Duluth Holdings Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: The 13 weeks ended May 3, 2020, compared with the 13 weeks ended May 5, 2019. Duluth sells apparel, workwear and accessories through its direct channels and stores; it reported one omnichannel segment beginning February 3, 2020. The company operated 59 retail stores and three outlets at quarter-end.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $109.9 million | $114.2 million | Down 3.8% |
| Gross profit / margin | $52.3 million / 47.6% | $60.9 million / 53.3% | Margin down 5.7 percentage points |
| SG&A | $71.3 million | $70.6 million | Up 1.0% |
| Operating loss | $19.0 million | $9.7 million | Loss widened |
| Net loss | $15.2 million | $7.6 million | Loss widened |
| Loss per share | $0.47 | $0.23 | Loss per share widened |
| Adjusted EBITDA (non-GAAP) | $(11.6) million | $(4.4) million | Down $7.2 million |
Direct-to-consumer sales were $86.5 million, up 31.7%; store sales were $23.4 million, down 51.8%. Gross margin pressure reflected extended clearance events and a sitewide sale to move inventory during store closures. SG&A included $1.6 million of non-recurring COVID-19 costs, as well as higher retail overhead, digital advertising, shipping and technology depreciation; lower catalog spending partly offset these items.
Cash flow, liquidity and debt
- Operating cash use was $33.5 million, versus $13.1 million in the prior-year quarter. Inventory growth used $27.2 million of cash; quarter-end inventory was $175.0 million, up from $147.8 million at fiscal year-end.
- Investing cash use was $4.1 million, down from $9.8 million. Financing provided $44.7 million, including net term-loan proceeds of about $29.7 million and net revolver proceeds of about $15.7 million.
- Cash and cash equivalents were $8.9 million; cash, cash equivalents and restricted cash totaled $9.3 million. Working capital was $114.4 million.
- Duluth debt was $84.8 million: $35.0 million drawn on the revolver and $49.75 million on the delayed-draw term loan. TRI debt was $28.2 million and is consolidated, but Duluth states it is not the guarantor or obligor. Debt balances are reported before lease liabilities.
- The credit facility was amended to a total commitment of $150.5 million, including a new $20.5 million delayed-draw facility that was unfunded at quarter-end. The company reported compliance with debt covenants. The revolver and existing term loan had a 3.6% effective interest rate at May 3, 2020.
- Operating and finance lease liabilities were $114.5 million and $39.0 million, respectively. The company deferred approximately $0.7 million of rent under landlord concessions.
Material changes, outlook and risks
- All stores were temporarily closed for seven weeks, from March 20 through May 3. Online growth partly offset store-market sales declines. As of June 4, 58 of 62 stores had reopened in some capacity.
- Management reduced planned fiscal 2020 capital expenditures by 50% to approximately $15 million, and planned four store openings for the year. One store opened during the quarter.
- Management expected fiscal 2020 operating cash flow to remain positive, citing seasonal working-capital reductions in the fourth quarter, and said cash flow plus available credit should cover anticipated needs. This outlook depends on uncertain pandemic conditions.
- COVID-19 disrupted operations and supply chains and created uncertainty around store traffic, consumer demand, and future store openings. Management could not reliably estimate the pandemic’s duration or financial impact. Interim impairment tests found no impairment losses, but future losses remain possible.
- The filing also identifies civil unrest as a risk, including store closures or reduced hours and possible disruption to distribution. The company reported no legal proceedings expected to have a material adverse effect.
- Other notable item: the available-for-sale security had a $0.7 million unrealized loss before tax recorded in other comprehensive income; no other-than-temporary impairment was recorded.
Investor verification priorities
- Track online sales strength against store recovery, reopening pace, and the effect of promotions on gross margin.
- Verify inventory levels, sell-through and cash conversion, given the quarter’s inventory build and management’s reference to historically elevated inventory.
- Monitor cash burn, borrowing levels, remaining credit availability, covenant compliance and the timing of seasonal cash generation.
- Compare actual capital spending and store openings with the reduced fiscal-year plan; assess the ongoing impact of COVID-19 and civil unrest.
- Review subsequent filings for impairment indicators, landlord concession repayments and any changes to management’s liquidity or full-year cash-flow expectations.