What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-09-01 compared with 2023-06-02 · 101 added, 55 removed, 137 unchanged (53% 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 2023 and fiscal 2022 represent our 13-week periods ended April 30, 2023 and May 1, 2022, respectively.

The three months of fiscal 2023 and fiscal 2022 represent our 13-week periods ended July 30, 2023 and July 31, 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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For example, all statements we make relating to our estimated and projected earnings, revenue, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements.

All forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 2022 Form 10-K, and other SEC filings, which factors are incorporated by reference herein.

All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 2022 Form 10-K, and other SEC filings, which factors are incorporated by reference herein.

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;

our ability to maintain and enhance a strong brand image;

the prolonged effects of economic uncertainty on store traffic and disruptions to our distribution network, supply chains and operations;

our ability to maintain and enhance a strong brand and sub-brand image;

adapting to declines in consumer confidence, inflation and decreases in consumer spending;

effectively adapting to new challenges associated with our expansion into new geographic markets;

generating adequate cash from our existing stores to support our growth;

our ability to meet customer delivery time expectations;

natural disasters, unusually adverse weather conditions, boycotts, prolonged public health crises, epidemics or pandemics and unanticipated events;

generating adequate cash from our existing stores and direct sales to support our growth;

the impact of changes in corporate tax regulations and sales tax;

identifying and responding to new and changing customer preferences;

the success of the locations in which our stores are located;

effectively relying on sources for merchandise located in foreign markets;

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the inability to maintain the performance of a maturing store portfolio;

the impact of changes in corporate tax regulations;

identifying and responding to new and changing customer preferences;

the success of the locations in which our stores are located;

our ability to attract and retain customers in the various retail venues and locations in which our stores are located;

our inability to deploy marketing tactics to strengthen brand awareness and attract new customers in a cost effective manner;

our ability to successfully open new stores;

competing effectively in an environment of intense competition;

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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;

the potential for further increases in price and availability of raw materials;

our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices;

the susceptibility of the price and availability of our merchandise to international trade conditions;

failure of our vendors and their manufacturing sources to use acceptable labor or other practices;

our dependence upon key executive management or our inability to hire or retain the talent required for our business;

increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment;

failure of our information technology systems to support our current and growing business, before and after our planned upgrades;

disruptions in our supply chain and fulfillment centers;

our inability to protect our trademarks or other intellectual property rights;

infringement on the intellectual property of third parties;

acts of war, terrorism or civil unrest;

the impact of governmental laws and regulations and the outcomes of legal proceedings;

changes in U.S.

laws affecting the importation and taxation of goods, including imposition of unilateral tariffs on imported goods;

our ability to secure the personal and/or financial information of our customers and comply with the security standards for the credit card industry;

and other factors that may be disclosed in our SEC filings or otherwise.

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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 April 30, 2023, we operated 62 retail stores and three outlet stores.

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

 Net sales decreased by 1.7% over the prior year second quarter to $139.1 million, and net sales in the first six months of fiscal 2023 decreased by 0.6% over the first six months of the prior year to $262.9 million;

 Net loss of $2.0 million in fiscal 2023 second quarter compared to the prior year second quarter net income of $2.3 million, and net loss in the first six months of fiscal 2023 of $5.9 million compared to net income in the first six months of fiscal 2022 of $1.0 million;

 Adjusted EBITDA decreased to $8.6 million in fiscal 2023 second quarter compared to the prior year second quarter Adjusted EBITDA of $13.2 million, and adjusted EBITDA in the first six months of fiscal 2023 of $13.8 million compared to $21.1 million over the first six months of fiscal 2022.

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

GAAP financial measures.

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Economic Conditions

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 United States economy has experienced continued high inflation during the first half 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.

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inventory shrinkage;

inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves;

inventory adjustments

due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves;

inbound freight;

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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.

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.

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.

Adjusted EBITDA

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Three Months Ended

April 30, 2023

Six Months Ended

July 30, 2023

July 31, 2022

July 30, 2023

July 31, 2022

(in thousands)

1 unchanged sentence

Selling, general and administrative expenses

Operating loss

Operating (loss) income

Interest expense

Other income, net

Loss before income taxes

Income tax benefit

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net loss attributable to noncontrolling interest

Net loss attributable to controlling interest

Net (loss) income attributable to controlling interest

Percentage of Net sales:

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Selling, general and administrative expenses

Operating loss

Operating (loss) income

Interest expense

Other income, net

Loss before income taxes

Income tax benefit

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net loss attributable to noncontrolling interest

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.

Net (loss) income attributable to controlling interest

Three Months Ended July 30, 2023 , Compared to Three Months Ended July 31, 2022

Net sales decreased $2.4 million, or 1.7%, to $139.1 million in the three months ended July 30, 2023 compared to $141.5 million in the three months ended July 31, 2022.

Store market net sales decreased $2.8 million, or 2.8%, to $97.6 million in the three months ended July 30, 2023 compared to $100.4 million in the three months ended July 31, 2022.

Non-store market net sales increased by $0.8 million, or 1.9%, to $40.6 million in the three months ended July 30, 2023 compared to $39.9 million in the three months ended July 31, 2022.

Gross profit decreased $4.1 million, or 5.5%, to $71.5 million in the three months ended July 30, 2023 compared to $75.6 million in the three months ended July 31, 2022.

As a percentage of net sales, gross margin decreased to 51.4% of net sales in the three months ended July 30, 2023, compared to 53.4% of net sales in the three months ended July 31, 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 $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.

Selling, general and administrative expenses increased $1.2 million, or 1.7%, to $72.9 million in the three months ended July 30, 2023 compared to $71.7 million in the three months ended July 31, 2022.

Selling, general and administrative expenses as a percentage of net sales increased to 52.4% in the three months ended July 30, 2023, compared to 50.7% in the three months ended July 31, 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 investments in new headcount to drive ongoing strategic initiatives.

Income tax benefit was $0.2 million in the three months ended July 30, 2023, compared to income tax expense of $0.7 million in the three months ended July 31, 2022.

The effective tax rate related to controlling interest, which was not meaningful for the three months ended July 30, 2023, was impacted by discrete items related to stock compensation activity.

The effective tax rate was 23% for the three months ended July 31, 2022.

Net (Loss) Income Attributable to Controlling Interest

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.

Net loss attributable to controlling interest was $2.0 million, in the three months ended July 30, 2023 compared to net income of $2.4 million in the three months ended July 31, 2022, due to the factors discussed above.

Six Months Ended July 30, 2023 Compared to Six Months Ended July 31, 2022

Net sales decreased $1.5 million, or 0.6%, to $262.9 million in the six months ended July 30, 2023 compared to $264.4 million in the six months ended July 31, 2022.

Store market net sales decreased $2.5 million, or 1.4%, to $183.0 million in the six months ended July 30, 2023 compared to $185.5 million in the six months ended July 31, 2022.

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

Non-store market net sales increased by $1.4 million, or 1.8%, to $78.0 million in the six months ended July 30, 2023 compared to $76.6 million in the six months ended July 31, 2022.

Gross profit decreased $5.6 million, or 3.9%, to $137.1 million in the six months ended July 30, 2023 compared to $142.7 million in the six months ended July 31, 2022.

As a percentage of net sales, gross margin decreased to 52.2% of net sales in the six months ended July 30, 2023, compared to 54.0% of net sales in the six months ended July 31, 2022.

The decrease in gross margin was primarily driven by a lower mix of full price sales, coupled with deeper discounting.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $3.4 million, or 2.4%, to $143.1 million in the six months ended July 30, 2023 compared to $139.7 million in the six months ended July 31, 2022.

Selling, general and administrative expenses as a percentage of net sales increased to 54.4% in the six months ended July 30, 2023, compared to 52.8% in the six months ended July 31, 2022.

The increase in selling, general and administrative expense was partially due to higher occupancy costs from the new automated Southeast fulfillment center, as well as investments in new headcount.

Income tax benefit was $1.7 million in the six months ended July 30, 2023, compared to income tax expense of $0.3 million in the six months ended July 31, 2022.

The effective tax rate related to controlling interest was 22% for the six months ended July 30, 2023 compared to 21% for the six months ended July 31, 2022.

Net (Loss) Income Attributable to Controlling Interest

Net loss attributable to controlling interest was $5.9 million in the six months ended July 30, 2023 compared to net income of $1.1 million in the six months ended July 31, 2022, 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.

The following table presents reconciliations of net (loss) 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

April 30, 2023

Six Months Ended

July 30, 2023

July 31, 2022

July 30, 2023

July 31, 2022

(in thousands)

Net (loss) income

Depreciation and amortization

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Interest expense

Income tax benefit

Income tax (benefit) expense

Stock based compensation

Adjusted EBITDA

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA 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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $4.6 million to $8.6 million in the three months ended July 30, 2023 compared to $13.2 million in the three months ended July 31, 2022.

As a percentage of net sales, Adjusted EBITDA decreased to 6.2% of net sales in the three months ended July 30, 2023 compared to 9.4% of net sales in the three months ended July 31, 2022.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $7.3 million to $13.8 million in the six months ended July 30, 2023 compared to $21.1 million in the six months ended July 31, 2022.

As a percentage of net sales, Adjusted EBITDA decreased to 5.3% of net sales in the six months ended July 30, 2023 compared to 8.0% of net sales in the six months ended July 31, 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 April 30, 2023, our net working capital was $88.7 million, including $9.2 million of cash and cash equivalents.

At July 30, 2023, our net working capital was $84.6 million, including $11.1 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.

Three Months Ended

April 30, 2023

Six Months Ended

July 30, 2023

July 31, 2022

(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 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.

For the six months ended July 30, 2023, net cash used in operating activities was $1.2 million, which primarily consisted of cash used in operating assets and liabilities of $11.0 million and a net loss for the six months ended July 30, 2023 offset by depreciation of $14.9 million.

The cash used in operating assets and liabilities of $11.0 million was primarily due to a $7.3 million decrease in accrued expenses and $2.2 million increase in inventory.

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.

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 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.

For the six months ended July 30, 2023 and July 31, 2022, net cash used in investing activities was $31.4 million and $18.7 million, respectively, and was primarily driven by new investments in the fulfillment 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 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.

For the six months ended July 30, 2023 an July 31, 2022, net cash used in financing activities was $1.8 million, 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