Duluth Holdings Inc. (NASDAQ:DLTH) Q3 2020 Earnings Conference Call December 3, 2020 9:30 AM ET Company Participants Donni Case - IR Steve Schlecht - CEO Dave Loretta - CFO Conference Call Participants Jonathan Komp - Robert W. Baird Jim Duffy - Stifel Dylan Carden - William Blair Richard Hayden - THC Operator Good morning, and welcome to the Duluth Holdings Third Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an ...

[PART I. FINANCIAL INFORMATION](index=2&type=section&id=Part%20I%E2%80%94Financial%20Information) This section presents the company's unaudited condensed consolidated financial statements and management's analysis of financial condition and results of operations [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, shareholders' equity, cash flows, and detailed notes on accounting policies and financial disclosures [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | ASSETS (in thousands) | August 2, 2020 | February 2, 2020 | | :-------------------------------------- | :------------- | :--------------- | | Cash and cash equivalents | $19,005 | $2,189 | | Inventory, less reserves | $167,584 | $147,849 | | Total current assets | $201,793 | $162,192 | | Property and equipment, net | $136,448 | $137,071 | | Total assets | $506,183 | $474,050 | | LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands) | August 2, 2020 | February 2, 2020 | | :-------------------------------------------------- | :------------- | :--------------- | | Trade accounts payable | $40,141 | $33,053 | | Total current liabilities | $84,121 | $79,775 | | Duluth long-term debt, less current maturities | $77,000 | $38,332 | | Total liabilities | $338,783 | $297,944 | | Total shareholders' equity | $167,400 | $176,106 | | Total liabilities and shareholders' equity | $506,183 | $474,050 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) | (in thousands, except per share figures) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net sales | $137,375 | $121,963 | $247,292 | $236,207 | | Gross profit | $72,472 | $64,804 | $124,804 | $125,722 | | Operating income (loss) | $9,792 | $3,735 | $(9,182) | $(6,369) | | Net income (loss) | $5,898 | $1,846 | $(9,281) | $(5,799) | | Net income (loss) attributable to controlling interest | $5,941 | $1,936 | $(9,194) | $(5,636) | | Basic earnings (loss) per share | $0.18 | $0.06 | $(0.28) | $(0.17) | [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) | (in thousands) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) | $5,898 | $1,846 | $(9,281) | $(5,799) | | Other comprehensive income | $248 | $0 | $(270) | $0 | | Comprehensive income (loss) | $6,146 | $1,846 | $(9,551) | $(5,799) | | Comprehensive income (loss) attributable to controlling interest | $6,189 | $1,936 | $(9,464) | $(5,636) | [Condensed Consolidated Statement of Shareholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statement%20of%20Shareholders%27%20Equity) | (in thousands) | Balance at February 2, 2020 | Balance at August 2, 2020 | | :------------- | :-------------------------- | :------------------------ | | Capital stock | $90,902 | $91,921 | | Retained earnings | $87,589 | $78,395 | | Total shareholders' equity | $176,106 | $167,400 | - The company reported a net loss of **$15.1 million** for the period ended May 3, 2020, and a net income of **$5.9 million** for the period ended August 2, 2020, impacting retained earnings[21](index=21&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | (in thousands) | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :------------- | :------------------------------ | :------------------------------ | | Net cash used in operating activities | $(12,802) | $(8,045) | | Net cash used in investing activities | $(9,135) | $(16,713) | | Net cash provided by financing activities | $38,865 | $27,829 | | Increase in cash, cash equivalents and restricted cash | $16,928 | $3,071 | | Cash, cash equivalents and restricted cash at end of period | $19,168 | $6,156 | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION](index=10&type=section&id=1.%20NATURE%20OF%20OPERATIONS%20AND%20BASIS%20OF%20PRESENTATION) - Duluth Holdings Inc. is a lifestyle brand of men's and women's casual wear, workwear, and accessories, sold exclusively through its direct (website and catalogs) and retail channels[30](index=30&type=chunk) - As of August 2, 2020, the Company operated **59 retail stores** and **three outlet stores**[31](index=31&type=chunk) - Effective February 3, 2020, the Company updated its segment reporting to one reportable external segment, consistent with its omnichannel business approach, due to the similar nature of products, production, distribution, target customers, and economic characteristics across channels[31](index=31&type=chunk)[118](index=118&type=chunk) - The COVID-19 pandemic negatively impacted business operations and financial performance for the three and six months ended August 2, 2020, leading to temporary store closures and operational adjustments[35](index=35&type=chunk)[37](index=37&type=chunk) - The Company performed interim impairment assessments for intangible assets, long-lived assets, and goodwill at May 3, 2020, due to COVID-19 indicators, concluding no impairment losses were incurred[38](index=38&type=chunk)[39](index=39&type=chunk) - Inventory is valued at the lower of cost and net realizable value using the first-in, first-out method, with significant estimates for obsolescence and shrinkage[41](index=41&type=chunk) - The business is seasonal, with a significant portion of revenue and operating profit historically recognized in the fourth fiscal quarter due to the holiday season[44](index=44&type=chunk) | (in thousands) | August 2, 2020 | February 2, 2020 | | :------------- | :------------- | :--------------- | | Cash and cash equivalents | $19,005 | $2,189 | | Restricted Cash | $163 | $51 | | Total cash, cash equivalents and restricted cash | $19,168 | $2,240 | - The Company adopted ASU No. 2018-15 on February 3, 2020, regarding accounting for cloud computing arrangement implementation costs, which did not have a material impact on financial statements[52](index=52&type=chunk) [2. LEASES](index=12&type=section&id=2.%20LEASES) - The Company recognizes Right-of-Use (ROU) assets and lease liabilities for non-cancelable retail space leases, which expire through **2036**, with initial terms of **five to fifteen years**[53](index=53&type=chunk)[54](index=54&type=chunk) - Due to COVID-19, the Company negotiated rent deferrals of approximately **$1.1 million** for April and May 2020, recorded as accrued expenses, without applying lease modification guidance[59](index=59&type=chunk) Lease Expense (in thousands) | Lease Expense (in thousands) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :--------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Total finance lease expense | $1,343 | $760 | $2,438 | $1,060 | | Operating lease expense | $4,495 | $3,609 | $8,631 | $7,159 | | Total lease expense | $11,739 | $6,674 | $19,055 | $12,350 | Lease Information | Lease Information | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :---------------- | :------------------------------ | :------------------------------ | | Weighted-average remaining lease term (Finance leases) (years) | 14 | 15 | | Weighted-average remaining lease term (Operating leases) (years) | 10 | 10 | | Weighted-average discount rate (Finance leases) (%) | 4.5 | 4.5 | | Weighted-average discount rate (Operating leases) (%) | 4.3 | 4.3 | Future Minimum Lease Payments (in thousands) as of August 2, 2020 | Fiscal year | Finance (in thousands) | Operating (in thousands) | | :---------------------------------------------------------------- | :--------------------- | :----------------------- | | 2020 (remainder) | $1,670 | $7,501 | | 2021 | $3,368 | $14,881 | | Thereafter | $37,519 | $70,828 | | Total future minimum lease payments | $52,801 | $137,791 | | Less – Discount | $14,203 | $25,874 | | Lease liability | $38,598 | $111,917 | [3. DEBT AND LINE OF CREDIT](index=14&type=section&id=3.%20DEBT%20AND%20LINE%20OF%20CREDIT) Debt (in thousands) | Debt (in thousands) | August 2, 2020 | February 2, 2020 | | :------------------ | :------------- | :--------------- | | TRI Senior Secured Note | $24,601 | $24,835 | | TRI Note | $3,500 | $3,500 | | Duluth Line of credit | $30,000 | $19,332 | | Duluth Delayed draw term loan | $49,500 | $20,000 | | Total Duluth long-term debt | $77,000 | $38,332 | - The Company's credit facility provides for up to **$80.0 million** in revolving credit and up to **$50.0 million** in a delayed draw term loan (DDTL), totaling **$130.0 million**, maturing on **May 17, 2023**[66](index=66&type=chunk) - On April 30, 2020, the Credit Agreement was amended to include an incremental DDTL of **$20.5 million**, increasing the total credit facility to **$150.5 million**, and loan covenants were amended for greater flexibility[69](index=69&type=chunk) - As of August 2, 2020, the Company was in compliance with all financial and non-financial covenants for all debts[69](index=69&type=chunk) [4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES](index=15&type=section&id=4.%20Accrued%20Expenses%20and%20Other%20Current%20Liabilities) Accrued Expenses and Other Current Liabilities (in thousands) | Accrued Expenses and Other Current Liabilities (in thousands) | August 2, 2020 | February 2, 2020 | | :------------------------------------------------------------ | :------------- | :--------------- | | Salaries and benefits | $4,139 | $2,775 | | Deferred revenue | $7,749 | $9,946 | | Freight | $4,946 | $5,404 | | Product returns | $3,966 | $3,508 | | Total accrued expenses and other current liabilities | $28,816 | $29,464 | [5. FAIR VALUE](index=15&type=section&id=5.%20FAIR%20VALUE) - The fair value of the Company's available-for-sale security is valued based on a discounted cash flow method (Level 3), incorporating the U.S. Treasury yield curve, credit information, and estimated future cash flows[73](index=73&type=chunk) (in thousands) Level 3 security: Corporate trust | (in thousands) Level 3 security: Corporate trust | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | | :----------------------------------------------- | :--------------------- | :--------------------- | :---------------------- | :------------------- | | August 2, 2020 | $6,115 | $0 | $111 | $6,004 | | February 2, 2020 | $6,178 | $254 | $0 | $6,432 | - The Company does not intend to sell the available-for-sale security in the near term and expects to recover its entire amortized cost basis, thus no other-than-temporary impairment was recorded[76](index=76&type=chunk)[77](index=77&type=chunk) [6. VARIABLE INTEREST ENTITY](index=17&type=section&id=6.%20VARIABLE%20INTEREST%20ENTITY) - The Company consolidates TRI Holdings, LLC (TRI) as a variable interest entity (VIE) because it has a controlling financial interest, directing TRI's activities and absorbing its losses/receiving benefits[82](index=82&type=chunk)[83](index=83&type=chunk) - TRI's primary purpose is to own the real property for the Company's headquarters, which the Company leases[83](index=83&type=chunk) (in thousands) | (in thousands) | August 2, 2020 | February 2, 2020 | | :------------- | :------------- | :--------------- | | TRI Total assets | $25,992 | $26,260 | | TRI Long-term debt | $27,512 | $27,778 | | Noncontrolling interest in VIE | $(2,253) | $(2,166) | | Total liabilities and shareholders' equity | $25,992 | $26,260 | [7. EARNINGS (LOSS) PER SHARE](index=17&type=section&id=7.%20EARNINGS%20(LOSS)%20PER%20SHARE) (in thousands, except per share data) | (in thousands, except per share data) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) attributable to controlling interest | $5,941 | $1,936 | $(9,194) | $(5,636) | | Basic earnings (loss) per share | $0.18 | $0.06 | $(0.28) | $(0.17) | | Diluted earnings (loss) per share | $0.18 | $0.06 | $(0.28) | $(0.17) | - Diluted earnings (loss) per share computations excluded unvested restricted stock for the three months ended August 2, 2020, and for both six-month periods, as their inclusion would be anti-dilutive due to a net loss[88](index=88&type=chunk) [8. STOCK-BASED COMPENSATION](index=18&type=section&id=8.%20STOCK-BASED%20COMPENSATION) Stock Compensation Expense (in thousands) | Stock Compensation Expense (in thousands) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Total stock compensation expense | $0.4 | $0.5 | $0.8 | $0.9 | - As of August 2, 2020, the Company had unrecognized compensation expense of **$2.8 million** related to restricted stock awards, expected to be recognized over a weighted average period of **3.2 years**[91](index=91&type=chunk) Unvested Restricted Stock Activity (Six Months Ended August 2, 2020) | Unvested Restricted Stock Activity (Six Months Ended August 2, 2020) | Shares | Weighted average fair value per share ($) | | :--------------------------------------------------- | :-------- | :---------------------------------------- | | Outstanding at February 2, 2020 | 192,094 | $17.71 | | Granted | 278,675 | $7.16 | | Vested | (111,654) | $17.26 | | Forfeited | (15,996) | $10.10 | | Outstanding at August 2, 2020 | 343,119 | $12.02 | [9. PROPERTY AND EQUIPMENT](index=18&type=section&id=9.%20PROPERTY%20AND%20EQUIPMENT) Property and Equipment, net (in thousands) | Property and Equipment, net (in thousands) | August 2, 2020 | February 2, 2020 | | :--------------------------------------- | :------------- | :--------------- | | Land and land improvements | $4,486 | $4,486 | | Leasehold improvements | $43,114 | $42,757 | | Buildings | $35,905 | $35,903 | | Construction in progress | $14,535 | $5,799 | | Property and equipment, net | $136,448 | $137,071 | [10. REVENUE](index=19&type=section&id=10.%20REVENUE) - Revenue primarily consists of apparel, footwear, and hard goods sales, recognized upon shipment for direct-to-consumer and at point of sale for retail stores[95](index=95&type=chunk) Sales by Channel (in thousands) | Sales by Channel (in thousands) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Direct-to-consumer | $100,581 | $60,267 | $187,111 | $125,968 | | Stores | $36,794 | $61,696 | $60,181 | $110,239 | | Total | $137,375 | $121,963 | $247,292 | $236,207 | Contract Assets and Liabilities (in thousands) | Contract Assets and Liabilities (in thousands) | August 2, 2020 | February 2, 2020 | | :--------------------------------------------- | :------------- | :--------------- | | Contract assets | $1,768 | $1,932 | | Contract liabilities | $7,593 | $9,790 | Gift Card Liability Reconciliation (in thousands) | Gift Card Liability Reconciliation (in thousands) | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | | Balance as of beginning of period | $9,790 | $8,508 | | Gift cards sold | $4,059 | $3,974 | | Gift cards redeemed | $(5,211) | $(5,552) | | Gift card breakage | $(1,045) | $0 | | Balance as of end of period | $7,593 | $6,930 | [11. INCOME TAXES](index=20&type=section&id=11.%20INCOME%20TAXES) - The effective tax rate related to controlling interest was **24%** for the three months ended August 2, 2020, and **26%** for the six months ended August 2, 2020, compared to **26%** for both periods in the prior year[102](index=102&type=chunk) - The CARES Act, enacted in March 2020, did not materially impact the effective tax rate for the three and six months ended August 2, 2020, but the Company continues to evaluate its future impact[103](index=103&type=chunk) [12. RECENT ACCOUNTING PRONOUNCEMENTS](index=20&type=section&id=12.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) - The Company expects to adopt ASU 2016-13, 'Financial Instruments-Credit Losses (Topic 326),' on **January 30, 2023**, and is evaluating its impact on consolidated financial statements[104](index=104&type=chunk) [13. SUBSEQUENT EVENTS](index=20&type=section&id=13.%20SUBSEQUENT%20EVENTS) - The Company has evaluated subsequent events through the date of issuance and determined no material subsequent events require disclosure[105](index=105&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operational results, highlighting COVID-19 impact, key metrics, and growth strategies [Overview](index=21&type=section&id=Overview) - Duluth Holdings Inc. is a lifestyle brand of men's and women's casual wear, workwear, and accessories, operating an omnichannel platform with **59 retail stores** and **three outlet stores** as of August 2, 2020[110](index=110&type=chunk) - The company focuses on innovative, durable, and functional products, building strong brand awareness and a loyal customer base[111](index=111&type=chunk)[113](index=113&type=chunk) Financial Results Summary (in millions) | Financial Results Summary (in millions) | Q2 FY2020 | Q2 FY2019 | H1 FY2020 | H1 FY2019 | | :------------------------------------ | :-------- | :-------- | :-------- | :-------- | | Net sales | $137.4 | $122.0 | $247.3 | $236.2 | | Net income (loss) | $5.9 | $1.9 | $(9.2) | $(5.6) | | Adjusted EBITDA | $16.8 | $9.6 | $5.2 | $4.7 | - Net sales in fiscal 2020 second quarter increased by **12.6%** over the prior year, and net sales in the first six months of fiscal 2020 increased by **4.7%**[114](index=114&type=chunk) - Adjusted EBITDA increased by **75.3%** in fiscal 2020 second quarter and **9.6%** in the first six months of fiscal 2020[114](index=114&type=chunk) - The business is seasonal, with historically higher net sales in the fourth fiscal quarter due to the holiday selling season[116](index=116&type=chunk) - Growth strategies include building brand awareness, selective retail expansion, broadening men's product assortments, and growing the women's business, with an emphasis on profitability[117](index=117&type=chunk) [COVID-19](index=22&type=section&id=COVID-19) - The COVID-19 pandemic negatively affected the U.S. and global economies, disrupting supply chains and financial markets, and leading to business closures[120](index=120&type=chunk) - Company actions in response to COVID-19 included temporary store closures, operational changes for social distancing, work-from-home for corporate employees, amending the Credit Agreement for flexibility, cost reductions, furloughs, pay reductions for senior leadership, and reduced capital spend[121](index=121&type=chunk)[123](index=123&type=chunk) - All **62 retail stores** re-opened by **June 15, 2020**, but prolonged safety concerns are expected to keep store traffic subdued through fiscal 2020[124](index=124&type=chunk) - Due to better-than-expected performance, the CEO's base salary and senior leadership's pay reductions will be reinstated/expire as planned in **October 2020**[124](index=124&type=chunk) - The ultimate impact of COVID-19 remains uncertain and depends on future developments, including the pandemic's duration and spread, and government actions[125](index=125&type=chunk) [How We Assess the Performance of Our Business](index=23&type=section&id=How%20We%20Assess%20the%20Performance%20of%20Our%20Business) - Net sales include merchandise sales plus shipping and handling revenue, less returns and discounts, recognized upon shipment for direct-to-consumer and at point of sale for retail stores[127](index=127&type=chunk) - Gross profit is net sales less cost of goods sold, with gross margin as a percentage of net sales[128](index=128&type=chunk) - Cost of goods sold includes direct merchandise cost, inventory shrinkage, adjustments, and inbound/store freight[128](index=128&type=chunk) - Selling, general and administrative (SG&A) expenses include payroll, occupancy, marketing (television, catalog, print), logistics, consulting, and professional services[130](index=130&type=chunk) - SG&A as a percentage of net sales is typically higher in lower-volume quarters[130](index=130&type=chunk) - Adjusted EBITDA is a non-U.S. GAAP measure defined as consolidated net income (loss) before depreciation, amortization, interest, and income taxes, adjusted for non-cash and other non-recurring items, used to assess operating performance[132](index=132&type=chunk)[133](index=133&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) | (in thousands) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net sales | $137,375 | $121,963 | $247,292 | $236,207 | | Gross profit | $72,472 | $64,804 | $124,804 | $125,722 | | Operating income (loss) | $9,792 | $3,735 | $(9,182) | $(6,369) | | Net income (loss) attributable to controlling interest | $5,941 | $1,936 | $(9,194) | $(5,636) | | Gross margin | 52.8% | 53.1% | 50.5% | 53.2% | | SG&A as % of net sales | 45.6% | 50.1% | 54.2% | 55.9% | - For the three months ended August 2, 2020, net sales increased **12.6%** to **$137.4 million**, driven by a **58.6%** increase in non-store market sales, partially offset by a **1.8%** decrease in store market sales due to temporary closures[136](index=136&type=chunk)[137](index=137&type=chunk) - Gross margin decreased to **52.8%** (from **53.1%**) for the three months ended August 2, 2020, due to promotional and clearance events, partially offset by reduced store delivery costs and favorable inventory count results[138](index=138&type=chunk)[139](index=139&type=chunk) - SG&A expenses as a percentage of net sales decreased to **45.6%** (from **50.1%**) for the three months ended August 2, 2020, primarily due to a shift to more efficient digital marketing[140](index=140&type=chunk) - For the six months ended August 2, 2020, net sales increased **4.7%** to **$247.3 million**, with non-store market sales up **41.7%** and store market sales down **8.3%** due to closures[144](index=144&type=chunk)[145](index=145&type=chunk) - Gross profit decreased **0.7%** to **$124.8 million** for the six months ended August 2, 2020, with gross margin decreasing to **50.5%** (from **53.2%**) due to promotional and clearance events during store closures[146](index=146&type=chunk) - SG&A expenses as a percentage of net sales decreased to **54.2%** (from **55.9%**) for the six months ended August 2, 2020[147](index=147&type=chunk) [Reconciliation of Net Income (Loss) to EBITDA and EBITDA to Adjusted EBITDA](index=27&type=section&id=Reconciliation%20of%20Net%20Income%20(Loss)%20to%20EBITDA%20and%20EBITDA%20to%20Adjusted%20EBITDA) | (in thousands) | Three Months Ended August 2, 2020 | Three Months Ended August 4, 2019 | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) | $5,898 | $1,846 | $(9,281) | $(5,799) | | EBITDA | $16,343 | $9,005 | $4,316 | $3,711 | | Adjusted EBITDA | $16,761 | $9,560 | $5,197 | $4,740 | - Adjusted EBITDA increased by **$7.2 million** (**75.3%**) to **$16.8 million** for the three months ended August 2, 2020, and by **$0.5 million** (**9.6%**) to **$5.2 million** for the six months ended August 2, 2020[152](index=152&type=chunk)[153](index=153&type=chunk) - As a percentage of net sales, Adjusted EBITDA increased to **12.2%** (from **7.8%**) for the three months and to **2.1%** (from **2.0%**) for the six months ended August 2, 2020[152](index=152&type=chunk)[153](index=153&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) - Primary liquidity sources are cash from operating activities and a credit facility[154](index=154&type=chunk) - Cash needs include inventory, marketing, payroll, store leases, and capital expenditures for new stores and IT[154](index=154&type=chunk) - Net working capital was **$117.7 million**, including **$19.0 million** in cash and cash equivalents, as of August 2, 2020[154](index=154&type=chunk) - Expected capital expenditures for fiscal 2020 are approximately **$15.0 million**, a **50% reduction** from the initial plan, with **$8.0 million** allocated for new retail store expansion and point of sale upgrades[155](index=155&type=chunk) - The Company anticipates positive cash flows from operations for the full fiscal year 2020, despite negative cash flows in the first half due to seasonality and COVID-19[160](index=160&type=chunk) Cash Flow Analysis (in thousands) | Cash Flow Analysis (in thousands) | Six Months Ended August 2, 2020 | Six Months Ended August 4, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net cash used in operating activities | $(12,802) | $(8,045) | | Net cash used in investing activities | $(9,135) | $(16,713) | | Net cash provided by financing activities | $38,865 | $27,829 | - Net cash used in operating activities for the six months ended August 2, 2020, was **$12.8 million**, primarily due to a net loss and a **$19.7 million** increase in inventory[161](index=161&type=chunk) - Net cash used in investing activities was **$9.1 million**, mainly for capital expenditures of **$8.8 million** for new retail stores and IT investments[163](index=163&type=chunk) - Net cash provided by financing activities was **$38.9 million**, primarily from **$29.5 million** (net) from the term loan and **$10.7 million** (net) from the revolving line of credit[165](index=165&type=chunk) - The Credit Agreement was amended on **April 30, 2020**, to include an incremental delayed draw term loan of **$20.5 million**, increasing the total credit facility to **$150.5 million**[167](index=167&type=chunk) - There have been no significant changes to contractual obligations or material off-balance sheet arrangements[169](index=169&type=chunk)[170](index=170&type=chunk) - The Company adopted new accounting guidance for cloud computing arrangement implementation costs on **February 3, 2020**, with no restatement of prior periods[173](index=173&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states no significant changes in market risks from the 2019 Form 10-K, referring to Note 3 for interest rate risk disclosures - No significant changes in market risks were identified compared to the 2019 Form 10-K[177](index=177&type=chunk) - Disclosures on interest rate risks related to borrowings under the credit agreement are provided in Note 3[177](index=177&type=chunk) [Item 4. Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures as of August 2, 2020, with no material changes or COVID-19 impacts on internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of **August 2, 2020**[178](index=178&type=chunk) - No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report on Form 10-Q[179](index=179&type=chunk) - COVID-19 and remote work did not materially impact the Company's ability to maintain internal control over financial reporting and disclosure controls and procedures for the six months ended August 2, 2020[180](index=180&type=chunk) [PART II. OTHER INFORMATION](index=30&type=section&id=Part%20II%E2%80%94Other%20Information) This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report [Item 1. Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) The Company is not party to any legal proceedings expected to have a material adverse effect on its business, establishing reserves for probable and estimable losses - The Company is not currently involved in any legal proceedings expected to have a material adverse effect on its business[181](index=181&type=chunk) - Reserves are established for legal matters when an unfavorable outcome is probable and the loss is reasonably estimable[181](index=181&type=chunk) [Item 1A. Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) This section notes no material changes to risk factors, except for the ongoing adverse effects of COVID-19 on operations, store traffic, and distribution networks - No material changes to risk factors were identified, except for the ongoing adverse effects of the COVID-19 pandemic[182](index=182&type=chunk)[183](index=183&type=chunk) - The COVID-19 pandemic may continue to adversely affect store traffic, potentially leading to reduced store hours or closures, and further loss of retail sales and profits[184](index=184&type=chunk) - The pandemic and surge in online purchasing may cause significant disruptions to the distribution network, including increased surcharges and insufficient shipping thresholds from primary delivery providers like UPS, potentially leading to higher expenses, delayed shipments, and lost sales[186](index=186&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=31&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Company did not sell unregistered equity securities during the quarter, detailing shares acquired from employees for tax withholding upon restricted stock vesting - No unregistered equity securities were sold during the quarter ended **August 2, 2020**[188](index=188&type=chunk) Shares Acquired from Employees to Satisfy Minimum Tax Withholding Requirements | Period | Total number of shares purchased (shares) | Average price per share ($) | | :------------------------ | :---------------------------------------- | :-------------------------- | | May 4, 2020 - May 31, 2020 | 7,669 | $3.87 | | June 1, 2020 - July 5, 2020 | 132 | $7.36 | | July 6, 2020 - August 2, 2020 | 4,939 | $7.44 | | Total | 12,740 | $6.22 | [Item 6. Exhibits](index=32&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL-related documents - The exhibit index includes certifications from the CEO and CFO (Exhibits **31.1, 31.2, 32.1, 32.2**) and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents (Exhibits **101.INS** to **101.PRE**)[191](index=191&type=chunk) - XBRL-related information is furnished, not filed, in accordance with Regulation S-T[192](index=192&type=chunk) [SIGNATURES](index=33&type=section&id=Signatures) This section provides the official signatures for the Quarterly Report on Form 10-Q, confirming its submission - The report was signed on **September 4, 2020**, by David Loretta, Senior Vice President and Chief Financial Officer, and Michael Murphy, Vice President and Chief Accounting Officer, on behalf of Duluth Holdings Inc[194](index=194&type=chunk)

Duluth Holdings Inc. (NASDAQ:DLTH) Q2 2020 Results Earnings Conference Call September 3, 2020 9:30 AM ET Company Participants Donni Case - Investor Relations Steve Schlecht - Chief Executive Officer Dave Loretta - Chief Financial Officer Conference Call Participants John Morris - Davidson Jonathan Komp - Baird Jim Duffy - Stifel Dylan Carden - William Blair Operator Good morning. And welcome to the Duluth Holdings Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [O ...

[FORM 10-Q Filing Information](index=1&type=section&id=FORM%2010-Q) This section provides basic identification details for Duluth Holdings Inc.'s Quarterly Report on Form 10-Q, including filing status and outstanding shares [Registrant Information](index=1&type=section&id=Registrant%20Information) This section provides the basic identification details for Duluth Holdings Inc.'s Quarterly Report on Form 10-Q for the period ended May 3, 2020, including its incorporation state, IRS Employer Identification Number, principal executive offices, and stock trading symbol (DLTH) on NASDAQ Global Select Market. It also confirms the company's filing status as an accelerated filer, smaller reporting company, and emerging growth company, and lists the outstanding shares of Class A and Class B common stock as of June 2, 2020 - Duluth Holdings Inc. is filing its Quarterly Report on Form 10-Q for the period ended **May 3, 2020**[1](index=1&type=chunk) - The company's Class B Common Stock trades on the NASDAQ Global Select Market under the symbol '**DLTH**'[1](index=1&type=chunk) Registrant Filing Status | Status | Indication | | :-------------------------- | :--------- | | Accelerated filer | ☑ | | Smaller reporting company | ☑ | | Emerging growth company | ☑ | Shares Outstanding as of June 2, 2020 | Class | Shares Outstanding | | :-------------------- | :----------------- | | Class A Common Stock | 3,364,200 | | Class B Common Stock | 29,443,075 | [Table of Contents](index=3&type=section&id=INDEX) This section lists the main parts and items of the Quarterly Report on Form 10-Q, providing an overview of the document's structure [Part I—Financial Information](index=3&type=section&id=Part%20I%E2%80%94Financial%20Information) This section outlines the financial information presented in Part I of the 10-Q report, including Item 1 (Financial Statements), Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations), Item 3 (Quantitative and Qualitative Disclosures About Market Risk), and Item 4 (Controls and Procedures) [Part II—Other Information](index=3&type=section&id=Part%20II%E2%80%94Other%20Information) This section details the other information included in Part II of the 10-Q report, covering Item 1 (Legal Proceedings), Item 1A (Risk Factors), Item 2 (Unregistered Sales of Equity Securities and Use of Proceeds), and Item 6 (Exhibits), followed by the Signatures [PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements of Duluth Holdings Inc. for the quarter ended May 3, 2020, and comparative periods. It includes the balance sheets, statements of operations, comprehensive income, shareholders' equity, and cash flows, along with detailed notes explaining the company's accounting policies, debt, leases, and the impact of COVID-19 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets show the company's financial position as of May 3, 2020, compared to February 2, 2020. Total assets increased to $505.6 million from $474.1 million, primarily driven by an increase in current assets, particularly inventory and cash. Total liabilities also increased significantly, mainly due to a rise in long-term debt Condensed Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | May 3, 2020 | February 2, 2020 | | :---------------------- | :---------- | :--------------- | | Total Assets | $505,612 | $474,050 | | Total Liabilities | $344,761 | $297,944 | | Total Shareholders' Equity| $160,851 | $176,106 | Key Asset Changes (Amounts in thousands) | Asset | May 3, 2020 | February 2, 2020 | Change (YoY) | | :---------------------------- | :---------- | :--------------- | :----------- | | Cash and cash equivalents | $8,854 | $2,189 | +304.4% | | Inventory | $175,037 | $147,849 | +18.4% | | Total current assets | $196,990 | $162,192 | +21.5% | Key Liability Changes (Amounts in thousands) | Liability | May 3, 2020 | February 2, 2020 | Change (YoY) | | :---------------------------- | :---------- | :--------------- | :----------- | | Duluth long-term debt | $84,750 | $39,332 | +115.5% | | Total current liabilities | $82,590 | $78,775 | +4.8% | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The condensed consolidated statements of operations show a significant increase in net loss for the three months ended May 3, 2020, compared to the prior year. Net sales decreased by 3.8%, while cost of goods sold increased, leading to a 14.1% decrease in gross profit. Selling, general and administrative expenses also rose, resulting in a substantially larger operating loss and net loss Condensed Consolidated Statements of Operations Highlights (Amounts in thousands) | Metric | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $109,917 | $114,244 | | Gross profit | $52,332 | $60,918 | | Selling, general and administrative expenses| $71,306 | $70,609 | | Operating loss | $(18,974) | $(9,691) | | Net loss | $(15,179) | $(7,645) | | Net loss per share (Basic & Diluted) | $(0.47) | $(0.23) | - Net sales decreased by **$4,327 thousand**, or **3.8%**, to **$109,917 thousand** (YoY)[13](index=13&type=chunk) - Gross profit decreased by **$8,586 thousand**, or **14.1%**, to **$52,332 thousand** (YoY)[13](index=13&type=chunk) - Net loss increased by **$7,534 thousand**, or **98.6%**, to **$15,179 thousand** (YoY)[13](index=13&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) The condensed consolidated statements of comprehensive income show a comprehensive loss of $15.7 million for the three months ended May 3, 2020, significantly higher than the $7.6 million loss in the prior year. This increase is primarily due to the higher net loss and an unrealized security loss arising during the period Condensed Consolidated Statements of Comprehensive Income (Amounts in thousands) | Metric | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(15,179) | $(7,645) | | Unrealized security loss | $(700) | — | | Income tax benefit (on security loss) | $182 | — | | Other comprehensive income | $(518) | — | | Comprehensive loss | $(15,697) | $(7,645) | - Comprehensive loss attributable to controlling interest increased from **$(7,572) thousand** in May 2019 to **$(15,653) thousand** in May 2020[15](index=15&type=chunk) [Condensed Consolidated Statement of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statement%20of%20Shareholders'%20Equity) The condensed consolidated statements of shareholders' equity show a decrease in total shareholders' equity from $176.1 million as of February 2, 2020, to $160.9 million as of May 3, 2020. This decline is primarily driven by the net loss incurred during the period and an accumulated other comprehensive loss Condensed Consolidated Statement of Shareholders' Equity Highlights (Amounts in thousands) | Metric | February 2, 2020 | May 3, 2020 | | :---------------------------------------- | :--------------- | :---------- | | Capital stock | $90,902 | $91,451 | | Retained earnings | $87,589 | $72,454 | | Accumulated other comprehensive (loss) income | $188 | $(330) | | Total shareholders' equity | $176,106 | $160,851 | - Total shareholders' equity decreased by **$15,255 thousand** from February 2, 2020, to May 3, 2020[17](index=17&type=chunk)[10](index=10&type=chunk) - Retained earnings decreased by **$15,135 thousand** due to the net loss for the period[17](index=17&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The condensed consolidated statements of cash flows indicate a significant increase in cash, cash equivalents, and restricted cash by $7.06 million for the three months ended May 3, 2020, compared to a decrease of $0.515 million in the prior year. This was primarily driven by substantial net cash provided by financing activities, offsetting the increased cash used in operating and investing activities Condensed Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Activity | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(33,491) | $(13,111) | | Net cash used in investing activities | $(4,102) | $(9,762) | | Net cash provided by financing activities | $44,653 | $22,358 | | Increase (decrease) in cash, cash equivalents and restricted cash | $7,060 | $(515) | - Net cash used in operating activities increased by **$20,380 thousand** (YoY), primarily due to a larger net loss and a significant increase in inventory[23](index=23&type=chunk)[142](index=142&type=chunk) - Net cash provided by financing activities increased by **$22,295 thousand** (YoY), driven by proceeds from term loans and revolving line of credit[23](index=23&type=chunk)[147](index=147&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's operations, accounting policies, the impact of COVID-19, lease accounting, debt structure, fair value measurements, and recent accounting pronouncements. Key updates include the company's shift to a single reportable segment, the financial and operational impacts of the COVID-19 pandemic, and amendments to its credit agreement [1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION](index=11&type=section&id=1.%20NATURE%20OF%20OPERATIONS%20AND%20BASIS%20OF%20PRESENTATION) This note describes Duluth Holdings Inc.'s business as a lifestyle brand of men's and women's apparel sold through direct and retail channels. It highlights the company's transition to a single reportable segment due to its omnichannel approach and discusses the significant impact of the COVID-19 pandemic on its operations and financial performance, including interim impairment assessments - Duluth Holdings Inc. operates as a lifestyle brand for men's and women's casual wear, workwear, and accessories, sold exclusively through its direct (website and catalogs) and retail channels[25](index=25&type=chunk) - As of **February 3, 2020**, the Company updated its segment reporting to **one reportable external segment**, consistent with its omnichannel business approach, consolidating its direct and retail segments[26](index=26&type=chunk) - The **COVID-19 pandemic negatively affected** the Company's business operations and financial performance for the three months ended **May 3, 2020**, leading to interim impairment assessments for intangible and long-lived assets, though **no impairment losses were incurred**[31](index=31&type=chunk)[34](index=34&type=chunk)[35](index=35&type=chunk) Cash, Cash Equivalents and Restricted Cash Reconciliation (Amounts in thousands) | Item | May 3, 2020 | February 2, 2020 | | :---------------------------------------- | :---------- | :--------------- | | Cash and cash equivalents | $8,854 | $2,189 | | Restricted Cash | $446 | $51 | | Total cash, cash equivalents and restricted cash | $9,300 | $2,240 | [2. LEASES](index=15&type=section&id=2.%20LEASES) This note details the company's lease accounting under ASC Topic 842, recognizing Right-of-Use (ROU) assets and lease liabilities for non-cancelable retail space leases. Due to COVID-19, the company negotiated rent deferrals of approximately $0.7 million for April and May 2020, which were recorded as accrued expenses without applying lease modification guidance - The Company recognizes ROU assets and lease liabilities for non-cancelable retail space leases under **ASC Topic 842**[45](index=45&type=chunk) - The Company deferred approximately **$700 thousand** in rent for April and May 2020 due to COVID-19, recorded within accrued expenses and other current liabilities[49](index=49&type=chunk) Total Lease Expense (Amounts in thousands) | Lease Expense Type | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Total finance lease expense | $1,095 | $300 | | Operating lease expense | $4,136 | $3,550 | | Amortization of build-to-suit leases capital contribution | $324 | $214 | | Variable lease expense | $1,761 | $1,612 | | Total lease expense | $7,316 | $5,676 | Weighted-Average Lease Terms and Discount Rates | Lease Type | May 3, 2020 (Years) | May 5, 2019 (Years) | May 3, 2020 (Rate) | May 5, 2019 (Rate) | | :-------------- | :------------------ | :------------------ | :----------------- | :----------------- | | Finance leases | 14 | 15 | 4.5% | 4.5% | | Operating leases| 10 | 10 | 4.3% | 4.3% | [3. DEBT AND LINE OF CREDIT](index=18&type=section&id=3.%20DEBT%20AND%20LINE%20OF%20CREDIT) This note details the company's debt structure, including TRI Holdings, LLC's senior secured and promissory notes, and Duluth's credit agreement. The credit agreement was amended on April 30, 2020, to include an incremental delayed draw term loan of $20.5 million, increasing the total credit facility to $150.5 million, and adjusted loan covenants for greater flexibility. The company was in compliance with all debt covenants as of May 3, 2020 - The Company's credit agreement was amended on **April 30, 2020**, to include an incremental delayed draw term loan of **$20,500 thousand**, increasing the total credit facility to **$150,500 thousand**[58](index=58&type=chunk) - Loan covenants were amended to allow for **greater flexibility** during peak borrowing periods in fiscal 2020[58](index=58&type=chunk) - As of **May 3, 2020**, the Company was in **compliance with all financial and non-financial covenants** for its debts[59](index=59&type=chunk) Debt Composition (Amounts in thousands) | Debt Type | February 2, 2020 | | :------------------------ | :--------------- | | TRI Senior Secured Note | $24,835 | | TRI Note | $3,500 | | Line of credit | $19,332 | | Delayed draw term loan | $20,000 | | Total Duluth long-term debt | $39,332 | [4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES](index=19&type=section&id=4.%20ACCRUED%20EXPENSES%20AND%20OTHER%20CURRENT%20LIABILITIES) This note provides a breakdown of accrued expenses and other current liabilities, which increased from $29.464 million as of February 2, 2020, to $35.525 million as of May 3, 2020. Notable increases include salaries and benefits, and accrued advertising, while deferred revenue decreased Accrued Expenses and Other Current Liabilities (Amounts in thousands) | Item | May 3, 2020 | February 2, 2020 | | :--------------------------------------- | :---------- | :--------------- | | Salaries and benefits | $3,736 | $2,775 | | Deferred revenue | $7,890 | $9,946 | | Freight | $5,544 | $5,404 | | Product returns | $3,688 | $3,508 | | Accrued advertising | $8,016 | $633 | | Total accrued expenses and other current liabilities | $35,525 | $29,464 | - Accrued advertising increased significantly from **$633 thousand** to **$8,016 thousand** (YoY)[61](index=61&type=chunk) - Deferred revenue decreased from **$9,946 thousand** to **$7,890 thousand** (YoY)[61](index=61&type=chunk) [5. FAIR VALUE](index=19&type=section&id=5.%20FAIR%20VALUE) This note discusses the fair value measurements of the company's financial instruments, primarily focusing on its available-for-sale security and TRI long-term debt. The available-for-sale security, valued using a Level 3 discounted cash flow method, experienced an unrealized loss of $446 thousand as of May 3, 2020, compared to a gain of $254 thousand as of February 2, 2020. The company does not anticipate an other-than-temporary impairment - The fair value of the Company's available-for-sale security is valued using a **Level 3 discounted cash flow method**[64](index=64&type=chunk) Available-for-Sale Security Fair Value (Amounts in thousands) | Metric | May 3, 2020 | February 2, 2020 | | :----------------------------------- | :---------- | :--------------- | | Cost or Amortized Cost | $6,147 | $6,178 | | Gross Unrealized Gains | — | $254 | | Gross Unrealized Losses | $446 | — | | Fair Estimated Value | $5,701 | $6,432 | - The Company assessed the unrealized loss position and determined that it is expected to recover the entire amortized cost basis, thus **no other-than-temporary impairment was recorded**[65](index=65&type=chunk)[67](index=67&type=chunk) [6. VARIABLE INTEREST ENTITY](index=21&type=section&id=6.%20VARIABLE%20INTEREST%20ENTITY) This note explains the consolidation of TRI Holdings, LLC (TRI) as a variable interest entity (VIE). Duluth Holdings Inc. is deemed the primary beneficiary of TRI, which owns the company's headquarters, due to its power to direct activities and absorb losses/receive benefits. As a result, TRI's financial results are consolidated into Duluth's statements, with intercompany balances and the lease eliminated - Duluth Holdings Inc. consolidates TRI Holdings, LLC (TRI) as a **variable interest entity (VIE)** because it is the **primary beneficiary**[71](index=71&type=chunk)[72](index=72&type=chunk) - TRI's primary purpose is to own the real property for the Company's headquarters in **Mt. Horeb, Wisconsin**[72](index=72&type=chunk) Consolidated Amounts from TRI (Amounts in thousands) | Item | May 3, 2020 | February 2, 2020 | | :--------------------------------------- | :---------- | :--------------- | | Total assets | $26,126 | $26,260 | | Total liabilities and shareholders' equity | $26,126 | $26,260 | [7. LOSS PER SHARE](index=23&type=section&id=7.%20LOSS%20PER%20SHARE) This note details the calculation of basic and diluted loss per share. For the three months ended May 3, 2020, both basic and diluted loss per share were $(0.47), compared to $(0.23) in the prior year, reflecting the increased net loss. Unvested restricted stock was excluded from diluted EPS calculation as its inclusion would be anti-dilutive Loss Per Share Calculation (Amounts in thousands, except per share data) | Metric | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to controlling interest | $(15,135) | $(7,572) | | Weighted average shares outstanding (Basic) | 32,372 | 32,281 | | Loss per share (Basic) | $(0.47) | $(0.23) | | Loss per share (Diluted) | $(0.47) | $(0.23) | - Diluted loss per share for the three months ended **May 3, 2020**, was **$(0.47)**, an increase from **$(0.23)** in the prior year[75](index=75&type=chunk) - **100 thousand** and **300 thousand** shares of unvested restricted stock were excluded from diluted EPS calculation for May 3, 2020, and May 5, 2019, respectively, due to their **anti-dilutive effect**[75](index=75&type=chunk) [8. STOCK-BASED COMPENSATION](index=24&type=section&id=8.%20STOCK-BASED%20COMPENSATION) This note outlines the company's stock-based compensation plan, recognizing $0.4 million in expense for restricted stock for both the three months ended May 3, 2020, and May 5, 2019. As of May 3, 2020, there was $3.2 million in unrecognized compensation expense related to restricted stock awards, expected to be recognized over a weighted average period of 3.3 years - Total stock compensation expense for restricted stock was **$400 thousand** for both the three months ended May 3, 2020, and May 5, 2019[78](index=78&type=chunk) - As of **May 3, 2020**, unrecognized compensation expense related to restricted stock awards was **$3,200 thousand**, with a weighted average recognition period of **3.3 years**[78](index=78&type=chunk) Unvested Restricted Stock Activity (Three Months Ended May 3, 2020) | Activity | Shares | Weighted Average Fair Value Per Share | | :---------------------------- | :-------- | :------------------------------------ | | Outstanding at February 2, 2020 | 192,094 | $17.71 | | Granted | 199,319 | $8.29 | | Vested | (49,922) | $18.93 | | Forfeited | (730) | $18.00 | | Outstanding at May 3, 2020 | 340,761 | $12.02 | [9. PROPERTY AND EQUIPMENT](index=24&type=section&id=9.%20PROPERTY%20AND%20EQUIPMENT) This note details the composition of property and equipment, net, which saw a slight increase from $137.071 million as of February 2, 2020, to $137.253 million as of May 3, 2020. This was primarily driven by an increase in construction in progress, partially offset by accumulated depreciation and amortization Property and Equipment, Net (Amounts in thousands) | Item | May 3, 2020 | February 2, 2020 | | :--------------------------------------- | :---------- | :--------------- | | Land and land improvements | $4,486 | $4,486 | | Leasehold improvements | $43,555 | $42,518 | | Buildings | $35,903 | $35,903 | | Office equipment and furniture | $49,219 | $48,274 | | Software | $27,354 | $26,538 | | Accumulated depreciation and amortization| $(59,096) | $(53,255) | | Construction in progress | $13,933 | $10,795 | | Property and equipment, net | $137,253 | $137,071 | - Construction in progress increased by **$3,138 thousand** from February 2, 2020, to May 3, 2020[79](index=79&type=chunk) - Accumulated depreciation and amortization increased by **$5,841 thousand**[79](index=79&type=chunk) [10. REVENUE](index=24&type=section&id=10.%20REVENUE) This note details the company's revenue recognition policies, primarily from the sale of apparel, footwear, and hard goods, recognized upon shipment for direct sales and at point of sale for store sales. It disaggregates sales by channel, showing a significant increase in direct-to-consumer sales and a substantial decrease in store sales for the three months ended May 3, 2020, largely due to store closures from COVID-19 - Revenue from merchandise shipped to customers is recognized upon shipment, while store revenue is recognized at the **point of sale**[80](index=80&type=chunk) Sales Disaggregated by Channel (Amounts in thousands) | Sales Channel | May 3, 2020 | May 5, 2019 | | :----------------- | :---------- | :---------- | | Direct-to-consumer | $86,530 | $65,701 | | Stores | $23,387 | $48,543 | | Total | $109,917 | $114,244 | - Direct-to-consumer sales increased by **$20,829 thousand**, or **31.7%** (YoY)[83](index=83&type=chunk) - Store sales decreased by **$25,156 thousand**, or **51.8%** (YoY), primarily due to temporary store closures from COVID-19[83](index=83&type=chunk) Contract Assets and Liabilities (Amounts in thousands) | Item | May 3, 2020 | February 2, 2020 | | :------------------- | :---------- | :--------------- | | Contract assets | $1,922 | $1,932 | | Contract liabilities | $7,733 | $9,790 | [11. INCOME TAXES](index=26&type=section&id=11.%20INCOME%20TAXES) This note discusses the income tax benefit and effective tax rates. The income tax benefit for the three months ended May 3, 2020, was $5.1 million, up from $2.7 million in the prior year. The effective tax rate related to controlling interest was 25% for the current period, slightly down from 26% in the prior year. The CARES Act, enacted in March 2020, did not materially impact the effective tax rate for the period, but its future impact is still being evaluated Income Tax Benefit and Effective Tax Rate | Metric | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Income tax benefit | $5,086 | $2,683 | | Effective tax rate (controlling interest) | 25% | 26% | - The **CARES Act**, enacted in **March 2020**, did not materially impact the effective tax rate for the three months ended May 3, 2020, but its future impact is under evaluation[87](index=87&type=chunk) [12. RECENT ACCOUNTING PRONOUNCEMENTS](index=28&type=section&id=12.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) This note discusses recent accounting pronouncements, specifically ASU 2016-13 (CECL) regarding credit losses. As a smaller reporting company, Duluth Holdings Inc. expects to adopt ASU 2016-13 on January 30, 2023, and is currently evaluating its potential impact on the consolidated financial statements - The Company expects to adopt **ASU 2016-13 (CECL)** on **January 30, 2023**, as a smaller reporting company[89](index=89&type=chunk) - The Company is currently evaluating the level of impact **ASU 2016-13** will have on its consolidated financial statements[89](index=89&type=chunk) [13. SUBSEQUENT EVENTS](index=28&type=section&id=13.%20SUBSEQUENT%20EVENTS) This note addresses subsequent events, primarily the ongoing impact of COVID-19 and related government mandates for non-essential retail closures. The company acknowledges the potential for significant negative impacts on sales and profits due to reduced customer traffic and supply chain disruptions, but cannot reliably estimate the full financial impact or duration of the pandemic - Mandates for non-essential retail closures due to **COVID-19** could negatively impact the Company's business[90](index=90&type=chunk) - Significant reductions in customer visits and spending could result in **loss of sales and profits** and other material adverse effects[90](index=90&type=chunk) - The Company cannot reliably estimate the length or severity of the **COVID-19 outbreak** or its full financial impact[90](index=90&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Duluth Holdings Inc.'s financial condition and results of operations for the three months ended May 3, 2020. It covers the company's business overview, the significant impact of COVID-19 on sales and operations, key financial performance metrics, and liquidity. The company experienced a net sales decrease, a larger net loss, and negative Adjusted EBITDA, primarily due to store closures and promotional activities during the pandemic, partially offset by strong direct sales growth [Overview](index=29&type=section&id=Overview) Duluth Holdings Inc. is a lifestyle brand offering men's and women's casual wear, workwear, and accessories through its omnichannel platform (website, catalog, and 62 retail stores as of May 3, 2020). The company reported a 3.8% decrease in net sales, a net loss of $15.1 million, and Adjusted EBITDA of $(11.6) million for the first quarter of fiscal 2020, largely impacted by COVID-19. Inventory levels are higher than historical levels due to prior commitments and slower sales growth - Duluth Holdings Inc. operates **59 retail stores** and **three outlet stores** as of **May 3, 2020**, in addition to its website and catalog channels[94](index=94&type=chunk) - Net sales in fiscal 2020 first quarter decreased by **3.8%** to **$109,917 thousand** (YoY)[98](index=98&type=chunk) - Net loss was **$15,179 thousand** in fiscal 2020 first quarter, compared to **$7,645 thousand** in the prior year (YoY)[98](index=98&type=chunk) - Adjusted EBITDA was **$(11,564) thousand** in fiscal 2020 first quarter, compared to **$(4,407) thousand** in the prior year (YoY)[98](index=98&type=chunk) - Inventory position is **higher than historical levels** due to purchase commitments made prior to scaling back new store openings and a general slowdown in sales growth[99](index=99&type=chunk) [COVID-19 Impact and Response](index=31&type=section&id=COVID-19) The COVID-19 pandemic significantly impacted the company's Q1 2020 operations, leading to temporary closure of all stores for seven weeks, operational changes in distribution centers, and work-from-home for corporate employees. The company amended its Credit Agreement for flexibility, reduced planned capital spend by 50%, and initiated furloughs for 68% of salaried staff. Despite a $1.6 million non-recurring COVID-19 expense and decreased revenue, direct sales surged, and 58 of 62 retail stores had re-opened by June 4, 2020 - The Company temporarily closed **all stores for a period of seven weeks** during the three months ended May 3, 2020, due to COVID-19[106](index=106&type=chunk) - The Credit Agreement was amended to include an incremental delayed draw term loan of **$20,500 thousand** and adjusted loan covenants for **greater flexibility**[106](index=106&type=chunk) - Planned capital expenditures were **reduced by 50%**, primarily by decreasing new store openings to **four** in fiscal 2020[108](index=108&type=chunk) - The Company recognized **$1,600 thousand** in non-recurring COVID-19 related expenses during the quarter[109](index=109&type=chunk) - As of **June 4, 2020**, **58 of the 62 retail stores have re-opened** in some capacity[109](index=109&type=chunk) [How We Assess the Performance of Our Business](index=33&type=section&id=How%20We%20Assess%20the%20Performance%20of%20Our%20Business) This section outlines the key financial and operating measures Duluth Holdings Inc. uses to evaluate its business performance: Net Sales, Gross Profit, Selling, General and Administrative Expenses, and Adjusted EBITDA. It defines each metric, explains its components, and discusses factors influencing them, such as seasonality, shipping and handling revenue, and the impact of growth strategies on expenses - Net sales include merchandise sales plus shipping and handling revenue, less returns and discounts, recognized upon shipment for direct sales and at **point of sale for retail**[112](index=112&type=chunk) - Gross profit is net sales less cost of goods sold, with gross margin as a percentage of net sales; cost of goods sold **excludes depreciation and amortization**[113](index=113&type=chunk) - Selling, general and administrative expenses include all operating costs not in cost of goods sold, such as payroll, occupancy, marketing, and logistics, and are expected to **decrease as a percentage of sales** over time despite increasing in absolute terms with growth[114](index=114&type=chunk)[116](index=116&type=chunk) - **Adjusted EBITDA** is defined as consolidated net income (loss) before depreciation and amortization, interest expense, and provision for income taxes, adjusted for certain non-cash and other items not representative of ongoing operating performance[118](index=118&type=chunk) [Results of Operations](index=36&type=section&id=Results%20of%20Operations) This section provides a detailed comparison of the company's financial results for the three months ended May 3, 2020, versus May 5, 2019. Net sales decreased by 3.8%, driven by a 15.8% decline in store market sales due to COVID-19 closures, partially offset by a 26.4% increase in non-store market sales. Gross profit decreased by 14.1% due to extended clearance events. Selling, general and administrative expenses increased by 1.0%, including $1.6 million in COVID-19 related expenses. The company reported a net loss of $15.1 million, nearly double the prior year's loss, and Adjusted EBITDA decreased to $(11.6) million Consolidated Results of Operations (Amounts in thousands, except percentages) | Metric | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $109,917 (100.0%) | $114,244 (100.0%) | | Gross profit | $52,332 (47.6%) | $60,918 (53.3%) | | Selling, general and administrative expenses| $71,306 (64.9%) | $70,609 (61.8%) | | Operating loss | $(18,974) (-17.3%) | $(9,691) (-8.5%) | | Net loss | $(15,179) (-13.8%) | $(7,645) (-6.7%) | - Store market sales decreased by **$12,600 thousand**, or **15.8%**, to **$67,200 thousand** (YoY), due to temporary store closures[123](index=123&type=chunk) - Non-store market sales increased by **$8,700 thousand**, or **26.4%**, to **$41,500 thousand** (YoY), driven by digital advertising and free shipping offers[123](index=123&type=chunk) - Gross margin decreased to **47.6%** from **53.3%** (YoY), primarily due to extended clearance and new sitewide sale events[124](index=124&type=chunk) Reconciliation of Net Loss to Adjusted EBITDA (Amounts in thousands) | Metric | Three Months Ended May 3, 2020 | Three Months Ended May 5, 2019 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(15,179) | $(7,645) | | EBITDA | $(12,027) | $(4,881) | | Adjusted EBITDA | $(11,564) | $(4,407) | - Adjusted EBITDA decreased by **$7,157 thousand** to **$(11,564) thousand** (YoY), representing **(10.5)% of net sales** compared to (3.9)% in the prior year[131](index=131&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) Duluth Holdings Inc. relies on cash from operations and its credit facility for liquidity, with primary needs for inventory, marketing, payroll, leases, and capital expenditures. Net working capital was $114.4 million as of May 3, 2020. The company expects to spend $15.0 million on capital expenditures in fiscal 2020, a 50% reduction from previous plans. Cash flow from operating activities was negative in Q1 2020 due to net loss and increased inventory, but is expected to be positive for the full fiscal year. Financing activities provided significant cash, primarily from term loans and the revolving line of credit, which was amended to increase availability and provide covenant flexibility - Net working capital was **$114,400 thousand** as of **May 3, 2020**, including **$8,900 thousand** of cash and cash equivalents[132](index=132&type=chunk) - Expected capital expenditures for fiscal 2020 are approximately **$15,000 thousand**, a **50% reduction** from previous plans, with **$8,000 thousand** allocated for new retail store expansion and point of sale upgrades[136](index=136&type=chunk) - Net cash used in operating activities was **$33,500 thousand** for the three months ended **May 3, 2020**, primarily due to a net loss and a **$27,200 thousand** increase in inventory[142](index=142&type=chunk) - Net cash provided by financing activities was **$44,600 thousand**, primarily from **$29,700 thousand** (net) from term loans and **$15,700 thousand** (net) from the revolving line of credit[147](index=147&type=chunk) - The credit facility was amended on **April 30, 2020**, to include an incremental delayed draw term loan of **$20,500 thousand**, increasing the total facility to **$150,500 thousand**, and loan covenants were adjusted for **greater flexibility**[149](index=149&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there have been no significant changes in the market risks previously described in the company's 2019 Form 10-K. It refers to Note 3, 'Debt and Line of Credit,' for disclosures regarding interest rates on borrowings under the credit agreement - **No significant changes** in market risks compared to the 2019 Form 10-K[159](index=159&type=chunk) - Interest rate disclosures for borrowings under the credit agreement are provided in **Note 3, 'Debt and Line of Credit'**[159](index=159&type=chunk) [Item 4. Controls and Procedures](index=42&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms that the company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of May 3, 2020. Furthermore, there were no material changes in internal control over financial reporting during the period, and COVID-19 did not materially impact the ability to maintain these controls - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were **effective as of May 3, 2020**[160](index=160&type=chunk) - **No material changes** in internal control over financial reporting occurred during the period[161](index=161&type=chunk) - **COVID-19 did not materially impact** the ability to maintain internal control over financial reporting and disclosure controls and procedures[162](index=162&type=chunk) [PART II. OTHER INFORMATION](index=42&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides information on legal proceedings, risk factors, equity sales, and exhibits for the reporting period [Item 1. Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) This section states that Duluth Holdings Inc. is not currently party to any legal proceedings that are expected to have a material adverse effect on its business, financial condition, operating results, or cash flows. The company establishes reserves for specific legal matters when an unfavorable outcome is probable and estimable - The Company is **not currently involved in any legal proceedings** expected to have a material adverse effect on its business[163](index=163&type=chunk) - Reserves are established for legal matters when an unfavorable outcome is **probable and estimable**[163](index=163&type=chunk) [Item 1A. Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) This section highlights that there have been no material changes to the company's previously disclosed risk factors, except for the new risk related to current civil unrest. Civil unrest could adversely affect the business by causing temporary store closures, limiting operating hours, reducing customer traffic, impacting distribution, and hindering new store openings, with the full impact currently inestimable - **No material changes** to risk factors previously disclosed in the 2019 Form 10-K, except for the impact of current civil unrest[164](index=164&type=chunk) - Current civil unrest could **materially adversely affect the business** by causing temporary store closures, reduced customer traffic, and potential impacts on distribution and new store openings[165](index=165&type=chunk)[166](index=166&type=chunk) - The impact of civil unrest on the business, financial condition, and results of operations **cannot presently be estimated**[166](index=166&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=44&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section confirms that Duluth Holdings Inc. did not sell any unregistered equity securities during the quarter ended May 3, 2020. It details shares acquired from employees to satisfy minimum tax withholding requirements upon the vesting of restricted stock, totaling 18,082 shares at an average price of $6.33 per share - **No unregistered equity securities were sold** during the quarter ended May 3, 2020[169](index=169&type=chunk) Shares Acquired from Employees for Tax Withholding (Three Months Ended May 3, 2020) | Period | Total Number of Shares Purchased | Average Price Per Share | | :-------------------------- | :------------------------------- | :---------------------- | | February 3 - March 1, 2020 | 3,347 | $8.54 | | March 2 - April 5, 2020 | 7,968 | $6.58 | | April 6 - May 3, 2020 | 6,767 | $3.86 | | Total | 18,082 | $6.33 | [Item 6. Exhibits](index=45&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including amendments to the Credit Agreement, certifications from the CEO and CFO, and XBRL-related documents. It specifies that XBRL information is furnished, not filed - **Exhibit 10.1** includes Amendment No. 1 to the Credit Agreement, dated **April 30, 2020**[172](index=172&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer are filed as **Exhibits 31.1, 31.2, 32.1, and 32.2**[172](index=172&type=chunk) - **XBRL-related information** (Exhibits 101.INS, SCH, CAL, DEF, LAB, PRE) is furnished, not filed, in accordance with **Regulation S-T**[172](index=172&type=chunk) [SIGNATURES](index=46&type=section&id=SIGNATURES) This section contains the official signatures for the Quarterly Report on Form 10-Q, confirming its due authorization [Report Signatures](index=46&type=section&id=Report%20Signatures) This section contains the official signatures for the Quarterly Report on Form 10-Q, confirming its due authorization. The report was signed on June 5, 2020, by David Loretta, Senior Vice President and Chief Financial Officer, and Michael Murphy, Vice President and Chief Accounting Officer, on behalf of Duluth Holdings Inc - The report was signed on **June 5, 2020**[175](index=175&type=chunk) - Signed by **David Loretta, Senior Vice President and Chief Financial Officer**[175](index=175&type=chunk) - Signed by **Michael Murphy, Vice President and Chief Accounting Officer**[176](index=176&type=chunk)

Duluth Holdings Inc. (NASDAQ:DLTH) Q1 2020 Earnings Conference Call June 4, 2020 9:30 AM ET Company Participants Stephen Schlecht - Executive Chairman and CEO David Loretta - SVP and CFO Donni Case - IR, Financial Profiles, Inc. Conference Call Participants John Morris - D.A. Davidson Jonathan Komp - Robert W. Baird James Duffy - Stifel, Nicolaus & Co. Dylan Carden - William Blair Operator Good day, and welcome to the Duluth Holdings Inc. First Quarter 2020 Earnings Conference Call. All participants will b ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended February 2, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file No. 001-37641 DULUTH HOLDINGS INC. (Exact name of registrant as specified in its charter) | --- | --- | --- | |------------------------------------|-------- ...

Financial Data and Key Metrics Changes - For Q4 2019, net sales were reported at $259.6 million, a 4% increase from $250.5 million in the previous year, with a comparable 13-week sales growth of 7% [12][11] - Fourth quarter EPS increased to $0.75 from $0.64 last year, including a benefit of approximately $0.02 from one-time tax credits [12] - Adjusted EBITDA rose to $39.9 million, up 13.7% from $35.1 million last year, indicating successful execution of plans to improve customer service and manage expenses [14] - Gross margin rate increased by 40 basis points compared to last year, resulting in a gross profit of $137 million [18] Business Line Data and Key Metrics Changes - Direct product sales increased by 1.5% on a 13-week basis, while shipping revenues surged by 42% to $4.7 million [15] - Store sales grew by 15.5%, driven by new stores opened in 2018 and 2019 [15] - The women's business outperformed the men's business, with a growth rate of 12% for the quarter, while men's business grew by 5% [20] Market Data and Key Metrics Changes - New customer growth was up 20% in 2019, with approximately 40% of this growth coming from retail stores [8] - Direct sales growth in markets with a store outpaced non-store markets, with established markets seeing direct growth in the low-teens [17] Company Strategy and Development Direction - The company is taking a conservative approach to spending and is reviewing store opening plans due to the COVID-19 pandemic [7][5] - The focus remains on optimizing the current fleet of 62 stores and enhancing store productivity through targeted promotions and localized product assortments [9] - Investments in technology and infrastructure are ongoing, with plans for customer-facing enhancements and improved analytics for marketing strategies [30][31] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the unprecedented challenges posed by the COVID-19 pandemic and the fluid nature of the situation [4] - The company has suspended financial guidance due to uncertainty in consumer spending and is focusing on expense control and liquidity [33][35] - Despite current challenges, management remains confident in the long-term value of investments made over the past few years [11] Other Important Information - Inventory at year-end increased by 51% to $148 million, primarily due to higher sales plans from over 12 months earlier [26] - Capital expenditures for 2019 were $31 million, down 42% from the prior year, reflecting a strategic decision to open fewer stores [29] Q&A Session Summary Question: Can you provide insight into inventory levels excluding early receipts? - Management indicated that roughly a third of the inventory increase was related to pulling in receipts for spring and summer earlier [37] Question: Could SG&A dollars potentially decrease in the coming year? - Management confirmed that there is enough control within the expense structure to maintain spending levels, with the possibility of SG&A being flat [38] Question: What are the expected benefits and timing of new systems for customer enhancement? - Management detailed ongoing upgrades to the POS system for a seamless customer experience and improvements in merchandise lifecycle planning [40][43] Question: Can you walk through the balance sheet and available liquidity? - Management highlighted that inventory levels are higher than ideal but manageable, with a $130 million line of credit available for funding [45][48] Question: What is the current cash burn rate and how long can the company sustain operations? - Management expressed confidence in liquidity over the short term, with plans to take further action if economic impacts persist [50][51] Question: Is there potential for flexibility in lease payments given current circumstances? - Management stated that the occupancy cost structure is favorable and does not foresee the need to request accommodations on existing leases [53]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents Duluth Holdings Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, shareholders' equity, and cash flows, with detailed notes on accounting policies, leases, debt, and segment performance for the periods ended November 3, 2019, and October 28, 2018 [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheets show a significant increase in total assets and liabilities as of November 3, 2019, compared to February 3, 2019, primarily driven by the adoption of ASC 842, which led to the recognition of right-of-use assets and corresponding lease liabilities | Metric (in thousands) | November 3, 2019 | February 3, 2019 | | :-------------------- | :--------------- | :--------------- | | Total Assets | $518,117 | $295,305 | | Total Liabilities | $365,139 | $135,195 | | Total Shareholders' Equity | $152,978 | $160,110 | - Current assets increased significantly from **$118,198 thousand** to **$204,263 thousand**, largely due to an increase in inventory from **$97,685 thousand** to **$183,115 thousand**[6](index=6&type=chunk) - The adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets (**$119,323 thousand**) and finance lease right-of-use assets (**$45,313 thousand**) as of November 3, 2019, which were not present on February 3, 2019[6](index=6&type=chunk) [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the three months ended November 3, 2019, the company reported net income, a significant improvement from a net loss in the prior year period, driven by increased net sales and improved operating income. However, for the nine-month period, the company recorded a net loss, contrasting with net income in the prior year, primarily due to higher selling, general, and administrative expenses Key Financial Highlights (in thousands, except per share figures) | Metric | 3 Months Ended Nov 3, 2019 | 3 Months Ended Oct 28, 2018 | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------------------------- | :------------------------- | :-------------------------- | :------------------------- | :-------------------------- | | Net Sales | $119,768 | $106,701 | $355,975 | $317,561 | | Gross Profit | $65,365 | $60,971 | $191,087 | $179,151 | | Operating Income (Loss) | $1,328 | $(2,563) | $(5,041) | $7,076 | | Net Income (Loss) attributable to controlling interest | $182 | $(3,150) | $(5,453) | $2,536 | | Basic EPS attributable to controlling interest | $0.01 | $(0.10) | $(0.17) | $0.08 | - Net sales increased by **12.2%** for the three months and **12.1%** for the nine months ended November 3, 2019, compared to the respective prior year periods[13](index=13&type=chunk) - Gross profit margin decreased to **54.6%** for the three months and **53.7%** for the nine months ended November 3, 2019, from **57.1%** and **56.4%** in the prior year periods, respectively[13](index=13&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) The company reported comprehensive income attributable to controlling interest of $396 thousand for the three months ended November 3, 2019, a significant improvement from a loss in the prior year, primarily due to net income and unrealized security gains. For the nine-month period, however, it reported a comprehensive loss Comprehensive Income (Loss) (in thousands) | Metric | 3 Months Ended Nov 3, 2019 | 3 Months Ended Oct 28, 2018 | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------------------------- | :------------------------- | :-------------------------- | :------------------------- | :-------------------------- | | Net Income (Loss) | $89 | $(3,076) | $(5,709) | $2,693 | | Other comprehensive income | $214 | $0 | $214 | $0 | | Comprehensive Income (Loss) attributable to controlling interest | $396 | $(3,150) | $(5,239) | $2,536 | - Unrealized security gains of **$289 thousand** were recognized during the three and nine months ended November 3, 2019, contributing to other comprehensive income[15](index=15&type=chunk) [Condensed Consolidated Statement of Shareholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statement%20of%20Shareholders'%20Equity) Total shareholders' equity decreased from **$160.1 million** at February 3, 2019, to **$153.0 million** at November 3, 2019, influenced by a cumulative effect adjustment from ASC 842 adoption, net loss, and stock-based compensation activities Shareholders' Equity (in thousands) | Metric | November 3, 2019 | February 3, 2019 | | :-------------------- | :--------------- | :--------------- | | Total Shareholders' Equity | $152,978 | $160,110 | | Capital Stock | $90,451 | $89,849 | | Retained Earnings | $63,214 | $70,592 | | Accumulated other comprehensive income | $214 | $0 | - The adoption of ASC 842 resulted in a cumulative-effect adjustment of **$(1,924) thousand** to retained earnings at February 4, 2019[17](index=17&type=chunk) - Net loss for the nine months ended November 3, 2019, reduced retained earnings by **$(7,572) thousand**[17](index=17&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended November 3, 2019, the company experienced a significant increase in cash used in operating activities, primarily due to inventory build-up. Investing activities also used cash for capital expenditures, while financing activities provided substantial cash through line of credit and term loan proceeds Cash Flow Summary (in thousands) | Activity | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------------------- | :------------------------- | :-------------------------- | | Net cash used in operating activities | $(47,624) | $(23,502) | | Net cash used in investing activities | $(24,541) | $(46,317) | | Net cash provided by financing activities | $73,043 | $65,929 | | Increase (decrease) in cash and restricted cash | $878 | $(3,890) | - The increase in cash used in operating activities was primarily driven by an **$85.4 million** increase in inventory for the peak season and new retail stores[22](index=22&type=chunk) - Financing activities were significantly boosted by **$225.1 million** in proceeds from the line of credit and **$20.0 million** from a delayed draw term loan[22](index=22&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) These notes provide detailed explanations and breakdowns of the company's financial statements, covering its operations, significant accounting policies, the impact of new accounting standards (ASC 842), debt structure, segment performance, and other critical financial information [1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION](index=11&type=section&id=1.%20NATURE%20OF%20OPERATIONS%20AND%20BASIS%20OF%20PRESENTATION) Duluth Holdings Inc. operates as a lifestyle brand of men's and women's apparel through direct and retail channels, adopted ASC 842 on February 4, 2019, and experiences seasonal business with significant fourth-quarter revenue - Duluth Trading is a lifestyle brand of men's and women's casual wear, workwear, and accessories, sold exclusively through its direct (website and catalogs) and retail channels (**55 retail stores and 3 outlet stores** as of November 3, 2019)[24](index=24&type=chunk) - The company adopted ASC 842 (Leases) on February 4, 2019, recognizing a **$121.8 million** right-of-use asset and a **$115.5 million** lease liability, with a cumulative-effect adjustment to retained earnings[34](index=34&type=chunk)[37](index=37&type=chunk) - The business is seasonal, with a significant portion of revenue and operating profit historically recognized in the **fourth fiscal quarter** due to the holiday season[29](index=29&type=chunk) [2. LEASES](index=12&type=section&id=2.%20LEASES) Following ASC 842 adoption, the company recognized ROU assets and lease liabilities for non-cancelable retail leases, with finance leases having a 15-year weighted-average term and operating leases a 10-year term Lease Expense Components (in thousands) | Expense Type | 3 Months Ended Nov 3, 2019 | 9 Months Ended Nov 3, 2019 | | :-------------------------------- | :------------------------- | :------------------------- | | Selling, general and administrative expenses | $542 | $1,168 | | Interest expense | $368 | $802 | | Total lease expense | $910 | $1,970 | Lease Metrics as of November 3, 2019 | Metric | Finance Leases | Operating Leases | | :-------------------------------- | :------------- | :--------------- | | Weighted-average remaining lease term (years) | 15 | 10 | | Weighted-average discount rate | 4.5% | 4.3% | Future Minimum Lease Payments (in thousands) as of November 3, 2019 | Fiscal Year | Finance | Operating | | :------------ | :------ | :-------- | | 2019 (remainder) | $823 | $3,775 | | 2020 | $3,342 | $14,745 | | 2021 | $3,342 | $14,193 | | 2022 | $3,342 | $14,391 | | 2023 | $3,363 | $14,579 | | Thereafter | $41,078 | $81,286 | | Total future minimum lease payments | $55,290 | $142,969 | | Less – Discount | $15,523 | $28,321 | | Lease liability | $39,767 | $114,648 | [3. DEBT AND LINE OF CREDIT](index=16&type=section&id=3.%20DEBT%20AND%20LINE%20OF%20CREDIT) The company's debt includes TRI Senior Secured Note and TRI Note, alongside a credit agreement providing an **$80.0 million** revolving credit facility and a **$50.0 million** delayed draw term loan, with all covenants in compliance as of November 3, 2019 Debt and Line of Credit (in thousands) | Debt Type | November 3, 2019 | February 3, 2019 | | :-------------------------- | :--------------- | :--------------- | | TRI Senior Secured Note | $24,921 | $25,251 | | TRI Note | $3,500 | $3,500 | | Long-term debt, net of current maturities | $27,880 | $28,283 | | Line of credit | $70,470 | $16,542 | | Delayed draw term loan | $20,000 | $0 | - The Credit Agreement provides for an **$80.0 million** revolving credit facility and a **$50.0 million** delayed draw term loan, maturing on May 17, 2023[50](index=50&type=chunk) - As of November 3, 2019, the Company was in compliance with all financial and non-financial covenants for all debts[51](index=51&type=chunk) [4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES](index=17&type=section&id=4.%20ACCRUED%20EXPENSES%20AND%20OTHER%20CURRENT%20LIABILITIES) Accrued expenses and other current liabilities totaled **$27.8 million** as of November 3, 2019, with significant components including deferred revenue, freight, product returns, and accrued advertising Accrued Expenses and Other Current Liabilities (in thousands) | Category | November 3, 2019 | February 3, 2019 | | :-------------------------------- | :--------------- | :--------------- | | Salaries and benefits | $3,685 | $2,328 | | Deferred revenue | $6,947 | $8,493 | | Freight | $2,947 | $4,141 | | Product returns | $2,997 | $2,088 | | Accrued advertising | $4,374 | $389 | | Other | $6,094 | $8,155 | | Total | $27,750 | $26,530 | [5. INVESTMENT](index=17&type=section&id=5.%20INVESTMENT) The company's available-for-sale security, a corporate trust, was valued at **$6.5 million** using a discounted cash flow method (Level 3 fair value) as of November 3, 2019, reflecting an unrealized gain Available-for-Sale Security (in thousands) as of November 3, 2019 | Metric | Cost or Amortized Cost | Gross Unrealized Gains | Estimated Fair Value | | :-------------------- | :--------------------- | :--------------------- | :------------------- | | Corporate trust | $6,210 | $289 | $6,499 | - The fair value of the available-for-sale security is determined using a **Level 3 discounted cash flow method**[56](index=56&type=chunk) [6. VARIABLE INTEREST ENTITY](index=18&type=section&id=6.%20VARIABLE%20INTEREST%20ENTITY) The company consolidates TRI Holdings, LLC (TRI) as a variable interest entity, being its primary beneficiary, and includes TRI's assets and liabilities in its condensed consolidated balance sheets Impact of TRI Consolidation on Balance Sheet (in thousands) | Category | November 3, 2019 | February 3, 2019 | | :-------------------------- | :--------------- | :--------------- | | Total Assets | $28,074 | $28,580 | | Total Liabilities and Shareholders' Equity | $28,074 | $28,580 | | Long-term debt | $28,421 | $28,751 | | Noncontrolling interest in VIE | $(495) | $(239) | - The Company leases its headquarters from TRI and invested **$6.3 million** in a trust that loaned funds to TRI for construction[61](index=61&type=chunk) [7. EARNINGS (LOSS) PER SHARE](index=19&type=section&id=7.%20EARNINGS%20(LOSS)%20PER%20SHARE) Basic and diluted EPS for the three months ended November 3, 2019, were **$0.01**, a significant improvement from a loss of **$(0.10)** in the prior year, while the nine-month period showed a loss of **$(0.17)** Earnings (Loss) Per Share (Class A and Class B) | Metric | 3 Months Ended Nov 3, 2019 | 3 Months Ended Oct 28, 2018 | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------------------- | :------------------------- | :-------------------------- | :------------------------- | :-------------------------- | | Basic EPS | $0.01 | $(0.10) | $(0.17) | $0.08 | | Diluted EPS | $0.01 | $(0.10) | $(0.17) | $0.08 | - The computation of diluted EPS excluded **0.1 million shares** of unvested restricted stock for the three months ended November 3, 2019, and **55.6 thousand shares** for the nine months ended November 3, 2019, due to their anti-dilutive effect[64](index=64&type=chunk) [8. STOCK-BASED COMPENSATION](index=19&type=section&id=8.%20STOCK-BASED%20COMPENSATION) Stock-based compensation expense was a benefit of **$(0.8) million** for the three months and an expense of **$0.2 million** for the nine months ended November 3, 2019, with **$2.3 million** in unrecognized expense remaining Stock Compensation Expense (Benefit) (in thousands) | Period | 3 Months Ended Nov 3, 2019 | 9 Months Ended Nov 3, 2019 | 3 Months Ended Oct 28, 2018 | 9 Months Ended Oct 28, 2018 | | :-------------------- | :------------------------- | :------------------------- | :-------------------------- | :-------------------------- | | Stock Compensation Expense (Benefit) | $(800) | $200 | $400 | $1,300 | Unvested Restricted Stock Activity (9 Months Ended Nov 3, 2019) | Activity | Shares | Weighted average fair value per share | | :-------------------- | :----- | :------------------------------------ | | Outstanding at Feb 3, 2019 | 321,657 | $14.29 | | Granted | 165,730 | $17.70 | | Vested | (61,647) | $18.90 | | Forfeited | (232,145) | $12.63 | | Outstanding at Nov 3, 2019 | 193,595 | $17.74 | - Unrecognized compensation expense of **$2.3 million** is expected to be recognized over a weighted average period of **2.8 years**[68](index=68&type=chunk) [9. PROPERTY AND EQUIPMENT](index=21&type=section&id=9.%20PROPERTY%20AND%20EQUIPMENT) Net property and equipment decreased to **$139.1 million** as of November 3, 2019, from **$167.1 million** at February 3, 2019, primarily due to changes in buildings and leasehold improvements Property and Equipment, Net (in thousands) | Category | November 3, 2019 | February 3, 2019 | | :-------------------------- | :--------------- | :--------------- | | Land and land improvements | $4,486 | $4,486 | | Leasehold improvements | $41,111 | $32,765 | | Buildings | $37,151 | $71,469 | | Warehouse equipment | $13,798 | $13,051 | | Office equipment and furniture | $45,638 | $36,473 | | Computer equipment | $6,835 | $5,072 | | Software | $26,189 | $24,939 | | Construction in progress | $11,660 | $12,896 | | Total Property and equipment, net | $139,134 | $167,109 | [10. SEGMENT REPORTING](index=21&type=section&id=10.%20SEGMENT%20REPORTING) The company operates in direct and retail segments; for the three months ended November 3, 2019, retail net sales grew **24.1%**, while direct net sales grew **2.9%**, with retail operating income remaining positive Segment Net Sales (in thousands) | Segment | 3 Months Ended Nov 3, 2019 | 3 Months Ended Oct 28, 2018 | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------- | :------------------------- | :-------------------------- | :------------------------- | :-------------------------- | | Direct Net Sales | $61,581 | $59,827 | $187,549 | $186,872 | | Retail Net Sales | $58,187 | $46,874 | $168,426 | $130,689 | | Total Net Sales | $119,768 | $106,701 | $355,975 | $317,561 | Segment Operating Income (Loss) (in thousands) | Segment | 3 Months Ended Nov 3, 2019 | 3 Months Ended Oct 28, 2018 | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------- | :------------------------- | :-------------------------- | :------------------------- | :-------------------------- | | Direct Operating Income (Loss) | $(5,229) | $(8,357) | $(22,054) | $(9,362) | | Retail Operating Income (Loss) | $6,557 | $5,794 | $17,013 | $16,438 | | Total Operating Income (Loss) | $1,328 | $(2,563) | $(5,041) | $7,076 | - Retail segment net sales increased by **24.1%** for the three months and **28.9%** for the nine months ended November 3, 2019, driven by new store openings[74](index=74&type=chunk) [11. CONTRACT ASSETS AND LIABILITIES](index=22&type=section&id=11.%20CONTRACT%20ASSETS%20AND%20LIABILITIES) Contract assets increased to **$1.3 million**, while contract liabilities decreased to **$7.0 million** as of November 3, 2019, with **$7.0 million** revenue recognized from beginning contract liabilities for the nine months Contract Assets and Liabilities (in thousands) | Category | November 3, 2019 | February 3, 2019 | | :-------------------- | :--------------- | :--------------- | | Contract assets | $1,345 | $895 | | Contract liabilities | $6,963 | $8,508 | - Revenue recognized from the beginning contract liability balance was **$1.9 million** for the three months and **$7.0 million** for the nine months ended November 3, 2019[76](index=76&type=chunk) [12. INCOME TAXES](index=24&type=section&id=12.%20INCOME%20TAXES) The effective tax rate for controlling interest was **29%** for the nine months ended November 3, 2019, benefiting from discrete stock compensation items, compared to **27%** in the prior year - The effective tax rate for controlling interest was **29%** for the nine months ended November 3, 2019, and **25%** for the three months ended November 3, 2019[78](index=78&type=chunk) - The effective tax rate for controlling interest was **27%** for the nine months ended October 28, 2018, and **25%** for the three months ended October 28, 2018[78](index=78&type=chunk) [13. RECENT ACCOUNTING PRONOUNCEMENTS](index=24&type=section&id=13.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) No new significant accounting pronouncements impacted the company during the nine months ended November 3, 2019 - No significant new accounting pronouncements during the nine months ended November 3, 2019[79](index=79&type=chunk) [14. SUBSEQUENT EVENTS](index=24&type=section&id=14.%20SUBSEQUENT%20EVENTS) No material subsequent events require disclosure after evaluating through the financial statement issuance date - No material subsequent events to disclose[80](index=80&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance indicators, strategic initiatives, liquidity, capital resources, and critical accounting policies for the periods ended November 3, 2019, against prior periods [Overview](index=25&type=section&id=Overview) Duluth Holdings Inc. is a growing lifestyle apparel brand with **39 consecutive quarters** of net sales growth, planning to moderate capital outlays in 2020 to focus on returns and positive free cash flow - Net sales have increased year-over-year for **39 consecutive quarters** through November 3, 2019[88](index=88&type=chunk) Key Financial Highlights (in millions) | Metric | Fiscal 2019 Q3 | Fiscal 2019 9 Months | | :-------------------- | :------------- | :------------------- | | Net Sales | $119.8 | $356.0 | | Net Income (Loss) | $0.2 | $(5.5) | | Adjusted EBITDA | $7.3 | $12.0 | - The company opened **three new stores** in fiscal 2019 Q3, adding approximately **47,000 gross square footage**, with retail stores achieving an average payback of **less than two years**[88](index=88&type=chunk) - Capital outlays are expected to moderate in 2020, with plans to expand square footage by **30% to 40% less** than the last 3 years, focusing on driving greater returns and positive free cash flow[89](index=89&type=chunk) [How We Assess the Performance of Our Business](index=27&type=section&id=How%20We%20Assess%20the%20Performance%20of%20Our%20Business) The company evaluates performance using Net Sales, Gross Profit, SG&A Expenses, and Adjusted EBITDA, considering Adjusted EBITDA a useful non-GAAP measure for operating performance - Net sales include merchandise sales plus shipping and handling revenue, less returns and discounts, recognized upon shipment for direct sales and at point of sale for retail sales[94](index=94&type=chunk) - Gross profit is net sales less cost of goods sold, with gross margin potentially impacted by declines in shipping and handling revenues[96](index=96&type=chunk) - Selling, general and administrative expenses include payroll, occupancy, marketing, logistics, and professional services, expected to decrease as a percentage of sales over time despite absolute increases[97](index=97&type=chunk)[98](index=98&type=chunk) - Adjusted EBITDA is defined as consolidated net income (loss) before depreciation, amortization, interest, and income taxes, adjusted for certain non-cash and other items not representative of ongoing operating performance[100](index=100&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) This section details the company's financial performance for the three and nine months ended November 3, 2019, analyzing changes in net sales, gross profit, selling, general and administrative expenses, and net income (loss) compared to prior periods [Three Months Ended November 3, 2019 Compared to Three Months Ended October 28, 2018](index=29&type=section&id=Three%20Months%20Ended%20November%203,%202019%20Compared%20to%20Three%20Months%20Ended%20October%2028,%202018) Net sales increased by **12.2%** to **$119.8 million**, driven by **24.1%** retail growth; gross margin decreased by **250 basis points**, but SG&A as a percentage of net sales decreased by **600 basis points**, leading to **$0.2 million** net income Three Months Financial Performance (in thousands, except percentages) | Metric | Nov 3, 2019 | Oct 28, 2018 | Change ($) | Change (%) | | :-------------------------------- | :---------- | :----------- | :--------- | :--------- | | Net Sales | $119,768 | $106,701 | $13,067 | 12.2% | | Direct Net Sales | $61,581 | $59,827 | $1,754 | 2.9% | | Retail Net Sales | $58,187 | $46,874 | $11,313 | 24.1% | | Gross Profit | $65,365 | $60,971 | $4,394 | 7.2% | | Gross Margin % | 54.6% | 57.1% | -2.5% | -250 bps | | SG&A Expenses | $64,037 | $63,534 | $503 | 0.8% | | SG&A % of Net Sales | 53.5% | 59.5% | -6.0% | -600 bps | | Net Income (Loss) attributable to controlling interest | $182 | $(3,150) | $3,332 | N/A | - The decrease in gross margin rate was primarily due to additional global promotions and recent clearance activity[106](index=106&type=chunk) - Advertising and marketing costs as a percentage of net sales decreased by **440 basis points** due to lower catalog circulation and advertising leverage from higher retail sales mix[110](index=110&type=chunk) [Nine Months Ended November 3, 2019 Compared to Nine Months Ended October 28, 2018](index=31&type=section&id=Nine%20Months%20Ended%20November%203,%202019%20Compared%20to%20Nine%20Months%20Ended%20October%2028,%202018) Net sales increased by **12.1%** to **$356.0 million**, with retail sales up **28.9%**; gross margin decreased by **270 basis points**, and SG&A as a percentage of net sales increased by **90 basis points**, resulting in a **$5.5 million** net loss Nine Months Financial Performance (in thousands, except percentages) | Metric | Nov 3, 2019 | Oct 28, 2018 | Change ($) | Change (%) | | :-------------------------------- | :---------- | :----------- | :--------- | :--------- | | Net Sales | $355,975 | $317,561 | $38,414 | 12.1% | | Direct Net Sales | $187,549 | $186,872 | $677 | 0.4% | | Retail Net Sales | $168,426 | $130,689 | $37,737 | 28.9% | | Gross Profit | $191,087 | $179,151 | $11,936 | 6.7% | | Gross Margin % | 53.7% | 56.4% | -2.7% | -270 bps | | SG&A Expenses | $196,128 | $172,075 | $24,053 | 14.0% | | SG&A % of Net Sales | 55.1% | 54.2% | 0.9% | 90 bps | | Net Income (Loss) attributable to controlling interest | $(5,453) | $2,536 | $(7,989) | N/A | - General and administrative expenses as a percentage of net sales increased by **310 basis points**, primarily due to increased occupancy and equipment costs from retail store growth and higher depreciation from technology and corporate facility investments[119](index=119&type=chunk) - Advertising and marketing costs as a percentage of net sales decreased by **200 basis points**, attributed to lower catalog circulation and advertising leverage from a higher retail sales mix[121](index=121&type=chunk) [Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA](index=33&type=section&id=Reconciliation%20of%20Net%20Income%20to%20EBITDA%20and%20EBITDA%20to%20Adjusted%20EBITDA) Adjusted EBITDA for the three months ended November 3, 2019, significantly increased to **$7.3 million** (**6.1%** of net sales), but for the nine-month period, it decreased to **$12.0 million** (**3.4%** of net sales) Adjusted EBITDA Reconciliation (in thousands) | Metric | 3 Months Ended Nov 3, 2019 | 3 Months Ended Oct 28, 2018 | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------- | :------------------------- | :-------------------------- | :------------------------- | :-------------------------- | | Net income (loss) | $89 | $(3,076) | $(5,709) | $2,693 | | EBITDA | $8,009 | $558 | $11,720 | $15,431 | | Stock based compensation | $(747) | $447 | $282 | $1,305 | | Adjusted EBITDA | $7,262 | $1,005 | $12,002 | $16,736 | - Adjusted EBITDA as a percentage of net sales increased by **520 basis points** to **6.1%** for the three months ended November 3, 2019[125](index=125&type=chunk) - Adjusted EBITDA as a percentage of net sales decreased by **190 basis points** to **3.4%** for the nine months ended November 3, 2019[127](index=127&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) The company relies on operating cash and a credit facility for liquidity, with primary cash needs for inventory, marketing, leases, and capital expenditures, reporting **$108.7 million** net working capital [General](index=35&type=section&id=General) Primary liquidity sources are cash from operations and a **$130.0 million** credit facility, with **$38.0 million** in planned fiscal 2019 capital expenditures, and net working capital of **$108.7 million** - Primary liquidity sources are cash from operating activities and a credit facility of up to **$130.0 million** (including an **$80.0 million** revolver and **$50.0 million** DDTL)[128](index=128&type=chunk) - Expected capital expenditures for fiscal 2019 are approximately **$38.0 million**, with **$30.0 million to $32.0 million** allocated for new retail store expansion and remodels[129](index=129&type=chunk) - Net working capital was **$108.7 million** at November 3, 2019, including **$2.2 million** of cash[129](index=129&type=chunk) [Cash Flow Analysis](index=35&type=section&id=Cash%20Flow%20Analysis) For the nine months ended November 3, 2019, net cash used in operating activities increased to **$47.6 million** due to inventory, while financing activities provided **$73.0 million** from credit and term loan proceeds Cash Flow Summary (in thousands) | Activity | 9 Months Ended Nov 3, 2019 | 9 Months Ended Oct 28, 2018 | | :-------------------------------- | :------------------------- | :-------------------------- | | Net cash used in operating activities | $(47,624) | $(23,502) | | Net cash used in investing activities | $(24,541) | $(46,317) | | Net cash provided by financing activities | $73,043 | $65,929 | - Operating cash flow was negative for the nine months, primarily due to an **$85.4 million** increase in inventory for the peak season and new retail stores[135](index=135&type=chunk) - Investing activities included **$20.9 million** in capital expenditures for new retail stores and IT investments, and **$3.7 million** in capital contributions for build-to-suit stores[139](index=139&type=chunk) - Financing activities provided **$73.0 million**, primarily from **$53.9 million** (net) from the revolving line of credit and **$20.0 million** from the term loan[142](index=142&type=chunk) [Line of Credit](index=37&type=section&id=Line%20of%20Credit) The company's credit agreement provides an **$80.0 million** revolving line of credit and a **$50.0 million** delayed draw term loan, both maturing on May 17, 2023, with all covenants in compliance - The credit agreement provides for **$80.0 million** in revolving credit and **$50.0 million** in a delayed draw term loan, maturing on May 17, 2023[50](index=50&type=chunk) - The company was in compliance with all financial and non-financial covenants as of November 3, 2019, and expects to remain so for the remainder of fiscal 2019[145](index=145&type=chunk) [Contractual Obligations](index=37&type=section&id=Contractual%20Obligations) No significant changes have occurred in the company's contractual obligations since the Annual Report on Form 10-K for the fiscal year ended February 3, 2019 - No significant changes to contractual obligations since the 2018 Form 10-K[146](index=146&type=chunk) [Off-Balance Sheet Arrangements](index=37&type=section&id=Off-Balance%20Sheet%20Arrangements) The company is not a party to any material off-balance sheet arrangements - No material off-balance sheet arrangements[147](index=147&type=chunk) [Critical Accounting Policies and Critical Accounting Estimates](index=37&type=section&id=Critical%20Accounting%20Policies%20and%20Critical%20Accounting%20Estimates) No significant changes to critical accounting policies and estimates occurred, except for the adoption of ASC 842 on February 4, 2019, which changed lease accounting - No significant changes to critical accounting policies and estimates, except for the adoption of ASC 842 on February 4, 2019[151](index=151&type=chunk)[152](index=152&type=chunk) [Recent Accounting Pronouncements](index=39&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 13 for information regarding recent accounting pronouncements, indicating no new significant pronouncements during the period - Refers to Note 13 for information on recent accounting pronouncements, which states no new significant pronouncements[154](index=154&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) No significant changes in market risks were noted from the 2018 Form 10-K, with interest rate risk information referenced in Note 3 - No significant changes in market risks as previously disclosed in the 2018 Form 10-K[155](index=155&type=chunk) - Interest rate disclosure related to borrowings under the credit agreement is provided in Note 3[155](index=155&type=chunk) [Item 4. Controls and Procedures](index=39&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of November 3, 2019, and the previously identified material weakness in internal control over financial reporting has been remediated [Evaluation of Disclosure Controls and Procedures](index=39&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of November 3, 2019 - Disclosure controls and procedures were **effective** as of November 3, 2019[156](index=156&type=chunk) [Material Weakness](index=39&type=section&id=Material%20Weakness) The material weakness in internal control over financial reporting, previously disclosed in the 2018 Form 10-K, has been remediated as of November 3, 2019 - The material weakness in internal control over financial reporting has been **remediated** as of November 3, 2019[159](index=159&type=chunk) - Remediation steps included hiring additional resources and automating/enhancing reconciliation process controls[158](index=158&type=chunk) [Changes in Internal Control Over Financial Reporting](index=41&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) No other material changes in internal control over financial reporting occurred during the quarter covered by this Quarterly Report on Form 10-Q - No other material changes in internal control over financial reporting during the quarter[162](index=162&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business, financial condition, operating results, or cash flows - No legal proceedings are expected to have a **material adverse effect** on the company's business[163](index=163&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K have occurred - No material changes to risk factors as previously disclosed in the 2018 Form 10-K[164](index=164&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not sell any unregistered equity securities during the quarter ended November 3, 2019, but acquired shares from employees for tax withholding upon restricted stock vesting - No unregistered equity securities were sold during the quarter ended November 3, 2019[165](index=165&type=chunk) Shares Acquired from Employees for Tax Withholding (Quarter Ended Nov 3, 2019) | Period | Total number of shares purchased | Average price paid per share | | :-------------------------- | :----------------------------- | :--------------------------- | | August 5 - September 1, 2019 | 78 | $11.62 | | September 2 - October 6, 2019 | 46 | N/A | | October 7 - November 3, 2019 | — | N/A | | Total | 124 | $10.59 | [Item 6. Exhibits](index=42&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the CEO and CFO, and XBRL-related documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents[168](index=168&type=chunk) [Signatures](index=43&type=section&id=Signatures) The report is duly signed on behalf of Duluth Holdings Inc. by David Loretta, Senior Vice President and Chief Financial Officer, and Michael Murphy, Vice President and Chief Accounting Officer - The report is signed by David Loretta, Senior Vice President and Chief Financial Officer, and Michael Murphy, Vice President and Chief Accounting Officer[171](index=171&type=chunk)[172](index=172&type=chunk)

Financial Data and Key Metrics Changes - The company reported net sales of $119.8 million for Q3 2019, a 12% increase compared to $106.7 million in the same period last year [10] - Net income for the quarter was $182,000 or $0.01 per diluted share, compared to a net loss of $3.2 million or $0.10 per diluted share last year [17] - Adjusted EBITDA increased to $7.3 million from $1 million year-over-year [17] Business Line Data and Key Metrics Changes - Direct segment sales grew by 2.9%, while retail segment sales increased by 24% [10] - The women's business outpaced men's with an overall growth rate of 19% for the quarter, driven by new product introductions and the expansion of the plus size line [12][13] - Men's business grew by 10%, supported by successful product launches, although faced challenges from unseasonably warm weather affecting outerwear sales [13] Market Data and Key Metrics Changes - The company opened three new stores in Q3, bringing the total to 58 stores compared to 43 stores in the prior year [11] - Markets where stores have been open for at least two years showed positive sales growth, while new store markets experienced lower direct sales growth due to cannibalization [42] Company Strategy and Development Direction - The company is focused on optimizing retail stores and infrastructure to improve ROI on past investments, with a strong emphasis on driving traffic through local advertising and in-store events [6] - Management is implementing a re-platforming of the customer data warehouse system to personalize marketing and improve full-price selling [32] - The company plans to maintain a cautious approach to retail expansion while leveraging existing stores to build brand awareness [5] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's preparedness for the fourth quarter, with improved inventory management and a strong product lineup for the holiday season [9] - There are mixed sentiments regarding consumer spending, but the company is ready to adapt to market conditions [9] - The company expects sales growth of approximately 10% for the full year, with gross margins projected to decline by 100 to 150 basis points [20] Other Important Information - The company experienced a 39% increase in inventory to $183 million, attributed to early deliveries for the peak selling season [18] - Capital expenditures for Q3 were $8 million, down from $19 million the previous year, primarily for new stores [19] Q&A Session Summary Question: Can you provide insight on inventory levels and expectations for the fourth quarter? - Management indicated that inventory was pulled forward by 3 to 4 weeks, resulting in an expected year-over-year increase of 20% to 30% by year-end [24] Question: What are the expectations for sales growth in the fourth quarter? - Sales growth for Q4 is expected to be low to mid-single digits, influenced by the previous year's 53rd week [26] Question: What are the broader thoughts on the state of the business? - Management noted no surprises and emphasized the brand's solid health, despite challenges in the retail environment [28] Question: How do you view margin performance and outlook? - Management expects continued improvement in operating margins, with gross margin impacted by competitive pricing pressures [30] Question: What initiatives are in place to drive top-line growth? - Key initiatives include enhancing customer data systems for personalized marketing and improving omnichannel capabilities [32]

Financial Data and Key Metrics Changes - For Q2 2019, the company reported net sales of $122 million, a 10% increase from $111 million in the previous year [15] - Net income for the quarter was $1.9 million or $0.06 per diluted share, down from $6.4 million or $0.20 per diluted share last year [26] - Adjusted EBITDA decreased to $9.6 million from $13.1 million in the prior year [26] - Selling, general and administrative (SG&A) expenses increased by 16.7% to $61.1 million, compared to $52.3 million last year [21] Business Line Data and Key Metrics Changes - Direct segment sales were flat at $60.3 million, while Retail segment sales grew by 24% to $61.7 million [15] - The women's business outpaced men's with over 20% growth for the quarter, while men's sales faced challenges [19] - The company added four new stores during the quarter, bringing the total to 55 stores compared to 39 stores last year [16] Market Data and Key Metrics Changes - The company experienced sluggish sales trends in the direct channel and existing store markets, particularly in May [17] - The gross margin for the quarter declined by 310 basis points, resulting in a gross profit of $64.8 million [18] - The company expects gross margins to improve in the second half of the fiscal year but will still fall short of recovering first-half declines [20] Company Strategy and Development Direction - The company plans to moderate retail expansion in 2020 to focus on improving asset productivity and operating margin rates [11] - Key priorities include driving top-line growth through new product offerings, leveraging cost structure for profitability, and achieving greater returns on investments [13] - The company aims to transition all apparel goods out of China by 2020, with less than 15% of total sourced products currently exposed to China [21] Management's Comments on Operating Environment and Future Outlook - Management acknowledged that performance in the first half of the year was below expectations, leading to a reduction in guidance for 2019 [10] - The company expects second-half sales growth of roughly 10%, supported by new market expansion and improved inventory flow [34] - Management remains optimistic about long-term growth opportunities despite current challenges [44] Other Important Information - Capital expenditures for Q2 were $7 million, down from $12.8 million last year, primarily for new store openings [31] - The company plans to continue opening stores in new markets but will reduce the pace of capital outlays going into 2020 [32] - The company expects SG&A as a percentage of sales to decrease by over 150 basis points in the second half of the year [25] Q&A Session Summary Question: Update on leadership transition and future plans - Management is committed to overseeing operations and will begin a search for a permanent replacement in early 2020, focusing on candidates with strong brand credentials [41] Question: Thoughts on moderating retail growth - The moderation is seen as a pause to improve operating ratios, with a focus on executing well and building the brand [43] Question: Long-term vision for SG&A ratio - The company aims to leverage SG&A and return operating margins to historical levels, targeting high-single to low-double digit margins [46] Question: Behind-the-scenes investments and their impact - Investments in infrastructure and logistics are expected to yield benefits in SG&A leverage and inventory management [48] Question: Update on women's business as a percentage of total sales - Women's business is trending around 27% of total sales, with potential for growth due to strong marketing and new product launches [51]