What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-09-03 compared with 2021-06-04 · 96 added, 52 removed, 159 unchanged (48% of the section changed)

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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.

The three and six months of fiscal 2021 and fiscal 2020 represent our 13 and 26 week periods ended August 1, 2021 and August 2, 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 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 SEC filings, which factors are incorporated by reference herein.

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 initiatives, or 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, and other SEC filings, which factors are incorporated by reference herein.

These risks and uncertainties include, but are not limited to, the following:

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;

our ability to maintain and enhance a strong brand image;

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

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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 May 2, 2021, we operated 61 retail stores and three outlet stores.

Since then, we have expanded our retail presence, and as of August 1, 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 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;

 Net sales in fiscal 2021 second quarter increased by 8.6% over the prior year second quarter to $149.1 million, and net sales in the first six months of fiscal 2021 increased by 14.3% over the first six months of the prior year to $282.5 million;

 Net income of $9.0 million in fiscal 2021 second quarter compared to the prior year second quarter net income of $5.9 million, and net income in the first six months of fiscal 2021 of $9.5 million compared to a net loss in the first six months of fiscal 2020 of $(9.2) million;

 Adjusted EBITDA increased to $21.6 million in fiscal 2021 second quarter compared to the prior year second quarter Adjusted EBITDA of $16.8 million, and adjusted EBITDA in the first six months of fiscal 2021 of $31.7 million compared to $5.2 million over the first six months of the prior year.

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.

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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.

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.

The Company has completed a comprehensive review of current operations, logistics networks, marketing and technology capabilities, and unique brands and products.

The Company formulated the “Big Dam Blueprint”, which management believes will unlock the Company’s full potential for long-term, sustainable growth.

Big Dam Blueprint

 Begin with a digital-first mindset that integrates technology into all areas of the business, fundamentally changing how we operate and deliver value to customers.

 Intensify efforts to optimize Duluth Trading’s owned retail channels by increasing focus and investments in our direct channel as our primary growth vehicle.

We are conducting strategic research that will inform decisions on future stores regarding new locations and market share potential, size and layout.

 Evolve the Company’s multi-brand platform as a new pathway to grow the business.

Create unique brand positions, across men’s and women’s, for Duluth, 40Grit, Alaskan Hardgear, Buck Naked, and Best Made to address customer needs for various occasions including work, outdoor recreation, casual lifestyle, and first layer.

Invest in the evolution of the Duluth Trading platform to enable the integration of new brands, expand our offerings and broaden our customer base.

 Carefully test and learn to unlock long-term growth potential.

Explore new opportunities to engage current and potential customers through products, services and touchpoints that they expect and value.

 Increase and, in some areas, accelerate investments to future proof the business.

Areas under analysis include greater automation across the logistics network;

technology that will improve operations, generate positive impact and sustainable returns;

support growth through multiple brands and seamlessly integrate new brands into the portfolio, and attract the talent, skillsets and expertise needed to scale the business.

Our management’s discussion and analysis includes market sales metrics for our stores, website and catalog sales.

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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.

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 by our store operations.

How We Assess the Performance of Our Business

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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 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

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.

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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.

They also include marketing expense, which primarily includes digital and television advertising, catalog production, mailing and print advertising costs, as well as all logistics costs associated with shipping product to our customers, consulting and software expenses and professional services fees.

Selling, general and administrative expenses as a percentage of net sales is usually higher in lower-volume quarters and lower in higher-volume quarters because a portion of the costs are relatively fixed.

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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.

While we expect these expenses to increase as we continue to grow our organization to support our growing business and increase brand awareness, we believe these expenses will decrease as a percentage of sales over time.

Adjusted EBITDA

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We believe Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other items.

We also use Adjusted EBITDA as the key financial metric in determining our fiscal 2021 bonus compensation for our employees.

This non-GAAP measure may not be comparable to similarly titled measures used by other companies.

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Three Months Ended

Six Months Ended

August 1, 2021

August 2, 2020

August 1, 2021

August 2, 2020

(in thousands)

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Interest expense

Other income, net

Other income (loss), net

Income (loss) before income taxes

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Interest expense

Other income, net

Other income (loss), net

Income (loss) before income taxes

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Net income (loss) attributable to controlling interest

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.

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.

Three Months Ended August 1, 2021 Compared to Three Months Ended August 2, 2020

Net sales increased $11.7 million, or 8.6%, to $149.1 million in the three months ended August 1, 2021 compared to $137.4 million in the three months ended August 2, 2020.

The increase was due to an increase in store market sales, partially offset by a decrease in non-store market sales.

Store market sales increased $17.7 million, or 19.8%, to $107.1 million in the three months ended August 1, 2021 compared to $89.4 million in the three months ended August 2, 2020.

The year-over-year sales difference was primarily driven by temporary store closures beginning on March 20, 2020 until they re-opened beginning in the first week of May through the third week of June.

Non-store market sales decreased $5.9 million, or 12.7%, to $40.7 million in the three months ended August 1, 2021 compared to $46.6 million in the three months ended August 2, 2020.

The decrease was due to the rapid shift by customers from buying in-store to buying online, extended free shipping, higher promotions, and deeper investments in digital prospecting in the prior year.

Gross profit increased $8.9 million, or 12.4%, to $81.4 million in the three months ended August 1, 2021 compared to $72.5 million in the three months ended August 2, 2020.

As a percentage of net sales, gross margin increased to 54.6% of net sales in the three months ended August 1, 2021, compared to 52.8% of net sales in the three months ended August 2, 2020.

The increase in gross margin rate was driven by a higher mix of full price sales, as well as improved gross margin rates particularly within the Women’s division.

Selling, General and Administrative Expenses

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 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.

Selling, general and administrative expenses increased $5.7 million, or 9.0%, to $68.3 million in the three months ended August 1, 2021 compared to $62.7 million in the three months ended August 2, 2020.

Selling, general and administrative expenses as a percentage of net sales increased slightly to 45.8% in the three months ended August 1, 2021, compared to 45.6% in the three months ended August 2, 2020.

The increase in selling, general and administrative expense was primarily due to higher wages due to the Company’s retail locations being open for the full fiscal quarter, coupled with annual merit increases and higher depreciation expense.

Income tax expense was $3.0 million in the three months ended August 1, 2021, compared to an income tax expense of $1.9 million in the three months ended August 2, 2020.

The effective tax rate related to controlling interest was 25% for the three months ended August 1, 2021 compared to 24% for the three months ended August 2, 2020.

Net Income Attributable to Controlling Interest

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.

Net income attributable to controlling interest was $9.0 million, in the three months ended August 1, 2021 compared to net income of $5.9 million in the three months ended August 2, 2020, due to the factors discussed above.

Six Months Ended August 1, 2021 Compared to Six Months Ended August 2, 2020

Net sales increased $35.3 million, or 14.3%, to $282.6 million in the six months ended August 1, 2021 compared to $247.3 million in the six months ended August 2, 2020.

The increase was due to an increase in store market sales, partially offset by a decrease in non-store market sales.

Store market sales increased $40.2 million, or 25.6%, to $197.0 million in the six months ended August 1, 2021 compared to $156.8 million in the six months ended August 2, 2020.

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

Non-store market sales decreased $5.1 million, or 5.9%, to $82.7 million in the six months ended August 1, 2021 compared to $87.8 million in the six months ended August 2, 2020 also due to heavy volume in the prior year due to customer purchasing patterns migrating online, extended free shipping offers, higher promotions and deeper investments in digital prospecting.

Gross profit increased $23.2 million, or 18.6%, to $148.0 million in the six months ended August 1, 2021 compared to $124.8 million in the six months ended August 2, 2020.

As a percentage of net sales, gross margin increased to 52.4% of net sales in the six months ended August 1, 2021, compared to 50.5% of net sales in the six months ended August 2, 2020.

The increase in gross margin rate was also driven by 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 decreased $1.0 million, or 0.7%, to $133.0 million in the six months ended August 1, 2021 compared to $134.0 million in the six months ended August 2, 2020.

Selling, general and administrative expenses as a percentage of net sales decreased to 47.1% in the six months ended August 1, 2021, compared to 54.2% in the six months ended August 2, 2020.

The positive leverage was primarily due to shifting to a more efficient digital marketing approach.

The decrease in selling, general and administrative expense was primarily due to decreased traditional advertising, partially offset by increased wages due to Company retail locations being open for the full fiscal year, as well as increased depreciation expense associated with investments in technology.

Income tax expense was $3.1 million in the six months ended August 1, 2021, compared to an income tax benefit of $3.2 million in the six months ended August 2, 2020.

The effective tax rate related to controlling interest was 25% for the six months ended August 1, 2021 compared to 26% for the six months ended August 2, 2020.

Net Income Attributable to Controlling Interest

Net income attributable to controlling interest was $9.5 million, in the six months ended August 1, 2021 compared to a net loss of $9.2 million in the six months ended August 2, 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

Six Months Ended

August 1, 2021

August 2, 2020

August 1, 2021

August 2, 2020

(in thousands)

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Adjusted EBITDA

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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $4.8 million to $21.6 million in the three months ended August 1, 2021 compared to $16.8 million in the three months ended August 2, 2020.

As a percentage of net sales, Adjusted EBITDA increased to 14.5% of net sales in the three months ended August 1, 2021 compared to 12.2% of net sales in the three months ended August 2, 2020.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $26.5 million to $31.7 million in the six months ended August 1, 2021 compared to $5.2 million in the six months ended August 2, 2020.

As a percentage of net sales, Adjusted EBITDA increased to 11.2% of net sales in the six months ended August 1, 2021 compared to 2.1% of net sales in the six months ended August 2, 2020.

Liquidity and Capital Resources

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The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities.

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

At August 1, 2021, our net working capital was $84.2 million, including $18.9 million of cash and cash equivalents.

We expect to spend approximately $18.0 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.

Capital expenditures includes a total of approximately $16.0 million related to investments in technology and $2.0 million for one planned new retail store expected to open in the third quarter.

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.

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.

Three Months Ended

Six Months Ended

August 1, 2021

August 2, 2020

(in thousands)

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Net cash (used in) provided by financing activities

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

(Decrease) increase in cash, cash equivalents

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 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.

For the six months ended August 1, 2021, net cash provided by operating activities was $26.5 million, which primarily consisted of net income of $9.5 million, non-cash depreciation and amortization of $14.5 million, and cash provided by operating assets and liabilities of $1.8 million.

The cash provided by operating assets and liabilities of $1.8 million primarily consisted of a $14.2 million decrease in inventory and a $2.9 million increase in trade accounts payable, partially offset by a $7.0 million decrease in income taxes payable and a $4.9 million decrease in accrued expenses.

For the six months ended August 2, 2020, net cash used in operating activities was $12.8 million, which primarily 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, 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, 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.

Net Cash Used in Investing 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.

For the six months ended August 1, 2021, net cash used in investing activities was $4.9 million and was primarily driven by capital expenditures of $5.0 million for new investments in 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.

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 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.

For the six months ended August 1, 2021, net cash used in financing activities was $50.0 million, primarily consisting of the full paydown of the Company’s debt.

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.

Contractual Obligations

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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