What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-12-03 compared with 2021-09-03 · 73 added, 80 removed, 175 unchanged (47% of the section changed)

5 unchanged sentences

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

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.

The three and nine months of fiscal 2021 and fiscal 2020 represent our 13 and 39 week periods ended October 31, 2021 and November 1, 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 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;

the prolonged effects of 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;

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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 August 1, 2021, we operated 61 retail stores and three outlet stores.

Since then, we have expanded our retail presence, and as of October 31, 2021, 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.

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A summary of our financial results is as follows:

 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.

 Net sales in fiscal 2021 third quarter increased by 7.2% over the prior year third quarter to $145.3 million, and net sales in the first nine months of fiscal 2021 increased by 11.8% over the first nine months of the prior year to $427.8 million;

 Net income of $2.8 million in fiscal 2021 third quarter compared to the prior year third quarter net income of $0.9 million, and net income in the first nine months of fiscal 2021 of $12.3 million compared to a net loss in the first nine months of fiscal 2020 of $8.3 million;

 Adjusted EBITDA increased to $13.2 million in fiscal 2021 third quarter compared to the prior year third quarter Adjusted EBITDA of $11.4 million, and Adjusted EBITDA in the first nine months of fiscal 2021 increased to $44.9 million compared to $16.6 million for the first nine months of the prior year.

See the “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.

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

The Company continues to progress on further defining and executing the “Big Dam Blueprint,” which management believes will unlock the Company’s full potential for long-term, sustainable growth.

As introduced in the second quarter of 2021, the Big Dam Blueprint focuses on the following key strategic areas:

 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.

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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.

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.

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.

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We expect gross profit to increase to the extent that we successfully grow our net sales.

Given the size of our sales through our direct-to-consumer sales channel relative to our total net sales, shipping and handling revenue has had a significant impact on our gross profit and gross profit margin.

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

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

Declines in shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling expense.

Our gross profit may not be comparable to other retailers, as we do not include distribution network and store occupancy expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.

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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.

The most significant components of these increases are advertising, rent/occupancy and payroll costs.

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.

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Three Months Ended

Six Months Ended

August 1, 2021

August 2, 2020

August 1, 2021

August 2, 2020

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands)

Cost of goods sold (excluding depreciation

‎ and amortization)

Cost of goods sold (excluding depreciation and amortization)

Selling, general and administrative expenses

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Interest expense

Other income (loss), net

Other (loss) income, net

Income (loss) before income taxes

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Interest expense

Other income (loss), net

Other (loss) income, net

Income (loss) before income taxes

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Net income (loss) attributable to controlling interest

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.

Three Months Ended October 31, 2021 Compared to Three Months Ended November 1, 2020

Net sales increased $9.7 million, or 7.2%, to $145.3 million in the three months ended October 31, 2021 compared to $135.5 million in the three months ended November 1, 2020.

The increase was primarily due to an increase in store market sales.

Store market sales increased $9.4 million, or 10.5%, to $103.0 million in the three months ended October 31, 2021 compared to $93.6 million in the three months ended November 1, 2020.

The year-over-year sales difference was primarily driven by continued increases in store traffic and conversion as compared to the prior year.

Non-store market sales increased slightly by $0.3 million, or 0.7%, to $41.1 million in the three months ended October 31, 2021 compared to $40.7 million in the three months ended November 1, 2020.

Gross profit increased $12.6 million, or 17.8%, to $83.6 million in the three months ended October 31, 2021 compared to $71.0 million in the three months ended November 1, 2020.

As a percentage of net sales, gross margin increased to 57.6% of net sales in the three months ended October 31, 2021, compared to 52.4% of net sales in the three months ended November 1, 2020.

The increase in gross margin rate was driven by a higher mix of full price sales due to lower clearance inventory and fewer promotional events as compared to the same period in the prior year.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses increased $10.6 million, or 15.5%, to $78.8 million in the three months ended October 31, 2021 compared to $68.2 million in the three months ended November 1, 2020.

Selling, general and administrative expenses as a percentage of net sales increased to 54.2% in the three months ended October 31, 2021, compared to 50.3% in the three months ended November 1, 2020.

The increase in selling, general and administrative expense was primarily due to higher personnel costs, coupled with increased advertising spend as advertising was limited in the prior year based on our uncertainty about customer demand resulting from the pandemic.

Income tax expense was $0.9 million in the three months ended October 31, 2021, compared to an income tax expense of $0.4 million in the three months ended November 1, 2020.

The effective tax rate related to controlling interest was 25% for the three months ended October 31, 2021 compared to 29% for the three months ended November 1, 2020.

Net Income Attributable to Controlling Interest

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.

Net income attributable to controlling interest was $2.8 million, in the three months ended October 31, 2021 compared to net income of $0.9 million in the three months ended November 1, 2020, due to the factors discussed above.

Nine Months Ended October 31, 2021 Compared to Nine Months Ended November 1, 2020

Net sales increased $45.0 million, or 11.8%, to $427.8 million in the nine months ended October 31, 2021 compared to $382.8 million in the nine months ended November 1, 2020.

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

Store market sales increased $49.7 million, or 19.9%, to $300.0 million in the nine months ended October 31, 2021 compared to $250.3 million in the nine months ended November 1, 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.

Non-store market sales decreased $5.0 million, or 3.9%, to $123.8 million in the nine months ended October 31, 2021 compared to $128.8 million in the nine months ended November 1, 2020 also due to heavy volume in the prior year as customer purchasing patterns migrating online, coupled with extended free shipping offers, higher promotions and deeper investments in digital prospecting in the prior year.

Gross profit increased $35.8 million, or 18.3%, to $231.6 million in the nine months ended October 31, 2021 compared to $195.8 million in the nine months ended November 1, 2020.

As a percentage of net sales, gross margin increased to 54.1% of net sales in the nine months ended October 31, 2021, compared to 51.2% of net sales in the nine months ended November 1, 2020.

The increase in gross margin rate was driven by a higher mix of full price sales due to lower clearance inventory and fewer promotional events, 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.

Selling, general and administrative expenses increased $9.6 million, or 4.8%, to $211.8 million in the nine months ended October 31, 2021 compared to $202.2 million in the nine months ended November 1, 2020.

Selling, general and administrative expenses as a percentage of net sales decreased to 49.5% in the nine months ended October 31, 2021, compared to 52.8% in the nine months ended November 1, 2020.

The positive leverage was primarily due to shifting to a more efficient digital marketing approach, as well as lower shipping expenses driven in part by a shift in channel mix resulting from higher store traffic during the current year.

The increase in selling, general and administrative expense was primarily due to increased wages due to Company retail locations being open for the full fiscal year, wage increases at both the stores and distribution centers, as well as increased depreciation expense associated with investments in technology.

Income tax expense was $4.0 million in the nine months ended October 31, 2021, compared to an income tax benefit of $2.8 million in the nine months ended November 1, 2020.

The effective tax rate related to controlling interest was 25% for the nine months ended October 31, 2021 compared to 26% for the nine months ended November 1, 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.

Net income attributable to controlling interest was $12.3 million, in the nine months ended October 31, 2021 compared to a net loss of $8.3 million in the nine months ended November 1, 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

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 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 $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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $1.8 million to $13.2 million in the three months ended October 31, 2021 compared to $11.4 million in the three months ended November 1, 2020.

As a percentage of net sales, Adjusted EBITDA increased to 9.1% of net sales in the three months ended October 31, 2021 compared to 8.4% of net sales in the three months ended November 1, 2020.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $28.3 million to $44.9 million in the nine months ended October 31, 2021 compared to $16.6 million in the nine months ended November 1, 2020.

As a percentage of net sales, Adjusted EBITDA increased to 10.5% of net sales in the nine months ended October 31, 2021 compared to 4.3% of net sales in the nine months ended November 1, 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 August 1, 2021, our net working capital was $84.2 million, including $18.9 million of cash and cash equivalents.

At October 31, 2021, our net working capital was $89.9 million, including $20.4 million of cash and cash equivalents.

We expect to spend approximately $18.5 million in fiscal 2021 on capital expenditures, inclusive of software hosting implementation costs.

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.

Capital expenditures includes a total of approximately $16.4 million related to investments in technology and $2.1 million for the one planned new retail store that opened in the third quarter.

Due to the seasonality of our business, a

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A summary of operating, investing and financing activities is shown in the following table.

Six Months Ended

August 1, 2021

August 2, 2020

Nine Months Ended

October 31, 2021

November 1, 2020

(in thousands)

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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 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.

For the nine months ended October 31, 2021, net cash provided by operating activities was $32.8 million, which primarily consisted of net income of $12.2 million, non-cash depreciation and amortization of $21.8 million, and cash used in operating assets and liabilities of $3.0 million.

The cash used in operating assets and liabilities of $3.0 million primarily consisted of a $16.0 million increase in inventory and a $7.6 million decrease in income taxes payable offset by a $4.1 million increase in accrued expenses and a $24.9 million increase in trade accounts payable.

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.

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 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.

For the nine months ended October 31, 2021, net cash used in investing activities was $8.9 million and was primarily driven by capital expenditures of $9.1 million for a new distribution center and one new retail store, as well as investments in 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.

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 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.

For the nine months ended October 31, 2021, net cash used in financing activities was $50.6 million, primarily consisting of the full paydown of Duluth’s debt.

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.

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