DULUTH HOLDINGS INC. 10-Q

Item 1. Financial Statements DULUTH HOLDINGS INC. Condensed Consolidated Balance Sheets - Assets (Unaudited) (Amounts in thousands) April 30, 2023 January 29, 2023 ASSETS Current Assets: Cash and cash equivalents $ 9,210 $ 45,548 Receivables 6,437 6,041 Inventory, less reserves of $ 1,929 and $ 1,837 , respectively 144,969 154,922 Prepaid expenses & other current assets 15,918 15,154 Total current assets 176,534 221,665 Property and equipment, net 122,812 112,564 Operating lease right-of-use assets 128,436 131,753 Finance lease right-of-use assets, net 46,474 47,206 Available-for-sale security 5,416 5,539 Other assets, net 8,591 8,727 Deferred tax assets 136 — Total assets $ 488,399 $ 527,454 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 3 DULUTH HOLDINGS INC. Condensed Consolidated Balance Sheets – Liabilities and Shareholders’ Equity (Unaudited) (Amounts in thousands) April 30, 2023 January 29, 2023 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 36,123 $ 56,547 Accrued expenses and other current liabilities 30,921 40,815 Income taxes payable 1,423 1,761 Current portion of operating lease liabilities 15,713 15,571 Current portion of finance lease liabilities 2,885 2,842 Current maturities of TRI long-term debt 787 768 Total current liabilities 87,852 118,304 Operating lease liabilities, less current maturities 114,019 117,366 Finance lease liabilities, less current maturities 36,688 37,425 TRI long-term debt, less current maturities 25,726 25,913 Deferred tax liabilities — 1,249 Total liabilities 264,285 300,257 Shareholders' equity: Preferred stock, no par value; 10,000 shares authorized; no shares issued or outstanding as of April 30, 2023 and January 29, 2023 — — Common stock (Class A), no par value; 10,000 shares authorized; 3,364 shares issued and outstanding as of April 30, 2023 and January 29, 2023 — — Common stock (Class B), no par value; 200,000 shares authorized; 31,264 shares issued and 31,110 shares outstanding as of April 30, 2023, 30,191 shares issued and 30,079 shares outstanding as of January 29, 2023 — — Treasury stock, at cost; 154 and 112 shares as of April 30, 2023 and January 29, 2023, respectively ( 1,732 ) ( 1,459 ) Capital stock 99,968 98,842 Retained earnings 129,303 133,172 Accumulated other comprehensive income ( 207 ) ( 148 ) Total shareholders' equity of Duluth Holdings Inc. 227,332 230,407 Noncontrolling interest ( 3,218 ) ( 3,210 ) Total shareholders' equity 224,114 227,197 Total liabilities and shareholders' equity $ 488,399 $ 527,454 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 4 DULUTH HOLDINGS INC. Condensed Consolidated Statements of Operations (Unaudited) (Amounts in thousands, except per share figures) Three Months Ended April 30, 2023 May 1, 2022 Net sales $ 123,759 $ 122,904 Cost of goods sold (excluding depreciation and amortization) 58,108 55,841 Gross profit 65,651 67,063 Selling, general and administrative expenses 70,200 67,994 Operating loss ( 4,549 ) ( 931 ) Interest expense 934 876 Other income, net 148 46 Loss before income taxes ( 5,335 ) ( 1,761 ) Income tax benefit ( 1,458 ) ( 438 ) Net loss ( 3,877 ) ( 1,323 ) Less: Net loss attributable to noncontrolling interest ( 8 ) ( 29 ) Net loss attributable to controlling interest $ ( 3,869 ) $ ( 1,294 ) Basic earnings per share (Class A and Class B): Weighted average shares of common stock outstanding 32,865 32,714 Net loss per share attributable to controlling interest $ ( 0.12 ) $ ( 0.04 ) Diluted earnings per share (Class A and Class B): Weighted average shares and equivalents outstanding 32,865 32,714 Net loss per share attributable to controlling interest $ ( 0.12 ) $ ( 0.04 ) The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 5 DULUTH HOLDINGS INC. Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (Amounts in thousands) Three Months Ended April 30, 2023 May 1, 2022 Net loss $ ( 3,877 ) $ ( 1,323 ) Other comprehensive income Securities available-for sale: Unrealized security loss arising during the period ( 79 ) ( 449 ) Income tax benefit ( 20 ) ( 113 ) Other comprehensive loss ( 59 ) ( 336 ) Comprehensive loss ( 3,936 ) ( 1,659 ) Comprehensive loss attributable to noncontrolling interest ( 8 ) ( 29 ) Comprehensive loss attributable ‎ to controlling interest $ ( 3,928 ) $ ( 1,630 ) The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 6 DULUTH HOLDINGS INC. Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) (Amounts in thousands) Three Months Ended April 30, 2023 Accumulated Noncontrolling Capital stock other interest in Total Treasury Retained comprehensive variable interest shareholders' Shares Amount stock earnings income (loss) entity equity Balance at January 29, 2023 33,443 $ 98,842 $ ( 1,459 ) $ 133,172 $ ( 148 ) $ ( 3,210 ) $ 227,197 Issuance of common stock 1,081 136 — — — — 136 Stock-based compensation — 990 — — — — 990 Restricted stock forfeitures ( 9 ) — — — — — — Restricted stock surrendered for taxes ( 41 ) — ( 273 ) — — — ( 273 ) Other comprehensive loss — — — — ( 59 ) — ( 59 ) Net loss — — — ( 3,869 ) — ( 8 ) ( 3,877 ) Balance at April 30, 2023 34,474 $ 99,968 $ ( 1,732 ) $ 129,303 $ ( 207 ) $ ( 3,218 ) $ 224,114 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 7 DULUTH HOLDINGS INC. Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) (Amounts in thousands) Three Months Ended May 1, 2022 Accumulated Noncontrolling Capital stock other interest in Total Treasury Retained comprehensive variable interest shareholders' Shares Amount stock earnings income entity equity Balance at January 30, 2022 33,071 $ 95,515 $ ( 1,002 ) $ 130,868 $ 489 $ ( 3,152 ) $ 222,718 Issuance of common stock 292 166 — — — — 166 Stock-based compensation — 618 — — — — 618 Restricted stock forfeitures ( 1 ) — — — — — — Restricted stock surrendered for taxes ( 33 ) — ( 455 ) — — — ( 455 ) Other comprehensive income — — — — ( 336 ) — ( 336 ) Net loss — — — ( 1,294 ) — ( 29 ) ( 1,323 ) Balance at May 1, 2022 33,329 $ 96,299 $ ( 1,457 ) $ 129,574 $ 153 $ ( 3,181 ) $ 221,388 The accompanying notes are an integral part of these condensed consolidated financial statements. ‎ 8 DULUTH HOLDINGS INC. Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) Three Months Ended April 30, 2023 May 1, 2022 Cash flows from operating activities: Net loss $ ( 3,877 ) $ ( 1,323 ) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 7,413 7,520 Stock based compensation 990 618 Deferred income taxes ( 1,365 ) 37 Loss on disposal of property and equipment — 26 Changes in operating assets and liabilities: Receivables ( 396 ) 358 Inventory 9,953 ( 29,572 ) Prepaid expense & other current assets 84 746 Software hosting implementation costs, net ( 746 ) ( 1,007 ) Deferred catalog costs — 10 Trade accounts payable ( 21,080 ) 10,362 Income taxes payable ( 338 ) ( 2,032 ) Accrued expenses and deferred rent obligations ( 4,475 ) ( 17,500 ) Other assets ( 17 ) ( 11 ) Noncash lease impacts ( 119 ) 51 Net cash used in operating activities ( 13,973 ) ( 31,717 ) Cash flows from investing activities: Purchases of property and equipment ( 21,392 ) ( 3,885 ) Principal receipts from available-for-sale security 44 39 Proceeds from disposals — 3 Net cash used in investing activities ( 21,348 ) ( 3,843 ) Cash flows from financing activities: Proceeds from line of credit 10,000 — Payments on line of credit ( 10,000 ) — Payments on TRI long term debt ( 186 ) ( 168 ) Payments on finance lease obligations ( 694 ) ( 664 ) Payments of tax withholding on vested restricted shares ( 273 ) ( 455 ) Other 136 166 Net cash used in financing activities ( 1,017 ) ( 1,121 ) Decrease in cash and cash equivalents ( 36,338 ) ( 36,681 ) Cash and cash equivalents at beginning of period 45,548 77,051 Cash and cash equivalents at end of period $ 9,210 $ 40,370 Supplemental disclosure of cash flow information: Interest paid $ 934 $ 876 Income taxes paid $ 216 $ 1,610 Supplemental disclosure of non-cash information: Unpaid liability to acquire property and equipment $ 1,832 $ 4,121 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION A. Nature of Operations Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold primarily through the Company’s own omnichannel platform. The Company’s products are marketed under the Duluth Trading name, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise. The Company identifies its operating segments according to how its business activities are managed and evaluated. The Company continues to report one reportable external segment, consistent with the Company’s omnichannel business approach. The Company’s revenues generated outside the United States were insignificant. The Company has two classes of authorized common stock: Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to ten votes per share and is convertible at any time into one share of Class B common stock. Each share of Class B common stock is entitled to one vote per share. The Company’s Class B common stock trades on the NASDAQ Global Select Market under the symbol “DLTH.” B. Basis of Presentation The condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Company consolidates TRI Holdings, LLC (“TRI”) as a variable interest entity (see Note 6 “Variable Interest Entity” for further information). All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2023 is a 52-week period and ends on January 28 , 2024 . Fiscal 2022 was a 52-week period and ended on January 29, 2023. The three months of fiscal 2023 and fiscal 2022 represent the Company’s 13-week periods ended April 30, 2023 and May 1, 2022, respectively. The accompanying condensed consolidated financial statements as of and for the three months ended April 30, 2023 and May 1, 2022 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations as of and for the three months ended April 30, 2023 and May 1, 2022. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the fiscal year ended January 29, 2023. C. Impairment Analysis As of April 30, 2023 and for the three months ended, no triggering events or indicators of asset impairment were noted. D. Inventory Inventory, consisting of purchased product, is valued at the lower of cost or net realizable value, under the first-in, first-out method. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. Both estimates have calculations that require the Company to make assumptions and apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. Inventory is adjusted periodically to reflect current market conditions, which requires management’s judgment that may significantly affect the ending inventory valuation, as well as gross margin. The reserve for inventory shrinkage is adjusted to reflect the trend of historical physical inventory count results. The Company performs its retail store physical inventory counts in July and the difference between actual and estimated shrinkage, recorded in Cost of goods sold, may cause fluctuations in second fiscal quarter results. 10 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) E. Prepaid Expenses and Other Assets Prepaid expenses and other assets consist of the following: April 30, 2023 January 29, 2023 (in thousands) Prepaid expenses & other current assets Pending returns inventory, net $ 2,001 $ 2,373 Current software hosting implementation costs, net 3,024 3,074 Other prepaid expenses 10,893 9,707 Prepaid expenses & other current assets $ 15,918 $ 15,154 Other assets, net Goodwill $ 402 $ 402 Intangible assets, net 445 450 Non-current software hosting implementation costs 6,047 6,148 Other assets, net 1,697 1,727 Other assets, net $ 8,591 $ 8,727 F. Seasonality of Business The Company’s business is affected by the pattern of seasonality common to most apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year due to increased sales during the holiday season. G. Cash and Cash Equivalents The Company considers short-term investments with original maturities of three months or less when purchased to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within 2 to 4 days of the original sales transaction and are considered to be cash equivalents. H. Reclassifications Certain reclassifications have been made to the 2022 financial statements in order to conform to 2023 presentation. The Company reclassified $ 4.2 million and ($ 4.2 ) million from Property, Plant & Equipment and Prepaid Expenses, respectively, in the prior period. There were no changes to previously reported shareholders' equity, statement of cash flows or net income (loss) as a result of the reclassifications. I. Significant Accounting Policies There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended January 29, 2023. ‎ 11 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 2. LEASES Based on the criteria set forth in ASC Topic 842, Leases (“ASC 842”), the Company recognizes Right-of-use (ROU) assets and lease liabilities related to leases on the Company’s consolidated balance sheets. The Company determines if an arrangement is, or contains, a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments and the ROU asset is measured at the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease. The Company leases retail space under non-cancelable lease agreements, which expire on various dates through 2036. Substantially all of these arrangements are store leases. Store leases generally have initial lease terms ranging from five years to fifteen years with renewal options and rent escalation provisions. At the commencement of a lease, the Company includes only the initial lease term as the option to extend is not reasonably certain. The Company does not record leases with a lease term of 12 months or less on the Company’s consolidated balance sheets. When calculating the lease liability on a discounted basis, the Company applies its estimated discount. The Company bases this discount on a collateralized interest rate as well as publicly available data for instruments with similar characteristics. In addition to rent payments, leases for retail space contain payments for real estate taxes, insurance costs, common area maintenance, and utilities that are not fixed. The Company accounts for these costs as variable payments and does not include such costs as a lease component. The expense components of the Company’s leases reflected on the Company’s consolidated statement of operations were as follows: Consolidated Statement Three Months Ended of Operations April 30, 2023 May 1, 2022 (in thousands) Finance lease expenses Amortization of right-of-use ‎ assets Selling, general and ‎ administrative expenses $ 840 $ 840 Interest on lease liabilities Interest expense 438 466 Total finance lease expense $ 1,278 $ 1,306 Operating lease expense Selling, general and ‎ administrative expenses $ 5,050 $ 4,389 Amortization of build-to-suit ‎ leases capital contribution Selling, general and ‎ administrative expenses 321 321 Variable lease expense Selling, general and ‎ administrative expenses 2,914 1,972 Total lease expense $ 9,563 $ 7,988 ‎ 12 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Other information related to leases were as follows: Three Months Ended April 30, 2023 May 1, 2022 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Financing cash flows from finance leases $ 694 $ 664 Operating cash flows from finance leases $ 438 $ 466 Operating cash flows from operating leases $ 5,135 $ 4,439 Right-of-use assets obtained in exchange for lease liabilities: Operating leases 588 — Weighted-average remaining lease term (in years): Finance leases 11 12 Operating leases 8 8 Weighted-average discount rate: Finance leases 4.4 % 4.4 % Operating leases 4.1 % 4.1 % Future minimum lease payments under the non-cancellable leases are as follows as of April 30, 2023: Fiscal year Finance Operating (in thousands) 2023 (remainder of fiscal year) $ 3,419 $ 15,569 2024 4,736 20,313 2025 5,099 19,648 2026 3,993 18,795 2027 3,993 17,545 Thereafter 29,231 61,036 Total future minimum lease payments $ 50,471 $ 152,906 Less – Discount ( 10,898 ) ( 23,174 ) Lease liability $ 39,573 $ 129,732 3. DEBT AND CREDIT AGREEMENT Debt consists of the following: April 30, 2023 January 29, 2023 (in thousands) TRI Senior Secured Note $ 23,013 $ 23,181 TRI Note 3,500 3,500 $ 26,513 $ 26,681 Less: current maturities 787 768 TRI long-term debt $ 25,726 $ 25,913 TRI Holdings, LLC TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $ 26.7 million. The TRI Senior Secured Note is scheduled to mature on October 15, 2038 and requires installment payments with an interest rate of 4.95 %. See Note 6 “Variable Interest Entities” for further information. 13 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) TRI entered into a promissory note (“TRI Note”) with an original balance of $ 3.5 million. The TRI Note is scheduled to mature in November 2038 and requires annual interest payments at a rate of 3.05 %, with a final balloon payment due in November 2038 . While the above notes are consolidated in accordance with ASC Topic 810, Consolidation , the Company is not the guarantor nor obligor of these notes. Credit Agreement On May 14, 2021, the Company entered into a credit agreement (the “Credit Agreement”), which was treated as a modification for accounting purposes. The Credit Agreement originally matured on May 14, 2026 and provided for borrowings of up to $ 150.0 million that were available under a revolving senior credit facility, with a $ 5.0 million sublimit for issuance of standby letters of credit, as well as a $ 10.0 million sublimit for swing line loans. At the Company’s option, the interest rate applicable to the revolving senior credit facility was a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus the applicable rate of 1.25 % to 2.00 % determined based on the Company’s rent adjusted leverage ratio, or (ii) the base rate plus the applicable rate of 0.25 % to 1.00 % based on the Company’s rent adjusted leverage ratio. The Credit Agreement was secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the Credit Agreement. On July 8, 2022, the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”), which was treated as a modification for accounting purposes. The First Amendment amends the Credit Agreement in order to (i) increase the revolving commitment from $ 150 million to $ 200 million; (ii) extend the maturity date from May 14, 2026 to July 8, 2027; (iii) amend the pricing index to replace BSBY with the Term Secured Overnight Financing Rate; and (iv) to reduce the commitment fee in some instances. As of April 30, 2023 and for the three months then ended, the Company was in compliance with all financial and non-financial covenants contained within the Credit Agreement and the First Amendment. 4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following: April 30, 2023 January 29, 2023 (in thousands) Salaries and benefits $ 3,615 $ 2,404 Deferred revenue 8,525 10,249 Freight 4,315 7,193 Product returns 4,259 5,168 Unpaid purchases of property & equipment 1,250 6,271 Accrued advertising 2,386 2,020 Other 6,571 7,510 Total accrued expenses and other current liabilities $ 30,921 $ 40,815 5. FAIR VALUE ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., an exit price). The exit price is based on the amount that the holder of the asset or liability would receive or need to pay in an actual transaction (or in a hypothetical transaction if an actual transaction does not exist) at the measurement date. ASC 820 describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable, as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities. 14 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s assets and liabilities measured at fair value are categorized as Level 1 or Level 3 instruments. The fair value of the Company’s money market account is obtained from real-time quotes for transactions in active exchange markets involving identical assets (Level 1). The fair value of the Company’s available-for-sale security was valued based on a discounted cash flow method (Level 3), which incorporates the U.S. Treasury yield curve, credit information and an estimate of future cash flows. During fiscal 2022, certain changes in the inputs did impact the fair value of the available-for-sale security. The calculated fair value is based on estimates that are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The amortized cost and fair value of the Company’s money market account and available-for-sale security and the corresponding amount of gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows: April 30, 2023 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 1 security: Money market funds $ — $ — $ — $ — Level 3 security: Corporate trust $ 5,693 $ — $ ( 277 ) $ 5,416 January 29, 2023 Cost or Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value (in thousands) Level 1 security: Money market funds $ 25,031 $ — $ — $ 25,031 Level 3 security: Corporate trust $ 5,737 $ — $ ( 198 ) $ 5,539 The Company does not intend to sell the available-for-sale-security in the near term and does not believe that it will be required to sell the security. The Company reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment. No other-than-temporary impairment was recorded in the unaudited condensed consolidated statements of operations for the three months ended April 30, 2023 or May 1, 2022 . 15 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of April 30, 2023. Amortized Estimated Cost Fair Value (in thousands) Within one year $ 186 $ 167 After one year through five years 1,236 1,146 After five years through ten years 1,872 1,783 After ten years 2,399 2,320 Total $ 5,693 $ 5,416 The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows: April 30, 2023 January 29, 2023 Carrying Amount Fair Value Carrying Amount Fair Value (in thousands) TRI Long-term debt, including short-term portion $ 26,513 $ 25,577 $ 26,681 $ 26,172 The above long-term debt, including short-term portion is attributable to the consolidation of TRI in accordance with ASC Topic 810, Consolidation . The fair value was also based on a discounted cash flow method (Level 3) based on credit information and an estimate of future cash flows. 6. VARIABLE INTEREST ENTITY Based upon the criteria set forth in ASC 810, Consolidation , the Company consolidates variable interest entities (“VIEs”) in which it has a controlling financial interest and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and the right to receive benefits that are significant to the VIE. The Company has determined that it was the primary beneficiary of one variable interest entity (“VIE”) as of April 30, 2023 and January 29, 2023. The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company invested $ 6.3 million in a trust that loaned funds to TRI for the construction of the Company’s headquarters. TRI is a Wisconsin limited liability company whose primary purpose and activity is to own this real property. The Company considers itself the primary beneficiary for TRI as the Company has both the power to direct the activities that most significantly impact the entity’s economic performance and is expected to receive benefits that are significant to TRI. As the Company is the primary beneficiary, it consolidates TRI and the lease is eliminated in consolidation. The Company does not consolidate the trust as the Company is not the primary beneficiary. 16 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The condensed consolidated balance sheets include the following amounts as a result of the consolidation of TRI as of April 30, 2023 and January 29, 2023: April 30, 2023 January 29, 2023 (in thousands) Cash $ 26 $ 20 Property and equipment, net 23,405 23,612 Total assets $ 23,431 $ 23,632 Other current liabilities $ 136 $ 161 Current maturities of long-term debt 787 768 TRI Long-term debt 25,726 25,913 Noncontrolling interest in VIE ( 3,218 ) ( 3,210 ) Total liabilities and shareholders' equity $ 23,431 $ 23,632 7. EARNINGS PER SHARE Earnings per share is computed under the provisions of ASC 260 , Earnings Per Share . Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings per share is based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock and are considered only for dilutive earnings per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation is as follows: Three Months Ended April 30, 2023 May 1, 2022 (in thousands, except per share data) Numerator - net loss attributable to ‎ controlling interest $ ( 3,869 ) $ ( 1,294 ) Denominator - weighted average shares ‎ (Class A and Class B) Basic 32,865 32,714 Dilutive shares — — Diluted 32,865 32,714 Earnings per share (Class A and Class B) Basic $ ( 0.12 ) $ ( 0.04 ) Diluted $ ( 0.12 ) $ ( 0.04 ) The computation of diluted (loss) earnings per share excluded 0.3 million and 0.2 million shares of unvested restricted stock for the three months ended April 30, 2023 and May 1, 2022, respectively because their inclusion would be anti-dilutive due to a net loss. 8. STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plan in accordance with ASC 718, Stock Compensation , which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period of the award. Total stock compensation expense associated with restricted stock recognized by the Company was $ 1.0 million and $ 0.6 million for the three months ended April 30, 2023 and May 1, 2022, respectively. The Company’s total stock compensation expense is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations. 17 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) A summary of the activity in the Company’s unvested restricted stock during the three months ended April 30, 2023 is as follows: Weighted average fair value Shares per share Outstanding at January 29, 2023 618,772 $ 12.05 Granted 1,066,091 6.59 Vested ( 119,825 ) 12.45 Forfeited ( 8,556 ) 12.10 Outstanding at April 30, 2023 1,556,482 $ 8.54 At April 30, 2023, the Company had unrecognized compensation expense of $ 10.9 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.9 years. 9. PROPERTY AND EQUIPMENT Property and equipment consist of the following: April 30, 2023 January 29, 2023 (in thousands) Land and land improvements $ 4,486 $ 4,486 Leasehold improvements 50,793 49,450 Buildings 36,191 36,183 Vehicles 161 161 Warehouse equipment 25,962 25,951 Office equipment and furniture 53,763 53,713 Computer equipment 9,502 9,185 Software 36,878 36,260 217,736 215,389 Accumulated depreciation and amortization ( 125,431 ) ( 118,989 ) 92,305 96,400 Construction in progress 30,507 16,164 Property and equipment, net $ 122,812 $ 112,564 10. REVENUE The Company’s revenue primarily consists of the sale of apparel, footwear and hard goods. Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon shipment. Store revenue is recognized at the point of sale, net of returns, and excludes taxes. Shipping and processing revenue generated from customer orders are included as a component of net sales and shipping and processing expense, including handling expense, is included as a component of selling, general and administrative expenses. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included in accrued expenses. 18 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Sales disaggregated based upon sales channel is presented below. Three Months Ended April 30, 2023 May 1, 2022 (in thousands) Direct-to-consumer $ 79,502 $ 77,680 Stores 44,257 45,224 $ 123,759 $ 122,904 Contract Assets and Liabilities The Company’s contract assets primarily consist of the right of return for amounts of inventory to be returned that is expected to be resold and is recorded in Prepaid expenses and other current assets on the Company’s consolidated balance sheets. The Company’s contract liabilities primarily consist of gift card liabilities and are recorded in Accrued expenses and other current liabilities under deferred revenue (see Note 4 “Accrued Expenses and Other Current Liabilities”) on the Company’s consolidated balance sheets. Upon issuance of a gift card, a liability is established for its cash value. The gift card liability is relieved and revenues on gift cards are recorded at the time of redemption by the customer. Contract assets and liabilities on the Company’s consolidated balance sheets are presented in the following table: April 30, 2023 January 29, 2023 (in thousands) Contract assets $ 2,001 $ 2,373 Contract liabilities $ 8,525 $ 10,249 Revenue from gift cards is recognized when the gift card is redeemed by the customer for merchandise or as a gift card breakage, an estimate of gift cards which will not be redeemed. The Company does not record breakage revenue when escheat liability to the relevant jurisdictions exists. Gift card breakage is recorded within Net sales on the Company’s consolidated statement of operations. The following table provides the reconciliation of the contract liability related to gift cards for the nine months ended: April 30, 2023 May 1, 2022 (in thousands) Balance as of beginning of period $ 10,249 $ 10,791 Gift cards sold 1,878 1,909 Gift cards redeemed ( 3,553 ) ( 3,603 ) Gift card breakage ( 49 ) ( 43 ) Balance as of end of period $ 8,525 $ 9,054 11. INCOME TAXES The provision for income taxes for the interim period is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The effective tax rate related to controlling interest was 27 % and 25 % for the three months ended April 30, 2023 and May 1, 2022, respectively. The income from TRI was excluded from the calculation of the Company’s effective tax rate, as TRI is a limited liability company and not subject to income taxes. ‎ 19 Table of Contents DULUTH HOLDINGS INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 12. RECENT ACCOUNTING PRONOUNCEMENTS In June 2016, the FASB issued Accounting Standards Update No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as “CECL”. In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. On November 15, 2019, the FASB issued ASU No. 2019-10 “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815, and Leases (Topic 842),” (ASU 2019-10”), which provides a framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. ASU 2019-10 amends the effective dates for ASU 2016-13 for smaller reporting companies with fiscal years beginning after December 15, 2022, and interim periods within those years. The Company adopted ASU 2016-13 on January 30, 2023, the first day of the Company’s first quarter for the fiscal year ending January 28, 2024, the Company’s fiscal year 2023. The adoption of the standard did not have a material impact on the Company’s consolidated financial results. 20 Table of Contents