Duluth (DLTH) - 2024 Q3 - Quarterly Report

Part I—Financial Information Item 1. Financial Statements The company's financial statements for the period ended October 29, 2023, show a decrease in net sales and an increase in net loss compared to the prior year, with key balance sheet changes including a significant drop in cash, an increase in inventory, and the utilization of the line of credit Condensed Consolidated Balance Sheets As of October 29, 2023, total assets were $526.0 million, a slight decrease from $527.5 million at January 29, 2023, with key changes including a decrease in cash and cash equivalents from $45.5 million to $8.2 million, and an increase in inventory from $154.9 million to $174.0 million, alongside a $36.0 million draw on the Duluth line of credit | (Amounts in millions) | October 29, 2023 | January 29, 2023 | | :--- | :--- | :--- | | Total current assets | $203.5 | $221.7 | | Total assets | $526.0 | $527.5 | | Total current liabilities | $141.2 | $118.3 | | Total liabilities | $312.1 | $300.3 | | Total shareholders' equity | $213.9 | $227.2 | | Total liabilities and shareholders' equity | $526.0 | $527.5 | - Cash and cash equivalents decreased significantly to $8.2 million from $45.5 million at the beginning of the fiscal year[9] - Inventory increased to $174.0 million from $154.9 million, while a $36.0 million balance appeared on the Duluth line of credit[9][12] Condensed Consolidated Statements of Operations For the third quarter ended October 29, 2023, net sales decreased to $138.2 million from $147.1 million year-over-year, resulting in a net loss of $10.5 million, compared to a $6.2 million loss in the same period last year, with the nine-month period showing net sales falling to $401.1 million from $411.5 million and the net loss widening to $16.4 million from $5.2 million year-over-year | (Amounts in millions) | Three Months Ended Oct 29, 2023 | Three Months Ended Oct 30, 2022 | Nine Months Ended Oct 29, 2023 | Nine Months Ended Oct 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $138.2 | $147.1 | $401.1 | $411.5 | | Gross profit | $69.4 | $76.9 | $206.5 | $219.6 | | Operating loss | $(12.4) | $(7.4) | $(18.4) | $(4.5) | | Net loss attributable to controlling interest | $(10.5) | $(6.2) | $(16.3) | $(5.1) | | Net loss per share (Basic & Diluted) | $(0.32) | $(0.19) | $(0.50) | $(0.16) | Condensed Consolidated Statements of Cash Flows For the nine months ended October 29, 2023, net cash used in operating activities was $31.0 million, a significant outflow driven by a net loss of $16.4 million and a $19.0 million increase in inventory, while net cash used in investing activities was $39.8 million, primarily for property and equipment purchases, and net cash provided by financing activities was $33.5 million, largely from proceeds from the line of credit, resulting in a decrease in cash and cash equivalents of $37.4 million | (Amounts in millions) | Nine Months Ended Oct 29, 2023 | Nine Months Ended Oct 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(31.0) | $(51.0) | | Net cash used in investing activities | $(39.8) | $(24.1) | | Net cash provided by financing activities | $33.5 | $7.5 | | Decrease in cash and cash equivalents | $(37.4) | $(67.6) | | Cash and cash equivalents at end of period | $8.2 | $9.4 | Notes to Condensed Consolidated Financial Statements The notes detail the company's accounting policies, business operations, and financial arrangements, including the disaggregation of revenue by channel showing declines in both direct-to-consumer and store sales, and outlining its debt structure, including a $200 million revolving credit facility with $36 million drawn as of the reporting date - The company operates as a single reportable segment with an omnichannel business approach, selling men's and women's casual wear, workwear, and accessories[29][30] | (Amounts in millions) | Three Months Ended Oct 29, 2023 | Three Months Ended Oct 30, 2022 | | :--- | :--- | :--- | | Direct-to-consumer | $87.0 | $91.0 | | Stores | $51.2 | $56.1 | | Total | $138.2 | $147.1 | - The company's credit agreement provides for borrowings up to $200.0 million; as of October 29, 2023, the company had $36.0 million outstanding on its line of credit and was in compliance with all covenants[55][56][51] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 6.1% decrease in Q3 net sales to declines in store traffic, partially offset by improved online conversion rates, with gross margin contracting from 52.3% to 50.2% due to a lower mix of full-price sales, and SG&A expenses decreasing slightly due to lower advertising spend, resulting in a net loss of $10.5 million for the quarter and an Adjusted EBITDA of negative $1.6 million, while liquidity relies on cash from operations and its credit facility, with approximately $55.0 million in capital expenditures planned for fiscal 2023 Results of Operations For the third quarter of fiscal 2023, net sales fell 6.1% to $138.2 million, driven by lower store traffic, with gross margin declining by 210 basis points to 50.2% due to increased promotional activity, and SG&A expenses decreasing by 2.9% to $81.8 million, leading to a net loss of $10.5 million for the quarter and $16.3 million for the nine months - Q3 net sales decreased by $8.9 million (6.1%) to $138.2 million, primarily due to declines in store traffic[112] - Q3 gross margin decreased to 50.2% from 52.3% in the prior year, driven by a lower mix of full-price sales compared to promotional sales[114] - Q3 SG&A expenses decreased by $2.5 million (2.9%) due to reduced advertising spending and fulfillment efficiencies, partially offset by higher personnel costs and depreciation[115][116] Reconciliation of Net Loss to Adjusted EBITDA Adjusted EBITDA, a non-GAAP measure, decreased to a loss of $1.6 million in the third quarter of 2023 from a positive $1.7 million in the same period of 2022, and for the nine-month period, Adjusted EBITDA fell to $12.3 million from $22.9 million year-over-year, reflecting lower sales and gross profit | (Amounts in millions) | Three Months Ended Oct 29, 2023 | Three Months Ended Oct 30, 2022 | Nine Months Ended Oct 29, 2023 | Nine Months Ended Oct 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(10.5) | $(6.2) | $(16.4) | $(5.2) | | EBITDA | $(2.6) | $1.0 | $9.0 | $20.9 | | Adjusted EBITDA | $(1.6) | $1.7 | $12.3 | $22.9 | Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and its credit facility, with working capital at $62.3 million as of October 29, 2023, including $8.2 million in cash, and net cash used in operating activities for the first nine months of fiscal 2023 totaling $31.0 million, while capital expenditures for fiscal 2023 are expected to be approximately $55.0 million, focused on logistics and IT investments - The company's primary sources of liquidity are cash from operating activities and its credit facility[130] - Capital expenditures for fiscal 2023 are expected to be approximately $55.0 million, primarily for investments in logistics optimization and information technology[131] - For the nine months ended October 29, 2023, net cash used in operating activities was $31.0 million, while net cash provided by financing activities was $33.5 million, mainly from $36.0 million in net borrowings under the revolving line of credit[134][136][140] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no significant changes in the market risks described in its Annual Report on Form 10-K for the fiscal year ended January 29, 2023, with the primary market risk relating to interest rate fluctuations on borrowings under its credit agreement - There have been no significant changes in the market risks from those disclosed in the company's 2022 Form 10-K[147] Item 4. Controls and Procedures Based on an evaluation as of the end of the quarter, the Chief Executive Officer and Interim Chief Financial Officer concluded that the company's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - Management, including the CEO and Interim CFO, concluded that as of October 29, 2023, the company's disclosure controls and procedures were effective[148] - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[149] Part II—Other Information Item 1. Legal Proceedings The company is not currently party to any legal proceedings that it believes would have a material adverse effect on its business, financial condition, or results of operations - The company is not presently a 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 its Annual Report on Form 10-K for the fiscal year 2022 - No material changes to the company's risk factors have occurred since the filing of its fiscal 2022 Annual Report on Form 10-K[151] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not sell any unregistered equity securities during the quarter, but did acquire 1,702 shares from employees at an average price of $6.10 per share to satisfy minimum tax withholding requirements upon the vesting of restricted stock - During the three months ended October 29, 2023, the company acquired a total of 1,702 shares from employees to satisfy tax withholding obligations related to vested restricted stock[152][153] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The report includes certifications from the CEO and Interim CFO as required by the Sarbanes-Oxley Act, as well as XBRL financial data[155]