Duluth Holdings Inc. — Q2 fiscal 2020 Form 10-Q
Reporting period: 13 weeks ended August 2, 2020; year-to-date comparisons cover 26 weeks. Duluth sells apparel, workwear and accessories through its direct-to-consumer and retail channels. It operated 59 retail stores and three outlet stores at quarter-end.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $137.4m | $122.0m | $247.3m | $236.2m |
| Gross profit / margin | $72.5m / 52.8% | $64.8m / 53.1% | $124.8m / 50.5% | $125.7m / 53.2% |
| Operating income (loss) | $9.8m | $3.7m | $(9.2)m | $(6.4)m |
| Net income (loss) | $5.9m | $1.8m | $(9.3)m | $(5.8)m |
| EPS attributable to controlling interest | $0.18 | $0.06 | $(0.28) | $(0.17) |
| Adjusted EBITDA | $16.8m | $9.6m | $5.2m | $4.7m |
Q2 sales rose 12.6%; direct-to-consumer sales were $100.6m versus $60.3m, while store sales were $36.8m versus $61.7m. The company attributed growth primarily to online demand and digital advertising. Gross margin fell 0.3 percentage points in Q2 and 2.7 points year to date, reflecting promotions and clearance activity. Q2 SG&A increased to $62.7m, but fell to 45.6% of sales from 50.1%, supporting higher operating income.
For the first half, sales increased 4.7%, but gross profit declined and net loss widened. Adjusted EBITDA is a non-GAAP measure; it increased 75.3% in Q2 and 9.6% year to date.
Cash, debt and liquidity
- Cash and cash equivalents were $19.0m at August 2, up from $2.2m at fiscal year-end; working capital was $117.7m. Inventory was $167.6m, up $19.7m from year-end.
- First-half operating cash use was $12.8m, investing cash use was $9.1m, and financing provided $38.9m. The company attributed operating cash use partly to seasonal inventory build and COVID-19 impacts.
- Duluth borrowings were $79.5m: $30.0m on the revolving line and $49.5m on the delayed-draw term loan. An additional $20.5m incremental term-loan facility was undrawn. Consolidated debt also included $28.1m of TRI debt, which Duluth said it is not guarantor or obligor of.
- The company reported compliance with debt covenants and expects compliance for the remainder of fiscal 2020. Management said cash from operations and credit availability should cover anticipated working capital and capital expenditures.
Outlook, risks and notable items
- No numerical sales or earnings guidance was provided. Management expects full-year fiscal 2020 operating cash flow to be positive, citing seasonal working-capital reductions in Q4. Planned fiscal 2020 capital expenditures were approximately $15m, about half the original plan, including approximately $8m for store expansion and point-of-sale upgrades; the company planned four new store openings.
- All 62 stores had reopened in some capacity by June 15, but management expected subdued store traffic through fiscal 2020. The ongoing pandemic’s effects on demand, operations, liquidity and cash flow remained uncertain.
- COVID-19 actions included temporary store closures, cost reductions, staff furloughs, executive pay reductions, and amended borrowing arrangements. The CEO’s base salary was scheduled to resume October 19, 2020; senior leadership pay reductions were also scheduled to end then.
- Potential shipping-capacity constraints and higher carrier surcharges, particularly during the holiday peak, could increase costs, delay shipments or reduce sales. Management was considering additional shipping partners.
- The company negotiated rent deferrals; approximately $1.1m was deferred at quarter-end and recorded in current liabilities. It reported no impairment charges for the quarter and no material subsequent events.
Most important facts for investors to verify
- Whether online demand and sales growth persist as store traffic and customer behavior normalize.
- Whether promotional activity, inventory levels and shipping costs pressure gross margins in coming periods.
- Available borrowing capacity and covenant compliance, especially amid continued seasonal cash needs and pandemic uncertainty.
- Execution of the reduced capital-spending and four-store opening plans, and the actual timing of positive full-year operating cash flow.