Duluth Holdings Inc. — Q1 Fiscal 2019 Form 10-Q
Business context and reporting period. Duluth sells branded apparel, workwear and accessories through its direct channels (website and catalogs) and retail stores. This filing covers the 13 weeks ended May 5, 2019, compared with the 13 weeks ended April 29, 2018. At quarter-end, the company operated 48 retail stores and three outlet stores. Results are seasonal, with sales and operating profit historically weighted toward the holiday-season fourth quarter.
Key financial results
| Metric | Q1 FY2019 | Prior-year quarter |
|---|---|---|
| Net sales | $114.2 million | $100.2 million |
| Gross profit / margin | $60.9 million / 53.3% | $55.9 million / 55.8% |
| SG&A | $70.6 million (61.8% of sales) | $56.2 million (56.1%) |
| Operating loss | $9.7 million | $0.3 million |
| Net loss | $7.6 million | $0.7 million |
| Adjusted EBITDA (non-GAAP) | $(4.4) million | $2.6 million |
| Net cash used in operating activities | $13.1 million | $11.0 million |
Margins and earnings. Gross margin fell 250 basis points, primarily due to product mix from clearance activity and slightly lower shipping revenue. SG&A increased $14.4 million, including higher general and administrative, selling, and advertising and marketing costs; higher store occupancy, depreciation, and headcount were cited among the drivers. The company recorded a $2.7 million income tax benefit. Basic and diluted loss per share were both $0.23, versus $0.02 loss per share in the prior-year quarter.
Cash, liquidity and debt. Cash was $1.0 million at May 5, 2019; restricted cash was $1.6 million. Net working capital was $63.4 million. Operating cash use and investing cash use of $9.8 million were funded primarily by $22.7 million of net revolving-credit borrowings; cash and restricted cash declined $0.5 million during the quarter. The company reported $29.6 million of long-term debt and $39.2 million outstanding under its line of credit. It had an $80 million revolver and a $50 million delayed-draw term loan facility, and reported compliance with debt covenants. Lease liabilities recognized under the newly adopted lease standard were $128.6 million for operating leases and $9.0 million for finance leases; these are separate from the debt figures.
Material changes and management commentary
- Sales grew 14.0%, led by retail, up 42.8% to $48.5 million, reflecting new stores and partly offset by existing-store performance. Direct sales declined 0.8% to $65.7 million; management said the decline continued through the first five weeks of Q2. Website visits rose 14% year over year.
- The retail share of sales increased to 42.5% from 33.9%. The company opened five stores during the quarter, adding approximately 78,000 square feet.
- Inventory increased to $104.3 million from $97.7 million at the prior fiscal year-end. Management attributed seasonal operating cash use in part to inventory purchases and expects operating cash flow to be positive for the full fiscal year, with seasonal working-capital reductions in Q4.
- Fiscal 2019 capital expenditures were expected to be approximately $40–$45 million, including $30–$32 million for new-store expansion and remodels. Management said operating cash flow and available revolver capacity should cover working-capital needs, planned capital expenditures, and growth for the foreseeable future.
- Adoption of ASC 842 on February 4, 2019 resulted in recognition of lease right-of-use assets and liabilities and a $1.9 million reduction to opening retained earnings. Prior-period figures were not restated, so balance-sheet comparisons are affected by the accounting change.
Risks, controls and contingencies
Management highlighted risks including competition, seasonality, customer preferences, inventory planning, retail expansion and store performance, labor and transportation costs, and information-technology systems. The filing reported no material change to previously disclosed risk factors, no material subsequent events, and no legal proceedings expected to have a material adverse effect. A previously reported material weakness in internal control—related to resources, the new order-management-system conversion, and timely account reconciliations—remained unremediated. Management concluded disclosure controls were not effective as of May 5, 2019, while stating that the financial statements fairly present the company’s results in all material respects.
Most important facts for investors to verify
- Whether direct-channel sales stabilize, given the reported continued decline early in Q2, and whether retail growth persists beyond new-store contributions.
- Whether clearance-related product mix and lower shipping revenue continue to pressure gross margin.
- Whether SG&A growth, especially occupancy, depreciation, and personnel costs, moderates relative to sales growth.
- Whether seasonal inventory investment converts to cash as expected and full-year operating cash flow turns positive.
- Available borrowing capacity, covenant headroom, and the distinction between funded debt and substantial lease obligations.
- Progress in remediating the material weakness and evidence that the improved controls operate effectively.