What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-31 compared with 2023-12-01 · 54 added, 73 removed, 161 unchanged (44% of the section changed)

3 unchanged sentences

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 2024 is a 53-week period and ends on February 2, 2025.

Fiscal 2023 was a 52-week period and ended on January 28, 2024.

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

The three months of fiscal 2024 and fiscal 2023 represent our 13-week periods ended April 28, 2024 and April 30, 2023, 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 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.

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 2023 Fo rm 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 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;

the prolonged effects of economic uncertainties on store and website 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;

disruptions in our e-commerce platform;

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

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inability to timely and effectively obtain shipments of products from our suppliers and deliver merchandise to our customers;

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

the inability to maintain the performance of maturing store portfolio;

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

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our ability to adapt to significant changes in sales due to the seasonality of our business;

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;

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;

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

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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;

our ability to secure the personal and/or financial information of our customers and employees;

our ability to comply with the security standards for the credit card industry;

our failure to maintain adequate internal controls over our financial and management systems;

acquisition, disposition, and development risks;

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 October 29, 2023, we operated 62 retail stores and three outlet stores.

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

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A summary of our financial results is as follows:

 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.

 Net sales decreased by 5.7% over the prior year first quarter to $116.7 million;

 Net loss of $7.9 million in fiscal 2024 first quarter compared to the prior year first quarter net loss of $3.9 million;

 Adjusted EBITDA decreased to $1.8 million in fiscal 2024 first quarter compared to the prior year first quarter Adjusted EBITDA of $5.3 million.

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.

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Economic Conditions

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.

The macroeconomic environment is experiencing inflation, recessionary concerns and general uncertainty regarding the future economic environment and therefore we cannot predict the ultimate impact of these economic conditions on our operational and financial performance.

Given the uncertainty, we cannot reasonably estimate store traffic patterns and the prolonged impact on overall consumer demand.

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and freight from our distribution centers to our retail stores.

The primary drivers of the costs of individual goods are raw material costs.

The primary drivers of the costs of individual goods are

raw material costs.

Depreciation and amortization are excluded from gross profit.

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Selling, general and administrative expenses include all operating costs not included in cost of goods sold.

These expenses include all payroll and payroll-related expenses and occupancy expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization.

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.

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

We also use Adjusted EBITDA as the key financial metric in determining bonus compensation for our employees.

We also use Adjusted EBITDA as one of the key financial metric in determining bonus compensation for our employees.

This non-GAAP measure may not be comparable to similarly titled measures used by other companies.

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Three Months Ended

Nine Months Ended

October 29, 2023

October 30, 2022

October 29, 2023

October 30, 2022

April 28, 2024

April 30, 2023

(in thousands)

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Income tax benefit

Net loss attributable to noncontrolling interest

Net income (loss) attributable to noncontrolling interest

Net loss attributable to controlling interest

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Income tax benefit

Net loss attributable to noncontrolling interest

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 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 income (loss) attributable to noncontrolling interest

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.

Three Months Ended April 28, 2024, Compared to Three Months Ended April 30, 2023

Net sales decreased $7.1 million, or 5.7%, to $116.7 million in the three months ended April 28, 2024 compared to $123.8 million in the three months ended April 30, 2023 .

Net sales was impacted by challenging traffic and a lower in-stock position at the beginning of the quarter.

Store market net sales decreased $7.3 million, or 8.6%, to $78.1 million in the three months ended April 28, 2024 compared to $85.4 million in the three months ended April 30, 2023 .

Non-store market net sales decreased by $3.8 million, or 10.2%, to $33.6 million in the three months ended April 28, 2024 compared to $37.4 million in the three months ended April 30, 2023 .

Gross profit decreased $4.0 million, or 6.1%, to $61.6 million in the three months ended April 28, 2024 compared to $65.7 million in the three months ended April 30, 2023 .

As a percentage of net sales, gross margin decreased slightly to 52.8% of net sales in the three months ended April 28, 2024, compared to 53.0% of net sales in the three months ended April 30, 2023 .

While new product cost came in better than expected, we are seeing a delay in impact to gross margin rate as we sell through older, higher cost inventory.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses increased $0.4 million, or 0.6%, to $70.6 million in the three months ended April 28, 2024 compared to $70.2 million in the three months ended April 30, 2023 .

Selling, general and administrative expenses as a percentage of net sales increased to 60.5% in the three months ended April 28, 2024, compared to 56.7% in the three months ended April 30, 2023 .

The increase in selling, general and administrative expense was mainly driven by higher fixed costs and depreciation from foundational strategic investments, partially offset by efficiencies across logistics and the fulfillment center network.

Income tax benefit was $2.1 million in the three months ended April 28, 2024, compared to income tax benefit of $1.5 million in the three months ended April 30, 2023 .

The effective tax rate related to controlling interest for the three months ended April 28, 2024 and April 30, 2023 was 21% and 27%, respectively.

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.

Net loss attributable to controlling interest was $7.9 million, in the three months ended April 28, 2024 compared to net loss of $3.9 million in the three months ended April 30, 2023 , due to the factors discussed above.

Reconciliation of Net Loss to EBITDA and EBITDA to Adjusted EBITDA

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Three Months Ended

Nine Months Ended

October 29, 2023

October 30, 2022

October 29, 2023

October 30, 2022

April 28, 2024

April 30, 2023

(in thousands)

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Adjusted EBITDA

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.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $3.4 million to $1.8 million in the three months ended April 28, 2024 compared to $5.3 million in the three months ended April 30, 2023 .

As a percentage of net sales, Adjusted EBITDA decreased to 1.6% of net sales in the three months April 28, 2024 compared to 4.3% of net sales in the three months ended April 30, 2023 .

Liquidity and Capital Resources

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

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

At April 28, 2024, our net working capital was $75.9 million, including $6.8 million of cash and cash equivalents.

We expect to spend approximately $25.0 million in fiscal 2024 on capital expenditures, inclusive of software hosting implementation costs, primarily due to investments in logistics optimization, including investments in the fulfillment network and information technology.

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

Nine Months Ended

October 29, 2023

October 30, 2022

Three Months Ended

April 28, 2024

April 30, 2023

(in thousands)

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Net cash used in investing activities

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Decrease in cash and cash equivalents

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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 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.

For the three months ended April 28, 2024, net cash used in operating activities was $33.7 million, which primarily consisted of cash used in operating assets and liabilities of $33.3 million and a $7.9 million net loss for the three months ended April 28, 2024 partially offset by depreciation of $8.3 million.

The cash used in operating assets and liabilities of $33.3 million was primarily due to a $10.7 million increase in inventory and $13.2 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.

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.

Net Cash Used in Investing Activities

Investing activities consist primarily of capital expenditures for growth related to investments in infrastructure and information technology.

For the nine months ended October 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

For the three months ended April 28, 2024 and April 30, 2023 , net cash used in investing activities was $1.5 million and $21.3 million, respectively.

Net Cash Provided by (Used in) 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.

For the three months ended April 28, 2024, net cash provided by financing activities was $9.8 million, primarily consisting of $11.0 million in net borrowings under our revolving line of credit.

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.

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