What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-06-04 compared with 2020-12-04 · 66 added, 135 removed, 145 unchanged (58% of the section changed)

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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 2021 is a 52-week period and ends on January 30, 2022.

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.

Fiscal 2020 was a 52-week period and ended on January 31, 2021.

The three months of fiscal 2021 and fiscal 2020 represent our 13 week periods ended May 2, 2021 and May 3, 2020, 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.

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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.

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 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;

the 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 and sub-brand image;

effectively adapting to new challenges associated with our expansion into new geographic markets;

generating adequate cash from our existing stores to support our growth;

effectively relying on sources for merchandise located in foreign markets;

transportation delays and interruptions, including port congestion;

inability to timely and effectively obtain shipments of products from our suppliers and deliver merchandise to our customers;

the inability to maintain the performance of a maturing store portfolio;

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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;

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 in global market constraints;

increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment;

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We undertake no obligation to update or revise these forward-looking statements, except as required under the federal securities laws.

We are a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through our own omnichannel platform.

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 November 1, 2020, we operated 62 retail stores and three outlet stores.

Since then, we have expanded our retail presence, and as of May 2, 2021, we operated 61 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.

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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;

 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.

 Net sales in fiscal 2021 first quarter increased by 21.4% over the prior year first quarter to $133.4 million;

 Net income of $0.5 million in fiscal 2021 first quarter compared to the prior year first quarter net loss of $(15.2) million;

 Adjusted EBITDA increased to $10.1 million in fiscal 2021 first quarter compared to the prior year first quarter Adjusted EBITDA of $(11.6) million;

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-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.

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.

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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;

 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;

 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.

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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 is equal to our net sales less cost of goods sold.

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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.

Historically, this revenue has partially offset shipping and handling expense included in selling, general and administrative

We have experienced declines in shipping and handling revenues, and this trend is expected to continue.

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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

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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 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.

Results of Operations

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Three Months Ended

Nine Months Ended

November 1, 2020

November 3, 2019

November 1, 2020

November 3, 2019

(in thousands)

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Interest expense

Other income (loss), net

Other income, net

Income (loss) before income taxes

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Interest expense

Other income (loss), net

Other income, net

Income (loss) before income taxes

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Net income (loss) attributable to controlling interest

Three Months Ended November 1, 2020 Compared to Three Months Ended November 3, 2019

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.

Three Months Ended May 2, 2021 Compared to Three Months Ended May 3, 2020

Net sales increased $23.5 million, or 21.4%, to $133.4 million in the three months ended May 2, 2021 compared to $109.9 million in the three months ended May 3, 2020.

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.

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.

Store market sales increased $22.5 million, or 33.3%, to $89.9 million in the three months ended May 2, 2021 compared to $67.4 million in the three months ended May 3, 2020.

The year-over-year sales difference was driven by temporary store closures in fiscal 2020 beginning on March 20, 2020 through May 3, 2020, as well as growth in online sales from both existing customers and new buyers.

Non-store market sales increased $0.8 million, or 2%, to $42.0 million in the three months ended May 2, 2021 compared to $41.2 million in the three months ended May 3, 2020.

Gross profit increased $14.2 million, or 27.2%, to $66.5 million in the three months ended May 2, 2021 compared to $52.3 million in the three months ended May 3, 2020.

As a percentage of net sales, gross margin increased to 49.9% of net sales in the three months ended May 2, 2021, compared to 47.6% of net sales in the three months ended May 3, 2020.

The increase in gross margin rate was driven a higher mix of full price sales as well as improved gross margin rates on both full price and clearance items.

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.

Selling, general and administrative expenses decreased $6.7 million, or 9.3%, to $64.6 million in the three months ended May 2, 2021 compared to $71.3 million in the three months ended May 3, 2020.

Selling, general and administrative expenses as a percentage of net sales decreased to 48.5% in the three months ended May 2, 2021, compared to 64.9% in the three months ended May 3, 2020.

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.

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 $1.6 million of non-recurring COVID-19 related expenses during the first quarter of the prior fiscal year.

The decrease was partially offset by increased wages due to Company retail locations being open for the full fiscal quarter.

Income tax expense was $0.1 million in the three months ended May 2, 2021, compared to an income tax benefit of $5.1 million in the three months ended May 3, 2020.

The effective tax rate related to controlling interest was 16% for the three months ended May 2, 2021, which was impacted by changes to certain discrete items during the quarter.

Excluding these non-recurring discrete items, the effective tax rate related to controlling interest was 25% for both the three months ended May 2, 2021 and May 3, 2020.

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 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 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.

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.

Net income attributable to controlling interest was $0.5 million, in the three months ended May 2, 2021 compared to a net loss of $(15.1) million in the three months ended May 3, 2020, due to the factors discussed above.

Reconciliation of Net Income (Loss) to EBITDA and EBITDA to Adjusted EBITDA

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Three Months Ended

Nine Months Ended

November 1, 2020

November 3, 2019

November 1, 2020

November 3, 2019

(in thousands)

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Depreciation and amortization

Amortization of internal-use software hosting

subscription implementation costs

Interest expense

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Adjusted EBITDA

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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $20.7 million to $10.1 million in the three months ended May 2, 2021 compared to $(11.6) million in the three months ended May 3, 2020.

As a percentage of net sales, Adjusted EBITDA increased to 7.6% of net sales in the three months ended May 2, 2021 compared to (10.5)% of net sales in the three months ended May 3, 2020.

Liquidity and Capital Resources

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.

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 November 1, 2020, our net working capital was $136.6 million, including $12.8 million of cash and cash equivalents.

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.

At May 2, 2021, our net working capital was $73.5 million, including $26.1 million of cash and cash equivalents.

We expect to spend approximately $15.0 million in fiscal 2021 on capital expenditures, inclusive of software hosting implementation costs.

Capital expenditures includes a total of approximately $13.0 million related to investments in technology and $2.0 million for one planned new retail 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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A summary of operating, investing and financing activities is shown in the following table.

Nine Months Ended

November 1, 2020

November 3, 2019

Three Months Ended

(in thousands)

Net cash used in operating activities

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Increase in cash, cash equivalents and restricted cash

Net Cash used in Operating Activities

Net cash (used in) provided by financing activities

(Decrease) increase in cash, cash equivalents and restricted cash

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.

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.

For the three months ended May 2, 2021, net cash provided by operating activities was $12.4 million, which consisted of net income of $0.5 million, cash provided by operating assets and liabilities of $4.8 million, non-cash depreciation and amortization of $7.3 million, and stock based compensation of $0.4 million.

The cash provided by operating assets and liabilities of $4.8 million primarily consisted of a $4.9 million decrease in inventory and a $6.5 million increase in trade accounts payable, partially offset by a $6.8 million decrease in accrued expenses.

For the three months ended May 3, 2020, net cash used in operating activities was $33.5 million, which consisted of net loss of $15.2 million and cash used in operating assets and liabilities of $25.4 million, partially offset by non-cash depreciation and amortization of $6.7 million and stock based compensation of $0.5 million.

The cash used in operating assets and liabilities of $25.4 million primarily consisted of a $27.2 million increase in inventory.

The quarter-end inventory position, although primarily consisting of core non-seasonal products, reflected a higher balance than historical levels due to purchase commitments made prior to scaling back new store openings and a general slowdown in sales growth over the prior 18 months.

Net cash used in operating activities was partially offset by a $5.1 million increase in accrued expenses and deferred rent obligations, a $3.4 million decrease of income taxes payable and a $1.0 million decrease in deferred catalog costs.

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.

Net Cash Provided by Financing Activities

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 May 2, 2021, net cash used in investing activities was $2.0 million and was primarily driven by capital expenditures of $2.0 million for new investments in information technology.

For the three months ended May 3, 2020, net cash used in investing activities was $4.1 million and was primarily driven by capital expenditures of $4.1 million for new retail stores, as well as investments in information technology.

Net Cash (Used in) 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.

For the three months ended May 2, 2021, net cash used in financing activities was $31.6 million, primarily consisting of payments of $30.6 million on long-term debt.

For the three months ended May 3, 2020, net cash provided by financing activities was $44.7 million, primarily consisting of proceeds of $29.7 million, net from our term loan and proceeds of $15.7 million, net from our revolving line of credit to fund working capital.

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.

There have been no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

Off-Balance Sheet Arrangements

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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.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis