Duluth Holdings Inc. — Q3 FY2020 Form 10-Q
Reporting period: 13 weeks ended November 1, 2020; comparative quarter ended November 3, 2019. Nine-month comparisons are 39-week periods. Duluth sells branded apparel, workwear and accessories through its direct-to-consumer and store channels. At quarter-end it operated 62 retail stores and three outlet stores. The filing reports one external segment, reflecting its omnichannel business model.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $135.5M | $119.8M | $382.8M | $356.0M |
| Gross profit / margin | $71.0M / 52.4% | $65.4M / 54.6% | $195.8M / 51.2% | $191.1M / 53.7% |
| Operating income (loss) | $2.8M | $1.3M | $(6.3)M | $(5.0)M |
| Net income (loss) | $0.9M | $0.1M | $(8.4)M | $(5.7)M |
| Net income (loss) attributable to controlling interest | $0.9M | $0.2M | $(8.3)M | $(5.5)M |
| Adjusted EBITDA | $11.4M (8.4% of sales) | $7.3M (6.1%) | $16.6M (4.3%) | $12.0M (3.4%) |
| Interest expense | $1.6M | $1.5M | $4.8M | $3.1M |
Quarterly sales rose 13.2%; nine-month sales rose 7.5%. Direct-to-consumer sales were $86.4M for the quarter and $273.5M for nine months, versus $61.6M and $187.5M a year earlier. Store sales were $49.1M and $109.3M, versus $58.2M and $168.4M. The filing attributes online growth to customer acquisition and digital promotions; store sales remained affected by lower traffic and earlier temporary closures.
Gross margin contracted as promotional, clearance and sitewide events supported sales and inventory movement. SG&A rose 6.5% in the quarter and 3.1% for nine months, but declined as a share of sales to 50.3% and 52.8%, respectively. Management cited more efficient digital marketing and lower catalog/TV spend, offset by shipping, store overhead and technology depreciation. Adjusted EBITDA is a non-GAAP measure.
Cash, liquidity and debt
- Cash and cash equivalents were $12.8M at November 1, 2020, versus $2.2M at February 2, 2020. Net working capital was $136.6M.
- Nine-month operating cash use was $28.6M, improved from $47.6M used a year earlier. Inventory growth used $65.6M, partly offset by a $21.4M increase in accounts payable. Investing cash use was $11.5M; financing provided $50.7M.
- Company line-of-credit and delayed-draw term-loan borrowings totaled $91.9M ($43.0M revolver and $48.9M term loan), compared with $39.3M at fiscal year-end. Separately consolidated TRI debt was $28.0M; Duluth states it is not the guarantor or obligor of that debt.
- The credit agreement provides an $80.0M revolver and a $50.0M delayed-draw term loan, plus an incremental $20.5M delayed-draw facility available through March 31, 2021. The incremental facility was undrawn at quarter-end. Borrowings were secured by substantially all Company assets; the Company reported compliance with covenants.
- Management expected full-year FY2020 operating cash flow to be positive, citing seasonal working-capital reductions in Q4, and believed cash flow and credit availability sufficient for foreseeable working capital and capital needs. Planned FY2020 capital expenditures were approximately $17M, about 40% below the original plan; approximately $10M was for store expansion and point-of-sale upgrades.
Outlook, risks and notable items
- COVID-19 had closed all stores beginning March 20, 2020; stores reopened in some capacity by June 15. Management expected subdued store traffic through FY2020, particularly during the holiday season, but said the pandemic’s continuing effect on demand and operations could not be reasonably estimated.
- Management cited peak-season shipping capacity and cost risks, including expected carrier surcharges; it added a shipping partner and said its primary carrier had increased shipping thresholds for Q4.
- Management described the business as seasonal, with a significant share of revenue and operating profit historically generated in Q4. No specific earnings or revenue guidance was provided.
- COVID response measures included cost reductions, extended payment terms, merchandise-receipt cancellations, employee furloughs and temporary compensation reductions. The Company reduced planned store openings to four for FY2020.
- COVID-related impairment assessments at May 3, 2020 found no impairment; the filing reported no later triggering events or long-lived asset impairment charges through November 1. Future impairment remains uncertain.
- The Company disclosed that a lease-expense table had overstated total lease expense by $3.9M for the three- and six-month periods ended August 2, 2020; it stated there was no impact to the financial statements or other disclosures for those periods.
- Management reported no material changes to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether the strong direct-sales growth can persist and offset subdued in-store traffic after the pandemic period.
- Whether promotions, shipping costs and holiday-season carrier constraints continue to pressure gross margin and profitability.
- Whether Q4 seasonal cash generation meets management’s expectation for positive full-year operating cash flow and supports inventory, capex and debt needs.
- Current borrowing availability, covenant headroom and repayment requirements under the credit facilities, including the incremental facility’s short maturity.
- The assumptions behind inventory valuation and impairment assessments, and the continued effects of COVID-19 on demand, supply chains and store operations.
- The full context and accounting treatment of the disclosed $3.9M lease-expense table overstatement.