SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-Q
_________________________________________
☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 30, 2017
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 001-37641
_________________________________________
DULUTH HOLDINGS INC.
(Exact name of registrant as specified in its charter)
_________________________________________
Wisconsin |
39-1564801 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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170 Countryside Drive P.O. Box 409 Belleville, Wisconsin |
53508 |
(Address of principal executive offices) |
(Zip Code) |
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(608) 424-1544 |
(Registrant’s telephone number, including area code) |
_________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer |
☐ |
Accelerated filer |
☑ |
Non-accelerated filer |
☐ |
Smaller reporting company |
☐ |
(Do not check if 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. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of September 1, 2017, was 3,364,200.
The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of September 1, 2017, was 29,094,597.
DULUTH HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED July 30, 2017
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3 | ||
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Condensed Consolidated Balance Sheets as of July 30, 2017 and January 29, 2017 (Unaudited) |
3 |
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4 | |
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5 | |
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6 | |
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7 | |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
8 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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26 | ||
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2
PART I. FINANCIAL INFORMATION
DULUTH HOLDINGS INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands)
|
||||||
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July 30, 2017 |
January 29, 2017 |
||||
ASSETS |
||||||
Current Assets: |
||||||
Cash |
$ |
1,411 |
$ |
24,042 | ||
Accounts receivable |
34 | 45 | ||||
Other receivables |
419 | 349 | ||||
Inventory, less reserve for excess and obsolete items |
84,734 | 70,368 | ||||
Prepaid expenses |
8,034 | 4,860 | ||||
Deferred catalog costs |
1,468 | 1,582 | ||||
Total current assets |
96,100 | 101,246 | ||||
Property and equipment, net |
75,746 | 52,432 | ||||
Restricted cash |
2,469 | 1,435 | ||||
Goodwill |
402 | 402 | ||||
Other assets, net (see Note 11) |
6,980 | 452 | ||||
Total assets |
$ |
181,697 |
$ |
155,967 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||
Current liabilities: |
||||||
Trade accounts payable |
$ |
17,836 |
$ |
9,330 | ||
Accrued expenses and other current liabilities |
17,239 | 19,822 | ||||
Income taxes payable |
301 | 5,225 | ||||
Bank overdrafts |
2,350 |
— |
||||
Current maturities of long-term debt |
81 | 742 | ||||
Total current liabilities |
37,807 | 35,119 | ||||
Long-term line of credit |
11,943 |
— |
||||
Finance lease obligations under build-to-suit leases |
6,770 | 3,349 | ||||
Long-term debt, less current maturities |
1,466 | 35 | ||||
Deferred rent obligations, less current maturities |
2,595 | 2,109 | ||||
Deferred tax liabilities |
1,149 | 1,567 | ||||
Total liabilities |
61,730 | 42,179 | ||||
Commitments and contingencies |
||||||
Shareholders' equity: |
||||||
Preferred stock, no par value; 10,000 shares authorized; no shares |
— |
— |
||||
Common stock (Class A), no par value; 10,000 shares authorized; |
— |
— |
||||
Common stock (Class B), no par value; 200,000 shares authorized; |
— |
— |
||||
Capital stock |
87,063 | 86,446 | ||||
Retained earnings |
29,372 | 24,733 | ||||
Total shareholders' equity of Duluth Holdings Inc. |
116,435 | 111,179 | ||||
Noncontrolling interest |
3,532 | 2,609 | ||||
Total shareholders' equity |
119,967 | 113,788 | ||||
Total liabilities and shareholders' equity |
$ |
181,697 |
$ |
155,967 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share figures)
|
Three Months Ended |
Six Months Ended |
||||||||||
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July 30, 2017 |
July 31, 2016 |
July 30, 2017 |
July 31, 2016 |
||||||||
Net sales |
$ |
86,226 |
$ |
65,823 |
$ |
169,913 |
$ |
134,455 | ||||
Cost of goods sold (excluding depreciation and amortization) |
37,303 | 26,901 | 72,347 | 55,842 | ||||||||
Gross profit |
48,923 | 38,922 | 97,566 | 78,613 | ||||||||
Selling, general and administrative expenses |
41,534 | 32,936 | 89,428 | 67,286 | ||||||||
Operating income |
7,389 | 5,986 | 8,138 | 11,327 | ||||||||
Interest expense |
372 | 37 | 538 | 75 | ||||||||
Other income, net |
45 | 60 | 102 | 130 | ||||||||
Income before income taxes |
7,062 | 6,009 | 7,702 | 11,382 | ||||||||
Income tax expense |
2,709 | 2,325 | 2,934 | 4,386 | ||||||||
Net income |
4,353 | 3,684 | 4,768 | 6,996 | ||||||||
Less: Net income attributable to noncontrolling interest |
69 | 65 | 129 | 136 | ||||||||
Net income attributable to controlling interest |
$ |
4,284 |
$ |
3,619 |
$ |
4,639 |
$ |
6,860 | ||||
Basic earnings per share (Class A and Class B): |
||||||||||||
Weighted average shares of |
31,828 | 31,520 | 31,825 | 31,520 | ||||||||
Net income per share attributable |
$ |
0.13 |
$ |
0.11 |
$ |
0.15 |
$ |
0.22 | ||||
Diluted earnings per share (Class A and Class B): |
||||||||||||
Weighted average shares and |
32,318 | 32,263 | 32,344 | 32,265 | ||||||||
Net income per share attributable |
$ |
0.13 |
$ |
0.11 |
$ |
0.14 |
$ |
0.21 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Amounts in thousands)
|
Three Months Ended |
Six Months Ended |
||||||||||
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July 30, 2017 |
July 31, 2016 |
July 30, 2017 |
July 31, 2016 |
||||||||
Net Income |
$ |
4,353 |
$ |
3,684 |
$ |
4,768 |
$ |
6,996 | ||||
Other comprehensive income: |
||||||||||||
Change in value of interest rate swap agreement |
— |
6 |
— |
12 | ||||||||
Comprehensive income |
4,353 | 3,690 | 4,768 | 7,008 | ||||||||
Comprehensive income attributable |
69 | 65 | 129 | 136 | ||||||||
Comprehensive income attributable |
$ |
4,284 |
$ |
3,625 |
$ |
4,639 |
$ |
6,872 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DULUTH HOLDINGS INC.
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)
(Amounts in thousands)
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Noncontrolling |
|||||||||||||
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interest in |
Total |
||||||||||||
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Capital stock |
Retained |
variable interest |
shareholders' |
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Shares |
Amount |
earnings |
entity |
equity |
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Balance at January 29, 2017 |
32,376 |
$ |
86,446 |
$ |
24,733 |
$ |
2,609 |
$ |
113,788 | |||||
Issuance of common stock |
102 |
— |
— |
— |
— |
|||||||||
Restricted stock forfeitures |
(8) |
— |
— |
— |
— |
|||||||||
Amortization of stock-based compensation |
— |
617 |
— |
— |
617 | |||||||||
Capital contributions |
— |
— |
— |
794 | 794 | |||||||||
Net income |
— |
— |
4,639 | 129 | 4,768 | |||||||||
Balance at July 30, 2017 |
32,470 |
$ |
87,063 |
$ |
29,372 |
$ |
3,532 |
$ |
119,967 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
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Six Months Ended |
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July 30, 2017 |
July 31, 2016 |
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Cash flows from operating activities: |
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Net income |
$ |
4,768 |
$ |
6,996 | ||
Adjustments to reconcile net income to net cash (used in) provided by |
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Depreciation and amortization |
3,280 | 1,951 | ||||
Amortization of stock-based compensation |
617 | 615 | ||||
Deferred income taxes |
(418) | (228) | ||||
Changes in operating assets and liabilities: |
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Accounts receivable |
11 | (24) | ||||
Other receivables |
(70) | (325) | ||||
Inventory |
(12,879) | (10,855) | ||||
Prepaid expense |
(2,749) | (12) | ||||
Deferred catalog costs |
1,050 | 1,067 | ||||
Trade accounts payable |
6,641 | 5,641 | ||||
Income taxes payable |
(4,924) | (994) | ||||
Accrued expenses and deferred rent obligations |
(7,495) | (2,760) | ||||
Net cash (used in) provided by operating activities |
(12,168) | 1,072 | ||||
Cash flows from investing activities: |
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Purchases of property and equipment |
(20,054) | (14,513) | ||||
Change in other assets |
(6,495) |
— |
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Change in restricted cash |
(1,034) | (774) | ||||
Purchases of other assets |
(68) | (20) | ||||
Net cash used in investing activities |
(27,651) | (15,307) | ||||
Cash flows from financing activities: |
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Proceeds from line of credit |
17,395 |
— |
||||
Payments on line of credit |
(5,452) |
— |
||||
Proceeds from long term debt |
800 |
— |
||||
Payments on long term debt |
(20) | (135) | ||||
Payments on capital lease obligations |
(10) | (9) | ||||
Change in bank overdrafts |
2,350 |
— |
||||
Distributions to shareholders |
— |
(192) | ||||
Proceeds from finance lease obligations |
1,310 |
— |
||||
Capital contributions to variable interest entity |
794 |
— |
||||
Other |
21 |
— |
||||
Net cash provided by (used in) financing activities |
17,188 | (336) | ||||
Decrease in cash |
(22,631) | (14,571) | ||||
Cash at beginning of period |
24,042 | 37,873 | ||||
Cash at end of period |
$ |
1,411 |
$ |
23,302 | ||
Supplemental disclosure of cash flow information |
||||||
Interest paid |
$ |
472 |
$ |
75 | ||
Income taxes paid |
$ |
8,340 |
$ |
5,544 | ||
Supplemental disclosure of non-cash information |
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Property and equipment acquired under build-to-suit leases |
$ |
2,090 |
$ |
83 | ||
Unpaid liability to acquire property and equipment |
$ |
4,411 |
$ |
1,713 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
A. Nature of Operations
Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through the Company’s own direct and retail channels. The direct segment, consisting of the Company’s website and catalogs, offers products nationwide. In 2010, the Company added retail to its omni-channel platform with the opening of its first store. Since then, Duluth Trading has expanded its retail presence, and as of July 30, 2017, the Company operated 20 retail stores and three outlet stores across the Midwestern and Eastern United States. The Company’s products are marketed under the Duluth Trading brand, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise.
The Company has two classes of authorized common stock: Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to ten votes per share and is convertible at any time into one share of Class B common stock. Each share of Class B common stock is entitled to one vote per share. The Company’s Class B common stock trades on the NASDAQ Global Select Market under the symbol “DLTH.”
B. Basis of Presentation
The condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of the parent, Duluth Holdings Inc., and its wholly-owned subsidiary, Duluth Trading Company, LLC. Effective October 3, 2016, Duluth Trading Company, LLC was dissolved and no longer consolidated, which did not impact the Company’s consolidated financial statements. The Company also consolidates Schlecht Retail Ventures LLC (“SRV”) as a variable interest entity (see Note 4 “Variable Interest Entity”). All intercompany balances and transactions have been eliminated.
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2017 is a 52-week period and ends on January 28, 2018. Fiscal 2016 was a 52-week period and ended on January 29, 2017. The three and six months of fiscal 2017 and fiscal 2016 represent the Company’s 13 and 26-week periods ended July 30, 2017 and July 31, 2016, respectively.
The accompanying condensed consolidated financial statements as of and for the three and six months ended July 30, 2017 and July 31, 2016 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 note disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations as of and for the three and six months ended July 30, 2017 and July 31, 2016. 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, 2017.
C. Seasonality of Business
The Company’s business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year as a result of increased sales during the holiday season.
D. Restricted Cash
The Company’s restricted cash is held in escrow accounts and is used to pay a portion of the construction loans entered into by third party landlords (the “Landlords”) in connection with the Company’s retail store leases. The restricted cash is disbursed based on the escrow agreements entered into by and among the Landlords, the Company and the escrow agent.
E. Build-to-Suit Lease
The Company may at times be involved in the construction of stores to be leased by the Company and, depending on the extent to which the Company is involved, the Company may be deemed the owner of the leased premises for accounting purposes during the store construction period. The Company’s headquarters lease, see Note 11 “Subsequent Events,” is treated as a build-to-suit lease transaction for accounting purposes during the construction period. For leases that the Company is
8
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
deemed the owner of the property during the construction period, upon commencement of the construction project, the Company is required to capitalize the cash and non-cash assets contributed by the landlord for construction as property and equipment on the Company’s Condensed Consolidated Balance Sheets. Upon the completion of the construction project, the Company performs an analysis on the lease to determine if the Company qualifies for sale-leaseback treatment. For those qualifying leases, the finance lease obligation and the associated property and equipment are removed and the difference is reclassified to either prepaid or deferred rent and amortized over the lease term as an increase or decrease to rent expense. If the lease does not qualify for sale-leaseback treatment, the finance lease obligation is amortized over the lease term based on the rent payments in the lease agreement and the associated property and equipment are depreciated over the estimated useful life.
As of July 30, 2017, the Company capitalized $13.8 million in property and equipment and $0.1 million in accumulated depreciation and recorded a $6.8 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes. As of January 29, 2017, the Company capitalized $6.6 million in property and equipment and $0.01 million in accumulated depreciation and recorded a $3.3 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes.
2. DEBT AND LINE OF CREDIT
Debt consists of the following:
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July 30, 2017 |
January 29, 2017 |
||||
(in thousands) |
||||||
SRV Mortgage Term A Note |
$ |
707 |
$ |
727 | ||
SRV Mortgage Term B Note |
800 |
— |
||||
Line of credit |
11,943 |
— |
||||
Capitalized lease obligations |
40 | 50 | ||||
|
$ |
13,490 |
$ |
777 | ||
Less: current maturities |
(81) | (742) | ||||
Long-term debt |
$ |
13,409 |
$ |
35 |
Schlecht Retail Ventures LLC
SRV entered into a mortgage note (“SRV Term A Note”) with an original balance of $0.8 million. The SRV Term A Note was scheduled to mature in September 2017 and required monthly payments of $3,300 plus interest at 3.1%, with a final balloon payment due in September 2017. On July 20, 2017, SRV refinanced the SRV Term A Note, which extended the maturity date to September 2022, with a final balloon payment in September 2022, and changed the interest rate to 3.69%. The required monthly payments of $3,300 did not change.
On July 20, 2017, SRV entered into a mortgage note (“SRV Term B Note”) with an original balance of $0.8 million. The SRV Term B Note matures in September 2022 and requires monthly payments of $3,300 plus interest at 3.69%, with a final balloon payment in September 2022.
The SRV Term A Note and SRV Term B Note are guaranteed by the Company’s majority shareholder and collateralized by certain real property owned by SRV in Mt. Horeb, Wisconsin.
Line of Credit
The Amended and Restated Loan Agreement dated as of October 7, 2016 (the “Amended and Restated Agreement”) provides for borrowing availability of up to $40.0 million from October 7, 2016 through July 31, 2017, up to $50.0 million from August 1, 2017 through July 31, 2018, and up to $60.0 million from August 1, 2018 through July 31, 2019. The Amended and Restated Agreement matures on July 31, 2019, and bears interest, payable monthly, at a rate equal to the adjusted LIBOR rate, as defined in the Amended and Restated Agreement (effective rate of 2.3% at July 30, 2017). The Amended and Restated Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including minimum tangible net worth and a minimum trailing twelve month EBITDA. In addition, the Amended and Restated Agreement does not contain borrowing base limits.
As of July 30, 2017 and for the six months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above.
9
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
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July 30, 2017 |
January 29, 2017 |
||||
(in thousands) |
||||||
Salaries and benefits |
$ |
1,955 |
$ |
3,885 | ||
Deferred revenue |
4,906 | 5,590 | ||||
Freight |
1,085 | 1,574 | ||||
Product returns |
409 | 1,088 | ||||
Catalog costs |
558 | 556 | ||||
Unpaid purchases of property & equipment |
4,411 | 3,485 | ||||
Accrued advertising |
1,163 | 1,060 | ||||
Other |
2,752 | 2,584 | ||||
Total accrued expenses and other current liabilities |
$ |
17,239 |
$ |
19,822 | ||
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4. VARIABLE INTEREST ENTITY
Based upon the criteria set forth in ASC 810, Consolidation, the Company has determined that it was the primary beneficiary of one variable interest entity (“VIE”) as of July 30, 2017 and January 29, 2017, as the Company absorbs significant economics of the entity and has the power to direct the activities that are considered most significant to the entity.
The Company leases certain retail store facilities and office buildings from SRV, a VIE whose primary purpose and activity is to own this real property. SRV is a Wisconsin limited liability company that is owned by the majority shareholder of the Company. The Company considers itself the primary beneficiary for SRV as the Company is expected to receive a majority of SRV’s expected residual returns based on the activity of SRV. As the Company is the primary beneficiary, it consolidates SRV and the leases are eliminated in consolidation.
The condensed consolidated balance sheets include the following amounts as a result of the consolidation of SRV as of July 30, 2017 and January 29, 2017:
|
July 30, 2017 |
January 29, 2017 |
||||
(in thousands) |
||||||
Cash |
$ |
1,238 |
$ |
139 | ||
Other receivables |
11 | 9 | ||||
Property and equipment, net |
3,973 | 3,248 | ||||
Other assets, net |
6 | 5 | ||||
Total assets |
$ |
5,228 |
$ |
3,401 | ||
|
||||||
Other current liabilities |
$ |
263 |
$ |
792 | ||
Long-term debt |
1,433 |
— |
||||
Noncontrolling interest in VIE |
3,532 | 2,609 | ||||
Total liabilities and shareholders' equity |
$ |
5,228 |
$ |
3,401 |
The Company does not consolidate the developer of the Company’s future headquarters as the Company is not the primary beneficiary, see Note 11 “Subsequent Events.”
10
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
5. EARNINGS PER SHARE
Earnings per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings per share is based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock. The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation is as follows:
|
Three Months Ended |
Six Months Ended |
||||||||||
|
July 30, 2017 |
July 31, 2016 |
July 30, 2017 |
July 31, 2016 |
||||||||
(in thousands, except per share data) |
||||||||||||
Numerator - net income attributable |
$ |
4,284 |
$ |
3,619 |
$ |
4,639 |
$ |
6,860 | ||||
Denominator - weighted average shares |
||||||||||||
Basic |
31,828 | 31,520 | 31,825 | 31,520 | ||||||||
Dilutive shares |
490 | 743 | 519 | 745 | ||||||||
Diluted |
32,318 | 32,263 | 32,344 | 32,265 | ||||||||
Earnings per share (Class A and Class B) |
||||||||||||
Basic |
$ |
0.13 |
$ |
0.11 |
$ |
0.15 |
$ |
0.22 | ||||
Diluted |
$ |
0.13 |
$ |
0.11 |
$ |
0.14 |
$ |
0.21 |
6. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plan in accordance with ASC 718, Stock Compensation, which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period of the award.
Total stock compensation expense associated with restricted stock recognized by the Company during the three and six months ended July 30, 2017 was $0.3 million and $0.6 million, respectively, and during the three and six months ended July 31, 2016 was $0.3 million and $0.6 million, respectively. The Company’s total stock compensation expense is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
A summary of the activity in the Company’s unvested restricted stock during the six months ended July 30, 2017 is as follows:
|
Weighted |
|||||
|
average |
|||||
|
fair value |
|||||
|
Shares |
per share |
||||
Outstanding at January 29, 2017 |
794,712 |
$ |
4.34 | |||
Granted |
102,363 | 19.51 | ||||
Vested |
(246,708) | 2.06 | ||||
Forfeited |
(8,289) | 22.32 | ||||
Outstanding at July 30, 2017 |
642,078 |
$ |
7.40 |
At July 30, 2017, the Company had unrecognized compensation expense of $2.9 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 1.8 years.
11
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
July 30, 2017 |
January 29, 2017 |
||||
(in thousands) |
||||||
Land and land improvements |
$ |
3,055 |
$ |
2,986 | ||
Leasehold improvements |
16,774 | 12,752 | ||||
Buildings |
23,735 | 16,178 | ||||
Vehicles |
177 | 177 | ||||
Warehouse equipment |
4,301 | 3,939 | ||||
Office equipment and furniture |
16,226 | 11,125 | ||||
Computer equipment |
2,909 | 2,509 | ||||
Software |
6,849 | 6,659 | ||||
|
74,026 | 56,325 | ||||
Accumulated depreciation and amortization |
(18,761) | (15,529) | ||||
|
55,265 | 40,796 | ||||
Construction in progress |
20,481 | 11,636 | ||||
Property and equipment, net |
$ |
75,746 |
$ |
52,432 |
8. SEGMENT REPORTING
The Company has two operating segments, which are also its reportable segments: direct and retail. The direct segment includes net sales from the Company’s website and catalogs. The retail segment includes net sales from the Company’s retail and outlet stores. These two operating segments are components of the Company for which separate financial information is available and for which operating results are evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing performance of the segments.
Income tax expense, and corporate expenses, which include but are not limited to: human resources, legal, finance, information technology, design and other corporate-related expenses are included in the Company’s direct segment. Interest expense, depreciation and amortization, and property and equipment expenditures, are recognized in each segment. Advertising expenses are generally included in the Company’s direct segment, except for specific store advertising, which is included in the Company’s retail segment.
Net sales by product is not presented because providing the information is impracticable. Net sales outside of the United States were insignificant. Variable allocations of assets are not made for segment reporting. The Company does not have any assets outside of the United States.
12
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Segment information is presented in the following tables:
|
Three Months Ended |
Six Months Ended |
||||||||||
|
July 30, 2017 |
July 31, 2016 |
July 30, 2017 |
July 31, 2016 |
||||||||
(in thousands) |
||||||||||||
Net sales |
||||||||||||
Direct |
$ |
57,667 |
$ |
53,841 |
$ |
121,442 |
$ |
114,166 | ||||
Retail |
28,559 | 11,982 | 48,471 | 20,289 | ||||||||
Total net sales |
$ |
86,226 |
$ |
65,823 |
$ |
169,913 |
$ |
134,455 | ||||
Operating income |
||||||||||||
Direct |
$ |
3,125 |
$ |
4,587 |
$ |
2,968 |
$ |
8,778 | ||||
Retail |
4,264 | 1,399 | 5,170 | 2,549 | ||||||||
Total operating income |
7,389 | 5,986 | 8,138 | 11,327 | ||||||||
Interest expense |
372 | 37 | 538 | 75 | ||||||||
Other income, net |
45 | 60 | 102 | 130 | ||||||||
Income before income taxes |
$ |
7,062 |
$ |
6,009 |
$ |
7,702 |
$ |
11,382 |
Segment total assets
|
July 30, 2017 |
January 29, 2017 |
||||
(in thousands) |
||||||
Direct |
$ |
116,914 |
$ |
115,239 | ||
Retail |
64,783 | 40,728 | ||||
Total assets at period end |
$ |
181,697 |
$ |
155,967 |
9. INCOME TAXES
The provision for income taxes for the interim period is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The effective tax rate related to controlling interest was 39% for both the three and six months ended July 30, 2017, and July 31, 2016. The income from SRV was excluded from the calculation of the Company’s effective tax rate, as SRV is an “S” corporation and not subject to income taxes.
10. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
Simplifying the Measurement of Inventory
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”), which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The provisions of ASU 2015-11 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-11 as of January 30, 2017, the first day of the Company’s fiscal year 2017 and there was no significant impact to the Company’s consolidated financial statements.
13
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to improve the accounting for share-based payment transactions. ASU 2016-09 changes certain aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The provisions of ASU 2016-09 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those years, early adoption is permitted. The Company adopted ASU 2016-09 as of May 1, 2016 and there was no significant impact to the Company’s consolidated financial statements.
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”), which requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. In addition, an allocation of valuation allowances between current and noncurrent deferred tax assets is not required, because the allowances will be classified as noncurrent. The provisions of ASU 2015-17 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-17 as of January 31, 2016 and has reported deferred tax assets and liabilities as noncurrent on the balance sheet.
Recently Issued Accounting Pronouncements Not Yet Adopted
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition model requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of the performance obligations. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and change in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt ASU 2014-09 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company expects to adopt ASU 2014-09 retrospectively with the cumulative effect of initially applying the update recognized at the date of the adoption along with additional disclosures. The Company’s review is ongoing and the Company has not yet identified any material changes in the timing of revenue recognition. The Company continues to evaluate the new disclosure requirements of ASU 2014-09 on its consolidated financial statements.
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on the balance sheets (right-of-use asset and lease liability), but recognize expenses on the income statements in a manner which is similar to the current lease standard. The provisions of ASU 2016-02 are effective for public entities with fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company expects to early adopt ASU 2016-02 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company conducts its retail operations through leased stores and therefore, the Company expects the adoption of ASU 2016-02 to have a significant impact on its consolidated financial statements.
14
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Statement of Cash Flows
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for public entities with fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company expects to adopt ASU 2016-18 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company is evaluating the level of impact of adopting ASU 2016-18 will have on the Company’s consolidated financial statements.
11. SUBSEQUENT EVENTS
The Company evaluated its July 30, 2017 unaudited condensed consolidated financial statements for subsequent events through September 6, 2017, the date the unaudited condensed consolidated financial statements were available to be issued.
On August 18, 2017, the Company entered into a lease agreement for the construction of the Company’s headquarters in Mt. Horeb, Wisconsin (the “HQ Lease”). The HQ Lease is for an initial term of 30 years and is expected to begin on November 1, 2018, with annual lease payments of $1.8 million, increasing at 2.0% each year, through the first 20 years, then beginning in year 21, the annual lease payments reset to $1.3 million, increasing at 2.0% each year until the end of the lease term, with a renewal option to extend for up to two terms of ten years each. The Company is treating the HQ Lease as a build-to-suit lease transaction for accounting purposes during the construction period. The construction completion date of the Company’s headquarters is expected on or before November 1, 2018.
In conjunction with the HQ Lease discussed above, the Company entered into an agreement to purchase a $6.4 million investment in a note (the “Note”) with an interest rate of 4.95% and a 20-year term from a financial services firm through a private placement sale. The Note was issued from the developer of the Company’s planned headquarters in Mt. Horeb, Wisconsin. During the first 13 months of the Note, beginning October 15, 2017, the Company expects to receive interest only payments. From November 15, 2018 through the maturity date of the Note on October 15, 2038, the Company expects to receive principal and interest payments. As of July 30, 2017, the cash available for purchase of the Note was advanced to the developer to begin construction on the Company’s headquarters and is recorded in other assets, net on the Company’s condensed consolidated balance sheet. The Company expects the transaction to close by the end of September 30, 2017. At closing, the Company plans to record the $6.4 million Note as an available-for-sale security on the Company’s balance sheet.
15
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, 2017 (“2016 Form 10-K”).
The three and six months of fiscal 2017 and fiscal 2016 represent our 13 and 26-week periods ended July 30, 2017 and July 31, 2016, 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. and its subsidiary on a consolidated basis.
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 or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 2016 Form 10-K, which factors are incorporated by reference herein. 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 rapidly growing lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through our own direct and retail channels. The direct segment, consisting of our website and catalogs, offers products nationwide and represented 66.9% and 71.5% of our consolidated net sales for the three and six months ended July 31, 2017, respectively, and 81.8% and 84.9% of our consolidated net sales for the three and six months ended July 30, 2016, respectively. In 2010, we added retail to our omni-channel platform with the opening of our first store. Since then, we have expanded our retail presence, and as of July 30, 2017, we operated 20 retail stores and three outlet stores. Net sales for our retail segment represented 33.1% and 28.5% of consolidated net sales for the three and six months ended July 30, 2017, respectively, and 18.2% and 15.1% of consolidated net sales for the three and six months ended July 31, 2016, respectively.
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 have increased year-over-year for 30 consecutive quarters through July 30, 2017; |
· |
Net sales in fiscal 2017 second quarter increased by 31.0% over the prior year second quarter to $86.2 million and net sales in the first six months of fiscal 2017 increased by 26.4% over the first six months of the prior year to $169.9 million; |
16
· |
Net income in fiscal 2017 second quarter increased by 18.4% over the prior year second quarter to $4.3 million and net income in the first six months of fiscal 2017 decreased by 32.4% over the first six months of the prior year to $4.6 million; |
· |
Adjusted EBITDA in fiscal 2017 second quarter increased by 26.7% over the prior year second quarter to $9.5 million and adjusted EBITDA in the first six months of fiscal 2017 decreased by 13.4% over the first six months of the prior year to $12.1 million; and |
· |
Our retail stores have achieved an average payback of less than two years. |
See “Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net income to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures. See also the information under the heading “Adjusted EBITDA” in the section “How We Assess the Performance of Our Business” for our definition of Adjusted EBITDA.
Our business is seasonal, and as a result, our net sales fluctuate from quarter to quarter, which often affects the comparability of our results between quarters. Net sales are historically higher in the fourth quarter of our fiscal year due to the holiday selling season.
We are pursuing several strategies to continue our profitable growth, including building brand awareness to continue customer acquisition, accelerating retail expansion, selectively broadening assortments in certain men’s product categories and growing our women’s business.
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 sales are recognized upon customer receipt of the product, while retail sales are recognized at the point of sale. We also use net sales as one of the key financial metrics in determining our annual bonus compensation for our employees.
Comparable Store Sales
Comparable store sales are generally calculated based upon retail stores that were open at least twelve full fiscal months as of the end of the reporting period. Our outlet stores are not included in the comparable store sales calculations.
Comparable store sales allow us to evaluate how our retail store base is performing by measuring the change in period over-period net sales in stores that have been open for twelve fiscal months or more. Some of our competitors and other retailers calculate comparable store sales differently than we do; as a result, our comparable store sales may not be comparable to similar data made available by other companies. We have excluded comparable store sales data from this Form 10-Q due to the limited number of comparable retail stores as of July 30, 2017. Although retail store expansion is part of our growth strategy, we expect a majority of our net sales to come from our direct segment for the foreseeable future.
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. We expect gross profit to increase to the extent that we successfully grow our net sales. Given the size of our direct segment sales relative to our total net sales, shipping and handling revenue has had a significant impact on our gross profit and gross profit margin. Historically, this revenue has partially offset shipping and handling expense included in selling, general and administrative expenses. Declines in shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling expense. Our gross profit may not be comparable to other retailers, as we do not include distribution network and store occupancy expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.
17
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 television advertising, catalog production, mailing and print advertising costs, as well as all logistics costs associated with shipping product to our customers, consulting and software expenses and professional services fees. Selling, general and administrative expenses as a percentage of net sales is usually higher in lower-volume quarters and lower in higher-volume quarters because a portion of the costs are relatively fixed.
Our historical sales growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are advertising, marketing and payroll costs. While we expect these expenses to increase as we continue to open new stores, increase brand awareness and grow our organization to support our growing business, we believe these expenses will decrease as a percentage of sales over time.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure of operating performance, as it provides a clearer picture of operating results by excluding the effects of financing and investing activities by eliminating the effects of interest and depreciation costs and eliminating expenses that are not reflective of underlying business performance. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business. We also use Adjusted EBITDA as one of the key financial metrics in determining our annual bonus compensation for our employees.
We define Adjusted EBITDA as consolidated net income (loss) 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.
18
Results of Operations
The following table summarizes our unaudited consolidated results of operations for the periods indicated, both in dollars and as a percentage of net sales.
|
Three Months Ended |
Six Months Ended |
|||||||||||
|
July 30, 2017 |
July 31, 2016 |
July 30, 2017 |
July 31, 2016 |
|||||||||
(in thousands) |
|||||||||||||
Direct net sales |
$ |
57,667 |
$ |
53,841 |
$ |
121,442 |
$ |
114,166 | |||||
Retail net sales |
28,559 | 11,982 | 48,471 | 20,289 | |||||||||
Net sales |
86,226 | 65,823 | 169,913 | 134,455 | |||||||||
Cost of goods sold (excluding depreciation and amortization) |
37,303 | 26,901 | 72,347 | 55,842 | |||||||||
Gross profit |
48,923 | 38,922 | 97,566 | 78,613 | |||||||||
Selling, general and administrative expenses |
41,534 | 32,936 | 89,428 | 67,286 | |||||||||
Operating income |
7,389 | 5,986 | 8,138 | 11,327 | |||||||||
Interest expense |
372 | 37 | 538 | 75 | |||||||||
Other income, net |
45 | 60 | 102 | 130 | |||||||||
Income before income taxes |
7,062 | 6,009 | 7,702 | 11,382 | |||||||||
Income tax expense |
2,709 | 2,325 | 2,934 | 4,386 | |||||||||
Net income |
4,353 | 3,684 | 4,768 | 6,996 | |||||||||
Less: Net income attributable to |
69 | 65 | 129 | 136 | |||||||||
Net income attributable to controlling interest |
$ |
4,284 |
$ |
3,619 |
$ |
4,639 |
$ |
6,860 | |||||
Percentage of Net sales: |
|||||||||||||
Direct net sales |
66.9 |
% |
81.8 |
% |
71.5 |
% |
84.9 |
% |
|||||
Retail net sales |
33.1 |
% |
18.2 |
% |
28.5 |
% |
15.1 |
% |
|||||
Net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|||||
Cost of goods sold (excluding depreciation and amortization) |
43.3 |
% |
40.9 |
% |
42.6 |
% |
41.5 |
% |
|||||
Gross profit |
56.7 |
% |
59.1 |
% |
57.4 |
% |
58.5 |
% |
|||||
Selling, general and administrative expenses |
48.2 |
% |
50.0 |
% |
52.6 |
% |
50.0 |
% |
|||||
Operating income |
8.6 |
% |
9.1 |
% |
4.8 |
% |
8.4 |
% |
|||||
Interest expense |
0.4 |
% |
0.1 |
% |
0.3 |
% |
0.1 |
% |
|||||
Other income, net |
0.1 |
% |
0.1 |
% |
0.1 |
% |
0.1 |
% |
|||||
Income before income taxes |
8.2 |
% |
9.1 |
% |
4.5 |
% |
8.5 |
% |
|||||
Income tax expense |
3.1 |
% |
3.5 |
% |
1.7 |
% |
3.3 |
% |
|||||
Net income |
5.0 |
% |
5.6 |
% |
2.8 |
% |
5.2 |
% |
|||||
Less: Net income attributable to |
0.1 |
% |
0.1 |
% |
0.1 |
% |
0.1 |
% |
|||||
Net income attributable to controlling interest |
5.0 |
% |
5.5 |
% |
2.7 |
% |
5.1 |
% |
Three Months Ended July 30, 2017 Compared to Three Months Ended July 31, 2016
Net Sales
Net sales increased $20.4 million, or 31.0%, to $86.2 million in the three months ended July 30, 2017 compared to $65.8 million in the three months ended July 31, 2016, driven by gains in both direct and retail segments of $3.8 million, or 7.1%, and $16.6 million, or 138.3%, respectively, with gains across all product categories. Our website visits increased 19.8% in the three months ended July 30, 2017 compared to the three months ended July 31, 2016. The increase in retail net sales was primarily due to having 12 more stores during the three months ended July 30, 2017 as compared to the three months ended July 31, 2016.
Gross Profit
Gross profit increased $10.0 million, or 25.7%, to $48.9 million in the three months ended July 30, 2017 compared to $38.9 million in the three months ended July 31, 2016. As a percentage of net sales, gross margin decreased 240 basis points to
19
56.7% of net sales in the three months ended July 30, 2017, compared to 59.1% of net sales in the three months ended July 31, 2016. The decrease in gross margin rate was primarily attributable to a decline in shipping revenues due to promotions offering more free shipping days, as compared to the prior year three months, coupled with the increase in inventory reserve due to retail growth and an increase in freight cost related to transporting inventory from our Belleville distribution center to our retail stores due to geographic expansion.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $8.6 million, or 26.1%, to $41.5 million in the three months ended July 30, 2017 compared to $32.9 million in the three months ended July 31, 2016. Selling, general and administrative expenses as a percentage of net sales decreased 180 basis points to 48.2% in the three months ended July 30, 2017, compared to 50.0% in the three months ended July 31, 2016. The increase in selling, general and administrative expenses was attributable to an increase of $1.3 million in advertising and marketing costs, $3.5 million in selling expenses and $3.8 million in general and administrative expenses.
As a percentage of net sales, advertising and marketing costs decreased 340 basis points to 17.4% in the three months ended July 30, 2017, compared to 20.8% in the three months ended July 31, 2016. The 340 basis point decrease in advertising and marketing costs as a percentage of net sales was primarily attributable to a decrease of 220 basis points due the shift in our women’s television advertising that occurred in the first quarter of fiscal 2017, as compared to the second quarter of fiscal 2016, coupled with a decrease of 110 basis points due to our planned decrease spend in catalog costs as a percentage of net sales.
As a percentage of net sales, selling expenses increased 100 basis points to 14.1% in the three months ended July 30, 2017, compared to 13.1% in the three months ended July 31, 2016, primarily due to an increase of 130 basis points in customer service due to growth in retail, offset by a decrease of 50 basis points in shipping expenses due to leverage from an increase in the proportion of retail net sales.
As a percentage of net sales, general and administrative expenses increased 60 basis points to 16.7% in the three months ended July 30, 2017, compared to 16.1% in the three months ended July 31, 2016. The 60 basis point increase was primarily attributable to an increase of 70 basis points in occupancy and equipment cost due to growth in retail, coupled with an increase of 40 basis points in depreciation, which was partially offset by decrease of 50 basis points in personnel expenses due to operating leverage from higher sales.
Interest Expense
Interest expense was $0.4 million in the three months ended July 30, 2017, compared to $0.04 million in the three months ended July 31, 2016. The increase in interest expense was primarily attributable to our build-to-suit retail stores.
Provision for Income Taxes
Income tax expense was $2.7 million in the three months ended July 30, 2017, compared to $2.3 million in the three months ended July 31, 2016. Our effective tax rate related to controlling interest was 39%, for both the three months ended July 30, 2017 and July 30, 2016.
Net Income
Net income increased $0.7 million, or 18.4%, to $4.3 million in the three months ended July 30, 2017, compared to $3.6 million in the three months ended July 31, 2016, primarily due to the factors discussed above.
Six Months Ended July 30, 2017 Compared to Six Months Ended July 31, 2016
Net Sales
Net sales increased $35.5 million, or 26.4%, to $169.9 million in the six months ended July 30, 2017 compared to $134.5 million in the six months ended July 31, 2016, driven by gains in both direct and retail segments of $7.3 million, or 6.4%, and $28.2 million, or 138.9%, respectively, with gains across all product categories. Our website visits increased 18.0% in the six months ended July 30, 2017 compared to the six months ended July 31, 2016. The increase in retail net sales was primarily attributable to the same factors discussed above for the three months ended July 30, 2017 compared to the three months ended July 31, 2016.
20
Gross Profit
Gross profit increased $19.0 million, or 24.1%, to $97.6 million in the six months ended July 30, 2017 compared to $78.6 million in the six months ended July 31, 2016. As a percentage of net sales, gross margin decreased 110 basis points to 57.4% of net sales in the six months ended July 30, 2017, compared to 58.5% of net sales in the six months ended July 31, 2016. The decrease in gross margin rate was primarily due to the same factors discussed above for the three months ended July 30, 2017 compared to the three months ended July 31, 2016, which was partially offset by an increase in product margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $22.1 million, or 32.9%, to $89.4 million in the six months ended July 30, 2017 compared to $67.3 million in the six months ended July 31, 2016. Selling, general and administrative expenses as a percentage of net sales increased 260 basis points to 52.6% in the six months ended July 30, 2017, compared to 50.0% in the six months ended July 31, 2016. The increase in selling, general and administrative expenses was attributable to an increase of $7.2 million in advertising and marketing costs, $6.2 million in selling expenses and $8.7 million in general and administrative expenses.
As a percentage of net sales, advertising and marketing costs decreased 30 basis points to 21.2% in the six months ended July 30, 2017, compared to 21.5% in the six months ended July 31, 2016. The 30 basis point decrease in advertising and marketing costs as a percentage of net sales was primarily attributable to a decrease of 120 basis points in catalog costs due to our planned decrease spend in catalog as a percentage of net sales, which was partially offset by an increase of 80 basis points in television advertising primarily due to increase in women’s television advertising.
As a percentage of net sales, selling expenses increased 90 basis points to 14.3% in the six months ended July 30, 2017, compared to 13.4% in the six months ended July 31, 2016, primarily due to an increase of 140 basis points in customer service due to growth in retail, offset by a decrease of 50 basis points in shipping expenses attributable to the leverage from an increase in the proportion of retail net sales.
As a percentage of net sales, general and administrative expenses increased 200 basis points to 17.1% in the six months ended July 30, 2017, compared to 15.1% in the six months ended July 31, 2016. The 200 basis point increase was primarily attributable to an increase of 140 basis points in occupancy and equipment costs due to retail growth and an increase of 40 basis points in depreciation.
Interest Expense
Interest expense was $0.5 million in the six months ended July 30, 2017, compared to $0.1 million in the six months ended July 31, 2016. The increase in interest expense was primarily attributable to our build-to-suit retail stores.
Provision for Income Taxes
Income tax expense was $2.9 million in the six months ended July 30, 2017, compared to $4.4 million in the six months ended July 31, 2016. Our effective tax rate related to controlling interest was 39%, for both the six months ended July 30, 2017 and July 31, 2016.
Net Income
Net income decreased $2.2 million, or 32.4%, to $4.6 million in the six months ended July 30, 2017, compared to $6.9 million in the six months ended July 31, 2016, primarily due to the factors discussed above.
21
Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net income to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-GAAP financial measures, for the periods indicated below. See the above section titled “How We Assess the Performance of Our Business,” for our definition of Adjusted EBITDA.
|
Three Months Ended |
Six Months Ended |
||||||||||
|
July 30, 2017 |
July 31, 2016 |
July 30, 2017 |
July 31, 2016 |
||||||||
(in thousands) |
||||||||||||
Net income |
$ |
4,353 |
$ |
3,684 |
$ |
4,768 |
$ |
6,996 | ||||
Depreciation and amortization |
1,728 | 1,082 | 3,280 | 1,951 | ||||||||
Interest expense |
372 | 37 | 538 | 75 | ||||||||
Income tax expense |
2,709 | 2,325 | 2,934 | 4,386 | ||||||||
EBITDA |
$ |
9,162 |
$ |
7,128 |
$ |
11,520 |
$ |
13,408 | ||||
Non-cash stock based compensation |
293 | 335 | 617 | 615 | ||||||||
Adjusted EBITDA |
$ |
9,455 |
$ |
7,463 |
$ |
12,137 |
$ |
14,023 |
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $2.0 million, or 26.7%, to $9.5 million in the three months ended July 30, 2017 compared to $7.5 million in the three months ended July 31, 2016. As a percentage of net sales, Adjusted EBITDA decreased 30 basis points to 11.0% of net sales in the three months ended July 30, 2017 compared to 11.3% of net sales in the three months ended July 31, 2016.
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $1.9 million, or 13.4%, to $12.1 million in the six months ended July 30, 2017 compared to $14.0 million in the six months ended July 31, 2016. As a percentage of net sales, Adjusted EBITDA decreased 330 basis points to 7.1% of net sales in the six months ended July 30, 2017 compared to 10.4% of net sales in the six months ended July 31, 2016.
Liquidity and Capital Resources
General
Our business relies on cash from operating activities, as well as cash on hand and a revolving line of credit as our primary sources of liquidity, which was increased effective August 1, 2017, from $40.0 million to $50.0 million through July 31, 2018. Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, capital expenditures associated with opening new stores, infrastructure and information technology. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities.
We expect to spend approximately $38.0 million to $42.0 million in fiscal 2017 on capital expenditures, including a total of approximately $28.0 million to $32.0 million for new retail store expansion. We expect it will take approximately $2.0 million to $2.6 million in capital expenditures and starting inventory to open a new store. At July 30, 2017, our net working capital was $58.3 million, including $1.4 million of cash. 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. During the first three quarters of our fiscal year, we typically are net users of cash in our operating activities as we acquire inventory in anticipation of our peak selling season, which occurs in 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 balance as of July 30, 2017, combined with cash flow from operating activities and the availability of cash under our revolving line of credit will be sufficient to cover working capital requirements and anticipated capital expenditures and for funding our growth strategy for the foreseeable future.
22
Cash Flow Analysis
A summary of operating, investing and financing activities is shown in the following table.
|
Six Months Ended |
|||||
|
July 30, 2017 |
July 31, 2016 |
||||
(in thousands) |
||||||
Net cash (used in) provided by operating activities |
$ |
(12,168) |
$ |
1,072 | ||
Net cash used in investing activities |
(27,651) | (15,307) | ||||
Net cash provided by (used in) financing activities |
17,188 | (336) | ||||
Decrease in cash |
$ |
(22,631) |
$ |
(14,571) |
Net Cash (used in) provided by Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, loss on disposal of property, equipment and other assets, stock-based compensation and the effect of changes in assets and liabilities.
While our cash flows from operations for the six months ended July 31, 2017 is negative, primarily driven by the seasonal nature of our business, we expect cash flows from operations for the full year fiscal 2017 to be positive from normal operating performance and seasonal reductions in working capital during the fourth quarter of our fiscal year, which is consistent with previous full fiscal years.
For the six months ended July 30, 2017, net cash used in operating activities was $12.2 million, which consisted of net income of $4.8 million, non-cash depreciation and amortization of $3.3 million and stock based compensation of $0.6 million, offset by cash used in operating assets and liabilities of $20.4 million. The cash used in operating assets and liabilities of $20.4 million primarily consisted of $12.9 million increase in inventory, primarily due to sales increase and building up of inventory for the opening of new retail stores during fiscal 2017 and our peak season, , $7.5 million decrease in accrued expenses and deferred rent obligations and $4.9 million decrease in income taxes payable primarily due to timing of payments, which was partially offset by an increase in trade accounts payable of $6.6 million.
For the six months ended July 31, 2016, net cash provided operating activities was $1.1 million, which primarily consisted of net income of $7.0 million, non-cash depreciation and amortization of $2.0 million and stock based compensation of $0.6 million, offset by cash used in operating assets and liabilities of $8.3 million. The cash used in operating assets and liabilities of $8.3 million primarily consisted of $10.9 million increase in inventory, due to building up of inventory for our peak season, coupled with plans for opening of new retail stores in fiscal 2016, and a $2.8 million decrease in accrued expenses, which was partially offset by an increase of $5.6 in trade accounts payable primarily attributable to the timing.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth related to new store openings, information technology and enhancements for our distribution and corporate facilities, coupled with changes in restricted cash, which is related to our retail store leasing agreements.
For the six months ended July 30, 2017, net cash used in investing activities was $27.7 million and was primarily driven by capital expenditures of $20.1 million for the opening of seven new retail stores and investments in information technology, $6.5 million increase in other assets primarily related to funds advanced to the Company’s developer in connection with building our headquarters, see Note 11 “Subsequent Events,” of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and a change in restricted cash of $1.0 million.
For the six months ended July 31, 2016, net cash used in investing activities was $15.3 million and was primarily driven by capital expenditures of $14.5 million for the expansion of our Belleville distribution center and additional new retail stores.
Net Cash Provided by (used in) Financing Activities
Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-term debts, as well as distributions to the individuals and entities that were our shareholders prior to our IPO and holders of noncontrolling interest in variable interest entity, proceeds from finance lease obligations and capital contributions to Schlecht Retail Ventures LLC.
For the six months ended July 30, 2017, net cash provided by financing activities was $17.2 million, primarily consisting of proceeds of $11.9 million, net from our revolving line of credit, $0.8 million from long-term debt, $2.3 million in change in
23
bank overdraft, $1.3 million from our finance lease obligations in connection with our build-to-suit lease transactions and $0.8 million for capital contributions to SRV.
For the six months ended July 31, 2016, net cash used in financing activities was $0.3 million, primarily consisting of the final $0.2 million distributions to our pre-IPO shareholders due to the termination of our “S” corporation status and $0.1 million payments on long-term debt.
Line of Credit
The Amended and Restated Loan Agreement dated as of October 7, 2016 (the “Amended and Restated Agreement”) provides for borrowing availability of up to $40.0 million from October 7, 2016 through July 31, 2017, up to $50.0 million from August 1, 2017 through July 31, 2018 and up to $60.0 million from August 1, 2018 through July 31, 2019. The Amended and Restated Agreement matures on July 31, 2019, and bears interest, payable monthly, at a rate equal to the adjusted LIBOR rate, as defined in the Amended and Restated Agreement (effective rate of 2.3% at July 30, 2017). The Amended and Restated Agreement is secured by essentially all Company assets and requires that we maintain compliance with certain financial and non-financial covenants, including minimum tangible net worth and a minimum trailing twelve month EBITDA. In addition, the Amended and Restated Agreement does not contain borrowing base limits. As of July 30, 2017 and for the six months then ended, we were in compliance with all financial and non-financial covenants, and we expect to be in compliance with all financial and non-financial covenants for the remainder of fiscal 2017.
Contractual Obligations
Except as discussed in Note 11 “Subsequent Events,” of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, 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, 2017.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, except for operating leases.
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 Annual Report on Form 10-K for the fiscal year ended January 29, 2017.
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition model requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of the performance obligations. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and change in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. Accordingly, we will adopt ASU 2014-09 on January 29, 2018, the first day of our first quarter for the fiscal year ending February 3, 2019, our fiscal year 2018. We expect to adopt ASU 2014-09 retrospectively with the cumulative effect of initially applying the
24
update recognized at the date of the adoption along with additional disclosures. Our review is ongoing and we have not yet identified any material changes in the timing of revenue recognition. We continue to evaluate the new disclosure requirements of ASU 2014-09 on our consolidated financial statements.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”), which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The provisions of ASU 2015-11 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2015-11 as of January 30, 2017, the first day of our fiscal year 2017 and there was no significant impact to our consolidated financial statements.
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”), which requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. In addition, an allocation of valuation allowances between current and noncurrent deferred tax assets is not required, because the allowances will be classified as noncurrent. The provisions of ASU 2015-17 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2015-17 as of January 31, 2016 and have reported deferred tax assets and liabilities as noncurrent on the consolidated balance sheets.
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on the balance sheets, but recognize expenses on the income statements in a manner which is similar to the current lease standard. The provisions of ASU 2016-02 are effective for public entities with fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We expect to early adopt ASU 2016-02 on January 29, 2018, the first day of our first quarter for the fiscal year ending February 3, 2019, our fiscal year 2018. We conduct our retail operations through leased stores and therefore, we expect the adoption of ASU 2016-02 to have a significant impact on our consolidated financial statements.
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to improve the accounting for share-based payment transactions. ASU 2016-09 changes certain aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The provisions of ASU 2016-09 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those years, early adoption is permitted. We adopted ASU 2016-09 as of May 1, 2016 and there was no significant impact to our consolidated financial statements.
Statement of Cash Flows
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for public entities with fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We expect to adopt ASU 2016-18 on January 29, 2018, the first day of our first quarter for the fiscal year ending February 3, 2019, our fiscal year 2018. We are evaluating the level of impact of adopting ASU 2016-18 will have on our consolidated financial statements.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risks described in our 2016 Form 10-K. See Note 2 “Debt and Line of Credit,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this Form 10-Q, for disclosure on our interest rate related to our line of credit.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Section 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires management of an issuer subject to the Exchange Act to evaluate, with the participation of the issuer’s principal executive and principal financial officers, or persons performing similar functions, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of each fiscal quarter. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change 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 has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
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.
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 Annual Report on Form 10-K for the fiscal year ended January 29, 2017. There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any equity securities during the quarter ended July 30, 2017, which were not registered under the Securities Act.
Please refer to the Exhibit Index.
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: September 6, 2017 |
|
||
|
DULUTH HOLDINGS INC. |
||
|
/s/ DAVID LORETTA |
||
|
|
David Loretta |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
(On behalf of the Registrant as Principal Financial Officer and Principal Accounting Officer) |
27
EXHIBIT INDEX
|
|
|
|
|
|
Exhibit No. |
|
10.1+ |
|
10.2+ |
|
10.3+ |
|
10.4+ |
|
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** |
+ |
Indicates management contract or compensation plan or arrangement. |
* |
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.” |
28
Summary of Outside Director Compensation Program
Annual Retainers
Director |
$40,000 |
Paid quarterly at beginning of quarter |
|
|
|
Chair of Audit Committee |
+$15,000 |
Paid quarterly |
|
|
|
Chair of Compensation Committee |
+$10,000 |
Paid quarterly |
|
|
|
Chair of Nominating and Governance Committee |
+$7,500 |
Paid quarterly |
|
|
|
Non-chair Audit Committee member |
+$5,000 |
Paid quarterly |
|
|
|
Non-chair Compensation Committee member |
+$5,000 |
Paid quarterly |
|
|
|
Non-chair Nominating and Governance Committee member |
+$4,000 |
Paid quarterly |
Note: All travel expenses paid based on voucher.
STOCK COMPENSATION: |
$40,000/year; each grant subject to one year vesting; stock compensation granted in May of each year. |
Note: For subsequent new Board members who join Board mid-year, cash and stock compensation is pro-rated.
CERTIFICATIONS
I, Stephanie L. Pugliese, Chief Executive Officer, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 6, 2017
/s/ Stephanie L. Pugliese |
Stephanie L. Pugliese |
Chief Executive Officer |
CERTIFICATIONS
I, David Loretta, Chief Financial Officer, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 6, 2017
/s/ David Loretta |
David Loretta |
Chief Financial Officer |
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “Company”) for the quarterly period ended July 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephanie L. Pugliese, 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:
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 |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ Stephanie L. Pugliese |
Name: |
Stephanie L. Pugliese |
Title: |
Chief Executive Officer |
Date: |
September 6, 2017 |
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.
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Duluth Holdings Inc. (the “Company”) for the quarterly period ended July 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Loretta, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
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 |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ David Loretta |
Name: |
David Loretta |
Title: |
Chief Financial Officer |
Date: |
September 6, 2017 |
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.