UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 2021
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-37641
DULUTH HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Wisconsin
39-1564801
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
201 East Front Street
Mount Horeb, Wisconsin
53572
(Address of principal executive offices)
(Zip Code)
(608) 424-1544
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class B Common Stock, No Par Value
DLTH
NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of September 1, 2021, was 3,364,200.
The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of September 1, 2021, was 29,692,405.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED August 1, 2021
INDEX
Part I—Financial Information
Page
Item 1.
Financial Statements
3
Condensed Consolidated Balance Sheets as of August 1, 2021 and January 31, 2021 (Unaudited)
Condensed Consolidated Statements of Operations for the three and six months ended August 1, 2021 and August 2, 2020 (Unaudited)
5
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended August 1, 2021 and August 2, 2020 (Unaudited)
6
Condensed Consolidated Statement of Shareholders’ Equity for the six months ended August 1, 2021 (Unaudited)
7
Condensed Consolidated Statement of Shareholders’ Equity for the six months ended August 2, 2020 (Unaudited)
8
Condensed Consolidated Statements of Cash Flows for the six months ended August 1, 2021 and August 2, 2020 (Unaudited)
9
Notes to Condensed Consolidated Financial Statements (Unaudited)
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27
Item 4.
Controls and Procedures
28
Part II—Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
29
Item 6.
Exhibits
30
Signatures
31
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - Assets
(Unaudited)
(Amounts in thousands)
August 1, 2021
January 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents
$
18,921
47,221
Receivables
2,912
2,270
Inventory, less reserves of $1,077 and $1,600, respectively
134,887
149,052
Prepaid expenses & other current assets
13,090
10,203
Prepaid catalog costs
39
1,014
Total current assets
169,849
209,760
Property and equipment, net
117,571
124,237
Operating lease right-of-use assets
112,131
117,490
Finance lease right-of-use assets, net
51,598
53,468
Available-for-sale security
6,729
6,111
Other assets, net
5,280
4,511
Total assets
463,158
515,577
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Balance Sheets – Liabilities and Shareholders’ Equity
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable
37,717
33,647
Accrued expenses and other current liabilities
32,687
37,686
Income taxes payable
587
7,579
Current portion of operating lease liabilities
11,378
11,050
Current portion of finance lease liabilities
2,657
2,629
Current portion of Duluth long-term debt
—
2,500
Current maturities of TRI long-term debt
658
623
Total current liabilities
85,684
95,714
Operating lease liabilities, less current maturities
98,950
104,287
Finance lease liabilities, less current maturities
41,633
43,299
Duluth long-term debt, less current maturities
45,750
TRI long-term debt, less current maturities
26,928
27,229
Deferred tax liabilities
8,061
8,200
Total liabilities
261,256
324,479
Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized; no shares issued or outstanding as of August 1, 2021 and January 31, 2021
Common stock (Class A), no par value; 10,000 shares authorized; 3,364 shares issued and outstanding as of August 1, 2021 and January 31, 2021
Common stock (Class B), no par value; 200,000 shares authorized; 29,771 shares issued and 29,693 shares outstanding as of August 1, 2021 and 29,530 shares issued and 29,477 shares outstanding as of January 31, 2021
Treasury stock, at cost; 78 and 53 shares as of August 1, 2021 and January 31, 2021, respectively
(991)
(628)
Capital stock
94,080
92,875
Retained earnings
110,703
101,166
Accumulated other comprehensive income
564
48
Total shareholders' equity of Duluth Holdings Inc.
204,356
193,461
Noncontrolling interest
(2,454)
(2,363)
Total shareholders' equity
201,902
191,098
Total liabilities and shareholders' equity
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share figures)
Three Months Ended
Six Months Ended
August 2, 2020
Net sales
149,127
137,375
282,546
247,292
Cost of goods sold (excluding depreciation and amortization)
67,701
64,903
134,577
122,488
Gross profit
81,426
72,472
147,969
124,804
Selling, general and administrative expenses
68,339
62,680
132,987
133,986
Operating income (loss)
13,087
9,792
14,982
(9,182)
Interest expense
1,182
1,778
2,490
3,128
Other income (loss), net
56
(250)
72
(191)
Income (loss) before income taxes
11,961
7,764
12,564
(12,501)
Income tax expense (benefit)
3,014
1,866
3,119
(3,220)
Net income (loss)
8,947
5,898
9,445
(9,281)
Less: Net loss attributable to noncontrolling interest
(45)
(43)
(91)
(87)
Net income (loss) attributable to controlling interest
8,992
5,941
9,536
(9,194)
Basic earnings (loss) per share (Class A and Class B):
Weighted average shares of common stock outstanding
32,624
32,445
32,582
32,408
Net income (loss) per share attributable to controlling interest
0.28
0.18
0.29
(0.28)
Diluted earnings (loss) per share (Class A and Class B):
Weighted average shares and equivalents outstanding
32,813
32,786
0.27
Condensed Consolidated Statements of Comprehensive Income
Other comprehensive income
Securities available-for sale:
Unrealized security income (loss) arising during the period
419
335
689
(365)
105
87
173
(95)
Other comprehensive income (loss)
314
248
516
(270)
Comprehensive income (loss)
9,261
6,146
9,961
(9,551)
Comprehensive loss attributable to noncontrolling interest
Comprehensive income (loss) attributable to controlling interest
9,306
6,189
10,052
(9,464)
Condensed Consolidated Statement of Shareholders’ Equity
Six Months Ended August 1, 2021
Accumulated
Noncontrolling
other
interest in
Total
Treasury
Retained
comprehensive
variable interest
shareholders'
Shares
Amount
stock
earnings
income
entity
equity
Balance at January 31, 2021
32,841
Issuance of common stock
101
132
Stock-based compensation
371
Restricted stock forfeitures
(1)
Restricted stock surrendered for taxes
(24)
(358)
Other comprehensive loss
202
544
(46)
498
Balance at May 2, 2021
32,917
93,378
(986)
101,711
250
(2,409)
191,944
142
139
563
(2)
(5)
Balance at August 1, 2021
33,057
Six Months Ended August 2, 2020
Balance at February 2, 2020
32,536
90,902
(407)
87,589
188
(2,166)
176,106
227
115
434
(18)
(107)
(518)
Net loss
(15,135)
(44)
(15,179)
Balance at May 3, 2020
32,744
91,451
(514)
72,454
(330)
(2,210)
160,851
98
372
(15)
(13)
(67)
Balance at August 2, 2020
32,814
91,921
(581)
78,395
(82)
(2,253)
167,400
Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
14,516
13,292
Stock based compensation
1,007
881
Deferred income taxes
(312)
3,300
Loss on disposal of property and equipment
67
321
Changes in operating assets and liabilities:
(642)
(625)
Income taxes receivable
(3,780)
Inventory
14,165
(19,735)
Prepaid expense & other current assets
(1,332)
2,594
Software hosting implementation costs, net
(1,220)
Deferred catalog costs
975
927
2,889
3,360
(6,992)
(3,427)
Accrued expenses and deferred rent obligations
(4,908)
(1,556)
Other assets
(1,035)
Noncash lease impacts
(111)
Net cash provided by (used in) operating activities
26,512
(12,802)
Cash flows from investing activities:
Purchases of property and equipment
(4,984)
(8,842)
Capital contributions towards build-to-suit stores
(357)
Principal receipts from available-for-sale security
71
64
Proceeds from disposals
55
Net cash used in investing activities
(4,858)
(9,135)
Cash flows from financing activities:
Proceeds from line of credit
5,000
52,484
Payments on line of credit
(5,000)
(41,816)
Proceeds from delayed draw term loan
30,000
Payments on delayed draw term loan
(48,250)
(500)
Payments on TRI long term debt
(303)
(234)
Payments on finance lease obligations
(1,237)
(793)
Payments of tax withholding on vested restricted shares
(363)
(174)
Other
199
(102)
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 beginning of period
2,240
Cash, cash equivalents and restricted cash at end of period
19,168
Supplemental disclosure of cash flow information:
Interest paid
2,519
3,151
Income taxes paid
10,461
40
Supplemental disclosure of non-cash information:
Unpaid liability to acquire property and equipment
2,052
2,451
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
A. Nature of Operations
Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold primarily through the Company’s own omnichannel platform. The Company’s products are marketed under the Duluth Trading brand, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise.
The Company identifies its operating segments according to how its business activities are managed and evaluated. The Company continues to report one reportable external segment, consistent with the Company’s omnichannel business approach. The Company’s revenues generated outside the United States were insignificant.
The Company has two classes of authorized common stock: Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to ten votes per share and is convertible at any time into one share of Class B common stock. Each share of Class B common stock is entitled to one vote per share. The Company’s Class B common stock trades on the NASDAQ Global Select Market under the symbol “DLTH.”
B. Basis of Presentation
The condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Company consolidates TRI Holdings, LLC (“TRI”) as a variable interest entity (see Note 6 “Variable Interest Entity” for further information). All significant intercompany balances and transactions have been eliminated in consolidation.
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2021 is a 52-week period and ends on January 30, 2022. Fiscal 2020 was a 52-week period and ended on January 31, 2021. The three months of fiscal 2021 and fiscal 2020 represent the Company’s 13 week periods ended August 1, 2021 and August 2, 2020, respectively.
The accompanying condensed consolidated financial statements as of and for the three and six months ended August 1, 2021 and August 2, 2020 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations as of and for the three and six months ended August 1, 2021 and August 2, 2020. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2021.
C. COVID-19
In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place. These impacts are discussed within these notes to the condensed consolidated financial statements.
The ultimate impact of COVID-19 on our operational and financial performance still depends on future developments outside of our control. Given the uncertainty, we cannot reasonably estimate the continued impact on our business and whether that impact will be different than what we have already experienced.
D. Impairment Analysis
As of August 1, 2021 and for the three and six months then ended, no triggering events or indicators of asset impairment were noted.
E. Inventory
Inventory consists of finished goods stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out valuation method. The Company records an inventory reserve for the anticipated loss associated with selling
inventories below cost. Inventory reserve for excess and obsolete items was $1.1 million and $1.6 million as of August 1, 2021 and January 31, 2021, respectively.
The reserve for inventory shrinkage is adjusted to reflect the trend of historical physical inventory count results. The Company performs its retail store physical inventory counts in July and the difference between actual and estimated shrinkage, recorded in Cost of goods sold, may cause fluctuations in second fiscal quarter results.
F. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
(in thousands)
Pending returns inventory, net
1,972
Current software hosting implementation costs, net
1,303
1,149
Other prepaid expenses
9,815
6,564
Goodwill
402
Intangible assets, net
255
264
Non-current software hosting implementation costs
2,606
2,755
2,017
1,090
G. Seasonality of Business
The Company’s business is affected by the pattern of seasonality common to most apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year as a result of increased sales during the holiday season.
H. Cash and cash equivalents
The Company considers short-term investments with original maturities of three months or less when purchased to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within 2 to 4 days of the original sales transaction and are considered to be cash equivalents.
I. Reclassifications
Certain reclassifications have been made to the 2020 financial statements in order to conform to the 2021 presentation. There were no changes to previously reported shareholders’ equity or net income (loss) as a result of the reclassifications.
J. Significant Accounting Policies
There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended January 31, 2021.
2. LEASES
Based on the criteria set forth in ASC Topic 842, Leases (“ASC 842”), the Company recognizes ROU assets and lease liabilities related to leases on the Company’s consolidated balance sheets. The Company determines if an arrangement is, or contains, a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments and the ROU asset is measured at the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease.
The Company leases retail space under non-cancelable lease agreements, which expire on various dates through 2036. Substantially all of these arrangements are store leases. Store leases generally have initial lease terms ranging from five years to fifteen years with renewal options and rent escalation provisions. At the commencement of a lease, the Company includes only
the initial lease term as the option to extend is not reasonably certain. The Company does not record leases with a lease term of 12 months or less on the Company’s consolidated balance sheets.
When calculating the lease liability on a discounted basis, the Company applies its estimated discount. The Company bases this discount on a collateralized interest rate as well as publicly available data for instruments with similar characteristics.
In addition to rent payments, leases for retail space contain payments for real estate taxes, insurance costs, common area maintenance, and utilities that are not fixed. The Company accounts for these costs as variable payments and does not include such costs as a lease component.
The expense components of the Company’s leases reflected on the Company’s consolidated statement of operations were as follows:
Consolidated Statement
of Operations
Finance lease expenses
Amortization of right-of-use assets
Selling, general and administrative expenses
840
908
1,678
1,565
Interest on lease liabilities
486
435
981
873
Total finance lease expense
1,326
1,343
2,659
2,438
Operating lease expense
3,849
4,495
7,800
8,631
Amortization of build-to-suit leases capital contribution
3,624
649
3,948
Variable lease expense
2,167
2,277
4,226
4,038
Total lease expense
7,663
11,739
15,334
19,055
Other information related to leases were as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases
1,237
793
Operating cash flows from finance leases
Operating cash flows from operating leases
7,842
7,607
Weighted-average remaining lease term (in years):
Finance leases
12
14
Operating leases
Weighted-average discount rate:
4.4%
4.5%
4.3%
Future minimum lease payments under the non-cancellable leases are as follows as of August 1, 2021:
Fiscal year
Finance
Operating
2021 (remainder of fiscal year)
2,273
7,879
2022
4,523
15,961
2023
4,551
16,143
2024
4,736
15,493
2025
5,098
14,703
Thereafter
37,218
63,463
Total future minimum lease payments
58,399
133,642
Less – Discount
(14,109)
(23,314)
Lease liability
44,290
110,328
3. DEBT AND CREDIT AGREEMENT
Debt consists of the following:
TRI Senior Secured Note
24,086
24,352
TRI Note
3,500
27,586
27,852
Less: current maturities
TRI long-term debt
Duluth Delayed draw term loan
48,250
Duluth long-term debt
TRI Holdings, LLC
TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $26.7 million. The TRI Senior Secured Note is scheduled to mature on October 15, 2038 and requires installment payments with an interest rate of 4.95%. See Note 6 “Variable Interest Entities” for further information.
TRI entered into a promissory note (“TRI Note”) with an original balance of $3.5 million. The TRI Note is scheduled to mature in November 2038 and requires annual interest payments at a rate of 3.05%, with a final balloon payment due in November 2038.
While the above notes are consolidated in accordance with ASC Topic 810, Consolidation, the Company is not the guarantor nor obligor of these notes.
Credit Agreement
On May 17, 2018, the Company entered into a credit agreement (the “Credit Agreement”) which provided for borrowing availability of up to $80.0 million in revolving credit (the “Revolver”), and borrowing availability of up to $50.0 million in a delayed draw term loan (“DDTL”), for a total credit facility of $130.0 million. The $80.0 million revolving credit facility was scheduled to mature on May 17, 2023. The $50.0 million DDTL was available to draw upon in differing amounts through May 17, 2020 and was scheduled to mature on May 17, 2023. Outstanding balances under the DDTL required quarterly principal payments with a final balloon payment at maturity. The Credit Agreement was secured by essentially all Company assets and required the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the Credit Agreement.
On April 30, 2020, the Credit Agreement was amended to include an incremental DDTL of $20.5 million (the “Incremental DDTL”) that was available to draw upon before March 31, 2021, and matured on April 29, 2021, for a total credit facility of $150.5 million. The loan covenants were also amended to allow for greater flexibility during the Company’s peak borrowing periods in fiscal 2020. The interest rate applicable to the Revolver or DDTL was a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR (with a 1% floor) for such interest period plus a margin of 225 to 300 basis points, based upon the Company’s rent adjusted leverage. The interest rate applicable to the Incremental DDTL was also a fixed rate over the aforementioned interest periods equal to LIBOR (with a 1% floor) for such interest period plus a margin of 275 to 350 basis points.
On May 14, 2021, the Company terminated the Credit Agreement, and entered into a new credit agreement (the “New Credit Agreement”), which was treated as a modification for accounting purposes. The New Credit Agreement matures on May 14, 2026 and provides for borrowings of up to $150.0 million that are available under a revolving senior credit facility, with a $5.0 million sublimit for issuance of standby letters of credit, as well as a $10.0 million sublimit for swing line loans. At the Company’s option, the interest rate applicable to the revolving senior credit facility will be a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus the applicable rate of 1.25% to 2.00% determined based on the Company’s rent adjusted leverage ratio, or (ii) the base rate plus the applicable rate of 0.25% to 1.00% based on the Company’s rent adjusted leverage ratio. The New Credit Agreement is secured by essentially all Company assets and requires the Company
to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the New Credit Agreement
As of August 1, 2021 and for the six months then ended, the Company was in compliance with all financial and non-financial covenants contained within the New Credit Agreement.
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
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
4,508
4,963
Total accrued expenses and other current liabilities
5. FAIR VALUE
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., an exit price). The exit price is based on the amount that the holder of the asset or liability would receive or need to pay in an actual transaction (or in a hypothetical transaction if an actual transaction does not exist) at the measurement date. ASC 820 describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value of the Company’s available-for-sale security was valued based on a discounted cash flow method (Level 3), which incorporates the U.S. Treasury yield curve, credit information and an estimate of future cash flows. During the six months ended August 1, 2021, certain changes in the inputs did impact the fair value of the available-for-sale security. The calculated fair value is based on estimates that are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The amortized cost and fair value of the Company’s available-for-sale security and the corresponding amount of gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows:
Cost or
Gross
Amortized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
Level 3 security:
Corporate trust
5,976
753
6,047
The Company does not intend to sell the available-for-sale-security in the near term and does not believe that it will be required to sell the security. The Company reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment.
No other-than-temporary impairment was recorded in the unaudited condensed consolidated statements of operations for the six months ended August 1, 2021 or August 2, 2020.
The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of August 1, 2021.
Within one year
155
After one year through five years
1,053
1,271
After five years through ten years
1,628
1,847
After ten years
3,140
3,412
The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows:
Carrying Amount
TRI Long-term debt, including short-term portion
28,641
28,697
The above long-term debt, including short-term portion is attributable to the consolidation of TRI in accordance with ASC Topic 810, Consolidation. The fair value was also based on a discounted cash flow method (Level 3) based on credit information and an estimate of future cash flows.
As of January 31, 2021, the carrying value of the delayed draw term loan approximated its fair value.
6. VARIABLE INTEREST ENTITY
Based upon the criteria set forth in ASC 810, Consolidation, the Company consolidates variable interest entities (“VIEs”) in which it has a controlling financial interest and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and the right to receive benefits that are significant to the VIE. The Company has determined that it was the primary beneficiary of one variable interest entity (“VIE”) as of August 1, 2021 and January 31, 2021.
The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company invested $6.3 million in a trust that loaned funds to TRI for the construction of the Company’s headquarters. TRI is a Wisconsin limited liability company whose primary purpose and activity is to own this real property. The Company considers itself the primary beneficiary for TRI as the Company has both the power to direct the activities that most significantly impact the entity’s economic performance and is expected to receive benefits that are significant to TRI. As the Company is the primary beneficiary, it consolidates TRI and the lease is eliminated in consolidation. The Company does not consolidate the trust as the Company is not the primary beneficiary.
The condensed consolidated balance sheets include the following amounts as a result of the consolidation of TRI as of August 1, 2021 and January 31, 2021:
Cash
749
747
24,489
24,800
25,238
25,547
Other current liabilities
106
58
Current maturities of long-term debt
TRI Long-term debt
Noncontrolling interest in VIE
7. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings (loss) per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock and are considered only for dilutive earnings (loss) per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculation is as follows:
(in thousands, except per share data)
Numerator - net income (loss) attributable to controlling interest
Denominator - weighted average shares (Class A and Class B)
Basic
Dilutive shares
189
204
Diluted
Earnings (loss) per share (Class A and Class B)
The computation of diluted loss per share for the three and six months ended August 2, 2020 excluded (0.1) million and (0.1) million shares of unvested restricted stock, respectively, because their inclusion would be anti-dilutive.
8. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plan in accordance with ASC 718, Stock Compensation, which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period of the award.
Total stock compensation expense associated with restricted stock recognized by the Company was $0.6 million and $1.0 million for the three and six months ended August 1, 2021, respectively and $0.4 million and $0.8 million for the three and six months ended August 2, 2020, respectively. The Company’s total stock compensation expense is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
A summary of the activity in the Company’s unvested restricted stock during the six months ended August 1, 2021 is as follows:
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
At August 1, 2021, the Company had unrecognized compensation expense of $4.8 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.6 years.
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Land and land improvements
4,486
Leasehold improvements
46,643
47,451
Buildings
35,346
35,344
Vehicles
161
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
197,478
198,605
Accumulated depreciation and amortization
(87,300)
(75,958)
110,178
122,647
Construction in progress
7,393
1,590
10. REVENUE
The Company’s revenue primarily consists of the sale of apparel, footwear and hard goods. Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon shipment. Store revenue is
recognized at the point of sale, net of returns, and excludes taxes. Shipping and processing revenue generated from customer orders are included as a component of net sales and shipping and processing expense, including handling expense, is included as a component of selling, general and administrative expenses. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included in accrued expenses.
Sales disaggregated based upon sales channel is presented below.
Direct-to-consumer
85,264
100,581
173,630
187,111
Stores
63,863
36,794
108,916
60,181
Contract Assets and Liabilities
The Company’s contract assets primarily consist of the right of return for amounts of inventory to be returned that is expected to be resold and is recorded in Prepaid expenses and other current assets on the Company’s consolidated balance sheets. The Company’s contract liabilities primarily consist of gift card liabilities and are recorded in Accrued expenses and other current liabilities under deferred revenue (see Note 4 “Accrued Expenses and Other Current Liabilities”) on the Company’s consolidated balance sheets. Upon issuance of a gift card, a liability is established for its cash value. The gift card liability is relieved and revenues on gift cards are recorded at the time of redemption by the customer.
Contract assets and liabilities on the Company’s consolidated balance sheets are presented in the following table:
Contract assets
Contract liabilities
9,788
Revenue from gift cards is recognized when the gift card is redeemed by the customer for merchandise, or as a gift card breakage, an estimate of gift cards which will not be redeemed. The Company does not record breakage revenue when escheat liability to the relevant jurisdictions exists. Gift card breakage is recorded within Net sales on the Company’s consolidated statement of operations. The following table provides the reconciliation of the contract liability related to gift cards for the six months ended:
Balance as of beginning of period
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
7,593
11. INCOME TAXES
The provision for income taxes for the interim period is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. 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. The income from TRI was excluded from the calculation of the Company’s effective tax rate, as TRI is a limited liability company and not subject to income taxes.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as “CECL”. In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. On November 15, 2019, the FASB issued ASU No. 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815, and Leases (Topic 842),” (ASU 2019-10”), which provides framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. ASU 2019-10 amends the effective dates for ASU 2016-13 for smaller reporting companies with fiscal years beginning after December 15, 2022, and interim periods within those years. The Company expects to adopt ASU 2016-13 on January 30, 2023, the first day of the Company’s first quarter for the fiscal year ending January 28, 2024, the Company’s fiscal year 2023. The Company is evaluating the level of impact adopting ASU 2016-13 will have on the Company’s consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and related notes of Duluth Holdings Inc. included in Item 1of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 (“2020 Form 10-K”).
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2021 is a 52-week period and ends on January 30, 2022. Fiscal 2020 was a 52-week period and ended on January 31, 2021. The three and six months of fiscal 2021 and fiscal 2020 represent our 13 and 26 week periods ended August 1, 2021 and August 2, 2020, respectively.
Unless the context indicates otherwise, the terms the “Company,” “Duluth,” “Duluth Trading,” “we,” “our,” or “us” are used to refer to Duluth Holdings Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. All statements other than statements of historical or current facts included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “could,” “estimate,” “expect,” “project,” “plan,” “potential,” “intend,” “believe,” “may,” “might,” “will,” “objective,” “should,” “would,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenue, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 2020 Form 10-K, and other SEC filings, which factors are incorporated by reference herein. These risks and uncertainties include, but are not limited to, the following: the prolonged effects of the COVID-19 on store traffic and disruptions to our distribution network, supply chains and operations; our ability to maintain and enhance a strong brand image; effectively adapting to new challenges associated with our expansion into new geographic markets; generating adequate cash from our existing stores to support our growth; effectively relying on sources for merchandise located in foreign markets; transportation delays and interruptions, including port congestion; inability to timely and effectively obtain shipments of products from our suppliers and deliver merchandise to our customers; the inability to maintain the performance of a maturing store portfolio; the impact of changes in corporate tax regulations; identifying and responding to new and changing customer preferences; the success of the locations in which our stores are located; our ability to attract and retain customers in the various retail venues and locations in which our stores are located; competing effectively in an environment of intense competition; our ability to adapt to significant changes in sales due to the seasonality of our business; price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it will be sold in global market constraints; increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment; failure of our information technology systems to support our current and growing business, before and after our planned upgrades; and other factors that may be disclosed in our SEC filings or otherwise. Moreover, we operate in an evolving environment, new risk factors and uncertainties emerge from time to time and it is not possible for management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements.
We undertake no obligation to update or revise these forward-looking statements, except as required under the federal securities laws.
Overview
We are a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold primarily through our own omnichannel platform. We offer products nationwide through our website and catalog. In 2010, we initiated our omnichannel platform with the opening of our first store. Since then, we have expanded our retail presence, and as of August 1, 2021, we operated 61 retail stores and three outlet stores.
We offer a comprehensive line of innovative, durable and functional products, such as our Longtail T® shirts, Buck NakedTM underwear, Fire Hose® work pants, and No-Yank® Tank, which reflect our position as the Modern, Self-Reliant American Lifestyle brand. Our brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic for everyday and on-the-job use.
From our heritage as a catalog for those working in the building trades, Duluth Trading has become a widely recognized brand and proprietary line of innovative and functional apparel and gear. Over the last decade, we have created strong brand awareness, built a loyal customer base and generated robust sales momentum. We have done so by sticking to our roots of “there’s gotta be a better way” and through our relentless focus on providing our customers with quality, functional products.
A summary of our financial results is as follows:
Net sales in fiscal 2021 second quarter increased by 8.6% over the prior year second quarter to $149.1 million, and net sales in the first six months of fiscal 2021 increased by 14.3% over the first six months of the prior year to $282.5 million;
Net income of $9.0 million in fiscal 2021 second quarter compared to the prior year second quarter net income of $5.9 million, and net income in the first six months of fiscal 2021 of $9.5 million compared to a net loss in the first six months of fiscal 2020 of $(9.2) million; and
Adjusted EBITDA increased to $21.6 million in fiscal 2021 second quarter compared to the prior year second quarter Adjusted EBITDA of $16.8 million, and adjusted EBITDA in the first six months of fiscal 2021 of $31.7 million compared to $5.2 million over the first six months of the prior year.
See “Reconciliation of Net Income (Loss) to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net income (loss) to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures. See also the information under the heading “Adjusted EBITDA” in the section “How We Assess the Performance of Our Business” for our definition of Adjusted EBITDA.
The Company has completed a comprehensive review of current operations, logistics networks, marketing and technology capabilities, and unique brands and products. The Company formulated the “Big Dam Blueprint”, which management believes will unlock the Company’s full potential for long-term, sustainable growth.
Big Dam Blueprint
Begin with a digital-first mindset that integrates technology into all areas of the business, fundamentally changing how we operate and deliver value to customers.
Intensify efforts to optimize Duluth Trading’s owned retail channels by increasing focus and investments in our direct channel as our primary growth vehicle. We are conducting strategic research that will inform decisions on future stores regarding new locations and market share potential, size and layout.
Evolve the Company’s multi-brand platform as a new pathway to grow the business. Create unique brand positions, across men’s and women’s, for Duluth, 40Grit, Alaskan Hardgear, Buck Naked, and Best Made to address customer needs for various occasions including work, outdoor recreation, casual lifestyle, and first layer. Invest in the evolution of the Duluth Trading platform to enable the integration of new brands, expand our offerings and broaden our customer base.
Carefully test and learn to unlock long-term growth potential. Explore new opportunities to engage current and potential customers through products, services and touchpoints that they expect and value.
Increase and, in some areas, accelerate investments to future proof the business. Areas under analysis include greater automation across the logistics network; technology that will improve operations, generate positive impact and sustainable returns; support growth through multiple brands and seamlessly integrate new brands into the portfolio, and attract the talent, skillsets and expertise needed to scale the business.
Our management’s discussion and analysis includes market sales metrics for our stores, website and catalog sales. Market areas are determined by a third-party that divides the United States and Puerto Rico into 280 unique geographical areas. Our store market sales metrics include sales from our stores, website and catalog. Our non-store market sales metrics include sales from our website and catalog.
COVID-19
In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place.
The ultimate impact of COVID-19 on our operational and financial performance still depends on future developments outside of our control, including the duration and spread of the pandemic and related actions taken by federal, state and local government officials, and international governments to prevent disease spread. Given the uncertainty, we cannot reasonably
estimate store traffic patterns and the prolonged impact on overall consumer demand. We continue to actively evaluate all federal, state and local regulations to ensure compliance by our store operations.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of financial and operating measures that affect our operating results.
Net Sales
Net sales reflect our sale of merchandise plus shipping and handling revenue collected from our customers, less returns and discounts. Direct-to-consumer sales are recognized upon shipment of the product and store sales are recognized at the point of sale.
Gross Profit
Gross profit is equal to our net sales less cost of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of goods sold includes the direct cost of purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves; inbound freight; and freight from our distribution centers to our retail stores. The primary drivers of the costs of individual goods are raw material costs. Depreciation and amortization are excluded from gross profit. We expect gross profit to increase to the extent that we successfully grow our net sales. Given the size of our sales through our direct-to-consumer sales channel relative to our total net sales, shipping and handling revenue has had a significant impact on our gross profit and gross profit margin. Historically, this revenue has partially offset shipping and handling expense included in selling, general and administrative expenses. We have experienced declines in shipping and handling revenues, and this trend is expected to continue. Declines in shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling expense. Our gross profit may not be comparable to other retailers, as we do not include distribution network and store occupancy expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include all payroll and payroll-related expenses and occupancy expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization. They also include marketing expense, which primarily includes digital and television advertising, catalog production, mailing and print advertising costs, as well as all logistics costs associated with shipping product to our customers, consulting and software expenses and professional services fees. Selling, general and administrative expenses as a percentage of net sales is usually higher in lower-volume quarters and lower in higher-volume quarters because a portion of the costs are relatively fixed.
Our historical sales growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are advertising, marketing, rent/occupancy and payroll costs. While we expect these expenses to increase as we continue to grow our organization to support our growing business and increase brand awareness, we believe these expenses will decrease as a percentage of sales over time.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure of operating performance, as it provides a clearer picture of operating results by excluding the effects of financing and investing activities by eliminating the effects of interest and depreciation costs and eliminating expenses that are not reflective of underlying business performance. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business.
We define Adjusted EBITDA as consolidated net income before depreciation and amortization, interest expense and provision for income taxes adjusted for the impact of certain items, including non-cash and other items we do not consider representative of our ongoing operating performance. We believe Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other items. We also use Adjusted EBITDA as the key financial metric in determining our fiscal 2021 bonus compensation for our employees. This non-GAAP measure may not be comparable to similarly titled measures used by other companies.
Results of Operations
The following table summarizes our unaudited consolidated results of operations for the periods indicated, both in dollars and as a percentage of net sales.
Cost of goods sold (excluding depreciation and amortization)
Percentage of Net sales:
100.0
%
45.4
47.2
47.6
49.5
Gross margin
54.6
52.8
52.4
50.5
45.8
45.6
47.1
54.2
8.8
7.1
5.3
(3.7)
0.8
1.3
0.9
-
(0.2)
(0.1)
8.0
5.7
4.4
(5.1)
2.0
1.4
1.1
(1.3)
6.0
4.3
3.3
(3.8)
3.4
Three Months Ended August 1, 2021 Compared to Three Months Ended August 2, 2020
Net sales increased $11.7 million, or 8.6%, to $149.1 million in the three months ended August 1, 2021 compared to $137.4 million in the three months ended August 2, 2020. The increase was due to an increase in store market sales, partially offset by a decrease in non-store market sales.
Store market sales increased $17.7 million, or 19.8%, to $107.1 million in the three months ended August 1, 2021 compared to $89.4 million in the three months ended August 2, 2020. The year-over-year sales difference was primarily driven by temporary store closures beginning on March 20, 2020 until they re-opened beginning in the first week of May through the third week of June. Non-store market sales decreased $5.9 million, or 12.7%, to $40.7 million in the three months ended August 1, 2021 compared to $46.6 million in the three months ended August 2, 2020. The decrease was due to the rapid shift by customers from buying in-store to buying online, extended free shipping, higher promotions, and deeper investments in digital prospecting in the prior year.
Gross profit increased $8.9 million, or 12.4%, to $81.4 million in the three months ended August 1, 2021 compared to $72.5 million in the three months ended August 2, 2020. As a percentage of net sales, gross margin increased to 54.6% of net sales in the three months ended August 1, 2021, compared to 52.8% of net sales in the three months ended August 2, 2020. The increase in gross margin rate was driven by a higher mix of full price sales, as well as improved gross margin rates particularly within the Women’s division.
Selling, general and administrative expenses increased $5.7 million, or 9.0%, to $68.3 million in the three months ended August 1, 2021 compared to $62.7 million in the three months ended August 2, 2020. Selling, general and administrative expenses as a percentage of net sales increased slightly to 45.8% in the three months ended August 1, 2021, compared to 45.6% in the three months ended August 2, 2020.
The increase in selling, general and administrative expense was primarily due to higher wages due to the Company’s retail locations being open for the full fiscal quarter, coupled with annual merit increases and higher depreciation expense.
Income Taxes
Income tax expense was $3.0 million in the three months ended August 1, 2021, compared to an income tax expense of $1.9 million in the three months ended August 2, 2020. The effective tax rate related to controlling interest was 25% for the three months ended August 1, 2021 compared to 24% for the three months ended August 2, 2020.
Net Income Attributable to Controlling Interest
Net income attributable to controlling interest was $9.0 million, in the three months ended August 1, 2021 compared to net income of $5.9 million in the three months ended August 2, 2020, due to the factors discussed above.
Six Months Ended August 1, 2021 Compared to Six Months Ended August 2, 2020
Net sales increased $35.3 million, or 14.3%, to $282.6 million in the six months ended August 1, 2021 compared to $247.3 million in the six months ended August 2, 2020. The increase was due to an increase in store market sales, partially offset by a decrease in non-store market sales.
Store market sales increased $40.2 million, or 25.6%, to $197.0 million in the six months ended August 1, 2021 compared to $156.8 million in the six months ended August 2, 2020. The year-over-year sales difference was driven by temporary store closures in fiscal 2020 beginning on March 20, 2020 through the third week of June, as well as growth in online sales from both existing customers and new buyers. Non-store market sales decreased $5.1 million, or 5.9%, to $82.7 million in the six months ended August 1, 2021 compared to $87.8 million in the six months ended August 2, 2020 also due to heavy volume in the prior year due to customer purchasing patterns migrating online, extended free shipping offers, higher promotions and deeper investments in digital prospecting.
Gross profit increased $23.2 million, or 18.6%, to $148.0 million in the six months ended August 1, 2021 compared to $124.8 million in the six months ended August 2, 2020. As a percentage of net sales, gross margin increased to 52.4% of net sales in the six months ended August 1, 2021, compared to 50.5% of net sales in the six months ended August 2, 2020. The increase in gross margin rate was also driven by a higher mix of full price sales as well as improved gross margin rates on both full price and clearance items.
Selling, general and administrative expenses decreased $1.0 million, or 0.7%, to $133.0 million in the six months ended August 1, 2021 compared to $134.0 million in the six months ended August 2, 2020. Selling, general and administrative expenses as a percentage of net sales decreased to 47.1% in the six months ended August 1, 2021, compared to 54.2% in the six months ended August 2, 2020. The positive leverage was primarily due to shifting to a more efficient digital marketing approach.
The decrease in selling, general and administrative expense was primarily due to decreased traditional advertising, partially offset by increased wages due to Company retail locations being open for the full fiscal year, as well as increased depreciation expense associated with investments in technology.
Income tax expense was $3.1 million in the six months ended August 1, 2021, compared to an income tax benefit of $3.2 million in the six months ended August 2, 2020. The effective tax rate related to controlling interest was 25% for the six months ended August 1, 2021 compared to 26% for the six months ended August 2, 2020.
Net income attributable to controlling interest was $9.5 million, in the six months ended August 1, 2021 compared to a net loss of $9.2 million in the six months ended August 2, 2020, due to the factors discussed above.
Reconciliation of Net Income (Loss) to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures, for the periods indicated below. See the above section titled “How We Assess the Performance of Our Business,” for our definition of Adjusted EBITDA.
7,242
6,603
Amortization of internal-use software hosting
subscription implementation costs
405
774
Amortization of build-to-suit operating leases capital contribution
198
397
EBITDA
20,988
16,343
30,741
4,316
637
418
21,625
16,761
31,748
5,197
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $4.8 million to $21.6 million in the three months ended August 1, 2021 compared to $16.8 million in the three months ended August 2, 2020. As a percentage of net sales, Adjusted EBITDA increased to 14.5% of net sales in the three months ended August 1, 2021 compared to 12.2% of net sales in the three months ended August 2, 2020.
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $26.5 million to $31.7 million in the six months ended August 1, 2021 compared to $5.2 million in the six months ended August 2, 2020. As a percentage of net sales, Adjusted EBITDA increased to 11.2% of net sales in the six months ended August 1, 2021 compared to 2.1% of net sales in the six months ended August 2, 2020.
Liquidity and Capital Resources
General
Our business relies on cash from operating activities and a credit facility as our primary sources of liquidity. Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, capital expenditures associated with infrastructure, information technology, and opening new stores. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities. At August 1, 2021, our net working capital was $84.2 million, including $18.9 million of cash and cash equivalents.
We expect to spend approximately $18.0 million in fiscal 2021 on capital expenditures, inclusive of software hosting implementation costs. Capital expenditures includes a total of approximately $16.0 million related to investments in technology and $2.0 million for one planned new retail store expected to open in the third quarter. Due to the seasonality of our business, a
significant amount of cash from operating activities is generated during the fourth quarter of our fiscal year. We also use cash in our investing activities for capital expenditures throughout all four quarters of our fiscal year.
We believe that our cash flow from operating activities and the availability of cash under our credit facility will be sufficient to cover working capital requirements and anticipated capital expenditures for the foreseeable future.
Cash Flow Analysis
A summary of operating, investing and financing activities is shown in the following table.
Net Cash Provided by (Used in) Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, stock-based compensation and the effect of changes in operating assets and liabilities.
For the six months ended August 1, 2021, net cash provided by operating activities was $26.5 million, which primarily consisted of net income of $9.5 million, non-cash depreciation and amortization of $14.5 million, and cash provided by operating assets and liabilities of $1.8 million. The cash provided by operating assets and liabilities of $1.8 million primarily consisted of a $14.2 million decrease in inventory and a $2.9 million increase in trade accounts payable, partially offset by a $7.0 million decrease in income taxes payable and a $4.9 million decrease in accrued expenses.
For the six months ended August 2, 2020, net cash used in operating activities was $12.8 million, which primarily consisted of net loss of $9.3 million and cash used in operating assets and liabilities of $21.3 million, partially offset by non-cash depreciation and amortization of $13.3 million, and deferred income taxes of $3.3 million. The cash used in operating assets and liabilities of $21.3 million primarily consisted of a $19.7 million increase in inventory, partially offset by a $2.6 million decrease in prepaid expenses and other current assets and a $3.4 million increase in trade accounts payable.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth related to investments in infrastructure, information technology, and new store openings.
For the six months ended August 1, 2021, net cash used in investing activities was $4.9 million and was primarily driven by capital expenditures of $5.0 million for new investments in information technology.
For the six months ended August 2, 2020, net cash used in investing activities was $9.1 million and was primarily driven by capital expenditures of $8.8 million for new retail stores, as well as investments in information technology.
Net Cash (Used in) Provided by Financing Activities
Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-term debt, as well as payments on finance lease obligations.
For the six months ended August 1, 2021, net cash used in financing activities was $50.0 million, primarily consisting of the full paydown of the Company’s debt.
For the six months ended August 2, 2020, net cash provided by financing activities was $38.9 million, primarily consisting of proceeds of $29.5 million, net from our term loan and proceeds of $10.7 million, net from our revolving line of credit to fund working capital.
Contractual Obligations
There have been no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements.
Critical Accounting Policies and Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements.
As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates described in our 2020 Form 10-K.
Recent Accounting Pronouncements
See Note 12 “Recent Accounting Pronouncements,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q for information regarding recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risks described in our 2020 Form 10-K. See Note 3 “Debt and Credit Agreement,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q, for disclosure on our interest rate related to borrowings under our credit agreement.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Section 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires management of an issuer subject to the Exchange Act to evaluate, with the participation of the issuer’s principal executive and principal financial officers, or persons performing similar functions, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of each fiscal quarter. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition, operating results or cash flows. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks that may have a material adverse effect on our business, financial condition and results of operations. For a detailed discussion of the risks that affect our business, please refer to the section entitled “Risk Factors” in our 2020 Form 10-K, or other SEC filings. There have been no material changes to our risk factors as previously disclosed in our fiscal 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any equity securities during the quarter ended August 1, 2021, which were not registered under the Securities Act.
The following table contains information of shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ restricted stock during the three months ended August 1, 2021.
Total number
Approximate dollar
of shares purchased
value of shares that
as part of publicly
may yet to be
of shares
Average price
announced plans
purchased under the
Period
purchased
paid per share
or programs
plans or programs
May 3, 2021 - May 30, 2021
May 31, 2021 - July 4, 2021
16.45
July 5, 2021 - August 1, 2021
179
16.98
311
16.72
Item 6. Exhibits
EXHIBIT INDEX
Exhibit No.
10.1
First Amended and Restated Employment Agreement, dated as of May 27, 2021, between Stephen L. Schlecht and the Company.*
10.2
Summary of Outside Director Compensation.*
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities and Exchange Act, as amended.*
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended.*
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS
XBRL Instance Document**
101.SCH
XBRL Taxonomy Extension Schema Document**
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF
XBRL Taxonomy Extension Definition Document**
101.LAB
XBRL Taxonomy Extension Label Linkbase Document**
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document**
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2021 has been formatted in Inline XBRL (Inline Extensible Business Reporting Language).
*
Filed herewith
**
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: September 3, 2021
DULUTH HOLDINGS INC.(Registrant)
/s/ David Loretta
David Loretta
Senior Vice President and Chief Financial Officer
(On behalf of the Registrant and as Principal Financial Officer)
/s/ Michael Murphy
Michael Murphy
Vice President and Chief Accounting Officer
(On behalf of the Registrant and as Principal Accounting Officer)