Duluth Holdings Inc. — Q2 FY2023 Form 10-Q
Business context and reporting period. Duluth sells branded apparel, workwear and accessories through its website, catalog and stores. The filing covers the 13 weeks and six months ended July 30, 2023, compared with periods ended July 31, 2022. The company operated 62 retail stores and three outlet stores. Its business is seasonal, with historically significant revenue and operating profit in the fourth fiscal quarter.
Financial results
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $139.1 million | $141.5 million | $262.9 million | $264.4 million |
| Gross profit / margin | $71.5 million / 51.4% | $75.6 million / 53.4% | $137.1 million / 52.2% | $142.7 million / 54.0% |
| Operating income (loss) | ($1.4) million | $3.9 million | ($6.0) million | $2.9 million |
| Net income (loss) | ($2.0) million | $2.3 million | ($5.9) million | $1.0 million |
| Diluted EPS | ($0.06) | $0.07 | ($0.18) | $0.03 |
| Adjusted EBITDA (non-GAAP) | $8.6 million | $13.2 million | $13.8 million | $21.1 million |
Cash flow and liquidity. For the six months, operating cash flow was negative $1.2 million, investing cash flow was negative $31.4 million, and financing cash flow was negative $1.8 million. Cash fell by $34.4 million to $11.1 million. Capital expenditures were $31.5 million; management expected approximately $55 million of FY2023 capital expenditures, primarily for fulfillment-network and information-technology investments. Net working capital was $84.6 million.
Debt and leases. Consolidated TRI long-term debt was $26.3 million, including current maturities; the filing states Duluth is not the guarantor or obligor of these TRI notes. Operating lease liabilities totaled $127.0 million and finance lease liabilities totaled $38.9 million. The company’s revolving credit facility has a $200 million commitment and matures July 8, 2027. The filing reports $10 million of borrowings and $10 million of repayments during the six-month period, and states the company was in compliance with facility covenants at July 30, 2023. Facility availability at period-end is not clearly stated in the provided filing text.
Material changes versus prior comparable periods
- Q2 sales declined 1.7%; first-half sales declined 0.6%. Direct-to-consumer sales rose while store sales fell: Q2 channel figures were $86.8 million and $52.3 million, respectively, versus $85.3 million and $56.2 million a year earlier.
- Gross margin fell 2.0 percentage points in Q2 and 1.8 points for the first half. Management attributed the pressure to a higher promotional and clearance mix and, for the first half, lower full-price sales and deeper discounting.
- SG&A rose 1.7% in Q2 and 2.4% for the first half, partly due to higher occupancy costs at the new automated Southeast fulfillment center and added strategic-initiative headcount. SG&A rose to 52.4% of sales in Q2 and 54.4% for the first half.
- Adjusted EBITDA decreased to 6.2% of Q2 sales from 9.4%, and to 5.3% of first-half sales from 8.0%.
- First-half operating cash use improved from $41.1 million to $1.2 million, primarily as inventory growth was much lower than in the prior-year period. Investing cash use increased from $18.7 million to $31.4 million.
Outlook, risks and other notable items
- Management said cash from operations and available credit were expected to cover working-capital needs and anticipated capital expenditures for the foreseeable future. No specific sales or earnings guidance is provided in the filing text.
- Management cited continued high inflation and uncertainty around store traffic and consumer demand. Disclosed risks also include consumer spending, supply-chain and fulfillment disruptions, inventory and discounting, competition, labor and transportation costs, and execution of growth and store initiatives.
- The company recorded no asset-impairment triggering events or indicators during the period and reported no material changes to previously disclosed risk factors. It reported no material off-balance-sheet arrangements and no legal proceedings believed likely to have a material adverse effect.
- A $5.3 million available-for-sale corporate trust security is valued using Level 3 discounted-cash-flow inputs; its fair value is subject to estimation uncertainty. No other-than-temporary impairment was recorded.
- Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether promotions and clearance activity persist, and whether gross margin stabilizes or recovers.
- Progress, costs and expected benefits from the new fulfillment center and planned capital spending.
- Cash use, seasonal working-capital needs, year-end liquidity and actual availability under the revolving facility.
- Store traffic and consumer demand trends, including the effect of inflation and weaker store-market sales.
- Valuation assumptions and credit performance underlying the Level 3 corporate trust security.