Duluth Holdings Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 29, 2017 (52 weeks); fiscal Q4 included the holiday season. Duluth sells branded casual wear, workwear and accessories through its direct channels (website and catalogs) and retail stores.
Financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $376.1 million | $304.2 million | +23.7% |
| Gross profit / margin | $214.1 million / 56.9% | $173.5 million / 57.0% | +23.4% profit; margin down 0.1 percentage point |
| Operating income / margin | $35.0 million / 9.3% | $29.2 million / 9.6% | +20.1% income; margin down 0.3 percentage point |
| Net income attributable to controlling interest | $21.3 million | $27.4 million | Down 22.3% reported |
| Diluted EPS | $0.66 | $1.06 | Down 37.7% |
| Adjusted EBITDA | $41.2 million / 10.9% of sales | $34.0 million / 11.2% of sales | +21.1%; margin down 0.3 percentage point |
- FY2016 direct sales were $309.7 million (+16.3%); retail sales were $66.4 million (+75.7%), with seven new stores opened. Direct represented 82.3% of sales and retail 17.7%.
- Q4 sales were $174.7 million versus $140.4 million; gross margin was 55.4% versus 56.1%; operating income was $22.9 million versus $19.0 million. Net income attributable to controlling interest was $14.0 million versus $17.5 million.
- Cash from operations was $20.3 million, compared with $14.2 million. Capital expenditures were $28.7 million, versus $7.3 million; cash used in investing was $30.3 million. Cash declined $13.8 million to $24.0 million.
- At year-end, working capital was $66.1 million and total assets were $156.0 million. Reported debt, including current maturities, was $0.8 million; the separate $40 million revolving credit facility had no balance outstanding. Finance lease obligations under build-to-suit leases were $3.3 million.
- Gross margin edged lower amid a promotional retail environment, partly offset by favorable product mix. SG&A rose 24.1% to $179.1 million; its share of sales increased 0.1 percentage point to 47.6%.
Material changes and unusual items
- The company’s S corporation status ended on November 25, 2015, when it converted to a C corporation and completed its IPO. FY2016 was subject to corporate income tax for the full year; income tax expense was $13.5 million versus $1.3 million in FY2015. Management reports that, using an approximately 40% C-corporation tax basis for comparison, FY2016 net income increased 23.4% over FY2015 pro forma net income.
- FY2016 included significant growth investment: capital expenditures of $28.7 million, seven store openings and a 75,000-square-foot distribution-center expansion. Inventory increased $14.4 million, contributing to operating cash needs.
- The company reported 28 consecutive quarters of year-over-year sales growth. Fourth-quarter sales accounted for 46.4% of FY2016 sales and 65.6% of annual net income, illustrating substantial seasonality.
Outlook, risks and contingencies
- Management planned 10 to 12 store openings in FY2017, with expected capital expenditures of $31 million to $35 million, including $23 million to $27 million for retail expansion. Estimated capital expenditures and starting inventory per new store were $2.0 million to $2.6 million.
- The revolving credit facility provided availability of up to $40 million through July 2017, increasing to $50 million through July 2018 and $60 million through July 2019. It is secured by substantially all company assets and has financial and non-financial covenants; the company reported compliance at year-end.
- Key risks include dependence on foreign sourcing and concentrated suppliers (the largest supplier represented 51% of FY2016 purchases; the top six represented 83%), inventory forecasting and seasonality, promotional and shipping-cost pressure, execution of rapid store growth, customer demand and brand strength, and technology, cybersecurity and supply-chain disruptions.
- Operating lease commitments totaled $57.2 million. Management did not identify legal proceedings expected to have a material adverse effect, while noting that litigation outcomes are inherently uncertain.
- Management said cash, operating cash flow and available credit should fund working capital and planned investment for the foreseeable future. This is not quantified earnings or revenue guidance.
Important facts for investors to verify
- Whether planned store openings achieve projected economics and payback as expansion accelerates.
- Whether sales growth can translate into stable or improving margins amid promotions, shipping costs and rising operating expenses.
- How much of the reported earnings decline reflects the full-year corporate tax burden versus underlying operating performance; review the pro forma comparison and assumptions.
- Inventory levels, markdowns, cash conversion and seasonal borrowing needs, particularly as inventory and capital investment rise.
- Supplier concentration, foreign sourcing exposure, lease obligations and the impact of planned system upgrades.
- Governance implications of the dual-class structure: Class A shares carry ten votes each, and the founder controlled approximately 67.3% of voting power.