Duluth Holdings Inc. — Q3 FY2023 Form 10-Q
Reporting period: 13 weeks ended October 29, 2023; nine-month year-to-date period ended October 29, 2023. Comparisons are with the periods ended October 30, 2022. Duluth Trading sells men’s and women’s apparel, workwear and accessories through direct-to-consumer channels and stores; it operated 62 retail stores and three outlet stores at quarter-end. Fiscal 2023 ends January 28, 2024. Results are unaudited.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $138.2 million | $147.1 million | $401.1 million | $411.5 million |
| Gross profit / margin | $69.4 million / 50.2% | $76.9 million / 52.3% | $206.5 million / 51.5% | $219.6 million / 53.4% |
| Operating loss | $12.4 million | $7.4 million | $18.4 million | $4.5 million |
| Net loss attributable to controlling interest | $10.5 million | $6.2 million | $16.3 million | $5.1 million |
| Adjusted EBITDA | $(1.6) million | $1.7 million | $12.3 million | $22.9 million |
Q3 sales fell 6.1%; year-to-date sales fell 2.5%. Q3 direct-to-consumer sales were $87.0 million versus $91.0 million, and store sales were $51.2 million versus $56.1 million. Gross margin contracted 2.1 percentage points in Q3 and 1.9 points year to date. SG&A was $81.8 million in Q3 and $225.0 million year to date; as a percentage of sales, it rose to 59.2% and 56.1%, respectively. Basic and diluted loss per share were both $0.32 for Q3 and $0.50 year to date.
Cash flow, debt and liquidity
For the nine months, operating cash use was $31.0 million, investing cash use was $39.8 million, and financing provided $33.5 million. Cash declined $37.4 million from the fiscal-year start to $8.2 million. Inventory increased $19.0 million and accounts payable decreased $10.2 million, contributing to operating cash use. Capital expenditures were $40.0 million; management expects approximately $55.0 million of FY2023 capital expenditures, including software implementation costs.
At October 29, 2023, the company had $36.0 million drawn on its revolving credit line, compared with no draw at January 29, 2023. The amended facility provides up to $200 million and matures July 8, 2027. The company reported covenant compliance. Separately consolidated TRI debt was $26.2 million, including $0.8 million current; Duluth states it is not guarantor or obligor on TRI’s notes. Current and noncurrent operating and finance lease liabilities were also material. Working capital was $62.3 million. Management expects operating cash flow and credit-facility availability to cover working capital and anticipated capital expenditures for the foreseeable future.
Drivers, outlook and risks
- Management attributed Q3 sales declines primarily to lower store traffic, partly offset by improved online conversion. Year-to-date store-market sales decreased 3.4%; non-store-market sales were nearly flat.
- Lower full-price sales mix relative to promotional sales primarily drove the gross-margin decline. Q3 SG&A fell modestly due to slightly lower advertising and fulfillment efficiencies, partly offset by personnel costs and depreciation. Year-to-date SG&A rose with occupancy costs at the new automated Southeast fulfillment center and added headcount, partly offset by fulfillment efficiencies.
- Adjusted EBITDA margin declined to negative 1.1% in Q3 and 3.1% year to date, versus 1.2% and 5.6%, respectively, in the prior-year periods. Adjusted EBITDA is a non-GAAP measure.
- The business is seasonal, historically generating a significant portion of revenue and operating profit in the fourth quarter. The filing gives no specific full-year sales or earnings guidance.
- Management cited continued high inflation and uncertainty about consumer demand and store traffic. Other disclosed risks include competition, supply-chain and delivery disruption, inventory and promotional exposure, labor and transportation costs, and execution of fulfillment-center and technology investments.
Other filing matters
The company reported no material changes to its previously disclosed risk factors, no material off-balance-sheet arrangements, and no legal proceedings believed likely to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. No impairment trigger was identified for the period.
Important facts for investors to verify
- Whether store traffic and sales stabilize, and whether promotional activity continues to pressure gross margin.
- Holiday-quarter performance and cash generation, given the company’s stated seasonality and low quarter-end cash balance.
- Remaining capital-spending requirements and the operating benefits, costs and execution risks of the Southeast fulfillment-center investment.
- Revolver utilization, borrowing costs, covenant headroom and liquidity under weaker-than-expected trading conditions.
- Inventory levels, markdown exposure and the assumptions used in inventory reserves.