DULUTH HOLDINGS INC. 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
The Company's fiscal year ends on the Sunday nearest to
Unless the context indicates otherwise, the terms the "Company," "Duluth,"
"Duluth Trading," "we," "our," or "us" are used to refer to
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 or initiatives, strategies or the expected outcome or impact
of pending or threatened litigation 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
2019 Form 10-K and other
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 exclusively 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
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.
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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 2020 first quarter decreased by 3.8% over the prior year
first quarter to
and retail store net sales decreased 51.8%;
· Net loss of
year first quarter net loss of
· Adjusted EBITDA of
prior year first quarter Adjusted EBITDA of
· We opened one new store in fiscal 2020 first quarter, adding approximately
17,000 of gross square footage.
As of
See "Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA"
section for a reconciliation of our net income to EBITDA and EBITDA to Adjusted
EBITDA, both of which are non-
Our business is seasonal, and as a result, our net sales fluctuate from quarter to quarter, which often affects the comparability of our results between quarters. Net sales are historically higher in the fourth quarter of our fiscal year due to the holiday selling season.
With a focus on profitability we are pursuing several strategies to continue our growth, including building brand awareness to continue customer acquisition, continuing selective retail expansion, selectively broadening assortments in certain men's product categories and growing our women's business.
We continue to grow our omnichannel distribution network which allows the
consumer to interact with us through a consistent customer experience whether on
the company website or at company stores. As we expand our distribution network,
and in conjunction with assessing the similar nature of products sold,
production process, distribution process, target customers and economic
characteristics between segments, we have determined that the historical
structure of separate reporting segments for direct and retail was no longer
representative. Therefore, as of
Our management's discussion and analysis includes market sales metrics for our
retail stores, website and catalog sales. Market areas are determined by a
third-party that divides
COVID-19
In
The Company has focused on protecting the health and safety of our employees,
customers and suppliers, working with our customers, landlords, suppliers and
vendors to minimize potential disruptions and supporting our community, while
managing our business in these unprecedented times. During the three months
ended
· Temporarily closed all stores for a period of seven weeks;
· Made operational changes to accommodate social distancing within our
distribution centers;
· Made work from home accommodations for corporate employees;
· Amended our Credit Agreement to include an incremental delayed draw term loan
of $20.5 million and amended the loan covenants to provide greater flexibility
during peak borrowing periods in fiscal 2020;
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· Partnered with landlords, suppliers and vendors to materially reduce costs,
extend payment terms and cancel merchandise receipts;
· Initiated furloughs of varying lengths with benefits intact for 68% of salaried
staff;
· Reduced planned capital spend levels by 50% primarily by decreasing new store
openings to four in fiscal 2020; and
· Partnered with the
apparel items.
Our business operations and financial performance for the three months ended
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 the pace and timing of remaining store openings, traffic patterns as stores re-open and the 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 reflect our sale of merchandise plus shipping and handling revenue collected from our customers, less returns and discounts. Website and catalog sales are recognized upon shipment of the product and retail store sales are recognized at the point of sale. We also use net sales as one of the key financial metrics in determining our annual bonus compensation for our employees.
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 direct segment sales 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 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.
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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 open new stores, increase brand awareness and grow our organization to support our growing business, 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 (loss) 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.
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Table of Contents 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.
Three Months Ended
May 3, 2020 May 5, 2019
(in thousands)
Net sales 109,917 114,244
Cost of goods sold (excluding depreciation
and amortization) 57,585 53,326
Gross profit 52,332 60,918
Selling, general and administrative expenses 71,306 70,609
Operating loss (18,974) (9,691)
Interest expense 1,350 841
Other income, net 59 204
Loss before income taxes (20,265) (10,328)
Income tax benefit 5,086 2,683
Net loss (15,179) (7,645)
Less: Net loss attributable to noncontrolling
interest (44) (73)
Net loss attributable to controlling interest
100.0 % 100.0 %
Cost of goods sold (excluding depreciation
and amortization) 52.4 % 46.7 %
Gross margin 47.6 % 53.3 %
Selling, general and administrative expenses 64.9 % 61.8 %
Operating loss (17.3) % (8.5) %
Interest expense 1.2 % 0.7 %
Other income, net 0.1 % 0.2 %
Loss before income taxes (18.4) % (9.0) %
Income tax benefit 4.6 % 2.3 %
Net loss (13.8) % (6.7) %
Less: Net loss attributable to noncontrolling
interest - % (0.1) %
Net loss attributable to controlling interest (13.8) % (6.6) %
Three Months Ended
Net sales decreased
Store market sales decreased
Gross Profit
Gross profit decreased
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
The increase in selling, general and administrative expense was due to the
aforementioned
Income Tax Benefit
Income tax benefit was
Net loss
Net loss was
Reconciliation of Net Loss to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net loss to EBITDA and EBITDA to
Adjusted EBITDA, both of which are non-
Three Months Ended
May 3, 2020 May 5, 2019
(in thousands)
Net loss $ (15,179) $ (7,645)
Depreciation and amortization 6,689 4,392
Interest expense 1,350 841
Amortization of build-to-suit operating leases
capital contribution 199 214
Income tax benefit 5,086 2,683
EBITDA $ (12,027) $ (4,881)
Stock based compensation 463 474
Adjusted EBITDA $ (11,564) $ (4,407) As a result of the factors discussed above in the "Results of Operations"
section, Adjusted EBITDA decreased
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 opening new stores, infrastructure and information
technology. The most significant components of our working capital are cash,
inventory, accounts payable and other current liabilities. At
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We expect to spend approximately
We believe that our cash flow from operating activities and the availability of cash under our amended borrowing 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.
Three Months Ended
May 3, 2020 May 5, 2019
(in thousands)
Net cash used in operating activities $ (33,491) $ (13,111)
Net cash used in investing activities (4,102) (9,762)
Net cash provided by financing activities 44,653 22,358
Increase (decrease) in cash, cash equivalents
and restricted cash $ 7,060 $ (515) Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization and, stock-based compensation and the effect of changes in operating assets and liabilities.
While our cash flows from operations for the three months ended
For the three months ended
For the three months ended
Investing activities consist primarily of capital expenditures for growth related to new store openings and information technology.
For the three months ended
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For the three months ended
Net Cash Provided by Financing Activities
Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-term debts, as well as payments on finance lease obligations.
For the three months ended
For the three months ended
Line of Credit
On
As of
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
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
As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates described in our 2019 Form 10-K, except as discussed below.
Recently Adopted Accounting Pronouncements
On
See Note 1 "Nature of Operations and Basis of Presentation," of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q for further information regarding recently adopted accounting pronouncements.
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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.
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