Duluth Holdings Inc. — Q3 FY2022 Form 10-Q
Reporting period: Third quarter and first nine months ended October 30, 2022; comparisons are with the periods ended October 31, 2021. Duluth sells apparel, workwear and accessories through its direct-to-consumer channels and stores. It operated 62 retail stores and three outlet stores at quarter-end.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $147.1 million | $145.3 million | $411.5 million | $427.8 million |
| Gross profit / margin | $76.9 million / 52.3% | $83.7 million / 57.6% | $219.6 million / 53.4% | $231.6 million / 54.1% |
| SG&A | $84.3 million | $78.8 million | $224.0 million | $211.8 million |
| Operating income (loss) | $(7.4) million | $4.9 million | $(4.5) million | $19.8 million |
| Net income (loss) | $(6.2) million | $2.8 million | $(5.2) million | $12.2 million |
| Adjusted EBITDA | $1.7 million | $13.0 million | $22.9 million | $44.3 million |
Q3 diluted loss per share was $0.19, versus earnings per share of $0.09 a year earlier. Nine-month diluted loss per share was $0.16, compared with earnings per share of $0.38. Adjusted EBITDA is a non-GAAP measure.
For the quarter, sales increased 1.3%, but gross profit declined 8.0%. Management attributed the 5.3 percentage-point gross-margin reduction mainly to a higher promotional-sales mix. SG&A rose 7.0%, primarily from higher digital advertising and depreciation. For the first nine months, sales fell 3.8%, with management citing slower store traffic; gross margin declined 0.7 percentage points, while SG&A increased 5.8%, reflecting added headcount and depreciation from ongoing capital investment.
Cash, liquidity and debt
- Cash and cash equivalents were $9.4 million at October 30, 2022, down from $77.1 million at January 30, 2022.
- Nine-month operating cash flow was negative $51.0 million, versus positive $32.8 million in the prior-year period. Inventory increased $82.0 million; higher accounts payable partly offset cash use.
- Investing cash outflow was $24.1 million, mainly for fulfillment-network and technology investments. Financing provided $7.5 million, including $10.0 million drawn on the revolving line of credit.
- Current assets were $240.0 million and current liabilities were $141.3 million. Inventory was $204.7 million, up from $122.7 million at fiscal year-end.
- The company reported $10.0 million outstanding under its revolving facility. The amended facility provides up to $200 million, matures July 8, 2027, and uses Term SOFR as its pricing index. Duluth reported compliance with all facility covenants.
- Consolidated TRI debt was $26.8 million. The filing states Duluth is not the guarantor or obligor of TRI’s notes.
Outlook, commentary and risks
Management expected fiscal 2022 capital expenditures of approximately $35 million, including software-hosting implementation costs, principally for logistics optimization, fulfillment and information technology. Management said operating cash flow and credit-facility availability should cover working capital needs and anticipated capital expenditures for the foreseeable future, while noting that cash generation is seasonal and historically strongest in the fourth quarter. The filing provides no specific revenue or earnings guidance.
The company continued its “Big Dam Blueprint,” emphasizing digital capabilities, direct-channel investment, a multi-brand platform, testing growth opportunities, and investment in logistics, technology and talent. Risks discussed include inflation, consumer demand and store traffic uncertainty, supply-chain and transportation disruptions, inventory planning, competition, labor and other operating costs, seasonality, and IT systems. No material changes to previously disclosed risk factors were reported. No material legal proceedings, material off-balance-sheet arrangements, or impairment indicators were reported.
Key facts for investors to verify
- Whether promotional activity and margin pressure persist, and whether inventory levels normalize after the substantial build.
- Whether slower store traffic and lower nine-month sales improve during the holiday-driven fourth quarter.
- How quickly the company converts inventory and capital spending into operating cash flow, given lower cash and the new revolver draw.
- Progress against the approximately $35 million fiscal-year capital expenditure plan and the expected returns from fulfillment and technology investment.
- Whether the company remains in compliance with credit-facility covenants and has adequate liquidity through seasonal working-capital swings.