Duluth (DLTH) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Duluth Holdings Inc.'s unaudited condensed consolidated financial statements and management's analysis for the quarter ended May 1, 2022 Item 1. Financial Statements This section presents Duluth Holdings Inc.'s unaudited condensed consolidated financial statements and related notes for the quarter ended May 1, 2022 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity | ASSETS | May 1, 2022 ($ thousands) | January 30, 2022 ($ thousands) | |:--------------------------------------------------------------------------|:--------------------------|:-------------------------------| | Cash and cash equivalents | 40,370 | 77,051 | | Inventory, less reserves | 152,244 | 122,672 | | Total current assets | 214,133 | 222,521 | | Total assets | 502,793 | 515,550 | | LIABILITIES AND SHAREHOLDERS' EQUITY | May 1, 2022 ($ thousands) | January 30, 2022 ($ thousands) | |:--------------------------------------------------------------------------|:--------------------------|:-------------------------------| | Trade accounts payable | 54,523 | 45,402 | | Accrued expenses and other current liabilities | 32,214 | 47,504 | | Total current liabilities | 108,151 | 115,996 | | Total liabilities | 281,404 | 292,832 | | Total shareholders' equity | 221,389 | 222,718 | | Total liabilities and shareholders' equity | 502,793 | 515,550 | - Total assets decreased from $515.55 million at January 30, 2022, to $502.79 million at May 1, 2022. This was primarily driven by a decrease in cash and cash equivalents from $77.05 million to $40.37 million, despite an increase in inventory from $122.67 million to $152.24 million[8] - Total liabilities decreased from $292.83 million to $281.40 million, mainly due to a reduction in accrued expenses and other current liabilities from $47.50 million to $32.21 million, partially offset by an increase in trade accounts payable[11] Condensed Consolidated Statements of Operations This section details the company's financial performance, including net sales, gross profit, operating income, and net income | Metric | Three Months Ended May 1, 2022 ($ thousands) | Three Months Ended May 2, 2021 ($ thousands) | |:------------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Net sales | 122,904 | 133,419 | | Cost of goods sold | 55,841 | 66,876 | | Gross profit | 67,063 | 66,543 | | Selling, general and administrative expenses | 67,994 | 64,648 | | Operating (loss) income | (931) | 1,895 | | Net (loss) income attributable to controlling interest | (1,294) | 544 | | Basic (loss) earnings per share | (0.04) | 0.02 | | Diluted (loss) earnings per share | (0.04) | 0.02 | - Net sales decreased by 7.9% from $133.4 million in Q1 2021 to $122.9 million in Q1 2022. Despite this, gross profit slightly increased by 0.8% to $67.1 million, and gross margin improved from 49.9% to 54.6%[14] - The company reported a net loss attributable to controlling interest of $(1.29) million, or $(0.04) per share, in Q1 2022, a significant decline from net income of $0.54 million, or $0.02 per share, in Q1 2021[14] Condensed Consolidated Statements of Comprehensive Income This section presents the company's comprehensive income, including net income and other comprehensive income components | Metric | Three Months Ended May 1, 2022 ($ thousands) | Three Months Ended May 2, 2021 ($ thousands) | |:------------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Net (loss) income | (1,323) | 498 | | Other comprehensive (loss) income | (336) | 202 | | Comprehensive (loss) income | (1,659) | 700 | | Comprehensive (loss) income attributable to controlling interest | (1,630) | 746 | - Comprehensive loss attributable to controlling interest was $(1.63) million for the three months ended May 1, 2022, a decrease from comprehensive income of $0.75 million in the prior year, primarily due to the net loss and unrealized security losses[17] Condensed Consolidated Statement of Shareholders' Equity This section outlines changes in the company's shareholders' equity, including capital stock, retained earnings, and comprehensive income | Metric | January 30, 2022 ($ thousands) | May 1, 2022 ($ thousands) | |:------------------------------------------------|:-------------------------------|:--------------------------| | Capital stock | 95,515 | 96,299 | | Treasury stock | (1,002) | (1,457) | | Retained earnings | 130,868 | 129,575 | | Accumulated other comprehensive income | 489 | 153 | | Noncontrolling interest | (3,152) | (3,181) | | Total shareholders' equity | 222,718 | 221,389 | - Total shareholders' equity decreased from $222.72 million at January 30, 2022, to $221.39 million at May 1, 2022, primarily driven by a net loss of $(1.29) million and other comprehensive loss of $(0.34) million[20] Condensed Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities | Cash Flow Activity | Three Months Ended May 1, 2022 ($ thousands) | Three Months Ended May 2, 2021 ($ thousands) | |:------------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Net cash (used in) provided by operating activities | (31,717) | 12,423 | | Net cash used in investing activities | (3,843) | (1,974) | | Net cash used in financing activities | (1,121) | (31,616) | | Decrease in cash, cash equivalents | (36,681) | (21,167) | | Cash and cash equivalents at end of period | 40,370 | 26,054 | - Net cash used in operating activities was $(31.72) million in Q1 2022, a significant shift from $12.42 million provided in Q1 2021, primarily due to a $29.57 million increase in inventory and a $17.50 million decrease in accrued expenses[26][133] - Net cash used in investing activities increased to $(3.84) million in Q1 2022 from $(1.97) million in Q1 2021, driven by higher capital expenditures for information technology investments[26][135] - Net cash used in financing activities decreased substantially to $(1.12) million in Q1 2022 from $(31.62) million in Q1 2021, as the prior year included significant payments on long-term debt[26][137][138] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of accounting policies, significant estimates, and other financial information 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION This note describes Duluth Holdings Inc.'s business, omnichannel operations, accounting principles, and seasonal financial performance - Duluth Holdings Inc. is a lifestyle brand specializing in men's and women's casual wear, workwear, and accessories, sold primarily through its omnichannel platform[29] - The company operates as one reportable external segment and consolidates TRI Holdings, LLC as a variable interest entity[30][32] - Inventory is valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method, with reserves for excess and obsolete items totaling $2.0 million as of May 1, 2022[38][40] - The business is seasonal, with a significant portion of revenue and operating profit historically recognized in the fourth fiscal quarter due to the holiday season[42] 2. LEASES This note details the company's lease accounting, including Right-of-use assets, lease liabilities, and future minimum payments - The Company recognizes Right-of-use (ROU) assets and lease liabilities for non-cancelable retail space leases, with terms typically ranging from five to fifteen years and expiring through 2036[47][48] | Lease Expense Type | Three Months Ended May 1, 2022 ($ thousands) | Three Months Ended May 2, 2021 ($ thousands) | |:-------------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Total finance lease expense | 1,306 | 1,333 | | Operating lease expense | 4,389 | 3,951 | | Amortization of build-to-suit leases capital contribution | 321 | 328 | | Variable lease expense | 1,972 | 2,059 | | Total lease expense | 7,988 | 7,671 | | Fiscal Year (in thousands) | Finance Lease Payments | Operating Lease Payments | |:---------------------------|:-----------------------|:-------------------------| | 2022 (remainder) | $3,393 | $13,261 | | 2023 | $4,551 | $17,919 | | 2024 | $4,736 | $17,304 | | 2025 | $5,098 | $16,554 | | 2026 | $3,993 | $15,612 | | Thereafter | $33,225 | $59,227 | | Total future minimum lease payments | $54,996 | $139,877 | 3. DEBT AND CREDIT AGREEMENT This note outlines the company's debt structure, including TRI Holdings' notes and the $150.0 million revolving senior credit facility | Debt Type | May 1, 2022 ($ thousands) | January 30, 2022 ($ thousands) | |:------------------------------|:--------------------------|:-------------------------------| | TRI Senior Secured Note | 23,651 | 23,801 | | TRI Note | 3,500 | 3,500 | | Total Debt | 27,151 | 27,301 | | Less: current maturities | 711 | 693 | | TRI long-term debt | 26,440 | 26,608 | - The company entered into a new credit agreement on May 14, 2021, providing a $150.0 million revolving senior credit facility, maturing on May 14, 2026[58] - As of May 1, 2022, the company was in compliance with all financial and non-financial covenants of the New Credit Agreement[59] 4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES This note details the components and changes in accrued expenses and other current liabilities, which decreased to $32.21 million | Category | May 1, 2022 ($ thousands) | January 30, 2022 ($ thousands) | |:-------------------------------------------------|:--------------------------|:-------------------------------| | Salaries and benefits | 5,206 | 11,773 | | Deferred revenue | 9,054 | 10,791 | | Freight | 4,174 | 8,942 | | Product returns | 4,381 | 5,439 | | Unpaid purchases of property & equipment | 3,004 | 794 | | Accrued advertising | 3,178 | 600 | | Total accrued expenses and other current liabilities | 32,214 | 47,504 | - Total accrued expenses and other current liabilities decreased by $15.29 million, or 32.2%, from $47.50 million at January 30, 2022, to $32.21 million at May 1, 2022[60] 5. FAIR VALUE This note explains the company's fair value measurements for its available-for-sale security and TRI long-term debt - The company's available-for-sale security (corporate trust) is valued using a Level 3 discounted cash flow method[65] | Metric | May 1, 2022 ($ thousands) | January 30, 2022 ($ thousands) | |:-------------------------------------|:--------------------------|:-------------------------------| | Available-for-sale security (Fair Value) | 6,066 | 6,554 | | TRI Long-term debt (Fair Value) | 25,731 | 27,804 | - The fair value of the available-for-sale security decreased from $6.55 million to $6.07 million, with an unrealized security loss of $(0.45) million recognized during the three months ended May 1, 2022[17][66] 6. VARIABLE INTEREST ENTITY This note explains the consolidation of TRI Holdings, LLC as a variable interest entity, which owns the company's headquarters - Duluth Holdings Inc. consolidates TRI Holdings, LLC (TRI) as a variable interest entity (VIE) because it is deemed the primary beneficiary, having the power to direct TRI's activities and receive significant benefits[71][72] - TRI's primary purpose is to own the real property for the company's headquarters, which Duluth leases[72] | TRI Consolidated Amounts (in thousands) | May 1, 2022 | January 30, 2022 | |:----------------------------------------|:------------|:-----------------| | Property and equipment, net | $24,025 | $24,180 | | Total assets | $24,049 | $24,201 | | TRI Long-term debt | $26,440 | $26,608 | | Noncontrolling interest in VIE | $(3,181) | $(3,152) | | Total liabilities and shareholders' equity | $24,049 | $24,201 | 7. (LOSS) EARNINGS PER SHARE This note presents basic and diluted loss per share for the three months ended May 1, 2022, and explains anti-dilutive impacts | Metric | Three Months Ended May 1, 2022 | Three Months Ended May 2, 2021 | |:------------------------------------------------|:-------------------------------|:-------------------------------| | Net (loss) income attributable to controlling interest ($ thousands) | (1,294) | 544 | | Weighted average shares outstanding (Basic) | 32,714 | 32,540 | | Weighted average shares outstanding (Diluted) | 32,714 | 32,720 | | Basic (loss) earnings per share | (0.04) | 0.02 | | Diluted (loss) earnings per share | (0.04) | 0.02 | - Diluted (loss) earnings per share was $(0.04) for the three months ended May 1, 2022, compared to $0.02 for the same period in 2021[76] - 0.2 million shares of unvested restricted stock were excluded from the diluted EPS calculation for Q1 2022 because their inclusion would have been anti-dilutive due to the net loss[76] 8. STOCK-BASED COMPENSATION This note details stock-based compensation expense and outstanding unvested restricted stock awards, including unrecognized expense - Total stock compensation expense associated with restricted stock was $0.6 million for the three months ended May 1, 2022, up from $0.4 million in the prior year[78] | Restricted Stock Activity | Shares | Weighted average fair value per share | |:--------------------------------|:----------|:--------------------------------------| | Outstanding at January 30, 2022 | 405,334 | $13.54 | | Granted | 279,638 | $12.77 | | Vested | (96,207) | $13.75 | | Forfeited | (969) | $15.61 | | Outstanding at May 1, 2022 | 587,796 | $13.19 | - As of May 1, 2022, unrecognized compensation expense related to restricted stock awards was $6.6 million, to be recognized over a weighted average period of 3.0 years[79] 9. PROPERTY AND EQUIPMENT This note provides a breakdown of property and equipment, net, which decreased to $108.28 million due to depreciation and new investments | Category | May 1, 2022 ($ thousands) | January 30, 2022 ($ thousands) | |:----------------------------------------|:--------------------------|:-------------------------------| | Land and land improvements | 4,486 | 4,486 | | Leasehold improvements | 48,125 | 48,093 | | Buildings | 35,359 | 35,359 | | Software | 35,413 | 34,207 | | Total gross property and equipment | 202,976 | 201,973 | | Accumulated depreciation and amortization | (101,426) | (97,473) | | Construction in progress | 6,733 | 5,578 | | Property and equipment, net | 108,283 | 110,078 | - Net property and equipment decreased by $1.79 million, or 1.6%, from $110.08 million at January 30, 2022, to $108.28 million at May 1, 2022[82] 10. REVENUE This note describes the company's revenue recognition policies, sales channel performance, and contract balances - Revenue is recognized upon shipment for direct-to-consumer sales and at the point of sale for store sales, net of returns and excluding taxes[83] | Sales Channel | Three Months Ended May 1, 2022 ($ thousands) | Three Months Ended May 2, 2021 ($ thousands) | |:-------------------|:---------------------------------------------|:---------------------------------------------| | Direct-to-consumer | 77,680 | 88,366 | | Stores | 45,224 | 45,053 | | Total | 122,904 | 133,419 | | Contract Balances (in thousands) | May 1, 2022 | January 30, 2022 | |:---------------------------------|:------------|:-----------------| | Contract assets | $1,852 | $2,235 | | Contract liabilities | $9,054 | $10,791 | - Gift card breakage revenue is recorded within Net sales when no escheat liability to relevant jurisdictions exists[89] 11. INCOME TAXES This note details the company's income tax benefit and effective tax rate for Q1 2022, excluding TRI's income - Income tax benefit was $(0.44) million for the three months ended May 1, 2022, compared to an income tax expense of $0.11 million in the prior year[14][122] - The effective tax rate related to controlling interest increased to 25% for Q1 2022 from 16% for Q1 2021[90][122] - Income from TRI Holdings, LLC is excluded from the effective tax rate calculation as TRI is a limited liability company and not subject to income taxes[90] 12. RECENT ACCOUNTING PRONOUNCEMENTS This note discusses the company's evaluation of ASU 2016-13, expected to be adopted in fiscal year 2023 - The company is evaluating the impact of adopting ASU 2016-13, which requires a forward-looking approach to estimate credit losses on financial instruments[91] - As a smaller reporting company, Duluth Holdings Inc. expects to adopt ASU 2016-13 on January 30, 2023, for its fiscal year 2023[91] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Duluth Holdings Inc.'s financial condition and operational results Overview This section provides an overview of Duluth Holdings Inc.'s business, key Q1 2022 financial results, and strategic initiatives - Duluth Holdings Inc. is a lifestyle brand offering men's and women's casual wear, workwear, and accessories through its omnichannel platform, operating 62 retail stores and three outlet stores as of May 1, 2022[96] - Key financial results for Q1 fiscal 2022 include a 7.9% decrease in net sales to $122.9 million, a net loss of $(1.3) million (compared to $0.5 million net income in prior year), and Adjusted EBITDA decreasing to $7.9 million (from $9.6 million)[100][125] - The company is executing its "Big Dam Blueprint" strategy, focusing on a digital-first mindset, optimizing owned retail channels, evolving its multi-brand platform, testing new opportunities, and accelerating investments in logistics automation and technology[102] How We Assess the Performance of Our Business This section explains key financial metrics used to evaluate the company's performance, including net sales, gross profit, and EBITDA - Net sales include merchandise sales plus shipping and handling revenue, less returns and discounts, recognized upon shipment for direct-to-consumer and at point of sale for stores[107] - Gross profit is net sales less cost of goods sold, with gross margin as a percentage of net sales. Cost of goods sold includes direct merchandise cost, inventory shrinkage, adjustments, and inbound/distribution center freight[108] - Selling, general and administrative (SG&A) expenses include payroll, occupancy, marketing, logistics, consulting, and software costs. SG&A as a percentage of net sales is typically higher in lower-volume quarters[109] - Adjusted EBITDA is a non-GAAP measure defined as consolidated net income before depreciation, amortization, interest, and income taxes, adjusted for non-cash and other non-representative items. It is used to assess operating performance and determine bonus compensation[111][112] Results of Operations This section analyzes the company's operational results for the three months ended May 1, 2022, focusing on key financial metrics | Metric | Three Months Ended May 1, 2022 ($ thousands) | Three Months Ended May 2, 2021 ($ thousands) | |:------------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Net sales | 122,904 | 133,419 | | Gross profit | 67,063 | 66,543 | | Gross margin | 54.6% | 49.9% | | Selling, general and administrative expenses | 67,994 | 64,648 | | Operating (loss) income | (931) | 1,895 | | Net (loss) income attributable to controlling interest | (1,294) | 544 | | Adjusted EBITDA | 7,886 | 9,556 | - Net sales decreased by $10.5 million (7.9%) to $122.9 million, primarily due to supply chain disruptions and heavier clearance sales in the prior year. Store market sales decreased by 5.4%, and non-store market sales decreased by 12.5%[116][117] - Gross profit increased by $0.5 million (0.8%) to $67.1 million, with gross margin improving to 54.6% from 49.9%, driven by a higher mix of full-price sales due to reduced promotional activity[119] - Selling, general and administrative expenses increased by $3.3 million (5.2%) to $68.0 million, rising to 55.3% of net sales from 48.5%, mainly due to investments in new headcount, increased depreciation, and higher advertising expense[120][121] - Adjusted EBITDA decreased by $1.7 million to $7.9 million, representing 6.4% of net sales, down from 7.2% in the prior year[125] Liquidity and Capital Resources This section discusses the company's liquidity sources, cash needs, working capital, and cash flow activities - The company's primary liquidity sources are cash from operating activities and its credit facility. Key cash needs include inventory, marketing, payroll, store leases, and capital expenditures for infrastructure, IT, and new stores[126] - Net working capital was $106.0 million at May 1, 2022, including $40.4 million in cash and cash equivalents[127] - Expected capital expenditures for fiscal 2022 are approximately $40.0 million, primarily for logistics optimization and automated fulfillment centers[128] - Net cash used in operating activities was $(31.7) million in Q1 2022, primarily due to a $29.6 million increase in inventory and a $17.5 million decrease in accrued expenses[133] - Net cash used in investing activities was $(3.8) million, driven by $3.9 million in capital expenditures for information technology[135] - Net cash used in financing activities was $(1.1) million, mainly for payments on finance lease obligations[137] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no significant changes in the company's market risks since its 2021 Form 10-K filing - No significant changes in market risks were reported compared to the 2021 Form 10-K[144] - Disclosure on interest rate risk related to the credit agreement is available in Note 3 of the Condensed Consolidated Financial Statements[144] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of May 1, 2022[145] - No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report on Form 10-Q[146] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, equity security sales, and exhibits Item 1. Legal Proceedings This section states that the company is not currently involved in any legal proceedings expected to have a material adverse effect - The company is not currently party to any legal proceedings expected to have a material adverse effect on its business, financial condition, operating results, or cash flows[147] - Reserves are established for specific legal matters when an unfavorable outcome is probable and the loss is reasonably estimable[147] Item 1A. Risk Factors This section confirms no material changes to the company's risk factors since its fiscal 2021 Annual Report on Form 10-K - No material changes to risk factors were reported compared to the fiscal 2021 Annual Report on Form 10-K[149] - The company operates in a rapidly changing environment with inherent risks that may materially affect its business, financial condition, and results of operations[149] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered equity security sales and details shares acquired from employees for tax withholding - No unregistered equity securities were sold during the quarter ended May 1, 2022[151] | Period | Total number of shares purchased | Average price per share | |:--------------------------------------|:---------------------------------|:------------------------| | January 31, 2022 - February 27, 2022 | 50,817 | $14.40 | | February 28, 2022 - April 3, 2022 | 30,048 | $13.12 | | April 4, 2022 - May 1, 2022 | 15,342 | $12.32 | | Total | 96,207 | $13.67 | - The company acquired 96,207 shares from employees to cover tax withholding requirements on vested restricted stock, with an average price of $13.67 per share[152] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including executive compensation plans and various certifications - Exhibits include executive severance plans, director compensation summaries, and CEO/CFO certifications[154] - XBRL Instance Document and Taxonomy Extension documents are furnished, not filed, in accordance with Regulation S-T[154] Signatures This section confirms the due signing of the Quarterly Report on Form 10-Q by the company's key financial officers - The report was signed on June 3, 2022, by David Loretta, Senior Vice President and Chief Financial Officer, and Michael Murphy, Vice President and Chief Accounting Officer[158]