SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 29, 2017May 5, 2019
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-37641
_________________________________________
DULUTH HOLDINGS INC.
(Exact name of registrant as specified in its charter)
_________________________________________
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Wisconsin | 39-1564801 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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(Address of principal executive offices) | (Zip Code) |
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(608) 424-1544 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class B Common Stock, No Par Value | DLTH | NASDAQ Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☑ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
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| Emerging growth company | ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of December 4, 2017,June 10, 2019, was 3,364,200.3,364,200.
The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of December 4, 2017,June 10, 2019, was 29,097,107.
29,360,357.
DULUTH HOLDINGS INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED October 29, 2017 May 5, 2019
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3 | ||
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6 | ||
| 7 | |
8 | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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27 | ||
27 | ||
28 | ||
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| 29 |
2
PART I. FINANCIAL INFORMATION
DULUTH HOLDINGS INC.
Condensed Consolidated Balance Sheets - Assets
(Unaudited)
(Amounts in thousands)
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| October 29, 2017 |
| January 29, 2017 | ||
ASSETS |
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Current Assets: |
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Cash |
| $ | 958 |
| $ | 24,042 |
Accounts receivable |
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| 62 |
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| 45 |
Other receivables |
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| 1,669 |
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| 349 |
Inventory, less reserve for excess and obsolete items |
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| 129,475 |
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| 70,368 |
Prepaid expenses |
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| 8,820 |
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| 4,860 |
Deferred catalog costs |
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| 4,431 |
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| 1,582 |
Total current assets |
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| 145,415 |
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| 101,246 |
Property and equipment, net |
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| 98,151 |
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| 52,432 |
Restricted cash |
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| 2,169 |
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| 1,435 |
Available-for-sale security |
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| 6,323 |
|
| — |
Goodwill |
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| 402 |
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| 402 |
Other assets, net |
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| 487 |
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| 452 |
Total assets |
| $ | 252,947 |
| $ | 155,967 |
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Trade accounts payable |
| $ | 30,082 |
| $ | 9,330 |
Accrued expenses and other current liabilities |
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| 25,676 |
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| 19,822 |
Income taxes payable |
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| — |
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| 5,225 |
Bank overdrafts |
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| 2,930 |
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| — |
Current maturities of long-term debt |
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| 84 |
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| 742 |
Total current liabilities |
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| 58,772 |
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| 35,119 |
Long-term line of credit |
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| 50,101 |
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| — |
Finance lease obligations under build-to-suit leases |
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| 18,484 |
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| 3,349 |
Long-term debt, less current maturities |
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| 1,445 |
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| 35 |
Deferred rent obligations, less current maturities |
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| 3,305 |
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| 2,109 |
Deferred tax liabilities |
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| 1,507 |
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| 1,567 |
Total liabilities |
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| 133,614 |
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| 42,179 |
Commitments and contingencies |
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Shareholders' equity: |
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Preferred stock, no par value; 10,000 shares authorized; no shares |
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| — |
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| — |
Common stock (Class A), no par value; 10,000 shares authorized; |
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| — |
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| — |
Common stock (Class B), no par value; 200,000 shares authorized; |
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| — |
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| — |
Treasury stock, at cost; 3 and 0 shares as of October 29, 2017 and |
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| (57) |
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| — |
Capital stock |
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| 87,632 |
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| 86,446 |
Retained earnings |
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| 28,556 |
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| 24,733 |
Total shareholders' equity of Duluth Holdings Inc. |
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| 116,131 |
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| 111,179 |
Noncontrolling interest |
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| 3,202 |
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| 2,609 |
Total shareholders' equity |
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| 119,333 |
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| 113,788 |
Total liabilities and shareholders' equity |
| $ | 252,947 |
| $ | 155,967 |
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| May 5, 2019 |
| February 3, 2019 | ||
ASSETS |
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Current Assets: |
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Cash |
| $ | 992 |
| $ | 731 |
Accounts receivable |
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| 359 |
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| 28 |
Other receivables |
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| 8,292 |
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| 4,611 |
Inventory, less reserve for excess and obsolete items |
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| 104,289 |
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| 97,685 |
Prepaid expenses & other current assets |
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| 11,977 |
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| 12,640 |
Prepaid catalog costs |
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| 202 |
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| 2,503 |
Total current assets |
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| 126,111 |
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| 118,198 |
Property and equipment, net |
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| 136,652 |
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| 167,109 |
Operating lease right-of-use assets |
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| 134,956 |
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| — |
Finance lease right-of-use assets |
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| 10,610 |
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| — |
Restricted cash |
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| 1,578 |
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| 2,354 |
Available-for-sale security |
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| 6,267 |
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| 6,295 |
Goodwill |
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| 402 |
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| 402 |
Other assets, net |
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| 2,354 |
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| 2,401 |
Total assets |
| $ | 418,930 |
| $ | 296,759 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DULUTH HOLDINGS INC
Condensed Consolidated Balance Sheets – Liabilities and Equity
(Unaudited)
(Amounts in thousands)
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| May 5, 2019 |
| February 3, 2019 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Trade accounts payable |
| $ | 26,710 |
| $ | 25,363 |
Accrued expenses and other current liabilities |
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| 25,080 |
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| 26,530 |
Income taxes payable |
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| — |
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| 218 |
Current portion of operating lease liabilities |
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| 10,103 |
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| — |
Current portion of finance lease liabilities |
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| 315 |
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| — |
Current maturities of long-term debt |
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| 510 |
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| 500 |
Total current liabilities |
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| 62,718 |
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| 52,611 |
Long-term debt, less current maturities |
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| 29,576 |
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| 29,737 |
Finance lease obligations under build-to-suit leases |
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| — |
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| 23,034 |
Operating lease liabilities, less current maturities |
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| 118,475 |
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| — |
Finance lease liabilities, less current maturities |
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| 8,670 |
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| — |
Long-term line of credit |
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| 39,240 |
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| 16,542 |
Deferred tax liabilities |
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| 9,420 |
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| 9,722 |
Deferred rent obligations, less current maturities |
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| — |
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| 5,003 |
Total liabilities |
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| 268,099 |
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| 136,649 |
Commitments and contingencies |
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Shareholders' equity: |
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Preferred stock, no par value; 10,000 shares authorized; no shares |
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| — |
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| — |
Common stock (Class A), no par value; 10,000 shares authorized; |
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| — |
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| — |
Common stock (Class B), no par value; 200,000 shares authorized; |
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| — |
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| — |
Treasury stock, at cost; 19 and 5 shares as of May 5, 2019 and |
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| (369) |
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| (92) |
Capital stock |
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| 90,416 |
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| 89,849 |
Retained earnings |
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| 61,096 |
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| 70,592 |
Total shareholders' equity of Duluth Holdings Inc. |
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| 151,143 |
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| 160,349 |
Noncontrolling interest |
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| (312) |
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| (239) |
Total shareholders' equity |
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| 150,831 |
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| 160,110 |
Total liabilities and shareholders' equity |
| $ | 418,930 |
| $ | 296,759 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
34
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share figures)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| October 29, 2017 |
| October 30, 2016 |
| October 29, 2017 |
| October 30, 2016 | ||||
Net sales |
| $ | 83,729 |
| $ | 67,008 |
| $ | 253,642 |
| $ | 201,463 |
Cost of goods sold (excluding depreciation and amortization) |
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| 36,302 |
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| 28,260 |
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| 108,649 |
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| 84,102 |
Gross profit |
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| 47,427 |
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| 38,748 |
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| 144,993 |
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| 117,361 |
Selling, general and administrative expenses |
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| 48,039 |
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| 37,929 |
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| 137,467 |
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| 105,215 |
Operating (loss) income |
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| (612) |
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| 819 |
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| 7,526 |
|
| 12,146 |
Interest expense |
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| 661 |
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| 33 |
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| 1,199 |
|
| 108 |
Other income, net |
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| 73 |
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| 33 |
|
| 175 |
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| 163 |
(Loss) income before income taxes |
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| (1,200) |
|
| 819 |
|
| 6,502 |
|
| 12,201 |
Income tax (benefit) expense |
|
| (454) |
|
| 305 |
|
| 2,480 |
|
| 4,691 |
Net (loss) income |
|
| (746) |
|
| 514 |
|
| 4,022 |
|
| 7,510 |
Less: Net income attributable to noncontrolling interest |
|
| 70 |
|
| 52 |
|
| 199 |
|
| 188 |
Net (loss) income attributable to controlling interest |
| $ | (816) |
| $ | 462 |
| $ | 3,823 |
| $ | 7,322 |
Basic earnings per share (Class A and Class B): |
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Weighted average shares of |
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| 31,861 |
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| 31,520 |
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| 31,837 |
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| 31,520 |
Net (loss) income per share attributable to controlling interest |
| $ | (0.03) |
| $ | 0.01 |
| $ | 0.12 |
| $ | 0.23 |
Diluted earnings per share (Class A and Class B): |
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Weighted average shares and |
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| 31,861 |
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| 32,294 |
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| 32,297 |
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| 32,286 |
Net (loss) income per share attributable to controlling interest |
| $ | (0.03) |
| $ | 0.01 |
| $ | 0.12 |
| $ | 0.23 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Amounts in thousands)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| October 29, 2017 |
| October 30, 2016 |
| October 29, 2017 |
| October 30, 2016 | ||||
Net (loss) income |
| $ | (746) |
| $ | 514 |
| $ | 4,022 |
| $ | 7,510 |
Other comprehensive income: |
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Change in value of interest rate swap agreement |
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| — |
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| 15 |
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| — |
|
| 27 |
Comprehensive (loss) income |
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| (746) |
|
| 529 |
|
| 4,022 |
|
| 7,537 |
Comprehensive income attributable |
|
| 70 |
|
| 52 |
|
| 199 |
|
| 188 |
Comprehensive (loss) income attributable |
| $ | (816) |
| $ | 477 |
| $ | 3,823 |
| $ | 7,349 |
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| Three Months Ended | ||||
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| May 5, 2019 |
| April 29, 2018 | ||
Net sales |
| $ | 114,244 |
| $ | 100,207 |
Cost of goods sold (excluding depreciation and amortization) |
|
| 53,326 |
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| 44,267 |
Gross profit |
|
| 60,918 |
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| 55,940 |
Selling, general and administrative expenses |
|
| 70,609 |
|
| 56,197 |
Operating loss |
|
| (9,691) |
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| (257) |
Interest expense |
|
| 841 |
|
| 821 |
Other income, net |
|
| 204 |
|
| 163 |
Loss before income taxes |
|
| (10,328) |
|
| (915) |
Income tax benefit |
|
| (2,683) |
|
| (232) |
Net loss |
|
| (7,645) |
|
| (683) |
Less: Net (loss) income attributable to noncontrolling interest |
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| (73) |
|
| 8 |
Net loss attributable to controlling interest |
| $ | (7,572) |
| $ | (691) |
Basic loss per share (Class A and Class B): |
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Weighted average shares of common stock outstanding |
|
| 32,281 |
|
| 32,046 |
Net loss per share attributable to controlling interest |
| $ | (0.23) |
| $ | (0.02) |
Diluted loss per share (Class A and Class B): |
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Weighted average shares and equivalents outstanding |
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| 32,281 |
|
| 32,046 |
Net loss per share attributable to controlling interest |
| $ | (0.23) |
| $ | (0.02) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DULUTH HOLDINGS INC.
Condensed Consolidated StatementStatements of Shareholders’ EquityComprehensive Income
(Unaudited)
(Amounts in thousands)
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| Noncontrolling |
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| Capital stock |
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| interest in |
| Total | ||||||||
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| Treasury |
| Retained |
| variable interest |
| shareholders' | |||||||
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| Shares |
| Amount |
| stock |
| earnings |
| entity |
| equity | |||||
Balance at January 29, 2017 |
| 32,376 |
| $ | 86,446 |
| $ | — |
| $ | 24,733 |
| $ | 2,609 |
| $ | 113,788 |
Issuance of common stock |
| 109 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Restricted stock forfeitures |
| (21) |
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| — |
|
| — |
|
| — |
|
| — |
|
| — |
Amortization of stock-based compensation |
| — |
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| 1,186 |
|
| — |
|
| — |
|
| — |
|
| 1,186 |
Restricted stock surrendered for taxes |
| (3) |
|
| — |
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| (57) |
|
| — |
|
| — |
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| (57) |
Capital contributions |
| — |
|
| — |
|
| — |
|
| — |
|
| 794 |
|
| 794 |
Distributions |
| — |
|
| — |
|
| — |
|
| — |
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| (400) |
|
| (400) |
Net income |
| — |
|
| — |
|
| — |
|
| 3,823 |
|
| 199 |
|
| 4,022 |
Balance at October 29, 2017 |
| 32,461 |
| $ | 87,632 |
| $ | (57) |
| $ | 28,556 |
| $ | 3,202 |
| $ | 119,333 |
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| Three Months Ended | ||||
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| May 5, 2019 |
| April 29, 2018 | ||
Net loss |
| $ | (7,645) |
| $ | (683) |
Other comprehensive income |
|
| — |
|
| — |
Comprehensive loss |
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| (7,645) |
|
| (683) |
Comprehensive (loss) income attributable to noncontrolling interest |
|
| (73) |
|
| 8 |
Comprehensive loss attributable to controlling interest |
| $ | (7,572) |
| $ | (691) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DULUTH HOLDINGS INC.
Condensed Consolidated StatementsStatement of Cash FlowsShareholders’ Equity
(Unaudited)
(Amounts in thousands)
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| Nine Months Ended | ||||
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| October 29, 2017 |
| October 30, 2016 | ||
Cash flows from operating activities: |
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Net income |
| $ | 4,022 |
| $ | 7,510 |
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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| 5,104 |
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| 3,215 |
Amortization of stock-based compensation |
|
| 1,186 |
|
| 969 |
Deferred income taxes |
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| (60) |
|
| 151 |
Loss on disposal of property and equipment |
|
| — |
|
| 3 |
Changes in operating assets and liabilities: |
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Accounts receivable |
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| (17) |
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| (10) |
Other receivables |
|
| (1,320) |
|
| (3,007) |
Inventory |
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| (57,020) |
|
| (40,891) |
Prepaid expense |
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| (3,136) |
|
| 181 |
Deferred catalog costs |
|
| (1,006) |
|
| 485 |
Trade accounts payable |
|
| 18,665 |
|
| 6,713 |
Income taxes payable |
|
| (5,225) |
|
| (1,308) |
Accrued expenses and deferred rent obligations |
|
| 3,850 |
|
| (794) |
Net cash used in operating activities |
|
| (34,957) |
|
| (26,783) |
Cash flows from investing activities: |
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Purchases of property and equipment |
|
| (37,501) |
|
| (21,026) |
Purchase of available-for-sale security |
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| (6,323) |
|
| — |
Change in restricted cash |
|
| (734) |
|
| (1,367) |
Purchases of other assets |
|
| (85) |
|
| (80) |
Net cash used in investing activities |
|
| (44,643) |
|
| (22,473) |
Cash flows from financing activities: |
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Proceeds from line of credit |
|
| 76,476 |
|
| 18,156 |
Payments on line of credit |
|
| (26,375) |
|
| (4,947) |
Proceeds from long term debt |
|
| 800 |
|
| — |
Payments on long term debt |
|
| (34) |
|
| (4,216) |
Payments on capital lease obligations |
|
| (14) |
|
| (14) |
Change in bank overdrafts |
|
| 2,930 |
|
| 2,055 |
Distributions to shareholders |
|
| — |
|
| (192) |
Distributions to holders of noncontrolling interest in variable interest entity |
|
| (400) |
|
| (30) |
Proceeds from finance lease obligations |
|
| 2,358 |
|
| — |
Capital contributions to variable interest entity |
|
| 794 |
|
| 744 |
Shares withheld for tax payments on vested restricted shares |
|
| (57) |
|
| — |
Other |
|
| 38 |
|
| — |
Net cash provided by financing activities |
|
| 56,516 |
|
| 11,556 |
Decrease in cash |
|
| (23,084) |
|
| (37,700) |
Cash at beginning of period |
|
| 24,042 |
|
| 37,873 |
Cash at end of period |
| $ | 958 |
| $ | 173 |
Supplemental disclosure of cash flow information |
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|
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Interest paid |
| $ | 947 |
| $ | 116 |
Income taxes paid |
| $ | 8,950 |
| $ | 7,929 |
Supplemental disclosure of non-cash information |
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|
|
Property and equipment acquired under build-to-suit leases |
| $ | 12,739 |
| $ | 1,957 |
Unpaid liability to acquire property and equipment |
| $ | 4,144 |
| $ | 3,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended May 5, 2019 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Noncontrolling |
|
|
| |
|
| Capital stock |
|
|
|
| interest in |
| Total | ||||||||
|
|
|
| Treasury |
| Retained |
| variable interest |
| shareholders' | |||||||
|
| Shares |
| Amount |
| stock |
| earnings |
| entity |
| equity | |||||
Balance at February 3, 2019 |
| 32,574 |
| $ | 89,849 |
| $ | (92) |
| $ | 70,592 |
| $ | (239) |
| $ | 160,110 |
Cumulative effect from |
| — |
|
| — |
|
| — |
|
| (1,924) |
|
| — |
|
| (1,924) |
Balance at February 4, 2019 |
| 32,574 |
|
| 89,849 |
|
| (92) |
|
| 68,668 |
|
| (239) |
|
| 158,186 |
Issuance of common stock |
| 149 |
|
| 134 |
|
| — |
|
| — |
|
| — |
|
| 134 |
Stock-based compensation |
| — |
|
| 433 |
|
| — |
|
| — |
|
| — |
|
| 433 |
Restricted stock forfeitures |
| (6) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Restricted stock surrendered for taxes |
| (15) |
|
| — |
|
| (277) |
|
| — |
|
| — |
|
| (277) |
Net loss |
| — |
|
| — |
|
| — |
|
| (7,572) |
|
| (73) |
|
| (7,645) |
Balance at May 5, 2019 |
| 32,703 |
| $ | 90,416 |
| $ | (369) |
| $ | 61,096 |
| $ | (312) |
| $ | 150,831 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
DULUTH HOLDINGS INC.
Condensed Consolidated Statement of Shareholders’ Equity
(Unaudited)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended April 29, 2018 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Noncontrolling |
|
|
| |
|
| Capital stock |
|
|
|
| interest in |
| Total | ||||||||
|
|
|
| Treasury |
| Retained |
| variable interest |
| shareholders' | |||||||
|
| Shares |
| Amount |
| stock |
| earnings |
| entity |
| equity | |||||
Balance at January 28, 2018 |
| 32,462 |
| $ | 88,043 |
| $ | (57) |
| $ | 48,084 |
| $ | 3,279 |
| $ | 139,349 |
Cumulative effect from |
| — |
|
| — |
|
| — |
|
| (648) |
|
| — |
|
| (648) |
Balance at January 29, 2018 |
| 32,462 |
| $ | 88,043 |
| $ | (57) |
| $ | 47,436 |
| $ | 3,279 |
| $ | 138,701 |
Issuance of common stock |
| 106 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Restricted stock surrendered for taxes |
| (2) |
|
| — |
|
| (35) |
|
| — |
|
| — |
|
| (35) |
Stock-based compensation |
| — |
|
| 409 |
|
| — |
|
| — |
|
| — |
|
| 409 |
Net (loss) income |
| — |
|
| — |
|
| — |
|
| (691) |
|
| 8 |
|
| (683) |
Balance at April 29, 2018 |
| 32,566 |
| $ | 88,452 |
| $ | (92) |
| $ | 46,745 |
| $ | 3,287 |
| $ | 138,392 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
DULUTH HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
|
|
|
|
|
|
|
| May 5, 2019 |
| April 29, 2018 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
| $ | (7,645) |
| $ | (683) |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 4,392 |
|
| 2,309 |
Stock based compensation |
|
| 474 |
|
| 409 |
Deferred income taxes |
|
| (302) |
|
| 40 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable |
|
| (331) |
|
| 22 |
Other receivables |
|
| (3,681) |
|
| (308) |
Inventory |
|
| (6,604) |
|
| (10,363) |
Prepaid expense & other current assets |
|
| 2,577 |
|
| (1,527) |
Deferred catalog costs |
|
| 2,301 |
|
| (814) |
Trade accounts payable |
|
| 1,221 |
|
| (1,441) |
Income taxes payable |
|
| (218) |
|
| (421) |
Accrued expenses and deferred rent obligations |
|
| (5,295) |
|
| 1,790 |
Net cash used in operating activities |
|
| (13,111) |
|
| (10,987) |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property and equipment |
|
| (8,015) |
|
| (14,000) |
Capital contributions towards build-to-suit stores |
|
| (1,788) |
|
| — |
Principal receipts from available-for-sale security |
|
| 28 |
|
| — |
Change in other assets |
|
| 13 |
|
| 43 |
Net cash used in investing activities |
|
| (9,762) |
|
| (13,957) |
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from line of credit |
|
| 70,172 |
|
| 37,464 |
Payments on line of credit |
|
| (47,474) |
|
| (16,214) |
Payments on long term debt |
|
| (119) |
|
| (19) |
Payments on finance lease obligations |
|
| (37) |
|
| (1) |
Change in bank overdrafts |
|
| — |
|
| 478 |
Proceeds from finance lease obligations |
|
| — |
|
| 266 |
Shares withheld for tax payments on vested restricted shares |
|
| (277) |
|
| (35) |
Other |
|
| 93 |
|
| 24 |
Net cash provided by financing activities |
|
| 22,358 |
|
| 21,963 |
Decrease in cash and restricted cash |
|
| (515) |
|
| (2,981) |
Cash and restricted cash at beginning of period |
|
| 3,085 |
|
| 7,083 |
Cash and restricted cash at end of period |
| $ | 2,570 |
| $ | 4,102 |
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
Interest paid |
| $ | 986 |
| $ | 737 |
Income taxes paid |
| $ | 2,179 |
| $ | 149 |
Supplemental disclosure of non-cash information: |
|
|
|
|
|
|
Property and equipment acquired under build-to-suit leases |
| $ | — |
| $ | 7,331 |
Unpaid liability to acquire property and equipment |
| $ | 846 |
| $ | 2,507 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
79
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
A. Nature of Operations
Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through the Company’s own direct and retail channels. The direct segment, consisting of the Company’s website and catalogs, offers products nationwide. In 2010, the Company added retail to its omni-channel platform with the opening of its first store. Since then, Duluth Trading has expanded its retail presence, and as of October 29, 2017,May 5, 2019, the Company operated 2348 retail stores and three outlet stores across the Midwestern, Eastern and Western United States.stores. The Company’s products are marketed under the Duluth Trading brand, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise.
The Company has two classes of authorized common stock: Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to ten votes per share and is convertible at any time into one share of Class B common stock. Each share of Class B common stock is entitled to one vote per share. The Company’s Class B common stock trades on the NASDAQ Global Select Market under the symbol “DLTH.”
B. Basis of Presentation
The condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of the parent, DuluthCompany consolidates TRI Holdings, Inc., and its wholly-owned subsidiary, Duluth Trading Company, LLC. Effective October 3, 2016, Duluth Trading Company, LLC was dissolved and no longer consolidated, which did not impact the Company’s consolidated financial statements. The Company also consolidates Schlecht Retail Ventures LLC (“SRV”TRI”) as a variable interest entity (see Note 56 “Variable Interest Entity”) for further information). All intercompany balances and transactions have been eliminated.
The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 20172019 is a 52-week period and ends on January 28, 2018.February 2, 2020. Fiscal 20162018 was a 52-week53-week period and ended on January 29, 2017.February 3, 2019. The three and nine months of fiscal 20172019 and fiscal 20162018 represent the Company’s 13-week and 39-week periods ended OctoberMay 5, 2019 and April 29, 2017 and October 30, 2016,2018, respectively.
The accompanying condensed consolidated financial statements as of and for the three and nine months ended OctoberMay 5, 2019 and April 29, 2017 and October 30, 20162018 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations as of and for the three and nine months ended OctoberMay 5, 2019 and April 29, 2017 and October 30, 2016.2018. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the fiscal year ended January 29, 2017. February 3, 2019.
C. Seasonality of Business
The Company’s business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year as a result of increased sales during the holiday season.
D. Restricted Cash
The Company’s restricted cash is held in escrow accounts and is used to pay a portion of the construction loans entered into by third party landlords (the “Landlords”) in connection with the Company’s retail store leases. The restricted cash is disbursed based on the escrow agreements entered into by and among the Landlords, the Company and the escrow agent.
E. Build-to-Suit Lease
The Company may at times be involvedF. Significant Accounting Policies
Except as disclosed below, there have been no significant changes to the Company’s significant accounting policies as described in the construction of stores to be leased byCompany’s Annual Report on Form 10-K for the Company and, depending on the extent to which the Company is involved, the Company may be deemed the owner of the leased premises for accounting purposes during the store construction period. The Company’s lease for its new headquarters is treated as a build-to-suit lease transaction for accounting purposes during the construction period. For leases that the Company is deemed the owner of theyear ended February 3, 2019.
810
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Recently Adopted Accounting Pronouncements
On February 4, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) and related amendments. ASC 842 requires lessees to (i) recognize a right-of-use asset and a lease liability that is initially measured at the present value of the remaining lease payments, on the consolidated balance sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease related cash payments within operating and financing activities.
The Company adopted ASC 842 utilizing the optional transition method, which allows guidance to be initially applied at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected the package of practical expedients, which allows the Company to forgo reassessing prior conclusions on lease definition, classification and initial direct costs related to existing leases as of the adoption date. The Company elected not to recognize short-term leases on the consolidated balance sheets and all non-lease components, such as common area maintenance, were excluded.
The Company’s existing lease arrangements consist of both operating leases and build-to-suit leases. Under ASC 842, the Company is still required to evaluate whether it is deemed to be the owner of the leased property for accounting purposes during the store construction period, however, the prescriptive rules under ASC 840 have been removed. The Company evaluated its existing build-to-suit leases as of the adoption date and determined that the Company is not the owner of the leased premises during the construction period, upon commencementwhich resulted in the derecognition of the construction project, the Company is required to capitalize the cashits build-to-suit assets and non-cash assets contributed by the landlord for construction as property and equipmentliabilities that were previously reported on the Company’s Condensed Consolidated Balance Sheets. Upon the completionconsolidated balance sheets. As of February 4, 2019, substantially all of the construction project,previous build-to-suit leases are classified as operating leases.
The impact of the adoption was a $121.8 million right-of-use asset (“ROU asset”) with an offsetting $115.5 million lease liability, which is net of $4.9 million of previously recognized straight-line operating lease adjustments on existing leases and $11.2 million of unamortized initial direct costs. The lease liabilities at February 4, 2019 reflect remaining lease payments discounted using an incremental borrowing rate based on the remaining lease term (the “Discount”), as an implicit rate was not readily determinable for any of the Company’s existing leases. See Note 2 “Leases,” for further information.
2. LEASES
Effective February 4, 2019, the Company performs an analysisadopted ASC 842, which resulted in a recognition of ROU assets and lease liabilities related to leases on the Company’s consolidated balance sheets. The Company determines if an arrangement is, or contains, a lease at inception. ROU assets represent the right to determine if the Company qualifiesuse an underlying asset for sale-leaseback treatment. For those qualifying leases, the finance lease obligation and the associated property and equipment are removed and the difference is reclassified to either prepaid or deferred rent and amortized over the lease term as an increase or decreaseand lease liabilities reflect the obligation to rent expense. Ifmake lease payments arising from the lease does not qualify for sale-leaseback treatment, the finance lease obligation is amortized overlease. At any given time during the lease term, basedthe lease liability represents the present value of the remaining lease payments and the ROU asset is measured at the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zero at the end of the lease.
The Company leases retail space under non-cancelable lease agreements, which expire on various dates through 2036. Substantially all of these arrangements are store leases. Store leases generally have initial lease terms ranging from five to fifteen years with renewal options and rent escalation provisions. The Company does not record leases with a lease term of 12 months or less on the Company’s consolidated balance sheets.
When calculating the lease liability on a discounted basis, the Company applies its estimated Discount. The Company bases this Discount on a collateralized interest rate as well as publicly available data for instruments with similar characteristics.
In addition to rent payments, in theleases for retail space contain payments for real estate taxes, insurance costs, common area maintenance, and utilities that are not fixed. The Company accounts for these costs as variable payments and does not include such costs as a lease agreement and the associated property and equipment are depreciated over the estimated useful life.component.
As of October 29, 2017, the Company capitalized $27.5 million in property and equipment and $0.2 million in accumulated depreciation and recorded an $18.5 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes. As of January 29, 2017, the Company capitalized $6.6 million in property and equipment and $0.01 million in accumulated depreciation and recorded a $3.3 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes.
2. DEBT AND LINE OF CREDIT
Debt consists of the following:
|
|
|
|
|
|
|
|
| October 29, 2017 |
| January 29, 2017 | ||
(in thousands) |
|
|
|
| ||
SRV Mortgage Term A Note |
| $ | 700 |
| $ | 727 |
SRV Mortgage Term B Note |
|
| 793 |
|
| — |
Line of credit |
|
| 50,101 |
|
| — |
Capitalized lease obligations |
|
| 36 |
|
| 50 |
|
| $ | 51,630 |
| $ | 777 |
Less: current maturities |
|
| (84) |
|
| (742) |
Long-term debt |
| $ | 51,546 |
| $ | 35 |
Schlecht Retail Ventures LLC
SRV entered into a mortgage note (“SRV Term A Note”) with an original balance of $0.8 million. The SRV Term A Note was scheduled to mature in September 2017 and required monthly payments of $3,300 plus interest at 3.1%, with a final balloon payment due in September 2017. On July 20, 2017, SRV refinanced the SRV Term A Note, which extended the maturity date to September 2022, with a final balloon payment in September 2022, and changed the interest rate to 3.69%. The required monthly payments of $3,300 did not change.
On July 20, 2017, SRV entered into a mortgage note (“SRV Term B Note”) with an original balance of $0.8 million. The SRV Term B Note matures in September 2022 and requires monthly payments of $3,300 plus interest at 3.69%, with a final balloon payment in September 2022.
The SRV Term A Note and SRV Term B Note are guaranteed by the Company’s majority shareholder and collateralized by certain real property owned by SRV in Mt. Horeb, Wisconsin.
Line of Credit
On September 29, 2017, the Company entered into a first amendment to the Amended and Restated Loan Agreement dated as of October 7, 2016 (the “Amended and Restated Agreement”), providing for borrowing availability of up to $60.0 million from September 29, 2017 through July 31, 2019. Effective November 1, 2017, the Company entered into a second amendment to the Amended and Restated Agreement, providing for borrowing availability of up to $80.0 million from November 1, 2017 through December 31, 2017 and borrowing availability of up to $60.0 million from January 1, 2018 through July 31, 2019. The Amended and Restated Agreement matures on July 31, 2019, and bears interest, payable monthly, at a rate equal to the adjusted LIBOR rate, as defined in the Amended and Restated Agreement (effective rate of 2.5% at October 29, 2017). The Amended and Restated Agreement is secured by essentially all Company assets and requires the Company to
911
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The expense components of the Company’s leases reflected on the Company’s consolidated statement of operations were as follows:
Three Months Ended | |||||
Consolidated Statement of Operations | May 5, 2019 | ||||
(in thousands) | |||||
Finance lease | |||||
Amortization of right-of-use assets | Selling, general and administrative expenses | $ | 78 | ||
Interest on lease liabilities | Interest expense | 59 | |||
Total finance lease expense | $ | 137 | |||
Operating lease expense | Selling, general and administrative expenses | $ | 3,678 | ||
Amortization of build-to-suit leases capital contribution | Selling, general and administrative expenses | 214 | |||
Variable lease expense | Selling, general and administrative expenses | 1,612 | |||
Total lease expense | $ | 5,641 |
Other information related to leases were as follows:
Three Months Ended | |||
May 5, 2019 | |||
(in thousands) | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Financing cash flows from finance leases | 40 | ||
Operating cash flows from finance leases | 59 | ||
Operating cash flows from operating leases | 3,408 | ||
Right-of-use assets obtained in exchange for lease liabilities: | |||
Finance leases | 3,985 | ||
Operating leases | 24,992 | ||
Weighted-average remaining lease term (in years): | |||
Finance leases | 16 | ||
Operating leases | 11 | ||
Weighted-average discount rate: | |||
Finance leases | 4.5% | ||
Operating leases | 4.3% |
Future minimum lease payments under the non-cancellable leases are as follows as of May 5, 2019:
|
|
|
|
|
|
|
Fiscal year |
|
| Finance |
|
| Operating |
(in thousands) |
|
|
|
|
|
|
2019 (remainder of fiscal year) |
| $ | 533 |
| $ | 11,446 |
2020 |
|
| 710 |
|
| 15,015 |
2021 |
|
| 710 |
|
| 14,169 |
2022 |
|
| 710 |
|
| 14,295 |
2023 |
|
| 732 |
|
| 14,461 |
Thereafter |
|
| 9,450 |
|
| 95,321 |
Total future minimum lease payments |
| $ | 12,845 |
| $ | 164,707 |
Less – Discount |
|
| 3,860 |
|
| 36,129 |
Lease liability |
| $ | 8,985 |
| $ | 128,578 |
12
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Prior to the adoption of ASC 842, the minimum lease payments under non-cancellable operating leases were as follows as of February 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
| Operating Leases |
|
|
| ||||
|
| Related |
|
|
|
| |||
Fiscal year |
| party |
| Other |
| Total | |||
(in thousands) |
|
|
|
|
|
|
|
|
|
2019 |
| $ | 147 |
| $ | 15,598 |
| $ | 15,745 |
2020 |
|
| 144 |
|
| 16,013 |
|
| 16,157 |
2021 |
|
| 147 |
|
| 15,327 |
|
| 15,474 |
2022 |
|
| 149 |
|
| 15,444 |
|
| 15,593 |
2023 |
|
| 136 |
|
| 15,648 |
|
| 15,784 |
Thereafter |
|
| — |
|
| 112,098 |
|
| 112,098 |
Total future minimum lease payments |
| $ | 723 |
| $ | 190,128 |
| $ | 190,851 |
3. DEBT AND LINE OF CREDIT
Debt consists of the following:
|
|
|
|
|
|
|
|
| May 5, 2019 |
| February 3, 2019 | ||
(in thousands) |
|
|
|
| ||
TRI Senior Secured Note |
| $ | 26,586 |
| $ | 26,705 |
TRI Note |
|
| 3,500 |
|
| 3,500 |
Capital lease obligations |
|
| — |
|
| 32 |
|
| $ | 30,086 |
| $ | 30,237 |
Less: current maturities |
|
| 510 |
|
| 500 |
Long-term debt |
| $ | 29,576 |
| $ | 29,737 |
|
|
|
|
|
|
|
Line of credit |
| $ | 39,240 |
| $ | 16,542 |
TRI Holdings, LLC
TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $26.7 million. The TRI Senior Secured Note is scheduled to mature on October 15, 2038 and requires installment payments with an interest rate of 4.95%. See Note 6 “Variable Interest Entities” for further information.
TRI entered into a promissory note (“TRI Note”) with an original balance of $3.5 million. The TRI Note is scheduled to mature in November 2038 and requires annual interest payments at a rate of 3.05%, with a final balloon payment due in November 2038.
Line of Credit
On May 17, 2018, the Company entered into a credit agreement (the “Credit Agreement”) which provides for borrowing availability of up to $80.0 million in revolving credit (the “Revolver”), and borrowing availability of up to $50.0 million in a delayed draw term loan (“DDTL”), for a total credit facility of $130.0 million. The $80.0 million revolving credit matures on May 17, 2023. The $50.0 million DDTL is available to draw upon in differing amounts through May 17, 2020, and matures on May 17, 2023. The Credit Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including minimum tangible net wortha maximum rent adjusted leverage ratio and a minimum trailing twelve month EBITDA.fixed charge coverage ratio as defined in the Credit Agreement. At the Company’s option, the interest rate applicable to the Revolver or DDTL will be a floating rate equal to: (i) the base rate plus a margin of 25 to 100 basis points (“bps”), based upon the Company’s rent adjusted leverage ratio, or (ii) a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR for such interest period plus a margin of 125 to 200 bps, based upon the Company’s rent adjusted leverage ratio (effective rate of 4.0% at May 5, 2019). In addition, outstanding balances under the Amended and Restated Agreement does not contain borrowing base limits.DDTL require quarterly principal payments with a final balloon payment at maturity.
13
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of October 29, 2017May 5, 2019 and for the ninethree months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above.
3.4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| October 29, 2017 |
| January 29, 2017 |
| May 5, 2019 |
| February 3, 2019 | ||||
(in thousands) |
|
|
|
|
|
|
|
| ||||
Salaries and benefits |
| $ | 1,645 |
| $ | 3,885 |
| $ | 3,469 |
| $ | 2,328 |
Deferred revenue |
|
| 6,395 |
|
| 5,590 |
|
| 7,330 |
|
| 10,485 |
Freight |
|
| 1,539 |
|
| 1,574 |
|
| 2,514 |
|
| 4,141 |
Product returns |
|
| 642 |
|
| 1,088 |
|
| 911 |
|
| 2,088 |
Catalog costs |
|
| 2,399 |
|
| 556 |
|
| 82 |
|
| 503 |
Unpaid purchases of property & equipment |
|
| 4,144 |
|
| 3,485 |
|
| 846 |
|
| 433 |
Accrued advertising |
|
| 4,634 |
|
| 1,060 |
|
| 5,652 |
|
| 389 |
Other |
|
| 4,278 |
|
| 2,584 |
|
| 4,276 |
|
| 6,163 |
Total accrued expenses and other current liabilities |
| $ | 25,676 |
| $ | 19,822 |
| $ | 25,080 |
| $ | 26,530 |
|
|
|
|
|
|
|
4.5. INVESTMENT
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., an exit price). The exit price is based on the amount that the holder of the asset or liability would receive or need to pay in an actual transaction (or in a hypothetical transaction if an actual transaction does not exist) at the measurement date. ASC 820 describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carryingfair value of the Company’s available-for-sale security was valued based on a recent purchase in inactive marketdiscounted cash flow method (Level 3)., which incorporates the U.S. Treasury yield curve, credit information and an estimate of future cash flows. As of May 5, 2019, the carrying value of the Company’s available-for-sale security approximates its fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| October 29, 2017 |
|
| January 29, 2017 |
| May 5, 2019 |
|
| February 3, 2019 | ||||||||||||||||||||||
|
| Cost or |
| Gross |
| Gross |
|
|
|
|
|
| Cost or |
| Gross |
| Gross |
|
|
|
|
| ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
| Estimated |
|
| Estimated |
| Amortized |
| Unrealized |
| Unrealized |
| Estimated |
|
| Estimated | ||||||||||
|
| Cost |
| Gains |
| Losses |
| Fair Value |
|
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value |
|
| Fair Value | ||||||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 security: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate trust |
| $ | 6,323 |
| $ | — |
| $ | — |
| $ | 6,323 |
|
| $ | — |
| $ | 6,267 |
| $ | — |
| $ | — |
| $ | 6,267 |
|
| $ | 6,295 |
1014
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of October 29, 2017.May 5, 2019. Cost and estimated fair value are equal.
|
|
|
|
|
|
|
| Estimated | |
|
|
| Fair Value | |
(in thousands) |
|
|
| |
Within one year |
|
| $ |
|
After one year through five years |
|
|
| |
After five years through ten years |
|
|
| |
After ten years |
|
|
| |
Total |
|
| $ | |
6,267 |
5.6. VARIABLE INTEREST ENTITY
Based upon the criteria set forth in ASC 810, Consolidation, the Company has determined that it was the primary beneficiary of one variable interest entity (“VIE”) as of October 29, 2017May 5, 2019 and January 29, 2017,February 3, 2019, as the Company absorbs significant economics of the entity and has the power to direct the activities that are considered most significant to the entity.
The Company leases certain retail store facilities and office buildingsthe Company’s headquarters in Mt. Horeb, Wisconsin from SRV,TRI. In conjunction with the lease, the Company invested $6.3 million in a VIEtrust (see Note 5 “Investment” for further information) that loaned funds to TRI for the construction of the Company’s headquarters. TRI is a Wisconsin limited liability company whose primary purpose and activity is to own this real property. SRV is a Wisconsin limited liability company that is owned by the majority shareholder of the Company. The Company considers itself the primary beneficiary for SRVTRI as the Company has both the power to direct the activities that most significantly impact the entity’s economic performance and is expected to receive a majority of SRV’s expected residual returns based on the activity of SRV.benefits that are significant to TRI. As the Company is the primary beneficiary, it consolidates SRVTRI and the leases arelease is eliminated in consolidation. The Company does not consolidate the trust as the Company is not the primary beneficiary.
The condensed consolidated balance sheets include the following amounts as a result of the consolidation of SRVTRI as of October 29, 2017May 5, 2019 and January 29, 2017:
February 3, 2019:
|
|
|
|
|
|
|
|
|
|
| ||
|
| October 29, 2017 |
| January 29, 2017 |
| May 5, 2019 |
| February 3, 2019 | ||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 656 |
| $ | 139 |
| $ | 454 |
| $ | 434 |
Other receivables |
|
| 20 |
| 9 | |||||||
Property and equipment, net |
|
| 4,102 |
| 3,248 |
|
| 27,657 |
| 28,146 | ||
Other assets, net |
|
| 14 |
|
| 5 |
|
| 1,757 |
|
| 1,454 |
Total assets |
| $ | 4,792 |
| $ | 3,401 |
| $ | 29,868 |
| $ | 30,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities |
| $ | 177 |
| $ | 792 |
| $ | 604 |
| $ | 68 |
Long-term debt |
|
| 1,413 |
| — |
|
| 29,576 |
| 30,205 | ||
Noncontrolling interest in VIE |
|
| 3,202 |
|
| 2,609 |
|
| (312) |
|
| (239) |
Total liabilities and shareholders' equity |
| $ | 4,792 |
| $ | 3,401 |
| $ | 29,868 |
| $ | 30,034 |
On August 18, 2017, the Company entered into a lease agreement with TRI Holdings, LLC (“TRI”), the developer of the Company’s future headquarters in Mt. Horeb, Wisconsin. The Company expects to take occupancy of the future headquarters on November 1, 2018. The Company determined it had a variable interest in TRI, however, the Company does not consolidate TRI, as the Company is not the primary beneficiary.
During the construction phase of the Company’s future headquarters, the Company is considered the owner for accounting purposes, as noted in footnote one, under build-to-suit lease. As of October 29, 2017, the Company capitalized $8.5 million in property & equipment and recorded $8.5 million non-current liability related to build-to-suit transactions, which are included in the balances disclosed under footnote one.
In conjunction with the headquarters lease, the Company invested $6.3 million in a trust (see Note 4 Investment) that funded the mortgage to TRI for the construction of the Company’s future headquarters. The Company does not consolidate the trust as the Company is not the primary beneficiary.
1115
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
6.
7. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings (loss) per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock. The reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
| October 29, 2017 |
| October 30, 2016 |
| October 29, 2017 |
| October 30, 2016 |
| May 5, 2019 |
| April 29, 2018 | ||||||
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator - net (loss) income attributable |
| $ | (816) |
| $ | 462 |
| $ | 3,823 |
| $ | 7,322 | ||||||
Numerator - net loss attributable |
| $ | (7,572) |
| $ | (691) | ||||||||||||
Denominator - weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 31,861 |
|
| 31,520 |
|
| 31,837 |
|
| 31,520 |
|
| 32,281 |
|
| 32,046 |
Dilutive shares |
|
| — |
|
| 774 |
|
| 460 |
|
| 766 |
|
| — |
|
| — |
Diluted |
|
| 31,861 |
|
| 32,294 |
|
| 32,297 |
|
| 32,286 |
|
| 32,281 |
|
| 32,046 |
(Loss) earnings per share (Class A and Class B) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loss per share (Class A and Class B) |
|
|
|
|
|
| ||||||||||||
Basic |
| $ | (0.03) |
| $ | 0.01 |
| $ | 0.12 |
| $ | 0.23 |
| $ | (0.23) |
| $ | (0.02) |
Diluted |
| $ | (0.03) |
| $ | 0.01 |
| $ | 0.12 |
| $ | 0.23 |
| $ | (0.23) |
| $ | (0.02) |
The computation of diluted earnings (loss) per share for the three months ended May 5, 2019 and April 29, 2018, excluded 0.3 million and 0.4 million shares of unvested restricted stock, respectively, because their inclusion would be anti-dilutive due to a net loss.
7.8. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plan in accordance with ASC 718, Stock Compensation, which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period of the award.
Total stock compensation expense associated with restricted stock recognized by the Company during the three and nine months ended October 29, 2017 was $0.6 million and $1.2 million, respectively, and during the three and nine months ended October 30, 2016 was $0.4 million for the three months ended May 5, 2019 and $1.0 million, respectively.April 29, 2018. The Company’s total stock compensation expense is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
A summary of the activity in the Company’s unvested restricted stock during the ninethree months ended October 29, 2017May 5, 2019 is as follows:
|
|
|
|
|
|
|
|
| ||||
|
|
|
| Weighted |
|
|
| Weighted | ||||
|
|
|
| average |
|
|
| average | ||||
|
|
|
| fair value |
|
|
| fair value | ||||
|
| Shares |
| per share |
| Shares |
| per share | ||||
Outstanding at January 29, 2017 |
| 794,712 |
| $ | 4.34 | |||||||
Outstanding at February 3, 2019 |
| 321,657 |
| $ | 14.29 | |||||||
Granted |
| 109,735 |
| 19.56 |
| 141,805 |
| 18.10 | ||||
Vested |
| (311,933) |
| 2.71 |
| (42,662) |
| 19.19 | ||||
Forfeited |
| (21,294) |
|
| 22.31 |
| (5,682) |
|
| 18.71 | ||
Outstanding at October 29, 2017 |
| 571,220 |
| $ | 6.76 | |||||||
Outstanding at May 5, 2019 |
| 415,118 |
| $ | 15.03 |
At October 29, 2017,May 5, 2019, the Company had unrecognized compensation expense of $2.5$4.5 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 1.83.0 years.
1216
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
8.9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
| ||||
|
| October 29, 2017 |
| January 29, 2017 |
| May 5, 2019 |
| February 3, 2019 | ||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Land and land improvements |
| $ | 3,055 |
| $ | 2,986 |
| $ | 4,486 |
| $ | 4,486 |
Leasehold improvements |
| 19,938 |
| 12,752 |
| 37,118 |
| 32,765 | ||||
Buildings |
| 26,882 |
| 16,178 |
| 36,475 |
| 71,469 | ||||
Vehicles |
| 177 |
| 177 |
| 161 |
| 161 | ||||
Warehouse equipment |
|
| 5,789 |
| 3,939 |
|
| 13,058 |
| 13,051 | ||
Office equipment and furniture |
|
| 19,102 |
| 11,125 |
|
| 39,732 |
| 36,473 | ||
Computer equipment |
|
| 3,300 |
| 2,509 |
|
| 5,828 |
| 5,072 | ||
Software |
|
| 7,219 |
|
| 6,659 |
|
| 25,370 |
|
| 24,939 |
|
|
| 85,462 |
|
| 56,325 |
|
| 162,228 |
|
| 188,416 |
Accumulated depreciation and amortization |
|
| (20,581) |
|
| (15,529) |
|
| (37,900) |
|
| (34,203) |
|
|
| 64,881 |
|
| 40,796 |
|
| 124,328 |
|
| 154,213 |
Construction in progress |
|
| 33,270 |
|
| 11,636 |
|
| 12,324 |
|
| 12,896 |
Property and equipment, net |
| $ | 98,151 |
| $ | 52,432 |
| $ | 136,652 |
| $ | 167,109 |
9.
10. SEGMENT REPORTING
The Company has two operating segments, which are also its reportable segments: direct and retail. The direct segment includes net sales from the Company’s website and catalogs. The retail segment includes net sales from the Company’s retail and outlet stores. These two operating segments are components of the Company for which separate financial information is available and for which operating results are evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing performance of the segments.
Income tax expense, and corporate expenses, which include but are not limited to: human resources, legal, finance, information technology, design and other corporate-related expenses are included in the Company’s direct segment. Interest expense, depreciation and amortization, and property and equipment expenditures, are recognized in each segment. Advertising expenses are generally included in the Company’s direct segment, except for specific store advertising, which is included in the Company’s retail segment.
Net sales by product is not presented because providing the information is impracticable. Net sales outside of the United States were insignificant. Variable allocations of assets are not made for segment reporting. The Company does not have any assets outside of the United States.
Segment information is presented in the following table:
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| May 5, 2019 |
| April 29, 2018 | ||
(in thousands) |
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
Direct |
| $ | 65,701 |
| $ | 66,212 |
Retail |
|
| 48,543 |
|
| 33,995 |
Total net sales |
| $ | 114,244 |
| $ | 100,207 |
Operating (loss) income |
|
|
|
|
|
|
Direct |
| $ | (12,266) |
| $ | (2,128) |
Retail |
|
| 2,575 |
|
| 1,871 |
Total operating loss |
|
| (9,691) |
|
| (257) |
Interest expense |
|
| 841 |
|
| 821 |
Other income, net |
|
| 204 |
|
| 163 |
Loss before income taxes |
| $ | (10,328) |
| $ | (915) |
1317
DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Segment information
Net sales by business is presented in the following tables:table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| October 29, 2017 |
| October 30, 2016 |
| October 29, 2017 |
| October 30, 2016 | ||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
| $ | 54,146 |
| $ | 52,271 |
| $ | 175,588 |
| $ | 166,437 |
Retail |
|
| 29,583 |
|
| 14,737 |
|
| 78,054 |
|
| 35,026 |
Total net sales |
| $ | 83,729 |
| $ | 67,008 |
| $ | 253,642 |
| $ | 201,463 |
Operating (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
| $ | (2,738) |
| $ | (84) |
| $ | 230 |
| $ | 8,694 |
Retail |
|
| 2,126 |
|
| 903 |
|
| 7,296 |
|
| 3,452 |
Total operating (loss) income |
|
| (612) |
|
| 819 |
|
| 7,526 |
|
| 12,146 |
Interest expense |
|
| 661 |
|
| 33 |
|
| 1,199 |
|
| 108 |
Other income, net |
|
| 73 |
|
| 33 |
|
| 175 |
|
| 163 |
(Loss) income before income taxes |
| $ | (1,200) |
| $ | 819 |
| $ | 6,502 |
| $ | 12,201 |
|
|
|
|
|
|
|
|
| Three Months Ended | ||||
|
| May 5, 2019 |
| April 29, 2018 | ||
(in thousands) |
|
|
|
|
|
|
Net sales |
|
|
|
|
|
|
Men's |
| $ | 75,800 |
| $ | 67,919 |
Women's |
|
| 32,173 |
|
| 27,161 |
Hard goods/other |
|
| 6,271 |
|
| 5,127 |
Total net sales |
| $ | 114,244 |
| $ | 100,207 |
Segment total assets
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
| ||
|
| October 29, 2017 |
| January 29, 2017 |
| May 5, 2019 |
| February 3, 2019 | ||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
| $ | 168,865 |
| $ | 115,239 |
| $ | 193,106 |
| $ | 182,883 |
Retail |
|
| 84,082 |
|
| 40,728 |
|
| 225,824 |
|
| 113,876 |
Total assets at period end |
| $ | 252,947 |
| $ | 155,967 |
| $ | 418,930 |
| $ | 296,759 |
10.11. INCOME TAXES
The provision for income taxes for the interim period is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The effective tax rate related to controlling interest was 36%26% and 39%25% for the three and nine months ended OctoberMay 5, 2019 and April 29, 2017, respectively, and 40% and 39% for the three and nine months ended October 30, 2016,2018, respectively. The income from SRVTRI was excluded from the calculation of the Company’s effective tax rate, as SRVTRI is an “S” corporationa limited liability company and not subject to income taxes.
11.12. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
SimplifyingDuring the Measurementthree months ended May 5, 2019, there have been no new recent accounting pronouncements that are of Inventory
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory(Topic 330) (“ASU 2015-11”), which changes the measurement principle for inventory from the lower of costsignificance, or marketpotential significance, to the lower of cost and net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The provisions of ASU 2015-11 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. Company.
13. SUBSEQUENT EVENTS
The Company adopted ASU 2015-11 as of January 30, 2017,has evaluated subsequent events through the first day of the Company’s fiscal year 2017,date which these condensed consolidated financial statements were available to be issued and there was no significant impacthas determined that it does not have any material subsequent events to the Company’sdisclose in these condensed consolidated financial statements.
1418
DULUTH HOLDINGS INC.Notes to Condensed Consolidated Financial Statements (Unaudited)
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to improve the accounting for share-based payment transactions. ASU 2016-09 changes certain aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The provisions of ASU 2016-09 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those years, early adoption is permitted. The Company adopted ASU 2016-09 as of May 1, 2016 and there was no significant impact to the Company’s consolidated financial statements.
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”), which requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. In addition, an allocation of valuation allowances between current and noncurrent deferred tax assets is not required, because the allowances will be classified as noncurrent. The provisions of ASU 2015-17 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-17 as of January 31, 2016 and has reported deferred tax assets and liabilities as noncurrent on the balance sheet.
Recently Issued Accounting Pronouncements Not Yet Adopted
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition model requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of the performance obligations. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and change in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt ASU 2014-09 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company expects to adopt ASU 2014-09 retrospectively with the cumulative effect of initially applying the update recognized at the date of the adoption along with additional disclosures. The Company’s revenue is primarily generated from the sale of finished goods to customers and those sales predominately contain a single performance obligation, revenue is recognized at the point of sale for the retail segment or when the products have been delivered to the customer for the direct segment. The Company’s review is ongoing as it specifically relates to sales returns and gift cards, and the Company has not yet identified any material changes in the timing of revenue recognition. The Company continues to evaluate the new disclosure requirements of ASU 2014-09 on its consolidated financial statements.
15
DULUTH HOLDINGS INC.Notes to Condensed Consolidated Financial Statements (Unaudited)
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on the balance sheets (right-of-use asset and lease liability), but recognize expenses on the income statements in a manner that is similar to the current lease standard. The provisions of ASU 2016-02 are effective for public entities with fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company expects to early adopt ASU 2016-02 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company conducts its retail operations through leased stores and therefore, the Company expects the adoption of ASU 2016-02 to have a significant impact on its consolidated financial statements.
Statement of Cash Flows
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for public entities with fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company expects to adopt ASU 2016-18 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company is evaluating the level of impact of adopting ASU 2016-18 will have on the Company’s consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and related notes of Duluth Holdings Inc. included in Item 1of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2017February 3, 2019 (“20162018 Form 10-K”).
The three and nine months of fiscal 20172019 and fiscal 20162018 represent our 13 and 39-week13-week periods ended OctoberMay 5, 2019 and April 29, 2017 and October 30, 2016,2018, respectively.
Unless the context indicates otherwise, the terms the “Company,” “Duluth,” “Duluth Trading,” “we,” “our,” or “us” are used to refer to Duluth Holdings Inc. and its subsidiary on a consolidated basis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. All statements other than statements of historical or current facts included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “could,” “estimate,” “expect,” “project,” “plan,” “potential,” “intend,” “believe,” “may,” “might,” “will,” “objective,” “should,” “would,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenue, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 20162018 Form 10-K and other SEC filings, which factors are incorporated by reference herein. These risks and uncertainties include, but are not limited to, the following:our ability to maintain and enhance a strong brand image; our ability to successfully open new stores; effectively adapting to new challenges associated with our expansion into new geographic markets; generating adequate cash from our existing stores to support our growth; the inability to maintain the performance of a maturing store portfolio; the impact of changes in corporate tax regulations; identifying and responding to new and changing customer preferences; the success of the locations in which our stores are located;our ability to attract and retain customers in the various retail venues and locations in which our stores are located; competing effectively in an environment of intense competition;our ability to adapt to significant changes in sales due to the seasonality of our business; price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it will be sold; increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment; failure of our information technology systems to support our current and growing business, before and after our planned upgrades; and other factors that may be disclose in our SEC filings or otherwise. Moreover, we operate in an evolving environment. Newenvironment, new risk factors and uncertainties emerge from time to time and it is not possible for management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements.
We undertake no obligation to update or revise these forward-looking statements, except as required under the federal securities laws.
Overview
We are a rapidly growing lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through our own direct and retail channels. The direct segment, consisting of our website and catalogs, offers products nationwide and represented 64.7%57.5% and 69.2%66.1% of our consolidated net sales for the three and nine months ended OctoberMay 5, 2019 and April 29, 2017, respectively, and 78.0% and 82.6% of our consolidated net sales for the three and nine months ended October 30, 2016,2018, respectively. In 2010, we added retail to our omni-channel platform with the opening of our first store. Since then, we have expanded our retail presence, and as of October 29, 2017,May 5, 2019, we operated 2348 retail stores and three outlet stores. Net sales for our retail segment represented 35.3%42.5% and 30.8%33.9% of our consolidated net sales for the three and nine months ended OctoberMay 5, 2019 and April 29, 2017, and 22.0% and 17.4% of consolidated net sales for the three and nine months ended October 30, 2016,2018, respectively.
We offer a comprehensive line of innovative, durable and functional products, such as our Longtail T® shirts, Buck NakedTM underwear, Fire Hose® work pants, and No-Yank® Tank, which reflect our position as the Modern, Self-Reliant American Lifestyle brand. Our brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic for everyday and on-the-job use.
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From our heritage as a catalog for those working in the building trades, Duluth Trading has become a widely recognized brand and proprietary line of innovative and functional apparel and gear. Over the last decade, we have created strong brand awareness, built a loyal customer base and generated robust sales momentum. We have done so by sticking to our roots of “there’s gotta be a better way” and through our relentless focus on providing our customers with quality, functional products.
A summary of our financial results is as follows:
· | Net sales have increased year-over-year for |
· | Net sales in fiscal |
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· | Net loss of |
· | Adjusted EBITDA of $(4.4) million in fiscal |
· | We opened five new stores in |
· | Our retail stores have achieved and are expected to |
See “Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net income to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial measures. See also the information under the heading “Adjusted EBITDA” in the section “How We Assess the Performance of Our Business” for our definition of Adjusted EBITDA.
Our business is seasonal, and as a result, our net sales fluctuate from quarter to quarter, which often affects the comparability of our results between quarters. Net sales are historically higher in the fourth quarter of our fiscal year due to the holiday selling season.
We are pursuing several strategies to continue our growth, including building brand awareness to continue customer acquisition, acceleratingcontinuing retail expansion, selectively broadening assortments in certain men’s product categories and growing our women’s business.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of financial and operating measures that affect our operating results.
Net Sales
Net sales reflect our sale of merchandise plus shipping and handling revenue collected from our customers, less returns and discounts. Direct sales are recognized upon customer receiptshipment of the product whileand retail sales are recognized at the point of sale. We also use net sales as one of the key financial metrics in determining our annual bonus compensation for our employees.
Comparable Store Sales
Comparable store sales are generally calculated based upon retail stores that were open at least twelve full fiscal months as of the end of the reporting period. Our outlet stores are not included in the comparable store sales calculations.
Comparable store sales allow us to evaluate how our retail store base is performing by measuring the change in period over-period net sales in stores that have been open for twelve fiscal months or more. Some of our competitors and other retailers calculate comparable store sales differently than we do; as a result, our comparable store sales may not be comparable to similar data made available by other companies. We have excluded comparable store sales data from this Form 10-Q due to the limited number of comparable retail stores as of October 29, 2017.
Gross Profit
Gross profit is equal to our net sales less cost of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of goods sold includes the direct cost of purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves; inbound freight; and freight from our distribution centers to our retail stores. The primary drivers of the costs of individual goods are raw material costs. Depreciation and amortization are excluded from gross profit. We expect gross profit to increase to the extent that we successfully grow our net sales. Given the size of our direct segment sales relative to our total net sales, shipping and handling revenue has had a significant impact on our gross profit and gross profit margin. Historically, this revenue has partially offset shipping and handling expense included in selling, general and administrative expenses. We have experienced declines in shipping and handling revenues, and this trend is expected to continue. Declines in shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling expense. Our gross profit may not be comparable to other retailers, as we do not include distribution network and store occupancy expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include all payroll and payroll-related expenses and occupancy expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization. They also include marketing expense, which primarily includes television advertising, catalog production, mailing and print advertising costs, as well as all logistics costs associated with shipping product to our customers, consulting and software expenses and professional services fees. Selling, general and administrative expenses as a percentage of net sales is usually higher in lower-volume quarters and lower in higher-volume quarters because a portion of the costs are relatively fixed.
Our historical sales growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are advertising, marketing, rent/occupancy and payroll costs. While we expect these expenses to increase as we continue to open new stores, increase brand awareness and grow our organization to support our growing business, we believe these expenses will decrease as a percentage of sales over time.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure of operating performance, as it provides a clearer picture of operating results by excluding the effects of financing and investing activities by eliminating the effects of interest and depreciation costs and eliminating expenses that are not reflective of underlying business performance. We use Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business. We also use Adjusted EBITDA as one of the key financial metrics in determining our annual bonus compensation for our employees.
We define Adjusted EBITDA as consolidated net income (loss) before depreciation and amortization, interest expense and provision for income taxes adjusted for the impact of certain items, including non-cash and other items we do not consider representative of our ongoing operating performance. We believe Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other items.
1921
Results of Operations
The following table summarizes our unaudited consolidated results of operations for the periods indicated, both in dollars and as a percentage of net sales.
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| Three Months Ended |
| Nine Months Ended |
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| Three Months Ended |
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| October 29, 2017 |
| October 30, 2016 |
| October 29, 2017 |
| October 30, 2016 |
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| May 5, 2019 |
| April 29, 2018 |
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(in thousands) |
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Direct net sales |
| $ | 54,146 |
| $ | 52,271 |
| $ | 175,588 |
| $ | 166,437 |
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| $ | 65,701 |
| $ | 66,212 |
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Retail net sales |
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| 29,583 |
|
| 14,737 |
|
| 78,054 |
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| 35,026 |
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| 48,543 |
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| 33,995 |
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Net sales |
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| 83,729 |
|
| 67,008 |
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| 253,642 |
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| 201,463 |
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| 114,244 |
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| 100,207 |
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Cost of goods sold (excluding depreciation and amortization) |
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| 36,302 |
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| 28,260 |
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| 108,649 |
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| 84,102 |
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| 53,326 |
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| 44,267 |
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Gross profit |
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| 47,427 |
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| 38,748 |
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| 144,993 |
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| 117,361 |
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| 60,918 |
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| 55,940 |
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Selling, general and administrative expenses |
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| 48,039 |
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| 37,929 |
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| 137,467 |
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| 105,215 |
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| 70,609 |
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| 56,197 |
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Operating (loss) income |
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| (612) |
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| 819 |
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| 7,526 |
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| 12,146 |
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Operating loss |
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| (9,691) |
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| (257) |
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Interest expense |
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| 661 |
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| 33 |
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| 1,199 |
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| 108 |
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| 841 |
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| 821 |
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Other income, net |
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| 73 |
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| 33 |
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| 175 |
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| 163 |
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| 204 |
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| 163 |
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(Loss) income before income taxes |
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| (1,200) |
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| 819 |
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| 6,502 |
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| 12,201 |
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Income tax (benefit) expense |
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| (454) |
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| 305 |
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| 2,480 |
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| 4,691 |
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Net (loss) income |
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| (746) |
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| 514 |
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| 4,022 |
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| 7,510 |
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Less: Net income attributable to |
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| 70 |
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| 52 |
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| 199 |
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| 188 |
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Net (loss) income attributable to controlling interest |
| $ | (816) |
| $ | 462 |
| $ | 3,823 |
| $ | 7,322 |
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Loss before income taxes |
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| (10,328) |
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| (915) |
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Income tax benefit |
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| (2,683) |
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| (232) |
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Net loss |
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| (7,645) |
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| (683) |
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Less: Net (loss) income attributable to noncontrolling interest |
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| (73) |
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| 8 |
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Net loss attributable to controlling interest |
| $ | (7,572) |
| $ | (691) |
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Percentage of Net sales: |
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Direct net sales |
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| 64.7 | % |
| 78.0 | % |
| 69.2 | % |
| 82.6 | % |
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| 57.5 | % |
| 66.1 | % |
Retail net sales |
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| 35.3 | % |
| 22.0 | % |
| 30.8 | % |
| 17.4 | % |
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| 42.5 | % |
| 33.9 | % |
Net sales |
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| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
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| 100.0 | % |
| 100.0 | % |
Cost of goods sold (excluding depreciation and amortization) |
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| 43.4 | % |
| 42.2 | % |
| 42.8 | % |
| 41.7 | % |
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| 46.7 | % |
| 44.2 | % |
Gross profit |
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| 56.6 | % |
| 57.8 | % |
| 57.2 | % |
| 58.3 | % |
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| 53.3 | % |
| 55.8 | % |
Selling, general and administrative expenses |
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| 57.4 | % |
| 56.6 | % |
| 54.2 | % |
| 52.2 | % |
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| 61.8 | % |
| 56.1 | % |
Operating (loss) income |
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| (0.7) | % |
| 1.2 | % |
| 3.0 | % |
| 6.0 | % | |||||||
Operating loss |
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| (8.5) | % |
| (0.3) | % | |||||||||||||
Interest expense |
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| 0.8 | % |
| 0.0 | % |
| 0.5 | % |
| 0.1 | % |
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| 0.7 | % |
| 0.8 | % |
Other income, net |
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| 0.1 | % |
| 0.0 | % |
| 0.1 | % |
| 0.1 | % |
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| 0.2 | % |
| 0.2 | % |
(Loss) income before income taxes |
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| (1.4) | % |
| 1.2 | % |
| 2.6 | % |
| 6.1 | % | |||||||
Income tax (benefit) expense |
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| (0.5) | % |
| 0.5 | % |
| 1.0 | % |
| 2.3 | % | |||||||
Net (loss) income |
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| (0.9) | % |
| 0.8 | % |
| 1.6 | % |
| 3.7 | % | |||||||
Less: Net income attributable to |
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| 0.1 | % |
| 0.1 | % |
| 0.1 | % |
| 0.1 | % | |||||||
Net (loss) income attributable to controlling interest |
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| (1.0) | % |
| 0.7 | % |
| 1.5 | % |
| 3.6 | % | |||||||
Loss before income taxes |
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| (9.0) | % |
| (0.9) | % | |||||||||||||
Income tax benefit |
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| (2.3) | % |
| (0.2) | % | |||||||||||||
Net loss |
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| (6.7) | % |
| (0.7) | % | |||||||||||||
Less: Net (loss) income attributable to noncontrolling interest |
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| (0.1) | % |
| - | % | |||||||||||||
Net loss attributable to controlling interest |
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| (6.6) | % |
| (0.7) | % |
Three Months Ended October 29, 2017May 5, 2019 Compared to Three Months Ended October 30, 2016April 29, 2018
Net Sales
Net sales increased $16.7$14.0 million, or 25.0%14.0%, to $83.7$114.2 million in the three months ended October 29, 2017May 5, 2019 compared to $67.0$100.2 million in the three months ended October 30, 2016,April 29, 2018, driven by gainsan increase in both direct andthe retail segmentssegment of $1.9$14.5 million, or 3.6%42.8%, and $14.8partially offset by a decrease in the direct segment of $0.5 million, or 100.7%0.8%, respectively, with gains across virtually all product categories and in both our men’s and women’s business. The decrease in the direct segment net sales has continued into the first five weeks of the second quarter. Our website visits increased 3.7%14% in the three months ended October 29, 2017May 5, 2019 compared to the three months ended October 30, 2016.April 29, 2018. The increase in retail net sales was primarily due to having 12 moredriven by new stores during the three months ended October 29, 2017with 51 stores as of May 5, 2019 compared to the three months ended October 30, 2016.33 stores as of April 29, 2018, partially offset by existing stores.
2022
Gross Profit
Gross profit increased $8.7$5.0 million, or 22.4%8.9%, to $47.4$60.9 million in the three months ended October 29, 2017May 5, 2019 compared to $38.7$55.9 million in the three months ended October 30, 2016.April 29, 2018. As a percentage of net sales, gross margin decreased 120250 basis points to 56.6%53.3% of net sales in the three months ended October 29, 2017,May 5, 2019, compared to 57.8%55.8% of net sales in the three months ended October 30, 2016.April 29, 2018. The decrease in gross margin rate was primarily attributable to a continuing declinedecrease in product margins due to product mix on recent clearance activity, coupled with a slight decrease in shipping revenues, coupled with an increase in freight cost related to transporting inventory from our Belleville distribution center to our retail stores due to geographic expansion, which was partially offset by an increase in product margins.revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.1$14.4 million, or 26.7%25.6%, to $48.0$70.6 million in the three months ended October 29, 2017May 5, 2019 compared to $37.9$56.2 million in the three months ended October 30, 2016.April 29, 2018. Selling, general and administrative expenses as a percentage of net sales increased 80570 basis points to 57.4%61.8% in the three months ended October 29, 2017,May 5, 2019, compared to 56.6%56.1% in the three months ended October 30, 2016.April 29, 2018. The increase in selling, general and administrative expenses was attributable to an increase of $2.3$2.5 million in advertising and marketing costs, $3.0$2.9 million in selling expenses and $4.8$9.0 million in general and administrative expenses.
As a percentage of net sales, advertising and marketing costs decreased 16050 basis points to 20.2%21.1% in the three months ended October 29, 2017,May 5, 2019, compared to 21.8%21.6% in the three months ended October 30, 2016.April 29, 2018. The 16050 basis point decrease in advertising and marketing costs as a percentage of net sales was primarily attributable to a decrease of 140 basis points in digital advertisingand a decrease of 130 basis points in catalog costs due to leverage gained from increase ina higher mix of retail net sales as discussed above, which was partially offset by an increase of 90 basis points in television and retail store advertising.sales.
As a percentage of net sales, selling expenses increased 6050 basis points to 15.8%16.6% in the three months ended October 29, 2017,May 5, 2019, compared to 15.2%16.1% in the three months ended October 30, 2016,April 29, 2018, primarily due to an increase of 110 basis points in customer service due to our growth in retail, which was partially offset by a decrease of 60 basis points in shipping expenses attributabledue to the leverage gained from an increase in the proportion of retail net sales.
As a percentage of net sales, general and administrative expenses increased 170570 basis points to 21.4%24.1% in the three months ended October 29, 2017,May 5, 2019, compared to 19.7%18.4% in the three months ended October 30, 2016.April 29, 2018. The 170570 basis point increase was primarily attributable to an increase of 70 basis points in occupancy and equipment cost due to growth in the number of retail stores, an increase of 70 basis pointsin depreciation expense due to investments in technology and corporate facilities, and an increase in personnel expenses primarilycost due to an expenseincrease in connection withheadcount to support the retirementgrowth of a senior management employee and an increase of 30 basis points in depreciation.the business.
Interest ExpenseIncome Tax Benefit
Interest expenseIncome tax benefit was $0.7$2.7 million in the three months ended October 29, 2017,May 5, 2019, compared to $0.03$0.2 million in the three months ended October 30, 2016. The increase in interest expense was primarily attributable to our build-to-suit retail stores and an increase in borrowings on our revolving line of credit.
Income Tax (Benefit) Expense
Income tax benefit was $0.5 million in the three months ended OctoberApril 29, 2017, compared to income tax expense of $0.3 million in the three months ended October 30, 2016. The decrease was primarily attributable to a net loss in comparison to a net income in the prior year three months ended October 30, 2016.2018. Our effective tax rate related to controlling interest was 36%26% and 40%,25% for the three months ended OctoberMay 5, 2019, and April 29, 2017 and October 30, 2016,2018, respectively.
Net (Loss) IncomeLoss
Net loss was $0.8$7.6 million, in the three months ended October 29, 2017May 5, 2019 compared to a net income of $0.5$0.7 million in the three months ended October 30, 2016,April 29, 2018, primarily due to the factors discussed above.
Nine Months Ended October 29, 2017 Compared to Nine Months Ended October 30, 2016
Net Sales
Net sales increased $52.2 million, or 25.9%, to $253.6 million in the nine months ended October 29, 2017 compared to $201.5 million in the nine months ended October 30, 2016, driven by gains in both direct and retail segments of $9.2 million, or 5.5%, and $43.0 million, or 122.8%, respectively, with gains across all product categories. Our website visits increased 13.2%
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in the nine months ended October 29, 2017 compared to the nine months ended October 30, 2016. The increase in retail net sales was primarily attributable to the same factors discussed above for the three months ended October 29, 2017 compared to the three months ended October 30, 2016.
Gross Profit
Gross profit increased $27.6 million, or 23.5%, to $145.0 million in the nine months ended October 29, 2017 compared to $117.4 million in the nine months ended October 30, 2016. As a percentage of net sales, gross margin decreased 110 basis points to 57.2% of net sales in the nine months ended October 29, 2017, compared to 58.3% of net sales in the nine months ended October 30, 2016. The decrease in gross margin rate was primarily due to the same factors discussed above for the three months ended July 30, 2017 compared to the three months ended July 31, 2016, which was partially offset by an increase in product margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $32.3 million, or 30.7%, to $137.5 million in the nine months ended October 29, 2017 compared to $105.2 million in the nine months ended October 30, 2016. Selling, general and administrative expenses as a percentage of net sales increased 200 basis points to 54.2% in the nine months ended October 29, 2017, compared to 52.2% in the nine months ended October 30, 2016. The increase in selling, general and administrative expenses was attributable to an increase of $9.5 million in advertising and marketing costs, $9.3 million in selling expenses and $13.5 million in general and administrative expenses.
As a percentage of net sales, advertising and marketing costs decreased 70 basis points to 20.9% in the nine months ended October 29, 2017, compared to 21.6% in the nine months ended October 30, 2016. The 70 basis point decrease in advertising and marketing costs as a percentage of net sales was primarily attributable to a decrease of 120 basis points in catalog costs and a decrease of 40 basis points in digital advertising, partially offset by an increase of 80 basis points in television advertising.
As a percentage of net sales, selling expenses increased 80 basis points to 14.8% in the nine months ended October 29, 2017, compared to 14.0% in the nine months ended October 30, 2016, primarily due to an increase of 130 basis points in customer service due to growth in retail, offset by a decrease of 50 basis points in shipping expenses attributable to the leverage gained from an increase in the proportion of retail net sales.
As a percentage of net sales, general and administrative expenses increased 190 basis points to 18.5% in the nine months ended October 29, 2017, compared to 16.6% in the nine months ended October 30, 2016. The 190 basis point increase was primarily attributable to an increase of 120 basis points in occupancy and equipment costs due to retail growth and an increase of 40 basis points in depreciation.
Interest Expense
Interest expense was $1.2 million in the nine months ended October 29, 2017, compared to $0.1 million in the nine months ended July 31, 2016. The increase in interest expense was due to the same factors discussed above for the three months ended October 29, 2017 compared to the three months ended October 30, 2016.
Income Tax Expense
Income tax expense was $2.5 million in the nine months ended October 29, 2017, compared to $4.7 million in the nine months ended October 30, 2016. Our effective tax rate related to controlling interest was 39%, for both the nine months ended October 29, 2017 and October 30, 2016.
Net Income
Net income decreased $3.5 million, or 47.8%, to $3.8 million in the nine months ended October 29, 2017, compared to $7.3 million in the nine months ended October 30, 2016, primarily due to the factors discussed above.
22
Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA
The following table presents reconciliations of net income to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-GAAPnon-U.S. GAAP financial measures, for the periods indicated below. See the above section titled “How We Assess the Performance of Our Business,” for our definition of Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
| October 29, 2017 |
| October 30, 2016 |
| October 29, 2017 |
| October 30, 2016 |
| May 5, 2019 |
| April 29, 2018 | ||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (746) |
| $ | 514 |
| $ | 4,022 |
| $ | 7,510 | ||||||
Net loss |
| $ | (7,645) |
| $ | (683) | ||||||||||||
Depreciation and amortization |
| 1,824 |
| 1,264 |
| 5,104 |
| 3,215 |
| 4,392 |
| 2,309 | ||||||
Interest expense |
| 661 |
| 33 |
| 1,199 |
| 108 |
| 841 |
| 821 | ||||||
Income tax (benefit) expense |
|
| (454) |
|
| 305 |
|
| 2,480 |
|
| 4,691 | ||||||
Amortization of build-to-suit leases capital contribution |
| 214 |
| — | ||||||||||||||
Income tax benefit |
|
| (2,683) |
|
| (232) | ||||||||||||
EBITDA |
| $ | 1,285 |
| $ | 2,116 |
| $ | 12,805 |
| $ | 15,524 |
| $ | (4,881) |
| $ | 2,215 |
Non-cash stock based compensation |
| 569 |
| 354 |
| 1,186 |
| 969 | ||||||||||
Stock based compensation |
|
| 474 |
|
| 409 | ||||||||||||
Adjusted EBITDA |
| $ | 1,854 |
| $ | 2,470 |
| $ | 13,991 |
| $ | 16,493 |
| $ | (4,407) |
| $ | 2,624 |
23
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $0.6$7.0 million or 24.9%, to $1.9$(4.4) million in the three months ended October 29, 2017May 5, 2019 compared to $2.5$2.6 million in the three months ended October 30, 2016.April 29, 2018. As a percentage of net sales, Adjusted EBITDA decreased 150650 basis points to 2.2%(3.9)% of net sales in the three months ended October 29, 2017May 5, 2019 compared to 3.7%2.6% of net sales in the three months ended October 30, 2016.
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA decreased $2.5 million, or 15.2%, to $14.0 million in the nine months ended OctoberApril 29, 2017 compared to $16.5 million in the nine months ended October 30, 2016. As a percentage of net sales, Adjusted EBITDA decreased 270 basis points to 5.5% of net sales in the nine months ended October 29, 2017 compared to 8.2% of net sales in the nine months ended October 30, 2016.
2018.
Liquidity and Capital Resources
General
Our business relies on cash from operating activities and a credit facility as well as cashour primary sources of liquidity. On May 17, 2018, we entered into a new credit facility which provides for borrowings of up to $80.0 million on hand and a revolving line of credit as our primary sources of liquidity, which was increased effective November 1, 2017, toand an additional $50.0 million in a delayed draw term loan. The $80.0 million revolving line of credit matures on May 17, 2023 and we have the option to draw in various amounts on the $50.0 million term loan through December 31, 2017 and then to $60.0 million from January 1, 2018 through July 31, 2019.May 17, 2020, with a maturity on May 17, 2023. Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, capital expenditures associated with opening new stores, infrastructure and information technology. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities.
We expect to spend approximately $42.0$40.0 million to $44.0$45.0 million in fiscal 20172019 on capital expenditures, net of proceeds from finance lease obligations, including a total of approximately $31.0$30.0 million to $33.0$32.0 million for new retail store expansion and remodels. We expect capital expenditures of approximately $2.0 million and starting inventory of $0.6$0.5 million to open a new store. At October 29, 2017,May 5, 2019, our net working capital was $86.6$63.4 million, including $1.0 million of cash. Due to the seasonality of our business, a significant amount of cash from operating activities is generated during the fourth quarter of our fiscal year. During the first three quarters of our fiscal year, we typically are net users of cash in our operating activities as we acquire inventory in anticipation of our peak selling season, which occurs in the fourth quarter of our fiscal year. We also use cash in our investing activities for capital expenditures throughout all four quarters of our fiscal year.
We believe that our cash balance as of October 29, 2017, combined with cash flow from operating activities and the availability of cash under our revolving line of credit will be sufficient to cover working capital requirements and anticipated capital expenditures and for funding our growth strategy for the foreseeable future.
23
Cash Flow Analysis
A summary of operating, investing and financing activities is shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| Three Months Ended | ||||||||
|
| October 29, 2017 |
| October 30, 2016 |
| May 5, 2019 |
| April 29, 2018 | ||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
| $ | (34,957) |
| $ | (26,783) |
| $ | (13,111) |
| $ | (10,987) |
Net cash used in investing activities |
|
| (44,643) |
|
| (22,473) |
|
| (9,762) |
|
| (13,957) |
Net cash provided by financing activities |
|
| 56,516 |
|
| 11,556 |
|
| 22,358 |
|
| 21,963 |
Decrease in cash |
| $ | (23,084) |
| $ | (37,700) | ||||||
Decrease in cash and restricted cash |
| $ | (515) |
| $ | (2,981) |
Net Cash used in Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization, loss on disposal of property, equipment and other assets, stock-based compensation and the effect of changes in assets and liabilities.
While our cash flows from operations for the ninethree months ended October 29, 2017May 5, 2019 is negative, primarily driven by the seasonal nature of our business, we expect cash flows from operations for the full year fiscal 20172019 to be positive from normal operating performance and seasonal reductions in working capital during the fourth quarter of our fiscal year, which is consistent with previous full fiscal years.
For the ninethree months ended October 29, 2017,May 5, 2019, net cash used in operating activities was $35.0$13.1 million, which primarily consisted of net incomeloss of $4.0$7.6 million, non-cash depreciation and amortization of $5.1$4.4 million and stock based compensation of $1.2$0.5 million, offset by cash used in operating assets and liabilities of $45.2$10.0 million. The cash used in operating assets and liabilities of $45.2$10.0 million primarily consisted of $57.0a $6.6 million increase in inventory, primarily due to the increase in the number of retail stores, a $5.3 million decrease in accrued expenses and deferred rent obligations and a $2.6 million increase in prepaid expense and other current assets due to the adoption of the new lease accounting standard, a $2.3 million decrease in deferred catalog
24
costs due to a shift in timing of early spring catalogs, and a $1.2 million increase in trade accounts payable due to timing of payments.
For the three months ended April 29, 2018, net cash used in operating activities was $11.0 million, which primarily consisted of net loss of $0.7 million, non-cash depreciation and amortization of $2.3 million and stock based compensation of $0.4 million, offset by cash used in operating assets and liabilities of $13.1 million. The cash used in operating assets and liabilities of $13.1 million primarily consisted of a $10.4 million increase in inventory, primarily due to the increase in the number of our retail stores, and building up our inventory for the peak holiday season, which was partially offset by an increase in trade accounts payable of $18.7 million primarily due to timing of payments.
For the nine months ended October 30, 2016, net cash used in operating activities was $26.8 million, which primarily consisted of net income of $7.5 million, non-cash depreciation and amortization of $3.2 million and stock based compensation of $1.0 million, offset by cash used in operating assets and liabilities of $38.6 million. The cash used in operating assets and liabilities of $38.6 million primarily consisted of $40.9a $1.5 million increase in inventory,prepaid expenses and other current assets due to building upgrowth and adoption of inventory for our peak season, coupled withthe revenue standard as a result of the increase in the number of our retail stores during fiscal 2016,estimated expected inventory returns, and $3.0a $1.4 million increase in other receivables primarily due to refunds for excess income tax payments, which was partially offset by a $6.7 million increasedecrease in trade accounts payable primarily due to seasonality and timing of payments.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth related to new store openings, information technology and enhancements for our distribution and corporate facilities, coupled with changes in restricted cash, which is related to our retail store leasing agreements. facilities.
For the ninethree months ended October 29, 2017,May 5, 2019, net cash used in investing activities was $44.6$9.8 million and was primarily driven by capital expenditures of $37.5$8.0 million for the opening of ten new retail stores and retail store build-out, as well as investments in information technology, $6.3and $1.8 million purchase of available-for-sale security, and a change in restricted cash of $0.7 million.capital contributions towards our build-to-suit stores.
For the ninethree months ended October 30, 2016,April 29, 2018, net cash used in investing activities was $22.5$14.0 million, andwhich was also primarily driven by capital expenditures of $21.0$14.0 million for the expansion of our Belleville distribution center, the opening of five new retail stores and retail store build-out, as well as investments in information technology.
Net Cash Provided by Financing Activities
Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-term debts, as well as distributions to the individuals and entities that were our shareholders prior to our IPO and holders of the noncontrolling interest in our variable interest entity TRI Holdings, LLC (“TRI”), proceeds from finance lease obligations and capital contributions to Schlecht Retail Ventures LLC.TRI.
For the ninethree months ended October 29, 2017,May 5, 2019, net cash provided by financing activities was $56.5$22.4 million, primarily consisting of proceeds of $50.1$22.7 million, net from our revolving line of credit $0.8to fund working capital.
For the three months ended April 29, 2018, net cash provided by financing activities was $22.0 million, primarily consisting of proceeds of $21.3 million, net from long-term debt, $2.9our revolving line of credit to fund working capital and capital expenditures, $0.5 million in
24
change in bank overdraft $2.4and $0.3 million from finance lease obligations in connection with our build-to-suit lease transactions and $0.8 million for capital contributions to SRV.
For the nine months ended October 30, 2016, net cash provided by financing activities was $11.6 million, primarily consisting of proceeds of $13.2 million, net from our revolving line of credit, $2.1 million in change in bank overdraft, and $0.7 million for capital contributions to SRV, offset by uses of $4.2 million for payments on long-term debt.transactions.
Line of Credit
On September 29, 2017,May 17, 2018, we entered into a first amendment to thenew credit agreement and subsequently terminated our Amended and Restated Loan Agreement dated asAgreement. The outstanding balance of October 7, 2016 (the “Amended and Restated Agreement”), providing for borrowing availability of up to $60.0$27.5 million from September 29, 2017 through July 31, 2019. Effective November 1, 2017, we entered into a second amendment tounder the Amended and Restated Agreement providing for borrowing availability of up to $80.0 million from November 1, 2017 through December 31, 2017 and borrowing availability of up to $60.0 million from January 1, 2018 through July 31, 2019.was paid off with borrowings under the new credit agreement. The Amended and Restated Agreement matures on July 31, 2019, and bears interest, payable monthly, at a rate equal to the adjusted LIBOR rate, as defined in the Amended and Restated Agreement (effective rate of 2.5% at October 29, 2017). The Amended and Restated Agreementcredit agreement is secured by essentially all Company assets and requires that we maintain compliance with certain financial and non-financial covenants, including minimum tangible net worth and a minimum trailing twelve month EBITDA. In addition, the Amendedmaximum rent adjusted leverage ratio and Restated Agreement does not contain borrowing base limits. minimum fixed charge coverage ratio. See Note 3 “Debt and Line of Credit,” for further information.
As of October 29, 2017May 5, 2019 and for the ninethree months then ended, we were in compliance with all financial and non-financial covenants, and we expect to bethe Company was in compliance with all financial and non-financial covenants for all debts discussed above and expects to be in compliance for the remainder of fiscal 2017. 2019.
Contractual Obligations
On August 18, 2017, we entered into a lease agreement for the construction of our headquarters in Mt. Horeb, Wisconsin (the “HQ Lease”). The HQ Lease is for an initial term of 30 years and is expected to begin on November 1, 2018, with annual lease payments of $1.8 million, increasing 2.0% each year through the first 20 years, then beginning in year 21, the annual lease payments reset to $1.3 million, increasing 2.0% each year until the end of the lease term, with a renewal option to extend for up to two terms of ten years each. The construction completion date of our headquarters is expected on or before November 1, 2018.
Except as discussed above, thereThere have been no significant changes to our contractual obligations as described in our 2016Annual Report on Form 10-K.10-K for the fiscal year ended February 3, 2019.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements, except for operating leases.arrangements.
Critical Accounting Policies and Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of
25
contingent assets and liabilities at the date of the financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements.
As of the date of this filing, there were no significant changes to any of the critical accounting policies and estimates described in our 20162018 Form 10-K.10-K, except as discussed below.
Recently IssuedAdopted Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014,On February 4, 2019, we adopted authoritative guidance related to leases using the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedesoptional transition method and elected the revenue recognition requirements in ASC Topic 605, Revenue Recognition. ASU 2014-09 requires revenue recognition to depictpackage of practical expedients. As such, the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expectscomparative prior period information has not been restated and continues to be entitledreported under the accounting standards in exchangeeffect for those goods or services. The new revenue recognition model requires identifyingperiods. Beginning with the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfactionfirst quarter of fiscal 2019, our financial results reflect adoption of the performance obligations. ASU 2014-09 also requires additional disclosure about the nature, amount, timingstandard.
See Note 1 “Nature of Operations and uncertaintyBasis of revenue and cash flows arising from customer contracts, including significant judgments and changePresentation,” of Notes to Condensed Consolidated Financial Statements included in judgments, andPart 1, Item 1, of this quarterly report on Form 10-Q for further information regarding recently adopted accounting pronouncements.
25Recent Accounting Pronouncements
assets recognized from costs incurredNotes to obtain or fulfill a contract. ASU 2014-09 can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effectCondensed Consolidated Financial Statements included in Part 1, Item 1, of initially applying the update recognized at the date of the initial application along with additional disclosures. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09this quarterly report on Form 10-Q for one year. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. Accordingly, we will adopt ASU 2014-09 on January 29, 2018, the first day of our first quarter for the fiscal year ending February 3, 2019, our fiscal year 2018. We expect to adopt ASU 2014-09 retrospectively with the cumulative effect of initially applying the update recognized at the date of the adoption along with additional disclosures. Our revenue is primarily generated from the sale of finished goods to customers and those sales predominately contain a single performance obligation, revenue is recognized at the point of sale for our retail segment or when the products have been delivered to the customer for our direct segment. Our review is ongoing as it specifically relates to sales returns and gift cards, and we not yet identified any material changes in the timing of revenue recognition. We continue to evaluate the new disclosure requirements of ASU 2014-09 on our consolidated financial statements.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”), which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The provisions of ASU 2015-11 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2015-11 as of January 30, 2017, the first day of our fiscal year 2017 and there was no significant impact to our consolidated financial statements.
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”), which requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. In addition, an allocation of valuation allowances between current and noncurrent deferred tax assets is not required, because the allowances will be classified as noncurrent. The provisions of ASU 2015-17 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2015-17 as of January 31, 2016 and have reported deferred tax assets and liabilities as noncurrent on the consolidated balance sheets.
Leases
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on the balance sheets, but recognize expenses on the income statements in a manner which is similar to the current lease standard. The provisions of ASU 2016-02 are effective for public entities with fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We expect to early adopt ASU 2016-02 on January 29, 2018, the first day of our first quarter for the fiscal year ending February 3, 2019, our fiscal year 2018. We conduct our retail operations through leased stores and therefore, we expect the adoption of ASU 2016-02 to have a significant impact on our consolidated financial statements.
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to improve theinformation regarding recent accounting for share-based payment transactions. ASU 2016-09 changes certain aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The provisions of ASU 2016-09 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those years, early adoption is permitted. We adopted ASU 2016-09 as of May 1, 2016 and there was no significant impact to our consolidated financial statements.pronouncements.
26
Statement of Cash Flows
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for public entities with fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We expect to adopt ASU 2016-18 on January 29, 2018, the first day of our first quarter for the fiscal year ending February 3, 2019, our fiscal year 2018. We are evaluating the level of impact of adopting ASU 2016-18 will have on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risks described in our 20162018 Form 10-K. See Note 23 “Debt and Line of Credit,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q, for disclosure on our interest rate related to our line of credit.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Section 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires management of an issuer subject to the Exchange Act to evaluate, with the participation of the issuer’s principal executive and principal financial officers, or persons performing similar functions, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of each fiscal quarter. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date,May 5, 2019, as a result of the material weakness in our internal control over financial reporting discussed below and in the Company’s Annual Report on Form 10-K, for the year ended February 3, 2019, our disclosure controls and procedures were not effective.
Material Weakness
As disclosed in our 2018 Form 10-K, management concluded that a material weakness existed in our internal control over financial reporting. Specifically we determined that due to the lack of sufficient resources throughout the year, we did not design and implement effective internal control activities to timely detect and resolve issues resulting from converting to a new order management system, nor did we consistently execute certain account reconciliations and analyses timely during fiscal 2018.
Management has developed certain remediation steps to address the material weakness discussed above and to improve internal control over financial reporting. The Company is taking steps to correctly allocate resources as needed and to further automate and enhance the reconciliation process. The material weakness will not be considered remediated until applicable remedial controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.
Management has concluded that, notwithstanding the material weakness described above, the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows as of the date, and for the periods presented, in conformity with U.S. GAAP.
26
Changes in Internal Control Over Financial Reporting
We implemented the new lease accounting standard as of February 4, 2019. As a result, we implemented changes to our processes and internal control over financial reporting to ensure compliance with the new accounting and disclosure rules. There waswere no changeother changes in our internal control over financial reporting (as defined in Rule 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition, operating results or cash flows. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.
We operate in a rapidly changing environment that involves a number of risks that may have a material adverse effect on our business, financial condition and results of operations. For a detailed discussion of the risks that affect our business, please refer to the section entitled “Risk Factors” in our 20162018 Form 10-K.10-K or other SEC filings. There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.
27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any equity securities during the quarter ended October 29, 2017,May 5, 2019, which were not registered under the Securities Act.
The following table contains information of shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ restricted stock during the quarter ended October 29, 2017.May 5, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total number |
| Approximate dollar | ||
|
|
|
|
|
|
| of shares purchased |
| value of shares that | |
|
| Total number |
|
|
|
| as part of publicly |
| may yet to be | |
|
| of shares |
| Average price |
| announced plans |
| purchased under the | ||
Period |
| purchased |
| paid per share |
| or programs |
| plans or programs | ||
July 31 - August 27, 2017 |
| — |
| $ | — |
| — |
| $ | — |
August 28 - October 1, 2017 |
| 2,890 |
|
| 19.75 |
| — |
|
| — |
October 2 - October 29, 2017 |
| — |
|
| — |
| — |
|
| — |
Total |
| 2,890 |
| $ | 19.75 |
| — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total number |
| Approximate dollar | ||
|
|
|
|
|
|
| of shares purchased |
| value of shares that | |
|
| Total number |
|
|
|
| as part of publicly |
| may yet to be | |
|
| of shares |
| Average price |
| announced plans |
| purchased under the | ||
Period |
| purchased |
| paid per share |
| or programs |
| plans or programs | ||
February 4 - March 3, 2019 |
| — |
| $ | — |
| — |
| $ | — |
March 4 - April 7, 2019 |
| 12,380 |
|
| 22.28 |
| — |
|
| — |
April 8 - May 5, 2019 |
| 2,143 |
|
| 17.08 |
| — |
|
| — |
Total |
| 14,523 |
| $ | 22.55 |
| — |
| $ | — |
27
Please refer to the Exhibit Index.
28
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |||
| |||
| |||
| |||
| |||
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29
EXHIBIT INDEX
|
|
Exhibit No. |
|
| |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | XBRL Instance Document** |
101.SCH | XBRL Taxonomy Extension Schema Document** |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** |
101.DEF | XBRL Taxonomy Extension Definition Document** |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document** |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** |
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* | Filed herewith |
** | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: June 14, 2019 | |||
DULUTH HOLDINGS INC. | |||
/s/ DAVID LORETTA | |||
David Loretta | |||
Senior Vice President and Chief Financial Officer | |||
(On behalf of the Registrant as Principal Financial Officer and Principal Accounting Officer) |
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