Duluth Holdings Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended January 29, 2023, a 52-week period; comparison is with the 52 weeks ended January 30, 2022. The company sells men’s and women’s casual wear, workwear and accessories through stores and direct-to-consumer channels. It operated 62 retail stores and three outlet stores at year-end.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $653.3 million | $698.6 million |
| Gross profit / gross margin | $343.4 million / 52.6% | $377.3 million / 54.0% |
| Operating income | $6.2 million | $44.1 million |
| Net income | $2.2 million | $29.6 million |
| Net income attributable to controlling interest | $2.3 million | $29.7 million |
| Diluted EPS | $0.07 | $0.90 |
| Adjusted EBITDA (non-GAAP) | $43.5 million | $77.4 million |
| Cash from operating activities | $(5.6) million | $92.0 million |
| Free cash flow (non-GAAP) | $(28.5) million | $81.6 million |
Net sales fell 6.5%; gross margin declined 1.4 percentage points. Selling, general and administrative expenses rose 1.2% to $337.2 million and increased to 51.6% of sales from 47.7%. Adjusted EBITDA margin was 6.7%, versus 11.1%.
Year-end cash and cash equivalents were $45.5 million, down from $77.1 million. Working capital was $107.9 million. Inventory increased to $154.9 million from $122.7 million. Operating cash use reflected, among other items, the $32.3 million inventory increase and an $11.8 million decrease in accrued expenses. Capital expenditures were $22.8 million in cash purchases of property and equipment; total FY2022 capital expenditures, including software hosting implementation costs, were $31.5 million.
Reported debt included $26.7 million of TRI debt consolidated in the financial statements; the company states it is not the guarantor or obligor of those notes. The company had a $200 million revolving credit commitment, amended in July 2022 and extended to July 2027, and reported covenant compliance. The filing indicates no year-end borrowing under the revolver. Operating and finance lease liabilities were also significant, at $132.9 million and $40.3 million, respectively.
Material changes and unusual items
- Sales declined across both store and direct-to-consumer channels: direct-to-consumer sales were $412.1 million versus $438.5 million, and store sales were $241.2 million versus $260.1 million.
- Management attributed lower gross margin mainly to a lower full-price sales mix and deeper promotions, particularly in the second half, amid a heavily promotional retail environment.
- SG&A increased mainly because of depreciation associated with technology and fulfillment-network investments; lower sales also worsened expense leverage.
- Fourth-quarter net sales were $241.8 million, or 37.0% of annual sales, compared with $270.8 million, or 38.8%, in FY2021. Fourth-quarter net income was $7.4 million versus $17.4 million.
- Net cash used in investing activities increased to $22.6 million, primarily reflecting property and equipment investment associated with the Adairsville, Georgia fulfillment center.
Outlook, risks and contingencies
Management’s “Big Dam Blueprint” prioritizes a digital-first approach, optimization of owned retail and direct channels, expansion of the multi-brand platform, selective testing of growth opportunities and investment in logistics and technology. The company expected approximately $55 million of FY2023 capital expenditures, including approximately $42.1 million for logistics optimization and the Adairsville automated fulfillment center. Management stated operating cash flow and credit-facility availability should cover working-capital needs and anticipated capital expenditures for the foreseeable future.
The filing highlights inflation and consumer-spending uncertainty, promotional and competitive pressure, inventory forecasting and seasonal demand, foreign sourcing and supplier concentration, shipping costs and service, execution of technology and fulfillment investments, and cybersecurity and privacy as material risks. One supplier accounted for 56% of inventory expenditures in FY2022. The company reported no legal proceedings expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective.
Important facts for investors to verify
- Whether sales, full-price mix and gross margin stabilize after the FY2022 decline and increased promotional activity.
- Whether inventory levels convert to sales and operating cash flow improves, given the year-over-year inventory build and negative free cash flow.
- Progress, cost and expected returns from the Adairsville fulfillment center and planned FY2023 capital expenditures.
- Availability and terms of the revolving facility, covenant headroom, and the distinction between company obligations and consolidated TRI debt.
- Exposure to the principal sourcing agent and the ability to manage freight, supplier, consumer-demand and other highlighted risks.