What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-22 compared with 2023-03-17 · 58 added, 64 removed, 189 unchanged (39% of the section changed)

6 unchanged sentences

For a discussion of fiscal 2022 results compared to fiscal 2021, refer to the Company’s Annual Report on Form 10-K for the year ended January 29, 2023.

We are a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold primarily through our own omnichannel platform.

We are a lifestyle brand of men’s and women’s workwear, casual wear, outdoor apparel and accessories sold primarily through our own omnichannel platform.

We offer products nationwide through our website and catalog.

1 unchanged sentence

Since then, we have expanded our retail presence, and as of January 28, 2024, 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.

We offer a comprehensive line of innovative, durable and functional products, such as our Longtail T ® shirts, Buck Naked ® underwear, Fire Hose ® work pants and No-Yank ® Tank, which reflect our position as the Modern, Self-Reliant American Lifestyle brand.

Our brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic for everyday and on-the-job use.

4 unchanged sentences

 Net sales in fiscal 2023 decreased by 1.0% over the prior year to $646.7 million;

 Net income in fiscal 2022 was $2.2 million compared to prior year net income of $29.6 million;

 Net loss in fiscal 2023 was ($9.4) million compared to prior year net income of $2.2 million;

 Adjusted EBITDA in fiscal 2023 decreased 23.2% over the prior year to $33.4 million.

See “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.

See “Reconciliation of Net (Loss) Income 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.

6 unchanged sentences

The United States economy has experienced high inflation during 2022 and 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.

The ultimate impact of higher inflationary periods and efforts to control inflation 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.

12 unchanged sentences

Depreciation and amortization are excluded from gross profit.

We expect gross profit to increase to the extent that we successfully grow our net sales.

Shipping and handling revenue is also reflected in our gross profit and gross profit margin.

10 unchanged sentences

We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business.

We define Adjusted EBITDA as consolidated net income before depreciation and amortization, interest expense and provision for income taxes adjusted for the impact of certain items, including non-cash and other items we do not consider representative of our ongoing operating performance.

We define Adjusted EBITDA as consolidated net (loss) income before depreciation and amortization, interest expense and provision for income taxes adjusted for the impact of certain items, including non-cash and other items we do not consider representative of our ongoing operating performance.

We believe Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other items.

13 unchanged sentences

Selling, general and administrative expenses

Operating income

Operating (loss) income

Interest expense

Other income, net

Income before income taxes

Income tax expense

Net loss attributable to noncontrolling interest

Net income attributable to controlling interest

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net income (loss) attributable to noncontrolling interest

Net (loss) income attributable to controlling interest

Percentage of Net sales:

1 unchanged sentence

Selling, general and administrative expenses

Operating income

Operating (loss) income

Interest expense

Other income, net

Income before income taxes

Income tax expense

Net loss attributable to noncontrolling interest

Net income attributable to controlling interest

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net income (loss) attributable to noncontrolling interest

Net (loss) income attributable to controlling interest

Fiscal 2023 Compared to Fiscal 2022

1 unchanged sentence

Store market net sales decreased $11.4 million, or 2.5%, to $445.1 million in fiscal 2023 compared to $456.5 million in fiscal 2022.

Net sales in non-store markets decreased $14.6 million, or 7.1%, to $191.6 million in fiscal 2022 compared to $206.2 million in fiscal 2021.

Net sales in non-store markets increased $4.4 million, or 2.3%, to $196.0 million in fiscal 2023 compared to $191.6 million in fiscal 2022.

Gross profit decreased $18.5 million, or 5.4%, to $325.0 million in fiscal 2023 compared to $343.4 million in fiscal 2022.

As a percentage of net sales, gross margin decreased to 50.3% of net sales in fiscal 2023 compared to 52.6% of net sales in fiscal 2022.

The decrease in gross margin rate was primarily due to a lower mix of full price sales, coupled with deeper discounts as a response to the heavily promotional industry environment, particularly during the back half of fiscal 2022.

The decrease in gross margin rate was primarily due to a lower mix of full price sales as customers purchasing activity increased during periods of promotions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $4.0 million, or 1.2%, to $337.2 million in fiscal 2022 compared to $333.2 million in fiscal 2021.

Selling, general and administrative expenses as a percentage of net sales increased in fiscal 2022 to 51.6% of net sales, compared to 47.7% of net sales for fiscal 2021.

The negative leverage was primarily due to lower net sales in the current period compared to the prior period.

The increase in selling, general and administrative expense was primarily caused by increased depreciation expense from continued investments in technology and throughout our fulfillment network.

Selling, general and administrative expenses decreased $3.4 million, or 1.0%, to $333.8 million in fiscal 2023 compared to $337.2 million in fiscal 2022.

Selling, general and administrative expenses as a percentage of net sales was 51.6% in fiscal 2023 and fiscal 2022.

Interest Expense

Interest expense decreased $1.0 million to $3.7 million in fiscal 2022 compared to $4.7 million in fiscal 2021.

The decrease in interest expense was primarily attributable to the larger amount of long-term debt outstanding in fiscal 2021 compared to fiscal 2022.

Income tax expense was $0.7 million in fiscal 2022 compared to $9.9 million in fiscal 2021.

Interest expense increased $0.5 million to $4.2 million in fiscal 2023 compared to $3.7 million in fiscal 2022.

The increase in interest expense was primarily attributable to increased interest rates on outstanding debt in fiscal 2023 compared to fiscal 2022.

Income tax benefit was $2.7 million in fiscal 2023 compared to income tax expense of $0.7 million in fiscal 2022.

Our effective tax rate related to controlling interest was 22.4% in fiscal 2023 compared to 23.5% in fiscal 2022.

Net Income Attributable to Controlling Interest

Net income attributable to controlling interest was $2.3 million in fiscal 2022 compared to $29.7 million in fiscal 2021, due to the factors discussed above.

Net (Loss) Income Attributable to Controlling Interest

Net loss attributable to controlling interest was ($9.4) million in fiscal 2023 compared to net income attributable to controlling interest of $2.3 million in fiscal 2022, due to the factors discussed above.

Non-GAAP Financial Measures

See the above section titled “How We Assess the Performance of Our Business,” for our definition of Adjusted EBITDA and Free Cash Flow.

Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA

The following table represents reconciliations of net income to EBITDA and EBITDA to Adjusted EBITDA for the periods indicated below.

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

The following table represents reconciliations of net (loss) income to EBITDA and EBITDA to Adjusted EBITDA for the periods indicated below.

Fiscal Year Ended

2 unchanged sentences

(in thousands)

Net (loss) income

Depreciation and amortization

2 unchanged sentences

Interest expense

Income tax expense

Income tax (benefit) expense

EBITDA (non-GAAP)

10 unchanged sentences

(in thousands)

Net cash (used in) provided by operating activities

Net cash provided by (used in) operating activities

Purchases of property and equipment

Free Cash Flow (non-GAAP)

Free cash flow decreased $110.1 million to ($28.5) million in fiscal 2022 compared to $81.6 million in fiscal 2021.

The decrease was primarily driven by lower net income, higher inventory levels and higher purchases of property and equipment.

Free cash flow increased $18.0 million to ($10.4) million in fiscal 2023 compared to ($28.5) million in fiscal 2022.

The increase was primarily driven by lower inventory levels, partially offset by higher purchases of property and equipment.

Liquidity and Capital Resources

2 unchanged sentences

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

At January 29, 2023 our working capital was $107.9 million, which includes cash and cash equivalents of $45.5 million.

As of January 28, 2024 our working capital was $78.5 million, which includes cash and cash equivalents of $32.2 million.

We spent $53.2 million in fiscal 2023 on capital expenditures, inclusive of investments in software hosting implementation costs, which are included in Prepaid expenses & other current assets on the Company’s Consolidated Balance Sheets.

We expect to spend approximately $55.0 million in fiscal 2023 on capital expenditures, of which approximately $42.1 million will be related to continued logistics optimization from introducing the new automated fulfillment center in Adairsville, Georgia.

We expect to spend approximately $25.2 million in fiscal 2024 on capital expenditures.

Due to the seasonality of our business, a significant amount of cash from operating activities is generated during the fourth quarter of our fiscal year.

During the first three quarters of our fiscal year, we typically are net users of cash in our operating activities as we acquire inventory in anticipation of our peak selling season, which occurs in the fourth quarter of our fiscal year.

We also use cash in our investing activities for capital expenditures throughout all four quarters of our fiscal year.

6 unchanged sentences

(in thousands)

Net cash (used in) provided by operating activities

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash used in financing activities

(Decrease) Increase in cash and cash equivalents

Net Cash Provided by Operating Activities

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

Decrease in cash and cash equivalents

Net Cash Provided by (Used in) Operating Activities

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

For fiscal 2023, net cash provided by operating activities was $38.7 million, which primarily consisted of non-cash depreciation and amortization of $32.2 million, amortization of stock-based compensation of $4.2 million and cash provided by operating assets and liabilities of $13.7 million, which was partially offset by net loss of ($9.4) million.

The cash provided by operating assets and liabilities of $13.7 million primarily consisted of a $29.2 million decrease in inventory partially offset by a $5.4 million and $5.1 million decrease in trade accounts payable and accrued expenses, respectively.

For fiscal 2022, net cash used in operating activities was $1.4 million, which primarily consisted of net income of $2.2 million, non-cash depreciation and amortization of $30.8 million, amortization of stock-based compensation of $2.7 million, which was offset by cash used in operating assets and liabilities of $37.2 million.

The cash used in operating assets and liabilities of $37.2 million primarily consisted of a $32.3 million increase in inventory, primarily due to the pull forward of spring receipts, and a $11.8 million decrease in accrued expenses, partially offset by a $12.7 million increase in trade accounts payable.

For fiscal 2021, net cash provided by operating activities was $92.0 million, which primarily consisted of net income of $29.6 million, non-cash depreciation and amortization of $29.2 million, amortization of stock-based compensation of $2.2 million and cash provided by operating assets and liabilities of $36.1 million.

The cash provided by operating assets and liabilities of $36.1 million primarily consisted of a $26.4 million decrease in inventory, a $10.5 million increase in trade accounts payable, and a $9.9 million increase in accrued expenses, partially offset by a $4.7 million increase in hosting software implementation costs, a $3.2 million increase in receivables, and a decrease of $2.4 million in prepaid expenses.

Net Cash Used in Investing Activities

Investing activities consist primarily of capital expenditures related to a new fulfillment center and information technology.

For fiscal 2022, net cash used in investing activities was $22.6 million, primarily driven by purchases of property and equipment of $22.8 million, primarily related to the Adairsville fulfillment center.

For fiscal 2021, net cash used in investing activities was $10.2 million, primarily driven by purchases of property and equipment of $10.4 million for the Salt Lake City fulfillment center and one new retail store, as well as investments in information technology.

Net Cash (Used in) Provided by Financing Activities

For fiscal 2023, net cash used in investing activities was $48.7 million, driven by purchases of property and equipment of $49.1 million, primarily related to the Adairsville, Georgia fulfillment center.

For fiscal 2022, net cash used in investing activities was $26.9 million, driven by purchases of property and equipment of $27.1 million, primarily related to the Adairsville, Georgia fulfillment center.

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 fiscal 2022, net cash used in financing activities was $3.2 million, primarily consisting of payments on finance lease obligations.

For fiscal 2021, net cash used in financing activities was $51.4 million, primarily consisting of the full paydown of Duluth’s bank debt.

For fiscal 2023 and fiscal 2022, net cash used in financing activities was $3.3 million and $3.2 million, respectively, primarily consisting of payments on finance lease obligations.

Credit Agreement

On May 17, 2018, the Company entered into a credit agreement (the “Credit Agreement”) which provided for borrowing availability of up to $80.0 million in revolving credit and associated swing line (the “Revolver”) and borrowing availability of up to $50.0 million in a delayed draw term loan (“DDTL”), for a total credit facility of $130.0 million.

On April 30, 2020, the Credit Agreement was amended to include an incremental DDTL of $20.5 million (the “Incremental DDTL”) that was available to draw upon before March 31, 2021, and matured on April 29, 2021, for a total credit facility of $150.5 million.

The loan covenants were also amended to allow for greater flexibility during the Company’s peak borrowing periods in fiscal 2020.

The interest rate applicable to the Revolver or DDTL was a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR (with a 1% floor) for such interest period plus a margin of 225 to 300 basis points, based upon the Company’s rent adjusted leverage ratio.

The interest rate applicable to the Incremental DDTL was also a fixed rate over the aforementioned interest periods equal to LIBOR (with a 1% floor) for such interest period plus a margin of 275 to 350 basis points.

On May 14, 2021, the Company terminated the Credit Agreement, and entered into a new credit agreement (the “New Credit Agreement”), which was treated as a modification for accounting purposes.

The New 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.

On May 14, 2021, the Company terminated its prior credit agreement, and 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 New Credit Agreement is 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 New Credit Agreement.

On July 8, 2022, the Company entered into the First Amendment to the New Credit Agreement (the “First Amendment”), which was treated as a modification for accounting purposes.

The First Amendment amends the New Credit Agreement in order to (i) increase the revolving commitment from $150.0 million to $200.0 million;

The Credit Agreement is 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 $150.0 million to $200.0 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.

and (iv) reduce the commitment fee in some instances.

As of and for the fiscal year ended January 28, 2024, we were in compliance with all financial and non-financial covenants.

37 unchanged sentences

Amounts refunded to customers are generally made by issuing the same payment tender as used in the original purchase.

Merchandise exchanges of the same product and price are not considered merchandise returns and are therefore excluded when calculating the sales returns reserve.

Merchandise exchanges of

the same product and price are not considered merchandise returns and are therefore excluded when calculating the sales returns reserve.

Our inventories are composed of finished goods and are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method.

2 unchanged sentences

We adjust our inventory for obsolescence based on historical trends, aging reports, specific identification, current retail prices and our estimates of future retail sales prices.

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, particularly in second fiscal quarter results.

Due to these factors, our obsolescence and shrinkage reserves contain uncertainties.

3 unchanged sentences

We have not made any material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves during the periods presented, nor have we recorded significant adjustments related to the physical inventory process.

The reserve for inventory shrinkage is adjusted to reflect the trend of historical physical inventory count results.

We account for income taxes and the related accounts using the asset and liability method in accordance with ASC Topic 740, Income Taxes (“ASC 740”).

10 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-K

Item 7. Management’s Discussion and Analysis