Duluth Holdings Inc. — Q2 FY2021 Form 10-Q
Reporting period: 13 weeks ended August 1, 2021; six-month comparison is against the period ended August 2, 2020. Duluth sells men’s and women’s apparel, workwear and accessories through its direct channels and retail stores. It operated 61 retail stores and three outlet stores at quarter-end. Results are unaudited.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $149.1m | $137.4m | $282.5m | $247.3m |
| Gross profit / margin | $81.4m / 54.6% | $72.5m / 52.8% | $148.0m / 52.4% | $124.8m / 50.5% |
| Operating income (loss) | $13.1m | $9.8m | $15.0m | $(9.2)m |
| Net income (loss) | $8.9m | $5.9m | $9.4m | $(9.3)m |
| Net income (loss) attributable to controlling interest | $9.0m | $5.9m | $9.5m | $(9.2)m |
| Diluted EPS | $0.27 | $0.18 | $0.29 | $(0.28) |
| Adjusted EBITDA | $21.6m | $16.8m | $31.7m | $5.2m |
Second-quarter SG&A was $68.3m, or 45.8% of sales, versus $62.7m, or 45.6%. Six-month SG&A declined to $133.0m from $134.0m and to 47.1% of sales from 54.2%. Adjusted EBITDA is a non-GAAP measure.
Financial position and liquidity
- At August 1, 2021, cash was $18.9m, down from $47.2m at January 31, 2021. Working capital was $84.2m; inventory was $134.9m, versus $149.1m at fiscal year-end.
- Six-month operating cash flow was $26.5m, compared with cash used of $12.8m a year earlier. Investing activities used $4.9m, principally for capital expenditures; financing activities used $50.0m, primarily to repay company debt. Cash decreased $28.3m.
- The $48.25m Duluth delayed-draw term loan was fully repaid. The May 2021 credit agreement provides a $150m revolving facility, maturing May 14, 2026. No revolver balance was reported at quarter-end; the company said it complied with covenants.
- Consolidated TRI debt was $27.6m, including a $24.1m secured note and $3.5m note. The filing states Duluth is not guarantor or obligor on these TRI notes. Lease liabilities were also substantial: operating lease liabilities of $110.3m and finance lease liabilities of $44.3m.
- Management estimated FY2021 capital expenditures of approximately $18m, including approximately $16m for technology and $2m for one planned store.
Material changes and management commentary
- Q2 sales increased 8.6%; six-month sales increased 14.3%. Store-market sales rose 19.8% in Q2 and 25.6% for the first six months. Non-store-market sales fell 12.7% and 5.9%, respectively.
- Management attributed store-market growth in part to prior-year store closures during the pandemic. Prior-year online demand also benefited from customer shifts online, extended free shipping, heavier promotions and increased digital prospecting, making comparisons difficult.
- Gross margin improved, which management attributed to a higher full-price sales mix and improved margins, including in Women’s. Six-month SG&A leverage benefited from a more efficient digital marketing approach and reduced traditional advertising.
- The “Big Dam Blueprint” emphasizes a digital-first business, optimization of owned retail channels, development of a multi-brand platform, testing growth opportunities and investments in logistics, technology and talent. The filing provides no specific financial guidance or quantified targets for this strategy.
Risks, contingencies and unusual items
- Management said the continuing effects of COVID-19 on store traffic, consumer demand, supply chains and operations remain uncertain and cannot be reasonably estimated. Risks also include transportation delays and port congestion, merchandise sourcing and delivery, labor and freight costs, competition, inventory management, technology execution and seasonality.
- The business is seasonal, historically generating a significant share of revenue and operating profit in the fourth quarter. Management also noted that July store inventory counts can cause second-quarter cost-of-goods-sold fluctuations.
- The filing reports no impairment indicators, no material off-balance-sheet arrangements, no material legal proceedings, and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether sales growth and margin gains persist after accounting for the prior-year pandemic closures and unusually strong online comparison period.
- Whether store-market growth offsets continued weakness in non-store-market sales, and how channel mix affects shipping costs and gross margin.
- Availability, borrowing conditions and covenant headroom under the new $150m revolving facility, particularly through seasonal working-capital needs.
- Progress and returns on the planned technology, logistics and store investments, and execution of the multi-brand strategy.
- Developments in COVID-19 impacts, supply-chain and transportation disruptions, freight and labor costs, and the company’s seasonal inventory and cash-flow cycle.