What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-12-01 compared with 2023-09-01 · 78 added, 82 removed, 156 unchanged (51% 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 July 30, 2023 and July 31, 2022, respectively.

The three months of fiscal 2023 and fiscal 2022 represent our 13-week periods ended October 29, 2023 and October 30, 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.

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 impact of inflation and measures to control inflation on our results of operations;

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

39 unchanged sentences

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

Since then, we have expanded our retail presence, and as of October 29, 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.

4 unchanged sentences

A summary of our financial results is as follows:

 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.

 Net sales decreased by 6.1% over the prior year third quarter to $138.2 million, and net sales in the first nine months of fiscal 2023 decreased by 2.5% over the first nine months of the prior year to $401.1 million;

 Net loss of $10.5 million in fiscal 2023 third quarter compared to the prior year third quarter net loss of $6.2 million, and net loss in the first nine months of fiscal 2023 of $16.4 million compared to net loss in the first nine months of fiscal 2022 of $5.2 million;

 Adjusted EBITDA decreased to ($1.6) million in fiscal 2023 third quarter compared to the prior year third quarter Adjusted EBITDA of $1.7 million, and adjusted EBITDA in the first nine months of fiscal 2023 of $12.3 million compared to $22.9 million over the first nine months of fiscal 2022.

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

GAAP financial measures.

5 unchanged sentences

Economic Conditions

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 United States economy has experienced continued high inflation throughout 2023.

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

8 unchanged sentences

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;

19 unchanged sentences

Three Months Ended

Six Months Ended

July 30, 2023

July 31, 2022

July 30, 2023

July 31, 2022

Nine Months Ended

October 29, 2023

October 30, 2022

October 29, 2023

October 30, 2022

(in thousands)

1 unchanged sentence

Selling, general and administrative expenses

Operating (loss) income

Operating loss

Interest expense

Other income, net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

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, net

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Loss before income taxes

Income tax benefit

Net loss attributable to noncontrolling interest

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.

Net loss attributable to controlling interest

Three Months Ended October 29, 2023, Compared to Three Months Ended October 30, 2022

Net sales decreased $8.9 million, or 6.1%, to $138.2 million in the three months ended October 29, 2023 compared to $147.1 million in the three months ended October 30, 2022 primarily due to declines in store traffic, partially offset by improved online conversion rates compared to the prior year.

Store market net sales decreased $7.2 million, or 6.9%, to $96.6 million in the three months ended October 29, 2023 compared to $103.8 million in the three months ended October 30, 2022.

Non-store market net sales decreased by $1.5 million, or 3.5%, to $40.8 million in the three months ended October 29, 2023 compared to $42.3 million in the three months ended October 30, 2022.

Gross profit decreased $7.5 million, or 9.8%, to $69.4 million in the three months ended October 29, 2023 compared to $76.9 million in the three months ended October 30, 2022.

As a percentage of net sales, gross margin decreased to 50.2% of net sales in the three months ended October 29, 2023, compared to 52.3% of net sales in the three months ended October 30, 2022.

The decrease in gross margin was primarily driven by a lower mix of full price sales as compared to promotional sales.

Selling, General and Administrative Expenses

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 $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 decreased $2.5 million, or 2.9%, to $81.8 million in the three months ended October 29, 2023 compared to $84.3 million in the three months ended October 30, 2022.

Selling, general and administrative expenses as a percentage of net sales increased to 59.2% in the three months ended October 29, 2023, compared to 57.3% in the three months ended October 30, 2022.

The decrease in selling, general and administrative expense was due to a slight decrease in advertising spending and efficiencies across the fulfillment center network, partially offset by higher personnel costs and higher depreciation from ongoing strategic investments.

Income tax benefit was $3.1 million in the three months ended October 29, 2023, compared to income tax benefit of $2.1 million in the three months ended October 30, 2022.

The effective tax rate related to controlling interest for the three months ended October 29, 2023 and October 30, 2022 was 23% and 25%, respectively.

Net Loss Attributable to Controlling Interest

Net loss attributable to controlling interest was $10.5 million, in the three months ended October 29, 2023 compared to net loss of $6.2 million in the three months ended October 30, 2022, due to the factors discussed above.

Nine Months Ended October 29, 2023 Compared to Nine Months Ended October 30, 2022

Net sales decreased $10.4 million, or 2.5%, to $401.1 million in the nine months ended October 29, 2023 compared to $411.5 million in the nine months ended October 30, 2022.

Store market net sales decreased $9.7 million, or 3.4%, to $279.6 million in the nine months ended October 29, 2023 compared to $289.3 million in the nine months ended October 30, 2022.

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

Non-store market net sales decreased slightly by $0.1 million, or 0.1%, to $118.8 million in the nine months ended October 29, 2023 compared to $118.9 million in the nine months ended October 30, 2022.

Gross profit decreased $13.1 million, or 5.9%, to $206.5 million in the nine months ended October 29, 2023 compared to $219.6 million in the nine months ended October 30, 2022.

As a percentage of net sales, gross margin decreased to 51.5% of net sales in the nine months ended October 29, 2023, compared to 53.4% of net sales in the nine months ended October 30, 2022.

The decrease in gross margin was primarily driven by a lower mix of full price sales as compared to promotional sales.

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 (loss) income to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S.

Selling, general and administrative expenses increased $0.9 million, or 0.4%, to $224.9 million in the nine months ended October 29, 2023 compared to $224.0 million in the nine months ended October 30, 2022.

Selling, general and administrative expenses as a percentage of net sales increased to 56.1% in the nine months ended October 29, 2023, compared to 54.4% in the nine months ended October 30, 2022.

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

Income tax benefit was $4.8 million in the nine months ended October 29, 2023, compared to income tax benefit of $1.8 million in the nine months ended October 30, 2022.

The effective tax rate related to controlling interest was 23% for the nine months ended October 29, 2023 compared to 26% for the nine months ended October 30, 2022.

Net Loss Attributable to Controlling Interest

Net loss attributable to controlling interest was $16.3 million in the nine months ended October 29, 2023 compared to net loss of $5.1 million in the nine months ended October 30, 2022, due to the factors discussed above.

Reconciliation of Net Loss to EBITDA and EBITDA to Adjusted EBITDA

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

GAAP financial measures, for the periods indicated below.

1 unchanged sentence

Three Months Ended

Six Months Ended

July 30, 2023

July 31, 2022

July 30, 2023

July 31, 2022

Nine Months Ended

October 29, 2023

October 30, 2022

October 29, 2023

October 30, 2022

(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 $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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $3.3 million to ($1.6) million in the three months ended October 29, 2023 compared to $1.7 million in the three months ended October 30, 2022.

As a percentage of net sales, Adjusted EBITDA decreased to (1.1%) of net sales in the three months ended October 29, 2023 compared to 1.2% of net sales in the three months ended October 30, 2022.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $10.6 million to $12.3 million in the nine months ended October 29, 2023 compared to $22.9 million in the nine months ended October 30, 2022.

As a percentage of net sales, Adjusted EBITDA decreased to 3.1% of net sales in the nine months ended October 29, 2023 compared to 5.6% of net sales in the nine months ended October 30, 2022.

Liquidity and Capital Resources

Our business relies on cash from operating activities and a credit facility as our primary sources of liquidity.

Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, capital expenditures associated with infrastructure and information technology.

Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, and capital expenditures associated with infrastructure and information technology.

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

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

At October 29, 2023, our net working capital was $62.3 million, including $8.2 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.

4 unchanged sentences

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

Six Months Ended

July 30, 2023

July 31, 2022

Nine Months Ended

October 29, 2023

October 30, 2022

(in thousands)

1 unchanged sentence

Net cash used in investing activities

Net cash used in financing activities

Net cash provided by financing activities

Decrease in cash and cash equivalents

1 unchanged sentence

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 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.

For the nine months ended October 29, 2023, net cash used in operating activities was $31.0 million, which primarily consisted of cash used in operating assets and liabilities of $36.6 million and a $16.4 million net loss for the nine months ended October 29, 2023 partially offset by depreciation of $23.4 million.

The cash used in operating assets and liabilities of $36.6 million was primarily due to a $19.0 million increase in inventory and $10.2 million decrease in trade accounts payable.

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 an $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.

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 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 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.

For the nine months ended October 29, 2023 and October 30, 2022, net cash used in investing activities was $39.8 million and $24.1 million, respectively, and was primarily driven by new investments in the fulfillment network, most notably the new automated Southeast fulfillment center, coupled with foundational investments in information technology.

Net Cash Provided by Financing Activities

Financing activities consist primarily of borrowings and payments related to our revolving line of credit as well as payments on finance lease obligations.

For the nine months ended October 29, 2023, net cash provided by financing activities was $33.5 million, primarily consisting of $36.0 million in net borrowings under our revolving line of credit.

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.

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