Duluth Holdings Inc. — Q1 FY2021 Form 10-Q
Reporting period: 13 weeks ended May 2, 2021. Unaudited results are compared with the 13 weeks ended May 3, 2020. Duluth Trading sells men’s and women’s apparel, workwear and accessories through an omnichannel business; it operated 61 retail stores and three outlet stores at quarter-end.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $133.4 million | $109.9 million |
| Gross profit / gross margin | $66.5 million / 49.9% | $52.3 million / 47.6% |
| SG&A | $64.6 million / 48.5% of sales | $71.3 million / 64.9% of sales |
| Operating income (loss) | $1.9 million | $(19.0) million |
| Net income (loss) | $0.5 million | $(15.2) million |
| Net income (loss) attributable to controlling interest | $0.5 million; $0.02 per diluted share | $(15.1) million; $(0.47) per diluted share |
| Adjusted EBITDA (non-GAAP) | $10.1 million; 7.6% of sales | $(11.6) million; (10.5)% of sales |
| Net cash from (used in) operating activities | $12.4 million | $(33.5) million |
Performance changes and drivers
- Sales increased 21.4%. Store-channel sales were $45.1 million, versus $23.4 million; direct-to-consumer sales were $88.4 million, versus $86.5 million. Management attributed the store comparison largely to temporary store closures in the prior-year quarter, as well as online growth from existing and new customers.
- Gross margin improved 2.3 percentage points, with management citing a higher full-price sales mix and improved margins on full-price and clearance merchandise.
- SG&A declined $6.7 million. Management cited lower traditional advertising and digital prospecting, elimination of third-party logistics, and $1.6 million of prior-year non-recurring COVID-related costs; increased wages with stores open for the full quarter partly offset the decline.
- The effective tax rate on controlling-interest income was 16%, affected by discrete items; management said it was 25% excluding those non-recurring items.
Cash, debt and liquidity
- Cash and cash equivalents were $26.1 million at May 2, down from $47.2 million at January 31. Net working capital was $73.5 million.
- Operating cash flow was $12.4 million. Inventory reduction and higher trade payables were principal working-capital sources, partly offset by lower accrued expenses. Investing cash outflow was $2.0 million, primarily technology capital spending.
- Financing cash outflow was $31.6 million, including $30.6 million of term-loan repayments; this drove the quarter’s $21.2 million decrease in cash.
- At quarter-end, Duluth had $17.6 million outstanding under its delayed-draw term loan, all classified as current, and no revolving-credit borrowings. TRI debt of $27.7 million is consolidated, but the company stated it is not the guarantor or obligor of those TRI notes. Operating and finance lease liabilities were also significant.
- On May 14, 2021, after quarter-end, the company terminated its prior credit agreement and entered a new, asset-secured revolving facility of up to $150 million, maturing May 14, 2026. The facility includes financial and non-financial covenants.
Outlook, risks and other notable matters
- No specific sales or earnings guidance is provided in the filing. Management expects fiscal 2021 capital expenditures of approximately $15 million, including about $13 million for technology and $2 million for one planned store. It said operating cash flow and credit-facility availability should cover anticipated working capital and capital expenditures for the foreseeable future.
- Management notes that sales and operating profit are historically concentrated in the fourth quarter, creating seasonal cash-flow needs. It also cautions that COVID-19’s continuing effects on demand, store traffic, supply chains and operations cannot be reasonably estimated.
- Other identified risks include transportation delays and port congestion, product sourcing and inventory planning, competition, changing customer preferences, labor and freight costs, store performance, and information-technology systems. Management reported no material change to previously disclosed risk factors.
- No impairment triggers were identified in the quarter. The company reported no material legal proceedings, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much of the sales increase reflects recovery from prior-year COVID-related store closures versus underlying demand growth.
- Whether improved gross margin and lower SG&A are sustainable, particularly given freight, marketing, wage and supply-chain pressures.
- Cash and borrowing availability after the May 14 refinancing, including covenant terms and the classification and repayment schedule of debt.
- Whether planned technology and store investment, inventory levels, and seasonal working-capital needs remain consistent with management’s liquidity expectations.