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]

Part I—Financial Information This section presents Duluth Holdings Inc.'s unaudited condensed consolidated financial statements and detailed notes for the periods ended August 4, 2019, and February 3, 2019 - The financial statements are condensed and unaudited, prepared according to SEC rules and U.S. GAAP, and should be read in conjunction with the prior annual report[25](index=25&type=chunk) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This item presents the core unaudited condensed consolidated financial statements, providing a snapshot of the company's financial health and performance - The notes are an integral part of these condensed consolidated financial statements, providing context and additional detail for understanding the financial position and performance[5](index=5&type=chunk)[7](index=7&type=chunk)[10](index=10&type=chunk) [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric | August 4, 2019 | February 3, 2019 | Change (vs Feb 3, 2019) | | :--------------------------- | :------------- | :--------------- | :---------------------- | | Total Assets | $434,095 | $295,305 | +$138,790 | | Total Liabilities | $280,795 | $135,195 | +$145,600 | | Total Shareholders' Equity | $153,300 | $160,110 | -$6,810 | | Cash | $3,468 | $731 | +$2,737 | | Inventory | $114,849 | $97,685 | +$17,164 | | Operating Lease ROU Assets | $115,053 | — | +$115,053 | | Operating Lease Liabilities | $101,173 | — | +$101,173 | | Long-term line of credit | $45,000 | $16,542 | +$28,458 | [Condensed Consolidated Statements of Operations](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Condensed Consolidated Statements of Operations (Amounts in thousands, except per share figures) | Metric | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :----------------------------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Net Sales | $121,963 | $110,653 | $236,207 | $210,860 | | Gross Profit | $64,804 | $62,240 | $125,722 | $118,180 | | Operating Income (Loss) | $3,735 | $9,896 | $(6,369) | $9,639 | | Net Income (Loss) attributable to controlling interest | $1,936 | $6,377 | $(5,636) | $5,686 | | Basic EPS | $0.06 | $0.20 | $(0.17) | $0.18 | | Diluted EPS | $0.06 | $0.20 | $(0.17) | $0.18 | [Condensed Consolidated Statements of Comprehensive Income](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) Condensed Consolidated Statements of Comprehensive Income (Amounts in thousands) | Metric | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :----------------------------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Net Income (Loss) | $1,846 | $6,452 | $(5,799) | $5,769 | | Other comprehensive income | — | — | — | — | | Comprehensive income (loss) attributable to controlling interest | $1,936 | $6,377 | $(5,636) | $5,686 | [Condensed Consolidated Statement of Shareholders' Equity (August 4, 2019)](index=8&type=section&id=Condensed%20Consolidated%20Statement%20of%20Shareholders'%20Equity%20(August%204%2C%202019)) Condensed Consolidated Statement of Shareholders' Equity (Six Months Ended August 4, 2019) (Amounts in thousands) | Metric | February 3, 2019 Balance | Cumulative effect from adoption of ASC 842 | Issuance of common stock | Stock-based compensation | Restricted stock activity | Net loss | August 4, 2019 Balance | | :----------------------------------- | :----------------------- | :----------------------------------------- | :----------------------- | :----------------------- | :------------------------ | :------- | :--------------------- | | Capital stock | $89,849 | — | $134 | $946 | — | — | $91,075 | | Treasury stock | $(92) | — | — | — | $(313) | — | $(405) | | Retained earnings | $70,592 | $(1,924) | — | — | — | $(7,572) | $63,032 | | Noncontrolling interest | $(239) | — | — | — | — | $(163) | $(402) | | Total shareholders' equity | $160,110 | $(1,924) | $134 | $946 | $(313) | $(7,645) | $153,300 | [Condensed Consolidated Statement of Shareholders' Equity (July 29, 2018)](index=9&type=section&id=Condensed%20Consolidated%20Statement%20of%20Shareholders'%20Equity%20(July%2029%2C%202018)) Condensed Consolidated Statement of Shareholders' Equity (Six Months Ended July 29, 2018) (Amounts in thousands) | Metric | January 28, 2018 Balance | Cumulative effect from adoption of ASC 606 | Issuance of common stock | Stock-based compensation | Restricted stock activity | Net (loss) income | July 29, 2018 Balance | | :----------------------------------- | :----------------------- | :----------------------------------------- | :----------------------- | :----------------------- | :------------------------ | :---------------- | :-------------------- | | Capital stock | $88,043 | — | — | $858 | — | — | $88,901 | | Treasury stock | $(57) | — | — | — | $(35) | — | $(92) | | Retained earnings | $48,084 | $(648) | — | — | — | $5,686 | $53,122 | | Noncontrolling interest | $3,279 | — | — | — | — | $83 | $3,362 | | Total shareholders' equity | $139,349 | $(648) | — | $858 | $(35) | $5,769 | $145,293 | [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Metric | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :-------------------------------------- | :--------------------------- | :---------------------------- | | Net cash used in operating activities | $(8,045) | $(12,585) | | Net cash used in investing activities | $(16,713) | $(27,325) | | Net cash provided by financing activities | $27,829 | $36,404 | | Increase (decrease) in cash and restricted cash | $3,071 | $(3,506) | | Cash and restricted cash at end of period | $6,156 | $3,577 | [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 financial statements, covering operations, accounting policies, and specific line items [1. Nature of Operations and Basis of Presentation](index=11&type=section&id=1.%20NATURE%20OF%20OPERATIONS%20AND%20BASIS%20OF%20PRESENTATION) - Duluth Holdings Inc. is an omni-channel retailer of men's and women's apparel and accessories, operating **52 retail stores and three outlet stores** as of August 4, 2019[21](index=21&type=chunk) - The company's business is seasonal, with a significant portion of revenue and operating profit recognized in the fourth fiscal quarter due to the holiday season[26](index=26&type=chunk) - The company has two classes of common stock (Class A and Class B) with identical rights except for voting (Class A has ten votes per share, Class B has one)[22](index=22&type=chunk) [2. Leases](index=13&type=section&id=2.%20LEASES) - Adopted ASC 842 on February 4, 2019, recognizing a **$121.8 million ROU asset** and **$115.5 million lease liability**, net of adjustments[31](index=31&type=chunk)[34](index=34&type=chunk) Lease Expense Components (Amounts in thousands) | Expense Type | Three Months Ended Aug 4, 2019 | Six Months Ended Aug 4, 2019 | | :----------------------------------------- | :----------------------------- | :--------------------------- | | Total finance lease expense | $923 | $1,060 | | Operating lease expense | $3,481 | $7,159 | | Amortization of capital contribution build-to-suit leases | $265 | $479 | | Variable lease expense | $2,040 | $3,652 | | Total lease expense | $6,709 | $12,350 | Future Minimum Lease Payments (Amounts in thousands) | Fiscal Year (remainder) | Finance Lease | Operating Lease | | :---------------------- | :------------ | :-------------- | | 2019 | $1,135 | $7,082 | | 2020 | $2,269 | $13,994 | | 2021 | $2,269 | $13,365 | | 2022 | $2,269 | $13,586 | | 2023 | $2,291 | $13,772 | | Thereafter | $27,877 | $77,325 | | Total | $38,110 | $139,124 | [3. Debt and Line of Credit](index=16&type=section&id=3.%20DEBT%20AND%20LINE%20OF%20CREDIT) Debt and Line of Credit (Amounts in thousands) | Debt Type | August 4, 2019 | February 3, 2019 | | :---------------------------- | :------------- | :--------------- | | TRI Senior Secured Note | $25,041 | $25,251 | | TRI Note | $3,500 | $3,500 | | Capital lease obligations | — | $32 | | Total Debt (before maturities)| $28,541 | $28,783 | | Long-term debt | $28,016 | $28,283 | | Line of credit | $45,000 | $16,542 | - The company has a **$130.0 million credit facility**, comprising an **$80.0 million revolving credit** and a **$50.0 million delayed draw term loan**, both maturing on May 17, 2023[48](index=48&type=chunk) - As of August 4, 2019, the company was in compliance with all financial and non-financial covenants for its debts[49](index=49&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 (Amounts in thousands) | Category | August 4, 2019 | February 3, 2019 | | :------------------------------------- | :------------- | :--------------- | | Salaries and benefits | $2,365 | $2,328 | | Deferred revenue | $6,861 | $8,493 | | Freight | $998 | $4,141 | | Product returns | $2,001 | $2,088 | | Catalog costs | $3 | $503 | | Unpaid purchases of property & equipment | $509 | $433 | | Accrued advertising | $5,596 | $389 | | Other | $5,360 | $8,155 | | Total | $23,693 | $26,530 | [5. Investment](index=17&type=section&id=5.%20INVESTMENT) - The company's available-for-sale security is valued using a Level 3 discounted cash flow method, incorporating U.S. Treasury yield curve, credit information, and estimated future cash flows[54](index=54&type=chunk) Available-for-Sale Security (Amounts in thousands) | Metric | August 4, 2019 | February 3, 2019 | | :----------------------------------- | :------------- | :--------------- | | Corporate trust (Fair Value) | $6,239 | $6,295 | Future Principal Receipts of Available-for-Sale Security (Amounts in thousands) | Maturity Period | Estimated Fair Value | | :------------------------------- | :------------------- | | Within one year | $124 | | After one year through five years| $866 | | After five years through ten years | $1,378 | | After ten years | $3,871 | | Total | $6,239 | [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 (VIE) because it is considered the primary beneficiary, having the power to direct activities and receive significant benefits[57](index=57&type=chunk)[58](index=58&type=chunk) Consolidated Amounts from TRI (Amounts in thousands) | Metric | August 4, 2019 | February 3, 2019 | | :----------------------------------- | :------------- | :--------------- | | Total Assets | $28,260 | $28,580 | | Total Liabilities and Shareholders' Equity | $28,260 | $28,580 | | Long-term debt | $28,541 | $28,751 | [7. Earnings (Loss) Per Share](index=20&type=section&id=7.%20EARNINGS%20(LOSS)%20PER%20SHARE) Earnings (Loss) Per Share (Amounts in thousands, except per share data) | Metric | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :----------------------------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Net income (loss) attributable to controlling interest | $1,936 | $6,377 | $(5,636) | $5,686 | | Basic EPS | $0.06 | $0.20 | $(0.17) | $0.18 | | Diluted EPS | $0.06 | $0.20 | $(0.17) | $0.18 | - **0.2 million shares** of unvested restricted stock were excluded from diluted EPS for the six months ended August 4, 2019, as their inclusion would be anti-dilutive due to a net loss[61](index=61&type=chunk) [8. Stock-Based Compensation](index=20&type=section&id=8.%20STOCK-BASED%20COMPENSATION) - Total stock compensation expense recognized was **$0.5 million** for the three months and **$0.9 million** for the six months ended August 4, 2019 (and July 29, 2018)[63](index=63&type=chunk) Unvested Restricted Stock Activity (Six Months Ended August 4, 2019) | Activity | Shares | Weighted average fair value per share | | :---------------------------- | :-------- | :------------------------------------ | | Outstanding at February 3, 2019 | 321,657 | $14.29 | | Granted | 165,190 | $17.73 | | Vested | (61,262) | $18.86 | | Forfeited | (7,858) | $19.23 | | Outstanding at August 4, 2019 | 417,727 | $14.89 | - Unrecognized compensation expense related to restricted stock awards was **$4.3 million** as of August 4, 2019, expected to be recognized over a weighted average period of **2.9 years**[63](index=63&type=chunk) [9. Property and Equipment](index=21&type=section&id=9.%20PROPERTY%20AND%20EQUIPMENT) Property and Equipment, Net (Amounts in thousands) | Category | August 4, 2019 | February 3, 2019 | | :-------------------------------- | :------------- | :--------------- | | Land and land improvements | $4,486 | $4,486 | | Leasehold improvements | $40,161 | $32,765 | | Buildings | $36,486 | $71,469 | | Warehouse equipment | $13,155 | $13,051 | | Office equipment and furniture | $43,879 | $36,473 | | Computer equipment | $6,194 | $5,072 | | Software | $25,669 | $24,939 | | Total (gross) | $170,191 | $188,416 | | Accumulated depreciation and amortization | $(43,526) | $(34,203) | | Construction in progress | $9,762 | $12,896 | | Property and equipment, net | $136,427 | $167,109 | [10. Segment Reporting](index=21&type=section&id=10.%20SEGMENT%20REPORTING) - The company operates in two reportable segments: direct (website and catalogs) and retail (stores)[66](index=66&type=chunk) Net Sales by Segment (Amounts in thousands) | Segment | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :------ | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Direct | $60,267 | $60,833 | $125,968 | $127,045 | | Retail | $61,696 | $49,820 | $110,239 | $83,815 | | Total | $121,963 | $110,653 | $236,207 | $210,860 | Operating Income (Loss) by Segment (Amounts in thousands) | Segment | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :------ | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Direct | $(4,146) | $1,123 | $(16,825) | $(1,005) | | Retail | $7,881 | $8,773 | $10,456 | $10,644 | | Total | $3,735 | $9,896 | $(6,369) | $9,639 | Net Sales by Business (Amounts in thousands) | Business | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Men's | $80,090 | $75,434 | $155,890 | $143,354 | | Women's | $35,742 | $29,625 | $67,915 | $56,785 | | Hard goods/other | $6,131 | $5,594 | $12,402 | $10,721 | | Total | $121,963 | $110,653 | $236,207 | $210,860 | [11. Contract Assets and Liabilities](index=22&type=section&id=11.%20CONTRACT%20ASSETS%20AND%20LIABILITIES) - Contract assets primarily consist of the right of return for inventory expected to be resold, recorded in Prepaid expenses and other current assets[72](index=72&type=chunk) - Contract liabilities primarily consist of gift card liabilities, recorded under deferred revenue in accrued expenses and other current liabilities[72](index=72&type=chunk) Contract Assets and Liabilities (Amounts in thousands) | Metric | August 4, 2019 | February 3, 2019 | | :--------------------- | :------------- | :--------------- | | Contract assets | $777 | $895 | | Contract liabilities | $6,930 | $8,508 | [12. Income Taxes](index=22&type=section&id=12.%20INCOME%20TAXES) - The effective tax rate related to controlling interest was **26%** for both the three and six months ended August 4, 2019, and July 29, 2018[74](index=74&type=chunk) - Income from TRI, a limited liability company, is excluded from the effective tax rate calculation as it is not subject to income taxes[74](index=74&type=chunk) [13. Recent Accounting Pronouncements](index=22&type=section&id=13.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) - No new significant accounting pronouncements during the six months ended August 4, 2019[75](index=75&type=chunk) [14. Subsequent Events](index=23&type=section&id=14.%20SUBSEQUENT%20EVENTS) - No material subsequent events to disclose through the date of financial statement issuance[77](index=77&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&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, results of operations, and liquidity for the reported periods - The discussion should be read in conjunction with the financial statements and notes in Item 1 and the prior annual report on Form 10-K[79](index=79&type=chunk) - The company is a growing lifestyle brand of men's and women's casual wear, workwear, and accessories, sold exclusively through its omni-channel platform (direct and retail)[81](index=81&type=chunk) [Forward-Looking Statements](index=24&type=section&id=Forward-Looking%20Statements) - The report contains forward-looking statements about future financial condition, results of operations, plans, and strategies, identifiable by words like "anticipate," "expect," and "will"[80](index=80&type=chunk) - All forward-looking statements are subject to risks and uncertainties, including those detailed in the company's 2018 Form 10-K, and the company does not commit to updating them[80](index=80&type=chunk) [Overview](index=24&type=section&id=Overview) - Net sales have increased year-over-year for **38 consecutive quarters** through August 4, 2019[85](index=85&type=chunk) Key Financial Highlights (Amounts in millions) | Metric | Q2 FY2019 (3 months ended Aug 4, 2019) | Q2 FY2018 (3 months ended Jul 29, 2018) | H1 FY2019 (6 months ended Aug 4, 2019) | H1 FY2018 (6 months ended Jul 29, 2018) | | :----------------------------------- | :------------------------------------- | :-------------------------------------- | :------------------------------------- | :-------------------------------------- | | Net Sales | $122.0 million (+10.2% YoY) | $110.7 million | $236.2 million (+12.0% YoY) | $210.9 million | | Net Income (Loss) | $1.9 million | $6.4 million | $(5.6) million | $5.7 million | | Adjusted EBITDA | $9.6 million | $13.1 million | $4.7 million (-69.9% YoY) | $15.7 million | - The company opened **four new stores** in Q2 FY2019, adding approximately **61,000 gross square footage**, with retail stores achieving an average payback of less than two years[85](index=85&type=chunk) - Capital outlays are expected to moderate in 2020, with store expansion square footage decreasing by **30% to 40%** compared to the last three years, to focus on driving greater returns and operating earnings[86](index=86&type=chunk) [How We Assess the Performance of Our Business](index=26&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, and are a key metric for annual bonus compensation[91](index=91&type=chunk) - Gross profit is net sales less cost of goods sold, with gross margin impacted by product margins, promotions, clearance activity, and shipping and handling revenues[93](index=93&type=chunk) - Selling, general and administrative expenses include payroll, occupancy, marketing, logistics, and professional services, and are expected to decrease as a percentage of sales over time despite absolute increases[94](index=94&type=chunk)[95](index=95&type=chunk) - Adjusted EBITDA is a non-U.S. GAAP measure used to assess operating performance by excluding depreciation, amortization, interest, taxes, and certain non-cash/non-recurring items[96](index=96&type=chunk)[97](index=97&type=chunk) [Results of Operations](index=28&type=section&id=Results%20of%20Operations) Consolidated Results of Operations (Percentage of Net Sales) | Metric | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :----------------------------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Direct net sales % | 49.4% | 55.0% | 53.3% | 60.3% | | Retail net sales % | 50.6% | 45.0% | 46.7% | 39.7% | | Gross margin % | 53.1% | 56.2% | 53.2% | 56.0% | | Selling, general and administrative expenses % | 50.1% | 47.3% | 55.9% | 51.5% | | Operating income (loss) % | 3.1% | 8.9% | (2.7)% | 4.6% | | Net income (loss) attributable to controlling interest % | 1.6% | 5.8% | (2.4)% | 2.7% | [Three Months Ended August 4, 2019 Compared to Three Months Ended July 29, 2018](index=28&type=section&id=Three%20Months%20Ended%20August%204%2C%202019%20Compared%20to%20Three%20Months%20Ended%20July%2029%2C%202018) - Net sales increased by **$11.3 million (10.2%)** to **$122.0 million**, primarily due to an **$11.9 million (23.8%) increase** in the retail segment, driven by new store openings (55 stores vs. 39 stores)[101](index=101&type=chunk) - Gross margin decreased by **310 basis points** to **53.1% of net sales**, mainly due to additional global promotions and recent clearance activity[103](index=103&type=chunk) - Selling, general and administrative expenses increased by **$8.7 million (16.7%)** to **$61.1 million**, rising to **50.1% of net sales**, driven by increased occupancy, depreciation, and personnel costs[104](index=104&type=chunk)[107](index=107&type=chunk) - Net income decreased from **$6.4 million** to **$1.9 million**[109](index=109&type=chunk) [Six Months Ended August 4, 2019 Compared to Six Months Ended July 29, 2018](index=29&type=section&id=Six%20Months%20Ended%20August%204%2C%202019%20Compared%20to%20Six%20Months%20Ended%20July%2029%2C%202018) - Net sales increased by **$25.3 million (12.0%)** to **$236.2 million**, driven by a **$26.4 million (31.5%) increase** in the retail segment[110](index=110&type=chunk) - Gross margin decreased by **280 basis points** to **53.2% of net sales**, primarily due to increased clearance and discounts, and a slight decrease in shipping revenues[111](index=111&type=chunk) - Selling, general and administrative expenses increased by **$23.6 million (21.7%)** to **$132.1 million**, rising to **55.9% of net sales**, mainly due to higher occupancy, depreciation, and personnel costs[116](index=116&type=chunk)[119](index=119&type=chunk) - The company reported a net loss of **$5.6 million**, compared to a net income of **$5.7 million** in the prior year period[121](index=121&type=chunk) [Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA](index=31&type=section&id=Reconciliation%20of%20Net%20Income%20to%20EBITDA%20and%20EBITDA%20to%20Adjusted%20EBITDA) Reconciliation of Net Income to EBITDA and Adjusted EBITDA (Amounts in thousands) | Metric | Three Months Ended Aug 4, 2019 | Three Months Ended Jul 29, 2018 | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :----------------------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Net income (loss) | $1,846 | $6,452 | $(5,799) | $5,769 | | Depreciation and amortization | $5,013 | $2,760 | $9,405 | $5,069 | | Interest expense | $1,203 | $1,234 | $1,631 | $2,055 | | Income tax expense (benefit) | $678 | $2,212 | $(2,005) | $1,980 | | EBITDA | $9,005 | $12,658 | $3,711 | $14,873 | | Stock based compensation | $555 | $449 | $1,029 | $858 | | Adjusted EBITDA | $9,560 | $13,107 | $4,740 | $15,731 | - Adjusted EBITDA decreased by **$3.5 million** to **$9.6 million (7.8% of net sales)** for the three months ended August 4, 2019, and by **$11.0 million** to **$4.7 million (2.0% of net sales)** for the six months ended August 4, 2019, compared to prior year periods[123](index=123&type=chunk)[126](index=126&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) - Primary liquidity sources are cash from operating activities and a **$130.0 million credit facility** (revolving line of credit and delayed draw term loan)[127](index=127&type=chunk) - Expected capital expenditures for fiscal 2019 are **$38.0 million to $42.0 million**, with **$30.0 million to $32.0 million** allocated for new retail store expansion and remodels[128](index=128&type=chunk) - Net working capital was **$66.1 million** at August 4, 2019, including **$3.5 million cash**[128](index=128&type=chunk) - Despite negative operating cash flow in the first three quarters due to seasonality and inventory build-up, the company expects positive cash flows from operations for the full fiscal year 2019[128](index=128&type=chunk)[133](index=133&type=chunk) [General](index=33&type=section&id=General) - The company's primary cash needs are for inventory, marketing and advertising, payroll, store leases, and capital expenditures for new stores, infrastructure, and information technology[127](index=127&type=chunk) - Due to seasonality, a significant portion of cash from operating activities is generated in the fourth fiscal quarter, with the first three quarters typically being net users of cash for inventory acquisition and capital expenditures[128](index=128&type=chunk) [Cash Flow Analysis](index=33&type=section&id=Cash%20Flow%20Analysis) Summary of Cash Flow Activities (Amounts in thousands) | Activity | Six Months Ended Aug 4, 2019 | Six Months Ended Jul 29, 2018 | | :---------------------------------------- | :--------------------------- | :---------------------------- | | Net cash used in operating activities | $(8,045) | $(12,585) | | Net cash used in investing activities | $(16,713) | $(27,325) | | Net cash provided by financing activities | $27,829 | $36,404 | | Increase (decrease) in cash and restricted cash | $3,071 | $(3,506) | - Net cash used in operating activities for the six months ended August 4, 2019, was **$8.0 million**, primarily due to a net loss and a **$17.2 million increase** in inventory[134](index=134&type=chunk) - Net cash used in investing activities was **$16.7 million**, driven by **$13.8 million** in capital expenditures for new retail stores and IT, and **$3.0 million** in capital contributions for build-to-suit stores[138](index=138&type=chunk) - Net cash provided by financing activities was **$27.8 million**, mainly from **$28.5 million (net) proceeds** from the revolving line of credit to fund working capital[141](index=141&type=chunk) [Line of Credit](index=35&type=section&id=Line%20of%20Credit) - The credit agreement provides for **$80.0 million** in revolving credit and **$50.0 million** in a delayed draw term loan, both maturing on May 17, 2023[143](index=143&type=chunk) - The credit agreement is secured by essentially all company assets and requires compliance with financial and non-financial covenants, including leverage and fixed charge coverage ratios[143](index=143&type=chunk) - The company was in compliance with all covenants as of August 4, 2019, and expects to remain so for the rest of fiscal 2019[144](index=144&type=chunk) [Contractual Obligations](index=35&type=section&id=Contractual%20Obligations) - No significant changes to contractual obligations since the fiscal year ended February 3, 2019[145](index=145&type=chunk) [Off-Balance Sheet Arrangements](index=35&type=section&id=Off-Balance%20Sheet%20Arrangements) - The company is not a party to any material off-balance sheet arrangements[146](index=146&type=chunk) [Critical Accounting Policies and Critical Accounting Estimates](index=35&type=section&id=Critical%20Accounting%20Policies%20and%20Critical%20Accounting%20Estimates) - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, which are evaluated on an ongoing basis[147](index=147&type=chunk) - No significant changes to critical accounting policies and estimates since the 2018 Form 10-K, except for the adoption of new lease accounting guidance (ASC 842)[149](index=149&type=chunk)[150](index=150&type=chunk) [Recently Adopted Accounting Pronouncements](index=37&type=section&id=Recently%20Adopted%20Accounting%20Pronouncements) - The company adopted ASC 842, Leases, on February 4, 2019, using the optional transition method, which means prior period information was not restated[150](index=150&type=chunk) [Recent Accounting Pronouncements](index=37&type=section&id=Recent%20Accounting%20Pronouncements) - Refers to Note 13 for information on recent accounting pronouncements, which indicates no new significant pronouncements during the period[152](index=152&type=chunk)[75](index=75&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item reports no significant changes in market risks since the 2018 Form 10-K, with details on interest rate risk in Note 3 - No significant changes in market risks since the 2018 Form 10-K[153](index=153&type=chunk) - Information on interest rate risk related to the line of credit is provided in Note 3, "Debt and Line of Credit"[153](index=153&type=chunk) [Item 4. Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) This item reports ineffective disclosure controls and procedures due to a material weakness, though financial statements are deemed fairly presented - Disclosure controls and procedures were not effective as of August 4, 2019, due to a material weakness in internal control over financial reporting[154](index=154&type=chunk) - Management concluded that, despite the material weakness, the consolidated financial statements fairly present the company's financial position, results of operations, and cash flows in conformity with U.S. GAAP[157](index=157&type=chunk) [Evaluation of Disclosure Controls and Procedures](index=37&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - The CEO and CFO concluded that disclosure controls and procedures were not effective as of August 4, 2019, due to a material weakness[154](index=154&type=chunk) [Material Weakness](index=37&type=section&id=Material%20Weakness) - A material weakness existed due to insufficient resources to timely detect and resolve issues from a new order management system conversion and inconsistent execution of account reconciliations[155](index=155&type=chunk) - Remediation steps include correctly allocating resources and enhancing the reconciliation process, but the weakness is not yet remediated[156](index=156&type=chunk) [Changes in Internal Control Over Financial Reporting](index=37&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) - No other material changes in internal control over financial reporting occurred during the period[158](index=158&type=chunk) Part II—Other Information This section covers other required disclosures, including legal proceedings, risk factors, unregistered equity sales, and filed exhibits [Item 1. Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is not party to any legal proceedings that would materially adversely affect its business, financial condition, operating results, or cash flows - The company is not currently party to any legal proceedings that would have a material adverse effect on its business, financial condition, operating results, or cash flows[160](index=160&type=chunk) [Item 1A. Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) This item refers to the 2018 Form 10-K for risk factors, noting no material changes to previously disclosed risks - No material changes to risk factors previously disclosed in the 2018 Form 10-K[161](index=161&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=39&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 August 4, 2019 - No unregistered equity securities were sold during the quarter ended August 4, 2019[162](index=162&type=chunk) [Item 6. Exhibits](index=40&type=section&id=Item%206.%20Exhibits) This item provides an index of exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL documents - The exhibit index includes certifications from the CEO and CFO, as well as XBRL instance and taxonomy documents[164](index=164&type=chunk) [Signatures](index=41&type=section&id=Signatures) This section contains the official signatures of the registrant's authorized officers, certifying the report - The report is signed by David Loretta, Senior Vice President and Chief Financial Officer, and Michael Murphy, Corporate Controller, on behalf of Duluth Holdings Inc[167](index=167&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________________________ FORM 10-Q _________________________________________ ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 5, 2019 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 Number 001-37641 _________________________________________ DULUTH HOL ...

Duluth Holdings Inc. (NASDAQ:DLTH) Q1 2019 Earnings Conference Call June 13, 2019 9:30 AM ET Â Company Participants Stephanie Pugliese - President, Chief Executive Officer Dave Loretta - Executive Vice President, Chief Financial Officer Donni Case - Investor Relations Conference Call Participants John Morris - DA Davidson Jonathan Komp - Robert W. Baird Jim Duffy - Stifel Operator Good morning everyone and welcome to the Duluth Holdings fiscal year 2019 earnings conference call. All participants will be in ...

Financial Performance - Net sales for fiscal 2018 increased by 20.5% year-over-year to $568.1 million[246] - Net income for fiscal 2018 was flat at $23.2 million compared to the prior year[246] - Adjusted EBITDA for fiscal 2018 increased by 11.6% to $51.8 million[246] - Net sales increased by $96.7 million, or 20.5%, to $568.1 million in fiscal 2018 compared to $471.4 million in fiscal 2017, driven by a $77.0 million increase in retail net sales[260] - Gross profit rose by $49.4 million, or 18.9%, to $310.4 million in fiscal 2018, with a gross margin of 54.6%, down from 55.4% in fiscal 2017[261] - Selling, general and administrative expenses increased by $49.3 million, or 22.0%, to $273.2 million in fiscal 2018, representing 48.1% of net sales[262] - Net income was $23.2 million in fiscal 2018, slightly down from $23.4 million in fiscal 2017[272] - For the fiscal year ended February 3, 2019, net sales increased to $568.1 million, up 21% from $471.4 million in the previous year[358] - Gross profit for the same period was $310.4 million, representing a gross margin of approximately 54.6%[358] - Operating income was reported at $37.2 million, slightly up from $37.1 million in the prior year[358] - Net income attributable to controlling interest was $23.2 million, compared to $23.4 million in the previous year, reflecting a decrease of 0.8%[358] Retail Segment Performance - The direct segment accounted for 61.7% of consolidated net sales in fiscal 2018, down from 70.2% in fiscal 2017[243] - Retail segment net sales represented 38.3% of consolidated net sales in fiscal 2018, up from 29.8% in fiscal 2017[243] - Retail segment operating income increased by $13.7 million, or 57.7%, to $37.5 million in fiscal 2018, with an operating income margin of 17.3%[269] - The company operated 46 stores in fiscal 2018 compared to 31 stores in fiscal 2017, contributing to the increase in retail net sales[260] - The company opened 15 retail stores in fiscal 2018, adding approximately 250,000 gross square feet[243] - The company anticipates opening 15 new stores in fiscal 2019[294] Debt and Assets - Total assets increased to $296.8 million in fiscal 2018 from $223.1 million in fiscal 2017[246] - Total debt rose to $46.8 million in fiscal 2018 from $1.5 million in fiscal 2017[246] - As of February 3, 2019, the company had total contractual cash obligations of $237.63 million, including $16.54 million in revolving line of credit and $190.85 million in operating leases[314] - The company’s total debt obligations as of February 3, 2019, amounted to $30.24 million, with $27.07 million maturing in 2024 and after[314] - Total liabilities rose to $136.6 million, compared to $83.8 million in the prior year, indicating a significant increase in leverage[356] - Total debt as of February 3, 2019, is $30.237 million, a significant increase from $1.508 million in January 28, 2018[430] Cash Flow and Investments - Net cash provided by operating activities was $31.1 million for fiscal 2018, consisting of net income of $23.2 million and non-cash depreciation and amortization of $12.6 million[298] - Net cash used in investing activities was $53.7 million for fiscal 2018, primarily driven by capital expenditures of $53.0 million[303] - Net cash provided by financing activities was $18.6 million for fiscal 2018, including borrowings of $130.1 million on the revolving line of credit[307] - The company expects to spend approximately $40.0 million to $45.0 million in fiscal 2019 on capital expenditures, including $30.0 million to $32.0 million for new retail store expansion[294] Tax and Compliance - Income tax expense decreased to $8.4 million in fiscal 2018 from $11.9 million in fiscal 2017, with an effective tax rate of 26.7%[271] - The effective tax rate related to controlling interest decreased to 33.7% in fiscal 2017 from 38.9% in fiscal 2016[286] - The company was in compliance with all financial and non-financial covenants as of the fiscal year ended February 3, 2019[312] Inventory and Assets Management - The company’s inventories are stated at the lower of cost and net realizable value, with significant estimates used in inventory valuation including obsolescence and shrinkage[321] - Inventory increased to $97.7 million, up from $89.5 million, reflecting a 9.5% rise year-over-year[356] - The principal supplier accounted for 52%, 50%, and 51% of total inventory expenditures in fiscal 2018, 2017, and 2016, respectively[389] Stock and Compensation - The number of Class B common stock available for future issuance under the 2015 Plan was 2,949,658 shares as of February 4, 2019[406] - Total stock compensation expense related to restricted stock was $1.6 million for fiscal 2018, consistent with fiscal 2017, and $1.2 million for fiscal 2016[408] - As of February 3, 2019, the company had unrecognized compensation expense of $2.5 million related to restricted stock awards, expected to be recognized over a weighted average period of 2.2 years[410] Accounting Changes - The company recognized revenue from direct sales upon shipment of the product for fiscal 2018, a change from prior periods where revenue was recognized upon customer receipt[317] - The company expects to adopt ASU 2016-02 on February 4, 2019, which will result in an increase in assets and liabilities due to the recording of right-of-use assets and corresponding lease liabilities[339] - The company's net sales for the year ended February 3, 2019, were reported at $568.1 million, with adjustments due to ASC 606 resulting in a net sales figure of $565.2 million[429] - The gross profit for the same period was $310.4 million, adjusted to $309.5 million after ASC 606[429] - The total liabilities reported were $136.6 million, adjusted to $139.6 million without ASC 606[429]