What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-06-02 compared with 2022-12-02 · 53 added, 97 removed, 139 unchanged (52% of the section changed)

5 unchanged sentences

Fiscal 2022 was a 52-week period and ended on January 29, 2023 .

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

The three months of fiscal 2023 and fiscal 2022 represent our 13-week periods ended April 30, 2023 and May 1, 2022, 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 30, 2022, we operated 62 retail stores and three outlet stores.

Since then, we have expanded our retail presence, and as of April 30, 2023, 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 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.

 Net sales increased by 0.7% over the prior year first quarter to $123.8 million;

 Net loss of $3.9 million in fiscal 2023 first quarter compared to the prior year first quarter net loss of $1.3 million;

 Adjusted EBITDA decreased to $5.3 million in fiscal 2023 first quarter compared to the prior year first quarter Adjusted EBITDA of $7.9 million.

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 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.

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

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

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

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

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

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

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

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

Areas under analysis include greater automation across the logistics network;

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

support growth through multiple brands and seamlessly integrate new brands into the portfolio;

and attract the talent, skillsets and expertise needed to scale the business.

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

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Economic Conditions

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.

The United States economy has experienced continued high inflation during the first quarter of 2023 and there are expectations in the market that inflation may remain at elevated levels.

The ultimate impact of 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.

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

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

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.

Adjusted EBITDA

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Three Months Ended

Nine Months Ended

October 30, 2022

October 31, 2021

October 30, 2022

October 31, 2021

April 30, 2023

(in thousands)

1 unchanged sentence

Selling, general and administrative expenses

Operating (loss) income

Operating loss

Interest expense

Other income (loss), net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Other income, net

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

Net (loss) income attributable to controlling interest

Net loss attributable to controlling interest

Percentage of Net sales:

2 unchanged sentences

Selling, general and administrative expenses

Operating (loss) income

Operating loss

Interest expense

Other income (loss), net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Other income, net

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

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 $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.

Net loss attributable to controlling interest

Three Months Ended April 30, 2023, Compared to Three Months Ended May 1, 2022

Net sales increased $0.9 million, or 0.7%, to $123.8 million in the three months ended April 30, 2023 compared to $122.9 million in the three months ended May 1, 2022.

Store market net sales increased $0.3 million, or 0.3%, to $85.4 million in the three months ended April 30, 2023 compared to $85.1 million in the three months ended May 1, 2022.

Non-store market net sales increased by $0.6 million, or 1.7%, to $37.4 million in the three months ended April 30, 2023 compared to $36.8 million in the three months ended May 1, 2022.

Gross profit decreased $1.4 million, or 2.1%, to $65.7 million in the three months ended April 30, 2023 compared to $67.1 million in the three months ended May 1, 2022.

As a percentage of net sales, gross margin decreased to 53.0% of net sales in the three months ended April 30, 2023, compared to 54.6% of net sales in the three months ended May 1, 2022.

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

The lower product margin rate was partially offset by expensing $3.9 million of expedited freight during the first quarter of 2022 compared to $0.1 million during the current quarter, impacting the quarter-over-quarter margin rate variance by 3.1%.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses increased $2.2 million, or 3.2%, to $70.2 million in the three months ended April 30, 2023 compared to $68.0 million in the three months ended May 1, 2022.

Selling, general and administrative expenses as a percentage of net sales increased to 56.7% in the three months ended April 30, 2023, compared to 55.3% in the three months ended May 1, 2022.

The increase in selling, general and administrative expense was partially due to higher occupancy costs from the new automated Southeast fulfillment center, coupled with increased amortization of software hosting implementation costs from continued capital investments.

Income tax benefit was $1.5 million in the three months ended April 30, 2023, compared to income tax benefit of $0.4 million in the three months ended May 1, 2022.

The effective tax rate related to controlling interest was 27% for the three months ended April 30, 2023 compared to 25% for the three months ended May 1, 2022.

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.

Net loss attributable to controlling interest was $3.9 million, in the three months ended April 30, 2023 compared to net loss of $1.3 million in the three months ended May 1, 2022, due to the factors discussed above.

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

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Three Months Ended

Nine Months Ended

October 30, 2022

October 31, 2021

October 30, 2022

October 31, 2021

April 30, 2023

(in thousands)

Net (loss) income

Depreciation and amortization

2 unchanged sentences

Interest expense

Income tax (benefit) expense

Income tax benefit

Stock based compensation

Adjusted EBITDA

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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $2.6 million to $5.3 million in the three months ended April 30, 2023 compared to $7.9 million in the three months ended May 1, 2022.

As a percentage of net sales, Adjusted EBITDA decreased to 4.3% of net sales in the three months ended April 30, 2023 compared to 6.4% of net sales in the three months ended May 1, 2022.

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

At April 30, 2023, our net working capital was $88.7 million, including $9.2 million of cash and cash equivalents.

We expect to spend approximately $55.0 million in fiscal 2023 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.

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

Nine Months Ended

October 30, 2022

October 31, 2021

Three Months Ended

April 30, 2023

(in thousands)

Net cash (used in) provided by operating activities

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash used in financing activities

Decrease in cash and cash equivalents

Net Cash (Used in) Provided by Operating Activities

Net Cash Used in Operating Activities

Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, stock-based compensation and the effect of changes in operating assets and liabilities.

For the 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 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.

For the three months ended April 30, 2023, net cash used in operating activities was $14.0 million, which primarily consisted of cash used in operating assets and liabilities of $17.1 million.

The cash used in operating assets and liabilities of $17.1 million was primarily due to a $21.1 million decrease in trade accounts payable partially offset by a $10.0 million decrease in inventory.

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.

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 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

For the three months ended April 30, 2023, net cash used in investing activities was $21.3 million and was primarily driven by new investments in the fulfillment network 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.

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 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.

For the three months ended April 30, 2023, net cash used in financing activities was $1.0 million, primarily consisting of payments on finance lease obligations.

For the three months ended May 1, 2022, net cash used in financing activities was $1.1 million, also primarily consisting of payments on finance lease obligations.

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