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 are forward-looking statements.
All forward-looking statements are subject to risks and uncertainties, including
the risks and uncertainties described under Part I, Item 1A "Risk Factors," in
our 2020 Form 10-K, Part II, 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 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
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 2021 first quarter increased by 21.4% over the prior year
first quarter to
?Net income of
?Adjusted EBITDA increased to
See "Reconciliation of Net Income (Loss) to EBITDA and EBITDA to Adjusted
EBITDA" section for a reconciliation of our net income (loss) to EBITDA and
EBITDA to Adjusted EBITDA, both of which are non-
With an emphasis on profitable growth we are pursuing several strategies, including evolving into a portfolio of distinct brands within the Duluth Trading ecosystem, growing sales in existing store and non-store markets, strengthening the core Men's Duluth sub-brand and growing our Women's Duluth sub-brand.
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
COVID-19
In
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 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. 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 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
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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.
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 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. This non-GAAP measure may not be comparable to similarly titled measures used by other companies.
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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
May 2, 2021 May 3, 2020
(in thousands)
Net sales $ 133,419 $ 109,917
Cost of goods sold (excluding depreciation
?and amortization) 66,876 57,585
Gross profit 66,543 52,332
Selling, general and administrative expenses 64,648 71,306
Operating income (loss) 1,895 (18,974)
Interest expense 1,308 1,350
Other income, net 16 59
Income (loss) before income taxes 603 (20,265)
Income tax expense (benefit) 105 (5,086)
Net income (loss) 498 (15,179)
Less: Net loss attributable to noncontrolling
interest (46) (44)
Net income (loss) attributable to controlling
interest $ 544 $ (15,135)
Percentage of Net sales:
Net sales 100.0 % 100.0 %
Cost of goods sold (excluding depreciation
?and amortization) 50.1 % 52.4 %
Gross margin 49.9 % 47.6 %
Selling, general and administrative expenses 48.5 % 64.9 %
Operating income (loss) 1.4 % (17.3) %
Interest expense 1.0 % 1.2 %
Other income, net - % 0.1 %
Income (loss) before income taxes 0.5 % (18.4) %
Income tax expense (benefit) 0.1 % (4.6) %
Net income (loss) 0.4 % (13.8) %
Less: Net loss attributable to noncontrolling
interest - % - %
Net income (loss) attributable to controlling
interest 0.4 % (13.8) %
Three Months Ended
Net sales increased
Store market sales increased
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Gross Profit
Gross profit increased
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased
The decrease in selling, general and administrative expense was primarily due to
decreased traditional advertising, reduced digital prospecting spend, the
elimination of third-party logistics, and
Income Taxes
Income tax expense was
Net Income Attributable to Controlling Interest
Net income attributable to controlling interest was
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-
Three Months Ended
May 2, 2021 May 3, 2020
(in thousands)
Net income (loss) $ 498 $ (15,179)
Depreciation and amortization 7,274 6,689
Amortization of internal-use software hosting
subscription implementation costs 369 -
Interest expense 1,308 1,350
Amortization of build-to-suit operating leases
?capital contribution 199 199
Income tax expense (benefit) 105 (5,086)
EBITDA $ 9,753 $ (12,027)
Stock based compensation 371 463
Adjusted EBITDA $ 10,124 $ (11,564) As a result of the factors discussed above in the "Results of Operations"
section, Adjusted EBITDA increased
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Liquidity and Capital Resources
General
Our business relies on cash from operating activities and a credit facility as
our primary sources of liquidity. Our primary cash needs have been for
inventory, marketing and advertising, payroll, store leases, capital
expenditures associated with infrastructure, information technology, and opening
new stores. The most significant components of our working capital are cash,
inventory, accounts payable and other current liabilities. At
We expect to spend approximately
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.
Three Months Ended
May 2, 2021 May 3, 2020
(in thousands)
Net cash provided by (used in) operating
activities $ 12,423 $ (33,491)
Net cash used in investing activities (1,974) (4,102)
Net cash (used in) provided by financing
activities (31,616) 44,653
(Decrease) increase in cash, cash equivalents
and restricted cash $ (21,167) $ 7,060
Net Cash Provided by (Used in) Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, stock-based compensation and the effect of changes in operating assets and liabilities.
For the three months ended
For the three months ended
Investing activities consist primarily of capital expenditures for growth related to investments in infrastructure, information technology, and new store openings.
For the three months ended
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For the three months ended
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 three months ended
For the three months ended
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 2020 Form 10-K.
Recent Accounting Pronouncements
See Note 12 "Recent Accounting Pronouncements," of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q for information regarding recent accounting pronouncements.
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