Duluth Holdings Inc. — Q1 Fiscal 2017 Form 10-Q
Reporting period: The unaudited 13 weeks ended April 30, 2017; comparable period ended May 1, 2016. Duluth sells branded apparel and accessories through its direct channel (website and catalogs) and retail stores. At quarter-end it operated 18 retail stores and two outlets.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $83.7 million | $68.6 million |
| Gross profit / gross margin | $48.6 million / 58.1% | $39.7 million / 57.8% |
| SG&A | $47.9 million (57.2% of sales) | $34.4 million (50.0% of sales) |
| Operating income | $0.7 million (0.9% margin) | $5.3 million (7.8% margin) |
| Net income | $0.4 million | $3.3 million |
| Net income attributable to controlling interest | $0.4 million; $0.01 per share | $3.2 million; $0.10 per share |
| Adjusted EBITDA | $2.7 million (3.2% of sales) | $6.6 million (9.6% of sales) |
| Net cash used in operating activities | $3.5 million | $3.8 million |
| Net cash used in investing activities | $7.7 million | $3.5 million |
At April 30, 2017, cash was $13.6 million, working capital was $59.1 million, and total assets were $160.0 million. Funded debt was $0.8 million, including $0.7 million of current maturities. The balance sheet also reported $4.8 million of noncurrent finance lease obligations for build-to-suit leases. No revolving-line borrowings were outstanding; $40.0 million was available. The secured revolving facility carries a 2.2% effective rate at quarter-end, matures July 31, 2019, and increases to $50 million of availability August 1, 2017. The company reported compliance with debt covenants.
Material changes and operating drivers
- Sales rose 21.9% to $83.7 million. Direct sales increased 5.7% to $63.8 million; retail sales grew 139.7% to $19.9 million, primarily reflecting 11 more stores than in the prior-year quarter. Four stores opened during the quarter, versus none in the comparable period. Website visits increased 16.5%.
- Gross margin improved 30 basis points, with product mix and strategic promotions partly offset by lower shipping revenue.
- SG&A increased 39.4%, driven by higher advertising and marketing ($5.9 million), general and administrative costs ($4.9 million), and selling expenses ($2.7 million). Advertising included the launch of a women’s television campaign; store openings, rent, depreciation, staffing, and retail-related customer service also raised costs.
- Net income fell 89.0%, and Adjusted EBITDA fell 59.1%. Direct-segment operating results shifted to a $0.2 million loss from $4.2 million income; retail operating income was $0.9 million versus $1.2 million.
- Cash declined $10.5 million during the quarter. Operating cash use reflected seasonal inventory investment, including a $4.5 million inventory increase; investing cash use primarily funded $8.3 million of capital expenditures.
Outlook, risks, and unusual items
- Management expects fiscal 2017 capital expenditures of $31–$35 million, including $23–$27 million for new-store expansion. Estimated capital expenditures and starting inventory per new store are $2.0–$2.6 million.
- Management expects positive operating cash flow for fiscal 2017 as seasonal working capital declines in the fourth quarter, and believes cash, operating cash flow, and available credit will cover foreseeable needs. The company is typically a cash user in the first three quarters and generates significant revenue and operating profit in the fourth quarter; results are seasonal.
- Growth plans include brand investment, retail expansion, selected men’s assortment growth, and growing the women’s business. Management reported a historical average store payback of less than two years. No specific sales or earnings guidance was provided.
- The company consolidates Schlecht Retail Ventures LLC, a variable interest entity owned by its majority shareholder, which holds certain leased property. Its September 2017 mortgage includes a balloon payment and is guaranteed by the majority shareholder.
- Management cited risks including execution of growth plans, seasonality, inventory and marketing needs, and the forward-looking risks incorporated from its 2016 Form 10-K. It reported no material changes to those risk factors and no legal proceedings expected to have a material adverse effect.
- The company expects lease-accounting adoption in fiscal 2018 to have a significant balance-sheet impact; its review of the revenue-recognition standard was ongoing, with no material timing changes identified to date.
Investor facts to verify
- Whether sales growth and store expansion can offset sharply higher SG&A and restore operating margins.
- Inventory levels, seasonal sell-through, and the adequacy of reserves for excess and obsolete inventory.
- Capital spending, new-store costs and payback, and the expected availability and use of revolving credit.
- Cash-flow seasonality and management’s expectation of positive full-year operating cash flow.
- The effect of the related-party property arrangements, SRV consolidation, and build-to-suit lease obligations.