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 July 30, 2023
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)
99
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 August 30, 2023, was 3,364,200.
The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of August 30, 2023, was 31,212,128.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED July 30, 2023
INDEX
Part I—Financial Information
Page
Item 1.
Financial Statements
3
Condensed Consolidated Balance Sheets as of July 30, 2023 and January 30, 2022 (Unaudited)
Condensed Consolidated Statements of Operations for the three and six months ended July 30, 2023 and July 31, 2022 (Unaudited)
5
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended July 30, 2023 and July 31, 2022 (Unaudited)
6
Condensed Consolidated Statement of Shareholders’ Equity for the six months ended July, 2023 (Unaudited)
7
Condensed Consolidated Statement of Shareholders’ Equity for the six months ended July 31, 2022 (Unaudited)
8
Condensed Consolidated Statements of Cash Flows for the six months ended July 30, 2023 and July 31, 2022 (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
Part II—Other Information
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
28
Item 6.
Exhibits
29
Signatures
30
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - Assets
(Unaudited)
(Amounts in thousands)
July 30, 2023
January 29, 2023
ASSETS
Current Assets:
Cash and cash equivalents
$
11,148
45,548
Receivables
5,758
6,041
Income tax receivable
140
—
Inventory, less reserves of $1,182 and $1,837, respectively
157,126
154,922
Prepaid expenses & other current assets
17,665
15,154
Total current assets
191,837
221,665
Property and equipment, net
125,970
112,564
Operating lease right-of-use assets
126,132
131,753
Finance lease right-of-use assets, net
45,742
47,206
Available-for-sale security
5,254
5,539
Other assets, net
7,853
8,727
Deferred tax assets
353
Total assets
503,141
527,454
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
59,259
56,547
Accrued expenses and other current liabilities
28,215
40,815
Income taxes payable
1,761
Current portion of operating lease liabilities
15,993
15,571
Current portion of finance lease liabilities
2,964
2,842
Current maturities of TRI long-term debt
807
768
Total current liabilities
107,238
118,304
Operating lease liabilities, less current maturities
110,999
117,366
Finance lease liabilities, less current maturities
35,906
37,425
TRI long-term debt, less current maturities
25,538
25,913
Deferred tax liabilities
1,249
Total liabilities
279,681
300,257
Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized; no shares
issued or outstanding as of July 30, 2023 and January 29, 2023
Common stock (Class A), no par value; 10,000 shares authorized; 3,364 shares
issued and outstanding as of July 30, 2023 and January 29, 2023
Common stock (Class B), no par value; 200,000 shares authorized;
31,371 shares issued and 31,217 shares outstanding as of July 30, 2023 and
30,191 shares issued and 30,079 shares outstanding as of January 29, 2023
Treasury stock, at cost; 154 and 112 shares as of July 30, 2023 and
January 29, 2023, respectively
(1,733)
(1,459)
Capital stock
101,415
98,842
Retained earnings
127,299
133,172
Accumulated other comprehensive loss
(295)
(148)
Total shareholders' equity of Duluth Holdings Inc.
226,686
230,407
Noncontrolling interest
(3,226)
(3,210)
Total shareholders' equity
223,460
227,197
Total liabilities and shareholders' equity
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share figures)
Three Months Ended
Six Months Ended
July 31, 2022
Net sales
139,099
141,511
262,858
264,415
Cost of goods sold (excluding depreciation and amortization)
67,616
65,903
125,724
121,744
Gross profit
71,483
75,608
137,134
142,671
Selling, general and administrative expenses
72,926
71,739
143,126
139,733
Operating (loss) income
(1,443)
3,869
(5,992)
2,938
Interest expense
880
879
1,814
1,755
Other income, net
109
78
257
124
(Loss) income before income taxes
(2,214)
3,068
(7,549)
1,307
Income tax (benefit) expense
(202)
727
(1,660)
289
Net (loss) income
(2,012)
2,341
(5,889)
1,018
Less: Net loss attributable to noncontrolling interest
(8)
(27)
(16)
(56)
Net (loss) income attributable to controlling interest
(2,004)
2,368
(5,873)
1,074
Basic earnings per share (Class A and Class B):
Weighted average shares of common stock outstanding
32,952
32,766
32,912
32,732
Net (loss) income per share attributable to controlling interest
(0.06)
0.07
(0.18)
0.03
Diluted earnings per share (Class A and Class B):
Weighted average shares and equivalents outstanding
32,910
Condensed Consolidated Statements of Comprehensive (Loss) Income
Other comprehensive income
Securities available-for sale:
Unrealized security loss arising during the period
(118)
(197)
(651)
Income tax benefit
(30)
(51)
(50)
(164)
Other comprehensive loss
(88)
(151)
(147)
(487)
Comprehensive (loss) income
(2,100)
2,190
(6,036)
531
Comprehensive loss attributable to noncontrolling interest
Comprehensive (loss) income attributable to controlling interest
(2,092)
2,217
(6,020)
587
Condensed Consolidated Statement of Shareholders’ Equity
Six Months Ended July 30, 2023
Accumulated
Noncontrolling
other
interest in
Total
Treasury
Retained
comprehensive
variable interest
shareholders'
Shares
Amount
stock
earnings
income (loss)
entity
equity
Balance at January 29, 2023
33,443
Issuance of common stock
1,081
136
Stock-based compensation
990
Restricted stock forfeitures
(9)
Restricted stock surrendered for taxes
(41)
(273)
(59)
Net loss
(3,869)
(3,877)
Balance at April 30, 2023
34,474
99,968
(1,732)
129,303
(207)
(3,218)
224,114
111
153
1,294
(4)
(1)
Net income (loss)
Balance at July 30, 2023
34,581
Six Months Ended July 31, 2022
income
Balance at January 30, 2022
33,071
95,515
(1,002)
130,868
489
(3,152)
222,718
292
166
618
(33)
(455)
(336)
(1,294)
(29)
(1,323)
Balance at May 1, 2022
33,329
96,299
(1,457)
129,575
(3,181)
221,389
56
147
656
(44)
Balance at July 31, 2022
33,341
97,102
(1,458)
131,943
2
(3,208)
224,381
Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
14,868
15,374
Stock based compensation
2,284
1,274
Deferred income taxes
(1,553)
Loss on disposal of property and equipment
16
23
Changes in operating assets and liabilities:
283
(309)
Income taxes receivable
(140)
Inventory
(2,204)
(41,827)
Prepaid expense & other current assets
(1,351)
86
Software hosting implementation costs, net
(370)
(529)
Deferred catalog costs
(25)
2,716
9,549
(1,761)
(6,231)
Accrued expenses and deferred rent obligations
(7,343)
(18,974)
Other assets
(20)
(519)
Noncash lease impacts
(785)
(75)
Net cash used in operating activities
(1,249)
(41,138)
Cash flows from investing activities:
Purchases of property and equipment
(31,483)
(18,814)
Principal receipts from available-for-sale security
88
79
Proceeds from disposals
Net cash used in investing activities
(31,395)
(18,727)
Cash flows from financing activities:
Proceeds from line of credit
10,000
Payments on line of credit
(10,000)
Payments on TRI long term debt
(373)
(338)
Payments on finance lease obligations
(1,397)
(1,336)
Payments of tax withholding on vested restricted shares
(274)
(456)
Other
288
313
Net cash used in financing activities
(1,756)
(1,817)
Decrease in cash and cash equivalents
(34,400)
(61,682)
Cash and cash equivalents at beginning of period
77,051
Cash and cash equivalents at end of period
15,369
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid
1,795
6,619
Supplemental disclosure of non-cash information:
Unpaid liability to acquire property and equipment
1,336
2,236
Table of Contents
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 name, 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 2023 is a 52-week period and ends on January 28, 2024. Fiscal 2022 was a 52-week period and ended on January 29, 2023. The three months of fiscal 2023 and fiscal 2022 represent the Company’s 13-week periods ended July 30, 2023 and July 31, 2022, respectively.
The accompanying condensed consolidated financial statements as of and for the three and six months ended July 30, 2023 and July 31, 2022 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 July 30, 2023 and July 31, 2022. 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 29, 2023.
C. Impairment Analysis
As of July 30, 2023 and for the three and six months ended, no triggering events or indicators of asset impairment were noted.
D. 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 $1.2 million as of July 30, 2023 and January 29, 2023.
The reserve for retail 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. Due to the timing of the inventory counts, an insignificant retail inventory shrinkage reserve was outstanding as of July 30, 2023, compared to $0.6 million as of January 29, 2023.
E. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
(in thousands)
Pending returns inventory, net
1,878
2,373
Current software hosting implementation costs, net
2,679
3,074
Other prepaid expenses
13,108
9,707
Goodwill
402
Intangible assets, net
441
450
Non-current software hosting implementation costs
5,358
6,148
1,652
1,727
F. 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 due to increased sales during the holiday season.
G. 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.
H. Reclassifications
Certain reclassifications have been made to the 2022 financial statements in order to conform to the 2023 presentation. The Company reclassified $4.2 million and ($4.2) million from Property, Plant & Equipment and Prepaid Expenses, respectively, in the prior period. There were no changes to previously reported shareholders' equity, statement of cash flows or net income (loss) as a result of the reclassifications.
I. 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 29, 2023.
2. LEASES
Based on the criteria set forth in ASC Topic 842, Leases (“ASC 842”), the Company recognizes right-of-use (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
1,680
Interest on lease liabilities
431
459
869
925
Total finance lease expense
1,271
1,299
2,549
2,605
Operating lease expense
5,051
4,717
10,101
9,106
Amortization of build-to-suit leases capital contribution
321
642
Variable lease expense
2,559
2,473
5,473
4,445
Total lease expense
9,202
8,810
18,765
16,798
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
1,397
Operating cash flows from finance leases
Operating cash flows from operating leases
10,340
9,166
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases
1,737
Weighted-average remaining lease term (in years):
Finance leases
11
12
Weighted-average discount rate:
4.4%
4.1%
Future minimum lease payments under the non-cancellable leases are as follows as of July 30, 2023:
Fiscal year
Finance
Operating
2023 (remainder of fiscal year)
2,285
10,504
2024
4,736
20,612
2025
5,099
19,888
2026
3,993
19,034
2027
17,785
Thereafter
29,231
61,200
Total future minimum lease payments
49,337
149,023
Less – Discount
(10,467)
(22,031)
Lease liability
38,870
126,992
3. DEBT AND CREDIT AGREEMENT
Debt consists of the following:
TRI Senior Secured Note
22,845
23,181
TRI Note
3,500
26,345
26,681
Less: current maturities
TRI 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 14, 2021, the Company entered into a credit agreement (the “Credit Agreement”), which was treated as a modification for accounting purposes. The Credit Agreement originally matured on May 14, 2026 and provided for borrowings of up to $150.0 million that were 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 was 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 Credit Agreement was 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 Credit Agreement.
On July 8, 2022, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”), which was treated as a modification for accounting purposes. The First Amendment amends the Credit Agreement in order to (i) increase the revolving commitment from $150.0 million to $200.0 million; (ii) extend the maturity date from May 14, 2026 to July 8, 2027; (iii) amend the pricing index to replace BSBY with the Term Secured Overnight Financing Rate; and (iv) reduce the commitment fee in some instances.
As of July 30, 2023 and for the six months then ended, the Company was in compliance with all financial and non-financial covenants contained within the Credit Agreement and the First Amendment.
4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
Salaries and benefits
2,401
2,404
Deferred revenue
7,828
10,249
Freight
3,651
7,193
Product returns
3,959
5,168
Unpaid purchases of property & equipment
560
6,271
Accrued advertising
1,730
2,020
8,086
7,510
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 Company’s assets and liabilities measured at fair value are categorized as Level 1 or Level 3 instruments. The fair value of the Company’s money market account is obtained from real-time quotes for transactions in active exchange markets involving identical assets (Level 1). 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 July 30, 2023, 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 money market account and 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 1 security:
Money market funds
4,054
Level 3 security:
Corporate trust
5,649
(395)
25,031
5,737
(198)
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 July 30, 2023 or July 31, 2022.
The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of July 30, 2023.
Within one year
190
164
After one year through five years
1,263
1,134
After five years through ten years
1,910
1,780
After ten years
2,286
2,176
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
24,782
26,172
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.
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 July 30, 2023 and January 29, 2023.
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 July 30, 2023 and January 29, 2023:
Cash
31
20
23,250
23,612
23,281
23,632
Other current liabilities
162
161
Current maturities of long-term debt
TRI Long-term debt
Noncontrolling interest in VIE
7. (LOSS) EARNINGS PER SHARE
Earnings per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings 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 per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation is as follows:
(in thousands, except per share data)
Numerator - net (loss) income attributable to controlling interest
Denominator - weighted average shares (Class A and Class B)
Basic
Dilutive shares
178
Diluted
(Loss) earnings per share (Class A and Class B)
The computation of diluted (loss) earnings per share excluded (0.2) million and 0.4 million shares of unvested restricted stock for the three and six months ended July 30, 2023, respectively, because their inclusion would be anti-dilutive due to a net loss.
The computation of diluted (loss) earnings per share excluded (0.1) million of unvested restricted stock for the three months ended July 31, 2022, because the inclusion of dilutive potential common shares outstanding 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 $1.3 million and $2.3 million for the three and six months ended July 30, 2023, 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 July 30, 2023 is as follows:
Weighted
average
fair value
per share
Outstanding at January 29, 2023
618,772
12.05
Granted
1,155,145
6.51
Vested
(161,732)
12.24
Forfeited
(13,179)
11.05
Outstanding at July 30, 2023
1,599,006
8.29
At July 30, 2023, the Company had unrecognized compensation expense of $10.0 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
55,918
49,450
Buildings
36,191
36,183
Vehicles
121
Warehouse equipment
26,029
25,951
Office equipment and furniture
53,802
53,713
Computer equipment
9,428
9,185
Software
37,216
36,260
223,191
215,389
Accumulated depreciation and amortization
(131,680)
(118,989)
91,511
96,400
Construction in progress
34,459
16,164
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
86,845
85,321
166,347
163,001
Stores
52,254
56,190
96,511
101,414
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
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
10,791
Gift cards sold
4,146
4,034
Gift cards redeemed
(6,373)
(6,468)
Gift card breakage
(194)
(247)
Balance as of end of period
8,110
11. INCOME TAXES
For the six months ended July 30, 2023, the Company has utilized the discrete effective tax rate method as allowed by Accounting Standards Codification ("ASC") 740-270-30-18, Income Taxes – Interim Reporting to calculate its interim tax provision. The discrete method treats the year-to-date period as if it was the annual period and determines the income tax expense or benefit on that basis. The Company believes that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method.
The effective tax rate related to controlling interest was 22% for the six months ended July 30, 2023 and 21% for the six months ended July 31, 2022. 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 a 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 adopted 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 adoption of the standard did not have a material impact on the Company’s consolidated financial results.
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 29, 2023 (“2022 Form 10-K”).
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2023 is a 52-week period and ends on January 28, 2024. Fiscal 2022 was a 52-week period and ended on January 29, 2023. The three months of fiscal 2023 and fiscal 2022 represent our 13-week periods ended July 30, 2023 and July 31, 2022, 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 that could cause actual results to differ materially from those expressed in the forward-looking statements, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 2022 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 impact of inflation on our results of operations; the prolonged effects of economic uncertainty on store traffic and disruptions to our distribution network, supply chains and operations; our ability to maintain and enhance a strong brand and sub-brand image; adapting to declines in consumer confidence, inflation and decreases in consumer spending; effectively adapting to new challenges associated with our expansion into new geographic markets; our ability to meet customer delivery time expectations; natural disasters, unusually adverse weather conditions, boycotts, prolonged public health crises, epidemics or pandemics and unanticipated events; generating adequate cash from our existing stores and direct sales to support our growth; the impact of changes in corporate tax regulations and sales tax; identifying and responding to new and changing customer preferences; the success of the locations in which our stores are located; 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; our inability to deploy marketing tactics to strengthen brand awareness and attract new customers in a cost effective manner; our ability to successfully open new stores; 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 due to global market constraints; the potential for further increases in price and availability of raw materials; our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices; the susceptibility of the price and availability of our merchandise to international trade conditions; failure of our vendors and their manufacturing sources to use acceptable labor or other practices; our dependence upon key executive management or our inability to hire or retain the talent required for our business; 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; disruptions in our supply chain and fulfillment centers; our inability to protect our trademarks or other intellectual property rights; infringement on the intellectual property of third parties; acts of war, terrorism or civil unrest; the impact of governmental laws and regulations and the outcomes of legal proceedings; changes in U.S. and non-U.S. laws affecting the importation and taxation of goods, including imposition of unilateral tariffs on imported goods; our ability to secure the personal and/or financial information of our customers and comply with the security standards for the credit card industry; 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 July 30, 2023, we operated 62 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 decreased by 1.7% over the prior year second quarter to $139.1 million, and net sales in the first six months of fiscal 2023 decreased by 0.6% over the first six months of the prior year to $262.9 million;
Net loss of $2.0 million in fiscal 2023 second quarter compared to the prior year second quarter net income of $2.3 million, and net loss in the first six months of fiscal 2023 of $5.9 million compared to net income in the first six months of fiscal 2022 of $1.0 million;
Adjusted EBITDA decreased to $8.6 million in fiscal 2023 second quarter compared to the prior year second quarter Adjusted EBITDA of $13.2 million, and adjusted EBITDA in the first six months of fiscal 2023 of $13.8 million compared to $21.1 million over the first six months of fiscal 2022.
See the “Reconciliation of Net (Loss) Income to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net (loss) income 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.
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.
Economic Conditions
The United States economy has experienced continued high inflation during the first half of 2023 and there are expectations in the market that inflation may remain at elevated levels.
The ultimate impact of higher inflationary periods on our operational and financial performance still depends on future developments outside of our control. Given the uncertainty, we cannot reasonably estimate store traffic patterns and the prolonged impact on overall consumer demand.
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. 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.
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 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.
Percentage of Net sales:
100.0
%
Cost of goods sold (excluding depreciation and amortization)
48.6
46.6
47.8
46.0
Gross margin
51.4
53.4
52.2
54.0
52.4
50.7
54.4
52.8
(1.0)
2.7
(2.3)
1.1
0.6
0.7
-
(1.6)
2.2
(2.9)
0.5
(0.1)
(0.6)
0.1
(1.4)
1.7
(2.2)
0.4
Three Months Ended July 30, 2023, Compared to Three Months Ended July 31, 2022
Net sales decreased $2.4 million, or 1.7%, to $139.1 million in the three months ended July 30, 2023 compared to $141.5 million in the three months ended July 31, 2022.
Store market net sales decreased $2.8 million, or 2.8%, to $97.6 million in the three months ended July 30, 2023 compared to $100.4 million in the three months ended July 31, 2022. Non-store market net sales increased by $0.8 million, or 1.9%, to $40.6 million in the three months ended July 30, 2023 compared to $39.9 million in the three months ended July 31, 2022.
Gross profit decreased $4.1 million, or 5.5%, to $71.5 million in the three months ended July 30, 2023 compared to $75.6 million in the three months ended July 31, 2022. As a percentage of net sales, gross margin decreased to 51.4% of net sales in the three months ended July 30, 2023, compared to 53.4% of net sales in the three months ended July 31, 2022.
The decrease in gross margin was primarily driven by a higher mix of promotional and clearance sales during the current period.
Selling, general and administrative expenses increased $1.2 million, or 1.7%, to $72.9 million in the three months ended July 30, 2023 compared to $71.7 million in the three months ended July 31, 2022. Selling, general and administrative expenses as a percentage of net sales increased to 52.4% in the three months ended July 30, 2023, compared to 50.7% in the three months ended July 31, 2022.
The increase in selling, general and administrative expense was partially due to higher occupancy costs from the new automated Southeast fulfillment center, coupled with investments in new headcount to drive ongoing strategic initiatives.
Income Taxes
Income tax benefit was $0.2 million in the three months ended July 30, 2023, compared to income tax expense of $0.7 million in the three months ended July 31, 2022. The effective tax rate related to controlling interest, which was not meaningful for the three months ended July 30, 2023, was impacted by discrete items related to stock compensation activity. The effective tax rate was 23% for the three months ended July 31, 2022.
Net (Loss) Income Attributable to Controlling Interest
Net loss attributable to controlling interest was $2.0 million, in the three months ended July 30, 2023 compared to net income of $2.4 million in the three months ended July 31, 2022, due to the factors discussed above.
Six Months Ended July 30, 2023 Compared to Six Months Ended July 31, 2022
Net sales decreased $1.5 million, or 0.6%, to $262.9 million in the six months ended July 30, 2023 compared to $264.4 million in the six months ended July 31, 2022.
Store market net sales decreased $2.5 million, or 1.4%, to $183.0 million in the six months ended July 30, 2023 compared to $185.5 million in the six months ended July 31, 2022. The decrease was driven by slower store traffic compared to the prior year. Non-store market net sales increased by $1.4 million, or 1.8%, to $78.0 million in the six months ended July 30, 2023 compared to $76.6 million in the six months ended July 31, 2022.
Gross profit decreased $5.6 million, or 3.9%, to $137.1 million in the six months ended July 30, 2023 compared to $142.7 million in the six months ended July 31, 2022. As a percentage of net sales, gross margin decreased to 52.2% of net sales in the six months ended July 30, 2023, compared to 54.0% of net sales in the six months ended July 31, 2022.
The decrease in gross margin was primarily driven by a lower mix of full price sales, coupled with deeper discounting.
Selling, general and administrative expenses increased $3.4 million, or 2.4%, to $143.1 million in the six months ended July 30, 2023 compared to $139.7 million in the six months ended July 31, 2022. Selling, general and administrative expenses as a percentage of net sales increased to 54.4% in the six months ended July 30, 2023, compared to 52.8% in the six months ended July 31, 2022.
The increase in selling, general and administrative expense was partially due to higher occupancy costs from the new automated Southeast fulfillment center, as well as investments in new headcount.
Income tax benefit was $1.7 million in the six months ended July 30, 2023, compared to income tax expense of $0.3 million in the six months ended July 31, 2022. The effective tax rate related to controlling interest was 22% for the six months ended July 30, 2023 compared to 21% for the six months ended July 31, 2022.
Net loss attributable to controlling interest was $5.9 million in the six months ended July 30, 2023 compared to net income of $1.1 million in the six months ended July 31, 2022, due to the factors discussed above.
Reconciliation of Net (Loss) Income to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net (loss) income 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.
7,455
7,854
Amortization of internal-use software hosting
subscription implementation costs
1,150
787
2,420
1,420
EBITDA
7,271
12,588
11,553
19,856
8,565
13,244
13,837
21,130
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $4.6 million to $8.6 million in the three months ended July 30, 2023 compared to $13.2 million in the three months ended July 31, 2022. As a percentage of net sales, Adjusted EBITDA decreased to 6.2% of net sales in the three months ended July 30, 2023 compared to 9.4% of net sales in the three months ended July 31, 2022.
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $7.3 million to $13.8 million in the six months ended July 30, 2023 compared to $21.1 million in the six months ended July 31, 2022. As a percentage of net sales, Adjusted EBITDA decreased to 5.3% of net sales in the six months ended July 30, 2023 compared to 8.0% of net sales in the six months ended July 31, 2022.
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 and information technology. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities. At July 30, 2023, our net working capital was $84.6 million, including $11.1 million of cash and cash equivalents.
We expect to spend approximately $55.0 million in fiscal 2023 on capital expenditures, inclusive of software hosting implementation costs, primarily due to investments in logistics optimization, including investments in the fulfillment network and information technology. 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 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 July 30, 2023, net cash used in operating activities was $1.2 million, which primarily consisted of cash used in operating assets and liabilities of $11.0 million and a net loss for the six months ended July 30, 2023 offset by depreciation of $14.9 million. The cash used in operating assets and liabilities of $11.0 million was primarily due to a $7.3 million decrease in accrued expenses and $2.2 million increase in inventory.
For the six months ended July 31, 2022, net cash used in operating activities was $41.1 million, which primarily consisted of cash used in operating assets and liabilities of $58.9 million. The cash used in operating assets and liabilities of $58.9 million was primarily due to a $41.8 million increase in inventory and a $19.0 million decrease in accrued expenses, partially offset by a $9.5 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 and information technology.
For the six months ended July 30, 2023 and July 31, 2022, net cash used in investing activities was $31.4 million and $18.7 million, respectively, and was primarily driven by new investments in the fulfillment network and information technology.
Net Cash Used in 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 July 30, 2023 an July 31, 2022, net cash used in financing activities was $1.8 million, primarily consisting of payments on finance lease obligations.
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 29, 2023.
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 2022 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 2022 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 2022 Form 10-K, or other SEC filings. There have been no material changes to our risk factors as previously disclosed in our fiscal 2022 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 July 30, 2023, 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 July 30, 2023.
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 1, 2023 - May 28, 2023
198
5.69
May 29, 2023 - July 2, 2023
366
6.16
July 3, 2023 - July 30, 2023
564
6.00
Item 6. Exhibits
EXHIBIT INDEX
Exhibit No.
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 July 30, 2023 has been formatted in Inline XBRL (Inline Extensible Business Reporting Language and contained in Exhibits 101).
*
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 1, 2023
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)