UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM
_________________________________________
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
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(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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(Address of principal executive offices) | (Zip Code) |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
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).
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.
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Large Accelerated Filer | o | þ | |
Non-accelerated Filer | o | Smaller Reporting Company | |
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| Emerging Growth Company |
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
The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of August 31, 2022, was
The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of August 31, 2022, was
DULUTH HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED July 31, 2022
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DULUTH HOLDINGS INC.
Condensed Consolidated Balance Sheets - Assets
(Unaudited)
(Amounts in thousands)
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| July 31, 2022 |
| January 30, 2022 | ||
ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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Receivables |
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Inventory, less reserves of $ |
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Prepaid expenses & other current assets |
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Prepaid catalog costs |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Finance lease right-of-use assets, net |
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Available-for-sale security |
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Other assets, net |
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Total assets |
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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)
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| July 31, 2022 |
| January 30, 2022 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Trade accounts payable |
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Accrued expenses and other current liabilities |
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Income taxes payable |
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Current portion of operating lease liabilities |
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Current portion of finance lease liabilities |
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Current portion of Duluth long-term debt |
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Current maturities of TRI long-term debt |
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Total current liabilities |
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Operating lease liabilities, less current maturities |
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Finance lease liabilities, less current maturities |
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Duluth long-term debt, less current maturities |
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TRI long-term debt, less current maturities |
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Deferred tax liabilities |
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Total liabilities |
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Shareholders' equity: |
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Preferred stock, par value; issued or outstanding as of July 31, 2022 and January 30, 2022 |
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Common stock (Class A), par value; |
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Common stock (Class B), par value; |
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Treasury stock, at cost; January 30, 2022, respectively |
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Capital stock |
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Retained earnings |
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Accumulated other comprehensive income |
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Total shareholders' equity of Duluth Holdings Inc. |
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Noncontrolling interest |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
| $ |
| $ | ||
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)
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| Three Months Ended |
| Six Months Ended | ||||||||
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| July 31, 2022 |
| August 1, 2021 |
| July 31, 2022 |
| August 1, 2021 | ||||
Net sales |
| $ |
| $ |
| $ |
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Cost of goods sold (excluding depreciation and amortization) |
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Gross profit |
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Selling, general and administrative expenses |
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Operating income |
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Interest expense |
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Other income, net |
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Income before income taxes |
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Income tax expense |
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Net income |
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Less: Net loss attributable to noncontrolling interest |
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Net income attributable to controlling interest |
| $ |
| $ |
| $ |
| $ | ||||
Basic earnings per share (Class A and Class B): |
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Weighted average shares of common stock outstanding |
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Net income per share attributable to controlling interest |
| $ | |
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| $ | |
| $ | |
Diluted earnings per share (Class A and Class B): |
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Weighted average shares and equivalents outstanding |
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Net income per share attributable to controlling interest |
| $ | |
| $ | |
| $ | |
| $ | |
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)
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| Three Months Ended |
| Six Months Ended | ||||||||
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| July 31, 2022 |
| August 1, 2021 |
| July 31, 2022 |
| August 1, 2021 | ||||
Net income |
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| $ |
| $ |
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Other comprehensive income |
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Securities available-for sale: |
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Unrealized security (loss) income arising during the period |
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Income tax (benefit) expense |
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Other comprehensive (loss) income |
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Comprehensive income |
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Comprehensive loss attributable to noncontrolling interest |
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Comprehensive income attributable |
| $ |
| $ |
| $ |
| $ | ||||
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)
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| Six Months Ended July 31, 2022 | ||||||||||||||||||
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| Accumulated |
| Noncontrolling |
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| Capital stock |
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| other |
| interest in |
| Total | |||||||||
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| Treasury |
| Retained |
| comprehensive |
| variable interest |
| shareholders' | ||||||||
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| Shares |
| Amount |
| stock |
| earnings |
| income |
| entity |
| equity | ||||||
Balance at January 30, 2022 |
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| $ |
| $ | ( |
| $ |
| $ |
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Issuance of common stock |
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Stock-based compensation |
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Restricted stock forfeitures |
| ( |
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Restricted stock surrendered for taxes |
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Other comprehensive loss |
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Net loss |
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Balance at May 1, 2022 |
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| $ |
| $ | ( |
| $ |
| $ |
| $ | ( |
| $ | |||||
Issuance of common stock |
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Stock-based compensation |
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Restricted stock forfeitures |
| ( |
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Restricted stock surrendered for taxes |
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Other comprehensive loss |
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Net income (loss) |
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Balance at July 31, 2022 |
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| $ | ( |
| $ |
| $ |
| $ | ( |
| $ | |||||
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)
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| Six Months Ended August 1, 2021 |
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| Accumulated |
| Noncontrolling |
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| Capital stock |
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| other |
| interest in |
| Total | |||||||||
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| Treasury |
| Retained |
| comprehensive |
| variable interest |
| shareholders' | ||||||||
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| Shares |
| Amount |
| stock |
| earnings |
| income |
| entity |
| equity | ||||||
Balance at January 31, 2021 |
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| $ |
| $ | ( |
| $ |
| $ |
| $ | ( |
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Issuance of common stock |
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Stock-based compensation |
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Restricted stock forfeitures |
| ( |
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Restricted stock surrendered for taxes |
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Other comprehensive income |
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Net income (loss) |
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Balance at May 2, 2021 |
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| $ | ( |
| $ |
| $ |
| $ | ( |
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Issuance of common stock |
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Stock-based compensation |
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Restricted stock forfeitures |
| ( |
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Restricted stock surrendered for taxes |
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Other comprehensive income |
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Net income (loss) |
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Balance at August 1, 2021 |
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| $ | ( |
| $ |
| $ |
| $ | ( |
| $ | |||||
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)
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| Six Months Ended | ||||
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| July 31, 2022 |
| August 1, 2021 | ||
Cash flows from operating activities: |
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Net income |
| $ |
| $ | ||
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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Stock based compensation |
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Deferred income taxes |
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Loss on disposal of property and equipment |
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Changes in operating assets and liabilities: |
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Receivables |
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Inventory |
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Prepaid expense & other current assets |
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Software hosting implementation costs, net |
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Deferred catalog costs |
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Trade accounts payable |
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Income taxes payable |
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Accrued expenses and deferred rent obligations |
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Other assets |
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Noncash lease impacts |
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Net cash (used in) provided by operating activities |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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Principal receipts from available-for-sale security |
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Proceeds from disposals |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Proceeds from line of credit |
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Payments on line of credit |
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Payments on delayed draw term loan |
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Payments on TRI long term debt |
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Payments on finance lease obligations |
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Payments of tax withholding on vested restricted shares |
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Other |
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Net cash used in financing activities |
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Decrease in cash, cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
| $ |
| $ | ||
Supplemental disclosure of cash flow information: |
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Interest paid |
| $ |
| $ | ||
Income taxes paid |
| $ |
| $ | ||
Supplemental disclosure of non-cash information: |
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Unpaid liability to acquire property and equipment |
| $ |
| $ | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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
The Company has
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 2022 is a 52-week period and ends on
The accompanying condensed consolidated financial statements as of and for the three and six months ended July 31, 2022 and August 1, 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 and six months ended July 31, 2022 and August 1, 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 30, 2022.
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. 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.
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 $
The reserve for retail inventory shrinkage is adjusted to reflect the trend of historical physical inventory count results. The Company performs its retail store physical inventory counts in July and the difference between actual and estimated shrinkage, recorded in Cost of goods sold, may cause fluctuations in second fiscal quarter results. Due to the timing of the inventory counts, an insignificant retail inventory shrinkage reserve was outstanding as of July 31, 2022, compared to $
Prepaid expenses and other assets consist of the following:
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| July 31, 2022 |
| January 30, 2022 | ||
(in thousands) |
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Prepaid expenses & other current assets |
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Pending returns inventory, net |
| $ |
| $ | ||
Current software hosting implementation costs, net |
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Other prepaid expenses |
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Prepaid expenses & other current assets |
| $ |
| $ | ||
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Other assets, net |
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Goodwill |
| $ |
| $ | ||
Intangible assets, net |
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Non-current software hosting implementation costs |
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Other assets, net |
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Other assets, net |
| $ |
| $ | ||
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.
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 Right-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
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
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.
The expense components of the Company’s leases reflected on the Company’s consolidated statement of operations were as follows:
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| Consolidated Statement |
| Three Months Ended |
| Six Months Ended | ||||||||
|
| of Operations |
| July 31, 2022 |
| August 1, 2021 |
| July 31, 2022 |
| August 1, 2021 | ||||
(in thousands) |
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Finance lease expenses |
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Amortization of right-of-use |
| Selling, general and |
| $ |
| $ |
| $ |
| $ | ||||
Interest on lease liabilities |
| Interest expense |
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Total finance lease expense |
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| $ |
| $ |
| $ |
| $ | ||||
Operating lease expense |
| Selling, general and |
| $ |
| $ |
| $ |
| $ | ||||
Amortization of build-to-suit |
| Selling, general and |
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Variable lease expense |
| Selling, general and |
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Total lease expense |
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| $ |
| $ |
| $ |
| $ | ||||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other information related to leases were as follows:
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| Six Months Ended | ||||
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| July 31, 2022 |
| August 1, 2021 | ||
(in thousands) |
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Cash paid for amounts included in the measurement of lease liabilities: |
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Financing cash flows from finance leases |
| $ |
| $ | ||
Operating cash flows from finance leases |
| $ |
| $ | ||
Operating cash flows from operating leases |
| $ |
| $ | ||
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Weighted-average remaining lease term (in years): |
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Finance leases |
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Operating leases |
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Weighted-average discount rate: |
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Finance leases |
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Operating leases |
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Future minimum lease payments under the non-cancellable leases are as follows as of July 31, 2022:
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Fiscal year |
| Finance |
| Operating | ||
(in thousands) |
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2022 (remainder of fiscal year) |
| $ |
| $ | ||
2023 |
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2024 |
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2025 |
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2026 |
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Thereafter |
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Total future minimum lease payments |
| $ |
| $ | ||
Less – Discount |
|
| ( |
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| ( |
Lease liability |
| $ |
| $ | ||
Debt consists of the following:
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| July 31, 2022 |
| January 30, 2022 | ||
(in thousands) |
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| ||
TRI Senior Secured Note |
| $ |
| $ | ||
TRI Note |
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| ||
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| $ |
| $ | ||
Less: current maturities |
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| ||
TRI long-term debt |
| $ |
| $ | ||
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TRI Holdings, LLC
TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
TRI entered into a promissory note (“TRI Note”) with an original balance of $
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 $
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 originally matured on
On July 8, 2022, the Company entered into the First Amendment to the New Credit Agreement (the “First Amendment”), which was treated as a modification for accounting purposes. The First Amendment amends the New Credit Agreement in order to (i) increase the revolving commitment from $
Accrued expenses and other current liabilities consist of the following:
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| July 31, 2022 |
| January 30, 2022 | ||
(in thousands) |
|
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| ||
Salaries and benefits |
| $ |
| $ | ||
Deferred revenue |
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Freight |
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Product returns |
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Unpaid purchases of property & equipment |
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Accrued advertising |
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Other |
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| ||
Total accrued expenses and other current liabilities |
| $ |
| $ | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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 six months ended July 31, 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 judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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:
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| July 31, 2022 | ||||||||||
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| Cost or |
| Gross |
| Gross |
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| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated | ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
(in thousands) |
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Level 3 security: |
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Corporate trust |
| $ |
| $ |
| $ |
| $ | ||||
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| January 30, 2022 | ||||||||||
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| Cost or |
| Gross |
| Gross |
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| ||||
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| Amortized |
| Unrealized |
| Unrealized |
| Estimated | ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
(in thousands) |
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Level 3 security: |
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Corporate trust |
| $ |
| $ |
| $ |
| $ | ||||
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.
The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of July 31, 2022.
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| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
(in thousands) |
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Within one year |
| $ |
| $ | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
After one year through five years |
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After five years through ten years |
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After ten years |
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Total |
| $ |
| $ |
The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows:
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| July 31, 2022 |
| January 30, 2022 | ||||||||
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| Carrying Amount |
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| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
(in thousands) |
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TRI Long-term debt, including short-term portion |
| $ |
| $ |
| $ |
| $ | ||||
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.
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
The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company invested $
The condensed consolidated balance sheets include the following amounts as a result of the consolidation of TRI as of July 31, 2022 and January 30, 2022:
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| July 31, 2022 |
| January 30, 2022 | ||
(in thousands) |
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Cash |
| $ |
| $ | ||
Property and equipment, net |
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Total assets |
| $ |
| $ | ||
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Other current liabilities |
| $ |
| $ | ||
Current maturities of long-term debt |
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| ||
TRI Long-term debt |
|
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| ||
Noncontrolling interest in VIE |
|
| ( |
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| ( |
Total liabilities and shareholders' equity |
| $ |
| $ | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. EARNINGS PER SHARE
Earnings per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings 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 earnings per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation is as follows:
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| July 31, 2022 |
| August 1, 2021 |
| July 31, 2022 |
| August 1, 2021 | ||||
(in thousands, except per share data) |
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Numerator - net income attributable to |
| $ |
| $ |
| $ |
| $ | ||||
Denominator - weighted average shares |
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Basic |
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| ||||
Dilutive shares |
|
| — |
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Diluted |
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| ||||
Earnings per share (Class A and Class B) |
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Basic |
| $ |
| $ |
| $ |
| $ | ||||
Diluted |
| $ |
| $ |
| $ |
| $ | ||||
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 $
A summary of the activity in the Company’s unvested restricted stock during the six months ended July 31, 2022 is as follows:
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| Weighted | |
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| average | |
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| fair value | |
|
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| Shares |
| per share | |
Outstanding at January 30, 2022 |
|
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| $ | ||
Granted |
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| ||
Vested |
|
| ( |
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| |
Forfeited |
|
| ( |
|
| |
Outstanding at July 31, 2022 |
|
|
| $ | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Property and equipment consist of the following:
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|
|
| July 31, 2022 |
| January 30, 2022 | ||
(in thousands) |
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Land and land improvements |
| $ |
| $ | ||
Leasehold improvements |
|
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| ||
Buildings |
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| ||
Vehicles |
|
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| ||
Warehouse equipment |
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Office equipment and furniture |
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Computer equipment |
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Software |
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| ||
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| ||
Accumulated depreciation and amortization |
|
| ( |
|
| ( |
|
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| ||
Construction in progress |
|
|
|
| ||
Property and equipment, net |
| $ |
| $ | ||
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 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.
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| July 31, 2022 |
| August 1, 2021 |
| July 31, 2022 |
| August 1, 2021 | ||||
(in thousands) |
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Direct-to-consumer |
| $ | |
| $ | |
| $ | |
| $ | |
Stores |
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| |
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| |
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| |
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| |
|
| $ | |
| $ | |
| $ | |
| $ | |
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:
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| July 31, 2022 |
| January 30, 2022 | ||
(in thousands) |
|
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Contract assets |
| $ | |
| $ | |
Contract liabilities |
| $ | |
| $ | |
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 six months ended:
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| July 31, 2022 |
| August 1, 2021 | ||
(in thousands) |
|
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|
Balance as of beginning of period |
| $ | |
| $ | |
Gift cards sold |
|
| |
|
| |
Gift cards redeemed |
|
| ( |
|
| ( |
Gift card breakage |
|
| ( |
|
| ( |
Balance as of end of period |
| $ | |
| $ | |
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
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 Fiscal year ended January 30, 2022 (“2021 Form 10-K”).
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2022 is a 52-week period and ends on January 29, 2023. Fiscal 2021 was a 52-week period and ended on January 30, 2022. The three months of fiscal 2022 and fiscal 2021 represent our 13-week periods ended July 31, 2022 and August 1, 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 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 2021 Form 10-K, 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 COVID-19 on store traffic and disruptions to our distribution network, supply chains and operations; our ability to maintain and enhance a strong 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 due to 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 July 31, 2022, we operated 62 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 decreased by 5.1% over the prior year second quarter to $141.5 million, and net sales in the first six months of fiscal 2022 decreased by 6.4% over the first six months of the prior year to $264.4 million;
Net income of $2.4 million in fiscal 2022 second quarter compared to the prior year second quarter net income of $9.0 million, and net income in the first six months of fiscal 2022 of $1.1 million compared to net income in the first six months of fiscal 2021 of $9.5 million; and
Adjusted EBITDA decreased to $13.2 million in fiscal 2022 second quarter compared to the prior year second quarter Adjusted EBITDA of $21.4 million, and adjusted EBITDA in the first six months of fiscal 2022 of $21.1 million compared to $31.4 million over the first six months of the prior year.
See the “Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net income 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.
The Company continues to progress on further 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 vehicle. We are 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 work, outdoor recreation, casual lifestyle, and first layer. Invest in the evolution of the Duluth Trading platform 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 some 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 sustainable returns; support growth through multiple brands and seamlessly integrate new brands into the portfolio; and 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.
Economic Conditions
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.
In addition to the COVID-19 pandemic, the United States economy has experienced high inflation during the first two quarters of 2022 and there are expectations in the market that inflation may remain at elevated levels.
The ultimate impact of COVID-19 and higher inflationary periods on our operational and financial performance still depends on future developments outside of our control. 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 by 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.
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. 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.
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.
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| Three Months Ended |
| Six Months Ended |
| ||||||||
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| July 31, 2022 |
| August 1, 2021 |
| July 31, 2022 |
| August 1, 2021 |
| ||||
(in thousands) |
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Net sales |
| $ | 141,511 |
| $ | 149,127 |
| $ | 264,415 |
| $ | 282,546 |
|
Cost of goods sold (excluding depreciation and amortization) |
|
| 65,903 |
|
| 67,701 |
|
| 121,744 |
|
| 134,577 |
|
Gross profit |
|
| 75,608 |
|
| 81,426 |
|
| 142,671 |
|
| 147,969 |
|
Selling, general and administrative expenses |
|
| 71,739 |
|
| 68,339 |
|
| 139,733 |
|
| 132,987 |
|
Operating income |
|
| 3,869 |
|
| 13,087 |
|
| 2,938 |
|
| 14,982 |
|
Interest expense |
|
| 879 |
|
| 1,182 |
|
| 1,755 |
|
| 2,490 |
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Other income, net |
|
| 78 |
|
| 56 |
|
| 124 |
|
| 72 |
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Income before income taxes |
|
| 3,068 |
|
| 11,961 |
|
| 1,307 |
|
| 12,564 |
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Income tax expense |
|
| 727 |
|
| 3,014 |
|
| 289 |
|
| 3,119 |
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Net income |
|
| 2,341 |
|
| 8,947 |
|
| 1,018 |
|
| 9,445 |
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Less: Net loss attributable to noncontrolling interest |
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| (27) |
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| (45) |
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| (56) |
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| (91) |
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Net income attributable to controlling interest |
| $ | 2,368 |
| $ | 8,992 |
| $ | 1,074 |
| $ | 9,536 |
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Percentage of Net sales: |
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Net sales |
|
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
Cost of goods sold (excluding depreciation |
|
| 46.6 | % |
| 45.4 | % |
| 46.0 | % |
| 47.6 | % |
Gross margin |
|
| 53.4 | % |
| 54.6 | % |
| 54.0 | % |
| 52.4 | % |
Selling, general and administrative expenses |
|
| 50.7 | % |
| 45.8 | % |
| 52.8 | % |
| 47.1 | % |
Operating income |
|
| 2.7 | % |
| 8.8 | % |
| 1.1 | % |
| 5.3 | % |
Interest expense |
|
| 0.6 | % |
| 0.8 | % |
| 0.7 | % |
| 0.9 | % |
Other income, net |
|
| - | % |
| - | % |
| - | % |
| - | % |
Income before income taxes |
|
| 2.2 | % |
| 8.0 | % |
| 0.5 | % |
| 4.4 | % |
Income tax expense |
|
| 0.5 | % |
| 2.0 | % |
| 0.1 | % |
| 1.1 | % |
Net income |
|
| 1.7 | % |
| 6.0 | % |
| 0.4 | % |
| 3.3 | % |
Less: Net loss attributable to noncontrolling interest |
|
| - | % |
| - | % |
| - | % |
| - | % |
Net income attributable to controlling interest |
|
| 1.7 | % |
| 6.0 | % |
| 0.4 | % |
| 3.4 | % |
Three Months Ended July 31, 2022 Compared to Three Months Ended August 1, 2021
Net Sales
Net sales decreased $7.6 million, or 5.1%, to $141.5 million in the three months ended July 31, 2022 compared to $149.1 million in the three months ended August 1, 2021. The decrease was primarily driven by slower store traffic, coupled with lower clearance sales as compared to the prior year.
Store market net sales decreased $6.7 million, or 6.3%, to $100.4 million in the three months ended July 31, 2022 compared to $107.1 million in the three months ended August 1, 2021. The decrease was also driven by slower store traffic compared to the prior year second quarter. Non-store market net sales decreased by $0.8 million, or 1.9%, to $39.9 million in the three months ended July 31, 2022 compared to $40.7 million in the three months ended August 1, 2021.
Gross Profit
Gross profit decreased $5.8 million, or 7.1%, to $75.6 million in the three months ended July 31, 2022 compared to $81.4 million in the three months ended August 1, 2021. As a percentage of net sales, gross margin decreased to 53.4% of net sales in the three months ended July 31, 2022, compared to 54.6% of net sales in the three months ended August 1, 2021. The decrease in gross margin was primarily driven by a $1.3 million inventory write down, which mostly consisted of product that was damaged while in-transit. Excluding the non-recurring inventory write down, gross margin would have been 54.4%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.4 million, or 5.0%, to $71.7 million in the three months ended July 31, 2022 compared to $68.3 million in the three months ended August 1, 2021. Selling, general and administrative expenses as a percentage of net sales increased to 50.7% in the three months ended July 31, 2022, compared to 45.8% in the three months ended August 1, 2021.
The increase in selling, general and administrative expense was primarily due to increased digital advertising to drive brand awareness and store traffic, investments in new headcount, as well as increased depreciation from continued capital investments.
Income Taxes
Income tax expense was $0.7 million in the three months ended July 31, 2022, compared to income tax expense of $3.0 million in the three months ended August 1, 2021. The effective tax rate related to controlling interest was 23% for the three months ended July 31, 2022 compared to 25% for the three months ended August 1, 2021.
Net Income Attributable to Controlling Interest
Net income attributable to controlling interest was $2.4 million, in the three months ended July 31, 2022 compared to net income of $9.0 million in the three months ended August 1, 2021, due to the factors discussed above.
Six Months Ended July 31, 2022 Compared to Six Months Ended August 1, 2021
Net Sales
Net sales decreased $18.1 million, or 6.4%, to $264.4 million in the six months ended July 31, 2022 compared to $282.6 million in the six months ended August 1, 2021. The decrease was primarily due to heavier promotions and clearance events in the prior year, coupled with slower store traffic in the current year.
Store market net sales decreased $11.5 million, or 5.8%, to $185.5 million in the six months ended July 31, 2022 compared to $197.0 million in the six months ended August 1, 2021. The decrease was also driven by slower store traffic compared to the prior year. Non-store market net sales decreased by $6.0 million, or 7.3%, to $76.6 million in the six months ended July 31, 2022 compared to $82.7 million in the six months ended August 1, 2021. The decrease was driven by a decrease in promotional events in the current year compared to the prior year.
Gross Profit
Gross profit decreased $5.3 million, or 3.6%, to $142.7 million in the six months ended July 31, 2022 compared to $148.0 million in the six months ended August 1, 2021. As a percentage of net sales, gross margin increased to 54.0% of net sales in the six months ended July 31, 2022, compared to 52.4% of net sales in the six months ended August 1, 2021. Excluding the aforementioned non-recurring inventory write down of $1.3 million during the second quarter, gross margin would have been 54.5%.
The increase in gross margin was driven by a higher mix of full price sales due to successfully dialing back promotional and clearance activity, particularly during the first quarter of the current year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.7 million, or 5.1%, to $139.7 million in the six months ended July 31, 2022 compared to $133.0 million in the six months ended August 1, 2021. Selling, general and administrative expenses as a percentage of net sales increased to 52.8% in the six months ended July 31, 2022, compared to 47.1% in the six months ended August 1, 2021.
The increase in selling, general and administrative expense was primarily due to investments in new headcount, increased depreciation from continued capital investments, as well as increased digital advertising expense.
Income Taxes
Income tax expense was $0.3 million in the six months ended July 31, 2022, compared to income tax expense of $3.1 million in the six months ended August 1, 2021. The effective tax rate related to controlling interest was 21% for the six months ended July 31, 2022 compared to 25% for the six months ended August 1, 2021.
Net Income Attributable to Controlling Interest
Net income attributable to controlling interest was $1.1 million, in the six months ended July 31, 2022 compared to net income of $9.5 million in the six months ended August 1, 2021, due to the factors discussed above.
Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net income 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.
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| Three Months Ended |
| Six Months Ended | ||||||||
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| July 31, 2022 |
| August 1, 2021 |
| July 31, 2022 |
| August 1, 2021 | ||||
(in thousands) |
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Net income |
| $ | 2,341 |
| $ | 8,947 |
| $ | 1,018 |
| $ | 9,445 |
Depreciation and amortization |
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| 7,854 |
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| 7,242 |
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| 15,374 |
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| 14,516 |
Amortization of internal-use software hosting |
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subscription implementation costs |
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| 787 |
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| 405 |
|
| 1,420 |
|
| 774 |
Interest expense |
|
| 879 |
|
| 1,182 |
|
| 1,755 |
|
| 2,490 |
Income tax expense |
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| 727 |
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| 3,014 |
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| 289 |
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| 3,119 |
EBITDA |
| $ | 12,588 |
| $ | 20,790 |
| $ | 19,856 |
| $ | 30,344 |
Stock based compensation |
|
| 656 |
|
| 637 |
|
| 1,274 |
|
| 1,007 |
Adjusted EBITDA |
| $ | 13,244 |
| $ | 21,427 |
| $ | 21,130 |
| $ | 31,351 |
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $8.2 million to $13.2 million in the three months ended July 31, 2022 compared to $21.4 million in the three months ended August 1, 2021. As a percentage of net sales, Adjusted EBITDA decreased to 9.4% of net sales in the three months ended July 31, 2022 compared to 14.4% of net sales in the three months ended August 1, 2021.
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $10.3 million to $21.1 million in the six months ended July 31, 2022 compared to $31.4 million in the six months ended August 1, 2021. As a percentage of net sales, Adjusted EBITDA decreased to 8.0% of net sales in the six months ended July 31, 2022 compared to 11.1% of net sales in the six months ended August 1, 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 and information technology. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities. At July 31, 2022, our net working capital was $102.4 million, including $15.4 million of cash and cash equivalents.
We expect to spend approximately $40.0 million in fiscal 2022 on capital expenditures, inclusive of software hosting implementation costs, primarily due to investments in 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.
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| Six Months Ended | ||||
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| July 31, 2022 |
| August 1, 2021 | ||
(in thousands) |
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Net cash (used in) provided by operating activities |
| $ | (41,138) |
| $ | 26,512 |
Net cash used in investing activities |
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| (18,727) |
|
| (4,858) |
Net cash used in financing activities |
|
| (1,817) |
|
| (49,954) |
Decrease in cash, cash equivalents |
| $ | (61,682) |
| $ | (28,300) |
Net Cash (Used in) Provided by 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 six months ended July 31, 2022, net cash used in operating activities was $41.1 million, which primarily consisted of cash used in operating assets and liabilities of $58.9 million. The cash used in operating assets and liabilities of $58.9 million was primarily due to a $41.8 million increase in inventory and a $19.0 million decrease in accrued expenses, partially offset by a $9.5 million increase in trade accounts payable.
For the six months ended August 1, 2021, net cash provided by operating activities was $26.5 million, which primarily consisted of net income of $9.5 million, non-cash depreciation and amortization of $14.5 million, and cash provided by operating assets and liabilities of $1.8 million. The cash provided by operating assets and liabilities of $1.8 million primarily consisted of a $14.2 million decrease in inventory and a $2.9 million increase in trade accounts payable, partially offset by a $7.0 million decrease in income taxes payable and a $4.9 million decrease in accrued expenses.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth related to investments in infrastructure and information technology.
For the six months ended July 31, 2022, net cash used in investing activities was $18.7 million and was primarily driven by capital expenditures of $18.8 million for new investments in the distribution network and information technology.
For the six months ended August 1, 2021, net cash used in investing activities was $4.9 million and was primarily driven by capital expenditures of $5.0 million for new investments in the distribution network and information technology.
Net Cash Used 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 six months ended July 31, 2022, net cash used in financing activities was $1.8 million, primarily consisting of payments on finance lease obligations.
For the six months ended August 1, 2021, net cash used in financing activities was $50.0 million, primarily consisting of the full paydown of the Company’s bank debt.
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 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 2021 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 2021 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 2021 Form 10-K, or other SEC filings. There have been no material changes to our risk factors as previously disclosed in our fiscal 2021 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 July 31, 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 July 31, 2022.
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| Total number |
| Approximate dollar | ||
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| of shares purchased |
| value of shares that | |
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| Total number |
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| as part of publicly |
| may yet to be | |
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| of shares |
| Average price |
| announced plans |
| purchased under the | ||
Period |
| purchased |
| paid per share |
| or programs |
| plans or programs | ||
May 2, 2022 - May 29, 2022 |
| — |
| $ | — |
| — |
| $ | — |
May 30, 2022 - July 3, 2022 |
| 365 |
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| 10.38 |
| — |
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| — |
July 4, 2022 - July 31, 2022 |
| — |
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| — |
| — |
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| — |
Total |
| 365 |
| $ | 10.38 |
| — |
| $ | — |
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit No. |
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10.1 | |
10.2 | Offer Letter Dated July 27, 2022 by and between Albert J. Sutera and Duluth Holdings Inc.* |
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 1, 2022 has been formatted in Inline XBRL (Inline Extensible Business Reporting Language and contained in Exhibits 101).
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* | 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.
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Date: September 2, 2022 |
| ||
| DULUTH HOLDINGS INC. | ||
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| /s/ David Loretta | |
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| David Loretta | |
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| Senior Vice President and Chief Financial Officer | |
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| (On behalf of the Registrant and as Principal Financial Officer) | |
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| |
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| /s/ Michael Murphy | |
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| Michael Murphy | |
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| Vice President and Chief Accounting Officer | |
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| (On behalf of the Registrant and as Principal Accounting Officer) | |
Exhibit 10.2
July 27, 2022
Dear AJ:
It is my pleasure to extend the following offer of employment to you on behalf of Duluth Trading Company. This letter will highlight some of the details of your employment. If you are in agreement with the terms of this offer, please acknowledge your acceptance verbally by end of business on 8/1/2022 and subsequently by signing and returning a copy of this letter to me.
Position Title: Senior Vice President, Chief Technology Officer & Logistics
Start Date: 8/14/2022
Reporting Relationship: Sam Sato, President & CEO
Base Salary: Your annual base salary will be $370,000, which is paid bi-weekly and is subject to deductions for taxes and other withholdings that are required by law. Your salary will be reviewed annually starting April 2023.
Bonus Potential: You will be eligible to participate in the Company's bonus plan for executive level employees as then in effect. For fiscal 2022, your bonus target is at 65% of your base salary and is contingent upon us meeting certain financial thresholds that are established annually. The maximum bonus award will be 130% of your base salary. Bonus payout is in March or April following year-end and your payout will be prorated for fiscal 2022 based on your start date.
Initial Stock Grant: You will receive an initial restricted stock grant with a grant date fair value of $370,000, with the number of Class B shares to be determined based on the closing market price on the date of the stock grant, which will be your first date of employment. The grant will vest 100% on the 3rd anniversary of the initial grant date, provided that you have been continuously employed through the vesting date.
LTI: In March or April of each year, you will be entitled to an annual grant of restricted stock, subject to Compensation Committee approval and Board ratification. Your target grant will have a grant date fair value equal to 50% of your base salary. The grant will vest 25% each year on a 4 year schedule, provided you are still employed on each vesting date.
Benefits: You will be eligible to participate in the Company’s health, dental, life, disability, 401(K), and flex spending plans. You are also eligible for the BeniComp Select Executive Medical Reimbursement Plan for you and your eligible dependents up to $15,000 per year. A summary of these plans is attached.
1
Severance Benefits: As a member of the Executive team you will be a participant in the Executive General Severance Plan and the Executive Change in Control Severance Plan. A summary of these plans is attached.
Time Off: Eligible employees are free to take leave when they require it, for vacation time, personal days, and sick leave, including, but not limited to, time off required under applicable local and state sick leave laws, subject to the limitations described in the Unlimited Time Off Policy for Exempt Employees.
Employee Purchase Program: The employee purchase program provides you with a 40% discount for personal use, including gift giving and can be redeemed online or at any one of our retail locations.
Relocation: Duluth Trading Company’s relocation policy is designed to assist you and your family by providing you with a comprehensive relocation package that facilitates your move while minimizing personal disruption and expense.
We have outsourced the day-to-day relocation administration to NEI Global Relocation Company (“NEI”). You will work with one point of coordination, your NEI Account Executive, throughout the relocation process. NEI is familiar with our policy, and the specific benefits provided to you.
NEI is able to answer any relocation-related questions you or your family may have along the way. Before listing your home for sale or purchasing a new home, you are asked to contact your NEI Account Executive to discuss the appropriate procedures to follow and the benefits for which you qualify. Using NEI selected vendors for the various aspects of your move will help make your relocation as smooth as possible and result in cost savings for Duluth Trading Company.
Background Check: This offer is contingent upon your passing a background check, reference check and signing a confidentiality and business ideas agreement. Your employment with Duluth Trading Company is at-will and either party can terminate the relationship at any time with or without cause and with or without notice.
Consistent with Duluth’s policy, we will commence a background check as a condition of employment. If our third-party vendor is unable to complete your background check due to office closures and/or the temporary inability to gather all relevant background information, we will wait an additional five (5) business days to see if we receive a complete background check. If we do not receive a complete report, we would like to move forward with your onboarding; however, we reserve the right to end your employment based on the result of the background check when it is completed.
I trust this letter confirms your understanding of the major items related to our offer of employment. If not, please contact me to resolve any outstanding items.
We look forward to you being a part of our growing company and anticipate wonderful contributions from you in your new role.
Sincerely,
/s/ Sam Sato
Sam Sato
President & CEO
Duluth Holdings Inc.
/s/ AJ Sutera 8/1/2022
AJ Sutera Date
2
Exhibit 31.1
CERTIFICATIONS
I, Sam Sato, Chief Executive Officer, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 2, 2022
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/s/ Sam Sato |
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Sam Sato |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, David Loretta, Chief Financial Officer, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 2, 2022
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/s/ David Loretta |
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David Loretta |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “Company”) for the quarterly period ended July 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sam Sato, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ Sam Sato |
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Name: |
Sam Sato |
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Title: |
Chief Executive Officer |
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Date: |
September 2, 2022 |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section. This certification shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
Exhibit 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “Company”) for the quarterly period ended July 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Loretta, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and |
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2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ David Loretta |
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Name: |
David Loretta |
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Title: |
Chief Financial Officer |
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Date: |
September 2, 2022 |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section. This certification shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.