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
_________________________________________
(Exact name of registrant as specified in its charter)
_________________________________________
| 99 |
(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) |
_________________________________________
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 November 29, 2023, was
The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of November 29, 2023, was
DULUTH HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED October 29, 2023
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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| October 29, 2023 |
| January 29, 2023 | ||
ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ |
| $ | ||
Receivables |
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Income tax receivable |
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| — | |
Inventory, less reserves of $ |
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Prepaid expenses & other current assets |
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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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Deferred tax assets |
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| — | |
Total assets |
| $ |
| $ | ||
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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| October 29, 2023 |
| January 29, 2023 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Trade accounts payable |
| $ |
| $ | ||
Accrued expenses and other current liabilities |
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Income taxes payable |
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| — |
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Current portion of operating lease liabilities |
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Current portion of finance lease liabilities |
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Duluth line of credit |
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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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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; |
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Common stock (Class A), par value; issued and outstanding as of October 29, 2023 and January 29, 2023 |
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Common stock (Class B), par value; |
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Treasury stock, at cost; |
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| ( |
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| ( |
Capital stock |
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Retained earnings |
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Accumulated other comprehensive loss |
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| ( |
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| ( |
Total shareholders' equity of Duluth Holdings Inc. |
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Noncontrolling interest |
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| ( |
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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 |
| Nine Months Ended | ||||||||
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| October 29, 2023 |
| October 30, 2022 |
| October 29, 2023 |
| October 30, 2022 | ||||
Net sales |
| $ |
| $ |
| $ |
| $ | ||||
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 loss |
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| ( |
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Interest expense |
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Other income, net |
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Loss before income taxes |
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| ( |
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| ( |
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| ( |
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| ( |
Income tax benefit |
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| ( |
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| ( |
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| ( |
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| ( |
Net loss |
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| ( |
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| ( |
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| ( |
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| ( |
Less: Net loss attributable to noncontrolling interest |
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| ( |
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| ( |
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| ( |
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Net loss 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 loss per share attributable to controlling interest |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Diluted earnings per share (Class A and Class B): |
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Weighted average shares and equivalents outstanding |
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Net loss 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 (Loss) Income
(Unaudited)
(Amounts in thousands)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| October 29, 2023 |
| October 30, 2022 |
| October 29, 2023 |
| October 30, 2022 | ||||
Net loss |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Other comprehensive income |
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Securities available-for sale: |
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Unrealized security loss arising during the period |
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| ( |
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| ( |
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| ( |
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| ( |
Income tax benefit |
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| ( |
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| ( |
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| ( |
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| ( |
Other comprehensive loss |
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| ( |
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| ( |
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| ( |
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| ( |
Comprehensive loss |
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| ( |
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| ( |
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| ( |
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| ( |
Comprehensive loss attributable to noncontrolling interest |
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| ( |
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| ( |
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| ( |
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| ( |
Comprehensive loss 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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| Nine Months Ended October 29, 2023 | ||||||||||||||||||
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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 (loss) |
| entity |
| equity | ||||||
Balance at January 29, 2023 |
|
| $ |
| $ | ( |
| $ |
| $ | ( |
| $ | ( |
| $ | ||||
Issuance of common stock |
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| — |
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| — |
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| — |
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| — |
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Stock-based compensation |
| — |
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| — |
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| — |
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| — |
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| — |
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Restricted stock forfeitures |
| ( |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
Restricted stock surrendered for taxes |
| ( |
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| — |
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| ( |
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| — |
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| — |
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| — |
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| ( |
Other comprehensive loss |
| — |
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| — |
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| — |
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| — |
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| ( |
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| — |
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| ( |
Net loss |
| — |
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| — |
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| — |
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| ( |
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| — |
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| ( |
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| ( |
Balance at April 30, 2023 |
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| $ |
| $ | ( |
| $ |
| $ | ( |
| $ | ( |
| $ | ||||
Issuance of common stock |
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| — |
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| — |
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| — |
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| — |
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Stock-based compensation |
| — |
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| — |
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| — |
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| — |
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| — |
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Restricted stock forfeitures |
| ( |
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| — |
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| — |
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| — |
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| — |
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| — |
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| — |
Restricted stock surrendered for taxes |
| — |
|
| — |
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| ( |
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| — |
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| — |
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| — |
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| ( |
Other comprehensive loss |
| — |
|
| — |
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| — |
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| — |
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| ( |
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| — |
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| ( |
Net loss |
| — |
|
| — |
|
| — |
|
| ( |
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| — |
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| ( |
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| ( |
Balance at July 30, 2023 |
|
| $ |
| $ | ( |
| $ |
| $ | ( |
| $ | ( |
| $ | ||||
Issuance of common stock |
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| — |
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| — |
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| — |
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| — |
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Stock-based compensation |
| — |
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| — |
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| — |
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| — |
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| — |
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Restricted stock forfeitures |
| ( |
|
| — |
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| — |
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| — |
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| — |
|
| — |
|
| — |
Restricted stock surrendered for taxes |
| — |
|
| — |
|
| ( |
|
| — |
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| — |
|
| — |
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| ( |
Other comprehensive income |
| — |
|
| — |
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| — |
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| — |
|
| ( |
|
| — |
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| ( |
Net loss |
| — |
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| — |
|
| — |
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| ( |
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| — |
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| ( |
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| ( |
Balance at October 29, 2023 |
|
| $ |
| $ | ( |
| $ |
| $ | ( |
| $ | ( |
| $ | ||||
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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| Nine Months Ended October 30, 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 |
|
| $ |
| $ | ( |
| $ |
| $ |
| $ | ( |
| $ | |||||
Issuance of common stock |
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| — |
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| — |
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| — |
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| — |
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Stock-based compensation |
| — |
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| — |
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| — |
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| — |
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| — |
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Restricted stock forfeitures |
| ( |
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| — |
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| — |
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| — |
|
| — |
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| — |
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| — |
Restricted stock surrendered for taxes |
| ( |
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| — |
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| ( |
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| — |
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| — |
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| — |
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| ( |
Other comprehensive income |
| — |
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| — |
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| — |
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| — |
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| ( |
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| — |
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| ( |
Net loss |
| — |
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| — |
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| — |
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| ( |
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| — |
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| ( |
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| ( |
Balance at May 1, 2022 |
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| $ |
| $ | ( |
| $ |
| $ |
| $ | ( |
| $ | |||||
Issuance of common stock |
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| — |
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| — |
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| — |
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| — |
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Stock-based compensation |
| — |
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| — |
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| — |
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| — |
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| — |
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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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| — |
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| — |
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| ( |
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| — |
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| ( |
Net income (loss) |
| — |
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| — |
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| — |
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| — |
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| ( |
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Balance at July 31, 2022 |
|
| $ |
| $ | ( |
| $ |
| $ |
| $ | ( |
| $ | |||||
Issuance of common stock |
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| — |
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| — |
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| — |
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| — |
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Stock-based compensation |
| — |
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| — |
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| — |
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| — |
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| — |
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Restricted stock forfeitures |
| ( |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Restricted stock surrendered for taxes |
| — |
|
| — |
|
| ( |
|
| — |
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| — |
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| — |
|
| ( |
Other comprehensive loss |
| — |
|
| — |
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| — |
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| — |
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| ( |
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| — |
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| ( |
Net loss |
| — |
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| — |
|
| — |
|
| ( |
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| — |
|
| ( |
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| ( |
Balance at October 30, 2022 |
|
| $ |
| $ | ( |
| $ |
| $ | ( |
| $ | ( |
| $ | ||||
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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| Nine Months Ended | ||||
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| October 29, 2023 |
| October 30, 2022 | ||
Cash flows from operating activities: |
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Net loss |
| $ | ( |
| $ | ( |
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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|
| ( | |
Income taxes receivable |
|
| ( |
|
| ( |
Inventory |
|
| ( |
|
| ( |
Prepaid expense & other current assets |
|
| ( |
|
| ( |
Software hosting implementation costs, net |
|
| ( |
|
| ( |
Deferred catalog costs |
|
| — |
|
| ( |
Trade accounts payable |
|
| ( |
|
| |
Income taxes payable |
|
| ( |
|
| ( |
Accrued expenses and deferred rent obligations |
|
| ( |
|
| ( |
Other assets |
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| ( | |
Noncash lease impacts |
|
| ( |
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| |
Net cash used in operating activities |
|
| ( |
|
| ( |
Cash flows from investing activities: |
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Purchases of property and equipment |
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| ( |
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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 |
|
| ( |
|
| — |
Payments on TRI long term debt |
|
| ( |
|
| ( |
Payments on finance lease obligations |
|
| ( |
|
| ( |
Payments of tax withholding on vested restricted shares |
|
| ( |
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| ( |
Other |
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Net cash provided by financing activities |
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Decrease in cash and cash equivalents |
|
| ( |
|
| ( |
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 2023 is a 52-week period and ends on
The accompanying condensed consolidated financial statements as of and for the three and nine months ended October 29, 2023 and October 30, 2022 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 nine months ended October 29, 2023 and October 30, 2022. 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 29, 2023.
As of October 29, 2023 and for the three and nine months ended, no triggering events or indicators of asset impairment were noted.
Inventory, consisting of purchased product, is valued at the lower of cost or net realizable value, under the first-in, first-out method. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. Both estimates have calculations that require the Company to make assumptions and apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. Inventory is adjusted periodically to reflect current market conditions, which requires management’s judgment that may significantly affect the ending inventory valuation, as well as gross margin.
The reserve for 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.
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
E. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
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|
| October 29, 2023 |
| January 29, 2023 | ||
(in thousands) |
|
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|
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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’s business is affected by the pattern of seasonality common to most apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year due to increased sales during the holiday season.
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
Certain reclassifications have been made to the 2022 financial statements in order to conform to the 2023 presentation. The Company reclassified $
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 |
| Nine Months Ended | ||||||||
|
| of Operations |
| October 29, 2023 |
| October 30, 2022 |
| October 29, 2023 |
| October 30, 2022 | ||||
(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 |
|
|
| $ |
| $ |
| $ |
| $ | ||||
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 |
|
|
| $ |
| $ |
| $ |
| $ | ||||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other information related to leases were as follows:
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|
| Nine Months Ended | ||||
|
| October 29, 2023 |
| October 30, 2022 | ||
(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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|
|
Right-of-use assets obtained in exchange for lease liabilities: |
|
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|
|
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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| ||
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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 October 29, 2023:
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|
Fiscal year |
| Finance |
| Operating | ||
(in thousands) |
|
|
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|
|
2023 (remainder of fiscal year) |
| $ |
| $ | ||
2024 |
|
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| ||
2025 |
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| ||
2026 |
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| ||
2027 |
|
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| ||
Thereafter |
|
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|
| ||
Total future minimum lease payments |
| $ |
| $ | ||
Less – Discount |
|
| ( |
|
| ( |
Lease liability |
| $ |
| $ | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Debt consists of the following:
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|
|
| October 29, 2023 |
| January 29, 2023 | ||
(in thousands) |
|
|
|
| ||
TRI Senior Secured Note |
| $ |
| $ | ||
TRI Note |
|
|
|
| ||
|
| $ |
| $ | ||
Less: current maturities |
|
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|
| ||
TRI long-term debt |
| $ |
| $ | ||
|
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|
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|
|
Duluth Line of credit |
| $ |
| $ | — | |
Less: current maturities |
|
|
|
| — | |
Duluth long-term debt |
| $ |
| $ | ||
TRI Holdings, LLC
TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $
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 14, 2021, the Company entered into a credit agreement (the “Credit Agreement”), which was treated as a modification for accounting purposes. The Credit Agreement originally matured on
On July 8, 2022, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”), which was treated as a modification for accounting purposes. The First Amendment amends the Credit Agreement in order to (i) increase the revolving commitment from $
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Accrued expenses and other current liabilities consist of the following:
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|
|
| October 29, 2023 |
| January 29, 2023 | ||
(in thousands) |
|
|
|
| ||
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 |
|
|
|
| ||
Accrued advertising |
|
|
|
| ||
Other |
|
|
|
| ||
Total accrued expenses and other current liabilities |
| $ |
| $ | ||
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 Company’s assets and liabilities measured at fair value are categorized as Level 1 or Level 3 instruments. The fair value of the Company’s money market account is obtained from real-time quotes for transactions in active exchange markets involving identical assets (Level 1). 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 nine months ended October 29, 2023, 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 judgement 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 money market account and 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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|
| October 29, 2023 | ||||||||||
|
| Cost or |
| Gross |
| Gross |
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated | ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
(in thousands) |
|
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|
Level 1 security: |
|
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|
|
|
|
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|
|
Money market funds |
| $ | — |
| $ | — |
| $ |
| $ | — | |
|
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Level 3 security: |
|
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|
|
|
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|
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|
|
Corporate trust |
| $ |
| $ | — |
| $ | ( |
| $ | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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|
| January 29, 2023 | ||||||||||
|
| Cost or |
| Gross |
| Gross |
|
| ||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated | ||||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
(in thousands) |
|
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|
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|
|
Level 1 security: |
|
|
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|
|
|
|
|
|
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|
|
Money market funds |
| $ |
| $ | — |
| $ | — |
| $ | ||
|
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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 October 29, 2023.
|
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|
|
|
| Amortized |
| Estimated | ||
|
| Cost |
| Fair Value | ||
(in thousands) |
|
|
|
| ||
Within one year |
| $ |
| $ | ||
After one year through five years |
|
|
|
| ||
After five years through ten years |
|
|
|
| ||
After ten years |
|
|
|
| ||
Total |
| $ |
| $ | ||
The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| October 29, 2023 |
| January 29, 2023 | ||||||||
|
|
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
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
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 October 29, 2023 and January 29, 2023:
|
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|
|
|
|
|
|
| October 29, 2023 |
| January 29, 2023 | ||
(in thousands) |
|
|
|
|
|
|
Cash |
| $ |
| $ | ||
Property and equipment, net |
|
|
|
| ||
Total assets |
| $ |
| $ | ||
|
|
|
|
|
|
|
Other current liabilities |
| $ |
| $ | ||
Current maturities of long-term debt |
|
|
|
| ||
TRI long-term debt |
|
|
|
| ||
Noncontrolling interest in VIE |
|
| ( |
|
| ( |
Total liabilities and shareholders' equity |
| $ |
| $ | ||
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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|
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|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| October 29, 2023 |
| October 30, 2022 |
| October 29, 2023 |
| October 30, 2022 | ||||
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator - net loss attributable to |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Denominator - weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
| ||||
Dilutive shares |
|
| — |
|
| — |
|
| — |
|
| — |
Diluted |
|
|
|
|
|
|
|
| ||||
Loss per share (Class A and Class B) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Diluted |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The computation of diluted loss per share excluded
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 nine months ended October 29, 2023 is as follows:
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|
|
| Weighted | |
|
|
|
|
| average | |
|
|
|
|
| fair value | |
|
|
| Shares |
| per share | |
Outstanding at January 29, 2023 |
|
|
| $ | ||
Granted |
|
|
|
| ||
Vested |
|
| ( |
|
| |
Forfeited |
|
| ( |
|
| |
Outstanding at October 29, 2023 |
|
|
| $ | ||
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
| October 29, 2023 |
| January 29, 2023 | ||
(in thousands) |
|
|
|
|
|
|
Land and land improvements |
| $ |
| $ | ||
Leasehold improvements |
|
|
|
| ||
Buildings |
|
|
|
| ||
Vehicles |
|
|
|
| ||
Warehouse equipment |
|
|
|
| ||
Office equipment and furniture |
|
|
|
| ||
Computer equipment |
|
|
|
| ||
Software |
|
|
|
| ||
|
|
|
|
| ||
Accumulated depreciation and amortization |
|
| ( |
|
| ( |
|
|
|
|
| ||
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 |
| Nine Months Ended | ||||||||
|
| October 29, 2023 |
| October 30, 2022 |
| October 29, 2023 |
| October 30, 2022 | ||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-consumer |
| $ | |
| $ | |
| $ | |
| $ | |
Stores |
|
| |
|
| |
|
| |
|
| |
|
| $ | |
| $ | |
| $ | |
| $ | |
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:
|
|
|
|
|
|
|
|
| October 29, 2023 |
| January 29, 2023 | ||
(in thousands) |
|
|
|
|
|
|
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 nine months ended:
|
|
|
|
|
|
|
|
| October 29, 2023 |
| October 30, 2022 | ||
(in thousands) |
|
|
|
|
|
|
Balance as of beginning of period |
| $ | |
| $ | |
Gift cards sold |
|
| |
|
| |
Gift cards redeemed |
|
| ( |
|
| ( |
Gift card breakage |
|
| ( |
|
| ( |
Balance as of end of period |
| $ | |
| $ | |
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 29, 2023 (“2022 Form 10-K”).
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2023 is a 52-week period and ends on January 28, 2024. Fiscal 2022 was a 52-week period and ended on January 29, 2023. The three months of fiscal 2023 and fiscal 2022 represent our 13-week periods ended October 29, 2023 and October 30, 2022, 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 that could cause actual results to differ materially from those expressed in the forward-looking statements, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 2022 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 impact of inflation and measures to control inflation on our results of operations; the prolonged effects of economic uncertainty on store traffic and disruptions to our distribution network, supply chains and operations; our ability to maintain and enhance a strong brand and sub-brand image; adapting to declines in consumer confidence, inflation and decreases in consumer spending; effectively adapting to new challenges associated with our expansion into new geographic markets; our ability to meet customer delivery time expectations; natural disasters, unusually adverse weather conditions, boycotts, prolonged public health crises, epidemics or pandemics and unanticipated events; generating adequate cash from our existing stores and direct sales to support our growth; the impact of changes in corporate tax regulations and sales tax; identifying and responding to new and changing customer preferences; the success of the locations in which our stores are located; 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; our inability to deploy marketing tactics to strengthen brand awareness and attract new customers in a cost effective manner; our ability to successfully open new stores; 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; the potential for further increases in price and availability of raw materials; our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices; the susceptibility of the price and availability of our merchandise to international trade conditions; failure of our vendors and their manufacturing sources to use acceptable labor or other practices; our dependence upon key executive management or our inability to hire or retain the talent required for our business; 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; disruptions in our supply chain and fulfillment centers; our inability to protect our trademarks or other intellectual property rights; infringement on the intellectual property of third parties; acts of war, terrorism or civil unrest; the impact of governmental laws and regulations and the outcomes of legal proceedings; changes in U.S. and non-U.S. laws affecting the importation and taxation of goods, including imposition of unilateral tariffs on imported goods; our ability to secure the personal and/or financial information of our customers and comply with the security standards for the credit card industry; 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 October 29, 2023, 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 6.1% over the prior year third quarter to $138.2 million, and net sales in the first nine months of fiscal 2023 decreased by 2.5% over the first nine months of the prior year to $401.1 million;
Net loss of $10.5 million in fiscal 2023 third quarter compared to the prior year third quarter net loss of $6.2 million, and net loss in the first nine months of fiscal 2023 of $16.4 million compared to net loss in the first nine months of fiscal 2022 of $5.2 million; and
Adjusted EBITDA decreased to ($1.6) million in fiscal 2023 third quarter compared to the prior year third quarter Adjusted EBITDA of $1.7 million, and adjusted EBITDA in the first nine months of fiscal 2023 of $12.3 million compared to $22.9 million over the first nine months of fiscal 2022.
See the “Reconciliation of Net Loss to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net loss to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures. See also the information under the heading “Adjusted EBITDA” in the section “How We Assess the Performance of Our Business” for our definition of Adjusted EBITDA.
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
The United States economy has experienced continued high inflation throughout 2023. The ultimate impact of 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.
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 |
| Nine Months Ended |
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| October 29, 2023 |
| October 30, 2022 |
| October 29, 2023 |
| October 30, 2022 |
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(in thousands) |
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Net sales |
| $ | 138,210 |
| $ | 147,126 |
| $ | 401,068 |
| $ | 411,541 |
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Cost of goods sold (excluding depreciation and amortization) |
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| 68,806 |
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| 70,205 |
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| 194,530 |
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| 191,949 |
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Gross profit |
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| 69,404 |
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| 76,921 |
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| 206,538 |
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| 219,592 |
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Selling, general and administrative expenses |
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| 81,832 |
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| 84,311 |
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| 224,958 |
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| 224,044 |
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Operating loss |
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| (12,428) |
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| (7,390) |
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| (18,420) |
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| (4,452) |
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Interest expense |
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| 1,219 |
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| 968 |
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| 3,033 |
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| 2,723 |
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Other income, net |
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| 47 |
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| 56 |
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| 304 |
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| 180 |
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Loss before income taxes |
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| (13,600) |
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| (8,302) |
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| (21,149) |
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| (6,995) |
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Income tax benefit |
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| (3,126) |
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| (2,059) |
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| (4,786) |
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| (1,770) |
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Net loss |
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| (10,474) |
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| (6,243) |
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| (16,363) |
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| (5,225) |
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Less: Net loss attributable to noncontrolling interest |
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| (8) |
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| (26) |
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| (24) |
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| (82) |
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Net loss attributable to controlling interest |
| $ | (10,466) |
| $ | (6,217) |
| $ | (16,339) |
| $ | (5,143) |
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Percentage of Net sales: |
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Net sales |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
Cost of goods sold (excluding depreciation |
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| 49.8 | % |
| 47.7 | % |
| 48.5 | % |
| 46.6 | % |
Gross margin |
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| 50.2 | % |
| 52.3 | % |
| 51.5 | % |
| 53.4 | % |
Selling, general and administrative expenses |
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| 59.2 | % |
| 57.3 | % |
| 56.1 | % |
| 54.4 | % |
Operating loss |
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| (9.0) | % |
| (5.0) | % |
| (4.6) | % |
| (1.1) | % |
Interest expense |
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| 0.9 | % |
| 0.7 | % |
| 0.8 | % |
| 0.7 | % |
Other income, net |
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| - | % |
| - | % |
| - | % |
| - | % |
Loss before income taxes |
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| (9.8) | % |
| (5.6) | % |
| (5.3) | % |
| (1.7) | % |
Income tax benefit |
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| (2.3) | % |
| (1.4) | % |
| (1.2) | % |
| (0.4) | % |
Net loss |
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| (7.6) | % |
| (4.2) | % |
| (4.1) | % |
| (1.3) | % |
Less: Net loss attributable to noncontrolling interest |
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| - | % |
| - | % |
| - | % |
| - | % |
Net loss attributable to controlling interest |
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| (7.6) | % |
| (4.2) | % |
| (4.1) | % |
| (1.2) | % |
Three Months Ended October 29, 2023, Compared to Three Months Ended October 30, 2022
Net Sales
Net sales decreased $8.9 million, or 6.1%, to $138.2 million in the three months ended October 29, 2023 compared to $147.1 million in the three months ended October 30, 2022 primarily due to declines in store traffic, partially offset by improved online conversion rates compared to the prior year.
Store market net sales decreased $7.2 million, or 6.9%, to $96.6 million in the three months ended October 29, 2023 compared to $103.8 million in the three months ended October 30, 2022. Non-store market net sales decreased by $1.5 million, or 3.5%, to $40.8 million in the three months ended October 29, 2023 compared to $42.3 million in the three months ended October 30, 2022.
Gross Profit
Gross profit decreased $7.5 million, or 9.8%, to $69.4 million in the three months ended October 29, 2023 compared to $76.9 million in the three months ended October 30, 2022. As a percentage of net sales, gross margin decreased to 50.2% of net sales in the three months ended October 29, 2023, compared to 52.3% of net sales in the three months ended October 30, 2022.
The decrease in gross margin was primarily driven by a lower mix of full price sales as compared to promotional sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $2.5 million, or 2.9%, to $81.8 million in the three months ended October 29, 2023 compared to $84.3 million in the three months ended October 30, 2022. Selling, general and administrative expenses as a percentage of net sales increased to 59.2% in the three months ended October 29, 2023, compared to 57.3% in the three months ended October 30, 2022.
The decrease in selling, general and administrative expense was due to a slight decrease in advertising spending and efficiencies across the fulfillment center network, partially offset by higher personnel costs and higher depreciation from ongoing strategic investments.
Income Taxes
Income tax benefit was $3.1 million in the three months ended October 29, 2023, compared to income tax benefit of $2.1 million in the three months ended October 30, 2022. The effective tax rate related to controlling interest for the three months ended October 29, 2023 and October 30, 2022 was 23% and 25%, respectively.
Net Loss Attributable to Controlling Interest
Net loss attributable to controlling interest was $10.5 million, in the three months ended October 29, 2023 compared to net loss of $6.2 million in the three months ended October 30, 2022, due to the factors discussed above.
Nine Months Ended October 29, 2023 Compared to Nine Months Ended October 30, 2022
Net Sales
Net sales decreased $10.4 million, or 2.5%, to $401.1 million in the nine months ended October 29, 2023 compared to $411.5 million in the nine months ended October 30, 2022.
Store market net sales decreased $9.7 million, or 3.4%, to $279.6 million in the nine months ended October 29, 2023 compared to $289.3 million in the nine months ended October 30, 2022. The decrease was primarily driven by slower store traffic compared to the prior year. Non-store market net sales decreased slightly by $0.1 million, or 0.1%, to $118.8 million in the nine months ended October 29, 2023 compared to $118.9 million in the nine months ended October 30, 2022.
Gross Profit
Gross profit decreased $13.1 million, or 5.9%, to $206.5 million in the nine months ended October 29, 2023 compared to $219.6 million in the nine months ended October 30, 2022. As a percentage of net sales, gross margin decreased to 51.5% of net sales in the nine months ended October 29, 2023, compared to 53.4% of net sales in the nine months ended October 30, 2022.
The decrease in gross margin was primarily driven by a lower mix of full price sales as compared to promotional sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.9 million, or 0.4%, to $224.9 million in the nine months ended October 29, 2023 compared to $224.0 million in the nine months ended October 30, 2022. Selling, general and administrative expenses as a percentage of net sales increased to 56.1% in the nine months ended October 29, 2023, compared to 54.4% in the nine months ended October 30, 2022.
The increase in selling, general and administrative expense was due to higher occupancy costs from the new automated Southeast fulfillment center, as well as investments in new headcount, partially offset by cost efficiencies across the fulfillment centers.
Income Taxes
Income tax benefit was $4.8 million in the nine months ended October 29, 2023, compared to income tax benefit of $1.8 million in the nine months ended October 30, 2022. The effective tax rate related to controlling interest was 23% for the nine months ended October 29, 2023 compared to 26% for the nine months ended October 30, 2022.
Net Loss Attributable to Controlling Interest
Net loss attributable to controlling interest was $16.3 million in the nine months ended October 29, 2023 compared to net loss of $5.1 million in the nine months ended October 30, 2022, due to the factors discussed above.
Reconciliation of Net Loss to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net loss to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures, for the periods indicated below. See the above section titled “How We Assess the Performance of Our Business,” for our definition of Adjusted EBITDA.
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| October 29, 2023 |
| October 30, 2022 |
| October 29, 2023 |
| October 30, 2022 | ||||
(in thousands) |
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Net loss |
| $ | (10,474) |
| $ | (6,243) |
| $ | (16,363) |
| $ | (5,225) |
Depreciation and amortization |
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| 8,566 |
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| 7,572 |
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| 23,434 |
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| 22,946 |
Amortization of internal-use software hosting |
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subscription implementation costs |
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| 1,227 |
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| 783 |
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| 3,647 |
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| 2,203 |
Interest expense |
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| 1,219 |
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| 968 |
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| 3,033 |
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| 2,723 |
Income tax benefit |
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| (3,126) |
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| (2,059) |
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| (4,786) |
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| (1,770) |
EBITDA |
| $ | (2,588) |
| $ | 1,021 |
| $ | 8,965 |
| $ | 20,877 |
Stock based compensation |
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| 1,021 |
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| 726 |
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| 3,305 |
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| 2,000 |
Adjusted EBITDA |
| $ | (1,567) |
| $ | 1,747 |
| $ | 12,270 |
| $ | 22,877 |
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $3.3 million to ($1.6) million in the three months ended October 29, 2023 compared to $1.7 million in the three months ended October 30, 2022. As a percentage of net sales, Adjusted EBITDA decreased to (1.1%) of net sales in the three months ended October 29, 2023 compared to 1.2% of net sales in the three months ended October 30, 2022.
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $10.6 million to $12.3 million in the nine months ended October 29, 2023 compared to $22.9 million in the nine months ended October 30, 2022. As a percentage of net sales, Adjusted EBITDA decreased to 3.1% of net sales in the nine months ended October 29, 2023 compared to 5.6% of net sales in the nine months ended October 30, 2022.
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, and 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 October 29, 2023, our net working capital was $62.3 million, including $8.2 million of cash and cash equivalents.
We expect to spend approximately $55.0 million in fiscal 2023 on capital expenditures, inclusive of software hosting implementation costs, primarily due to investments in logistics optimization, including investments in the fulfillment network and information technology. 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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| Nine Months Ended | ||||
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| October 29, 2023 |
| October 30, 2022 | ||
(in thousands) |
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Net cash used in operating activities |
| $ | (31,006) |
| $ | (51,008) |
Net cash used in investing activities |
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| (39,825) |
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| (24,117) |
Net cash provided by financing activities |
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| 33,460 |
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| 7,481 |
Decrease in cash and cash equivalents |
| $ | (37,371) |
| $ | (67,644) |
Net Cash Used in Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, stock-based compensation and the effect of changes in operating assets and liabilities.
For the nine months ended October 29, 2023, net cash used in operating activities was $31.0 million, which primarily consisted of cash used in operating assets and liabilities of $36.6 million and a $16.4 million net loss for the nine months ended October 29, 2023 partially offset by depreciation of $23.4 million. The cash used in operating assets and liabilities of $36.6 million was primarily due to a $19.0 million increase in inventory and $10.2 million decrease in trade accounts payable.
For the nine months ended October 30, 2022, net cash used in operating activities was $51.0 million, which primarily consisted of cash used in operating assets and liabilities of $70.8 million. The cash used in operating assets and liabilities of $70.8 million was primarily due to an $82.0 million increase in inventory and a $13.4 million decrease in accrued expenses, partially offset by a $34.7 million increase in trade accounts payable.
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 nine months ended October 29, 2023 and October 30, 2022, net cash used in investing activities was $39.8 million and $24.1 million, respectively, and was primarily driven by new investments in the fulfillment network, most notably the new automated Southeast fulfillment center, coupled with foundational investments in information technology.
Net Cash Provided by Financing Activities
Financing activities consist primarily of borrowings and payments related to our revolving line of credit as well as payments on finance lease obligations.
For the nine months ended October 29, 2023, net cash provided by financing activities was $33.5 million, primarily consisting of $36.0 million in net borrowings under our revolving line of credit.
For the nine months ended October 30, 2022, net cash provided by financing activities was $7.5 million, primarily consisting of $10.0 million in borrowings under our revolving line of credit, partially offset by payments on finance lease obligations.
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 29, 2023.
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 2022 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 2022 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 Interim 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 2022 Form 10-K, or other SEC filings. There have been no material changes to our risk factors as previously disclosed in our fiscal 2022 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 October 29, 2023, 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 October 29, 2023.
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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 | ||
July 31, 2023 - August 27, 2023 |
| 135 |
| $ | 7.30 |
| — |
| $ | — |
August 28, 2023 - October 1, 2023 |
| 1,567 |
|
| 6.00 |
| — |
|
| — |
October 2, 2023 - October 29, 2023 |
| — |
|
| — |
| — |
|
| — |
Total |
| 1,702 |
| $ | 6.10 |
| — |
| $ | — |
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit No. |
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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 October 29, 2023 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: December 1, 2023 |
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| DULUTH HOLDINGS INC. | ||
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| /s/ Michael Murphy | |
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| Michael Murphy | |
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| Vice President, Chief Accounting Officer and Interim Chief Financial Officer | |
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| (On behalf of the Registrant and as Principal Financial Officer and Principal Accounting Officer) | |
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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: December 1, 2023
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/s/ Sam Sato |
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Sam Sato |
Chief Executive officer
Exhibit 31.2
CERTIFICATIONS
I, Michael Murphy, Interim 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: December 1, 2023
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/s/ Michael Murphy |
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Michael Murphy |
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Interim 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 October 29, 2023 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: |
December 1, 2023 |
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 October 29, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Murphy, as Interim 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/ Michael Murphy |
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Name: |
Michael Murphy |
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Title: |
Interim Chief Financial Officer |
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Date: |
December 1, 2023 |
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.