Duluth Holdings' (DLTH) CEO Stephanie Pugliese on Q3 2016 Results - Earnings Call Transcript

| About: Duluth Holdings (DLTH)

Duluth Holdings, Inc. (NASDAQ:DLTH)

Q3 2016 Earnings Conference Call

December 08, 2016, 16:30 ET

Executives

Donni Case - IR

Stephanie Pugliese - CEO

Mark DeOrio - CFO

Analysts

Dan Wewer - Raymond James

John Morris - BMO Capital Markets

Eric Beder - Wunderlich Securities

Amy Noblin - William Blair

Jonathan Komp - Robert W. Baird

Operator

Welcome to the Duluth Holdings' Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. Please also note that today's event is being recorded. At this time I would like to turn the conference call over to Donni Case, Investor Relations for Duluth Holdings. Please go ahead.

Donni Case

Thank you Jamie and welcome to today's call to discuss Duluth Trading's third 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 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 can 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 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?

Stephanie Pugliese

Good afternoon and thank you for joining our third quarter 2016 conference call. In the third quarter we reported a 21% growth in net sales with gross profit up 23% year over year. We're pleased with the continued growth rate in the business and with our ability to deliver higher gross margin. That said, third quarter is a seasonally transitional period for retail and along with many of our peers, we were not immune to the extended warm weather we had this fall.

We started the quarter with positive sales momentum but toward the end of September when we traditionally experienced proportionately more sales being driven in cool weather goods, we saw a distinct softening in both men's and women's fall product such as transitional outerwear, heavier weight bottoms and midweight fleeces. Against this backdrop and despite the challenges, we maintained a gross profit margin of 57.8% which reflects strong initial gross profit, a shift in sales to higher margin product, as well as our team's successful management of promotional activity during the quarter.

While we recognize that certain factors, some beyond our control, can cause volatility from quarter to quarter, we're first and foremost committed to protecting our brand and increasing our active customer base. We believe that our measured promotional activity in the third quarter is a reflection of that.

Now I will spend a few moments on the details of the quarter. Our direct sales grew 10% and had relatively weaker performance when compared to the growth rate in prior quarters.

As I've previously mentioned, our men's customer tends to be a buy now/wear now type of guy, so we're not completely surprised with how the weather affected this part of the business. Our women's business which has consistently exceeded the growth rate of men's, also slowed this quarter.

Last year we ran women's television advertising in the third quarter and this year we deferred the TV campaign to the fourth quarter to connect more closely to the peak holiday selling season. We believe the slower growth rate in women's this quarter reflects the lack of TV advertising, as well as some weather sensitivity on heavier fall product.

In hindsight, it might not have been the best decision for the women's business this quarter, but we learned some valuable lessons that will factor into what type of advertising we use and how we will allocate advertising spend to go forward. It is now clear that our women's customers have a preference for live-action over animated advertising.

We have also gained considerable confidence in the power of women's advertising as a key component of our omni-channel marketing. And so far our fourth quarter women's business is again growing at a faster rate than the rest of the business. As it relates to women's marketing, we focused our campaign on a new product, the No-Yank Tank which solves a universal problem, is considered a staple in women's closets and is a core product for us. Based on the very strong response to the No-Yank Tank, we think a lot of women have been waiting a long time for our solution.

It is also important to note that all categories, with the exception of outwear, saw increases over last year. First Layer product, Alaskan Hardgear and women's accessories were particularly strong. And as in prior quarters, our core product continued to be the foundation of our sales base.

Speaking of Alaskan Hardgear, it is a good example of how adding innovative solutions to an existing product line creates great customer response. This year we introduced over 20 new products in our Alaskan Hardgear line which previously was a cold-weather category aimed at outdoor winter activity. With these new products which include knit tops and travel bags, we can now leverage Alaskan Hardgear's rugged appeal year round and reach new customers that might not need the coldest weather solution.

We're also testing a brand-new category, kids wear. We have introduced a limited assortment of Duluth Kids wear across all channels and the initial reaction has been positive. Again, this is an example of listening to our customers who have asked for Duluth products for their kids and grandkids.

Moving onto our promotional activities, the cadence of global promotions was at the same level as third quarter last year and we also continue to use a mix of product discounts and free shipping promotions. Via e-mail we incorporated product promotions and flash sales to keep momentum in the business and convert new customers to the brand.

As we move into our biggest selling season our inventory levels are in good shape. As I mentioned last quarter, at this time of the year we ramp up inventory, especially in core product, to stay in stock for immediate and complete order fulfillment.

Having the right inventory on hand is critical for both customer satisfaction and operational efficiency, especially as it pertains to containing shipping costs. We also factor for the inventory needed to stock new store openings.

In addition, our non-go-forward inventory is down to last year as a percent of total inventory and in absolute dollars. We expect to end the season and the year with more go-forward high-quality inventory than in prior years.

Moving onto our retail store expansion. We opened seven stores this year which exceeded our initial expectation of 3 to 5 stores. Our retail expansion strategy continues to work well and this part of our omni-channel approach is becoming more significant with each successful store opening.

This quarter retail sales growth accelerated to 68% year over year. On December 1 we celebrated the Grand Opening of our Independence, Missouri store which brings our total store count to 16. Independence is a suburb of Kansas City which gives us a presence in another major metro area.

In large part, 2016 has been about establishing our retail visibility in major markets like Chicago, Philadelphia, Washington DC, Omaha and now Kansas City. These new metro market stores are exceeding our expectations for early sales performance. And we're receiving tremendous customer feedback.

We're pleased with the decision to accelerate store openings in these markets in order to provide our customers with the full expression of the Duluth brand over the holiday shopping season. Relative to additional store openings, Noblesville, Indiana, a suburb of Indianapolis, is slated to open in the first quarter of 2017, as previously stated.

We have also announced signed leases for Burlington, Massachusetts which is near Boston; Warwick, Rhode Island; and WestChester, Ohio, a suburb of Cincinnati. And we now anticipate that these stores will also open in the first quarter of 2017. We're also pleased to have signed two additional leases in Pittsburgh, Pennsylvania and Macomb, Michigan, a suburb of Detroit.

We have increased our pace of store openings. And now expect to open 8 to 10 new stores in FY '17 with a focus on Eastern market.

We accomplished a lot in the third quarter, but it fell short of our expectations for a few key reasons. First, weather has become a greater variable in our business. We felt its effect last fall and this spring, but it was worse this quarter.

The weather from September through November 2016 was the warmest on record since 1950 for dozens of cities from the Northeast to the West. At King of Prussia's Grand Opening on October 21 it was almost 80 degrees and that certainly does not signal to customers that it is time to buy fleece and lined pants.

What it does signal to retailers is that it is time to get promotional. And frankly this promotional season is as extreme as we have seen in some time. As I mentioned earlier, we're very thoughtful about our promotional activities and we use promotions to stay competitive, build sales momentum and convert people to our brand. Fourth quarter is no exception to this.

Finally, over the last couple of years we have also observed growing consumer expectation of faster delivery times. With the speed of shipping, we believe the people are waiting later and later to do their holiday shopping and peak weeks before Christmas are getting bigger and bigger.

We think increased promotional activity and the expectation of quick delivery to the doorstep contribute to this wait and see posture. From a consumer viewpoint, it's understandable. But from a retailer's perspective, it creates a more unpredictable environment.

So what does this mean for our all-important fourth quarter? We had a great Black Friday and Cyber Monday on a year-over-year comparison, but even so our sales base going into November was less than anticipated. As I mentioned on our second quarter call, our full-year guidance is based on a high degree of confidence in hitting the midpoint of those numbers. While we still have some critical shopping days ahead and we're doing our level best to make them count, we're not confident that we can make up the lost ground based on our current run rate.

As a result we're revising our 2016 fiscal guidance and now expect sales in the range of $360 million to $370 million which would translate to a 20% growth rate at the midpoint. Mark will go into more detail on our revised guidance.

In closing, we have a tremendous proven business model and brand with a foundation in solution-based product, engaging storytelling and an outstanding customer experience. Even in the face of unexpected headwinds, we remain very confident in our ability to deliver on our long term goals. With that, I will turn the call over to Mark for his financial review.

Mark DeOrio

Thank you, Stephanie. We reported third quarter net sales of $67 million, up 21.2% compared to $55.3 million in the third quarter of last year. The net sales increase was driven by 12.3% growth in direct net sales and 68.4% growth in retail net sales.

Our website visits were up 16.7% over the third quarter of last year due primarily to our continued marketing and online advertising efforts. Our decision to defer the women's television ad campaign from the third to the fourth quarter undoubtedly reduced our year-over-year growth in visits in the third quarter.

Our increase in retail net sales was primarily due to the opening of five new retail stores during the second and third quarters of this year along with the opening of a retail store and outlet store in the prior year third and fourth quarters. We continue to achieve average payback on our stores of less than 24 months and we continue to find opportunities to improve our store opening process with each new location.

As we continue to add stores, retail sales are becoming a larger share of our consolidated net sales. In the third quarter they represented 22% of consolidated net sales compared to 15.8% a year ago. As we open more stores and build greater awareness for our brand we expect this trend to continue.

Gross profit for the third quarter increased 22.6% to $38.7 million or 57.8% of net sales, compared to $31.6 million or 57.2% of net sales last year. The 60 basis point improvement in gross margin was primarily due to improved initial product costs, a mix shift to higher margin products and measured promotional activity.

SG&A expenses increased 26.6% to $37.9 million compared to $30 million a year ago. As a percentage of net sales SG&A expenses increased 240 basis points to 56.6% compared to 54.2% a year ago.

As we discussed during our second quarter's earnings call we expected third quarter SG&A expenses as a percentage of net sales to increase considerably compared to the third quarter of last year. As anticipated, pre-opening expenses related to our new retail stores in Hoffman Estates, Downers Grove, King of Prussia, Manassas and Independence were significant contributors to the increase. As a percentage of net sales, advertising and marketing costs decreased 150 basis points to 21.8% compared to 23.3% a year ago, primarily due to a decision to shift a women's television advertising campaign from the third to the fourth quarter. As a percentage of net sales, selling expense decreased 10 basis points to 15.2% compared to 15.3% a year ago.

This was primarily due to more favorable shipping rates and lower distribution costs due to maximizing the use of our Belleville distribution center. This was partially offset by an increase in customer service expense from our retail expansion.

Finally, as a percentage of net sales, general and administrative expenses increased 410 basis points to 19.7% compared to 15.6% in the third quarter last year, primarily from increased retail store pre-opening expenses, rent and operating costs from our new retail stores and headcount increases appropriate for our growth plans. In addition our direct segment costs increased due to rent for our new return processing center and consulting expenses.

We reported GAAP net income of $500,000 or $0.01 per diluted share, compared to $1.5 million or $0.06 per diluted share a year ago. 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 $900,000 or $0.04 per diluted share. Adjusted EBITDA was $2.5 million or 3.7% of net sales, compared to $2.7 million or 4.8% of net sales in the prior-year period.

Turning now to the balance sheet and liquidity, we ended the third quarter with a cash balance of approximately $200,000 and net working capital of $69.5 million. We had $30.2 million of borrowings on our revolving line of credit with $26.8 million available on the $40 million line. This reflects a customary build-up of inventories in preparation for our peak sales season.

Inventories increased approximately 32% to $96.7 million from $73 million a year ago. This increase is lower than the 40% year-over-year increase we reported at the end of the second quarter.

We feel that we're well-positioned to support customers' orders in the fourth quarter and to provide inventory for our planned new stores. Additionally, as Stephanie mentioned, the make-up of our inventory is very good with our discontinued inventory down to last year, both as a percentage of total inventory and in absolute dollars.

Turning now to our expectations for the balance of the year. We're revising our expectations for the fourth quarter to reflect the challenging sales environment that we experienced in November and early December which included the continuation of unexpectedly warm weather and increased promotional activity.

While much of the fourth quarter remains at this point, we now believe it is likely that we will record lower net sales with lower gross margins than we had previously planned. Significant year-over-year improvements in our product margins will reduce the impact of increased promotional activity, but we still anticipate a decrease in final gross margins for the fourth quarter and the full year. A significant portion of the gross margin decreased will be due to lower shipping revenue.

We expect fourth quarter SG& A expenses as a percentage of net sales to be higher than the fourth quarter of last year. At this point in the year our ability to reduce SG&A expenses in response to lower gross profit expectations is limited.

Additionally, we do not intend to reduce any strategic expenditures that we believe will positively impact the business over the long term. For example, we plan to open 8 to 10 new retail stores in FY '17, with four stores expected to open in the first quarter of 2017. As a result, we anticipate higher pre-opening expenses to impact the fourth quarter of this year.

Our revised full-year 2016 guidance is as follows. We anticipate net sales to be in the range of $360 million to $370 million which reflects a 20% year-over-year growth rate at the midpoint. We expect GAAP EPS to be in the range of $0.52 to $0.60 per diluted share based on approximately 32.3 million fully diluted shares outstanding and a tax rate of 39% with the midpoint reflecting an anticipated increase in net income of 4.6% over 2015 pro forma net income.

We expect adjusted EBITDA to be in the range of $34 million to $38 million which reflects a 5.9% year-over-year growth rate at the midpoint. While we're disappointed with the softness we now expect for the fourth quarter of this year, we view this as a short term issue.

We have a strong business model and are actively working to deliver on its long term potential. With that, I will open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today comes from Dan Wewer from Raymond James. Please go ahead with your question.

Dan Wewer

Thanks. Stephanie, can you talk about how the sales pattern changed between direct and retail? The retail revenues look good, obviously lots of volatility in the number based on how rapidly you are growing your number of retail stores. But did it appear that the retail segment held up better than direct during this environment?

Stephanie Pugliese

Yes, the answer to your question, obviously there's a couple of different questions in there, the retail segment definitely held a better than direct overall in terms of growth rate. Much of the retail growth at 68% was obviously due to new stores in the mix. That said, we saw that retail held the existing stores in third quarter held on to growth rates a little bit longer than our direct business did. Our direct growth in the first half of third quarter was actually very close to what we had seen year-to-date in terms of growth rate. When we hit that last week or two of September and through October and quite frankly into November that's where we saw direct growth flow dramatically. So growing but not nearly at the rate that we had seen in prior quarters and prior months.

Dan Wewer

I know that you are not yet talking about same store sales, but is there anything qualitative you can say about the third quarter, now you have seen the fourth quarter? If that has now turn negative or if they are remaining positive?

Stephanie Pugliese

I would tell you what we have seen that is pretty straight across the Board in our -- I will call it the comp store base which is of course only if you stores at this point. But, we have definitely seen the impact of weather on those stores in both a negative way earlier on in third quarter and into November but also that the weather has turned particularly in the Midwest over the past 10 days or so and it's gotten much worse, seasonably cold. We've definitely seen improvement in those stores with the weather change.

Dan Wewer

And the last question I have for now, with the warm weather occurring as you are opening your new stores outside of DC in Philadelphia, did it have an adverse impact on your initial sales volumes in those stores?

Stephanie Pugliese

Those two stores actually opened up quite strongly. I think a lot of that has to do with the impact of being kind of the new guy in town and we were able to offset almost 80 degrees weather for example as I mentioned in King of Prussia. That said, we’ve definitely seen that, once King of Prussia was open for a couple of weeks, the sales mix of products that we saw was not quite as cold weather like as we would have originally expected to see. But now that weather is even starting to get a little bit colder on the East Coast, we're starting to see more of a normalization if you will on the assortment.

Operator

Our next question comes from John Morris from BMO Capital Markets. Please go ahead with your question.

John Morris

Wondering, you said that it was generally, in terms of the weakness, indirect across men's and women's. I'm wondering if there were any learnings there? A little bit more color. Was it really primarily outerwear related and have your great related on both of the gender sides of the business and if there are any other learnings there, that is my first question?

Stephanie Pugliese

Sure. So the way that I am thinking about it and when we looked at it, John, is on the direct side of the business the bigger impact was felt on the men's gender and within men's what we saw is that you're out of product the middle of September the spring summer product actually continue to grow a very strong rates year-over-year. What we saw was that fall winter product grew at a much lower rate and at certain points was even flat or slightly down the last year. And when I am referring to fall winter product, the big difference if you will, this year versus what we saw last year was that last year we weren't selling outerwear. Or we weren't selling heavier types of products. This year, because that warm weather extended so far and was even warmer than prior year's, we had difficulty selling some of our midweight product.

We had built an assortment the broader new product around fleece lined pants or lease jackets and shirts. And some of those products that are generally considered more transitional and less true cold-weather, even those products we have struggled with. On the women's side but we saw is that there wasn't kind of like in first quarter when we spoke if you remember, women still have quite the same sensitivity to cool or cold weather products as men stared. But it was compounded by the fact that we did not anniversaried that advertising and women's the third quarter. The women's got hit kind of with the double Academy this particular past quarter.

John Morris

Thanks that's helpful that kind of segues to my other question which was regarding the shift in the plan for the advertising from women's for Q3 and Q4. A little bit more behind your thought process on that? You did address it a little in your prepared remarks but wondering when you all began to make that decision that you were going to do that and why the timing on it and then sort of as a last subpart to the question, with your guidance for Q4 are you building, your lower guidance for Q4, your building in, in anticipation of some benefit, the fact that you're actually making that shift? Or are you going to kind of wait and see what kind of impact it has? Thanks.

Stephanie Pugliese

Sure. So to answer the first part of your question, we made the decision to advertise the no yank tank probably around the spring of this year. We started to look at consumers feedback and the sales trend of that particular product and felt like we had an important message, if you will, to the female consumer around a solution -based product. As I mentioned in my early remarks, the universal problem for women. And we feel like we had just a really great connection point. In terms of the timing of that advertising and how it relates to how we advertised last year, last year when we advertised and third quarter, it was the first time we had done live action advertising with our flannel shirt add. And we advertised in a time period that is traditionally known as a good selling period for women's products in the fall season.

And we saw some, a good reaction to the advertising, but we're still learning and testing and understanding exactly what type of impact that live ask action advertising could have. When we saw in the spring summer time period our dry on the flight advertising we got a little bit more insight into women's preference for live-action and I give us confidence to continue live-action for fall winter. The reason that he for the advertising in to November which is of course closer to peak in holiday selling his we were literally just tracking sales peaks and then let's put our advertising in a place where we're already seeing traffic come into the brand seeing the sales momentum year-over-year and was kind of build on a strength or a high point of the year.

And we did see some really nice reaction when that advertising turned on both on the product level as well as regaining some momentum in the women's business. Now in terms of your question around is that rebuilding of momentum built into our sales guidance or a revised guidance for fourth quarter? Yes it is. Remember women's is faster growing part of the business but it's still only 20% of the business overall. And while we freaking the momentum there is still not quite enough to get us to the point where we feel like we could have the original guidance.

Operator

Our next question comes from Eric Beder from Wunderlich Securities. Please go ahead with your question.

Eric Beder

Hi could you tell us a little bit about the kids business in terms of how you think that can grow? I know this is a new category for you. And are there other new categories here where you are looking at to expand into?

Stephanie Pugliese

Sure. So the kids business is a very test and learn part of our business right now a very small part not only of the assortment but of the sales expectations at this point. We're learning a lot not only about the overall consumer kind of appetite if you will for Duluth kids where, but also what proportion should be and what type of products what proportion by gender et cetera. So right now we're really looking at the kids business as a test for us for the next 12 months or so and we will build from there.

So little bit more to come on kids as we go forward, to answer your question about the other types of products that we're building in or growing or adding to the assortment, Alaskan hard geared is an area of the business, as I mentioned earlier, we expanded the season. We see continued success and the customer's response to that not only on the sales volume but also the feedback we're getting from our customers online via e-mail et cetera. And that's an area of the business that we're concentrating on because we think we have some really nice opportunity there.

In addition to that for the spring summer period, we're going to be introducing some new technologies and innovations around summer salt and keeping our customers comfortable as warm weather comes in the second part is spring summer in the second quarter and also looking at weather agnostic products if you will to introduce to our customers so that when the warm weather doesn't happen in spring and the cool weather doesn't happen in fall we've got some year-round product that can be really enticing and interesting to the customer.

Eric Beder

Okay. And just one more question, on your direct business did you see any regional differences? I know the Midwest has been very warm that other areas were as one. Did you see the difference in your regional direct business when you came through with it that?

Stephanie Pugliese

We didn't see a lot of difference regionally. The one place that did popped out that is kind of interesting is that our business in the Southeast actually had a stronger growth rate than the rest of the country. In the way we looked at that is the Southeast they don't expect it to get cold, in the month of October, for example. So those areas of the country where the weather tends to be more moderate anyway we didn't see quite the difficulty that we saw in other areas.

Operator

Our next question comes from Amy Noblin from William Blair. Please go ahead with your question.

Amy Noblin

Stephanie, I was hoping maybe you could step back, you touched upon some of this but how would you characterize overall the environment heading into these peak weeks of holiday versus last year? Last year at this time we were also talking about a slowdown in the business and the level of promotional activity obviously played out differently once we got into the peak weeks. Can you just talk about what similar and what's different as you characterized this year and last year? Thanks.

Stephanie Pugliese

So first of all what similar to last year, I think that certainly last year there was a promotional environment to be aware of and to be responsive to and that's very similar this year. We're seeing some of that promotional deep kind of cadence continue past the black Friday Cyber Monday kind of time period. The other thing that's probably similar to this year and I mentioned it a little bit earlier is that we do believe that the consumer is shopping closer and closer to need or closer and closer to Christmas if you will and a lot of that has to do with that expectation around I don't need to rush I can get it there on time faster shipment. So I think a lot of that is similar.

Now what that means is that there is probably more unknown if you will from today through end of January and there was even last year. We're in one of our biggest weeks right now. We got another big couple of weeks ahead of us before we actually hit Christmas and those weeks will be telling for us. And we're not going to kind of take our foot off the pedal if you will. As we mentioned before, the guidance that we put out and the way that we want to communicate our anticipation for whether it is a quarter or year is what we believe is the most likely outcome at the midpoint. And so that is why we felt it appropriate to bring this conversation to this call. Now in terms of what's different this year that also impacted our decision to reduce the guidance for the balance of the year is that at last year our November business was stronger year-over-year than what we saw this year.

Our November continue to be impacted by the weather. In early November and late October was impacted by the distraction factor that a lot of consumers felt this year that wasn't there last year and so while we're seeing similar builds week over week as we get closer and closer to the holiday, the base that we came into November with was lower than we needed it to be and so that is where some of our caution comes from as well.

Amy Noblin

You did say Black Friday and Cyber Monday were great. I'm curious of the growth rates you experienced at least on those peak days were more similar to the historical growth rates of the business? And that I was wondering just finally if you can talk about trends in traffic, ticket and conversion? Just some of the data sources we can track whether it be unique visitor today where painting addiction picture from other quarter actually played out I'm curious what you're seeing along some of those metrics? Thank you.

Stephanie Pugliese

Sure. So Thanksgiving weekend the build year-over-year for those four or five days was actually very similar to what we've seen in prior years and we were pleased with that timeframe. It didn't quite get us on a week over week in terms of gaining the momentum we needed to hit are expected numbers in the month of December. It didn't quite get us to that new threshold if you will but year-over-year builds in that weekend were very good. Your question about average basket size and visits, etcetera. What I would tell you is one of the things and to also respond to your question about what kind of lies underneath the covers might paint a slightly different picture on the quarter.

When we looked at third quarter one of the things that was very telling to us and while we talked about whether we talked about the momentum and direct is, as I mentioned, the first half of third quarter our year-over-year increases in direct and our retail stores were doing very well. Very consistent with what we saw leading up to third quarter year-to-date at that point. When the weather didn't turn at the end of September into October that is where things started falling pretty short particularly in the direct business. That's something to just consider in terms of third quarter wasn't universally tough, it was tough when we got to the point where the weather needed to turn and it didn't. The other thing that you asked about was AOB etcetera.

Our AOB has held pretty consistent for the third quarter it was very similar to last year. What we do find as we get into these bigger weeks particularly in fourth quarter and we've got weekends that are super high-volume weekends is some of that AOB is impacted by the types of promotions that we do. So global promotions tend to carry a higher AOB as an example from the standpoint of visit we did see a slowdown in visits particularly in the month of October and into November. And a lot of that is just very consistent with the overall trend, if you will, of the business and the lack of interest quite frankly in buying fall and cool weather product.

So it doesn't surprise us that we saw that. That said we're still seeing consistent percent of customers in retail stores for example are new to the brand. We're still growing in new visitors and new customers on the direct side of the business so we definitely see more people coming into the business, it just wasn't at quite the same growth rate as we saw in prior quarters.

Operator

[Operator Instructions]. Our next question comes from Jonathan Komp from Robert W. Baird. Please go ahead with your question.

Jonathan Komp

Thanks a couple of guidance related questions maybe Mark just starting on the margin front, I wanted to clarify I think you said down gross margin in the fourth quarter could you maybe parse out how much of that view is anything related to promotions versus the shipping factor that you mentioned?

Mark DeOrio

Yes, I would say that the impact of shipping revenue is expected to account for a good half of the impact we see in the gross margins.

Jonathan Komp

Okay. And on the sales front, obviously the retail business has a lot of momentum. I'm curious as you look at the direct side of the business during Q4 do you still think a double-digit growth rate is possible or any clarity on your expectations for the direct side of the business?

Stephanie Pugliese

John we're going to be pushing every day for double digit growth in direct. I will say that in November we didn't see that. We did slow in November relative to our expectation and relative to prior growth rate. That said, one of the things that we're constantly balancing is if we promoted even heavier and really decided to compete if you will with 40% off and 50% off and some of the other things that other retailers are doing, could we push our direct business to double digit growth? I'm confident that we could but our balance is how do we grow the business, continue to bring new customers into the brand whether that is direct or retail we're pretty agnostic about that quite honestly but how do we also protect the brand for long term? We know we have to be responsive I should say to a competitive environment but to what extent on the short term is something that we constantly ask ourselves and try to balance.

Jonathan Komp

Okay, that's helpful. And when you look ahead to the year ahead in 2017, obviously no formal guidance yet, but any thoughts on how quickly the direct side of the business can bounce back? Earlier in 2016 you had some delayed spring weather and the business quickly rebounded. I'm wondering if you think once you get past the weather driven months and some of the promotional driven months if you expect the direct business to bounce right back to more similar growth rates that you’ve seen over the last several quarters?

Stephanie Pugliese

I will tell John what we're looking at as we finish this year and are in the middle of preparations for next year and budgeting and guidance and all of that good stuff, we're confident in our commitment to 20% growth overall in the business and what we're looking at, one of the things that this kind of third wave if you will of unseasonable weather has made us think about more closely is those times whether it's the weeks or the months of the year that are very inconsistent from a weather perspective, we're going back in and looking at them and really understanding our expectations on growth, particularly on the direct side of the business because we feel it's important to be realistic about those time frames because we know there are things out of our control in those periods.

And we don't want to set our sales up for unrealistic expectations when we can't control some of the outcomes in these. Now that said when it comes to the things that we can control the other side of this is one of the key drivers of our direct business is our overall ad spend and that ad spend obviously breaks down into a multitude of different avenues, TV advertising, print, digital and retail stores and that's something we're also looking at, to make sure that we continue to fine-tune that mix of advertising spend and the effectiveness of it so that we can drive the direct business up to higher growth rates, but more to come on that. We're not quite finished with that yet.

Operator

[Operator Instructions]. And ladies and gentlemen at this time I'm showing no additional questions I'd like to turn the conference call back over to management for any closing remarks.

Stephanie Pugliese

I just want to thank all of you for joining our call today. I think I speak on behalf of everyone here at Duluth in wishing you all a wonderful holiday season and a prosperous beginning to the New Year. Thanks again.

Operator

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Apparel Stores,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.