Duluth Holdings Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2016 (13 and 26 weeks, respectively); comparisons are to periods ended August 2, 2015. Amounts below are in millions except per-share data, percentages, and store counts. The company sells branded apparel and accessories through its direct channel (website and catalogs) and retail stores. At quarter-end it operated nine retail stores and two outlet stores.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $65.8 | $51.7 | $134.5 | $108.5 |
| Gross profit / margin | $38.9 / 59.1% | $30.5 / 58.9% | $78.6 / 58.5% | $63.1 / 58.2% |
| Operating income / margin | $6.0 / 9.1% | $5.8 / 11.1% | $11.3 / 8.4% | $8.5 / 7.8% |
| Net income | $3.7 | $5.7 | $7.0 | $8.5 |
| Net income attributable to controlling interest | $3.6 | $5.7 | $6.9 | $8.4 |
| Basic / diluted EPS attributable to controlling interest | $0.11 / $0.11 | $0.24 / $0.24 | $0.22 / $0.21 | $0.35 / $0.35 |
| Adjusted EBITDA (non-GAAP) | $7.5 | $6.6 | $14.0 | $11.2 |
- Sales rose 27.4% in Q2 and 23.9% for the first half. Direct sales increased 24.2% and 20.6%, respectively; retail sales increased 43.8% and 47.2%. Retail represented 18.2% of Q2 sales and 15.1% of first-half sales, up from 16.1% and 12.7%.
- Gross margin improved modestly, but Q2 operating margin declined 2.0 percentage points as SG&A grew 33.3%, faster than sales. First-half operating margin increased 0.6 percentage points.
- Reported net income comparisons are affected by the November 2015 change from S-corporation to C-corporation tax status. On a pro forma 40% tax basis for prior-year periods, management reported controlling-interest net income growth of 5.8% for Q2 and 36.3% for the first half. Actual 2015 comparison-period net income was not taxed at the corporate level.
- Q2 adjusted EBITDA increased 13.9%, but its margin fell to 11.3% from 12.7%. First-half adjusted EBITDA rose 25.1%, with margin broadly stable at 10.4% versus 10.3%.
Cash flow, balance sheet, and liquidity
- For the six months, operating cash flow was $1.1 million, versus cash used of $1.0 million a year earlier. Inventory growth used $10.9 million of cash, partly offset by a $5.6 million increase in trade payables.
- Investing cash outflow was $15.3 million, primarily $14.5 million of capital expenditures; financing cash outflow was $0.3 million. Cash decreased $14.6 million to $23.3 million.
- At July 31, 2016, inventory was $66.9 million, total assets $133.4 million, and working capital $62.3 million. Total debt was $4.9 million, including $4.1 million classified as current.
- The company had no balance outstanding on its $40 million revolving credit facility; undrawn availability, subject to borrowing-base limits, was $33.5 million. It reported compliance with debt covenants. The facility is secured by substantially all company assets and expires in July 2018.
- After quarter-end, the company and its consolidated affiliate paid off three mortgage balances: approximately $0.4 million on August 5, $0.5 million on August 15, and $3.1 million on August 23. The related interest-rate swap was terminated after the $3.1 million payoff.
Outlook, commentary, and risks
- Management expected fiscal 2016 capital expenditures of approximately $24–$25 million, including $10–$11 million for new retail stores; a new store was expected to require $2.0–$2.6 million in capital expenditures and starting inventory.
- The company said cash on hand, operating cash flow, and available revolving-credit capacity should fund working capital, planned capital expenditures, and growth for the foreseeable future. It gave no specific full-year sales or earnings guidance in the provided filing text.
- Growth priorities include brand awareness and customer acquisition, retail expansion, selected men’s assortment broadening, and growth in women’s products. Management cited increased website visits and positive customer response to marketing. It also noted that historical sales and operating profit are concentrated in the holiday-season fourth quarter.
- Marketing, store expansion, payroll, distribution, and customer-service costs pressured quarterly expense leverage. Management attributed gross-margin improvement to product costs, mix, and promotion management; it also noted increased use of third-party logistics providers.
- Key exposures include seasonal inventory and working-capital needs, execution of store and distribution-center expansion, marketing effectiveness, and compliance with credit covenants. Most merchandise is sourced from Asia, generally in U.S. dollars; the company did not hedge foreign currency exposure. Operating leases are not reflected as debt under the then-current accounting presentation.
- The company reported no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. Disclosure controls were concluded effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and store expansion translate into sustained operating-margin improvement, particularly given Q2 SG&A growth and lower adjusted EBITDA margin.
- Whether inventory levels, seasonal demand, and planned capital spending convert into cash as expected; monitor holiday-season performance and cash flow.
- The impact of the corporate tax regime on reported earnings and EPS, using comparable after-tax periods when assessing trends.
- Remaining borrowing-base availability, covenant headroom, and debt balances after the disclosed subsequent mortgage repayments.
- Execution and returns from new stores, women’s marketing, and distribution-center investment; management cited average store payback of less than two years, a company-reported measure.