Good morning, and welcome to the Duluth Holdings Incorporated Fourth Quarter and Fiscal Year 2019 Conference Call. All participants will be in listen-only mode. [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 fourth quarter and fiscal year 2019 financial results. Our earnings release, which we issued this morning is available on our Investor Relations website at ir.duluthtrading.com under press releases. I am here today with Stephen Schlecht, Chief Executive Officer; and Dave Loretta, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we will turn the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified by the use of the 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 would like to turn the call over to Steve Schlecht, Chief Executive Officer of Duluth Tradings. Steve?

Good morning and thank you for joining us today. We are now in unprecedented times as a result of the Corona virus pandemic. Like companies across all sectors here at Duluth we are taking precautionary measures to ensure the health and well being of our employees, customers and suppliers. This situation is very fluid and changing rapidly and no one can predict its ultimate outcome. Our plans for fiscal 2020 made just a few weeks ago are already out of date and under review. For example, we are actively evaluating temporary store closures and we will fully comply with all federal, state and local regulations. To-date we have closed eight stores primarily in densely populated areas in the northeast. With our omni-channel model we are fortunate to have a strong online business which accounts for over 50% of our sales. That said we know that many customers are experiencing financial uncertainty that could have a significant impact on direct channel sales. This is definitely a time that challenges all retailers. But in Duluth's 25-year history we have been through difficult times before and have emerged stronger. I think our resilience rests on our foundational three brand pillars; solution based products manufactured with high quality craftsmanship, humorous and distinctive marketing and an outstanding customer experience. We have created a lifestyle brand that speaks directly to the modern self-relying American will always prevail regardless of challenging times. Our response to all this uncertainty is to take a very conservative approach to our business across all categories of spending. We're reviewing the store opening plans and have already made adjustments that Dave will discuss in more detail. We are closely monitoring our supply chain to keep our inventory in line and we have adequate financial resources to weather the storm. While we are…

Thanks Steve. And good morning everyone. For the fourth quarter we reported net sales of $259.6 million, up 4% compared to $250.5 million last year. On a comparable 13 week basis sales grew 7% overall and was in line with our updated expectations. Fourth quarter EPS was $0.75 compared to last year of $0.64 and included a benefit of roughly $0.02 from one-time tax credits. Pretax earnings for the quarter grew 14% and marks the second quarter in a row of operating margin expansion. This was consistent with what we shared on our call this time last year which was our goal to see operating margin expansion in the back half of the year as we cycled, past a heavy period of investments in new systems, upgraded logistics and new stores. Our adjusted EBITDA was $39.9 million, up 13.7% compared to $35.1 million last year. Despite some of the sales headwinds in the quarter as Steve mentioned we successfully executed plans to improve customer service through all our channels. We flowed inventory for better in stock positions and we managed expenses that improve the bottom-line results. While the customer response to our holiday offering was robust we do see further opportunities to refine our execution and drive additional efficiencies. We'll apply these learnings to improve our results for the next holiday season. Within our sales channels, direct product sales were up 1.5% on a 13 week basis compared to last year and shipping revenues were up 42% or $4.7 million compared to $3.3 million last year. Store sales grew 15.5% driven by new stores opened in 2018 and 2019. We added three new stores in the fourth quarter and roughly 29,000 gross square feet to our retail footprint. We ended the quarter with a total of 61 stores compared to…

We will now begin the question and answer session. [Operator Instructions] The first question is from John Morris with D.A. Davidson. Please go ahead.

Hi thanks. Good morning everybody. Hope everybody's doing well there and holding up given the circumstances. Dave question for you, I guess on the inventory can you give us a feel for what that would have looked like excluding the early receipt that you wisely took in to avoid some of the delays in the ports and everything but what would it have been ex those receipts? So that's my first question.

Yes, sure John. What it would have been was I'd say roughly a third of the increase is related to pulling in receipts for the spring and summer earlier into the year-end.

And with respect to the cost control programs that you could put into place in terms of your expense line, your SG&A and I know you're revisiting the budget now and I'm sure everything's quite fluid. I'm just wondering directionally could it be that SG&A actually, SG&A dollars could actually be down as opposed to continuing to increase even with those expense curves in the coming year?

Yes. Certainly there is enough control within our expense structure to maintain the level of spend. We do have increase in fixed costs related to the stores we've opened up last year and planned this year but obviously there is enough flex in the -- in our marketing, our variable expenses are very flexible on a sales line. So we certainly could see SG&A flat under that scenario just given the circumstances that the timing of when we think business is going to revive. So I think that's a possibility.

Okay. Great. And then my final question really kind of in two areas. I wanted to get a little bit more color on in terms of your investments of the new systems talking about the customer enhancement at the store level, can you tell us a little bit more about that what you expect maybe the timing of - what that is some examples of the timing of it and what kind of benefits you could get and then same with the adjustments to your new planning system? Thanks.

Sure. At the store level the investments that we're working on now include an upgrade of our POS system and this has been underway for a number of months beginning in late 2019. We're on the path for having an omni-channel platform within our stores that makes the experience a lot more seamless for our customers both when they come to the store to return items and we're able to attribute the return to the original order. If it was online or in another store we're able to fulfill goods within the same transaction at the POS system if that good is not in the store but maybe it's going to be shipped to the customer’s home. So we're able to put into our sales associates and information at the register to much more quickly and seamlessly make that transaction and have it visible across the chain so that the order information and the inventory information is real-time. The other aspect to our POS system is simply upgrading off an older platform that wasn't going to be scalable for us and it's not a requirement for new hardware but it's a software that is being run on the registers. And then I think you asked about the planning systems. That's also in the works our merchandise planning tools that we've integrated today have allowed us to be a more nimble on store replenishment but we haven't reached the point where we can truly get to store level assortment planning and streamline a lot of the back-office activities around all the way up from product development to managing the lifecycle of that item through its life. So a merchandise lifecycle planning tool is what we're just developing now but honestly that's on hold given the current environment and something that we will pick back up when we have clear visibility. The other system that we are continuing to proceed with is our customer data warehouse re-platform and that's been under way for a number of months and we are proceeding with that and we know that that's going to be able to give us our marketing aspects much more personalized and make it more efficient. So that initiative is well under way and we're proceeding with that.

Great. Thanks. Appreciate it.

Yes.

The next question is from Jonathan Komp with Baird. Please go ahead.

Yes, hi. Thank you, Dave, could you maybe just start maybe if you won't mind walking through the balance sheet, the major items and the available liquidity either at year-end or even currently, if you have any current views on just kind of where things stand and kind of more detail there.

Sure, Jon. Obviously, the inventory levels are the first area that we think about. And given my comments around setting receipts based on earlier plans, that is an issue that we will work through this year. As I said, a lot of our goods are year-round and don't require markdowns to really hit seasonal period. So we feel good about that. But at the end of the day, they are higher than we ideally like to be at. We do see that we can get by the year end under a conservative sales plan, inventories closer to in line with sales. But we'll have that as an ongoing factor. When you think about the funding, our line of credit today is $130 million of total capacity where we're evaluating the increase of that. We do have an incremental facility feature within our line of credit that will allow us to increase the capacity and that's in discussions right now with our bank group and whether we need to tap into that extra amount or not is really dependent on how much we can pull down our capital spend in our expenses. So we're making those decisions right now. I guess that I also want to stress on our balance sheet, when you look at the total debt component, the $28 million of long-term debt that relates to our corporate offices here is the tri-organization that we consolidate, that's not our obligation but it is on our balance sheet and reflects in the total debt picture, but we do see that through the course of the short-term here, we've got ample capacity to fund our business and our evaluated increase in that, in the very short term here.

Okay. That's helpful. And maybe a follow-up to that. Dave, if there is any, if you're willing to, maybe talk about either the quarterly or either monthly type kind of cash burn rate to think about, more just trying to get a sense if you could help kind of shore up any concerns about, obviously a lot of unknowns out there and certainly the duration of what's going on as a key variable but just how to think about in the current environment, how long everything you just mentioned that you still have some margin for error from a cash burn rate?

Yes Jon, I hesitate a little to get into some short-term projections, just given the dynamic nature of where we're at, as I kind of articulate on the previous question about expenses and what we have in our control there, there is quite a bit of discretionary spend that we can take action on and we've already prioritized those actions today and are going to be very vigilant about it. So, today we don't have concerns that over the next few months that would have any cash issues, we would certainly hope that as we come into the third quarter and fourth quarter of the year, if there is continued economic impacts, then we'll go to another layer of taking action on our expense and capital spend. But we are confident over the short term here that we've got ample capacity of liquidity to whether through that period.

Okay. Thank you. And maybe just last one from me, I guess, you just addressed some of the internal actions you could take. But I'm curious, just given the unprecedented nature of what's going on, I mean, when you think about either the committed leases, you mentioned or even the current rent that you're paying, I mean is there any scenario that you would envision where you'd be able to get some additional flexibility in the short term for those types of payments just given the type of nature we are, any more flexibility? Curious -- your thoughts there?

Well, Jon when we establish our store lease structures, we purposely do it with a fairly low occupancy cost unlike I'd say other kind of mall-based or specialty center-based retailers. So we feel pretty good about the occupancy and lease structure that we go into these with. We do original plans, we were targeting 10 stores to open in 2020 and we are cutting that in half. Until we open a store, we feel good that the ones we've got are going to be excellent locations, but at this stage, we don't have plans to go back to existing leases and ask for any accommodations there. We don't think that that's necessary at this stage.

Okay. I appreciate you taking all the balance sheet questions and best of luck. Thanks.

Yes. Thank you.

[Operator Instructions] The next question is from Jim Duffy with Stifel. Please go ahead.

Thank you. Good morning, guys, my question around the composition of the inventory, what's the mix of that spring-summer goods versus fall holiday and then inventories there obviously a potential source of cash, what are the strategies to manage through the inventory position?

Yes, Jim, the composition of the inventory leans obviously heavily to the spring-summer where we're in today, I'd say, greater than 70%. We do have fall-winter goods that we always maintain because of they are core and they are year-round. And then to the extent that some we put on markdown are generally year round as well. So we look at the composition and know that we're not tied to strictly clearing out of fashion oriented or tight seasonal aspects of our apparel, gives us more room to work through it. We can, as we proceed through the months here, take deeper action to clear through inventory. And I'd say, last year was sort of the low point on gross margins. We set the bar that still I think gives us room to maneuver and strike some discounts, if needed. But we feel pretty confident about the inventory levels and we're evaluating false winter receipts in terms of cancelling some but not starving the business for the fourth quarter, which at this stage, we still have hopes that we're going to see a good holiday period. But everything is in our ownership and our control unlike inventory that might be spilling into wholesale channels since we don't operate in those.

Thanks. Dave, that's a good segue to my next question. I was curious how you're thinking about offense versus defense. It's a dynamic environment, but as you look towards the back half of the year, how are you planning receipts, for the third quarter, you mentioned, fourth quarter you're planning for more normalization, at what point can you make adjustments and cancellations for those two? You just kind of regulate your inflow of inventory as appropriate for the business.

Well, we're making those decisions right now, Jim and the closer we get to the receipt time then we do lose flexibility because we placed orders directly with our manufacturers. So there is not a third party wholesaler that we can go back to. So it does require further upfront assessment of what the sell-throughs are going to be, but I'd say we would be certainly in a better position to be beyond the offense, if there is a, the visibility in the business comes through and we're able to be well positioned within our stores and online. I think the other aspect that we want to call out is we still are better than 50% on online and direct retailer. So that gives us some flexibility even today that I think other primarily store, store-based retailers are stuck with. So, yes, not sure if that helps give you any more color Jim, but that's where we're at.

It does. Thank you guys and good luck.

Thank you.

Thank you.

This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.