Duluth Holdings Inc (DLTH) 2017 Q1 法說會逐字稿

Good afternoon and welcome to the Duluth Holdings first-quarter 2017 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, and welcome to today's call to discuss Duluth Trading's first-quarter 2017 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 we 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 materially differ 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 statement 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?

Thank you, Donni, and welcome, everyone, to our first fiscal quarter of 2017 call. Before I begin my remarks, I want to say what a privilege it has been to work side-by-side with Mark these past seven years. He's been a great friend and colleague to me and to everyone at Duluth. I want to thank Mark for his dedication to growing our Company while keeping it financially strong. And I also want to express my gratitude that he will remain hard at work until the end of this year, and be fully involved in a smooth transition.

Now moving on to our first-quarter results. I'm pleased to report that net sales increased 22% to $83.7 million, which marks our 29th consecutive quarter of increased sales year-over-year. Gross margin also increased this quarter, reflecting strong product margins despite continued headwinds from declining shipping revenue in the direct business.

Even though we had a very slow start in February, sales started to gain momentum as we moved through the quarter and into April. Given the overall challenging environment for retailers in the first quarter, our team did a great job in driving top-line results.

For the first quarter, direct sales grew 6% year-over-year. Since this was off the pace of prior quarters, I want to give you some additional insight on how the quarter played out.

February is traditionally a clearance month. However, this year, we did not have sufficient clearance inventory to gain any meaningful promotional advantage. In addition, we were coming off of a more promotional fourth quarter than in prior years, and we saw that the consumer's expectations around getting a deal were higher than in the past.

As a result, February's direct sales declined year-over-year. As we moved through the quarter and had the benefit of our women's advertising campaign for the spring selling season, we saw direct sales improve to more normalized levels. That said, the stronger latter half of the quarter was not enough to offset the difficult results from February.

Underneath the top-line sales results, there were some important signs of strength in the business. This quarter, website visits grew by almost 17%, which was about 200 basis points higher than the growth in the first quarter last year. Again, we saw a similar pattern with monthly website visits building momentum throughout the quarter.

In addition, our new customers were up 31% over last year, an indication of the strength of the brand and of the effectiveness of the marketing activities that we put into place for March and for April.

Turning to retail, our retail growth of 140% is exceeding our expectations, with new store sales making a significant contribution in the first quarter. I know some of you on this call have visited our new stores, and I have been fortunate enough to attend just about every grand opening.

I can say, without reservation, that there is energy and excitement when Duluth comes to town. With this type of enthusiastic welcome, our new stores are performing extremely well. And we anticipate that our newest store openings will certainly hit or possibly exceed our timetable for return on investment. Our existing stores also continue to do well and, on average, we are meeting or exceeding our $450 per selling square foot target for our entire store portfolio.

Barring any unforeseen circumstances, we anticipate opening 12 stores and one outlet this fiscal year. We opened for stores in the first quarter to serve the Indianapolis, Boston, Detroit, and Providence areas. Early in the second quarter, we opened a store in Westchester, Ohio, a suburb of Cincinnati. And in two days, Pittsburgh, Pennsylvania, will have a Duluth store.

Since our last call, we have added Grandville, Michigan, a suburb of Grand Rapids, to our roster of 2017 stores. We have also added Louisville, Kentucky, where we will open one of our iconic stores in historic downtown Whiskey Row. Both stores are anticipated to open in fiscal fourth-quarter, in time for the holiday shopping season.

We are investing in our growth, and that investment was particularly impactful this quarter. In the first quarter of this year, we opened four stores versus none last year, and we have two more stores that have opened in early second quarter. In addition, we built brand awareness in women's through incremental marketing spend. We expect that we will see the benefits of these investments in future quarters and years.

As we look forward, our continued expansion of retail will most likely produce some lumpy quarters relative to our historical profitability. In order to help you understand the impact of pre-opening expenses on SG&A, Mark will go into more detail on the anticipated timing of store openings during each of the remaining quarters of this fiscal year.

As I have said before, we firmly believe that delivering a true and robust omni-channel experience is the future of retail. And while we are fortunate to have our roots in the direct business, there's no doubt in our minds that our retail stores are boosting awareness and are now an important part of the Duluth brand.

Long before experiential retailing became the new industry buzzword, we created the Duluth store concept to be a highly engaging customer experience. Our customers appreciate and comment on the friendliness of the staff, the interesting exhibits in a number of our stores, and the fact that they can enjoy coffee and water while they shop. It is truly a store like no other. And we can track that customers, both loyal fans and newcomers, are willing to come from miles away to experience a Duluth store.

New stores are driving incremental growth across the brand and across their respective markets. As I mentioned, overall new customer growth increased 31% in the first quarter, and 20% of that growth came from our retail stores.

On a separate yet important note, our East Coast stores are doing very well, which supports our conviction that our Duluth store concept and brand have widespread appeal beyond our Midwest roots.

In addition to the volume that we create within the four walls of a store, we continue to monitor the impact of a new store's opening on direct sales in its local market, especially in the larger metro markets. So far, the direct sales trend in the markets surrounding our new stores is similar to that of the smaller markets in terms of a deceleration in the first 12 months.

The good news is that now we are seeing evidence of a higher growth rate in direct sales in a market where a store has been open for more than 12 months. This re-acceleration is not just hitting the Company average for direct growth, but it is actually exceeding it. Since some larger-market stores will anniversary in the fourth quarter, we will have more data by the first quarter of fiscal 2018.

However, what we see now is very encouraging. These initial readings confirm that it is important to create multiple touch points in markets where we have high customer concentrations in order to fully realize the potential of Duluth Trading as a true omni-channel brand.

Moving on to our men's and women's business lines, our new product introductions are doing very well in both categories. We are gaining at greater share of his closet by expanding lines of perennial favorites, like Ballroom khakis and Wrinklefighter shirts that he can wear no matter what business he is in.

In women's, we brought back our live-action commercial for the No-Yank Tank this quarter. The No-Yank Tank has already become a customer favorite; and, responding to the popular demand, we have extended this line with camisoles and T-shirts. To optimize the growth potential we see in the women's business, we will continue to invest a larger portion of our marketing dollars to this segment.

In closing, I think that most retailers would agree that there is no normal businesses-as-usual month, season, or quarter anymore. To us, that means that we have to think harder and smarter about what we can do better and how we can anticipate our consumers' evolving expectations.

We are constantly reviewing all the levers that we have to drive our business forward: new product development, store expansion, marketing allocations, and the timing of promotional activity; all with an eye on what is best for our brand, and, most importantly, for our Duluth customer.

We built a powerful business model with deliberation and care, and we see substantial opportunity ahead to engage our customers where, when, and how they want to shop, while providing them an experience that is uniquely Duluth. We believe this is the best way to build long-term sustainable value for our shareholders.

With that, I will turn the call over to Mark.

Thank you, Stephanie. Before beginning my financial review, I want to reinforce that I will remain fully engaged as CFO until my successor is appointed. At that time, my role will be to ensure a smooth transition of my responsibilities, including the relationships I appreciate having with our analysts and key investors.

Now, moving on to first-quarter results. We are pleased that our first-quarter net sales and earnings were in line with our expectations, and we remain on track to deliver on our full-year financial guidance. We reported net sales of $83.7 million, up 21.9% compared to $68.6 million last year. This was our 29th consecutive quarter of increased sales year-over-year.

Net sales growth was driven by a 5.7% increase in the direct segment, and a 139.7% increase in the retail segment. We grew across virtually all product categories, and especially in men's and women's first layer products. The growth in our retail segment was primarily from having 11 more stores this quarter compared to last year.

Our four stores that opened in the first quarter have performed exceptionally well and above our expectations. New customers continue to drive sales growth in the direct business. Our website visits were up 16.5% year-over-year. As we anticipated, direct sales growth was lower in the markets with retail stores that have been open for less than one year. However, we were pleased to see above-average direct sales growth in the markets with retail stores that have been open more than one year.

Gross profit increased 22.6% to $48.6 million or 58.1% of net sales compared to $39.7 million or 57.8% of sales last year. The $8.9 million increase in gross profit was primarily due to higher net sales. The 30 basis point increase in gross margin rate reflected a stronger product margin from product mix and strategic management of promotional activity, partially offset by a decline in shipping revenues.

I want to comment next about our earnings per share. We reported net income of $0.01 per diluted share this quarter compared to $0.10 per diluted share in the first quarter of last year. This year-over-year difference in earnings per share was due to two actions that we took to invest in our growth during the quarter. The women's television advertising campaign, which was $2.7 million, reduced diluted earnings per share by $0.05. A $2.1 million increase in retail store pre-opening expenses reduced diluted earnings per share by $0.04.

Turning to SG&A, selling, general, and administrative expenses increased 39.4% to $47.9 million compared to $34.4 million last year. This included an increase of $5.9 million in advertising and marketing expenses, $2.7 million in selling expenses, and $4.9 million in general and administrative expenses.

As a percentage of net sales, SG&A expense was 57.2% compared to 50% last year. As a percentage of net sales, advertising and marketing costs increased 320 basis points to 25.2% compared to 22% in the three months ended May 1, 2016. As a percentage of net sales, general and administrative expenses increased 320 basis points to 17.4% compared to 14.2% in the three months ended May 1, 2016. As a percentage of net sales, selling expenses increased 80 basis points to 14.6% compared to 13.8% in the three months ended May 1, 2016.

Excluding retail store pre-opening expenses, which I will discuss later, our SG&A expense was 54.5% compared to 49.8% last year. This 470 basis point increase was primarily due to the 320 basis point increase in advertising expense. We spent $2.7 million on a women's television advertising campaign during the first quarter, whereas last year we did not run television advertising until the second quarter.

We ran the campaign during the first quarter this year so that we could transition from winter to spring with our very successful women's No-Yank Tank. While this increased our advertising expense ratio for the quarter, we believe these ads were an important contributor to the increasing sales momentum we saw as the quarter developed.

Other factors that contributed to increased SG&A expense as a percentage of net sales were personnel expense, customer service expense, rent, and depreciation. The increase in personnel expense reflects the impact of new salaried employees hired during the second half of 2016 to support the continuing growth of our business.

The increased customer service expense was due to the growth in the retail business, which has a higher customer service expense rate than the direct segment. The increased rent and depreciation expenses relate to our new returns facility and the Belleville warehouse expansion that took place during the first and second quarter of fiscal year 2016, respectively.

As we've mentioned, we expect to incur $500,000 to $600,000 of pre-opening expenses per store. These pre-opening expenses include rent, employee wages, and store-related advertising. We had $2.3 million in pre-opening expenses in the first quarter, as we opened four new stores and prepared to open several in the second quarter. This contrasts to last year, where we did not open any new stores until June and incurred just $200,000 in pre-opening expenses.

Let me take a few minutes to walk through the timing of our future retail store openings and the impact of pre-opening expenses on SG&A expense. Generally, we incur most of our pre-opening expenses over a two-month period: one month before the store opens, and the month of the store opening.

We plan to open our Pittsburgh store this Thursday, June 8, and we expect to open one more outlet store in the back half of the quarter, which totals two retail stores and one outlet in the second quarter. In the third quarter, we plan to open three new stores: two in the first half of the quarter, and the other in the second half of the quarter. We also intend to open three new stores early in the fourth quarter, so some of those pre-opening expenses will hit in the third quarter.

We reported net income of $400,000 or $0.01 per diluted share compared to $3.2 million or $0.10 per diluted share last year. Adjusted EBITDA was $2.7 million or 3.2% of net sales compared to $6.6 million or 9.6% of net sales last year. Referring to our balance sheet and liquidity, we ended the first quarter with a cash balance of $13.6 million and net working capital of $59.1 million. We had no borrowings on our $40 million revolving line of credit.

Inventories increased 30% to $75.7 million compared to $58.2 million at the end of the first quarter of fiscal 2016. We ended the quarter with less inventory and clearance than last year, both in absolute dollars and as a percentage of total inventories.

Turning now to our financial guidance, we are reaffirming our outlook for 2017. We expect to report net sales of between $455 million and $465 million, reflecting a 22.3% growth rate at the midpoint. We believe that given the strong performance of our retail business, this segment could account for as much as 27% to 30% of total net sales for the fiscal year.

We expect our full-year gross margin rate to be in line with last year. We expect advertising expense as a percentage of net sales to be lower than last year in the second, third, and fourth quarters and for the total year, primarily due to growth in the retail segment.

We expect our full-year selling, general, and administrative expenses as a percentage of net sales to increase over last year, due primarily to retail store pre-opening expenses I discussed earlier.

We are forecasting earnings per share between $0.66 and $0.71 per diluted share. This assumes a full-year weighted average diluted share count of 32.3 million shares, and a tax rate of 39%; and reflects an increase in net income of 4.2% at the midpoint compared to our 2016 net income.

We expect adjusted EBITDA to be between $47 million and $49.5 million, or a 17.8% growth rate at the midpoint. As discussed on last quarter's call, we believe our long-term growth goals of 20% net sales growth and 25% net income and adjusted EBITDA growth are achievable. However, our focus will be on investing to grow our business during the next 18 to 24 months.

As Stephanie mentioned, we plan to open a total of 12 new retail stores and an outlet in 2017, adding approximately 150,000 additional selling square feet. Our retail store forecast reflects our plans to spend $2 million to $2.6 million in capital expenditures and starting inventory on each new store.

In addition, we continue to make progress on our new order management system. We are currently in the testing phase of this project, and we expect OMS to go live in August of this year. However, we've decided to defer the deployment of our new e-commerce platform until early next year to avoid any potential risks associated with converting to a new website during our peak selling period.

We continue to expect capital expenditures of $31 million to $35 million in fiscal 2017.

In closing, we delivered solid results that were in line with our expectations, and we believe we are on track to achieve our growth objectives in 2017.

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

(Operator Instructions). John Morris, BMO Capital Markets.

This is Brandon Cheatham on for John. Thanks for taking our question. I just want to follow up on the deferral of the e-commerce platform. I think previously we had discussed that that was on schedule. Has anything changed there? Did we hit any snags in that? And are you still experiencing the full cost for that this year and just delaying the implementation?

So, this is Stephanie. Hi, Brandon. The story around the e-commerce delay or transfer into the beginning of next year is really around our OMS launch and the testing that we made the decision a little while ago to do more full round of testing on the order management system to ensure that we were executing it fully and making sure that there were no glitches before we went live.

As we made that decision to extend the testing period, what we found was that the interim period and then the launch of the e-commerce platform was getting a little too close for comfort for us, in order to be assured that as we get into the larger months of third and fourth quarter, we wouldn't have any sort of business implications, if you will, or hurt on the business.

So rather than take that risk -- and I know that on these calls and in meetings, we've talked a lot about our desire to always execute well. It is one of our culture and brand fundamentals. And so we made the decision to defer it so that we would consistently give the customer a great experience, particularly in those higher-volume months. And that's why we deferred the e-commerce platform.

The e-commerce platform itself has been on track, and we feel very good about that implementation. It was just, again, a timing for the combination of that order management and e-commerce.

In terms of the cost of the implementation of that e-commerce platform, we have been recognizing that cost through 2016 and into 2017. Most of that has been capitalized cost, and so that is on our books. The good news, if you will, is that the potential lag around the performance of an e-commerce site -- which often occurs when your customer is just getting used to something new -- we're expecting to happen in the lower-volume months of early first quarter, next year.

Okay, understood. I was just wondering, just if I could follow up on new customer acquisition to the extent your new store openings are contributing to that -- how has that progressed? Does it change from market to market? And what are you seeing from the new stores that you've opened so far this year?

In terms of how many customers are brand-new to the brand?

Yes.

We've actually seen it fairly consistent, that somewhere in the 40% to 50% range of new customers within the first six months or so of a store opening are new entirely to the brand. What we found is, when we looked at first quarter storewide -- meaning all of those stores: old stores, young stores, et cetera -- about 35% of the people shopping in those stores are new to the brand overall. So really healthy amount of custom -- new people coming through the doors on our retail stores.

Okay, thank you.

Jonathan Komp, Robert W. Baird.

First to start off with a clarification: I just wanted to ask Mark, did you mention 27% to 30% of sales for the year can be retail in terms of the mix? And related to that, I think that implies, at the midpoint, a pretty similar direct growth rate relative to what you've just experienced in the first quarter. So I just wanted to clarify and make sure that's how you're thinking about it.

Yes, Jon. On number one, I did say that the retail business could represent 27% to 30% of the business for the year. And yes, as you are suggesting, that would imply the direct segment growth rate of mid to high single digits.

Got it, okay. Makes sense. And maybe following up on the website visits, I think you mentioned it was up 17% year-over-year. And I was hoping you could help bridge the gap a bit. I think the gap versus your direct sales of only 6% was pretty wide relative to historical. So, is there anything you can point to, or is it too near-term focused to look at any individual quarter on those metrics?

Yes, Jon, the biggest gap in that delta is that we saw a decline year-over-year in the number of telephone sales -- or in the dollar amount of the telephone sales that we received. Not surprising; it's just a continued migration, if you will, of customers out of calling via the phone and into website visits. So that's the biggest chunk, because the direct, of course, includes both Web and calls.

The other piece of it is just to kind of -- there's a really three components, is conversion and average order value. Our conversion rate held steady for the quarter, year-over-year. Our average order value was down just a little bit. And that is primarily due to the growth in our base layer category, and particularly the strength of the No-Yank Tank in our women's segment while we actually maintained our units per transaction.

Because she was coming in -- a lot of new -- a lot of new customers are buying that No-Yank Tank, which is great for us, long-term. She was buying several No-Yank Tanks but they are $14 items, so that initial order value did come down a little bit this quarter.

Okay, great. And then a bigger-picture question, the accelerated retail buildout. First of all, I'd like to ask just how you are thinking about the optimal rate of growth for retail, especially given the short-term margin implications from that decision.

And then separately, it sounds like you are pleased in total with the customer acquisition and the total revenue growth, but obviously a pretty meaningful shift in growth across the channel. So, just wanted to ask how you are viewing that shifting dynamic. Sounds like that could be short-term as some of the growth rates start to normalize on the retail store base. But if you could maybe comment on those two bigger-picture topics, that would be helpful.

Sure. Let me take the easier or more straightforward one first, and that is the retail expansion and the pace that we're looking at. Obviously we have now talked about 12 stores versus the 10 to 12 range that we've given in prior calls. We are very confident in that number of 12 stores.

And that is reflective of not only the strong results that we have been seeing in small markets, large markets, Midwest, East Coast, build-to-suit, renovations, et cetera -- we are seeing very, very strong results, across the board, of types of stores and markets. And that gives us a lot of confidence to continue to expand that channel.

In addition, as you would expect, we have a number of potential locations in the pipeline at any given point. That is to continue the flow of retail expansion. It is also to protect ourselves if, for some reason, a particular location might not work out. So far we've been fortunate in that some of these locations in the pipeline have actually given us some opportunistic opportunities to open a store a little bit earlier than we had potentially thought originally. So that's why we're seeing that extension or acceleration, to a certain extent, of retail expansion.

The other thing, too, not to discount the fact that our team is growing; they are getting stronger. Our processes are improving, and we're gaining a lot of confidence in our ability to execute well in the opening of the stores.

Now on to the more complex and larger strategic point around the business and how things are shifting a little bit in our business. When we look at brand expansion -- and we've talked about this before -- at the end of the day, it's an omni-channel brand expansion for us. We're fortunate enough to have a very strong business model in that we control our destiny by channel, by product area, via direct interaction with our customers.

And one of those responsibilities, if you will, in having that direct business model to the customer is that we are looking at what is the best way to serve our customer. And what is our customer telling us in terms of where the growth lies?

Retail has exceeded our expectations. We feel confident, as I mentioned just a moment ago, around the retail expansion. And on the flip side, if you will, it allows us to continue to grow our direct business, but not force growth via over-promoting and getting tangled up in a very promotional environment. Doesn't mean that we're not going to have promotions.

It doesn't mean that we're not going to look to break down barriers to convert new lookers to brand fans. But it does mean that we are able to be aware and in control of our promotional activity on the direct side of the business while we're continuing to grow our overall business at 20%-plus via retail expansion. And that's a really important thing for us.

All that said, I would also note that there are two headwinds to direct: one in the short term, and one that we see continuing through. The short-term one is that when we're opening new stores for that first 12 months, we see a deceleration in direct. And certainly as we continue to open more stores and in bigger markets, the dollar value of that deceleration is creating some downward pressure on our direct growth. That is a short -- everything that we know today is that is a short-term issue because as we get past that 12-month mark, we will see a re-acceleration.

The other headwind that we face on the direct side of the business that is a sales or a volume implication, as well as a gross profit, is our shipping revenue. Our shipping revenue continues to decline as a percent of total sales. It declined year-over-year in dollars in first quarter. And so we're also recognizing that downward pressure. That has just come at us a little bit faster and a little bit harder than we expected when we modeled out this business a year or so ago.

Okay. Thank you. I'll leave it there.

Dylan Carden, William Blair.

Can you just speak here to the productivity level of new stores? It looks like from a total fleet perspective, you are getting this nice lift and have been over the last year. And then, going forward, what your expectations are, particularly as you're opening in markets that aren't as big as some of the more recent ones. And lapping harder comparisons.

Dylan, we continue to be very pleased with the performance of all of our new store openings. And referring to all the metrics you're familiar with, the payback on our initial investment in 24 months or less, the EBITDA margins in the mid-20s, all of those performance metrics are continuing to look very solid. Big stores, small stores; all the markets we've been opening in.

Excellent, thank you. And then if I can just get one more. The decision -- or perhaps it was always known to you -- but it looks like maybe one of these stores now is going to be an outlet that was previously planned to open. Was that a change in design? Or can you speak to the decision to open an outlet, particularly another one in the Midwest, as opposed to maybe some of your newer markets.

The outlet store was always within our plans. And to be clear about Red Wing, it is a combination store, if you will. We had the opportunity to open in that market. It's a great local market. The Red Wing flagship store is in that market as well. It's close enough to home, if you will. Because as you probably remember, we process all of our returns via our Verona or Belleville facility, so that allows us to be cost effective in getting those returns to a retail location, having something close by.

The other thing, as I mentioned, it's a combination store. One of the things that we've started to see success with in our outlet stores -- and it's really due to customers crying out for it -- and that is we devote a section of these outlet stores to best-selling, perennial favorites: Buck Naked underwear, No-Yank Tank, Longtail Ts, et cetera -- and we are selling both true outlet merchandise as well as our core bestsellers in those locations. And that combination is actually working quite well for us.

Excellent. Okay, thank you very much.

Jim Duffy, Stifel.

First question for you, Stephanie: can you share some observations about the changing consumer shopping patterns, and what you think that may mean for the direct business patterns over the balance of the year? And I guess related to that, how that informs your direct strategies, timing of promotions, nature of promotions, and so forth?

Sure. I would say that one of the things that we've observed so far year-to-date is that the consumer -- it continues to be a less predictable pattern of shopping. And there are a lot more -- the highs are higher, the lows are lower, week by week can month by month. We definitely experienced the second kind of phenomenon, if you will, that I would mention; and that is, particularly in direct, consumers are very promotion and deal sensitive.

And what we found is that -- one of the things that we haven't yet mentioned on this call is that in first quarter, we were three days less on global promotion than we were in first quarter of last year. That said, the number of days that we were on global promotion, the consumer reacted more strongly. So our days of global promotion, those lifts and that business was higher than we've seen in the past, which tells us that there's a higher sensitivity, again, to those promotions. And when we have shifted even a promotion one week to another, we definitely see volatility in the business.

And that's one of the things, Jim, that feeds into what I was hoping to articulate just a moment ago with Jon Komp, and how we see direct kind of go forward, is we want to be aware of some of these shifts in consumer patterns of behavior; but not be beholden to denigrating the brand, via deeper and deeper promotions or more and more global promotions.

And again, just remember, when I'm talking about global promotions, I'm talking about take-20%-off-of-your-order type of promotions. And so it's our strong desire to keep our brands healthy and strong and to not be forced into growing direct at the cost of brand.

So our promotional cadence, to be very specific: for the rest of the year, while we will certainly still test different types of promotions and test some timing on things so that we continue to be up to date and informed, our goal right now is to hold onto a similar promotional cadence or activity level as we had last year for the balance of the year.

Okay. So the consumer responding to promotions isn't unique to Duluth. Is there perhaps a counterintuitive strategy our a way to test it, perhaps backing off of promotions may in fact result in a better yield?

Well, one of the things that we saw is in the month of February, as I mentioned in the call a little bit earlier, we didn't have meaningful clearance -- end-of-season-clearance inventory to create big events. And that certainly hurt us.

In addition though, Jim, one of the things we also did was shift out a global promotion, take 20% off your order, timeframe, out of February and into March. And what we did find is that when we did that promotion in March, the response was really strong. That said -- and I mentioned this just a second ago -- the highs are higher, the lows are lower. Once we came off of that promotion, we definitely saw a drag on the business surrounding that 20%.

So again, we're looking on how we can cadence the promotions in such a way that we're not creating too much drag year-over-year. But at the same time, we are creating just enough tension, if you will, to not be on promotion all the time and continue to pull down the margin -- or to risk pulling down the margin, I guess is the right way of saying it, on the business.

Okay. That's very helpful perspective. Thank you.

Eric Beder, Wunderlich.

This is Bryan Caronia on for Eric. So the first question I had -- and you kind of touched on it in a few of your prior -- a few of the prior questions. But related to you noting that some of the quality of sales in your direct business were rather steady, as it pertained to conversion and average order value being reasonably flat year-over-year.

Can you coalesce that with -- obviously you're noting how weak the selling trends in February were. What could that potentially imply about what you saw about conversion and average order value, as well as online website traffic during the more stronger March and April periods?

So, the -- to take it one piece at a time: Web traffic, as we continue to go through the quarter, got stronger each month. So February was weak; March was stronger; April was the strongest of the three.

From a conversion standpoint, overall the conversion rate was flat. The month-to-month, off the top of my head, I think it was fairly similar month-over-month. What I can say is that it kind of -- and it goes back to what we've been talking about with promotions and global promotions -- any time we're running a significant promotion, whether that is a 20%-off-your-order, or a percent off a significant category for us -- like men's bottoms would be an example of that -- we see our conversion rates go up during those events. And that's been very similar year-over-year. We see that type of conversion change based on the promotional activity.

From an average order value, just kind of taking their third of the three, our average order value is actually very steady to last year. Where we started to see a dip, just that slight amount, as I mentioned, was as we were running women's No-Yank Tank ads and when we saw promotional activity around some of our base layer categories, which tend to be lower retails.

Again, we saw customers buying the same units per transaction; but they were entering into the brand at a lower threshold, if you will. And the average order value went down because of that.

That said, one thing I do want to add on that is, what we have found -- and I believe we have mentioned this in prior calls -- is that new customers that enter our brand via our what I would call ambassador products -- those products like Buck Naked underwear in men's, or Fire Hose work pants or flex, or now No-Yank Tank in women's -- those customers, while they will nibble to start with the brand, and perhaps purchase a slightly lower average order value, downstream they are very good customers for us. And we find that they not only come back to buy some of those same consumables or staple items, but they also cross over into different categories and become long-term, very strong brand fans for Duluth.

So it's good news for us, as we're entering people into the business with things like No-Yank Tank.

Great. And then if I could just add one more; sort of do a [par] question about the online business. Could you quantify or rationalize the, as you said, year-over-year decline in shipping revenue on a dollar basis, given your direct sales business did overall increase in on a dollar amount?

And then as you are obviously talking about the cadence of direct sales in the markets where you are opening new stores, how does that impact what your view is on the cadence of direct sales growth on a more medium- to longer-term basis?

Do you believe that you have levers to create a better degree of stableness overall, whether that's from the more mature markets or improving the declines in the rate of growth in direct sales business, as you are opening stores maybe past the 24- to 36-month timeline you sort of laid out in the medium-term?

So, I'm going to rephrase the second part of your question just to make sure that I understood it. Is what you're asking, have -- do we have some plans in place or some thoughts around how we mitigate some of that first-year deceleration in direct in the markets around new stores?

Or just mainly in general, especially now that with such a significant increase in your store base, how you see direct sales and the rate of that growth really in totality playing out.

I think that, to be very honest with you, it's one of the things we're learning a lot about, and that we're going to know a lot more about as we get through the end of this year, and into first quarter of next year when we anniversary.

If you think about it, right now, we are in the more-than-12-month timeframe of less than half of the stores that we have opened. As we get through the balance of this year, we will have 15 or 20 stores more in that grouping to be able to give us a lot more information.

One of the things that we are finding -- and it's very new information, so we're proving this stuff out as we keep going -- is that we are finding that customers that come to us originally from a retail store -- so that 50%-ish in the first few months, and that 35% that I mentioned in terms of the total fleet last quarter -- those customers are much more likely to cross back and forth between channels in the future.

So we do see a much more fluid interaction with our brand: learned about you in the store; even though you are only 10 miles away, the next purchase I make online. Then I come back to the store. Then I go back to the direct side. And that's something that we're picking apart right now to truly learn so that we can model into late 2018, into 2019, and understand where we see overall the direct business could go because of the retail stores that we'll have in the markets.

Remember, too, that one of the examples that we've given is that the Twin Cities market, when we added stores to that market and compared the total market after that with the stores in it, plus direct, to what direct would have done without stores, we tripled the size of that market by having multiple touch points for the customer.

We're seeing similar type of growth in other markets. Obviously in many markets, we have one store. And in the market where we have two stores, our Chicago metro area, we haven't yet anniversaried those stores.

So again, I think it goes back to we're learning a lot. We have very strong indications that the customer is and omni-channel customer; that retail benefits direct, and direct certainly benefits retail, particularly in how we locate and open our stores.

Did I answer that question?

Yes, perfect. Thank you very much.

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

Well, thank you so much, everyone, for joining today's call. And Mark and I will look forward to seeing many of you at our upcoming investor conferences in New York, Chicago, and Boston. Thank you.

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