What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-24 compared with 2024-03-22 · 58 added, 50 removed, 197 unchanged (35% of the section changed)

4 unchanged sentences

Management’s discussion focuses on fiscal 2024 results compared to fiscal 2023.

Fiscal year 2023 and 2022 were 52-week periods.

Fiscal year 2024 was a 53-week period and 2023 was a 52-week period.

For a discussion of fiscal 2023 results compared to fiscal 2022, refer to the Company’s Annual Report on Form 10-K for the year ended January 28, 2024.

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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 January 28, 2024, we operated 62 retail stores and three outlet stores.

Since then, we have expanded our retail presence, and as of February 2, 2025, 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 ® 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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From our heritage as a catalog for those working in the building trades, Duluth Trading has become a widely recognized brand and proprietary line of innovative and functional apparel and gear.

Over the last decade, we have created strong brand awareness, built a loyal customer base and generated robust sales momentum.

Over the last decade, we have created strong brand awareness, built a loyal customer base and generated sales growth.

We have done so by sticking to our roots of “there’s gotta be a better way” and through our relentless focus on providing our customers with quality, functional products.

A summary of our financial results is as follows:

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

 Net sales in fiscal 2024 decreased by 3.1% compared to the prior year to $626.6 million;

 Net loss in fiscal 2024 was ($43.6) million compared to prior year net loss of ($9.9) million;

 Adjusted EBITDA in fiscal 2024 decreased $18.0 million compared to the prior year to $14.6 million.

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.

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Our non-store market sales metrics include sales from our website, catalog and orders placed through the call center.

Economic Conditions

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 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.

How We Assess the Performance of Our Business

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Free Cash Flow

We believe Free Cash Flow is a useful measure of performance as an indication of our financial strength and provides additional perspective on our ability to efficiently use capital in executing our growth strategy.

We believe Free Cash Flow is a useful measure of performance as an indication of the Company’s ability to generate cash and provides additional perspective on our ability to efficiently use capital in executing our growth strategy.

We use Free Cash Flow to facilitate a comparison of our operating performance on a consistent basis from period-to-period and our ability to generate cash.

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Fiscal Year Ended

January 28, 2024

February 2, 2025

January 28, 2024

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Selling, general and administrative expenses

Operating (loss) income

Restructuring expense

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 expense (benefit)

Net income (loss) attributable to noncontrolling interest

Net (loss) income attributable to controlling interest

Net loss attributable to controlling interest

Percentage of Net sales:

1 unchanged sentence

Selling, general and administrative expenses

Operating (loss) income

Restructuring expense

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 expense (benefit)

Net income (loss) attributable to noncontrolling interest

Net (loss) income attributable to controlling interest

Net loss attributable to controlling interest

Fiscal 2024 Compared to Fiscal 2023

Net sales decreased $20.1 million, or 3.1%, to $626.6 million in fiscal 2024 compared to $646.7 million in fiscal 2023.

The decrease in net sales was primarily driven by lower average unit retail prices, processing delays at a legacy fulfillment center, lower web conversion and a decline in store traffic.

Following the surge in unit demand over the Black Friday weekend, inventory units housed in our highly automated Adairsville center were significantly depleted resulting in a higher level of orders being routed to a legacy fulfillment facility, which resulted in significant backlog.

We subsequently reduced promotional depth and frequency to address the order backlog and maintain sales quality, which constrained top-line growth.

Store market net sales decreased $3.3 million, or 0.8%, to $441.8 million in fiscal 2024 compared to $445.1 million in fiscal 2023.

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.

Net sales in non-store markets decreased $21.7 million, or 11.1%, to $174.3 million in fiscal 2024 compared to $196.0 million in fiscal 2023.

Gross profit decreased $16.5 million, or 5.1%, to $308.5 million in fiscal 2024 compared to $325.0 million in fiscal 2023.

As a percentage of net sales, gross margin decreased to 49.2% of net sales in fiscal 2024 compared to 50.3% of net sales in fiscal 2023.

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.

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, partially offset by an improvement in product costs from our direct to factory sourcing initiative.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses increased $3.1 million, or 0.9%, to $337.6 million in fiscal 2024 compared to $334.5 million in fiscal 2023.

Selling, general and administrative expenses as a percentage of net sales was 53.9% in fiscal 2024 compared to 51.7% in fiscal 2023.

The increase in selling, general and administrative expense as a percentage of net sales was mainly driven by increased overhead costs, partially offset by optimization in our outbound shipping network.

Interest Expense

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The increase in interest expense was primarily attributable to increased interest rates on outstanding debt in fiscal 2024 compared to fiscal 2023.

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

Income tax expense was $2.4 million in fiscal 2024 compared to income tax benefit of $2.9 million in fiscal 2023.

Our effective tax rate related to controlling interest was (5.7%) in fiscal 2024 compared to 22.4% in fiscal 2023.

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.

The provision for fiscal 2024 reflected the establishment of a valuation allowance against the net amount of deferred tax assets as well as pre-tax loss in the current year.

Net Loss Attributable to Controlling Interest

Net loss attributable to controlling interest was ($43.7) million in fiscal 2024 compared to ($9.9) million in fiscal 2023, 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 (Loss) Income to EBITDA and EBITDA to Adjusted EBITDA

Reconciliation of Net Loss 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

January 28, 2024

February 2, 2025

January 28, 2024

(in thousands)

Net (loss) income

Depreciation and amortization

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EBITDA (non-GAAP)

Stock based compensation

Long-term incentive expense

Restructuring expense

Impairment expense

Adjusted EBITDA (non-GAAP)

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $10.1 million, or 23.2%, to $33.4 million in fiscal 2023 compared to $43.5 million in fiscal 2022.

As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $18.0 million to $14.6 million in fiscal 2024 compared to $32.7 million in fiscal 2023.

As a percentage of net sales, Adjusted EBITDA decreased to 2.3% of net sales in fiscal 2024 compared to 5.1% of net sales in fiscal 2023.

3 unchanged sentences

Fiscal Year Ended

January 28, 2024

February 2, 2025

January 28, 2024

(in thousands)

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

Purchases of property and equipment

Free Cash Flow (non-GAAP)

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.

Free cash flow decreased $14.8 million to ($25.2) million in fiscal 2024 compared to ($10.4) million in fiscal 2023.

The decrease was primarily driven by higher inventory levels compared to a reduction in inventory in the prior year, partially offset by a decrease in purchases of property and equipment.

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.

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

As of February 2, 2025 our working capital was $63.1 million, which includes cash and cash equivalents of $3.3 million.

We spent $17.4 million in fiscal 2024 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.

7 unchanged sentences

Fiscal Year Ended

January 28, 2024

February 2, 2025

January 28, 2024

(in thousands)

Net cash provided by (used in) operating activities

Net cash (used in) provided by operating activities

Net cash used in investing activities

1 unchanged sentence

Decrease in cash and cash equivalents

Net Cash Provided by (Used in) Operating Activities

Net Cash (Used in) Provided by 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 2024, net cash used in operating activities was $16.9 million, which primarily consisted of non-cash depreciation and amortization of $32.3 million and amortization of stock-based compensation of $4.0 million, offset by cash used in operating assets and liabilities of $12.0 million and net loss of ($43.6) million.

The cash used in operating assets and liabilities of $12.0 million primarily consisted of a $40.8 million increase in inventory partially offset by a $22.9 million increase in trade accounts payable.

The increase in inventory and trade accounts payable was primarily related to an increase in in-transit inventory as we moved from purchasing through an agent to buying directly from factories coupled with higher inventory receipts on core year-round products to mitigate low in-stock post Black Friday week.

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 $14.5 million, which was partially offset by net loss of ($9.9) million.

The cash provided by operating assets and liabilities of $14.5 million primarily consisted of a $29.2 million decrease in inventory partially offset by a $5.4 million and $4.4 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.

Net Cash Used in Investing Activities

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

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 2024, net cash used in investing activities was $8.1 million, driven by purchases of property and equipment of $8.3 million.

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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.

On January 31, 2025, the Company entered into the Second Amendment to the Credit Agreement (the “Second Amendment”), which was treated as an extinguishment for accounting purposes.

The Second Amendment amends the Credit Agreement in order to (i) decrease the revolving commitment from $200.0 million to $100.0 million;

(ii) revise the definition of

“Applicable Rate” to provide for pricing terms in the event of a Rent Adjusted Leverage Ratio greater than or equal to 3.50:1.0;

(iii) limit the exceptions to the prohibition on restricted payments to (a) making dividends or distributions by any subsidiary to the Company, and (b) the acquisition of equity interests in satisfaction of tax withholding obligations associated with restricted stock or awards under employee incentive plans;

and (iv) provide that the Maximum Rent Adjusted Leverage Ratio and the Minimum Fixed Charge Coverage Ratio will be measured commencing on the fiscal quarter ending May 2, 2021 and measured quarterly thereafter as of the last day of each fiscal quarter of the Company (other than for the fiscal quarter ending February 2, 2025).

Contractual Obligations

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Revenue Recognition

Revenue for merchandise that is shipped to our customers from our fulfillment centers and stores is recognized upon shipment following customer payment, which is when the customer obtains control of the product and has the ability to direct the use of the product, including, among other options, the ability to redirect the product to a different shipping destination.

the use of the product, including, among other options, the ability to redirect the product to a different shipping destination.

Store revenue is recognized at the point of sale.

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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.

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A valuation allowance is established if it is more likely than not that some portion or all of the deferred income tax asset will not be realized.

No valuation allowance was recognized for the years ended January 28, 2024 or January 29, 2023.

A valuation allowance was recognized for the year ended February 2, 2025.

We establish assets and liabilities for uncertain tax positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognition threshold.

2 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