Duluth Holdings Inc.

Good day and welcome to the Duluth Holdings Inc. First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Donnie Case, Duluth Trading and Investor Relations. Please go ahead.

Thank you and welcome to today's call to discuss Duluth Trading's first quarter financial results. Our earnings release, which we issued this morning, is available on our investor relations website at irduluthrating.com under press releases. I am here today with Steve Schlecht, Chief Executive Officer, and Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks and then we will 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 predictions of future events. And with that, I'd like to turn the call over to Steve Schlecht, Chief Executive Officer of Duluth Trading. Steve?

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