Duluth Holdings (DLTH) Q1 2018 Earnings Conference Call Transcript

Duluth Holdings (DLTH -2.07%)
Q1 2018 Earnings Conference Call
Jun. 5, 2018 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Duluth Holdings first-quarter 2018 earnings conference call. [Operator instructions] Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Donni Case, investor relations for Duluth Holdings. Please go ahead.

Donni Case -- Investor Relations

Thank you, Jamie, and welcome to today's call to discuss Duluth Trading's first-quarter 2018 financial results. Our earnings release, which we hear this morning, 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 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. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as a prediction of future events. Please refer to our SEC filings for additional information.

And with that, I'd like to turn the call over to Stephanie Pugliese, chief executive officer of Duluth Trading. Stephanie?

Stephanie L. Pugliese -- President and Chief Executive Officer

Thank you, Donni, and welcome, everyone, to our first fiscal quarter of 2018 conference call. In the first quarter, net sales increased 20% to $100 million, which marks our 33rd consecutive quarter of increased net sales year over year. Retail sales for the quarter delivered a 71% growth rate, largely due to having 13 new retail stores as compared to the first quarter of 2017. Direct sales grew 4%, starting off stronger in February and March and then experiencing a slowdown in the latter part of April when weather impacted sales of our spring goods.

This delayed purchase of warmer weather product was particularly evident with our buy now male customer end. While April did not meet our expectations, the men's business still grew by an admirable 16% for the quarter. Women's, supported by strength across all categories, was less impacted by the cold weather and continued to deliver fast-paced growth of 31% year over year. Gross profit margin declined 230 basis points, primarily due to clearance activity in the months of February and early March and, to a lesser extent, by a continued decrease in shipping revenue, which on a dollar basis, was flat with last year's first quarter.

You may remember that last year, we missed opportunity for sales at the end of the season clearance due to lack of inventory. This quarter, our clearance inventory levels as a percent of total were more in line with historical numbers, and we were able to create some momentum in the early part of the quarter. Year-round and core product performed very well throughout the period, and overall gross profit rate improved as we finished April and through May. In all, the first quarter's gross profit rate was within our internal expectations.

As I have indicated before, quarters that have seasonal transitions can be uneven for a variety of reasons. That said, this quarter, we did a good job of controlling expenses, and our bottom-line results were in line with our plan. Dave will go into more detail on this. What's important to keep in perspective is that first-quarter accounts for less than 20% of our annual sales.

And for the full fiscal year, we expect to deliver on our 2018 financial guidance on both top and bottom line. Underneath the top-line sales results, we continued to see important signs of strength in the business. We saw growth in virtually all product categories in both men's and women's. In our established store markets, direct growth was more than double the company average.

The two new stores we opened this quarter in Anchorage, Alaska, and West Fargo, North Dakota, are performing very well, and new consumers acquired through our retail channel were up 56% in the first quarter compared to the prior year. With May under our belt, we are seeing increasing momentum as pent-up demand begins to unfold. Furthermore, we have a series of strong marketing campaigns throughout May and June that are being launched to accelerate spring and summer sales in both men's and women's. Key product categories like Dry on the Fly, Armachillo, Breezeshooter and our newly expanded women's garden line are being promoted across TV, digital, catalog and retail.

Turning now to our stated initiatives to drive both near and long-term growth. We continue to move into a true omnichannel environment with strong conviction. We are taking advantage of a competitive position that is not burdened with legacy issues like rationalizing store count or rightsizing the wholesale channel. We will continue to invest in building an omnichannel model that will enhance the experience of our valuable customer base and attract new customers to the Duluth Trading brand.

We have a very clear vision of how we will accomplish this goal. First, we are executing our plan to open 15 stores in fiscal 2018. In addition to those two stores opened in the first quarter, we have recently added Colorado Springs, Colorado, Lubbock and Denton, Texas, and our first West Coast store in Portland, Oregon. You may note that a couple of our 2018 stores, specifically Anchorage and Greensboro, North Carolina, have larger gross square footage than our average new store.

These stores have additional space for direct consumer order fulfillment. This enhances our ability to deliver orders to customers faster in those geographic areas and strengthens the omnichannel model. We continue to see that the presence of a store in a market allows us to increase our market share immediately through retail and then with outsized direct sales growth once the store is established in that market. The stores are the ultimate expression of the Duluth Trading brand, and they continue to prove out their importance in raising brand awareness, in attracting new customers and in increasing our penetration of valuable multichannel buyers, who annually spend twice as much as single-channel buyers.

Second, we will continue to focus on the significant market opportunity we see in our women's business. There is an untapped market in women's innovative, functional and comfortable workwear, and we continue to grow our presence in this space. We are building brand awareness through multiple aspects of marketing, including enhanced efforts in TV and digital. In addition, our retail stores have been instrumental in breaking down a key barrier to women adopting the brand, that is the ability to see, feel and try on products.

We are focused on providing her with new product categories like our expanded garden line, and with a greater range of sizes. When we launch our plus size category in the fall, more Duluth women will have apparel that is proportionally built for a satisfying and comfortable fit with all of the Duluth innovative features. Third, we will continue to invest in technology that will further reduce friction for our customers and enhance our omnichannel presence. I am pleased to report that our order management system went live on May 21 without any significant problems.

As a result, this year, we will have real-time visibility to inventory across channels, and we'll launch our ship from store, buy online pick up in stores and omnichannel returns programs. This will not only benefit our customers with greater flexibility and convenience, it will also enhance our operational efficiency and generate new sales opportunities through gift cards and other offerings. Our e-commerce platform will start testing internally with employees in a few weeks and will become available to our customers in mid-July. Our new website will provide a better mobile, tablet and desktop experience, more flexible content management and increased ability to personalize the experience.

As mentioned before, we are excited to present our customers with a state-of-the-art e-commerce platform, but we do anticipate a short period of disruption as they navigate through the new site. Finally, we will continue to future-proof our company by attracting and retaining high-caliber talent. We are expanding our leadership development programs to ensure succession in key functions and upward mobility within our organization. Our shareholders approved our employee stock purchase plan at the recent annual meeting, which provides an attractive benefit to our employees and a way to create a greater sense of ownership in the future of our company.

We all know that these investments will have near-term impact on profitability. However, as I said earlier, we have a high degree of conviction based on a growing body of data that our growth strategy is on target and the timing is right to maximize our competitive strengths and accelerate our omnichannel presence. Now I will turn the call over to Dave Loretta to cover our financial results and the details of our new credit facility.

Dave Loretta -- Chief Financial Officer

Thank you, Stephanie, and a morning, everyone. For the first quarter, we reported net sales of $100 million, up 20% compared to last year. Net sales growth was driven by both our retail and direct segments with retail sales increasing 71% to $34 million and direct sales growing 3.8% to $66 million -- excuse me, retail sales increased 71% and direct sales growing 3.8%. Shipping revenues of $2.4 million in the first quarter were flat to last year, and direct channel product sales grew 4% over last year.

With our strategy of opening physical stores in markets with a high concentration of direct customers, we continue to see strong retail volume growth coming from those markets when the stores are new. As a result, our most established markets continue to realize high growth rates overall. Since the beginning of fiscal 2017, our omnichannel chain has grown from 16 stores in 12 markets to 37 stores in 30 distinct customer markets today, which includes the four stores we've opened up in May. We are in the early innings of this market expansion strategy, but it will be the driving force of top-line growth this year and in the coming years, and the first-quarter results were in line with our plans.

As Stephanie mentioned, our overall direct segment growth in the first quarter was softer than expected in mid- to late April with a slow start to spring product season. In fact, total direct sales growth was up over 7% during the first 10 weeks of the quarter but temporarily slowed in the last three weeks. That trend reversed in May and is back in line with our plans. In addition, direct sales growth in the first quarter was slightly higher in markets with a store that's either new or established versus markets with no stores.

This reinforces our long-term conviction of the omnichannel market strategy. Our first-quarter gross profit was $55.9 million, or 55.8% of net sales, compared to $48.6 million, or 58.1% of net sales. The 230-basis-point decrease in gross margin rate was primarily due to a 100-basis-point decline in product margins from higher clearance activity and promotional mix, an 80-basis-point decline related to inventory reserves, a 30-basis-point decline from the impact of shipping costs to our retail stores, and a 20-basis-point decline due to direct shipping revenues. Selling, general, and administrative expenses increased 17% to $56.2 million, compared to $47.9 million last year.

This included an increase of $500,000 in advertising and marketing expenses and $3.9 million in selling expenses and $3.9 million in general and administrative expenses. As a percentage of net sales, SG&A expense decreased 110 basis points to 56.1%, compared to 57.2% last year. During the first quarter, we opened two new stores, and our retail store pre-opening expenses were $2 million, compared to $2.3 million in the prior year. As a reminder, most of our pre-opening expenses are incurred in the month prior to and during the month the store opens.

As a percentage of net sales, advertising and marketing cost decreased 360 basis points to 21.6%, compared to 25.2% in the quarter of last year. The 360-basis-point decline was primarily due to a decline of 300 basis points in catalog costs from the adoption of the new revenue recognition standard and our planned decrease in catalog spend as a percentage of net sales, coupled with a decline of 60 basis points in web marketing and television advertising due to the leverage gain from higher retail sales. Selling expenses as a percentage of net sales increased 150 basis points to 16.1%, compared to 14.6% last year. The 150-basis-point increase was primarily due to the higher retail selling costs resulting from additional stores, which was partially offset by leverage in shipping and distribution center costs due to the proportional increase of retail net sales.

General and administrative expenses as a percentage of net sales increased 100 basis points to 18.4%, compared to 17.4% last year, primarily due to an increase in the depreciation expense, information technology, and personnel expenses due to the growth of the business. We reported a net loss of $700,000, or $0.02 loss per diluted share, compared to a net income of $400,000, or $0.01 per diluted share last year. Adjusted EBITDA was essentially flat at $2.6 million, or 2.6% of net sales, compared to $2.7 million, or 3.2% of net sales last year. Moving on to our balance sheet and liquidity.

We ended the first quarter with net working capital of $40 million, which includes $21.3 million reclassification of our revolving line of credit into a current liability due to our new credit agreement, which I will discuss shortly. Inventories increased 29% to $98 million, compared to $76 million at the end of the first quarter last year. Approximately $10 million, or almost half of the increase, was due to the greater number of stores as compared to the prior-year first quarter. Adjusted for the increase in new stores, our inventories increased 16% due to an increase in year-round products coupled with higher outlet and clearance inventory.

As communicated in our last earnings call, we plan to increase our borrowing capacity to support our growth strategy, and I am pleased to report that on May 17, we entered into a new credit agreement, replacing our $60 million line of credit with a $130 million flexible borrowing facility. The new credit agreement includes $80 million of a revolving line of credit with a term of five years and includes an additional $50 million in term loan capacity. This new credit facility is the first multibank syndication for Duluth and includes three new lenders; U.S. Bank, KeyBanc, Wells Fargo Bank joining BMO Harris Bank, who continues as our lead institution.

Turning now to our 2018 financial outlook. Please keep in mind, our fiscal 2018 guidance is based on a 53-week period, as compared to a 52-week period in 2017. We are reaffirming our outlook for 2018, and we expect net sales to be between $555 million and $575 million, with the retail segment accounting for up to 40% of total net sales. The direct segment is expected to grow in the mid-single digits as compared to 2017, and we expect to open 15 stores this year, adding approximately 255,000 gross square feet.

We expect our full year gross margin rate to be flat compared to the prior year and our selling, general, and administrative expenses as a percentage of net sales to increase 50 to 100 basis points over last year, largely due to the investments we're making in retail expansion, infrastructure and people. We expect our 2018 full year pre-opening expenses to be $6.5 million to $7 million, compared to $7.5 million in 2017. We expect 2018 EPS to be between $0.79 and $0.84. This assumes a share count of 32.4 million shares and a tax rate of 26%.

We expect adjusted EBITDA to be between $51 million and $54 million. As Stephanie mentioned, our new order-management system went live on May 21 without any issues in the first -- and is the first step in a series of significant overhauls to our technology platform that will allow us to deliver on our commitment to being a true customer-focused omnichannel retail brand. In logistics, we continue to invest in creating end-to-end cap value and are on track to expand capacity in our distribution network by the third quarter of this year, both in the fulfillment centers and the store locations. And finally, our teams are starting work on a new inventory forecasting and assortment planning tool, which the first phase will be up and running before the fourth quarter of this year and will allow our teams to replenish inventory to the stores through the automated logic of the system.

In closing, we started the quarter strong and are in good shape to achieve the top-line results and deliver on our full-year guidance, while at the same time making the critical foundational investments necessary to support our long-range value growth objectives. With that, I will open the call to questions. Operator?

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question today comes from Dan Wewer from Raymond James. Please go ahead with your question.

Dan Wewer -- Raymond James -- Analyst

Thanks. The fiscal-year guidance of a flat gross margin rate is quite a bit different than the experience in the first quarter, when margins were down 230 basis points. Can you remind us where you see the opportunity quarters going forward on gross margin rate and why that is going to be different than what happened in 1Q?

Stephanie L. Pugliese -- President and Chief Executive Officer

Dan, this is Stephanie. To kind of take you through, first of all, what happened in the first quarter and then give you some insights into where we see the balance of the quarters, first-quarter gross margin decline was in a finite set of weeks of the quarter. It was specifically due to the end of winter clearance that we saw impacted our January gross profit rate. It also impacted the first six weeks or so of the quarter.

The good news of the quarter and the gross profit and the promotional strategy is that one of the things that we pay very close attention to is global promotions, so the "take 20% off your whole order," for example, that portion of our business was less of a percent of the overall business than it was last year. And we were on promotion around the same amount of days as we were last year. So getting past that end of winter clearance kind of section of time or segment of time, around that, the business was actually equivalent in gross profit and in some places, better than last year. So we do see, over the next -- we've seen so far in second quarter that our gross profit rate has normalized to last year.

We'll still continue the pressure, if you will, on shipping revenues. We are still expecting some level of decline, particularly as a percent of net sales over the year. We know that we have some downward pressure on gross profit with the freight to stores, as we've articulated in the past. That said, our women's business is now equivalent to men's in gross profit rate.

We have reached that critical mass point. And we're seeing that our retail stores tend to sell more at full price and have, on a product gross profit rate, slightly higher rates than in direct. So that's where we see some of the offsets as we go through for the balance of the year. And so we expect slight improvement quarter to quarter that will give us that flat scenario for the full year.

Dan Wewer -- Raymond James -- Analyst

So you are expecting a slight improvement in the reported gross margin rate for the second, third and fourth quarter year over year?

Stephanie L. Pugliese -- President and Chief Executive Officer

Yes. And remember that first quarter is less than 20% of the total year. So in terms of the overall gross profit, we can make up quite a bit in the fourth quarter alone. But as we keep going, we're -- as I said, we're expecting to see some small improvements quarter to quarter that will get us back to flat.

Dan Wewer -- Raymond James -- Analyst

Second question I have regards the observation that your direct revenues are growing twice as fast, 8% in mature omnichannel markets. Can you remind us which markets do you now consider to be mature omnichannel markets? I'm assuming Minneapolis, maybe Chicago. But if you could -- just how many markets are making up that observation?

Dave Loretta -- Chief Financial Officer

Sure, Dan. Really, we're looking at seven markets that are mature and established, and that's our Madison area here, obviously, with the Mount Horeb store, Milwaukee market. The Minneapolis-Twin Cities market is one of the more larger, established ones; Duluth, Minnesota, Des Moines, Iowa, Sioux Falls, and even sort of the Oshkosh area with our outlet store up in Wisconsin, so those are the more established. And before we get into the class of 16 stores, which we would consider those to become more mature and established after a two-year period, and they're entering their -- entering the beginning of their two-year period now.

Dan Wewer -- Raymond James -- Analyst

And then just the last question I have. I know that you will not provide same-store sales results. But looking at the gap between retail revenue growth and the growth in the number of retail stores, it looks like comps are positive. Do they actually accelerate during the period from where they have been running?

Dave Loretta -- Chief Financial Officer

Dan, the period from where they're running coming into this year?

Dan Wewer -- Raymond James -- Analyst

Yes. What -- so if you look at the first quarter with the way you calculate your same-store sales, does it accelerate or basically in line with what you have achieved in 2017?

Dave Loretta -- Chief Financial Officer

They were in line with 2017. The base of stores that are starting to enter their second year are still in that period where they're seeing more growth in the direct side -- component of their market versus the store traffic because the store traffic is really at its greatest during the year -- in the store's first fiscal year, full year.

Dan Wewer -- Raymond James -- Analyst

OK. Great. Thank you

Dave Loretta -- Chief Financial Officer

Yup.

Operator

Our next question comes from Michael Kawamoto from D.A. Davidson. Please go ahead with your question

Michael Kawamoto -- D. A. Davidson -- Analyst

Yeah. Hey, guys. Thanks for taking my question. Just first off, you opened some new stores in regions where you previously did not have any physical presence like Pacific Northwest, Alaska.

Can you talk about just any takeaways or things you've learned since being in some of these new markets with a physical presence?

Stephanie L. Pugliese -- President and Chief Executive Officer

Sure. I'll jump in on that, Michael. We -- so specifically, we opened, in the first quarter, just to remind everybody, in Anchorage and in Portland. We're seeing actually very similar results in the surrounding direct business where we do see a deceleration in those first 12 months or so.

Obviously, these stores are only in their first couple of months. That said, we've been really pleased particularly in the reaction in Anchorage. That store has been doing very well for us. Portland has also exceeded our expectations.

But I think we've hit a very positive chord with the Anchorage folks, particularly with our store within a store of Alaskan Hardgear that we have in those shops, just overall been very well received. But very consistent in terms of just the market reaction on the direct side so far.

Michael Kawamoto -- D. A. Davidson -- Analyst

Awesome. Thanks. And then I think on the last call, you said you had the expectation for shipping revenues to be down 20% for this year. Is that still the expectation?

Dave Loretta -- Chief Financial Officer

Yes. The first quarter, we were able to see that flat without any real impact because of free shipping offers that were the same year over year. But conservatively, we think the balance of the year is going to see some slip. Most of that would really be the fourth quarter and 15% to 20% less than the prior years is what we're forecasting.

Michael Kawamoto -- D. A. Davidson -- Analyst

Got it. Thanks. Best of luck for the rest of the year.

Stephanie L. Pugliese -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Jonathan Komp from Baird. Please go ahead with your question.

Jonathan Komp -- Robert W. Baird & Company -- Analyst

Yeah. Hi. Thank you. I wanted to start just by following up on the inventory and was hoping just to ask more detail about the inventory reserve and the need to take that.

And then also, I know you highlighted kind of a mid-teen inventory growth ex retail. Any more color around that piece specifically and kind of any remaining risk that you see within that inventory on hand?

Dave Loretta -- Chief Financial Officer

Sure. The inventory reserve increases continues to be a reflection of the growth of the retail channel, and increasing from a shrink standpoint is what's driving that. The higher growth rate within inventory, unrelated to new stores, is really a function of inventory that we came into this year on hand with, and that's what's being worked down over the course of the first and second quarters. So orders that were -- that we put into place for the back half of this year, those are orders we put in latter part of last year.

And so that's where we'll see the slow growth in inventory realized, is in the back half of the year. But the reserve is simply a function of inventory levels that we have today and the growing retail presence of the store base.

Stephanie L. Pugliese -- President and Chief Executive Officer

Jon, and I would just add on the complexion of the overall inventory, we have more core and year-round product, a higher percentage of that than we have last year. So while we want to get some of those numbers back in line, and I think that one of the reasons that we are excited about putting our new inventory and assortment planning tool in place is that it will give us more flexibility and visibility to managing inventory across so many locations now, including obviously the stores. But in terms of risk go forward on the complexion of the inventory, it's quite low. Our clearance inventory was higher than last year as we came out of fiscal 2017 and into first quarter.

We are more aligned coming out of first quarter and we don't have any large pockets of risk inventory that we think are going to be margin issues for us go forward.

Jonathan Komp -- Robert W. Baird & Company -- Analyst

OK, great. That's helpful. And then maybe a different topic, but I was hoping to hear a little more color on how you're thinking about direct growth for the year. I know you reiterated mid-single-digit growth for the year.

Q2 looked like a pretty decent quarter last year, but it sounds like you've accelerated despite that. And then as you think about some of the puts and takes both on the disruption element but also maybe on the back end, the sales opportunity from the e-commerce implementation, any more kind of granularity about how you're thinking about any quarter-to-quarter shifts there when you think of direct growth?

Stephanie L. Pugliese -- President and Chief Executive Officer

Sure. So second quarter so far, we have seen the direct growth renormalize, if you will, from those last three weeks of April, which just -- it clipped us on the spring -- on the selling of the spring goods. And that's really what decelerated, if you will, the entire quarter. As Dave mentioned in his remarks, the first 10 weeks of the quarter, we were at a 7% growth rate in direct.

We're seeing second quarter come back into that mid-single-digits kind of normalization, if you will, in terms of where we expected it. When we look out and look at the impact of both the order management system as well as the e-commerce platform transition that we're about to make, what we have built into our expectations is a -- some deceleration of the direct growth in the first four to six weeks of the e-commerce platform going live. A lot of that will have to -- has to do with an expectation that conversion rates might slow for a short period while customers are getting used to the new platform, while we are fine-tuning some of the links and search terms, etc., that bring traffic into our site overall. So that will impact a little bit of the end of first quarter.

But we'll see probably most of that four to six weeks in the very beginning of third quarter. And then the -- in terms of the upside on the e-commerce platform, we have been fairly conservative as we go later into third quarter and into fourth quarter in terms of increasing expectation around direct growth overall. We want to make sure we get in there and fine-tune, as I mentioned, some of those things before we speak to some really quantifiable upside that we've seen on the immediate front.

Jonathan Komp -- Robert W. Baird & Company -- Analyst

Great. And then last one for me, just looking at the men's and women's growth. Women's stayed very strong, men's has slowed a little bit. Sounds like there's a weather element to that.

But when you look at men's broadly, just wondering kind of your degree of focus there internally in terms of efforts to restart or kind of reinvigorate that growth rate there. And if you have any specific initiatives to share, that would be helpful as well.

Stephanie L. Pugliese -- President and Chief Executive Officer

Sure. On the men's side specifically, we've just launched -- a couple of weeks ago, we launched a new advertising campaign around our -- one of our key product groups for second quarter, which is the Breezeshooter product grouping. We're actually launching a new underwear product group in just a couple of weeks that I think will be very well received by our men's customers. And as we go into fall, we focused in on that seasonless kind of transitional type of product.

We have a couple of new product introductions there. In addition, we're building out Alaskan Hardgear and our Better-Built business, as we've talked about in the past, because we think that we long term have even greater opportunity in both of those kind of aspects of his closet, if you will, to expand our offering for men. But we do continue to look at our marketing and our outreach to customers, whether that is increasing digital positioning, presence on social media, as well as some specific marketing that we've put in place to drive traffic to our store base.

Jonathan Komp -- Robert W. Baird & Company -- Analyst

OK. Great. Thank you both.

Stephanie L. Pugliese -- President and Chief Executive Officer

Thanks, Jon.

Operator

Our next question comes from Jim Duffy from Stifel. Please go ahead with your question.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you. Good morning, everyone. My first question is on the systems implementation. I'm curious, did you see any revenue consequence from the on-boarding of the order-management system in May and/or the associated expenses with that tracking to plan?

Stephanie L. Pugliese -- President and Chief Executive Officer

We did not see any revenue impact on a negative way with the implementation. We were quite pleased with the fact that we didn't have any significant issues that impacted either at revenue or large customer base issues. So we're quite pleased with that, and we're excited about launching the kind of Phase 1, if you will, of e-commerce in just a couple of weeks with our employee base. Right now, we are operating on the new order management system and our legacy e-commerce platform.

So it would be great to get all of those kind of pieces in place and get those synergies going. In terms of the expenses of the order management system and the overall technology, we're on track for that in terms of what we expected to spend this year.

Jim Duffy -- Stifel Financial Corp. -- Analyst

OK. And then based on your response to Jonathan's question, it seems like you have planned in the guidance some slowdown in the direct business associated with the on-boarding of the e-commerce platform. Is that accurate?

Stephanie L. Pugliese -- President and Chief Executive Officer

Yes.

Jim Duffy -- Stifel Financial Corp. -- Analyst

OK. And Dave, just looking at liquidity, where do you project the line of credit usage in the third quarter? And what are you thinking in terms of cash flow for this year?

Dave Loretta -- Chief Financial Officer

Yes, sure. The line of credit balance at sort of its peak period at the end of the third quarter is projected to be similar to last year but elevated by about $10 million to $20 million. So in total, $70 million to $80 million. We'll likely have a balance on the balance sheet at the end of the fiscal year.

And a portion of that might be, from a term standpoint, part of the feature that credit facility would allow us to take a portion of debt and assign some fixed rate nature to it so that it's more permanent in nature, at least in the short term. This year, given the spend for the technology projects and the 15 stores, cash flows will be slightly negative coming out of this year. And that's the reason for a balance on the line of credit at the end of the year.

Jim Duffy -- Stifel Financial Corp. -- Analyst

OK. Last one for me, Dave. I understand there's accounting regulation change with respect to recognition of catalog expense. Can you help us think through the quarterly impact of that, even if just directionally so?

Dave Loretta -- Chief Financial Officer

Yes, sure. The impact within the first and second quarters are roughly $1 million in shifting from one quarter to the next. This quarter, the catalog expense had a benefit in that regard. But the biggest change would be in the third quarter, where we would have $2 million that would have expensed in the fourth quarter as it did last year, but it's being pulled into the third quarter.

And that's a reflection of recognizing the expense at the time that we basically mail our catalogs versus over a demand curve of three to four months. So third quarter is where we would expect to see roughly $2 million of added expense. But that's really being pulled in from the fourth quarter, so the fourth quarter is going to be reduced by that amount.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Got it. Thank you.

Dave Loretta -- Chief Financial Officer

Sure.

Operator

[Operator instructions] Our next question comes from Dylan Carden from William Blair.

Dylan Carden -- William Blair & Company -- Analyst

Yeah. Hi. Thank you. Guys, I just want to clarify.

In the prepared remarks, the established omnichannel markets growing more than double the 4% direct revenue. It sounded like you're talking about sort of two-plus-year-old legacy stores. Do I have that right? And just if so, what are you seeing kind of now that you're lapping the year on some of these newer locations and from a direct standpoint?

Stephanie L. Pugliese -- President and Chief Executive Officer

We -- so we are using a two-year mark as what we consider an established store market. We do, Dylan, see that we have some markets that are accelerating a little bit faster, some markets that are accelerating a little bit -- that are closer to that two-year mark. Overall though, the markets that we are kind of coming into that year-and-a-half mark, I can give you an example, our Chicago market, for example, had a very strong quarter on the direct side. So we are seeing the indications of some of those stores opened in mid-2016 that they are starting to reaccelerate.

But again, there's a little bit of noise in that last -- that 18 to 24 months that in aggregate, we're seeing them basically perform on par with the company. But once they hit that two-year established mark, it's more than double. And this last quarter, that growth rate was in obviously in the double digits, so we're very pleased with that.

Dylan Carden -- William Blair & Company -- Analyst

Got you. And on the new stores, is there any thought to sort of -- or change or in the sort of strategy where you opened these stores or how you open these stores? Or is it more or less kind of what we've seen thus far? Are you adjusting, I guess, as you start to roll out more stores, I guess, is the question.

Stephanie L. Pugliese -- President and Chief Executive Officer

We are continuing to use the foundational filters and principles that we have in what markets we're looking at, specifically where our Duluth direct customers, where there are high concentrations of them and overlaying that with where are people that look a whole lot like our Duluth customers but have not yet experienced the brand. So that's first and foremost and that has not changed. We also still very much look for locations that have high visibility, high-traffic roads, very close so that there's easy access for our customers to come in and out of the stores. We have similar adjacencies, I would say, although that's not a real strong part in that we look for a specific adjacency.

But we're finding that when we're closer to Home Depot or other stores that attract our customers, we've got a few stores, like I said, that are near a Home Depot or near a Cabela's, for example, those have been -- have had some nice synergies. But the -- I would say the biggest evolution in terms of the store prototype, if you will, is that we have added a new prototype to our build-to-suit stores. It gives us additional flexibility in areas where we have restrictions on height of buildings, for example, so that we continue to have that flexibility. We have added some stores with Alaskan Hardgear shops in them to add to the presence of that sub-brand.

And those are the types of things that we're learning more of those internal how do we build the assortment and strengthen that than changing any of our core premise.

Dylan Carden -- William Blair & Company -- Analyst

Great. Thank you. And then, I guess, just one more. Shipping threshold looked like they actually kind of improved even in the quarter and weren't as much of a drag.

I guess, it's probably too early to kind of call stability there. But what allowed you to do that and are you sort of more hopeful going forward on that particular item?

Stephanie L. Pugliese -- President and Chief Executive Officer

I think that the biggest piece of it is that we were, first of all, up against a quarter where we had a significant increase of free shipping last year. And obviously, last year, we saw a significant drop in revenues over prior year. So certainly, this past quarter, we did see more stability than we have seen in the past four or five quarters or so. In terms of what we see go forward, we still know that there is headwind and expectation around free shipping.

So we're building that into our forecast for the go forward. Is there a chance that it could stay more stable? Yes, because we are up against a lot of free shipping from last year. That said, I don't know that we've -- with one quarter under our belt, really know where the stable place is just yet.

Dylan Carden -- William Blair & Company -- Analyst

Sure. Fair enough. Thank you very much, guys.

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 Stephanie Pugliese for any closing remarks.

Stephanie L. Pugliese -- President and Chief Executive Officer

Thank you, everyone, for joining today's call. We look forward to seeing you in some of our upcoming June conferences.

Operator

[Operator signoff]

Duration: 47 minutes

Call Participants:

Donni Case -- Investor Relations

Stephanie L. Pugliese -- President and Chief Executive Officer

Dave Loretta -- Chief Financial Officer

Dan Wewer -- Raymond James -- Analyst

Michael Kawamoto -- D. A. Davidson -- Analyst

Jonathan Komp -- Robert W. Baird & Company -- Analyst

Jim Duffy -- Stifel Financial Corp. -- Analyst

Dylan Carden -- William Blair & Company -- Analyst

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