UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-Q
_________________________________________
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 2, 20211, 2022
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File Number 001-37641
_________________________________________
DULUTH HOLDINGS INC.
(Exact name of registrant as specified in its charter)
_________________________________________
99 | |
Wisconsin | 39-1564801 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
201 East Front Street Mount Horeb, Wisconsin | 53572 |
(Address of principal executive offices) | (Zip Code) |
(608) 424-1544 |
(Registrant’s telephone number, including area code) |
_________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class B Common Stock, No Par Value | DLTH | NASDAQ Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | o | Accelerated Filer | þ |
Non-accelerated Filer | o | Smaller Reporting Company | þ |
Emerging Growth Company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of June 2, 2021,1, 2022, was 3,364,200.
The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of June 2, 2021,1, 2022, was 29,658,718.29,995,500.
DULUTH HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED May 2, 20211, 2022
INDEX
Page | ||
3 | ||
3 | ||
5 | ||
6 | ||
7 | ||
| ||
8 | ||
9 | ||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 10 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |
| ||
| ||
| ||
| ||
| ||
| ||
|
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DULUTH HOLDINGS INC.
Condensed Consolidated Balance Sheets - Assets
(Unaudited)
(Amounts in thousands)
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 26,054 | $ | 47,221 | $ | 40,370 | $ | 77,051 | ||||
Receivables | 2,558 | 2,820 | 5,097 | 5,455 | ||||||||
Inventory, less reserves of $1,834 and $1,600, respectively | 144,185 | 149,052 | ||||||||||
Inventory, less reserves of $2,012 and $2,372, respectively | 152,244 | 122,672 | ||||||||||
Prepaid expenses & other current assets | 10,980 | 10,203 | 16,422 | 17,333 | ||||||||
Prepaid catalog costs | 802 | 1,014 | — | 10 | ||||||||
Total current assets | 184,579 | 210,310 | 214,133 | 222,521 | ||||||||
Property and equipment, net | 119,783 | 124,237 | 108,283 | 110,078 | ||||||||
Operating lease right-of-use assets | 115,060 | 117,490 | 118,414 | 120,911 | ||||||||
Finance lease right-of-use assets, net | 52,329 | 53,468 | 49,402 | 50,133 | ||||||||
Available-for-sale security | 6,346 | 6,111 | 6,066 | 6,554 | ||||||||
Other assets, net | 4,067 | 3,961 | 6,495 | 5,353 | ||||||||
Total assets | $ | 482,164 | $ | 515,577 | $ | 502,793 | $ | 515,550 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Condensed Consolidated Balance Sheets – Liabilities and Shareholders’ Equity
(Unaudited)
(Amounts in thousands)
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Trade accounts payable | $ | 40,091 | $ | 33,647 | $ | 54,523 | $ | 45,402 | ||||
Accrued expenses and other current liabilities | 30,903 | 37,686 | 32,214 | 47,504 | ||||||||
Income taxes payable | 7,683 | 7,579 | 4,782 | 6,814 | ||||||||
Current portion of operating lease liabilities | 11,189 | 11,050 | 13,191 | 12,882 | ||||||||
Current portion of finance lease liabilities | 2,578 | 2,629 | 2,730 | 2,701 | ||||||||
Current portion of Duluth long-term debt | 17,626 | 2,500 | — | — | ||||||||
Current maturities of TRI long-term debt | 640 | 623 | 711 | 693 | ||||||||
Total current liabilities | 110,710 | 95,714 | 108,151 | 115,996 | ||||||||
Operating lease liabilities, less current maturities | 101,876 | 104,287 | 104,448 | 107,094 | ||||||||
Finance lease liabilities, less current maturities | 42,304 | 43,299 | 39,574 | 40,267 | ||||||||
Duluth long-term debt, less current maturities | — | 45,750 | — | — | ||||||||
TRI long-term debt, less current maturities | 27,079 | 27,229 | 26,440 | 26,608 | ||||||||
Deferred tax liabilities | 8,252 | 8,200 | 2,791 | 2,867 | ||||||||
Total liabilities | 290,221 | 324,479 | 281,404 | 292,832 | ||||||||
Commitments and contingencies |
|
| ||||||||||
Shareholders' equity: | ||||||||||||
Preferred stock, no par value; 10,000 shares authorized; 0 shares issued or outstanding as of May 2, 2021 and January 31, 2021 | — | — | ||||||||||
Common stock (Class A), no par value; 10,000 shares authorized; 3,364 shares issued and outstanding as of May 2, 2021 and January 31, 2021 | — | — | ||||||||||
Common stock (Class B), no par value; 200,000 shares authorized; 29,631 shares issued and 29,553 shares outstanding as of May 2, 2021 and 29,530 shares issued and 29,477 shares outstanding as of January 31, 2021 | — | — | ||||||||||
Treasury stock, at cost; 78 and 53 shares as of May 2, 2021 and January 31, 2021, respectively | (986) | (628) | ||||||||||
Preferred stock, no par value; 10,000 shares authorized; 0 shares issued or outstanding as of May 1, 2022 and January 30, 2022 | — | — | ||||||||||
Common stock (Class A), no par value; 10,000 shares authorized; 3,364 shares issued and outstanding as of May 1, 2022 and January 30, 2022 | — | — | ||||||||||
Common stock (Class B), no par value; 200,000 shares authorized; 30,077 shares issued and 29,965 shares outstanding as of May 1, 2022 and 29,786 shares issued and 29,707 shares outstanding as of January 30, 2022 | — | — | ||||||||||
Treasury stock, at cost; 112 and 79 shares as of May 1, 2022 and January 30, 2022, respectively | (1,457) | (1,002) | ||||||||||
Capital stock | 93,378 | 92,875 | 96,299 | 95,515 | ||||||||
Retained earnings | 101,710 | 101,166 | 129,575 | 130,868 | ||||||||
Accumulated other comprehensive income | 250 | 48 | 153 | 489 | ||||||||
Total shareholders' equity of Duluth Holdings Inc. | 194,352 | 193,461 | 224,570 | 225,870 | ||||||||
Noncontrolling interest | (2,409) | (2,363) | (3,181) | (3,152) | ||||||||
Total shareholders' equity | 191,943 | 191,098 | 221,389 | 222,718 | ||||||||
Total liabilities and shareholders' equity | $ | 482,164 | $ | 515,577 | $ | 502,793 | $ | 515,550 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share figures)
Three Months Ended | Three Months Ended | |||||||||||
May 2, 2021 | May 3, 2020 | May 1, 2022 | May 2, 2021 | |||||||||
Net sales | $ | 133,419 | $ | 109,917 | $ | 122,904 | $ | 133,419 | ||||
Cost of goods sold (excluding depreciation and amortization) | 66,876 | 57,585 | 55,841 | 66,876 | ||||||||
Gross profit | 66,543 | 52,332 | 67,063 | 66,543 | ||||||||
Selling, general and administrative expenses | 64,648 | 71,306 | 67,994 | 64,648 | ||||||||
Operating income (loss) | 1,895 | (18,974) | ||||||||||
Operating (loss) income | (931) | 1,895 | ||||||||||
Interest expense | 1,308 | 1,350 | 876 | 1,308 | ||||||||
Other income, net | 16 | 59 | 46 | 16 | ||||||||
Income (loss) before income taxes | 603 | (20,265) | ||||||||||
Income tax expense (benefit) | 105 | (5,086) | ||||||||||
Net income (loss) | 498 | (15,179) | ||||||||||
(Loss) income before income taxes | (1,761) | 603 | ||||||||||
Income tax (benefit) expense | (438) | 105 | ||||||||||
Net (loss) income | (1,323) | 498 | ||||||||||
Less: Net loss attributable to noncontrolling interest | (46) | (44) | (29) | (46) | ||||||||
Net income (loss) attributable to controlling interest | $ | 544 | $ | (15,135) | ||||||||
Basic earnings (loss) per share (Class A and Class B): | ||||||||||||
Net (loss) income attributable to controlling interest | $ | (1,294) | $ | 544 | ||||||||
Basic (loss) earnings per share (Class A and Class B): | ||||||||||||
Weighted average shares of common stock outstanding | 32,540 | 32,372 | 32,714 | 32,540 | ||||||||
Net income (loss) per share attributable to controlling interest | $ | 0.02 | $ | (0.47) | ||||||||
Diluted earnings (loss) per share (Class A and Class B): | ||||||||||||
Net (loss) income per share attributable to controlling interest | $ | (0.04) | $ | 0.02 | ||||||||
Diluted (loss) earnings per share (Class A and Class B): | ||||||||||||
Weighted average shares and equivalents outstanding | 32,720 | 32,372 | 32,714 | 32,720 | ||||||||
Net income (loss) per share attributable to controlling interest | $ | 0.02 | $ | (0.47) | ||||||||
Net (loss) income per share attributable to controlling interest | $ | (0.04) | $ | 0.02 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Amounts in thousands)
Three Months Ended | ||||||
May 2, 2021 | May 3, 2020 | |||||
Net income (loss) | $ | 498 | $ | (15,179) | ||
Other comprehensive income | ||||||
Securities available-for sale: | ||||||
Unrealized security income (loss) arising during the period | 270 | (700) | ||||
Income tax expense (benefit) | 68 | (182) | ||||
Other comprehensive income (loss) | 202 | (518) | ||||
Comprehensive income (loss) | 700 | (15,697) | ||||
Comprehensive income (loss) attributable to noncontrolling interest | (46) | (44) | ||||
Comprehensive income (loss) attributable | $ | 746 | $ | (15,653) | ||
Three Months Ended | ||||||
May 1, 2022 | May 2, 2021 | |||||
Net (loss) income | $ | (1,323) | $ | 498 | ||
Other comprehensive income | ||||||
Securities available-for sale: | ||||||
Unrealized security (loss) income arising during the period | (449) | 270 | ||||
Income tax (benefit) expense | (113) | 68 | ||||
Other comprehensive (loss) income | (336) | 202 | ||||
Comprehensive (loss) income | (1,659) | 700 | ||||
Comprehensive loss attributable to noncontrolling interest | (29) | (46) | ||||
Comprehensive (loss) income attributable | $ | (1,630) | $ | 746 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)
(Amounts in thousands)
Three Months Ended May 2, 2021 | Three Months Ended May 1, 2022 | |||||||||||||||||||||||||||||||||||||||
Accumulated | Noncontrolling | Accumulated | Noncontrolling | |||||||||||||||||||||||||||||||||||||
Capital stock | other | interest in | Total | Capital stock | other | interest in | Total | |||||||||||||||||||||||||||||||||
Treasury | Retained | comprehensive | variable interest | shareholders' | Treasury | Retained | comprehensive | variable interest | shareholders' | |||||||||||||||||||||||||||||||
Shares | Amount | stock | earnings | income | entity | equity | Shares | Amount | stock | earnings | income | entity | equity | |||||||||||||||||||||||||||
Balance at January 31, 2021 | 32,841 | $ | 92,875 | $ | (628) | $ | 101,166 | $ | 48 | $ | (2,363) | $ | 191,098 | |||||||||||||||||||||||||||
Balance at January 30, 2022 | 33,071 | $ | 95,515 | $ | (1,002) | $ | 130,868 | $ | 489 | $ | (3,152) | $ | 222,718 | |||||||||||||||||||||||||||
Issuance of common stock | 101 | 132 | — | — | — | — | 132 | 292 | 166 | — | — | — | — | 166 | ||||||||||||||||||||||||||
Stock-based compensation | — | 371 | — | — | — | — | 371 | — | 618 | — | — | — | — | 618 | ||||||||||||||||||||||||||
Restricted stock forfeitures | (1) | — | — | — | — | — | — | (1) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Restricted stock surrendered for taxes | (24) | — | (358) | — | — | — | (358) | (33) | — | (455) | — | — | — | (455) | ||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | 202 | — | 202 | — | — | — | — | (336) | — | (336) | ||||||||||||||||||||||||||
Net income | — | — | — | 544 | — | (46) | 498 | |||||||||||||||||||||||||||||||||
Balance at May 2, 2021 | 32,917 | $ | 93,378 | $ | (986) | $ | 101,710 | $ | 250 | $ | (2,409) | $ | 191,943 | |||||||||||||||||||||||||||
Net loss | — | — | — | (1,294) | — | (29) | (1,323) | |||||||||||||||||||||||||||||||||
Balance at May 1, 2022 | 33,329 | $ | 96,299 | $ | (1,457) | $ | 129,575 | $ | 153 | $ | (3,181) | $ | 221,389 | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)
(Amounts in thousands)
Three Months Ended May 3, 2020 | Three Months Ended May 2, 2021 | |||||||||||||||||||||||||||||||||||||||
Accumulated | Noncontrolling | Accumulated | Noncontrolling | |||||||||||||||||||||||||||||||||||||
Capital stock | other | interest in | Total | Capital stock | other | interest in | Total | |||||||||||||||||||||||||||||||||
Treasury | Retained | comprehensive | variable interest | shareholders' | Treasury | Retained | comprehensive | variable interest | shareholders' | |||||||||||||||||||||||||||||||
Shares | Amount | stock | earnings | income | entity | equity | Shares | Amount | stock | earnings | income | entity | equity | |||||||||||||||||||||||||||
Balance at February 2, 2020 | 32,536 | $ | 90,902 | $ | (407) | $ | 87,589 | $ | 188 | $ | (2,166) | $ | 176,106 | |||||||||||||||||||||||||||
Balance at January 31, 2021 | 32,841 | $ | 92,875 | $ | (628) | $ | 101,166 | $ | 48 | $ | (3,000) | $ | 190,461 | |||||||||||||||||||||||||||
Issuance of common stock | 227 | 115 | — | — | — | — | 115 | 101 | 132 | — | — | — | — | 132 | ||||||||||||||||||||||||||
Stock-based compensation | — | 434 | — | — | — | — | 434 | — | 371 | — | — | — | — | 371 | ||||||||||||||||||||||||||
Restricted stock forfeitures | (1) | — | — | — | — | — | — | (1) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Restricted stock surrendered for taxes | (18) | — | (107) | — | — | — | (107) | (24) | — | (358) | — | — | — | (358) | ||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (518) | — | (518) | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | (15,135) | — | (44) | (15,179) | |||||||||||||||||||||||||||||||||
Balance at May 3, 2020 | 32,744 | $ | 91,451 | $ | (514) | $ | 72,454 | $ | (330) | $ | (2,210) | $ | 160,851 | |||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 202 | — | 202 | |||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | 544 | — | (46) | 498 | |||||||||||||||||||||||||||||||||
Balance at May 2, 2021 | 32,917 | $ | 93,378 | $ | (986) | $ | 101,710 | $ | 250 | $ | (3,046) | $ | 191,306 | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
Three Months Ended | Three Months Ended | |||||||||||
May 2, 2021 | May 3, 2020 | May 1, 2022 | May 2, 2021 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | 498 | $ | (15,179) | ||||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||
Net (loss) income | $ | (1,323) | $ | 498 | ||||||||
Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 7,274 | 6,689 | 7,520 | 7,274 | ||||||||
Stock based compensation | 371 | 463 | 618 | 371 | ||||||||
Deferred income taxes | (16) | (21) | 37 | (16) | ||||||||
Loss on disposal of property and equipment | 51 | — | 26 | 51 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Receivables | 262 | (1,989) | 358 | 262 | ||||||||
Inventory | 4,867 | (27,188) | (29,572) | 4,867 | ||||||||
Prepaid expense & other current assets | (595) | 2,196 | 746 | (595) | ||||||||
Software hosting implementation costs, net | (132) | — | (1,007) | (132) | ||||||||
Deferred catalog costs | 212 | 1,014 | 10 | 212 | ||||||||
Trade accounts payable | 5,991 | (1,842) | 10,362 | 5,991 | ||||||||
Income taxes payable | 104 | (3,427) | (2,032) | 104 | ||||||||
Accrued expenses and deferred rent obligations | (6,330) | 5,126 | (17,500) | (6,330) | ||||||||
Other assets | (33) | — | (11) | (33) | ||||||||
Noncash lease impacts | (101) | 667 | 51 | (101) | ||||||||
Net cash provided by (used in) operating activities | 12,423 | (33,491) | ||||||||||
Net cash (used in) provided by operating activities | (31,717) | 12,423 | ||||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (2,033) | (4,059) | (3,885) | (2,033) | ||||||||
Capital contributions towards build-to-suit stores | — | (74) | ||||||||||
Principal receipts from available-for-sale security | 35 | 31 | 39 | 35 | ||||||||
Proceeds from disposals | 24 | — | 3 | 24 | ||||||||
Net cash used in investing activities | (1,974) | (4,102) | (3,843) | (1,974) | ||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from line of credit | — | 37,484 | ||||||||||
Payments on line of credit | — | (21,816) | ||||||||||
Proceeds from delayed draw term loan | — | 30,000 | ||||||||||
Payments on delayed draw term loan | (30,625) | (250) | — | (30,625) | ||||||||
Payments on TRI long term debt | (151) | (116) | (168) | (151) | ||||||||
Payments on finance lease obligations | (615) | (392) | (664) | (615) | ||||||||
Payments of tax withholding on vested restricted shares | (358) | (107) | (455) | (358) | ||||||||
Other | 133 | (150) | 166 | 133 | ||||||||
Net cash (used in) provided by financing activities | (31,616) | 44,653 | ||||||||||
(Decrease) increase in cash, cash equivalents and restricted cash | (21,167) | 7,060 | ||||||||||
Cash, cash equivalents and restricted cash at beginning of period | 47,221 | 2,240 | ||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 26,054 | $ | 9,300 | ||||||||
Net cash used in financing activities | (1,121) | (31,616) | ||||||||||
Decrease in cash, cash equivalents | (36,681) | (21,167) | ||||||||||
Cash and cash equivalents at beginning of period | 77,051 | 47,221 | ||||||||||
Cash and cash equivalents at end of period | $ | 40,370 | $ | 26,054 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Interest paid | $ | 1,348 | $ | 1,447 | $ | 876 | $ | 1,348 | ||||
Income taxes paid | $ | — | $ | 37 | $ | 1,610 | $ | — | ||||
Supplemental disclosure of non-cash information: | ||||||||||||
Unpaid liability to acquire property and equipment | $ | 962 | $ | 2,000 | $ | 4,121 | $ | 962 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
A. Nature of Operations
Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold primarily through the Company’s own omnichannel platform. The Company’s products are marketed under the Duluth Trading brand,name, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise.
The Company identifies its operating segments according to how its business activities are managed and evaluated. The Company continues to report one1 reportable external segment, consistent with the Company’s omnichannel business approach. The Company’s revenues generated outside the United States were insignificant.
The Company has 2 classes of authorized common stock: Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to 10 votes per share and is convertible at any time into one share of Class B common stock. Each share of Class B common stock is entitled to 1 vote per share. The Company’s Class B common stock trades on the NASDAQ Global Select Market under the symbol “DLTH.”
B. Basis of Presentation
The condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Company consolidates TRI Holdings, LLC (“TRI”) as a variable interest entity (see Note 6 “Variable Interest Entity” for further information). All significant intercompany balances and transactions have been eliminated in consolidation.
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 20212022 is a 52-week period and ends on January 30, 2022.29, 2023. Fiscal 20202021 was a 52-week period and ended on January 31, 2021.30, 2022. The three months of fiscal 20212022 and fiscal 20202021 represent the Company’s 13 week13-week periods ended May 2, 20211, 2022 and May 3, 2020,2, 2021, respectively.
The accompanying condensed consolidated financial statements as of and for the three months ended May 2, 20211, 2022 and May 3, 20202, 2021 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations as of and for the three months ended May 2, 20211, 2022 and May 3, 2020.2, 2021. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2021.30, 2022.
C. COVID-19
In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place. These impacts are discussed within these notes to the condensed consolidated financial statements.
The ultimate impact of COVID-19 on our operational and financial performance still depends on future developments outside of our control. Given the uncertainty, we cannot reasonably estimate the continued impact on our business and whether that impact will be different than what we have already experienced.
D. Impairment Analysis
As of May 2, 20211, 2022 and for the three months then ended, no triggering events or indicators of asset impairment were noted.
At May 3, 2020, the Company determined that the effects of COVID-19 represented indicators of asset impairment, and as a result, performed interim impairment assessments for the Company’s intangible assets, long-lived assets and goodwill. Due to the nature of the Company’s intangible assets balance, the Company concluded that no indicators of impairment were present.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Based on these assessments, the Company concluded that 0 impairment losses had been incurred. However, the Company cannot predict the future impact or duration of the negative effect of COVID-19 and as a result, cannot reasonably predict the probability or amount of impairment losses that may be incurred in future periods.
There were no triggering events subsequent to the quarter ended May 3, 2020.
E. Inventory
Inventory consists of finished goods stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out valuation method. The Company records an inventory reserve for the anticipated loss associated with selling
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
inventories below cost. Inventory reserve for excess and obsolete items was $1.8$2.0 million and $1.6$2.4 million as of May 2, 20211, 2022 and January 31, 2021,30, 2022, respectively.
F. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
(in thousands) | ||||||||||||
Prepaid expenses & other current assets | ||||||||||||
Pending returns inventory, net | $ | 2,072 | $ | 2,490 | $ | 1,852 | $ | 2,235 | ||||
Current software hosting implementation costs, net | 1,246 | 1,149 | 2,061 | 1,475 | ||||||||
Other prepaid expenses | 7,662 | 6,564 | 12,509 | 13,623 | ||||||||
Prepaid expenses & other current assets | $ | 10,980 | $ | 10,203 | $ | 16,422 | $ | 17,333 | ||||
Other assets, net | ||||||||||||
Goodwill | $ | 402 | $ | 402 | $ | 402 | $ | 402 | ||||
Intangible assets, net | 260 | 264 | 241 | 246 | ||||||||
Non-current software hosting implementation costs | 2,493 | 2,755 | 4,122 | 2,949 | ||||||||
Other assets, net | 912 | 540 | 1,730 | 1,756 | ||||||||
Other assets, net | $ | 4,067 | $ | 3,961 | $ | 6,495 | $ | 5,353 | ||||
G. Seasonality of Business
The Company’s business is affected by the pattern of seasonality common to most apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year as a result of increased sales during the holiday season.
H. Cash and cash equivalentsCash Equivalents
The Company considers short-term investments with original maturities of three months or less when purchased to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within 2 to 4 days of the original sales transaction and are considered to be cash equivalents.
I. Significant Accounting Policies
There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended January 31, 2021.30, 2022.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. LEASES
Based on the criteria set forth in ASC Topic 842, Leases (“ASC 842”), the Company recognizes ROURight-of-use (ROU) assets and lease liabilities related to leases on the Company’s consolidated balance sheets. The Company determines if an arrangement is, or contains, a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments and the ROU asset is measured at the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to 0 at the end of the lease.
The Company leases retail space under non-cancelable lease agreements, which expire on various dates through 2036. Substantially all of these arrangements are store leases. Store leases generally have initial lease terms ranging from five years to
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
fifteen years with renewal options and rent escalation provisions. At the commencement of a lease, the Company includes only the initial lease term as the option to extend is not reasonably certain. The Company does not record leases with a lease term of 12 months or less on the Company’s consolidated balance sheets.
When calculating the lease liability on a discounted basis, the Company applies its estimated discount. The Company bases this discount on a collateralized interest rate as well as publicly available data for instruments with similar characteristics.
In addition to rent payments, leases for retail space contain payments for real estate taxes, insurance costs, common area maintenance, and utilities that are not fixed. The Company accounts for these costs as variable payments and does not include such costs as a lease component.
Due to the adverse impacts of COVID-19, the Company negotiated rent deferral and payback periods with a number of the Company’s store landlords for the months of April and May 2020. Based on the guidance set forth in the Financial Accounting Standards Board (“FASB”) issued Staff Q&A “Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic” the Company has accounted for these deferrals as if no changes to the lease contract were made and will not elect to apply the lease modification guidance under ASC 842. As of May 2, 2021 the Company has deferred rent of approximately $0.4 million which was recorded within accrued expenses and other current liabilities and will be paid in accordance with the concession arrangements.
The expense components of the Company’s leases reflected on the Company’s consolidated statement of operations were as follows:
Consolidated Statement | Three Months Ended | Consolidated Statement | Three Months Ended | |||||||||||||
of Operations | May 2, 2021 | May 3, 2020 | of Operations | May 1, 2022 | May 2, 2021 | |||||||||||
(in thousands) | ||||||||||||||||
Finance lease expenses | ||||||||||||||||
Amortization of right-of-use | Selling, general and | $ | 838 | $ | 657 | Selling, general and | $ | 840 | $ | 838 | ||||||
Interest on lease liabilities | Interest expense | 495 | 438 | Interest expense | 466 | 495 | ||||||||||
Total finance lease expense | $ | 1,333 | $ | 1,095 | $ | 1,306 | $ | 1,333 | ||||||||
Operating lease expense | Selling, general and | $ | 3,951 | $ | 4,136 | Selling, general and | $ | 4,389 | $ | 3,951 | ||||||
Amortization of build-to-suit | Selling, general and | 328 | 324 | Selling, general and | 321 | 328 | ||||||||||
Variable lease expense | Selling, general and | 2,059 | 1,761 | Selling, general and | 1,972 | 2,059 | ||||||||||
Total lease expense | $ | 7,671 | $ | 7,316 | $ | 7,988 | $ | 7,671 | ||||||||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other information related to leases were as follows:
Three Months Ended | Three Months Ended | |||||||||||
May 2, 2021 | May 3, 2020 | May 1, 2022 | May 2, 2021 | |||||||||
(in thousands) | ||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||
Financing cash flows from finance leases | $ | 615 | $ | 392 | $ | 664 | $ | 615 | ||||
Operating cash flows from finance leases | $ | 495 | $ | 439 | $ | 466 | $ | 495 | ||||
Operating cash flows from operating leases | $ | 3,977 | $ | 3,802 | $ | 4,439 | $ | 3,977 | ||||
Weighted-average remaining lease term (in years): | ||||||||||||
Finance leases | 13 | 14 | 12 | 13 | ||||||||
Operating leases | 9 | 10 | 8 | 9 | ||||||||
Weighted-average discount rate: | ||||||||||||
Finance leases | 4.4% | 4.5% | 4.4% | 4.4% | ||||||||
Operating leases | 4.3% | 4.3% | 4.1% | 4.3% | ||||||||
Future minimum lease payments under the non-cancellable leases are as follows as of May 2, 2021:1, 2022:
Fiscal year | Finance | Operating | Finance | Operating | ||||||||
(in thousands) | ||||||||||||
2021 (remainder of fiscal year) | $ | 3,381 | $ | 11,644 | ||||||||
2022 | 4,523 | 15,749 | ||||||||||
2022 (remainder of fiscal year) | $ | 3,393 | $ | 13,261 | ||||||||
2023 | 4,551 | 15,931 | 4,551 | 17,919 | ||||||||
2024 | 4,736 | 15,262 | 4,736 | 17,304 | ||||||||
2025 | 5,098 | 14,469 | 5,098 | 16,554 | ||||||||
2026 | 3,993 | 15,612 | ||||||||||
Thereafter | 37,188 | 62,742 | 33,225 | 59,227 | ||||||||
Total future minimum lease payments | $ | 59,477 | $ | 135,797 | $ | 54,996 | $ | 139,877 | ||||
Less – Discount | (14,595) | (22,732) | (12,692) | (22,238) | ||||||||
Lease liability | $ | 44,882 | $ | 113,065 | $ | 42,304 | $ | 117,639 | ||||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
3. DEBT AND CREDIT AGREEMENT
Debt consists of the following:
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
(in thousands) | ||||||||||||
TRI Senior Secured Note | $ | 24,219 | $ | 24,352 | $ | 23,651 | $ | 23,801 | ||||
TRI Note | 3,500 | 3,500 | 3,500 | 3,500 | ||||||||
$ | 27,719 | $ | 27,852 | $ | 27,151 | $ | 27,301 | |||||
Less: current maturities | 640 | 623 | 711 | 693 | ||||||||
TRI long-term debt | $ | 27,079 | $ | 27,229 | $ | 26,440 | $ | 26,608 | ||||
Duluth Line of credit | $ | — | $ | — | ||||||||
Duluth Delayed draw term loan | 17,626 | 48,250 | ||||||||||
$ | 17,626 | $ | 48,250 | |||||||||
Less: current maturities | 17,626 | 2,500 | ||||||||||
Duluth long-term debt | $ | — | $ | 45,750 | ||||||||
TRI Holdings, LLC
TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $26.7 million. The TRI Senior Secured Note is scheduled to mature on October 15, 2038 and requires installment payments with an interest rate of 4.95%. See Note 6 “Variable Interest Entities” for further information.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
TRI entered into a promissory note (“TRI Note”) with an original balance of $3.5 million. The TRI Note is scheduled to mature in November 2038 and requires annual interest payments at a rate of 3.05%, with a final balloon payment due in November 2038.
While the above notes are consolidated in accordance with ASC Topic 810, Consolidation, the Company is not the guarantor nor obligor of these notes.
Credit Agreement
On May 17, 2018, the Company entered into a credit agreement (the “Credit Agreement”) which provided for borrowing availability of up to $80.0 million in revolving credit and associated swing line (the “Revolver”), and borrowing availability of up to $50.0 million in a delayed draw term loan (“DDTL”), for a total credit facility of $130.0 million. The $80.0 million revolving credit facility was scheduled to mature on May 17, 2023. The $50.0 million DDTL was available to draw upon in differing amounts through May 17, 2020 and was scheduled to mature on May 17, 2023. Outstanding balances under the DDTL required quarterly principal payments with a final balloon payment at maturity. The Credit Agreement was secured by essentially all Company assets and required the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the Credit Agreement.
On April 30, 2020, the Credit Agreement was amended to include an incremental DDTL of $20.5 million (the “Incremental DDTL”) that was available to draw upon before March 31, 2021, and matured on April 29, 2021, for a total credit facility of $150.5 million. As of and for the three monthsfiscal year ended May 2,January 31, 2021, 0no amount of the Incremental DDTL was funded. The loan covenants were also amended to allow for greater flexibility during the Company’s peak borrowing periods in fiscal 2020. The interest rate applicable to the Revolver or DDTL was a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR (with a 1% floor) for such interest period plus a margin of 225 to 300 basis points, based upon the Company’s rent adjusted leverage ratio (effective rate of 3.5% for the Revolver and the DDTL at May 2, 2021).ratio. The interest rate applicable to the Incremental DDTL was also a fixed rate over the aforementioned interest periods equal to LIBOR (with a 1% floor) for such interest period plus a margin of 275 to 350 basis points.
On May 14, 2021, the Company terminated the Credit Agreement, and entered into a new credit agreement (the “New Credit Agreement”), which was treated as a modification for accounting purposes. The New Credit Agreement matures on May 14, 2026 and provides for borrowings of up to $150.0 million that are available under a revolving senior credit facility, with a $5.0 million sublimit for issuance of standby letters of credit, as well as a $10.0 million sublimit for swing line loans. At the Company’s option, the interest rate applicable to the revolving senior credit facility will be a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus the applicable rate of 1.25% to 2.00% determined based on the Company’s rent adjusted leverage ratio, or (ii) the base rate plus the applicable rate of 0.25% to 1.00% based on the Company’s rent adjusted leverage ratio. The New Credit Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the New Credit Agreement.
As of May 2, 20211, 2022 and for the three months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above. Subsequent tocontained within the May 2, 2021 quarter end, the Company refinanced the above credit agreement. See Note 13 “Subsequent Events” for further information.New Credit Agreement.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
(in thousands) | ||||||||||||
Salaries and benefits | $ | 8,261 | $ | 8,826 | $ | 5,206 | $ | 11,773 | ||||
Deferred revenue | 8,588 | 9,944 | 9,054 | 10,791 | ||||||||
Freight | 4,031 | 6,769 | 4,174 | 8,942 | ||||||||
Product returns | 4,615 | 5,304 | 4,381 | 5,439 | ||||||||
Catalog costs | 692 | 396 | 140 | — | ||||||||
Unpaid purchases of property & equipment | 132 | 503 | 3,004 | 794 | ||||||||
Accrued advertising | 2,794 | 981 | 3,178 | 600 | ||||||||
Other | 1,790 | 4,963 | 3,077 | 9,165 | ||||||||
Total accrued expenses and other current liabilities | $ | 30,903 | $ | 37,686 | $ | 32,214 | $ | 47,504 | ||||
5. FAIR VALUE
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”),, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., an exit price). The exit price is based on the amount that the holder of the asset or liability would receive or need to
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
pay in an actual transaction (or in a hypothetical transaction if an actual transaction does not exist) at the measurement date. ASC 820 describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value of the Company’s available-for-sale security was valued based on a discounted cash flow method (Level 3), which incorporates the U.S. Treasury yield curve, credit information and an estimate of future cash flows. During the three months ended May 2, 2021,1, 2022, certain changes in the inputs did impact the fair value of the available-for-sale security. The calculated fair value is based on estimates that are subjective in nature and involve uncertainties and matters of significant judgementjudgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The amortized cost and fair value of the Company’s available-for-sale security and the corresponding amount of gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows:
May 2, 2021 | May 1, 2022 | |||||||||||||||||||||||
Cost or | Gross | Gross | Cost or | Gross | Gross | |||||||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | Amortized | Unrealized | Unrealized | Estimated | |||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Level 3 security: | ||||||||||||||||||||||||
Corporate trust | $ | 6,012 | $ | 334 | $ | — | $ | 6,346 | $ | 5,861 | $ | 205 | $ | — | $ | 6,066 | ||||||||
January 31, 2021 | January 30, 2022 | |||||||||||||||||||||||
Cost or | Gross | Gross | Cost or | Gross | Gross | |||||||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | Amortized | Unrealized | Unrealized | Estimated | |||||||||||||||||
Cost | Gains | Losses | Fair Value | Cost | Gains | Losses | Fair Value | |||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Level 3 security: | ||||||||||||||||||||||||
Corporate trust | $ | 6,047 | $ | 64 | $ | — | $ | 6,111 | $ | 5,900 | $ | 654 | $ | — | $ | 6,554 | ||||||||
The Company does not intend to sell the available-for-sale-security in the near term and does not believe that it will be required to sell the security. The Company reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment.
NaN other-than-temporary impairment was recorded in the unaudited condensed consolidated statements of operations for the three months ended May 2, 20211, 2022 or May 3, 2020.2, 2021.
The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of May 2, 2021.1, 2022.
Amortized | Estimated | Amortized | Estimated | |||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||
(in thousands) | ||||||||||||
Within one year | $ | 151 | $ | 170 | $ | 168 | $ | 180 | ||||
After one year through five years | 1,028 | 1,124 | 1,129 | 1,191 | ||||||||
After five years through ten years | 1,596 | 1,691 | 1,730 | 1,792 | ||||||||
After ten years | 3,237 | 3,361 | 2,834 | 2,903 | ||||||||
Total | $ | 6,012 | $ | 6,346 | $ | 5,861 | $ | 6,066 | ||||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows:
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
TRI Long-term debt, including short-term portion | $ | 27,719 | $ | 29,787 | $ | 27,852 | $ | 28,697 | $ | 27,151 | $ | 25,731 | $ | 27,301 | $ | 27,804 | ||||||||
The above long-term debt, including short-term portion is attributable to the consolidation of TRI in accordance with ASC Topic 810, Consolidation. The fair value was also based on a discounted cash flow method (Level 3) based on credit information and an estimate of future cash flows.
As of May 2, 2021 and January 31, 2021, the carrying value of the delayed draw term loan and line of credit both approximated their fair value.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
6. VARIABLE INTEREST ENTITY
Based upon the criteria set forth in ASC 810, Consolidation, the Company consolidates variable interest entities (“VIEs”) in which it has a controlling financial interest and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and the right to receive benefits that are significant to the VIE. The Company has determined that it was the primary beneficiary of 1 variable interest entity (“VIE”) as of May 2, 20211, 2022 and January 31, 2021.30, 2022.
The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company invested $6.3 million in a trust that loaned funds to TRI for the construction of the Company’s headquarters. TRI is a Wisconsin limited liability company whose primary purpose and activity is to own this real property. The Company considers itself the primary beneficiary for TRI as the Company has both the power to direct the activities that most significantly impact the entity’s economic performance and is expected to receive benefits that are significant to TRI. As the Company is the primary beneficiary, it consolidates TRI and the lease is eliminated in consolidation. The Company does not consolidate the trust as the Company is not the primary beneficiary.
The condensed consolidated balance sheets include the following amounts as a result of the consolidation of TRI as of May 2, 20211, 2022 and January 31, 2021:30, 2022:
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
(in thousands) | ||||||||||||
Cash | $ | 747 | $ | 747 | $ | 24 | $ | 21 | ||||
Property and equipment, net | 24,644 | 24,800 | 24,025 | 24,180 | ||||||||
Total assets | $ | 25,391 | $ | 25,547 | $ | 24,049 | $ | 24,201 | ||||
Other current liabilities | $ | 81 | $ | 58 | $ | 79 | $ | 52 | ||||
Current maturities of long-term debt | 640 | 623 | 711 | 693 | ||||||||
TRI Long-term debt | 27,079 | 27,229 | 26,440 | 26,608 | ||||||||
Noncontrolling interest in VIE | (2,409) | (2,363) | (3,181) | (3,152) | ||||||||
Total liabilities and shareholders' equity | $ | 25,391 | $ | 25,547 | $ | 24,049 | $ | 24,201 | ||||
7. (LOSS) EARNINGS (LOSS) PER SHARE
Earnings (loss)(Loss) earnings per share is computed under the provisions of ASC 260, Earnings Per Share. Basic (loss) earnings (loss) per share is based on the weighted average number of common shares outstanding for the period. Diluted (loss) earnings (loss) per share is based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock and are considered only for dilutive (loss) earnings (loss) per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted (loss) earnings (loss) per share calculation is as follows:
Three Months Ended | ||||||
May 2, 2021 | May 3, 2020 | |||||
(in thousands, except per share data) | ||||||
Numerator - net income (loss) attributable to | $ | 544 | $ | (15,135) | ||
Denominator - weighted average shares | ||||||
Basic | 32,540 | 32,372 | ||||
Dilutive shares | 180 | — | ||||
Diluted | 32,720 | 32,372 | ||||
Earnings (loss) per share (Class A and Class B) | ||||||
Basic | $ | 0.02 | $ | (0.47) | ||
Diluted | $ | 0.02 | $ | (0.47) | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended | ||||||
May 1, 2022 | May 2, 2021 | |||||
(in thousands, except per share data) | ||||||
Numerator - net (loss) income attributable to | $ | (1,294) | $ | 544 | ||
Denominator - weighted average shares | ||||||
Basic | 32,714 | 32,540 | ||||
Dilutive shares | — | 180 | ||||
Diluted | 32,714 | 32,720 | ||||
(Loss) earnings per share (Class A and Class B) | ||||||
Basic | $ | (0.04) | $ | 0.02 | ||
Diluted | $ | (0.04) | $ | 0.02 | ||
The Computationcomputation of diluted loss(loss) earnings per share excluded 0.2 million shares of unvested restricted stock for the three months ended May 3, 2020 excluded 0.1 million shares of unvested restricted stock respectively,1, 2022 because their inclusion would be anti-dilutive due to a net loss.
8. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plan in accordance with ASC 718, Stock Compensation, which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period of the award.
Total stock compensation expense associated with restricted stock recognized by the Company was $0.6 million and $0.4 million for the three months ended May 1, 2022 and May 2, 2021, and May 3, 2020.respectively. The Company’s total stock compensation expense (benefit) is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
A summary of the activity in the Company’s unvested restricted stock during the three months ended May 2, 20211, 2022 is as follows:
Weighted | Weighted | |||||||||||
average | average | |||||||||||
fair value | fair value | |||||||||||
Shares | per share | Shares | per share | |||||||||
Outstanding at January 31, 2021 | 338,239 | $ | 9.74 | |||||||||
Outstanding at January 30, 2022 | 405,334 | $ | 13.54 | |||||||||
Granted | 90,914 | 15.45 | 279,638 | 12.77 | ||||||||
Vested | (68,502) | 11.70 | (96,207) | 13.75 | ||||||||
Forfeited | (595) | 17.95 | (969) | 15.61 | ||||||||
Outstanding at May 2, 2021 | 360,056 | $ | 10.79 | |||||||||
Outstanding at May 1, 2022 | 587,796 | $ | 13.19 | |||||||||
At May 2, 2021,1, 2022, the Company had unrecognized compensation expense of $3.2$6.6 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.93.0 years.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
(in thousands) | ||||||||||||
Land and land improvements | $ | 4,486 | $ | 4,486 | $ | 4,486 | $ | 4,486 | ||||
Leasehold improvements | 46,979 | 47,451 | 48,125 | 48,093 | ||||||||
Buildings | 35,342 | 35,344 | 35,359 | 35,359 | ||||||||
Vehicles | 161 | 161 | 161 | 161 | ||||||||
Warehouse equipment | 14,528 | 14,685 | 17,641 | 17,735 | ||||||||
Office equipment and furniture | 52,624 | 52,614 | 53,670 | 53,607 | ||||||||
Computer equipment | 9,809 | 9,861 | 8,121 | 8,325 | ||||||||
Software | 33,951 | 34,003 | 35,413 | 34,207 | ||||||||
197,880 | 198,605 | 202,976 | 201,973 | |||||||||
Accumulated depreciation and amortization | (81,615) | (75,958) | (101,426) | (97,473) | ||||||||
116,265 | 122,647 | 101,550 | 104,500 | |||||||||
Construction in progress | 3,518 | 1,590 | 6,733 | 5,578 | ||||||||
Property and equipment, net | $ | 119,783 | $ | 124,237 | $ | 108,283 | $ | 110,078 | ||||
10. REVENUE
The Company’s revenue primarily consists of the sale of apparel, footwear and hard goods. Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon shipment. Store revenue is recognized at the point of sale, net of returns, and excludes taxes. Shipping and processing revenue generated from customer
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
orders are included as a component of net sales and shipping and processing expense, including handling expense, is included as a component of selling, general and administrative expenses. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included in accrued expenses.
Sales disaggregated based upon sales channel is presented below.
Three Months Ended | Three Months Ended | ||||||||||||
May 2, 2021 | May 3, 2020 | May 1, 2022 | May 2, 2021 | ||||||||||
(in thousands) | |||||||||||||
Direct-to-consumer | $ | 88,366 | $ | 86,530 | $ | 77,680 | $ | 88,366 | |||||
Stores | 45,053 | 23,387 | 45,224 | 45,053 | |||||||||
$ | 133,419 | $ | 109,917 | $ | 122,904 | $ | 133,419 | ||||||
Contract Assets and Liabilities
The Company’s contract assets primarily consist of the right of return for amounts of inventory to be returned that is expected to be resold and is recorded in Prepaid expenses and other current assets on the Company’s consolidated balance sheets. The Company’s contract liabilities primarily consist of gift card liabilities and are recorded in Accrued expenses and other current liabilities under deferred revenue (see Note 4 “Accrued Expenses and Other Current Liabilities”) on the Company’s consolidated balance sheets. Upon issuance of a gift card, a liability is established for its cash value. The gift card liability is relieved and revenues on gift cards are recorded at the time of redemption by the customer.
Contract assets and liabilities on the Company’s consolidated balance sheets are presented in the following table:
May 2, 2021 | January 31, 2021 | May 1, 2022 | January 30, 2022 | |||||||||
(in thousands) | ||||||||||||
Contract assets | $ | 2,072 | $ | 2,490 | $ | 1,852 | $ | 2,235 | ||||
Contract liabilities | $ | 8,432 | $ | 9,788 | $ | 9,054 | $ | 10,791 | ||||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Revenue from gift cards is recognized when the gift card is redeemed by the customer for merchandise or as a gift card breakage, an estimate of gift cards which will not be redeemed. The Company does not record breakage revenue when escheat liability to the relevant jurisdictions exists. Gift card breakage is recorded within Net sales on the Company’s consolidated statement of operations. The following table provides the reconciliation of the contract liability related to gift cards for the ninethree months ended:
May 2, 2021 | May 3, 2020 | May 1, 2022 | May 2, 2021 | |||||||||
(in thousands) | ||||||||||||
Balance as of beginning of period | $ | 9,788 | $ | 9,790 | $ | 10,791 | $ | 9,788 | ||||
Gift cards sold | 1,739 | 1,545 | 1,909 | 1,739 | ||||||||
Gift cards redeemed | (2,990) | (2,606) | (3,603) | (2,990) | ||||||||
Gift card breakage | (105) | (996) | (43) | (105) | ||||||||
Balance as of end of period | $ | 8,432 | $ | 7,733 | $ | 9,054 | $ | 8,432 | ||||
11. INCOME TAXES
The provision for income taxes for the interim period is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The effective tax rate related to controlling interest was 25% for the three months ended May 1, 2022 and 16% for the three months ended May 2, 2021, which was impacted by changes to certain discrete items during the quarter. Excluding these non-recurring discrete items, the effective tax rate related to controlling interest was 25% for both the three months ended May 2, 2021 and May 3, 2020.2021. The income from TRI was excluded from the calculation of the Company’s effective tax rate, as TRI is a limited liability company and not subject to income taxes.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as “CECL”. In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. On November 15, 2019, the FASB issued ASU No. 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815, and Leases (Topic 842),” (ASU 2019-10”), which provides framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. ASU 2019-10 amends the effective dates for ASU 2016-13 for smaller reporting companies with fiscal years beginning after December 15, 2022, and interim periods within those years. The Company expects to adopt ASU 2016-13 on January 30, 2023, the first day of the Company’s first quarter for the fiscal year ending January 28, 2024, the Company’s fiscal year 2023. The Company is evaluating the level of impact adopting ASU 2016-13 will have on the Company’s consolidated financial statements.
13. SUBSEQUENT EVENTS
On May 14, 2021, the Company terminated the aforementioned Credit Agreement, dated as of May 17, 2018, as amended, and entered into a new credit agreement (the “New Credit Agreement”). The New Credit Agreement matures on May 14, 2026 and provides for borrowings of up to $150.0 million that are available under a revolving senior credit facility, with a $5.0 million sublimit for issuance of standby letters of credit, as well as a $10.0 million sublimit for swing line loans. At the Company’s option, the interest rate applicable to the Revolver will be a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus the applicable rate of 1.25% to 2.00% determined based on the Company’s rent adjusted leverage ratio, or (ii) the base rate plus the applicable rate of 0.25% to 1.00% based on the Company’s rent adjusted leverage ratio. The New Credit Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the New Credit Agreement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and related notes of Duluth Holdings Inc. included in Item 1of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscalFiscal year ended January 31, 30, 2022 (“2021 (“2020 Form 10-K”).
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 20212022 is a 52-week period and ends on January 30, 2022.29, 2023. Fiscal 20202021 was a 52-week period and ended on January 31, 2021.30, 2022. The three months of fiscal 20212022 and fiscal 20202021 represent our 13 week13-week periods ended May 2, 20211, 2022 and May 3, 2020,2, 2021, respectively.
Unless the context indicates otherwise, the terms the “Company,” “Duluth,” “Duluth Trading,” “we,” “our,” or “us” are used to refer to Duluth Holdings Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. All statements other than statements of historical or current facts included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “could,” “estimate,” “expect,” “project,” “plan,” “potential,” “intend,” “believe,” “may,” “might,” “will,” “objective,” “should,” “would,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenue, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth initiatives, or initiatives, strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 20202021 Form 10-K, Part II, and other SEC filings, which factors are incorporated by reference herein. These risks and uncertainties include, but are not limited to, the following: the prolonged effects of the COVID-19 on store traffic and disruptions to our distribution network, supply chains and operations; our ability to maintain and enhance a strong brand and sub-brand image; effectively adapting to new challenges associated with our expansion into new geographic markets; generating adequate cash from our existing stores to support our growth; effectively relying on sources for merchandise located in foreign markets; transportation delays and interruptions, including port congestion; inability to timely and effectively obtain shipments of products from our suppliers and deliver merchandise to our customers; the inability to maintain the performance of a maturing store portfolio; the impact of changes in corporate tax regulations; identifying and responding to new and changing customer preferences; the success of the locations in which our stores are located; our ability to attract and retain customers in the various retail venues and locations in which our stores are located; competing effectively in an environment of intense competition; our ability to adapt to significant changes in sales due to the seasonality of our business; price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it will be sold in global market constraints; increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment; failure of our information technology systems to support our current and growing business, before and after our planned upgrades; and other factors that may be disclosed in our SEC filings or otherwise. Moreover, we operate in an evolving environment, new risk factors and uncertainties emerge from time to time and it is not possible for management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements.
We undertake no obligation to update or revise these forward-looking statements, except as required under the federal securities laws.
Overview
We are a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold primarily through our own omnichannel platform. We offer products nationwide through our website and catalog. In 2010, we initiated our omnichannel platform with the opening of our first store. Since then, we have expanded our retail presence, and as of May 2, 2021,1, 2022, we operated 6162 retail stores and three outlet stores.
We offer a comprehensive line of innovative, durable and functional products, such as our Longtail T® shirts, Buck NakedTM underwear, Fire Hose® work pants, and No-Yank® Tank, which reflect our position as the Modern, Self-Reliant American Lifestyle brand. Our brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic for everyday and on-the-job use.
From our heritage as a catalog for those working in the building trades, Duluth Trading has become a widely recognized brand and proprietary line of innovative and functional apparel and gear. Over the last decade, we have created strong brand awareness, built a loyal customer base and generated robust sales momentum. We have done so by sticking to our roots of “there’s gotta be a better way” and through our relentless focus on providing our customers with quality, functional products.
A summary of our financial results is as follows:
Net sales in fiscal 2021 first quarter increaseddecreased by 21.4%7.9% over the prior year first quarter to $133.4$122.9 million;
Net incomeloss of $0.5($1.3) million in fiscal 20212022 first quarter compared to the prior year first quarter net lossincome of $(15.2)$0.5 million; and
Adjusted EBITDA increaseddecreased to $10.1$7.9 million in fiscal 20212022 first quarter compared to the prior year first quarter Adjusted EBITDA of $(11.6) million;$9.6 million.
See the “Reconciliation of Net (Loss) Income (Loss) to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net (loss) income (loss) to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures. See also the information under the heading “Adjusted EBITDA” in the section “How We Assess the Performance of Our Business” for our definition of Adjusted EBITDA.
With an emphasisThe Company continues to progress on profitablefurther defining and executing the “Big Dam Blueprint,” which management believes will unlock the Company’s full potential for long-term, sustainable growth. As introduced in the second quarter of 2021, the Big Dam Blueprint focuses on the following key strategic areas:
Begin with a digital-first mindset that integrates technology into all areas of the business, fundamentally changing how we operate and deliver value to customers.
Intensify efforts to optimize Duluth Trading’s owned retail channels by increasing focus and investments in our direct channel as our primary growth wevehicle. We are pursuing several strategies,conducting strategic research that will inform decisions on future stores regarding new locations and market share potential, size and layout.
Evolve the Company’s multi-brand platform as a new pathway to grow the business. Create unique brand positions, across men’s and women’s, for Duluth, 40Grit, Alaskan Hardgear, Buck Naked, and Best Made to address customer needs for various occasions including evolving into a portfoliowork, outdoor recreation, casual lifestyle, and first layer. Invest in the evolution of distinct brands within the Duluth Trading ecosystem, growing salesplatform to enable the integration of new brands, expand our offerings and broaden our customer base.
Carefully test and learn to unlock long-term growth potential. Explore new opportunities to engage current and potential customers through products, services and touchpoints that they expect and value.
Increase and, in existing storesome areas, accelerate investments to future proof the business. Areas under analysis include greater automation across the logistics network; technology that will improve operations, generate positive impact and non-store markets, strengtheningsustainable returns; support growth through multiple brands and seamlessly integrate new brands into the core Men’s Duluth sub-brandportfolio; and growing our Women’s Duluth sub-brand.attract the talent, skillsets and expertise needed to scale the business.
Our management’s discussion and analysis includes market sales metrics for our stores, website and catalog sales. Market areas are determined by a third-party that divides the United States and Puerto Rico into 280 unique geographical areas. Our store market sales metrics include sales from our stores, website and catalog. Our non-store market sales metrics include sales from our website and catalog.
COVID-19
In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place.
The ultimate impact of COVID-19 on our operational and financial performance still depends on future developments outside of our control, including the duration and spread of the pandemic and related actions taken by federal, state and local government officials, and international governments to prevent disease spread. Given the uncertainty, we cannot reasonably estimate store traffic patterns and the prolonged impact on overall consumer demand. We continue to actively evaluate all federal, state and local regulations to ensure compliance withby our store operations.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of financial and operating measures that affect our operating results.
Net Sales
Net sales reflect our sale of merchandise plus shipping and handling revenue collected from our customers, less returns and discounts. Direct-to-consumer sales are recognized upon shipment of the product and store sales are recognized at the point of sale. We also use net sales as one of the key financial metrics in determining our annual bonus compensation for our employees.
Gross Profit
Gross profit is equal to our net sales less cost of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of goods sold includes the direct cost of purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves; inbound freight; and freight from our distribution centers to our retail stores. The primary drivers of the costs of individual goods are raw material costs. Depreciation and amortization are excluded from gross profit. We expect gross profit to increase to the extent that we successfully grow our net sales. Given the size of our sales through our direct-to-consumer sales channel relative to our total net sales, shipping and handling revenue has had a significant impact on our gross profit and gross profit margin. Historically, this revenue has partially offset shipping and handling expense included in selling, general and administrative
expenses. We have experienced declines in shipping and handling revenues, and this trend is expected to continue. Declines in shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling expense. Our gross profit may not be comparable to other retailers, as we do not include distribution network and store occupancy expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include all payroll and payroll-related expenses and occupancy expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization. They also include marketing expense, which primarily includes digital and television advertising, catalog production, mailing and print advertising costs, as well as all logistics costs associated with shipping product to our customers, consulting and software expenses and professional services fees. Selling, general and administrative expenses as a percentage of net sales is usually higher in lower-volume quarters and lower in higher-volume quarters because a portion of the costs are relatively fixed.
Our historical sales growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are advertising, marketing, rent/occupancy and payroll costs. While we expect these expenses to increase as we continue to open new stores, increase brand awareness and grow our organization to support our growing business and increase brand awareness, we believe these expenses will decrease as a percentage of net sales over time.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure of operating performance, as it provides a clearer picture of operating results by excluding the effects of financing and investing activities by eliminating the effects of interest and depreciation costs and eliminating expenses that are not reflective of underlying business performance. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business.
We define Adjusted EBITDA as consolidated net income before depreciation and amortization, interest expense and provision for income taxes adjusted for the impact of certain items, including non-cash and other items we do not consider representative of our ongoing operating performance. We believe Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other items. We also use Adjusted EBITDA as the key financial metric in determining bonus compensation for our employees. This non-GAAP measure may not be comparable to similarly titled measures used by other companies.
Results of Operations
The following table summarizes our unaudited consolidated results of operations for the periods indicated, both in dollars and as a percentage of net sales.
Three Months Ended | Three Months Ended | |||||||||||||
May 2, 2021 | May 3, 2020 | May 1, 2022 | May 2, 2021 | |||||||||||
(in thousands) | ||||||||||||||
Net sales | $ | 133,419 | $ | 109,917 | $ | 122,904 | $ | 133,419 | ||||||
Cost of goods sold (excluding depreciation | 66,876 | 57,585 | ||||||||||||
Cost of goods sold (excluding depreciation and amortization) | 55,841 | 66,876 | ||||||||||||
Gross profit | 66,543 | 52,332 | 67,063 | 66,543 | ||||||||||
Selling, general and administrative expenses | 64,648 | 71,306 | 67,994 | 64,648 | ||||||||||
Operating income (loss) | 1,895 | (18,974) | ||||||||||||
Operating (loss) income | (931) | 1,895 | ||||||||||||
Interest expense | 1,308 | 1,350 | 876 | 1,308 | ||||||||||
Other income, net | 16 | 59 | 46 | 16 | ||||||||||
Income (loss) before income taxes | 603 | (20,265) | ||||||||||||
Income tax expense (benefit) | 105 | (5,086) | ||||||||||||
Net income (loss) | 498 | (15,179) | ||||||||||||
(Loss) income before income taxes | (1,761) | 603 | ||||||||||||
Income tax (benefit) expense | (438) | 105 | ||||||||||||
Net (loss) income | (1,323) | 498 | ||||||||||||
Less: Net loss attributable to noncontrolling interest | (46) | (44) | (29) | (46) | ||||||||||
Net income (loss) attributable to controlling interest | $ | 544 | $ | (15,135) | ||||||||||
Net (loss) income attributable to controlling interest | $ | (1,294) | $ | 544 | ||||||||||
Percentage of Net sales: | ||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of goods sold (excluding depreciation | 50.1 | % | 52.4 | % | 45.4 | % | 50.1 | % | ||||||
Gross margin | 49.9 | % | 47.6 | % | 54.6 | % | 49.9 | % | ||||||
Selling, general and administrative expenses | 48.5 | % | 64.9 | % | 55.3 | % | 48.5 | % | ||||||
Operating income (loss) | 1.4 | % | (17.3) | % | ||||||||||
Operating (loss) income | (0.8) | % | 1.4 | % | ||||||||||
Interest expense | 1.0 | % | 1.2 | % | 0.7 | % | 1.0 | % | ||||||
Other income, net | - | % | 0.1 | % | - | % | - | % | ||||||
Income (loss) before income taxes | 0.5 | % | (18.4) | % | ||||||||||
Income tax expense (benefit) | 0.1 | % | (4.6) | % | ||||||||||
Net income (loss) | 0.4 | % | (13.8) | % | ||||||||||
(Loss) income before income taxes | (1.4) | % | 0.5 | % | ||||||||||
Income tax (benefit) expense | (0.4) | % | 0.1 | % | ||||||||||
Net (loss) income | (1.1) | % | 0.4 | % | ||||||||||
Less: Net loss attributable to noncontrolling interest | - | % | - | % | - | % | - | % | ||||||
Net income (loss) attributable to controlling interest | 0.4 | % | (13.8) | % | ||||||||||
Net (loss) income attributable to controlling interest | (1.1) | % | 0.4 | % | ||||||||||
Three Months Ended May 2, 20211, 2022 Compared to Three Months Ended May 3, 20202, 2021
Net Sales
Net sales increased $23.5decreased $10.5 million, or 21.4%7.9%, to $122.9 million in the three months ended May 1, 2022 compared to $133.4 million in the three months ended May 2, 2021 compared2021. The decrease was primarily due to $109.9continued supply chain disruptions, coupled with heavier clearance sales during the prior year.
Store market net sales decreased $4.8 million, or 5.4%, to $85.1 million in the three months ended May 3, 2020. The increase was due to increases in both non-store and store market sales.
Store market sales increased $22.5 million, or 33.3%,1, 2022 compared to $89.9 million in the three months ended May 2, 2021 compared2021. Non-store market net sales decreased by $5.2 million, or 12.5%, to $67.4$36.8 million in the three months ended May 3, 2020. The year-over-year sales difference was driven by temporary store closures in fiscal 2020 beginning on March 20, 2020 through May 3, 2020, as well as growth in online sales from both existing customers and new buyers. Non-store market sales increased $0.8 million, or 2%,1, 2022 compared to $42.0 million in the three months ended May 2, 2021 compared to $41.2 million in2021. The decrease was also driven by heavier clearance and promotional activity during the three months ended May 3, 2020.prior year.
Gross Profit
Gross profit increased $14.2$0.5 million, or 27.2%0.8%, to $67.1 million in the three months ended May 1, 2022 compared to $66.5 million in the three months ended May 2, 2021 compared to $52.3 million in the three months ended May 3, 2020.2021. As a percentage of net sales, gross margin increased to 54.6% of net sales in the three months ended May 1, 2022, compared to 49.9% of net sales in the three months ended May 2, 2021, compared to 47.6% of net sales in the three months ended May 3, 2020.2021. The increase in gross margin rate was driven by a higher mix of full price sales as well as improved gross margin rates on both full pricedue to successfully dialing back promotional and clearance items.activity.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $6.7increased $3.3 million, or 9.3%5.2%, to $68.0 million in the three months ended May 1, 2022 compared to $64.6 million in the three months ended May 2, 2021 compared to $71.3 million in the three months ended May 3, 2020.2021. Selling, general and administrative expenses as a percentage of net sales decreasedincreased to 55.3% in the three months ended May 1, 2022, compared to 48.5% in the three months ended May 2, 2021, compared to 64.9% in the three months ended May 3, 2020. The positive leverage was primarily due to shifting to a more efficient digital marketing approach as customer purchasing patterns migrated to online.2021.
The decreaseincrease in selling, general and administrative expense was primarily due to decreased traditionalinvestments in new headcount, increased depreciation from continued capital investments, as well as increased advertising reduced digital prospecting spend, the elimination of third-party logistics, and $1.6 million of non-recurring COVID-19 related expenses during the first quarter of the prior fiscal year. The decrease was partially offset by increased wages due to Company retail locations being open for the full fiscal quarter.expense.
Income Taxes
Income tax benefit was ($0.4) million in the three months ended May 1, 2022, compared to an income tax expense wasof $0.1 million in the three months ended May 2, 2021, compared to an income tax benefit of $5.1 million in the three months ended May 3, 2020.2021. The effective tax rate related to controlling interest was 16% for the three months ended May 2, 2021, which was impacted by changes to certain discrete items during the quarter. Excluding these non-recurring discrete items, the effective tax rate related to controlling interest was 25% for boththe three months ended May 1, 2022 compared to 16% for the three months ended May 2, 2021 and May 3, 2020.2021.
Net (Loss) Income Attributable to Controlling Interest
Net incomeloss attributable to controlling interest was ($1.3) million, in the three months ended May 1, 2022 compared to net income of $0.5 million in the three months ended May 2, 2021, compared to a net loss of $(15.1) million in the three months ended May 3, 2020, due to the factors discussed above.
Reconciliation of Net (Loss) Income (Loss) to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures, for the periods indicated below. See the above section titled “How We Assess the Performance of Our Business,” for our definition of Adjusted EBITDA.
Three Months Ended | Three Months Ended | |||||||||||
May 2, 2021 | May 3, 2020 | May 1, 2022 | May 2, 2021 | |||||||||
(in thousands) | ||||||||||||
Net income (loss) | $ | 498 | $ | (15,179) | ||||||||
Net (loss) income | $ | (1,323) | $ | 498 | ||||||||
Depreciation and amortization | 7,274 | 6,689 | 7,520 | 7,274 | ||||||||
Amortization of internal-use software hosting | ||||||||||||
subscription implementation costs | 369 | — | 633 | — | ||||||||
Interest expense | 1,308 | 1,350 | 876 | 1,308 | ||||||||
Amortization of build-to-suit operating leases | 199 | 199 | ||||||||||
Income tax expense (benefit) | 105 | (5,086) | ||||||||||
Income tax (benefit) expense | (438) | 105 | ||||||||||
EBITDA | $ | 9,753 | $ | (12,027) | $ | 7,268 | $ | 9,185 | ||||
Stock based compensation | 371 | 463 | 618 | 371 | ||||||||
Adjusted EBITDA | $ | 10,124 | $ | (11,564) | $ | 7,886 | $ | 9,556 | ||||
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $20.7decreased $1.7 million to $10.1$7.9 million in the three months ended May 1, 2022 compared to $9.6 million in the three months ended May 2, 2021 compared to $(11.6) million in the three months ended May 3, 2020.2021. As a percentage of net sales, Adjusted EBITDA increaseddecreased to 7.6%6.4% of net sales in the three months ended May 1, 2022 compared to 7.2% of net sales in the three months ended May 2, 2021 compared to (10.5)% of net sales in the three months ended May 3, 2020.2021.
Liquidity and Capital Resources
General
Our business relies on cash from operating activities and a credit facility as our primary sources of liquidity. Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, capital expenditures associated with
infrastructure, information technology, and opening new stores. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities. At May 2, 2021,1, 2022, our net working capital was $73.5$106.0 million, including $26.1$40.4 million of cash and cash equivalents.
We expect to spend approximately $15.0$40.0 million in fiscal 20212022 on capital expenditures, inclusive of software hosting implementation costs. Capital expenditures includes a total of approximately $13.0 million relatedcosts, primarily due to investments in technology and $2.0 million for one planned new retail store.logistics optimization, including the introduction of automated fulfillment centers. Due to the seasonality of our business, a significant amount of cash from operating activities is generated during the fourth quarter of our fiscal year. We also use cash in our investing activities for capital expenditures throughout all four quarters of our fiscal year.
We believe that our cash flow from operating activities and the availability of cash under our credit facility will be sufficient to cover working capital requirements and anticipated capital expenditures for the foreseeable future.
Cash Flow Analysis
A summary of operating, investing and financing activities is shown in the following table.
Three Months Ended | ||||||
May 2, 2021 | May 3, 2020 | |||||
(in thousands) | ||||||
Net cash provided by (used in) operating activities | $ | 12,423 | $ | (33,491) | ||
Net cash used in investing activities | (1,974) | (4,102) | ||||
Net cash (used in) provided by financing activities | (31,616) | 44,653 | ||||
(Decrease) increase in cash, cash equivalents and restricted cash | $ | (21,167) | $ | 7,060 | ||
Three Months Ended | ||||||
May 1, 2022 | May 2, 2021 | |||||
(in thousands) | ||||||
Net cash (used in) provided by operating activities | $ | (31,717) | $ | 12,423 | ||
Net cash used in investing activities | (3,843) | (1,974) | ||||
Net cash used in financing activities | (1,121) | (31,616) | ||||
Decrease in cash, cash equivalents | $ | (36,681) | $ | (21,167) | ||
Net Cash (Used in) Provided by (Used in) Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, stock-based compensation and the effect of changes in operating assets and liabilities.
For the three months ended May 1, 2022, net cash used in operating activities was $31.7 million, which primarily consisted of a net loss of $1.3 million and cash used in operating assets and liabilities of $38.6 million. The cash used in operating assets and liabilities of $38.6 million primarily consisted of a $29.6 million increase in inventory and a $17.5 million decrease in accrued expenses offset by a $10.4 million increase in trade accounts payable.
For the three months ended May 2, 2021, net cash provided by operating activities was $12.4 million, which consisted of net income of $0.5 million, cash provided by operating assets and liabilities of $4.8$4.2 million, non-cash depreciation and amortization of $7.3 million, and stock based compensation of $0.4 million. The cash provided by operating assets and liabilities of $4.8$4.2 million primarily consisted of a $4.9 million decrease in inventory and a $6.5$6.0 million increase in trade accounts payable, partially offset by a $6.8$6.3 million decrease in accrued expenses.
For the three months ended May 3, 2020, net cash used in operating activities was $33.5 million, which consisted of net loss of $15.2 million and cash used in operating assets and liabilities of $25.4 million, partially offset by non-cash depreciation and amortization of $6.7 million and stock based compensation of $0.5 million. The cash used in operating assets and liabilities of $25.4 million primarily consisted of a $27.2 million increase in inventory. The quarter-end inventory position, although primarily consisting of core non-seasonal products, reflected a higher balance than historical levels due to purchase commitments made prior to scaling back new store openings and a general slowdown in sales growth over the prior 18 months. Net cash used in operating activities was partially offset by a $5.1 million increase in accrued expenses and deferred rent obligations, a $3.4 million decrease of income taxes payable and a $1.0 million decrease in deferred catalog costs.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth related to investments in infrastructure and information technology,technology.
For the three months ended May 1, 2022, net cash used in investing activities was $3.8 million and was primarily driven by capital expenditures of $3.9 million for new store openings.investments in information technology.
For the three months ended May 2, 2021, net cash used in investing activities was $2.0 million and was primarily driven by capital expenditures of $2.0 million for new investments in information technology.
For the three months ended May 3, 2020, net cash used in investing activities was $4.1 million and was primarily driven by capital expenditures of $4.1 million for new retail stores, as well as investments in information technology.
Net Cash (Used in) Provided byUsed in Financing Activities
Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-term debt, as well as payments on finance lease obligations.
For the three months ended May 1, 2022, net cash used in financing activities was $1.1 million, primarily consisting of payments on finance lease obligations.
For the three months ended May 2, 2021, net cash used in financing activities was $31.6 million, primarily consisting of payments of $30.6 million on long-term debt.
For the three months ended May 3, 2020, net cash provided by financing activities was $44.7 million, primarily consisting of proceeds of $29.7 million, net from our term loan and proceeds of $15.7 million, net from our revolving line of credit to fund working capital.
Contractual Obligations
There have been no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.30, 2022.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements.
Critical Accounting Policies and Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements.
As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates described in our 20202021 Form 10-K.
Recent Accounting Pronouncements
See Note 12 “Recent Accounting Pronouncements,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q for information regarding recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risks described in our 20202021 Form 10-K. See Note 3 “Debt and Credit Agreement,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q, for disclosure on our interest rate related to borrowings under our credit agreement.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Section 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires management of an issuer subject to the Exchange Act to evaluate, with the participation of the issuer’s principal executive and principal financial officers, or persons performing similar functions, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of each fiscal quarter. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition, operating results or cash flows. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks that may have a material adverse effect on our business, financial condition and results of operations. For a detailed discussion of the risks that affect our business, please refer to the section entitled “Risk Factors” in our 20202021 Form 10-K, or other SEC filings. There have been no material changes to our risk factors as previously disclosed in our fiscal 20202021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any equity securities during the quarter ended May 2, 2021,1, 2022, which were not registered under the Securities Act.
The following table contains information of shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ restricted stock during the three months ended May 2, 2021.1, 2022.
Total number | Approximate dollar | |||||||||
of shares purchased | value of shares that | |||||||||
Total number | as part of publicly | may yet to be | ||||||||
of shares | Average price | announced plans | purchased under the | |||||||
Period | purchased | paid per share | or programs | plans or programs | ||||||
February 1, 2021 - February 28, 2021 | 16,112 | $ | 14.05 | — | $ | — | ||||
March 1, 2021 - April 4, 2021 | 3,135 | 14.35 | — | — | ||||||
April 5, 2021 - May 2, 2021 | 5,280 | 16.46 | — | — | ||||||
Total | 24,527 | $ | 14.95 | — | $ | — | ||||
Total number | Approximate dollar | |||||||||
of shares purchased | value of shares that | |||||||||
Total number | as part of publicly | may yet to be | ||||||||
of shares | Average price | announced plans | purchased under the | |||||||
Period | purchased | paid per share | or programs | plans or programs | ||||||
January 31, 2022 - February 27, 2022 | 50,817 | $ | 14.40 | — | $ | — | ||||
February 28, 2022 - April 3, 2022 | 30,048 | 13.12 | — | — | ||||||
April 4, 2022 - May 1, 2022 | 15,342 | 12.32 | — | — | ||||||
Total | 96,207 | $ | 13.67 | — | $ | — | ||||
Item 6. Exhibits
EXHIBIT INDEX
Exhibit No. | |
10.1 | |
10.2 | |
10.3 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document** |
101.SCH | XBRL Taxonomy Extension Schema Document** |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** |
101.DEF | XBRL Taxonomy Extension Definition Document** |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document** |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended May |
* | Filed herewith |
** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: June | |||
DULUTH HOLDINGS INC. | |||
/s/ David Loretta | |||
David Loretta | |||
Senior Vice President and Chief Financial Officer | |||
(On behalf of the Registrant and as Principal Financial Officer) | |||
/s/ Michael Murphy | |||
Michael Murphy | |||
Vice President and Chief Accounting Officer | |||
(On behalf of the Registrant and as Principal Accounting Officer) | |||