Duluth (DLTH) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements and detailed notes for periods ended August 1, 2021, and January 31, 2021 Condensed Consolidated Balance Sheets | ASSETS (in thousands) | August 1, 2021 | January 31, 2021 | | :-------------------- | :------------- | :--------------- | | Cash and cash equivalents | $18,921 | $47,221 | | Inventory, net | $134,887 | $149,052 | | Total current assets | $169,849 | $209,760 | | Total assets | $463,158 | $515,577 | | LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands) | August 1, 2021 | January 31, 2021 | | :-------------------------------------------------- | :------------- | :--------------- | | Total current liabilities | $85,684 | $95,714 | | Total liabilities | $261,256 | $324,479 | | Total shareholders' equity | $201,902 | $191,098 | Condensed Consolidated Statements of Operations | Metric (in thousands) | Three Months Ended Aug 1, 2021 | Three Months Ended Aug 2, 2020 | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :-------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net sales | $149,127 | $137,375 | $282,546 | $247,292 | | Gross profit | $81,426 | $72,472 | $147,969 | $124,804 | | Operating income (loss) | $13,087 | $9,792 | $14,982 | $(9,182) | | Net income (loss) | $8,947 | $5,898 | $9,445 | $(9,281) | | Net income (loss) attributable to controlling interest | $8,992 | $5,941 | $9,536 | $(9,194) | Condensed Consolidated Statements of Comprehensive Income | Metric (in thousands) | Three Months Ended Aug 1, 2021 | Three Months Ended Aug 2, 2020 | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :-------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) | $8,947 | $5,898 | $9,445 | $(9,281) | | Other comprehensive income (loss) | $314 | $248 | $516 | $(270) | | Comprehensive income (loss) | $9,261 | $6,146 | $9,961 | $(9,551) | | Comprehensive income (loss) attributable to controlling interest | $9,306 | $6,189 | $10,052 | $(9,464) | Condensed Consolidated Statement of Shareholders' Equity | Metric (in thousands) | Balance at Jan 31, 2021 | Balance at Aug 1, 2021 | | :-------------------- | :---------------------- | :--------------------- | | Capital stock | $92,875 | $94,080 | | Retained earnings | $101,166 | $110,703 | | Total shareholders' equity | $191,098 | $201,902 | | Metric (in thousands) | Balance at Feb 2, 2020 | Balance at Aug 2, 2020 | | :-------------------- | :--------------------- | :--------------------- | | Capital stock | $90,902 | $91,921 | | Retained earnings | $87,589 | $78,395 | | Total shareholders' equity | $176,106 | $167,400 | Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :-------------------- | :--------------------------- | :--------------------------- | | Net cash provided by (used in) operating activities | $26,512 | $(12,802) | | Net cash used in investing activities | $(4,858) | $(9,135) | | Net cash (used in) provided by financing activities | $(49,954) | $38,865 | | (Decrease) increase in cash, cash equivalents | $(28,300) | $16,928 | | Cash, cash equivalents and restricted cash at end of period | $18,921 | $19,168 | Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Nature of Operations and Basis of Presentation - Duluth Holdings Inc. is a lifestyle brand of men's and women's casual wear, workwear, and accessories, primarily sold through its omnichannel platform (website, catalog, and 61 retail stores, 3 outlet stores as of August 1, 2021)[31][101] - The company operates as one reportable external segment and consolidates TRI Holdings, LLC as a variable interest entity[32][34] - The condensed consolidated financial statements are prepared in accordance with U.S. GAAP and are unaudited, including all normal and recurring adjustments[34][36] - The COVID-19 pandemic has negatively affected the U.S. and global economies, supply chains, and financial markets, with the ultimate impact on operational and financial performance remaining uncertain[37][38] - Inventory is stated at the lower of cost or net realizable value using the first-in, first-out method, with reserves for excess and obsolete items at $1.1 million as of August 1, 2021[40][42] - 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[44] 2. Leases - The Company recognizes Right-of-Use (ROU) assets and lease liabilities for non-cancelable retail space leases, which expire through 2036, with initial terms ranging from five to fifteen years[48][49] Lease Expense (in thousands) | Lease Expense (in thousands) | Three Months Ended Aug 1, 2021 | Three Months Ended Aug 2, 2020 | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :--------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Finance lease expenses | $1,326 | $1,343 | $2,659 | $2,438 | | Operating lease expense | $3,849 | $4,495 | $7,800 | $8,631 | | Variable lease expense | $2,167 | $2,277 | $4,226 | $4,038 | Lease Metric | Lease Metric | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :------------- | :--------------------------- | :--------------------------- | | Cash paid for finance leases (financing cash flows) | $1,237 | $793 | | Cash paid for finance leases (operating cash flows) | $981 | $873 | | Cash paid for operating leases (operating cash flows) | $7,842 | $7,607 | | Weighted-average remaining lease term (Finance leases) | 12 years | 14 years | | Weighted-average remaining lease term (Operating leases) | 9 years | 10 years | | Weighted-average discount rate (Finance leases) | 4.4% | 4.5% | | Weighted-average discount rate (Operating leases) | 4.3% | 4.3% | Future Minimum Lease Payments (in thousands) as of Aug 1, 2021 | Future Minimum Lease Payments (in thousands) as of Aug 1, 2021 | | :------------------------------------------------------------- | | Fiscal year | | 2021 (remainder) | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total future minimum lease payments | | Less – Discount | | Lease liability | | | | Finance | | $2,273 | | $4,523 | | $4,551 | | $4,736 | | $5,098 | | $37,218 | | $58,399 | | $(14,109) | | $44,290 | | | | Operating | | $7,879 | | $15,961 | | $16,143 | | $15,493 | | $14,703 | | $63,463 | | $133,642 | | $(23,314) | | $110,328 | 3. Debt and Credit Agreement Debt (in thousands) | Debt (in thousands) | August 1, 2021 | January 31, 2021 | | :------------------ | :------------- | :--------------- | | TRI Senior Secured Note | $24,086 | $24,352 | | TRI Note | $3,500 | $3,500 | | Total TRI debt | $27,586 | $27,852 | | Duluth Delayed draw term loan | — | $48,250 | | Total Duluth debt | — | $48,250 | - The Company terminated its previous Credit Agreement on May 14, 2021, and entered into a New Credit Agreement, which matures on May 14, 2026, providing up to $150.0 million in revolving senior credit[62] - The interest rate for the new revolving senior credit facility is a floating rate based on BSBY or the base rate, plus an applicable margin determined by the Company's rent-adjusted leverage ratio[62] - As of August 1, 2021, the Company was in compliance with all financial and non-financial covenants of the New Credit Agreement[64] 4. Accrued Expenses and Other Current Liabilities Accrued Expenses (in thousands) | Accrued Expenses (in thousands) | August 1, 2021 | January 31, 2021 | | :------------------------------ | :------------- | :--------------- | | Salaries and benefits | $8,473 | $8,826 | | Deferred revenue | $7,757 | $9,944 | | Freight | $3,343 | $6,769 | | Product returns | $4,514 | $5,304 | | Unpaid purchases of property & equipment | $1,400 | $503 | | Accrued advertising | $2,692 | $1,377 | | Other | $4,508 | $4,963 | | Total | $32,687 | $37,686 | 5. Fair Value - The Company's available-for-sale security is valued using a discounted cash flow method (Level 3), incorporating the U.S. Treasury yield curve, credit information, and estimated future cash flows[68] Available-for-Sale Security (in thousands) | Available-for-Sale Security (in thousands) | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Estimated Value | | :----------------------------------------- | :--------------------- | :--------------------- | :---------------------- | :------------------- | | August 1, 2021 | | | | | | Corporate trust | $5,976 | $753 | $— | $6,729 | | January 31, 2021 | | | | | | Corporate trust | $6,047 | $64 | $— | $6,111 | TRI Long-term debt (in thousands) | TRI Long-term debt (in thousands) | August 1, 2021 (Carrying Amount) | August 1, 2021 (Fair Value) | January 31, 2021 (Carrying Amount) | January 31, 2021 (Fair Value) | | :-------------------------------- | :------------------------------- | :-------------------------- | :--------------------------------- | :---------------------------- | | TRI Long-term debt, including short-term portion | $27,586 | $28,641 | $27,852 | $28,697 | 6. Variable Interest Entity - The Company consolidates TRI Holdings, LLC (TRI) as a variable interest entity (VIE) because it is deemed the primary beneficiary, having both the power to direct TRI's economic activities and the obligation/right to absorb/receive significant benefits[76][77] - TRI's primary purpose is to own the real property for the Company's headquarters in Mt. Horeb, Wisconsin, which the Company leases from TRI[77] Consolidated TRI Amounts (in thousands) | Consolidated TRI Amounts (in thousands) | August 1, 2021 | January 31, 2021 | | :------------------------------------ | :------------- | :--------------- | | Cash | $749 | $747 | | Property and equipment, net | $24,489 | $24,800 | | Total assets | $25,238 | $25,547 | | Other current liabilities | $106 | $58 | | Current maturities of long-term debt | $658 | $623 | | TRI Long-term debt | $26,928 | $27,229 | | Noncontrolling interest in VIE | $(2,454) | $(2,363) | | Total liabilities and shareholders' equity | $25,238 | $25,547 | 7. Earnings (Loss) Per Share EPS (Class A and Class B) | EPS (Class A and Class B) | Three Months Ended Aug 1, 2021 | Three Months Ended Aug 2, 2020 | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :------------------------ | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Basic | $0.28 | $0.18 | $0.29 | $(0.28) | | Diluted | $0.27 | $0.18 | $0.29 | $(0.28) | - The computation of diluted loss per share for the three and six months ended August 2, 2020, excluded 0.1 million shares of unvested restricted stock, respectively, as their inclusion would have been anti-dilutive[81] 8. Stock-Based Compensation Stock Compensation Expense (in thousands) | Stock Compensation Expense (in thousands) | Three Months Ended Aug 1, 2021 | Three Months Ended Aug 2, 2020 | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :---------------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Total stock compensation expense | $600 | $400 | $1,000 | $800 | Unvested Restricted Stock Activity | Unvested Restricted Stock Activity | Shares | Weighted average fair value per share | | :--------------------------------- | :-------- | :------------------------------------ | | Outstanding at January 31, 2021 | 338,239 | $9.74 | | Granted | 224,482 | $15.84 | | Vested | (148,719) | $7.81 | | Forfeited | (1,739) | $16.93 | | Outstanding at August 1, 2021 | 412,263 | $13.73 | - As of August 1, 2021, unrecognized compensation expense related to restricted stock awards was $4.8 million, expected to be recognized over a weighted average period of 2.6 years[84] 9. Property and Equipment Property and Equipment (in thousands) | Property and Equipment (in thousands) | August 1, 2021 | January 31, 2021 | | :------------------------------------ | :------------- | :--------------- | | Land and land improvements | $4,486 | $4,486 | | Leasehold improvements | $46,643 | $47,451 | | Buildings | $35,346 | $35,344 | | Warehouse equipment | $14,351 | $14,685 | | Office equipment and furniture | $52,687 | $52,614 | | Computer equipment | $9,813 | $9,861 | | Software | $33,991 | $34,003 | | Construction in progress | $7,393 | $1,590 | | Property and equipment, net | $117,571 | $124,237 | 10. Revenue - Revenue from merchandise shipped from distribution centers and stores is recognized upon shipment, while store revenue is recognized at the point of sale, net of returns[86][88] Sales Channel (in thousands) | Sales Channel (in thousands) | Three Months Ended Aug 1, 2021 | Three Months Ended Aug 2, 2020 | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :--------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Direct-to-consumer | $85,264 | $100,581 | $173,630 | $187,111 | | Stores | $63,863 | $36,794 | $108,916 | $60,181 | | Total | $149,127 | $137,375 | $282,546 | $247,292 | - Contract assets primarily consist of the right of return for inventory expected to be resold, while contract liabilities are mainly gift card liabilities[91] Gift Card Activity (in thousands) | Gift Card Activity (in thousands) | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Balance as of beginning of period | $9,788 | $9,790 | | Gift cards sold | $4,171 | $4,059 | | Gift cards redeemed | $(5,919) | $(5,211) | | Gift card breakage | $(283) | $(1,045) | | Balance as of end of period | $7,757 | $7,593 | 11. Income Taxes - The effective tax rate related to controlling interest was 25% for the six months ended August 1, 2021, and 26% for the six months ended August 2, 2020[93] 12. Recent Accounting Pronouncements - The Company expects to adopt ASU 2016-13 (CECL) on January 30, 2023, for the fiscal year ending January 28, 2024, and is currently evaluating its impact on consolidated financial statements[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results for Q2 and H1 2021, covering business overview, strategic initiatives, COVID-19 impact, and key financial metrics Overview - Duluth Trading is a lifestyle brand offering innovative, durable, and functional men's and women's casual wear, workwear, and accessories through its omnichannel platform (website, catalog, and 61 retail stores, 3 outlet stores as of August 1, 2021)[101][102] Financial Highlights (YoY Change) | Metric | Q2 Fiscal 2021 | Q2 Fiscal 2020 | 6 Months Fiscal 2021 | 6 Months Fiscal 2020 | | :----- | :------------- | :------------- | :------------------- | :------------------- | | Net sales | $149.1M (+8.6%) | $137.4M | $282.5M (+14.3%) | $247.3M | | Net income | $9.0M | $5.9M | $9.5M | $(9.2)M | | Adjusted EBITDA | $21.6M (+28.6%) | $16.8M | $31.7M (+510%) | $5.2M | - The Company has launched the 'Big Dam Blueprint' strategy to unlock long-term sustainable growth, focusing on a digital-first mindset, optimizing owned retail channels, evolving its multi-brand platform, careful testing, and accelerating investments in technology and logistics[107][108] - The COVID-19 pandemic continues to create uncertainty regarding store traffic patterns and overall consumer demand, with the ultimate impact on operational and financial performance still dependent on future developments[110][111] How We Assess the Performance of Our Business - 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[114] - Gross profit is net sales less cost of goods sold (excluding depreciation and amortization), with gross margin expected to increase with sales growth, though declines in shipping and handling revenues may adversely affect it[115] - Selling, general and administrative (SG&A) expenses include all operating costs not in COGS, such as payroll, occupancy, marketing, and logistics, typically higher as a percentage of net sales in lower-volume quarters[116] - Adjusted EBITDA is a non-GAAP measure defined as consolidated net income before depreciation, amortization, interest, and income taxes, adjusted for certain non-cash and other items, used to assess operating performance and for employee bonus compensation[118][119] Results of Operations Consolidated Results of Operations (in thousands, except percentages) | Metric | Three Months Ended Aug 1, 2021 | % of Net Sales | Three Months Ended Aug 2, 2020 | % of Net Sales | Six Months Ended Aug 1, 2021 | % of Net Sales | Six Months Ended Aug 2, 2020 | % of Net Sales | | :----- | :----------------------------- | :------------- | :----------------------------- | :------------- | :--------------------------- | :------------- | :--------------------------- | :------------- | | Net sales | $149,127 | 100.0% | $137,375 | 100.0% | $282,546 | 100.0% | $247,292 | 100.0% | | Gross profit | $81,426 | 54.6% | $72,472 | 52.8% | $147,969 | 52.4% | $124,804 | 50.5% | | SG&A expenses | $68,339 | 45.8% | $62,680 | 45.6% | $132,987 | 47.1% | $133,986 | 54.2% | | Operating income (loss) | $13,087 | 8.8% | $9,792 | 7.1% | $14,982 | 5.3% | $(9,182) | (3.7)% | | Net income (loss) attributable to controlling interest | $8,992 | 6.0% | $5,941 | 4.3% | $9,536 | 3.4% | $(9,194) | (3.7)% | - For the three months ended August 1, 2021, net sales increased 8.6% to $149.1 million, driven by a 19.8% increase in store market sales, partially offset by a 12.7% decrease in non-store market sales due to prior year's shift to online purchasing and promotions[123][124] - Gross margin increased to 54.6% (from 52.8%) for the three months, primarily due to a higher mix of full-price sales and improved gross margin rates in the Women's division[126] - SG&A expenses increased 9.0% to $68.3 million for the three months, mainly due to higher wages from stores being fully open and increased depreciation expense[127][128] - For the six months ended August 1, 2021, net sales increased 14.3% to $282.6 million, with store market sales up 25.6% due to store re-openings and online growth, while non-store market sales decreased 5.9%[131][132] - Gross margin for the six months increased to 52.4% (from 50.5%), driven by a higher mix of full-price sales and improved rates on both full-price and clearance items[133] - SG&A expenses decreased 0.7% to $133.0 million for the six months, showing positive leverage (47.1% of net sales vs. 54.2%) due to a more efficient digital marketing approach, partially offset by increased wages and depreciation[134][135] Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Metric | Three Months Ended Aug 1, 2021 | Three Months Ended Aug 2, 2020 | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :----- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net income (loss) | $8,947 | $5,898 | $9,445 | $(9,281) | | EBITDA | $20,988 | $16,343 | $30,741 | $4,316 | | Adjusted EBITDA | $21,625 | $16,761 | $31,748 | $5,197 | | Adjusted EBITDA % of Net Sales | 14.5% | 12.2% | 11.2% | 2.1% | Liquidity and Capital Resources - Primary liquidity sources are cash from operating activities and a credit facility, with key cash needs including inventory, marketing, payroll, store leases, and capital expenditures for infrastructure, IT, and new stores[141] - Net working capital was $84.2 million as of August 1, 2021, including $18.9 million in cash and cash equivalents[141] - Expected capital expenditures for fiscal 2021 are approximately $18.0 million, with $16.0 million for technology investments and $2.0 million for one new retail store[142] Cash Flow Summary (in thousands) | Activity | Six Months Ended Aug 1, 2021 | Six Months Ended Aug 2, 2020 | | :------- | :--------------------------- | :--------------------------- | | Net cash provided by (used in) operating activities | $26,512 | $(12,802) | | Net cash used in investing activities | $(4,858) | $(9,135) | | Net cash (used in) provided by financing activities | $(49,954) | $38,865 | | (Decrease) increase in cash, cash equivalents | $(28,300) | $16,928 | - Operating activities provided $26.5 million in cash for the six months ended August 1, 2021, primarily from net income, depreciation, and a $14.2 million decrease in inventory[147] - Investing activities used $4.9 million for the six months ended August 1, 2021, mainly for information technology investments[149] - Financing activities used $50.0 million for the six months ended August 1, 2021, primarily due to the full paydown of the Company's debt[151] Contractual Obligations - There have been no significant changes to the Company's contractual obligations as described in its Annual Report on Form 10-K for the fiscal year ended January 31, 2021[153] Off-Balance Sheet Arrangements - The Company is not a party to any material off-balance sheet arrangements[154] Critical Accounting Policies and Critical Accounting Estimates - As of the filing date, there were no significant changes to the critical accounting policies and estimates described in the Company's 2020 Form 10-K[156] Recent Accounting Pronouncements - Information regarding recent accounting pronouncements is provided in Note 12 to the Condensed Consolidated Financial Statements[157] Item 3. Quantitative and Qualitative Disclosures About Market Risk No significant changes in market risks from 2020 Form 10-K, with interest rate disclosures in Note 3 - There have been no significant changes in the market risks described in the Company's 2020 Form 10-K[158] - Disclosure on interest rates related to borrowings under the credit agreement can be found in Note 3, 'Debt and Credit Agreement,' of the Notes to Condensed Consolidated Financial Statements[158] Item 4. Controls and Procedures Confirms effectiveness of disclosure controls and procedures, with no material changes in 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 August 1, 2021[159] - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the period[160] PART II. OTHER INFORMATION Item 1. Legal Proceedings No material adverse legal proceedings, with reserves established for probable and estimable losses - The Company is not presently party to any legal proceedings whose resolution would have a material adverse effect on its business, financial condition, operating results, or cash flows[161] - Reserves are established for specific legal matters when an unfavorable outcome is probable and the loss is reasonably estimable[161] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the fiscal 2020 Annual Report on Form 10-K - There have been no material changes to the Company's risk factors as previously disclosed in its fiscal 2020 Annual Report on Form 10-K[162] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities sold; details shares acquired from employees for tax withholding upon restricted stock vesting - The Company did not sell any equity securities during the quarter ended August 1, 2021, that were not registered under the Securities Act[164] Shares Acquired from Employees for Tax Withholding | Period | Total number of shares purchased | Average price paid per share | | :---------------------- | :------------------------------- | :--------------------------- | | May 31, 2021 - July 4, 2021 | 132 | $16.45 | | July 5, 2021 - August 1, 2021 | 179 | $16.98 | | Total | 311 | $16.72 | Item 6. Exhibits Lists exhibits filed with the Quarterly Report on Form 10-Q, including agreements, compensation summaries, and certifications - The exhibit index includes the First Amended and Restated Employment Agreement, Summary of Outside Director Compensation, CEO and CFO certifications (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350), and various XBRL taxonomy documents[167]