What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-03 compared with 2021-12-03 · 61 added, 96 removed, 152 unchanged (51% of the section changed)

5 unchanged sentences

Fiscal 2021 was a 52-week period and ended on January 30, 2022.

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.

The three months of fiscal 2022 and fiscal 2021 represent our 13-week periods ended May 1, 2022 and May 2, 2021, 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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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 October 31, 2021, we operated 62 retail stores and three outlet stores.

Since then, we have expanded our retail presence, and as of May 1, 2022, 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 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.

 Net sales decreased by 7.9% over the prior year first quarter to $122.9 million;

 Net loss of ($1.3) million in fiscal 2022 first quarter compared to the prior year first quarter net income of $0.5 million;

 Adjusted EBITDA decreased to $7.9 million in fiscal 2022 first quarter compared to the prior year first quarter Adjusted EBITDA of $9.6 million.

See the “Reconciliation of Net (Loss) Income to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net (loss) income to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S.

GAAP financial measures.

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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.

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.

We also use Adjusted EBITDA as the key financial metric in determining 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

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands)

1 unchanged sentence

Selling, general and administrative expenses

Operating income (loss)

Operating (loss) income

Interest expense

Other (loss) income, net

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Other income, net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net loss attributable to noncontrolling interest

Net income (loss) attributable to controlling interest

Net (loss) income attributable to controlling interest

Percentage of Net sales:

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Selling, general and administrative expenses

Operating income (loss)

Operating (loss) income

Interest expense

Other (loss) income, net

Income (loss) before income taxes

Income tax expense (benefit)

Net income (loss)

Other income, net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net loss attributable to noncontrolling interest

Net income (loss) attributable to controlling interest

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 $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 $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 $5.0 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.

Net (loss) income attributable to controlling interest

Three Months Ended May 1, 2022 Compared to Three Months Ended May 2, 2021

Net sales decreased $10.5 million, or 7.9%, to $122.9 million in the three months ended May 1, 2022 compared to $133.4 million in the three months ended May 2, 2021.

The decrease was primarily due to continued supply chain disruptions, coupled with heavier clearance sales during the prior year.

Store market net sales decreased $4.8 million, or 5.4%, to $85.1 million in the three months ended May 1, 2022 compared to $89.9 million in the three months ended May 2, 2021.

Non-store market net sales decreased by $5.2 million, or 12.5%, to $36.8 million in the three months ended May 1, 2022 compared to $42.0 million in the three months ended May 2, 2021.

The decrease was also driven by heavier clearance and promotional activity during the prior year.

Gross profit increased $0.5 million, or 0.8%, to $67.1 million in the three months ended May 1, 2022 compared to $66.5 million in the three months ended May 2, 2021.

As a percentage of net sales, gross margin increased to 54.6% of net sales in the three months ended May 1, 2022, compared to 49.9% of net sales in the three months ended May 2, 2021.

The increase in gross margin rate was driven by a higher mix of full price sales due to successfully dialing back promotional and clearance activity.

Selling, General and Administrative Expenses

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 $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

Selling, general and administrative expenses increased $3.3 million, or 5.2%, to $68.0 million in the three months ended May 1, 2022 compared to $64.6 million in the three months ended May 2, 2021.

Selling, general and administrative expenses as a percentage of net sales increased to 55.3% in the three months ended May 1, 2022, compared to 48.5% in the three months ended May 2, 2021.

The increase in selling, general and administrative expense was primarily due to investments in new headcount, increased depreciation from continued capital investments, as well as increased advertising expense.

Income tax benefit was ($0.4) million in the three months ended May 1, 2022, compared to an income tax expense of $0.1 million in the three months ended May 2, 2021.

The effective tax rate related to controlling interest was 25% for the three months ended May 1, 2022 compared to 16% for the three months ended May 2, 2021.

Net (Loss) Income Attributable to Controlling Interest

Net loss attributable to controlling interest was ($1.3) million, in the three months ended May 1, 2022 compared to net income of $0.5 million in the three months ended May 2, 2021, due to the factors discussed above.

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

The following table presents reconciliations of net income (loss) to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S.

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Three Months Ended

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands)

Net income (loss)

Net (loss) income

Depreciation and amortization

2 unchanged sentences

Interest expense

Amortization of build-to-suit operating leases

‎ capital contribution

Income tax expense (benefit)

Income tax (benefit) expense

Stock based compensation

Adjusted EBITDA

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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $1.7 million to $7.9 million in the three months ended May 1, 2022 compared to $9.6 million in the three months ended May 2, 2021.

As a percentage of net sales, Adjusted EBITDA decreased to 6.4% of net sales in the three months ended May 1, 2022 compared to 7.2% of net sales in the three months ended May 2, 2021.

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 infrastructure, information technology, and opening new stores.

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 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 $16.4 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

significant amount of cash from operating activities is generated during the fourth quarter of our fiscal year.

At May 1, 2022, our net working capital was $106.0 million, including $40.4 million of cash and cash equivalents.

We expect to spend approximately $40.0 million in fiscal 2022 on capital expenditures, inclusive of software hosting implementation costs, primarily due to investments in logistics optimization, including the introduction of automated fulfillment centers.

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.

Nine Months Ended

October 31, 2021

November 1, 2020

Three Months Ended

(in thousands)

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash (used in) provided by financing activities

(Decrease) increase in cash, cash equivalents

Net Cash Provided by (Used in) Operating Activities

Net cash used in financing activities

Decrease in cash, cash equivalents

Net Cash (Used in) Provided by 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 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.

For the three months ended May 1, 2022, net cash used in operating activities was $31.7 million, which primarily consisted of a net loss of $1.3 million and cash used in operating assets and liabilities of $38.6 million.

The cash used in operating assets and liabilities of $38.6 million primarily consisted of a $29.6 million increase in inventory and a $17.5 million decrease in accrued expenses offset by a $10.4 million increase in trade accounts payable.

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 $4.2 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 $4.2 million primarily consisted of a $4.9 million decrease in inventory and a $6.0 million increase in trade accounts payable, partially offset by a $6.3 million decrease in accrued expenses.

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 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

Investing activities consist primarily of capital expenditures for growth related to investments in infrastructure and information technology.

For the three months ended May 1, 2022, net cash used in investing activities was $3.8 million and was primarily driven by capital expenditures of $3.9 million for new investments in information technology.

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.

Net Cash Used in 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 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.

For the three months ended May 1, 2022, net cash used in financing activities was $1.1 million, primarily consisting of 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.

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