Duluth (DLTH) - 2023 Q3 - Quarterly Report

Part I—Financial Information Item 1. Financial Statements The unaudited condensed consolidated financial statements for Q3 2022 report a net loss due to lower gross margins and increased expenses Condensed Consolidated Balance Sheets As of October 30, 2022, total assets increased to $547.7 million from $515.6 million at the end of fiscal 2021, primarily due to a substantial rise in inventory to $204.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 30, 2022 | Jan 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $9,407 | $77,051 | | Inventory, less reserves | $204,717 | $122,672 | | Total current assets | $240,017 | $222,521 | | Total assets | $547,650 | $515,550 | | Liabilities & Equity | | | | Trade accounts payable | $77,842 | $45,402 | | Duluth line of credit | $10,000 | $0 | | Total liabilities | $329,013 | $292,832 | | Total shareholders' equity | $218,637 | $222,718 | Condensed Consolidated Statements of Operations For Q3 2022, the company reported a net loss of $6.2 million, a significant downturn from prior-year net income, driven by decreased gross profit and increased SG&A expenses Q3 Statement of Operations Highlights (in thousands, except per share) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net sales | $147,126 | $145,277 | | Gross profit | $76,921 | $83,650 | | Operating (loss) income | $(7,390) | $4,858 | | Net (loss) income | $(6,243) | $2,763 | | Diluted EPS | $(0.19) | $0.09 | Nine Months Statement of Operations Highlights (in thousands, except per share) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net sales | $411,541 | $427,823 | | Gross profit | $219,592 | $231,619 | | Operating (loss) income | $(4,452) | $19,840 | | Net (loss) income | $(5,225) | $12,209 | | Diluted EPS | $(0.16) | $0.38 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities for the nine months ended October 30, 2022, was $51.0 million, primarily due to an $82.0 million increase in inventory Nine-Month Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(51,008) | $32,758 | | Net cash used in investing activities | $(24,117) | $(8,945) | | Net cash provided by (used in) financing activities | $7,481 | $(50,644) | | Decrease in cash and cash equivalents | $(67,644) | $(26,831) | - The significant cash used in operations was primarily driven by an $82.0 million increase in inventory during the first nine months of fiscal 2022[23][136] Notes to Condensed Consolidated Financial Statements This section details accounting policies, revenue by channel, lease obligations, and the company's amended credit facility, operating as a single segment - The company operates as a lifestyle brand of men's and women's apparel and accessories through an omnichannel platform and reports as a single external segment[26][27] Revenue by Sales Channel (in thousands) | Channel | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Direct-to-consumer | $90,999 | $85,200 | $254,000 | $258,830 | | Stores | $56,127 | $60,077 | $157,541 | $168,993 | | Total | $147,126 | $145,277 | $411,541 | $427,823 | - On July 8, 2022, the company amended its credit agreement, increasing the revolving commitment from $150 million to $200 million and extending the maturity date to July 8, 2027[54] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial results, noting a Q3 net sales increase but a significant profitability drop due to decreased gross margins and higher SG&A expenses amid economic uncertainties - The company is progressing on its "Big Dam Blueprint" strategy, which focuses on key areas such as a digital-first mindset, optimizing retail channels, evolving its multi-brand platform, and making investments to future-proof the business[98] - Management notes that high inflation in the U.S. economy and the ultimate impact of COVID-19 remain uncertainties that could affect operational and financial performance[100][101] Results of Operations Q3 2022 net sales rose 1.3% to $147.1 million, but gross margin declined to 52.3% and SG&A expenses increased, resulting in a net loss of $6.2 million - Q3 net sales increased 1.3% to $147.1 million, while nine-month net sales decreased 3.8% to $411.5 million, with the latter driven by slower store traffic[111][119] - Q3 gross margin decreased to 52.3% from 57.6% year-over-year, primarily due to a higher mix of promotional sales[114] - Q3 SG&A expenses increased 7.0% to $84.3 million, mainly due to increased digital advertising to drive brand awareness and higher depreciation from capital investments[115][116] Reconciliation of Net (Loss) Income to EBITDA and Adjusted EBITDA This section reconciles GAAP net income to non-GAAP EBITDA and Adjusted EBITDA, showing a sharp decline in Adjusted EBITDA for both Q3 and the nine-month period Adjusted EBITDA Reconciliation (in thousands) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $(6,243) | $2,763 | $(5,225) | $12,209 | | EBITDA | $1,021 | $12,377 | $20,877 | $42,721 | | Adjusted EBITDA | $1,747 | $12,982 | $22,877 | $44,333 | Liquidity and Capital Resources The company's liquidity relies on cash from operations and its credit facility, with $9.4 million in cash and planned capital expenditures of $35.0 million for fiscal 2022 - The company expects to spend approximately $35.0 million in fiscal 2022 on capital expenditures, primarily for investments in logistics optimization and information technology[131] - Net cash used in operating activities for the first nine months of 2022 was $51.0 million, a significant reversal from $32.8 million provided in the prior year, mainly due to an $82.0 million increase in inventory[134][136] Item 3. Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risks have occurred since the 2021 Form 10-K, with details on interest rate risk provided in Note 3 - There have been no significant changes in the market risks described in the company's 2021 Form 10-K[147] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of October 30, 2022, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of October 30, 2022[148] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[149] Part II—Other Information Item 1. Legal Proceedings The company is not presently party to any legal proceedings expected to have a material adverse effect on its business - The company is not presently party to any legal proceedings expected to have a material adverse effect on its business[150] Item 1A. Risk Factors There have been no material changes to the company's risk factors as previously disclosed in the fiscal 2021 Annual Report on Form 10-K - There have been no material changes to the company's risk factors as previously disclosed in the fiscal 2021 Annual Report on Form 10-K[151] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not sell unregistered equity securities, only acquiring a small number of shares from employees for tax withholding upon restricted stock vesting Share Repurchases for Tax Withholding (Q3 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Aug 1 - Aug 28, 2022 | 135 | $8.99 | | Aug 29 - Oct 2, 2022 | 64 | $7.07 | | Oct 3 - Oct 30, 2022 | 0 | N/A | | Total | 199 | $8.37 | Item 6. Exhibits This section provides an index of the exhibits filed with the Form 10-Q, which includes certifications from the Chief Executive Officer and Chief Financial Officer, as well as XBRL data files - The exhibits filed with this report include CEO and CFO certifications pursuant to SEC rules and the Sarbanes-Oxley Act, along with XBRL instance and taxonomy documents[156]