DULUTH HOLDINGS INC. 10-Q

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 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 nine months of fiscal 2020 and fiscal 2019 represent our 13 and 39-week periods ended November 1, 2020 and November 3, 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 and second quarter 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, n ew 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 November 1, 2020, 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 Naked TM 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. ‎ 21 Table of Contents 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 third quarter increased by 13.2% over the prior year third quarter to $135.5 million, and net sales in the first nine months of fiscal 2020 increased by 7.5% over the first nine months of the prior year to $382.8 million;  Net income of $0.9 million in fiscal 2020 third quarter compared to the prior year third quarter net income of $0.2 million and net loss in the first nine months of fiscal 2020 of $8.3 million compared to the net loss in the first nine months of fiscal 2019 of $5.5 million;  Adjusted EBITDA increased by 57.4% to $11.4 million in fiscal 2020 third quarter compared to the prior year third quarter Adjusted EBITDA of $7.3 million and adjusted EBITDA in the first nine months of fiscal 2020 increased by 38.6% over the first nine months of the prior year to $16.6 million; and  We opened three new stores in fiscal 2020 third quarter, adding approximately 32,800 of gross square feet. See “Reconciliation of Net Income (Loss) 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 profitable growth we are pursuing several strategies, 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 stores, website and catalog sales. Market areas are determined by a third-party that divides the United States and Puerto Rico into 280 unique geographical areas. Our store market sales metrics include sales from our stores, website and catalog. Our non-store market sales metrics include sales from our website and catalog. COVID-19 In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place. The 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; ‎ 22 Table of Contents  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;  The Board of Directors agreed to forgo cash retainers for the second and third quarters;  Reduced planned capital spend levels by approximately 40% primarily by decreasing new store openings to four in fiscal 2020; and  Partnered with the American Red Cross to donate a portion of sales on key apparel items. While the business environment and above actions have impacted our results for the first three quarters 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 third fiscal quarter. As of June 15, 2020, all of our 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, particularly as we head into the peak holiday season. 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 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 have increased based on anticipated sales volume during the fourth quarter. The Company has also added an additional shipping partner to mitigate any 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. ‎ 23 Table of Contents 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 increased during the third quarter and are expected to continue to increase during the fourth quarter, in part because of additional surcharges during our peak holiday shopping season due to the expected strained distribution network. 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. 24 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 Nine Months Ended November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019 (in thousands) Net sales $ 135,531 $ 119,768 $ 382,823 $ 355,975 Cost of goods sold (excluding depreciation ‎ and amortization) 64,494 54,403 186,982 164,888 Gross profit 71,037 65,365 195,841 191,087 Selling, general and administrative expenses 68,189 64,037 202,175 196,128 Operating income (loss) 2,848 1,328 (6,334) (5,041) Interest expense 1,643 1,500 4,771 3,131 Other income (loss), net 87 58 (104) 254 Income (loss) before income taxes 1,292 (114) (11,209) (7,918) Income tax expense (benefit) 393 (203) (2,827) (2,209) Net income (loss) 899 89 (8,382) (5,709) Less: Net loss attributable to noncontrolling interest (41) (93) (128) (256) Net income (loss) attributable to controlling interest $ 940 $ 182 $ (8,254) $ (5,453) Percentage of Net sales: Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold (excluding depreciation ‎ and amortization) 47.6 % 45.4 % 48.8 % 46.3 % Gross margin 52.4 % 54.6 % 51.2 % 53.7 % Selling, general and administrative expenses 50.3 % 53.5 % 52.8 % 55.1 % Operating income (loss) 2.1 % 1.1 % (1.7) % (1.4) % Interest expense 1.2 % 1.3 % 1.2 % 0.9 % Other income (loss), net 0.1 % - % - % 0.1 % Income (loss) before income taxes 1.0 % (0.1) % (2.9) % (2.2) % Income tax expense (benefit) 0.3 % (0.2) % (0.7) % (0.6) % Net income (loss) 0.7 % 0.1 % (2.2) % (1.6) % Less: Net loss attributable to noncontrolling interest - % (0.1) % - % (0.1) % Net income (loss) attributable to controlling interest 0.7 % 0.2 % (2.2) % (1.5) % Three Months Ended November 1, 2020 Compared to Three Months Ended November 3, 2019 Net Sales Net sales increased $15.8 million, or 13.2%, to $135.5 million in the three months ended November 1, 2020 compared to $119.8 million in the three months ended November 3, 2019. The increase was due to increases in both non-store and store market sales. Non-store market sales increased $11.1 million, or 37.5%, to $40.6 million in the three months ended November 1, 2020 compared to $29.5 million in the three months ended November 3, 2019. The increase was driven by new buyer growth and effective digital advertising to promote our Pink Buck Naked, Big Dam Birthday and global sales events. Store market sales increased $5.0 million, or 5.6%, to $93.8 million in the three months ended November 1, 2020 compared to $88.8 million in the three months ended November 3, 2019. The increase was driven by growth in online sales from both existing customers and new buyers, partially offset by a decline in in-store sales, caused by a decrease in store traffic due to continued COVID-19 safety concerns. ‎ 25 Table of Contents Gross Profit Gross profit increased $5.7 million, or 8.7%, to $71.0 million in the three months ended November 1, 2020 compared to $65.4 million in the three months ended November 3, 2019. As a percentage of net sales, gross margin decreased to 52.4% of net sales in the three months ended November 1, 2020, compared to 54.6% of net sales in the three months ended November 3, 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 drive top-line growth. The decrease was partially offset by reduced store delivery costs from lower store sales volumes. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $4.2 million, or 6.5%, to $68.2 million in the three months ended November 1, 2020 compared to $64.0 million in the three months ended November 3, 2019. Selling, general and administrative expenses as a percentage of net sales decreased to 50.3% in the three months ended November 1, 2020, compared to 53.5% in the three months ended November 3, 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 (Benefit) Income tax expense was $0.4 million in the three months ended November 1, 2020, compared to an income tax benefit of $0.2 million in the three months ended November 3, 2019. Our effective tax rate related to controlling interest, which was 29% for the three months ended November 1, 2020 was impacted by changes to certain discrete items during the quarter. Our effective tax rate related to controlling interest, which was not meaningful for the three months ended November 3, 2019, was impacted by discrete items related to stock compensation activity. Net Income Attributable to Controlling Interest Net income attributable to controlling interest was $0.9 million, in the three months ended November 1, 2020 compared to $0.2 million in the three months ended November 3, 2019, primarily due to the factors discussed above. Nine Months Ended November 1, 2020 Compared to Nine Months Ended November 3, 2019 Net Sales Net sales increased $26.8 million, or 7.5%, to $382.8 million in the nine months ended November 1, 2020 compared to $356.0 million in the nine months ended November 3, 2019. The increase was primarily due to an increase in non-store market sales slightly offset by a decrease in store market sales driven by temporary store closures in the first and second quarters of fiscal 2020. Non-store market sales increased $36.7 million, or 40.2%, to $128.1 million in the nine months ended November 1, 2020 compared to $91.3 million in the nine months ended November 3, 2019. The increase was also primarily driven by effective digital advertising to promote our Mother’s Day, Father’s Day, Pink Buck Naked, Big Dam Birthday, online warehouse clearance and global sales events, coupled with extended free shipping offers. Store market sales decreased $9.0 million, or 3.5%, to $250.9 million in the nine months ended November 1, 2020 compared to $259.9 million in the nine months ended November 3, 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 online sales from both existing customers and new buyers. Gross Profit Gross profit increased $4.8 million, or 2.5%, to $195.8 million in the nine months ended November 1, 2020 compared to $191.1 million in the nine months ended November 3, 2019. As a percentage of net sales, gross margin decreased to 51.2% of net sales in the nine months ended November 1, 2020, compared to 53.7% of net sales in the nine months ended November 3, 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. The decrease was partially offset by reduced store delivery costs from lower store sales volumes and lower product returns. 26 Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses increased $6.0 million, or 3.1%, to $202.2 million in the nine months ended November 1, 2020 compared to $196.1 million in the nine months ended November 3, 2019. Selling, general and administrative expenses as a percentage of net sales decreased to 52.8% in the nine months ended November 1, 2020, compared to 55.1% in the nine months ended November 3, 2019. The drivers of the increase in selling, general and administrative expense were consistent with those for three months ended November 1, 2020. Income Tax Benefit Income tax benefit was $2.8 million in the nine months ended November 1, 2020, compared to $2.2 million in the nine months ended November 3, 2019. Our effective tax rate related to controlling interest was 26% for the nine months ended November 1, 2020, compared to 29% for the nine months ended November 3, 2019. Net Loss Attributable to Controlling Interest Net loss attributable to controlling interest was $8.3 million, in the nine months ended November 1, 2020 compared to $5.5 million in the nine months ended November 3, 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 Nine Months Ended November 1, 2020 November 3, 2019 November 1, 2020 November 3, 2019 (in thousands) Net income (loss) $ 899 $ 89 $ (8,382) $ (5,709) Depreciation and amortization 7,917 6,529 21,209 15,934 Interest expense 1,643 1,500 4,771 3,131 Amortization of build-to-suit operating leases ‎ capital contribution 199 94 596 573 Income tax expense (benefit) 393 (203) (2,827) (2,209) EBITDA $ 11,051 $ 8,009 $ 15,367 $ 11,720 Stock based compensation 382 (747) 1,263 282 Adjusted EBITDA $ 11,433 $ 7,262 $ 16,630 $ 12,002 As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $4.2 million, or 57.4%, to $11.4 million in the three months ended November 1, 2020 compared to $7.3 million in the three months ended November 3, 2019. As a percentage of net sales, Adjusted EBITDA increased to 8.4% of net sales in the three months ended November 1, 2020 compared to 6.1% of net sales in the three months ended November 3, 2019. As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $4.6 million, or 38.6%, to $16.6 million in the nine months ended November 1, 2020 compared to $12.0 million in the nine months ended November 3, 2019. As a percentage of net sales, Adjusted EBITDA increased to 4.3% of net sales in the nine months ended November 1, 2020 compared to 3.4% of net sales in the nine months ended November 3, 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 November 1, 2020, our net working capital was $136.6 million, including $12.8 million of cash and cash equivalents. 27 Table of Contents We expect to spend approximately $17.0 million in fiscal 2020 on capital expenditures, which is an approximately 40% reduction from the beginning of the fiscal year plan. Capital expenditures includes a total of approximately $10.0 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. 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. Nine Months Ended November 1, 2020 November 3, 2019 (in thousands) Net cash used in operating activities $ (28,614) $ (47,624) Net cash used in investing activities (11,483) (24,541) Net cash provided by financing activities 50,657 73,043 Increase in cash, cash equivalents and restricted cash $ 10,560 $ 878 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 nine months ended November 1, 2020 is negative, due in part to the seasonal nature of our business, it has improved as compared to the nine months ended November 3, 2019 by $19.0 million. 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 nine months ended November 1, 2020, net cash used in operating activities was $28.6 million, which consisted of net loss of $8.4 million and cash used in operating assets and liabilities of $46.5 million, partially offset by non-cash depreciation and amortization of $21.2 million, stock based compensation of $1.3 million and deferred income taxes of $3.5 million. The cash used in operating assets and liabilities of $46.5 million primarily consisted of a $65.6 million increase in inventory in advance of our peak season, partially offset by a $21.4 million increase in trade accounts payable. For the nine months ended November 3, 2019, net cash used in operating activities was $47.6 million, which primarily consisted of net loss of $5.7 million and cash used in operating assets and liabilities of $57.2 million, partially offset by non-cash depreciation and amortization of $15.9 million and stock based compensation of $0.3 million. The cash used in operating assets and liabilities of $57.2 million primarily consisted of a $85.4 million increase in inventory, primarily due to building of inventory for our peak season and an increase in the number of retail stores, partially offset by a $29.9 million increase in trade accounts payable due to timing of payments. 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 nine months ended November 1, 2020, net cash used in investing activities was $11.5 million and was primarily driven by capital expenditures of $11.1 million for new retail stores, as well as investments in information technology. For the nine months ended November 3, 2019, net cash used in investing activities was $24.5 million and was primarily driven by capital expenditures of $20.9 million for new retail stores and retail store build-out, as well as investments in information technology, and $3.7 million of capital contributions towards our build-to-suit stores. 28 Table of Contents 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 nine months ended November 1, 2020, net cash provided by financing activities was $50.7 million, primarily consisting of proceeds of $28.9 million, net from our term loan and proceeds of $23.7 million, net from our revolving line of credit to fund working capital. For the nine months ended November 3, 2019, net cash provided by financing activities was $73.0 million, primarily consisting of proceeds of $53.9 million, net from our revolving line of credit and proceeds of $20.0 million from our term loan 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 November 1, 2020 and for the nine 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. ‎ 29 Table of Contents 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.