What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-09-02 compared with 2022-06-03 · 86 added, 56 removed, 157 unchanged (47% of the section changed)

5 unchanged sentences

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

The three months of fiscal 2022 and fiscal 2021 represent our 13-week periods ended May 1, 2022 and May 2, 2021, respectively.

The three months of fiscal 2022 and fiscal 2021 represent our 13-week periods ended July 31, 2022 and August 1, 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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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 in global market constraints;

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 due to 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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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 1, 2022, we operated 62 retail stores and three outlet stores.

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

 Net sales decreased by 5.1% over the prior year second quarter to $141.5 million, and net sales in the first six months of fiscal 2022 decreased by 6.4% over the first six months of the prior year to $264.4 million;

 Net income of $2.4 million in fiscal 2022 second quarter compared to the prior year second quarter net income of $9.0 million, and net income in the first six months of fiscal 2022 of $1.1 million compared to net income in the first six months of fiscal 2021 of $9.5 million;

 Adjusted EBITDA decreased to $13.2 million in fiscal 2022 second quarter compared to the prior year second quarter Adjusted EBITDA of $21.4 million, and adjusted EBITDA in the first six months of fiscal 2022 of $21.1 million compared to $31.4 million over the first six months of the prior year.

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

GAAP financial measures.

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Our non-store market sales metrics include sales from our website and catalog.

Economic Conditions

In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic by the World Health Organization.

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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 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.

In addition to the COVID-19 pandemic, the United States economy has experienced high inflation during the first two quarters of 2022 and there are expectations in the market that inflation may remain at elevated levels.

The ultimate impact of COVID-19 and higher inflationary periods on our operational and financial performance still depends on future developments outside of our control.

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

Our historical sales growth has been accompanied by increased selling, general and administrative expenses.

The most significant components of these increases are advertising, 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 net sales over time.

Adjusted EBITDA

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Three Months Ended

Six Months Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

(in thousands)

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Selling, general and administrative expenses

Operating (loss) income

Operating income

Interest expense

Other income, net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Income before income taxes

Income tax expense

Net loss attributable to noncontrolling interest

Net (loss) income attributable to controlling interest

Net income attributable to controlling interest

Percentage of Net sales:

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Selling, general and administrative expenses

Operating (loss) income

Operating income

Interest expense

Other income, net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Income before income taxes

Income tax expense

Net loss attributable to noncontrolling interest

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.

Net income attributable to controlling interest

Three Months Ended July 31, 2022 Compared to Three Months Ended August 1, 2021

Net sales decreased $7.6 million, or 5.1%, to $141.5 million in the three months ended July 31, 2022 compared to $149.1 million in the three months ended August 1, 2021.

The decrease was primarily driven by slower store traffic, coupled with lower clearance sales as compared to the prior year.

Store market net sales decreased $6.7 million, or 6.3%, to $100.4 million in the three months ended July 31, 2022 compared to $107.1 million in the three months ended August 1, 2021.

The decrease was also driven by slower store traffic compared to the prior year second quarter.

Non-store market net sales decreased by $0.8 million, or 1.9%, to $39.9 million in the three months ended July 31, 2022 compared to $40.7 million in the three months ended August 1, 2021.

Gross profit decreased $5.8 million, or 7.1%, to $75.6 million in the three months ended July 31, 2022 compared to $81.4 million in the three months ended August 1, 2021.

As a percentage of net sales, gross margin decreased to 53.4% of net sales in the three months ended July 31, 2022, compared to 54.6% of net sales in the three months ended August 1, 2021.

The decrease in gross margin was primarily driven by a $1.3 million inventory write down, which mostly consisted of product that was damaged while in-transit.

Excluding the non-recurring inventory write down, gross margin would have been 54.4%.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses increased $3.4 million, or 5.0%, to $71.7 million in the three months ended July 31, 2022 compared to $68.3 million in the three months ended August 1, 2021.

Selling, general and administrative expenses as a percentage of net sales increased to 50.7% in the three months ended July 31, 2022, compared to 45.8% in the three months ended August 1, 2021.

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

Income tax expense was $0.7 million in the three months ended July 31, 2022, compared to income tax expense of $3.0 million in the three months ended August 1, 2021.

The effective tax rate related to controlling interest was 23% for the three months ended July 31, 2022 compared to 25% for the three months ended August 1, 2021.

Net Income Attributable to Controlling Interest

Net income attributable to controlling interest was $2.4 million, in the three months ended July 31, 2022 compared to net income of $9.0 million in the three months ended August 1, 2021, due to the factors discussed above.

Six Months Ended July 31, 2022 Compared to Six Months Ended August 1, 2021

Net sales decreased $18.1 million, or 6.4%, to $264.4 million in the six months ended July 31, 2022 compared to $282.6 million in the six months ended August 1, 2021.

The decrease was primarily due to heavier promotions and clearance events in the prior year, coupled with slower store traffic in the current year.

Store market net sales decreased $11.5 million, or 5.8%, to $185.5 million in the six months ended July 31, 2022 compared to $197.0 million in the six months ended August 1, 2021.

The decrease was also driven by slower store traffic compared to the prior year.

Non-store market net sales decreased by $6.0 million, or 7.3%, to $76.6 million in the six months ended July 31, 2022 compared to $82.7 million in the six months ended August 1, 2021.

The decrease was driven by a decrease in promotional events in the current year compared to the prior year.

Gross profit decreased $5.3 million, or 3.6%, to $142.7 million in the six months ended July 31, 2022 compared to $148.0 million in the six months ended August 1, 2021.

As a percentage of net sales, gross margin increased to 54.0% of net sales in the six months ended July 31, 2022, compared to 52.4% of net sales in the six months ended August 1, 2021.

Excluding the aforementioned non-recurring inventory write down of $1.3 million during the second quarter, gross margin would have been 54.5%.

The increase in gross margin was driven by a higher mix of full price sales due to successfully dialing back promotional and clearance activity, particularly during the first quarter of the current year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $6.7 million, or 5.1%, to $139.7 million in the six months ended July 31, 2022 compared to $133.0 million in the six months ended August 1, 2021.

Selling, general and administrative expenses as a percentage of net sales increased to 52.8% in the six months ended July 31, 2022, compared to 47.1% in the six months ended August 1, 2021.

Income tax expense was $0.3 million in the six months ended July 31, 2022, compared to income tax expense of $3.1 million in the six months ended August 1, 2021.

The effective tax rate related to controlling interest was 21% for the six months ended July 31, 2022 compared to 25% for the six months ended August 1, 2021.

Net Income Attributable to Controlling Interest

Net income attributable to controlling interest was $1.1 million, in the six months ended July 31, 2022 compared to net income of $9.5 million in the six months ended August 1, 2021, due to the factors discussed above.

Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA

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

GAAP financial measures, for the periods indicated below.

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Three Months Ended

Six Months Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

(in thousands)

Net (loss) income

Depreciation and amortization

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Interest expense

Income tax (benefit) expense

Income tax expense

Stock based compensation

Adjusted EBITDA

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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $8.2 million to $13.2 million in the three months ended July 31, 2022 compared to $21.4 million in the three months ended August 1, 2021.

As a percentage of net sales, Adjusted EBITDA decreased to 9.4% of net sales in the three months ended July 31, 2022 compared to 14.4% of net sales in the three months ended August 1, 2021.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $10.3 million to $21.1 million in the six months ended July 31, 2022 compared to $31.4 million in the six months ended August 1, 2021.

As a percentage of net sales, Adjusted EBITDA decreased to 8.0% of net sales in the six months ended July 31, 2022 compared to 11.1% of net sales in the six months ended August 1, 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 and information technology.

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

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

At July 31, 2022, our net working capital was $102.4 million, including $15.4 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.

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

Three Months Ended

Six Months Ended

July 31, 2022

August 1, 2021

(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 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.

For the six months ended July 31, 2022, net cash used in operating activities was $41.1 million, which primarily consisted of cash used in operating assets and liabilities of $58.9 million.

The cash used in operating assets and liabilities of $58.9 million was primarily due to a $41.8 million increase in inventory and a $19.0 million decrease in accrued expenses, partially offset by a $9.5 million increase in trade accounts payable.

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.

Net Cash Used in Investing 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.

For the six months ended July 31, 2022, net cash used in investing activities was $18.7 million and was primarily driven by capital expenditures of $18.8 million for new investments in the distribution network and 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 the distribution network and 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 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.

For the six months ended July 31, 2022, net cash used in financing activities was $1.8 million, primarily consisting of 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 bank 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