Duluth Holdings Inc. — FY2021 Form 10-K
Business context and reporting period. Duluth Holdings sells men’s and women’s casual wear, workwear and accessories through stores, e-commerce and catalogs. This annual report covers the 52-week fiscal year ended January 30, 2022, compared with the 52-week year ended January 31, 2021. The company operated 62 retail stores and three outlets at year-end.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $698.6 million | $638.8 million | +9.4% |
| Gross profit / margin | $377.3 million / 54.0% | $331.5 million / 51.9% | Margin +2.1 percentage points |
| Operating income / margin | $44.1 million / 6.3% | $24.2 million / 3.8% | |
| Net income attributable to controlling interest | $29.7 million | $13.6 million | +118.8% |
| Diluted earnings per share | $0.90 | $0.42 | |
| Adjusted EBITDA (non-GAAP) | $77.4 million / 11.1% of sales | $54.7 million / 8.6% | +41.6% |
| Cash from operating activities | $92.0 million | $50.8 million | |
| Free cash flow (non-GAAP) | $81.6 million | $38.5 million | + $43.1 million |
Sales mix and seasonality. Store-channel sales were $260.1 million, up from $177.9 million; direct-to-consumer sales were $438.5 million, down from $460.8 million. Management attributed store growth in part to stores being open for the full year versus pandemic-related closures in the prior year. The fourth quarter generated $270.8 million of sales and $17.4 million of net income, respectively 38.8% and 58.4% of FY2021 totals; fourth-quarter net income was below FY2020’s $21.8 million.
Balance sheet and debt. At January 30, 2022, cash was $77.1 million, working capital was $106.5 million, inventory was $122.7 million (down from $149.1 million), and total assets were $515.6 million. Duluth had no outstanding borrowings under its own credit facility at year-end. Its May 2021 revolving credit agreement provides up to $150 million and matures May 14, 2026; the facility is secured by substantially all company assets and has financial and other covenants, which the company reported meeting. The consolidated balance sheet also includes $27.3 million of TRI debt; the company states it is not the guarantor or obligor on those notes. Operating and finance lease liabilities were also substantial, at $120.0 million and $43.0 million, respectively.
Material changes versus FY2020
- Sales and profitability increased, with gross margin improving as full-price sales mix rose, clearance inventory and promotional activity declined, and margins improved on full-price and clearance merchandise.
- SG&A rose 8.4% to $333.2 million, but declined as a share of sales to 47.7% from 48.1%. Management cited more efficient digital marketing and lower shipping expense from the channel mix, partly offset by wages, staffing and technology-related depreciation.
- Interest expense declined to $4.7 million from $6.3 million, primarily reflecting repayment of Duluth bank debt.
- Operating cash flow benefited in part from a $26.4 million inventory decrease and increases in accounts payable and accrued expenses. Financing cash flow included $48.3 million of delayed-draw term-loan repayments.
Outlook, management commentary and risks
Management expects approximately $57 million of FY2022 capital expenditures, principally for logistics optimization and automated fulfillment centers. It stated that operating cash flow and availability under the credit facility should fund working-capital needs and anticipated capital expenditures for the foreseeable future. The filing provides no specific FY2022 sales or earnings guidance. Its “Big Dam Blueprint” emphasizes digital-first operations, optimizing owned retail and direct channels, developing a multi-brand platform, testing growth opportunities and investing in logistics and technology.
COVID-related supply-chain disruption, container shortages, port congestion and expedited freight costs affected FY2021 operations; management said the future effects on store traffic and consumer demand remained uncertain. Key risks include dependence on foreign sourcing and a concentrated supplier base (the largest supplier represented 53% of inventory purchases), freight and labor cost increases, inventory forecasting and seasonal volatility, competition, customer demand, cyber and technology risks, and execution of growth initiatives. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. The product-return reserve was $5.4 million and was identified as a critical audit matter because estimating future returns requires judgment. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Whether gross-margin gains and improved profitability persist as freight, labor and merchandise costs evolve.
- Whether direct-to-consumer sales stabilize and store-market growth continues, while accounting for prior-year pandemic-related comparisons.
- Whether the planned $57 million FY2022 capital program, including fulfillment automation, is delivered on schedule and within budget.
- Cash conversion and inventory trends, including the extent to which FY2021 operating cash flow benefited from inventory reduction and higher payables/accruals.
- Supplier concentration, supply-chain resilience, covenant headroom and the distinction between Duluth borrowings and consolidated TRI debt.
- The assumptions behind non-GAAP Adjusted EBITDA and free cash flow, and the product-return reserve estimate.