What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-12-02 compared with 2022-09-02 · 81 added, 88 removed, 155 unchanged (52% 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 July 31, 2022 and August 1, 2021, respectively.

The three months of fiscal 2022 and fiscal 2021 represent our 13-week periods ended October 30, 2022 and October 31, 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.

8 unchanged sentences

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

the impact of inflation on our results of operations;

the prolonged effects of COVID-19 on store traffic and disruptions to our distribution network, supply chains and operations;

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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 July 31, 2022, we operated 62 retail stores and three outlet stores.

Since then, we have expanded our retail presence, and as of October 30, 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 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.

 Net sales increased by 1.3% over the prior year third quarter to $147.1 million, and net sales in the first nine months of fiscal 2022 decreased by 3.8% over the first nine months of the prior year to $411.5 million;

 Net loss of $6.2 million in fiscal 2022 third quarter compared to the prior year third quarter net income of $2.8 million, and net loss in the first nine months of fiscal 2022 of $5.2 million compared to net income in the first nine months of fiscal 2021 of $12.2 million;

 Adjusted EBITDA decreased to $1.7 million in fiscal 2022 third quarter compared to the prior year third quarter Adjusted EBITDA of $13.0 million, and adjusted EBITDA in the first nine months of fiscal 2022 of $22.9 million compared to $44.3 million over the first nine 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.

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Economic Conditions

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

This pandemic has negatively affected the U.S.

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.

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.

In addition to the COVID-19 pandemic, the United States economy has experienced high inflation during the first three 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.

Given the uncertainty, we cannot reasonably estimate store traffic patterns and the prolonged impact on overall consumer demand.

How We Assess the Performance of Our Business

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Three Months Ended

Six Months Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

Nine Months Ended

October 30, 2022

October 31, 2021

October 30, 2022

October 31, 2021

(in thousands)

1 unchanged sentence

Selling, general and administrative expenses

Operating income

Operating (loss) income

Interest expense

Other income, net

Income before income taxes

Income tax expense

Other income (loss), net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net loss attributable to noncontrolling interest

Net income attributable to controlling interest

Net (loss) income attributable to controlling interest

Percentage of Net sales:

2 unchanged sentences

Selling, general and administrative expenses

Operating income

Operating (loss) income

Interest expense

Other income, net

Income before income taxes

Income tax expense

Other income (loss), net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net loss attributable to noncontrolling interest

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%.

Net (loss) income attributable to controlling interest

Three Months Ended October 30, 2022 Compared to Three Months Ended October 31, 2021

Net sales increased $1.8 million, or 1.3%, to $147.1 million in the three months ended October 30, 2022 compared to $145.3 million in the three months ended October 31, 2021.

Store market net sales increased $0.8 million, or 0.8%, to $103.8 million in the three months ended October 30, 2022 compared to $103.0 million in the three months ended October 31, 2021.

Non-store market net sales increased by $1.2 million, or 2.9%, to $42.3 million in the three months ended October 30, 2022 compared to $41.1 million in the three months ended October 31, 2021.

Gross profit decreased $6.7 million, or 8.0%, to $76.9 million in the three months ended October 30, 2022 compared to $83.6 million in the three months ended October 31, 2021.

As a percentage of net sales, gross margin decreased to 52.3% of net sales in the three months ended October 30, 2022, compared to 57.6% of net sales in the three months ended October 31, 2021.

The decrease in gross margin was primarily driven by a higher mix of promotional sales during the current period.

Selling, General and Administrative Expenses

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 increased $5.5 million, or 7.0%, to $84.3 million in the three months ended October 30, 2022 compared to $78.8 million in the three months ended October 31, 2021.

Selling, general and administrative expenses as a percentage of net sales increased to 57.3% in the three months ended October 30, 2022, compared to 54.2% in the three months ended October 31, 2021.

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

Income tax benefit was $2.1 million in the three months ended October 30, 2022, compared to income tax expense of $0.9 million in the three months ended October 31, 2021.

The effective tax rate related to controlling interest was 25% for the three months ended October 30, 2022 compared to 25% for the three months ended October 31, 2021.

Net (Loss) Income Attributable to Controlling Interest

Net loss attributable to controlling interest was $6.2 million, in the three months ended October 30, 2022 compared to net income of $2.8 million in the three months ended October 31, 2021, due to the factors discussed above.

Nine Months Ended October 30, 2022 Compared to Nine Months Ended October 31, 2021

Net sales decreased $16.3 million, or 3.8%, to $411.5 million in the nine months ended October 30, 2022 compared to $427.8 million in the nine months ended October 31, 2021.

The decrease was primarily driven by continued slower store traffic, partially offset by increased promotional activity, particularly during the current quarter.

Store market net sales decreased $10.7 million, or 3.6%, to $289.3 million in the nine months ended October 30, 2022 compared to $300.0 million in the nine months ended October 31, 2021.

Non-store market net sales decreased by $4.8 million, or 3.9%, to $118.9 million in the nine months ended October 30, 2022 compared to $123.7 million in the nine months ended October 31, 2021.

Gross profit decreased $12.0 million, or 5.2%, to $219.6 million in the nine months ended October 30, 2022 compared to $231.6 million in the nine months ended October 31, 2021.

As a percentage of net sales, gross margin decreased to 53.4% of net sales in the nine months ended October 30, 2022, compared to 54.1% of net sales in the nine months ended October 31, 2021.

The decrease in gross margin was driven by a higher mix of promotional sales during the second and third quarters 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.

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 digital advertising expense.

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

Selling, general and administrative expenses increased $12.3 million, or 5.8%, to $224.0 million in the nine months ended October 30, 2022 compared to $211.8 million in the nine months ended October 31, 2021.

Selling, general and administrative expenses as a percentage of net sales increased to 54.4% in the nine months ended October 30, 2022, compared to 49.5% in the nine months ended October 31, 2021.

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

Income tax benefit was $1.8 million in the nine months ended October 30, 2022, compared to income tax expense of $4.0 million in the nine months ended October 31, 2021.

The effective tax rate related to controlling interest was 26% for the nine months ended October 30, 2022 compared to 25% for the nine months ended October 31, 2021.

Net (Loss) Income Attributable to Controlling Interest

Net loss attributable to controlling interest was $5.1 million, in the nine months ended October 30, 2022 compared to net income of $12.3 million in the nine months ended October 31, 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 to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S.

2 unchanged sentences

Three Months Ended

Six Months Ended

July 31, 2022

August 1, 2021

July 31, 2022

August 1, 2021

Nine Months Ended

October 30, 2022

October 31, 2021

October 30, 2022

October 31, 2021

(in thousands)

Net (loss) income

Depreciation and amortization

2 unchanged sentences

Interest expense

Income tax expense

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 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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $11.3 million to $1.7 million in the three months ended October 30, 2022 compared to $13.0 million in the three months ended October 31, 2021.

As a percentage of net sales, Adjusted EBITDA decreased to 1.2% of net sales in the three months ended October 30, 2022 compared to 8.9% of net sales in the three months ended October 31, 2021.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $21.4 million to $22.9 million in the nine months ended October 30, 2022 compared to $44.3 million in the nine months ended October 31, 2021.

As a percentage of net sales, Adjusted EBITDA decreased to 5.6% of net sales in the nine months ended October 30, 2022 compared to 10.4% of net sales in the nine months ended October 31, 2021.

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 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.

At October 30, 2022, our net working capital was $98.7 million, including $9.4 million of cash and cash equivalents.

We expect to spend approximately $35.0 million in fiscal 2022 on capital expenditures, inclusive of software hosting implementation costs, primarily due to investments in logistics optimization, including investments in the fulfillment network and information technology.

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.

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

Six Months Ended

July 31, 2022

August 1, 2021

Nine Months Ended

October 30, 2022

October 31, 2021

(in thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash used in financing activities

Decrease in cash, cash equivalents

Net cash provided by (used in) financing activities

Decrease in cash and 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 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.

For the nine months ended October 30, 2022, net cash used in operating activities was $51.0 million, which primarily consisted of cash used in operating assets and liabilities of $70.8 million.

The cash used in operating assets and liabilities of $70.8 million was primarily due to a $82.0 million increase in inventory and a $13.4 million decrease in accrued expenses, partially offset by a $34.7 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.

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, partially offset by a $4.1 million increase in accrued expenses and a $24.9 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 and 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

For the nine months ended October 30, 2022, net cash used in investing activities was $24.1 million and was primarily driven by new investments in the fulfillment network and 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 investments in a new fulfillment center, one new retail store, as well as information technology.

Net Cash Provided by (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 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.

For the nine months ended October 30, 2022, net cash provided by financing activities was $7.5 million, primarily consisting of $10.0 million in borrowings under our revolving line of credit, partially offset by 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.

Contractual Obligations

12 unchanged sentences

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