Duluth Holdings Inc. — Q2 FY2022 Form 10-Q
Reporting period: 13 weeks ended July 31, 2022; six-month results are compared with the periods ended August 1, 2021. Unaudited U.S. GAAP statements. Duluth sells branded apparel, workwear and accessories through direct-to-consumer and retail channels; it operated 62 stores and three outlet stores at quarter-end.
Key financial results
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $141.5m | $149.1m | $264.4m | $282.5m |
| Gross profit / margin | $75.6m / 53.4% | $81.4m / 54.6% | $142.7m / 54.0% | $148.0m / 52.4% |
| Operating income / margin | $3.9m / 2.7% | $13.1m / 8.8% | $2.9m / 1.1% | $15.0m / 5.3% |
| Net income attributable to controlling interest | $2.4m | $9.0m | $1.1m | $9.5m |
| Adjusted EBITDA / margin | $13.2m / 9.4% | $21.4m / 14.4% | $21.1m / 8.0% | $31.4m / 11.1% |
Cash flow and liquidity: Six-month operating cash flow was negative $41.1m, versus positive $26.5m a year earlier, mainly reflecting a $41.8m inventory build and a $19.0m decrease in accrued expenses, partly offset by higher payables. Investing cash outflow was $18.7m, largely capital expenditures; financing cash outflow was $1.8m. Cash declined to $15.4m from $77.1m at fiscal year-end. Net working capital was $102.4m.
Debt and leases: No borrowings were outstanding under Duluth’s revolving credit facility at July 31. The July amendment raised revolving commitments from $150m to $200m and extended maturity to July 8, 2027; the company reported compliance with covenants. Separately, $27.0m of TRI debt is consolidated, but Duluth is not its guarantor or obligor. Operating and finance lease liabilities remain material.
Material changes and management commentary
- Q2 sales fell 5.1%; six-month sales fell 6.4%. Management cited slower store traffic and, for the six-month comparison, heavier prior-year promotions and clearance activity. Q2 direct-to-consumer sales were nearly flat at $85.3m, while store-channel sales declined to $56.2m from $63.9m.
- Q2 gross margin declined 1.2 percentage points, including a $1.3m inventory write-down, mostly for goods damaged in transit. Management said Q2 margin excluding this item would have been 54.4%. Six-month gross margin improved year over year, reflecting less promotional activity.
- SG&A rose 5.0% in Q2 and 5.1% for the six months, driven by digital advertising, added headcount and depreciation from capital investment. Lower sales and higher operating expenses sharply reduced operating profit and Adjusted EBITDA.
- Inventory was $164.5m, up from $122.7m at fiscal year-end; the excess and obsolete inventory reserve was $2.3m versus $1.0m. Management expects approximately $40m of fiscal 2022 capital expenditures, primarily for logistics optimization, automated fulfillment and technology.
Outlook, risks and other items
The filing provides no specific sales or earnings guidance. Management expects operating cash flow and available credit capacity to cover working capital and planned capital expenditures for the foreseeable future, while noting that cash generation is seasonal and historically concentrated in the fourth quarter. The company’s Big Dam Blueprint prioritizes digital capabilities, owned-channel optimization, a multi-brand platform and selective growth investment.
Management cited elevated inflation, uncertain consumer demand and store traffic, COVID-related effects, supply-chain and transportation disruptions, labor and freight cost pressures, competition, inventory planning and technology execution among key risks. The company said there were no material changes to previously disclosed risk factors, no material legal proceedings, and no material off-balance-sheet arrangements. No asset impairment indicators were identified.
Important facts for investors to verify
- Whether weaker store traffic and lower sales persist, and how demand and promotional activity affect margins.
- Inventory quality, the extent of further write-downs or discounting, and progress in converting inventory into cash.
- Execution and returns on the planned capital spending and logistics investments, alongside ongoing SG&A growth.
- Liquidity through seasonal cash needs, availability and covenant terms of the amended $200m revolver, and the distinction between company debt and consolidated TRI debt.
- Potential effects of inflation, supply-chain disruption and consumer uncertainty on costs, fulfillment and sales.