Duluth Holdings Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended January 31, 2021, a 52-week year, compared with fiscal 2019 ended February 2, 2020. The filing is an annual report, not a standalone Q4 filing; it also reports unaudited fourth-quarter results. Duluth sells men’s and women’s apparel, workwear and accessories through e-commerce, catalogs and stores. At year-end it operated 62 retail stores and three outlets.
Financial performance and key metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $638.8 million | $615.6 million |
| Gross profit / margin | $331.5 million / 51.9% | $328.1 million / 53.3% |
| Operating income / margin | $24.2 million / 3.8% | $28.1 million / 4.6% |
| Net income | $13.4 million | $18.5 million |
| Net income attributable to controlling interest | $13.6 million | $18.9 million |
| Diluted EPS | $0.42 | $0.58 |
| Adjusted EBITDA (non-GAAP) | $55.5 million; 8.7% of sales | $51.9 million; 8.4% of sales |
| Cash from operating activities | $50.8 million | $8.3 million |
| Free cash flow (non-GAAP) | $38.5 million | $(22.4) million |
At January 31, 2021, cash was $47.2 million, working capital was $114.6 million and inventory was $149.1 million. Duluth had $48.3 million outstanding under its delayed-draw term loan and no revolver balance; the company’s own debt totaled $48.3 million. The balance sheet also consolidates $27.9 million of TRI debt, for which Duluth states it is neither guarantor nor obligor. The company reported compliance with debt covenants. Credit-facility availability and terms are subject to the agreement and its covenants.
Contractual future payments included $141.0 million of operating lease payments and $61.1 million of finance lease payments, as well as debt obligations. These are undiscounted contractual amounts, not balance-sheet carrying values.
Changes versus prior year and fourth quarter
- Annual sales rose 3.8%, but net income attributable to controlling interest fell about 28%; gross margin declined 1.4 percentage points.
- Direct-to-consumer sales increased to $460.8 million from $350.4 million, while store sales fell to $177.9 million from $265.3 million. Store closures and subdued traffic from COVID-19 drove the shift.
- Gross margin pressure reflected expanded promotions and clearance activity. SG&A rose 2.4% to $307.3 million, though it declined as a share of sales; higher shipping costs, surcharges, store overhead, depreciation and incentive compensation were partly offset by lower catalog and television advertising costs.
- Shipping and processing expense increased to $46.9 million from $31.3 million. Advertising and catalog expense declined to $72.4 million from $93.9 million.
- Operating cash flow improved substantially, primarily reflecting inventory discipline and changes in working capital; capital expenditures also fell to $11.7 million from $24.4 million.
- Q4 sales were $256.0 million versus $259.6 million. Q4 net income attributable to controlling interest was $21.8 million versus $24.4 million. Q4 provided 40.1% of FY2020 sales and 160.8% of annual net income, reflecting the first-quarter loss and the business’s holiday seasonality.
Outlook, commentary and risks
- The filing provides no specific numerical FY2021 revenue or earnings guidance. Management said cash from operations and available credit were expected to cover working-capital needs and anticipated capital expenditures for the foreseeable future.
- Management planned approximately $10 million of FY2021 capital expenditures and $5 million of additional cloud-hosting implementation investments. Planned initiatives include selective store expansion, investment in distribution capacity, growth of the women’s business, and development of additional brands.
- COVID-19 closed stores beginning March 20, 2020; reopening began in May, and all stores were open in some capacity by June 15. Store traffic remained subdued. Management said the pandemic’s future effects on demand, operations, liquidity and cash flows remained uncertain.
- The company amended its credit agreement during the pandemic, including a $20.5 million incremental delayed-draw facility available through March 31, 2021; none was funded at fiscal year-end. Management also cited cost reductions, extended payment terms, furloughs, temporary leadership pay reductions and a roughly 40% reduction in planned capital spending during FY2020.
- Important risks include dependence on foreign suppliers and a concentrated sourcing base: the largest supplier accounted for 60% of FY2020 inventory purchases. Other risks include supply-chain and freight disruption, shipping-cost pressure, seasonal inventory forecasting, competition, consumer demand, store expansion, cybersecurity and the continuing effects of COVID-19.
- No pending legal proceeding was identified as expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the auditor identified the change to a single reportable segment as a critical audit matter.
Investor verification priorities
- Confirm the persistence and profitability of the shift to direct-to-consumer sales, including the effect of shipping costs, promotions and reduced store traffic on margins.
- Review liquidity and borrowing capacity after the pandemic-related facility amendment, debt maturities, covenant requirements and lease commitments.
- Assess whether operating cash flow and free-cash-flow improvement are sustainable, including the effects of inventory, deferred payroll taxes and other working-capital movements.
- Monitor supplier concentration, overseas manufacturing and freight capacity, and the planned distribution-center investments.
- Verify future results against management’s stated priorities; the filing contains no specific numerical earnings or sales guidance.