expense closing the quarter at 50.0% of net sales, flat with the first quarter's SG&A expense rate. This reflects our efforts to maximize the use of our Belleville distribution center, which mitigated the impact of our higher cost 3PL providers. On a year-over-year basis, SG&A expense increased 220 basis points as a percentage of net sales, from 47.8% in the second quarter of last year.

Now, running through the major components of SG&A expense, as previously stated, we made the strategic decision to move a women's television advertising campaign into the second quarter. This shift was the primary reason behind the 160 basis point increase in advertising and marketing expense as a percentage of net sales compared to the prior-year period.

Selling expense, which includes store labor expense as well as distribution expense, increased 40 basis points as a percentage of net sales to 13.1% compared to 12.7% in the corresponding prior-year period. This was primarily due to an increase in distribution labor for retail preparation and retail store labor due to our growing number of retail stores.

Finally, as a percentage of net sales, general and administrative expenses increased 20 basis points to 16.1% compared to 15.9% in the prior-year period. This increase was primarily due to increased rental expense and store opening costs related to our retail expansion as well as higher depreciation expense due to additional capital investments. This was partially offset by decreases in personnel costs and professional fees as a relative percentage of higher net sales.

For our upcoming third quarter, we expect that our SG&A expenses as a percent of net sales will increase considerably as compared to the third quarter of last year. This increase will be primarily due to costs associated with the new retail stores, including rent expense, depreciation and labor expense.

As we said on our last conference call, we expect our fourth-quarter SG&A expense to decrease just slightly as a percent of net sales year over year, since we will have an apples-to-apples comparison for our 3PL providers and we will continue to experience cost savings for moving certain receiving and bulk-breaking activities from the 3PLs into our expanded Belleville distribution center. We will also experience some improved leverage on shipping expense due to the increase in retail sales in comparison to the fourth quarter of last year. For the full year, we continue to expect SG&A expense to be up modestly as a percent of net sales over the prior year. Our SG&A expense levels reflect the investments we are making for growth.

Second-quarter adjusted EBITDA was $7.5 million, or 11.3% of net sales compared to $6.6 million, or 12.7% of net sales in the prior-year period. This represented a 14% increase in adjusted EBITDA. We reported GAAP net income of $3.6 million, or $0.11 per diluted share compared to $5.7 million, or $0.24 per diluted share in the prior-year period. Our pro forma net income in the prior-year period, which includes an adjustment for income tax expense at an assumed combined federal, state and local effective tax rate of 40%, was $3.4 million or $0.14 per diluted share.

Turning now to the balance sheet and liquidity, we ended the second quarter with a cash balance of $23.3 million and net working capital of $62.3 million. We had no borrowings on our revolving letter credit. Inventories increased by 40% to $66.9 million, compared to $47.8 million at the end of the second quarter of FY15.

This increase reflects the inventories required to stock five new full-line stores, set to open in Fall/Winter 2016 as well as replenishment inventory for a total of 14 full-line stores this year versus seven stores last year. Inventory levels at the end of the second quarter also reflected our decision to receive Fall/Winter product earlier than last year to allow for the extra time required to prepare inventory for our 14 full-line retail stores.

For our direct segment, we also allowed extra time for our Belleville distribution center to cross-stock product and supply our two 3PL locations. As a reminder, our goal is to maintain sufficient stock to fulfill direct-segment orders complete at least 97% of the time. We achieved this goal during the second quarter. And we want to make certain that we continue this performance level during the third quarter and throughout the upcoming peak season.

Similar to last quarter, the composition of our inventory is very good, with the majority in high-quality core and go-forward products. Speaking of inventories, we have determined that the Hanjin shipping situation will impact less than 0.5% of our inbound receipts. Our two largest suppliers did not use Hanjin at all and other suppliers were able to transfer our business to other shippers. We expect that this matter will have no impact on our cost throughout the balance of the year.

Turning now to our financial guidance. As Stephanie mentioned, we are reaffirming our outlook for 2016. We expect to report net sales in the range of $370 million to $380 million, reflecting a 23.3% growth rate at the midpoint. We expect adjusted EBITDA to be in the range of $40 million to $42.5 million, or a 21.3% growth rate at the midpoint.

We are forecasting GAAP earnings per share in the range of $0.66 to $0.70 per diluted share. This assumes a fully diluted share count of approximately 32.2 million shares and a tax rate of 39% and reflects an increase in net income of 26.8% at the midpoint compared to the 2015 pro forma net income.

We are also reaffirming our long-term growth targets of 20% net sales growth, 25% adjusted EBITDA growth, and 25% net income growth. We now plan to open seven new retail stores in 2016, adding approximately 77,000 additional selling square feet. In addition, we have successfully expanded our Belleville warehouse operations and we are making steady progress on the design and implementation of a new order management system and e-Commerce system, both of which we expect to fully implement in the first half of FY17.

In closing, we delivered strong top-line growth and gross margin expansion this quarter and we are pleased with our team's expense management. We are on track to achieve our growth objectives in 2016 and we will continue to invest in infrastructure and new retail stores to support our growth over the long term.

With that, I will open the call for questions. Operator?

We will now begin the question-and-answer session.

(Operator Instructions)

At this time, we will pause momentarily to assemble our roster. Jonathan Komp, Robert W. Baird.

Thank you. First question I wanted just to ask on the direct business, it looks like the revenue growth accelerated nicely and I wanted to just ask, it sounded like it was pretty broad-based, but maybe if you could provide a little additional color on some of the drivers you think supported the step-up in the growth rate in the direct business?

Sure. So the primary driver of the acceleration in growth in direct was that the men's business which is -- we reported on last quarter had started off a little bit slowly in terms of the spring product and the spring and summer product in first quarter. As we kind of turned the corner, coming out of Memorial Day and the weather became more favorable, our wear now guy really turned up his purchasing behavior.

And we saw that, that the product like Dry on the Fly, like cooling products, they did very well for us in second quarter and we made up some of the ground that was a little bit slower as we ended first quarter and began the second. That was the primary driver of the direct business.

A secondary driver was that we timed our women's advertising differently this year versus last year as we've talked about and we did that specifically because we knew that the product that we were focusing in on, the Dry on the Fly category for women's, was more of a wear now product category as we headed into second quarter and that particular change in strategy paid off nicely for us on the women's business.

Okay, great. And then I know you held your -- or reaffirmed your prior full-year guidance ranges, but I'm curious just to ask, now that you have seen the business re-accelerate and has good momentum in several areas, is there any change in kind of your degree of confidence in the outlook for the year? I know there's still a big portion of the revenue to come yet but maybe if you could just talk about the second half outlook and your confidence in some of the drivers there?

Sure. I would reiterate that when we look to guidance, whether it's the annual guidance, or in this case reaffirming what we shared in the beginning of the year, our goal is to always provide guidance where we have a high degree of confidence of hitting those numbers. So I would reiterate that we continue to have that high degree of confidence and you know, Jon, you hit it on the head when you said there is still a bunch of the year to come; over 60% in both top and bottom lines, and it is the most important part of our year that's ahead of us.

We feel good about the momentum that we gained back in second quarter. Remember that year to date, our business is up just under 24% in net sales and that's pretty much in line with the guidance that we provided for the end of the year. So we're feeling pretty good about that.

Great. Maybe one more if I could then, just on the retail front. I know they're not entirely new geographies, but some of the locations like Omaha and Hoffman Estates, which I know is open for a little bit of time here, could you just comment on some of the initial learnings you've had? Those markets are on the fringe of your current footprint and if you could maybe just share any perspective on things like staffing those locations and kind of operationally getting them ready to go?

Sure. On the staffing portion of it, we do two things that give us really high confidence in continuing to maintain the customer experience that we expect in all of our stores for our customers, no matter where they're located. And that is, we have a manager-in-training program where we bring in future managers for new locations several months in advance of opening those locations.

So that they can not only learn our systems and our operational ways of doing things but also that they can learn our culture and the expectations that we have for our sales and that our customers have for us. And we continue to do that for both of our Omaha and our Hoffman Estates stores; we'll do that as we keep going forward.

In addition, we hire people whether that is on the management team or within the sales associate part of the store, we hire people from the local area so that we have insights into local events and what's going on in the communities so that we can continue to serve those communities as well as we serve the communities that we are in today. And that's something, again, that we'll continue to do.

Okay, great. (multiple speakers)

You asked two -- (multiple speakers) I'm sorry, Jon, you asked two about just like operationally, we have centered all of our retail inventory and shipping out of our Belleville DC. That same group will continue to serve all of our stores and we found a very smooth transition into both of those markets.

Great. Thanks for the perspective. I'll pass it on. Thank you.

John Morris, BMO Capital Markets.

Hi, thanks. Congratulations to you guys on a great quarter.

Thank you.

Really nice pick-up there. Couple questions here. Maybe I will ask a little bit more specifically. You had a really nice beat in the quarter; this kind of dovetails with the last question but I am thinking as we look ahead to the back half, Mark, we're still expecting the investment to continue in SG&A in Q3.

We've heard you about the -- still to expect a lack of leverage in Q3 but still indicating that we get that -- some of the back in Q4. I'm just wondering, has there been any change here in your thought about Q3 SG&A and/or directional sort of spend for Q3 at this point?

I'm wondering, any of the components, is anything kind of planned to change there, either increase or otherwise? Maybe with the specific comments around the plans for advertising and the balance of the year in the advertising spend, so start there?

Sure. John, first of all, consistent with the last call, we continue to expect to see a significant increase year over year in the SG&A expense in the third quarter. It will be primarily driven by the retail expansion. Not only the additional stores that are already open but the pre-opening costs for the stores that will be open through the balance of the year.

The -- to give you a little more color for it, I would say that we're expecting the year-over-year increase in the third quarter to be greater than what we just experienced in the second quarter. In terms of advertising expense, there really are no plans -- changes in our plans for how our advertising expense should roll out for the balance of the year.

Okay, good. And then Stephanie, a two-part question. One is, I know, previously, you've all commented about the start of the current quarter, Q -- whatever quarter we might be in; wondering if you care to give us any comment on that today? And secondly, maybe a little bit more color on product -- a little bit more color than you gave in the prepared remarks on product category performance, talking to men's and to women's? A little bit deeper color on that would be great.

Sure. I will start with just second quarter and then it kind of rolls into, John, what we've seen so far in third quarter. In second quarter, when you think about men's versus women's, our women's business continued to outpace in terms of the growth rate, the total Company and men's. So we're very pleased with that, especially, obviously since we put in the investment in the advertising on the TV side of things in women's.

And from a product category perspective in women's, it was very similar actually across both genders and that was, we saw a lot of strength in the latter part of the second quarter around our summer-solved type of products. So cooling products, quick dry products, those sorts of things really are important for us in the hot summer months and they did not disappoint this year, particularly, as I said, as we kind of came out of Memorial Day and headed into June and July.

As we have moved in and obviously, finished the month of August, we've continued to be pleased with the selling of those summer products and there hasn't really been a significant shift in terms of the importance of cooling, Dry on the Fly, et cetera, type of products. That said, while we're certainly pleased with August results, the August, first of all, is the smallest month of our quarter, in third quarter, and it is a very different complexion of the types of products we sell in August to what we're going to look forward to sell as we get into mid-September and through October, which is the largest month of the quarter.

So, as we saw last year, the -- that mid-range of September is quite telling in terms of how the Fall product is going to turn on and start gaining momentum and we look forward to seeing what's going to happen over the next couple of weeks. But so far for the month of August, we're pleased with the results.

Great, thanks. Good luck for the Fall.

Thank you.

Dan Wewer, Raymond James.

Thanks. I'd like to share my congratulations as well. It's fantastic results.

Thank you.

I want to ask, on real estate, can you talk about what changed, enabling the Company to potentially open two extra stores this year? And also is this a pull-forward of stores that were scheduled to open in 2017? I guess, certainly, the Independence store? That was true.

Sure. So I'll start with the second question first and that's the 2017 question.

We had -- we have said that our anticipated number of openings of stores for 2017 is seven to eight stores. We continue to reiterate that and we expect to open that same number of stores regardless of the fact that we've opened a few more or will open a few more this year. So in terms of number of absolute stores being open, we don't see that as a pull forward.

Now that said, we did, when we signed our lease for Independence, we -- it is a build-to-suit store, as I mentioned, there are more things obviously quite -- that can change and shift on the timing of build-to-suit stores and even our renovations. So at the time when we signed the lease and when we last talked about Independence as a first quarter store, that was the anticipated opening date.

We have found that we have been able to go a little bit faster in the construction of that store than we originally anticipated, working with our builders. Again, as I mentioned just a few minutes ago, we have weather up ahead of us. There could be some shifts in that but at this point in time, we expect that we can open that a little bit earlier than originally anticipated.

As for the second additional store, if you will, in 2016, which is the Manassas, we had the opportunity, as we've talked about before, we're out there looking at markets that we have recognized have the potential for a strong Duluth store in the future and we are out there looking every day to start getting some things in motion in different markets, and Manassas was no exception to that.

And when we found a location that we believed in, we -- the timeframe was such that we knew we could open it in fourth quarter. We thought that it was a great opportunity for us to start creating that hub of stores as we kind of moved eastward and as importantly, it will give us the opportunity to have two stores in the East open for the full year, full FY17, so that we gain not only the benefit of those stores but additional learnings for that part of the United States and that's why we made the decision to open those two stores.

Of the seven to eight stores you're looking at for next year, how many of those will be in that Eastern corridor?

We're focusing in the East. We have a store in Noblesville that will be a first quarter store for us. So obviously, that's still a little bit closer to home but the focus for us will be eastward expansion for 2017.

I also wanted to ask about -- to see the store model. I believe originally, you were projecting first year revenues at about $450 per square foot. You did note that the last two stores are running ahead of plan. How would you characterize that first year's sales budget now? Is it closer to $475 or $500 per foot?

It really, Dan, depends on the type of store. We have three types of stores that we kind of have in our arsenal, if you will, of store types. One is the build-to-suit store; another is a more classic renovation of an existing store; and then a third is historical downtown locations. When you look at those three different types in aggregate, we're close to the model that we've set out.

We've been pleased with the results of a couple of stores that we've opened. They are in bigger markets but when we think about the future, we're holding to that model right now, which gives us the flexibility to create a fleet of stores that have that mix of the three different types and some of those stores might be in smaller markets as we expand into 2017. But I think that the model that we've put out there is going to be a pretty good model for the aggregate or average of the stores that we're opening going forward.

And just the last question that I have. I know that you're not yet providing same-store sales, but can you remind me how many stores have been opened, let's say, more than 15 months? And if there is any kind of qualitative comments you can make about their comp store performance?

Yes, Dan, I'm -- we're counting them up right now. It's -- there are about five stores, if I've got it correct, in terms of the stores that have been open for more than 15 months. I'm having somebody double check that for me right now -- six; I was very close.

Okay.

Those stores all comped for us both in second quarter and in for the year to date; we've been pleased with the comps there. I think as importantly is what we've continued to see is once we hit that 12-month mark or so in a store being open, the direct side of our business continues to grow at the same pace as the balance of the country.

So when you look at the market as a whole, we continue to see with those six stores that are open more than 15 months as well as some of the newer stores that have come on board, that we are seeing strong market overall growth and creating an incremental impact with the retail store in that market. That is one of the things that we're most excited about.

Yes, of course. Thank you very much.

Thank you, Dan.

Thanks, Dan.

Amy Noblin, William Blair.

Thanks and let me add my congratulations on a terrific quarter. I wanted to start with the women's business. I know it's a smaller piece of the business but wondering if you can elaborate on any of your key learnings there, the profile of that customer, who is the incremental customer, is she new, is she a spouse or significant other of the male customer? I will start there.

Okay. So our women's customer, there are a lot of characteristics that are women and men share, things like love of being outdoors, having an appreciation for craftsmanship and a job well done, working with his or her hands, being very active. And those things have been very consistent with both men and women for a long time now.

What we're finding with the women's customer is because our brand awareness in women's is not as high as that of man's but it is continuing to grow, just like that of men's, we're finding that the percent of business that we're doing with new customers in women's is even higher than that of men. So we're bringing new women into the brand every single day and things like TV advertising help us do that.

What we're also finding is that our retail stores are very good attractors, if you will, and builders of brand awareness for women. Our women's business, and our penetration in retail stores in women's is higher than that of the direct side of the Business.

In fact, when you look at the amount of space devoted to women in retail and the stores -- and the sales we get from that, it's commensurate with that of men's. So we continue to broaden our visibility in women's, we are getting rewarded from that.

In terms of the typology of women, as I mentioned, I talked about the outside and the love of working with her hands. The other thing about our women is that they are independent in spirit. They appreciate the innovation and the functionality that we build into our product and as we've expanded our product line while keeping that core of functionality and innovation there, we've seen her respond even more favorably to new product lines.

That's very helpful; thank you. And then on the DC with Belleville up and running, can you just remind us which functions now you're doing through the Belleville DC as well as the 3PLs? And then you talked about already seeing some cost savings. Just wondering if you can elaborate or quantify there?

Hi, Amy. In terms of the key operations, the change that we made is now all of our receiving and breaking bulk is taking place in the Belleville Distribution Center and then it, in turn, supplies the two 3PL Partners with the product they will need for the direct-to-consumer shipments. The other thing that is centralized entirely in Belleville is all of the retail preparation of inventory.

In terms of the efficiencies that we refer to, particularly in the second quarter, what we are really referring to there is the fact that the variable cost of the Belleville distribution center is lower than that that we incur with the 3PL partners. So that is where the advantage came during the second quarter. I would add to that, that we are very pleased with the efficiencies that the Belleville team was able to achieve the in the way they operated the distribution center through out the summer.

Okay, thanks. And then my last one is just on the inventories. Obviously, you've accelerated the store growth and the top line is growing at a very rapid rate. But part of your investment has been on the replenishment side of the business. Can you remind us when we might lap that replenishment piece of the inventory investment?

Amy, when you talk about replenishment piece of inventory, can you just clarify that for me?

Well, I think you are talking about some of the core products and just being able to replenish core products and wanting to build into that so that you were never out of stock on some of the core products and I'm just wondering when you lapped that? Just the inventory relationship to sales when we might lap that piece of it?

Okay, thank you. The core product is -- and the desire and the importance for us as staying in stock on that product so we can fill orders when -- at the moment that people are placing them; that's an ongoing piece of our inventory strategy. That said, where you're going to see the more significant bumps, if you will, of inventory that's caused by bringing in that core product to be in stock will be at the transition of seasons.

So you'll see that at the beginning -- at the end of second quarter, at the beginning of third quarter, you will also see more significant bump of that in the end of first quarter and into -- actually in the end of fourth quarter and into first quarter so where we're kind of ramping up for a new season's worth of core product, that's where you're going to see a little bit heavier of a bump.

What is going to happen, as we go forward, probably for the next, I would say 12 to 18 months, is there's going to be quite a bit of lumpiness in inventory, specifically because of retail store openings, which I know obviously, we've gone through and explained. That's going to be a little bit trickier to kind of keep consistent or flat now because we obviously want to be able to bring in the inventory to open our new stores.

The last thing I would just say that in regards to inventory and it really is a composition piece of things is that our clearance inventory is actually a smaller percent of our total inventory than it was last year. So we are not concerned at all about the fact that first quarter with seasonal kind of summer goods was a little bit slower; the beginning of second quarter was a little bit slower.

We picked up a lot of momentum as we got through the latter part of second quarter and we feel very good about that composition. We did not have to take even the markdowns that we took last year on that type of product.

Okay, great. Congrats again and best of luck for Fall and Holiday.

Thanks a lot, Amy.

Thanks Amy.

Jim Duffy, Stifel.

Thanks. Hello, everyone. Hope you are all well. A few questions for me. The first is on the direct business, nice pick-up in growth. You spoke to that being driven by new customer acquisition, which is great. Are there any insights you can provide on direct business retention or revenue per customer metrics that you're seeing?

What we did see, Jim, in the quarter, on the revenue side or the kind of activity in response from the customer is that our average order value was actually up a little bit year over year. What we found is that, that increase in average order value was not only driven by new customers but it was consistent with repeat customers as well.

We aren't -- we don't give out numbers per se on the retention metrics, but we were pleased with our retention holding steady for the year-to-date. In fact, that we're actually very pleased with that considering the fact that we've added quite a few new customers onto our customer files this year. So, all indications with average order value with our core products continuing to grow at the -- and represent the same amount of our business as they did last year are indicators that our customers continue to come back and be pleased with what we have to offer.

That's great; thanks. And then I know that you test marketing for results ahead of the key seasonal period. Are there any messages that been testing very well that are worth highlighting, as you look into the season?

I would say that without showing too much of our hand around promotional strategy, one of the things that we have found is that our customers do respond to different types of promotional offers. So and particularly, the type of testing that we do revolve around different media.

So a postcard or a catalog or an e-mail, et cetera, and kind of the balance of those. In addition, we've tested different types of offers whether it is a take 20% off or a tiered offer, where you get $10 or $15 or $20 depending on what you spend. We found that it is nice to kind of shake that up a little bit and give our customers a fresh messaging every once in awhile.

Okay, great. And then last one for me, Stephanie, with the retail footprint, you're moving beyond small, medium size markets to the suburbs of much larger markets. Do you have any preliminary thoughts on how those stores may behave differently?

I think that's a good question, Jim. Right now, we've got days of Hoffman Estates under our belt to learn from. I would say that very initial results are that our customers are responding very similarly, when you look at things like an penetration of women's business or core product penetration. What we have found is that we have just as much wonderful feedback and wonderful response in bigger markets as we do in some of the smallest markets that we're in, which I think is really encouraging and exciting.

And we're learning every day. In the same way that we've been learning for the past six years since we opened our first store around how we merchandise and how we present goods and how much floor space we dedicate to certain things. We will continue to learn as we enter those larger markets and I'm sure we'll make some adjustments in the future.

Thank you very much.

Thank you.

Eric Beder, Wunderlich Securities.

Yes, good afternoon, everyone. This is Bryan Caronia on for Eric. We would also like to extend our congratulations on a very solid quarter.

Thank you.

Thanks.

So my first question is related to the store openings; one, I guess short-term and the second a bit longer term. And I apologize if this had been brought up prior in an earlier question or in the prepared remarks but despite your increasing the number of store openings this year from five to seven, you maintained guidance for full-year CapEx. Any chance you potentially reconciled that or am I just overlooking something specifically there?

This is Mark. You're correct; we're maintaining our guidance overall on CapEx and the fact is what's helping us there is that the capital expenditures that we had budgeted for our infrastructure projects is running a bit favorable to our original planning and we're seeing that offset the impact of additional retail stores. That's the main difference that we're seeing.

Fantastic. And then I guess looking into 2017, obviously the focus on the East Coast expansion. Any chance you could discuss over the longer term, what you see out of the East Coast marketplace? Obviously, as was alluded to in the prior question, moving into a lot more suburban areas of very large-scale markets.

So what you see it being in terms of a contributor, I guess even as it would stack up to the Midwest or your core Midwest region? Do you see it as being a bigger opportunity, given sort of the higher concentration of consumers or how do you reconcile your expectations of the East Coast over the long term?

I would say that it's a bigger dollar opportunity for us long-term. When you look at the direct business and where our business falls in regionally in direct, it's very similar to where population density is.

It's where our customers live; it's where we do well and we get most of our sales. In fact, our top three states are Texas, California, and New York. So you can see that those markets, longer term, are going to be big opportunities for us.

And I think that what's exciting about how we are expanding into those markets as well as what the long-term opportunity is, is that we do have that visibility to where our customers live, where the population is, so we can be very selective and very on point in terms of the site selection that we do or the market selection that we do. In addition, I think that what's also exciting for us is that a large market like that also offers us the opportunity to express our brand in various ways like historical downtowns or build-to-suit locations or renovations at existing retail spaces. So longer term, yes, we do think that we've got a great opportunity as we head eastward.

Great and if I could just squeeze one more quick one in. In terms of the direct business, can you give me any color in terms of what you're seeing in terms of mobile trends? Would be certainly interested to see how that might be impacting your direct business, both now and how you see it impacting it in the future? Thank you.

Sure. So mobile continues, as it does kind of industrywide, continues to be a growing part of how our customers are interacting with us, whether that is through opening e-mails or looking for a store location. One of the great things is that we do also continue to see increased conversion and revenue per customer in our mobile -- with mobile devices.

So we continue to make improvements and engage more strongly with customers. That said, as we continue to make those improvements, we're also well aware that we have more opportunity in the future, and part of our e-Commerce platform redesign will be bringing on a stronger mobile site and mobile experience for our customers.

Great. Thank you very much and good luck moving forward.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Stephanie Pugliese for any closing remarks.

Well, again, thank you, everyone, for participating in today's call and for all of your questions. I look forward to reporting back to you on our third-quarter in just a few months. Now, let's all keep our fingers crossed for an early cold snap in that weather in September. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.