Duluth (DLTH) - 2024 Q4 - Annual Report

Part I Business Duluth Holdings is an omnichannel lifestyle brand for workwear and casual apparel, operating 62 retail stores and three outlets, with a digital-first growth strategy and seasonal sales - Duluth Trading is a lifestyle brand for workwear and casual apparel, operating 62 retail stores and three outlet stores as of January 28, 2024[20] - The company's "Big Dam Blueprint" growth strategy emphasizes a digital-first approach, optimizing retail channels, evolving into a multi-brand business, and investing in capabilities and infrastructure[23][25] - The company does not own manufacturing facilities and relies on third-party vendors; in fiscal 2023, 59% of purchases came from its largest supplier, an agent partner in Hong Kong[36] - As of January 28, 2024, the company employed 950 full-time and 1,373 part-time and flexible part-time employees[43] - The business experiences significant seasonality, with the highest net sales and net income typically occurring in the fourth fiscal quarter due to the holiday sales period[44] Risk Factors The company faces strategic, operational, financial, and legal risks, including supply chain reliance, data security, consumer spending sensitivity, and internal control weaknesses - Strategic risks include failing to offer products customers want, inability to maintain a strong brand image, challenges with geographic expansion, and intense competition in the apparel industry[49][52][55][63] - Operational risks include reliance on foreign merchandise sources, potential disruptions in shipping and delivery, dependence on e-commerce, price fluctuations of raw materials, and data security breaches[72][74][78] - Financial risks are tied to consumer spending levels, which are sensitive to economic conditions, and the company's dependence on cash generated from operations to support growth[96][98] - The dual-class stock structure concentrates over 50% of voting power with the Chairman, Stephen L. Schlecht, limiting the influence of Class B shareholders[114] - A material weakness in internal control over financial reporting was identified for the fiscal year ended January 28, 2024, related to ineffective risk assessment in the financial reporting process[119][122] Unresolved Staff Comments The company reports no unresolved staff comments - None[129] Cybersecurity Cybersecurity governance is overseen by the audit committee, with risk management processes including annual assessments and third-party testing - The audit committee of the board of directors has oversight of cybersecurity risk, reviewing the threat landscape, mitigation strategies, and response plans[132] - The company uses various measures to manage cybersecurity risk, including self-assessments based on the ISO/IEC 33004:2015 model, third-party penetration testing, and vendor risk assessments[135] - In fiscal 2023, the company did not identify any no cybersecurity threats that have materially affected or are reasonably likely to materially affect its business strategy, results of operations, or financial condition[137] Properties As of January 28, 2024, the company operates 62 leased retail stores, 3 outlet stores, and multiple owned and leased fulfillment centers and offices Company Facilities as of January 28, 2024 | Facility Type | Count | Primary Locations | Ownership | | :--- | :--- | :--- | :--- | | Retail Stores | 62 | Nationwide | Leased | | Outlet Stores | 3 | Belleville, WI; Oshkosh, WI; Red Wing, MN | 1 Owned, 2 Leased | | Corporate Headquarters | 1 | Mount Horeb, WI | Leased | | Fulfillment Centers | 4 | Belleville, WI; Dubuque, IA; Adairsville, GA; Salt Lake City, UT | 1 Owned, 3 Leased | Legal Proceedings The company is not currently 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[140] Mine Safety Disclosures This item is not applicable to the company - Not applicable[141] Information about our Executive Officers This section provides biographical information for the company's executive officers, including the President and CEO, and the new CFO appointed in February 2024 - Samuel M. Sato serves as the President and Chief Executive Officer[144] - Heena K. Agrawal was appointed Senior Vice President and Chief Financial Officer in February 2024[144] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's Class B common stock trades on NASDAQ under "DLTH", while Class A is not publicly traded, and no cash dividends are anticipated - Class B common stock trades on NASDAQ under the symbol "DLTH"; Class A common stock is not traded[147] - The company has not declared cash dividends and does not anticipate declaring any in the foreseeable future[149] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 saw a 1.0% net sales decrease to $646.7 million and a net loss of $9.4 million, with gross margin declining and operating cash flow improving Fiscal 2023 vs. Fiscal 2022 Performance (in millions) | Metric | Fiscal 2023 ($) | Fiscal 2022 ($) | Change | | :--- | :--- | :--- | :--- | | Net Sales | 646.7 | 653.3 | -1.0% | | Gross Profit | 325.0 | 343.4 | -5.4% | | Gross Margin | 50.3% | 52.6% | -230 bps | | Operating (Loss) Income | (8.8) | 6.2 | -241.7% | | Net (Loss) Income | (9.4) | 2.2 | -517.3% | | Adjusted EBITDA | 33.4 | 43.5 | -23.2% | Cash Flow Summary (in thousands) | Cash Flow Activity | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $38,673 | ($1,396) | | Net cash used in investing activities | ($48,718) | ($26,873) | | Net cash used in financing activities | ($3,346) | ($3,234) | - The decrease in gross margin was primarily due to a lower mix of full-price sales as customer purchasing activity increased during promotional periods[174] - The company expects to spend approximately $25.2 million on capital expenditures in fiscal 2024, down from $53.2 million in fiscal 2023[187] Financial Statements and Supplementary Data This section presents audited financial statements, an unqualified audit opinion on financials, an adverse opinion on internal controls due to a material weakness, and key financial highlights - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements but an adverse opinion on the effectiveness of internal control over financial reporting as of January 28, 2024[223][234] - A material weakness was identified related to the mapping of general ledger accounts to the consolidated financial statements[236] - The auditor identified the assessment of the product return reserve as a critical audit matter, requiring a high degree of judgment[228] Consolidated Financial Highlights (in thousands) | Metric | Jan 28, 2024 | Jan 29, 2023 | | :--- | :--- | :--- | | Balance Sheet | | | | Cash and cash equivalents | $32,157 | $45,548 | | Inventory, net | $125,757 | $154,922 | | Total Assets | $490,453 | $527,454 | | Total Liabilities | $268,279 | $300,257 | | Total Shareholders' Equity | $222,174 | $227,197 | | Operations | | | | Net Sales | $646,681 | $653,307 | | Net (Loss) Income | ($9,373) | $2,246 | | Diluted EPS | ($0.28) | $0.07 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[361] Controls and Procedures Disclosure controls and procedures were deemed ineffective due to a material weakness in internal control over financial reporting, with a remediation plan initiated - Disclosure controls and procedures were concluded to be not effective as of January 28, 2024, due to a material weakness in internal control over financial reporting[363] - The material weakness was identified as an ineffective risk assessment related to mapping general ledger accounts to the consolidated financial statements, which created a reasonable possibility of a material misstatement[367] - Management has initiated a remediation plan to simplify the account mapping process and design and implement new process-level controls[372] Other Information The company reports no other information for this item - None[373] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[373] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference from the company's 2024 proxy statement[375] Executive Compensation Information on executive and director compensation is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference from the company's 2024 proxy statement[379] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference from the company's 2024 proxy statement[380] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference from the company's 2024 proxy statement[381] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference from the company's 2024 proxy statement[381] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and certifications - This section provides an index of all exhibits filed with the Form 10-K, including the consent of the independent registered public accounting firm, certifications by the CEO and CFO, and various material agreements[385][386][387] Form 10-K Summary This item is not applicable - Not applicable[388]