Duluth (DLTH) - 2021 Q1 - Quarterly Report

FORM 10-Q Filing Information 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 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] - The company's Class B Common Stock trades on the NASDAQ Global Select Market under the symbol 'DLTH'[1] 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 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 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 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 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 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 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 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] - Gross profit decreased by $8,586 thousand, or 14.1%, to $52,332 thousand (YoY)[13] - Net loss increased by $7,534 thousand, or 98.6%, to $15,179 thousand (YoY)[13] Condensed Consolidated Statements of Comprehensive Income 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] Condensed Consolidated Statement of Shareholders' Equity 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][10] - Retained earnings decreased by $15,135 thousand due to the net loss for the period[17] Condensed Consolidated Statements of Cash Flows 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][142] - Net cash provided by financing activities increased by $22,295 thousand (YoY), driven by proceeds from term loans and revolving line of credit[23][147] Notes to Condensed Consolidated Financial Statements 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 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] - 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] - 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][34][35] 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 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] - 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] 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 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] - Loan covenants were amended to allow for greater flexibility during peak borrowing periods in fiscal 2020[58] - As of May 3, 2020, the Company was in compliance with all financial and non-financial covenants for its debts[59] 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 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] - Deferred revenue decreased from $9,946 thousand to $7,890 thousand (YoY)[61] 5. FAIR VALUE 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] 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][67] 6. VARIABLE INTEREST ENTITY 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][72] - TRI's primary purpose is to own the real property for the Company's headquarters in Mt. Horeb, Wisconsin[72] 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 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] - 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] 8. STOCK-BASED COMPENSATION 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] - 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] 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 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] - Accumulated depreciation and amortization increased by $5,841 thousand[79] 10. REVENUE 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] 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] - Store sales decreased by $25,156 thousand, or 51.8% (YoY), primarily due to temporary store closures from COVID-19[83] 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 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] 12. RECENT ACCOUNTING PRONOUNCEMENTS 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] - The Company is currently evaluating the level of impact ASU 2016-13 will have on its consolidated financial statements[89] 13. SUBSEQUENT EVENTS 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] - Significant reductions in customer visits and spending could result in loss of sales and profits and other material adverse effects[90] - The Company cannot reliably estimate the length or severity of the COVID-19 outbreak or its full financial impact[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - Net sales in fiscal 2020 first quarter decreased by 3.8% to $109,917 thousand (YoY)[98] - Net loss was $15,179 thousand in fiscal 2020 first quarter, compared to $7,645 thousand in the prior year (YoY)[98] - Adjusted EBITDA was $(11,564) thousand in fiscal 2020 first quarter, compared to $(4,407) thousand in the prior year (YoY)[98] - 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] COVID-19 Impact and Response 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] - 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] - Planned capital expenditures were reduced by 50%, primarily by decreasing new store openings to four in fiscal 2020[108] - The Company recognized $1,600 thousand in non-recurring COVID-19 related expenses during the quarter[109] - As of June 4, 2020, 58 of the 62 retail stores have re-opened in some capacity[109] How We Assess the Performance of Our Business 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] - 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] - 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][116] - 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] Results of Operations 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] - 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] - Gross margin decreased to 47.6% from 53.3% (YoY), primarily due to extended clearance and new sitewide sale events[124] 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] Liquidity and Capital Resources 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] - 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] - 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] - 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - Interest rate disclosures for borrowings under the credit agreement are provided in Note 3, 'Debt and Line of Credit'[159] Item 4. Controls and Procedures 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] - No material changes in internal control over financial reporting occurred during the period[161] - COVID-19 did not materially impact the ability to maintain internal control over financial reporting and disclosure controls and procedures[162] PART II. OTHER INFORMATION This section provides information on legal proceedings, risk factors, equity sales, and exhibits for the reporting period Item 1. Legal Proceedings 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] - Reserves are established for legal matters when an unfavorable outcome is probable and estimable[163] Item 1A. Risk Factors 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] - 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][166] - The impact of civil unrest on the business, financial condition, and results of operations cannot presently be estimated[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] 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 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] - Certifications from the Chief Executive Officer and Chief Financial Officer are filed as Exhibits 31.1, 31.2, 32.1, and 32.2[172] - XBRL-related information (Exhibits 101.INS, SCH, CAL, DEF, LAB, PRE) is furnished, not filed, in accordance with Regulation S-T[172] SIGNATURES This section contains the official signatures for the Quarterly Report on Form 10-Q, confirming its due authorization Report Signatures 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] - Signed by David Loretta, Senior Vice President and Chief Financial Officer[175] - Signed by Michael Murphy, Vice President and Chief Accounting Officer[176]