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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Duluth Holdings Inc.    DLTH

DULUTH HOLDINGS INC.

(DLTH)
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DULUTH : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

09/04/2020 | 10:22am EST
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 February 2,
2020 ("2019 Form 10-K").

The Company's fiscal year ends on the Sunday nearest to January 31 of the
following year. Fiscal 2020 is a 52-week period and ends on January 31, 2021.
Fiscal 2019 was a 52-week period and ended on February 2, 2020. The three and
six months of fiscal 2020 and fiscal 2019 represent our 13 and 26-week periods
ended August 2, 2020 and August 4, 2019, 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 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, Part II, Item 1A "Risk Factors" in our first quarter Form 10-Q
and in this report on Form 10-Q and other SEC filings, which factors are
incorporated by reference herein. These risks and uncertainties include, but are
not limited to, the following: adverse changes in the economy or business
conditions, including the adverse effects of the COVID-19 pandemic; 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; our ability to successfully open new stores; effectively
adapting to new challenges associated with our expansion into new geographic
markets; generating adequate cash from our existing stores to support our
growth; 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; natural disasters, unusually adverse weather conditions, boycotts and
unanticipated events; 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 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 August 2, 2020, we operated 59 retail
store 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.


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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 second quarter increased by 12.6% over the prior year
second quarter to $137.4 million, and net sales in the first six months of
fiscal 2020 increased by 4.7% over the first six months of the prior year to
$247.3 million;

?Net income of $5.9 million in fiscal 2020 second quarter compared to the prior
year second quarter net income of $1.9 million and net loss in the first six
months of fiscal 2020 of $9.2 million compared to the net loss in the first six
months of fiscal 2019 of $5.6 million; and

?Adjusted EBITDA increased by 75.3% to $16.8 million in fiscal 2020 second quarter compared to the prior year second quarter Adjusted EBITDA of $9.6 million and adjusted EBITDA in the first six months of fiscal 2020 increased by 9.6% over the first six months of the prior year to $5.2 million.


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-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 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 an emphasis 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 our sales channels, we have determined that the
historical structure of separate reporting segments for direct and retail was no
longer representative of the way in which we manage our business. Therefore, as
of February 3, 2020, we have updated our segment reporting to one reportable
external segment, consistent with our omnichannel business approach.

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 the United States and Puerto Rico into 280 unique
geographical areas. Our store market sales metrics include sales from our retail
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 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. The Company took the
following significant actions during the first fiscal quarter as a response to
the pandemic:

?Beginning March 20, 2020 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;

?Began a six-month pay reduction for senior leadership ranging from 10 to 20 percent;

?The Company's Chief Executive Officer ("CEO") agreed to temporarily forgo his base salary starting March 22, 2020 through the end of fiscal 2020;

?Reduced planned capital spend levels by 50% primarily by decreasing new store openings to four in fiscal 2020; and

?Partnered with the American Red Cross to donate a portion of proceeds on key apparel items.


While the business environment and above actions have impacted our results for
the first half of the fiscal year, our strong brand awareness and loyal customer
base were evident by a continued surge in direct sales and improved
profitability during the second fiscal quarter. As of June 15, 2020, all of our
62 retail stores have re-opened in some capacity, but prolonged COVID-19 safety
concerns are expected to keep store traffic at subdued levels through fiscal
2020. In light of the Company's better than expected year-to-date performance,
the Board of Directors has decided to reinstate the Company's CEO's base salary
effective October 19, 2020. Senior leadership's pay reduction will also expire
as originally planned on October 19, 2020.

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
with 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 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. The shipping thresholds allocated to us by our primary delivery
provider, United Parcel Service ("UPS"), may not be sufficient for anticipated
sales volume in the third and fourth quarter, which may affect our sales. We are
considering adding additional shipping partners to mitigate these constraints on
our shipping capacity.

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.


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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.

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. Our shipping
and handling expenses are also expected to increase in the third and fourth
quarter, in part because of additional surcharges during our peak holiday
shopping season due to the expected strained distribution network. Management is
considering adding additional shipping partners and working closely with UPS to
mitigate the effect of these surcharges.

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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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               Six Months Ended
                                                               August 4,                       August 4,
                                             August 2, 2020       2019       August 2, 2020       2019
(in thousands)
Net sales                                   $        137,375$  121,963$        247,292$  236,207
Cost of goods sold (excluding
depreciation and amortization)                        64,903       57,159            122,488      110,485
Gross profit                                          72,472       64,804            124,804      125,722
Selling, general and administrative
expenses                                              62,680       61,069            133,986      132,091
Operating income (loss)                                9,792        3,735            (9,182)      (6,369)
Interest expense                                       1,778        1,203              3,128        1,631
Other (loss) income, net                               (250)          (8)              (191)          196
Income (loss) before income taxes                      7,764        2,524           (12,501)      (7,804)
Income tax expense (benefit)                           1,866          678            (3,220)      (2,005)
Net income (loss)                                      5,898        1,846            (9,281)      (5,799)
Less: Net loss attributable to
noncontrolling interest                                 (43)         (90)               (87)        (163)
Net income (loss) attributable to
controlling interest                        $          5,941   $    1,936$        (9,194)$  (5,636)
Percentage of Net sales:
Net sales                                              100.0 %      100.0 %            100.0 %      100.0 %
Cost of goods sold (excluding
depreciation and amortization)                          47.2 %       46.9 %             49.5 %       46.8 %
Gross margin                                            52.8 %       53.1 %             50.5 %       53.2 %
Selling, general and administrative
expenses                                                45.6 %       50.1 %             54.2 %       55.9 %
Operating income (loss)                                  7.1 %        3.1 %            (3.7) %      (2.7) %
Interest expense                                         1.3 %        1.0 %              1.3 %        0.7 %
Other (loss) income, net                               (0.2) %          - %            (0.1) %        0.1 %
Income (loss) before income taxes                        5.7 %        2.1 %            (5.1) %      (3.3) %
Income tax expense (benefit)                             1.4 %        0.6 %            (1.3) %      (0.8) %
Net income (loss)                                        4.3 %        1.5 %            (3.8) %      (2.5) %
Less: Net loss attributable to
noncontrolling interest                                    - %      (0.1) %                - %      (0.1) %
Net income (loss) attributable to
controlling interest                                     4.3 %        1.6 %            (3.7) %      (2.4) %


Three Months Ended August 2, 2020 Compared to Three Months Ended August 4, 2019

Net Sales

Net sales increased $15.4 million, or 12.6%, to $137.4 million in the three months ended August 2, 2020 compared to $122.0 million in the three months ended August 4, 2019. The increase was primarily due to an increase in non-store market sales slightly offset by a decrease in store market sales.


Non-store market sales increased $17.3 million, or 58.6%, to $46.8 million in
the three months ended August 2, 2020 compared to $29.5 million in the three
months ended August 4, 2019. The increase was driven by an increase in digital
advertising to promote our Mother's Day, Father's Day and online warehouse
clearance events. Store market sales decreased $1.6 million, or 1.8%, to $89.2
million in the three months ended August 2, 2020 compared to $90.9 million in
the three months ended August 4, 2019. The decrease was due to the temporary
closure of stores that continued from the first fiscal quarter until they
re-opened beginning in the first week of May through the third week of June,
partially offset by an increase in existing customers shifting from buying
in-store to buying online.

Gross Profit


Gross profit increased $7.7 million, or 11.8%, to $72.5 million in the three
months ended August 2, 2020 compared to $64.8 million in the three months ended
August 4, 2019. As a percentage of net sales, gross margin decreased to 52.8% of
net sales in the three months ended August 2, 2020, compared to 53.1% of net
sales in the three months ended August 4, 2019. The decrease in gross margin
rate was driven by promotional, clearance and sitewide sales events to continue
moving inventory during the period of slower store traffic and uncertainty in
customer demand. The decrease was partially offset by reduced store

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delivery costs from lower store sales volumes, lower product returns as well as
favorable retail physical inventory count results during the three months ended
August 2, 2020 as compared to the three months ended August 4, 2019.

Selling, General and Administrative Expenses


Selling, general and administrative expenses increased $1.6 million, or 2.6%, to
$62.7 million in the three months ended August 2, 2020 compared to $61.1 million
in the three months ended August 4, 2019. Selling, general and administrative
expenses as a percentage of net sales decreased to 45.6% in the three months
ended August 2, 2020, compared to 50.1% in the three months ended August 4,
2019. The positive leverage was primarily due to shifting to a more efficient
digital marketing approach as customer purchasing patterns migrated to online.

The increase in selling, general and administrative expense was due to increased
shipping costs to support website sales, higher retail overhead costs driven by
new store growth and increased depreciation expense associated with investments
in technology, partially offset by reduced catalog spend and national TV
advertising.

Income Tax Expense


Income tax expense was $1.9 million in the three months ended August 2, 2020,
compared to $0.7 million in the three months ended August 4, 2019. Our effective
tax rate related to controlling interest was 24% for the three months ended
August 2, 2020 compared to 26% for the three months ended August 4, 2019.

Net Income

Net income was $5.9 million, in the three months ended August 2, 2020 compared to net income of $1.9 million in the three months ended August 4, 2019, primarily due to the factors discussed above.

Six Months Ended August 2, 2020 Compared to Six Months Ended August 4, 2019

Net Sales

Net sales increased $11.1 million, or 4.7%, to $247.3 million in the six months ended August 2, 2020 compared to $236.2 million in the six months ended August 4, 2019. The increase was primarily due to an increase in non-store market sales slightly offset by a decrease in store market sales.


Non-store market sales increased $25.9 million, or 41.7%, to $88.2 million in
the six months ended August 2, 2020 compared to $62.3 million in the six months
ended August 4, 2019. The increase was also primarily driven by an increase in
digital advertising to promote our Mother's Day, Father's Day, online warehouse
clearance and global sales events, coupled with extended free shipping offers.
Store market sales decreased $14.2 million, or 8.3%, to $156.4 million in the
six months ended August 2, 2020 compared to $170.6 million in the six months
ended August 4, 2019. The decrease was due to the temporary closure of all
stores beginning on March 20, 2020 until they re-opened beginning in the first
week of May through the third week of June, partially offset by an increase in
existing customers shifting from buying in-store to buying online.

Gross Profit


Gross profit decreased $0.9 million, or 0.7%, to $124.8 million in the six
months ended August 2, 2020 compared to $125.7 million in the six months ended
August 4, 2020. As a percentage of net sales, gross margin decreased to 50.5% of
net sales in the six months ended August 2, 2020, compared to 53.2% of net sales
in the six months ended August 4, 2019. The decrease in gross margin rate was
driven by promotional events, extending clearance events and sitewide sales
events to continue moving inventory during the period of store closures and
uncertainty in customer demand.

Selling, General and Administrative Expenses


Selling, general and administrative expenses increased $1.9 million, or 1.4%, to
$134.0 million in the six months ended August 2, 2020 compared to $132.1 million
in the six months ended August 4, 2019. Selling, general and administrative
expenses as a percentage of net sales decreased to 54.2% in the six months ended
August 2, 2020, compared to 55.9% in the six months ended August 4, 2019.

The drivers of the increase in selling, general and administrative expense were consistent with those for the three months ended August 2, 2020.

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Income Tax Benefit


Income tax benefit was $3.2 million in the six months ended August 2, 2020,
compared to $2.0 million in the six months ended August 4, 2019. Our effective
tax rate related to controlling interest was 26% for both the six months ended
August 2, 2020, and six months ended August 4, 2019, respectively.

Net Loss

Net loss was $9.2 million, in the six months ended August 2, 2020 compared to $5.6 million in the six months ended August 4, 2019, primarily 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.

                                             Three Months Ended             

Six Months Ended

                                    August 2, 2020         August 4, 2019     August 2, 2020     August 4, 2019
(in thousands)
Net income (loss)                  $          5,898       $          1,846   $        (9,281)$        (5,799)
Depreciation and amortization                 6,603                  5,013             13,292              9,405
Interest expense                              1,778                  1,203              3,128              1,631
Amortization of build-to-suit
operating leases
?capital contribution                           198                    265                397                479
Income tax expense (benefit)                  1,866                    678 
          (3,220)            (2,005)
EBITDA                             $         16,343       $          9,005   $          4,316   $          3,711
Stock based compensation                        418                    555                881              1,029
Adjusted EBITDA                    $         16,761       $          9,560   $          5,197   $          4,740

As a result of the factors discussed above in the "Results of Operations" section, Adjusted EBITDA increased $7.2 million, or 75.3%, to $16.8 million in the three months ended August 2, 2020 compared to $9.6 million in the three months ended August 4, 2019. As a percentage of net sales, Adjusted EBITDA increased to 12.2% of net sales in the three months ended August 2, 2020 compared to 7.8% of net sales in the three months ended August 4, 2019.


As a result of the factors discussed above in the "Results of Operations"
section, Adjusted EBITDA increased $0.5 million, or 9.6%, to $5.2 million in the
six months ended August 2, 2020 compared to $4.7 million in the six months ended
August 4, 2019. As a percentage of net sales, Adjusted EBITDA increased to 2.1%
of net sales in the six months ended August 2, 2020 compared to 2.0% of net
sales in the six months ended August 4, 2019.

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 August 2, 2020,
our net working capital was $117.7 million, including $19.0 million of cash and
cash equivalents.

We continue to expect to spend approximately $15.0 million in fiscal 2020 on
capital expenditures, which is a 50% reduction from the beginning of the fiscal
year plan. Capital expenditures includes a total of approximately $8.0 million
for new retail store expansion and point of sale upgrades. We expect capital
expenditures of approximately $2.0 million and starting inventory of $0.5
million to open a new store. 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. During the first three quarters of our fiscal
year, we typically are net users of cash in our operating activities as we
acquire inventory in anticipation of our peak selling season, which occurs in
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.

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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.

                                                             Six Months Ended
                                                    August 2, 2020      August 4, 2019
(in thousands)
Net cash used in operating activities              $       (12,802)    $    

(8,045)

Net cash used in investing activities                       (9,135)         

(16,713)

Net cash provided by financing activities                    38,865         

27,829

Increase in cash, cash equivalents and
restricted cash                                    $         16,928    $    

3,071

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.

While our cash flows from operations for the six months ended August 2, 2020 is
negative, due in part to COVID-19 and in part to the seasonal nature of our
business, we expect cash flows from operations for the full year fiscal 2020 to
be positive based on operating performance and seasonal reductions in working
capital during the fourth quarter of our fiscal year, which is consistent with
previous full fiscal years.

For the six months ended August 2, 2020, net cash used in operating activities
was $12.8 million, which 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, stock based compensation of $0.9
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, primarily due to building of inventory for our peak
season, 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.

For the six months ended August 4, 2019, net cash used in operating activities
was $8.0 million, which primarily consisted of net loss of $5.8 million and cash
used in operating assets and liabilities of $12.0 million, partially offset by
non-cash depreciation and amortization of $9.4 million and stock based
compensation of $1.0 million. The cash used in operating assets and liabilities
of $12.0 million primarily consisted of a $17.2 million increase in inventory,
primarily due to the increase in the number of retail stores and building of
inventory for our peak season, a $10.8 million increase in trade accounts
payable due to timing of payments, a $7.1 million decrease in accrued expenses
and deferred rent obligations, and a $1.9 million decrease in deferred catalog
costs due to a reduction in catalog circulation.

Net Cash Used in Investing Activities

Investing activities consist primarily of capital expenditures for growth related to new store openings and 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.


For the six months ended August 4, 2019, net cash used in investing activities
was $16.7 million and was primarily driven by capital expenditures of $13.8
million for new retail stores and retail store build-out, as well as investments
in information technology, and $3.0 million of capital contributions towards our
build-to-suit stores.

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 debt, as well as payments on finance lease obligations.


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.

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For the six months ended August 4, 2019, net cash provided by financing activities was $27.8 million, primarily consisting of proceeds of $28.5 million, net from our revolving line of credit to fund working capital.

Line of Credit


On May 17, 2018, we entered into a credit agreement (the "Credit Agreement")
which provides for borrowings of up to $80.0 million on a revolving line of
credit and an additional $50.0 million in a delayed draw term loan. The $80.0
million revolving line of credit matures on May 17, 2023 and we had the option
to draw in various amounts on the $50.0 million term loan through May 17, 2020,
with a maturity on May 17, 2023. On April 30, 2020, the Credit Agreement was
amended to include an incremental delayed draw term loan of $20.5 million that
is available to draw upon before March 31, 2021, and matures on April 29, 2021,
for a total credit facility of $150.5 million.

As of August 2, 2020 and for the six months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above and expects to be in compliance for the remainder of fiscal 2020.

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 February 2, 2020.

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 2019 Form 10-K, except as discussed below.

Recently Adopted Accounting Pronouncements


On February 3, 2020, we adopted authoritative guidance related to accounting for
costs of implementation activities performed in a cloud computing arrangement
that is a service contract and elected the prospective transition. As such, the
comparative prior period information has not been restated and continues to be
reported under the accounting standards in effect for those periods. Beginning
with the first quarter of fiscal 2020, our financial results reflect adoption of
the standard.

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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