Duluth Holdings Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended February 2, 2020 (52 weeks); comparative FY2018 ended February 3, 2019 (53 weeks). The filing was signed March 20, 2020. FY2019 fourth quarter included the holiday selling season.
Business context
Duluth Trading sells men’s and women’s apparel, workwear, footwear, accessories and hard goods exclusively through its direct channels (website and catalogs) and retail stores. At year-end, it operated 58 retail stores and three outlet stores; it opened 15 retail stores during FY2019. Direct sales were 56.9% of revenue and retail sales 43.1%.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $615.6 million | $568.1 million |
| Gross profit / margin | $328.1 million / 53.3% | $310.4 million / 54.6% |
| Operating income / margin | $28.1 million / 4.6% | $37.2 million / 6.5% |
| Net income attributable to controlling interest | $18.9 million | $23.2 million |
| Diluted earnings per share | $0.58 | $0.72 |
| Adjusted EBITDA | $51.9 million / 8.4% of sales | $51.8 million / 9.1% of sales |
| Cash from operating activities | $6.7 million | $31.1 million |
| Cash used in investing activities | $30.7 million | $53.7 million |
| Cash provided by financing activities | $21.5 million | $18.6 million |
All figures are approximate; dollar amounts are in U.S. dollars. FY2019 net sales rose 8.4%, but FY2018 included an additional week, which contributed approximately $7.7 million of sales. Men’s sales were $419.1 million (+6.0%), women’s sales $162.8 million (+15.3%), and hard goods/other $33.7 million (+7.5%). Direct sales were essentially flat, while retail sales rose 22.0%, driven by new stores and partly offset by lower existing-store sales.
Fourth-quarter sales were $259.6 million versus $250.5 million, and net income attributable to controlling interest was $24.4 million versus $20.6 million. Q4 gross margin was 52.8% versus 52.4%; operating margin was 12.8% versus 12.0%.
Liquidity, debt and financial position
At February 2, 2020, cash was $0.5 million and working capital was $83.4 million. Inventory increased $50.2 million year over year to $147.8 million and was a major use of operating cash. The company reported $19.3 million outstanding on its revolving line and $20.0 million on its delayed-draw term loan, as well as $28.3 million of TRI Holdings debt consolidated in the financial statements. Duluth’s credit facility provides up to $80 million of revolving credit and up to $50 million of delayed-draw term financing; the facility is secured by substantially all company assets. The company reported compliance with its debt covenants at year-end.
Balance-sheet lease liabilities were $116.8 million operating and $39.0 million finance. Total contractual obligations reported were $267.8 million, including debt and lease commitments. The company adopted lease accounting standard ASC 842 in FY2019, adding right-of-use assets and lease liabilities to the balance sheet.
Changes, outlook and risks
- Revenue growth did not translate into higher annual profit: gross margin fell 1.3 percentage points, operating income declined 24.4%, and controlling-interest net income declined 18.3%. Management attributed lower gross margin primarily to additional promotions and clearance activity during the first three quarters; it said margins stabilized and exceeded the prior-year quarter in Q4.
- SG&A rose 9.8% to $300.0 million, reflecting store growth, personnel, occupancy, equipment and technology-related depreciation. Depreciation and amortization increased to $22.1 million from $12.6 million. Interest expense fell to $4.5 million, primarily following lease-accounting changes.
- Management expected capital outlays to moderate in 2020, with store growth planned at 30%–40% less square footage than over the preceding three years, and aimed to improve operating earnings and free cash flow. It had signed six store leases, four intended for FY2020. These plans were subject to substantial uncertainty.
- COVID-19 was identified as a significant subsequent risk. As of March 19, 2020, eight stores had closed, additional closures were under evaluation, and remaining stores could face reduced hours. The company said it was curtailing expenses and capital spending, limiting 2020 openings to stores with executed leases, delaying nonessential technology projects and had drawn an additional $30 million on its delayed-draw term loan. Management stated that the pandemic’s duration and financial impact could not be reliably estimated.
- Supply-chain concentration is material: the largest supplier/agent accounted for 54% of FY2019 inventory expenditures; the second accounted for 12%. Other principal risks include consumer demand and seasonality, inventory forecasting and markdowns, shipping economics, foreign sourcing and trade conditions, and cyber and technology disruptions.
- The company reported no legal proceedings expected to have a material adverse effect. Its independent auditor gave an unqualified opinion on the financial statements; management stated disclosure controls and internal control over financial reporting were effective. The auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- COVID-19 effects after the filing date: store closures, sales trends, supply availability, liquidity and further borrowing.
- Whether promotional activity and clearance pressure persist, and whether gross margin recovers while sales and earnings remain profitable.
- Inventory growth, aging and markdown exposure, including the effects of the revised inventory-obsolescence methodology.
- Actual FY2020 store openings and capital spending versus management’s reduced expansion plans, alongside free cash flow and covenant headroom.
- Current debt outstanding and availability under the revolving facility and delayed-draw term loan, including the post-year-end $30 million draw.
- Dependence on the largest sourcing agent and the resilience of manufacturing and distribution operations.