UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________





 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended April 30, 2017



OR





 

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)

 _________________________________________





 

Wisconsin

39-1564801

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)



 

170 Countryside Drive

P.O. Box 409

Belleville, Wisconsin

 

53508

(Address of principal executive offices)

(Zip Code)









(608) 424-1544

(Registrant’s telephone number, including area code)



_________________________________________

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 fil er, 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. (Check one):





 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(D o not check if smaller reporting company)

 

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 Regi strant’s Class A common stock, n o par value, as of June 5 , 2017, was 3,364,200 .

The number of shares outstanding of the Registrant’s Class B common stock,  n o par value, as of June 5, 2017 ,   was 29, 090,197 .

 

 

 

 


 

DULUTH HOLDINGS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED April 30, 2017  

INDEX

 



 

 



 

 



Part I—Financial Information

Page

 Item 1.

Financial Statements



Condensed Consolidated Balance Sheets   as of April 30, 2017   and January 29 , 201 7 (Unaudited)



Condensed Consolidated Stat ements of O perations for the three months ended April 30, 2017 and May 1 , 201 6 (Unaudited)



Condensed Consolidated Statement s of Comprehensive Income for the three   month s ended April 30, 2017 and May 1, 2016 (Unaudited)



Condensed Consolidated Statement of S h areholders’ Equity for t he three months ended April 30, 2017 (Unaudited)



Condensed Consolidated Stat e m ents of Cash Flows for the three month s ende d April 30 ,   2017 and May 1, 2016 (Unaudited)



Notes to Condensed Consolidated Financial Statements (Unaudited)

 Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16 

 Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25 

 Item 4.

Controls and Procedures

25 



Part II—Other Information

 

 Item 1.

Legal Proceedings

25 

 Item 1A.

Risk Factors

25 

 Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26 

 Item 6.

Exhibits

26 



 

 

 Signatures

 

27 





 

2

 


 

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements

DULUTH HOLDINGS INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands)





 

 

 

 

 

 



 

 

 

 

 

 



 

April 30, 2017

 

January 29, 2017

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$

13,584 

 

$

24,042 

Accounts receivable

 

 

31 

 

 

45 

Other receivables

 

 

1,100 

 

 

349 

Inventory, less reserve for excess and obsolete items
of $1,596 and $1,242 , respectively

 

 

75,716 

 

 

70,368 

Prepaid expenses

 

 

5,060 

 

 

4,860 

Deferred catalog costs

 

 

382 

 

 

1,582 

Total current assets

 

 

95,873 

 

 

101,246 

Property and equipment, net

 

 

62,480 

 

 

52,432 

Restricted cash

 

 

768 

 

 

1,435 

Goodwill

 

 

402 

 

 

402 

Other assets, net

 

 

467 

 

 

452 

Total assets

 

$

159,990 

 

$

155,967 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Trade accounts payable

 

$

10,662 

 

$

9,330 

Accrued expenses and other current liabilities

 

 

19,869 

 

 

19,822 

Income taxes payable

 

 

5,478 

 

 

5,225 

Current maturities of long-term debt

 

 

728 

 

 

742 

Total current liabilities

 

 

36,737 

 

 

35,119 

Finance lease obligations under build-to-suit leases

 

 

4,772 

 

 

3,349 

Long-term debt, less current maturities

 

 

34 

 

 

35 

Deferred rent obligations, less current maturities

 

 

2,106 

 

 

2,109 

Deferred tax liabilities

 

 

1,545 

 

 

1,567 

Total liabilities

 

 

45,194 

 

 

42,179 

Commitments and contingencies

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, no par value; 10,000 shares authorized; no shares
   issued or outstanding as of April 30, 2017 and January 29, 2017

 

 

 —

 

 

Common stock (Class A), no par value; 10,000 shares authorized;
    3,364 shares issued and outstanding as of April 30, 2017 and January 29, 2017

 

 

 —

 

 

Common stock (Class B), no par value; 200,000  shares authorized;
    29,078 and 29,012 shares issued and outstanding as of April 30, 2017 and
   January 29, 2017, respectively

 

 

 —

 

 

Capital stock

 

 

86,770 

 

 

86,446 

Retained earnings

 

 

25,088 

 

 

24,733 

Total shareholders' equity of Duluth Holdings Inc.

 

 

111,858 

 

 

111,179 

Noncontrolling interest

 

 

2,938 

 

 

2,609 

Total shareholders' equity

 

 

114,796 

 

 

113,788 

Total liabilities and shareholders' equity

 

$

159,990 

 

$

155,967 





The accompanying notes are an integral part of these condensed consolidated financial statements.



3

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands , except per share figures)

 









 

 

 

 

 

 



 

Three Months Ended



 

April 30, 2017

 

May 1, 2016

Net sales

 

$

83,687 

 

$

68,632 

Cost of goods sold (excluding depreciation and amortization)

 

 

35,044 

 

 

28,941 

Gross profit

 

 

48,643 

 

 

39,691 

Selling, general and administrative expenses

 

 

47,894 

 

 

34,350 

Operating income

 

 

749 

 

 

5,341 

Interest expense

 

 

166 

 

 

38 

Other income, net

 

 

57 

 

 

70 

Income before income taxes

 

 

640 

 

 

5,373 

Income tax expense

 

 

225 

 

 

2,061 

Net income

 

 

415 

 

 

3,312 

Less: Net income attributable to noncontrolling interest

 

 

60 

 

 

71 

Net income attributable to controlling interest

 

$

355 

 

$

3,241 

Basic earnings per share (Class A and Class B):

 

 

 

 

 

 

Weighted average shares of
   common stock outstanding

 

 

31,822 

 

 

31,520 

Net income per share attributable
   to controlling interest

 

$

0.01 

 

$

0.10 

Diluted earnings per share (Class A and Class B):

 

 

 

 

 

 

Weighted average shares and
   equivalents outstanding

 

 

32,320 

 

 

32,253 

Net income per share attributable
   to controlling interest

 

$

0.01 

 

$

0.10 





The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousand s )







 

 

 

 

 

 



 

Three Months Ended



 

April 30, 2017

 

May 1, 2016

Net Income

 

$

415 

 

$

3,312 

Other comprehensive income:

 

 

 

 

 

 

Change in value of interest rate swap agreement

 

 

 

 

Comprehensive income

 

 

415 

 

 

3,318 

Comprehensive income attributable
    to noncontrolling interest

 

 

60 

 

 

71 

Comprehensive income attributable
   to controlling interest

 

$

355 

 

$

3,247 





The accompanying notes are an integral part of these condensed consolidated financial statements .

 

5

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statement of Shareholders’ Equity

(Unaudited)

(Amounts in thousands)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 



 

 

 

 

 

 

 

 

 

interest in

 

Total



 

Capital stock

 

Retained

 

variable interest

 

shareholders'



 

Shares

 

Amount

 

earnings

 

entity

 

equity

Balance at January 29, 2017

 

32,376 

 

$

86,446 

 

$

24,733 

 

$

2,609 

 

$

113,788 

Issuance of common stock

 

73 

 

 

 

 

 

 

 

 

Restricted stock forfeitures

 

(7)

 

 

 

 

 

 

 

 

Amortization of stock-based compensation

 

 

 

324 

 

 

 

 

 

 

324 

Capital contributions

 

 

 

 

 

 

 

269 

 

 

269 

Distributions

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

355 

 

 

60 

 

 

415 

Balance at April 30, 2017

 

32,442 

 

$

86,770 

 

$

25,088 

 

$

2,938 

 

$

114,796 





The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)









 

 

 

 

 

 



 

Three Months Ended



 

April 30, 2017

 

May 1, 2016

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

415 

 

$

3,312 

Adjustments to reconcile net income to net cash used
   in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,552 

 

 

869 

Amortization of stock-based compensation

 

 

324 

 

 

280 

Deferred income taxes

 

 

(22)

 

 

(24)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

14 

 

 

(25)

Other receivables

 

 

(751)

 

 

(398)

Inventory

 

 

(4,453)

 

 

(2,786)

Prepaid expense

 

 

189 

 

 

151 

Deferred catalog costs

 

 

1,449 

 

 

1,781 

Trade accounts payable

 

 

188 

 

 

(4,574)

Income taxes payable

 

 

253 

 

 

657 

Accrued expenses and deferred rent obligations

 

 

(2,702)

 

 

(3,072)

Net cash used in operating activities

 

 

(3,544)

 

 

(3,829)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,327)

 

 

(3,476)

Change in restricted cash

 

 

667 

 

 

Purchases of other assets

 

 

(27)

 

 

Net cash used in investing activities

 

 

(7,687)

 

 

(3,476)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on long term debt

 

 

(10)

 

 

(68)

Payments on capital lease obligations

 

 

(5)

 

 

(5)

Distributions to shareholders

 

 

 

 

(192)

Proceeds from finance lease obligations

 

 

512 

 

 

Capital contributions to variable interest entity

 

 

269 

 

 

Other

 

 

 

 

Net cash provided by (used in) financing activities

 

 

773 

 

 

(265)

Decrease in cash

 

 

(10,458)

 

 

(7,570)

Cash at beginning of period

 

 

24,042 

 

 

37,873 

Cash at end of period

 

$

13,584 

 

$

30,303 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Interest paid

 

$

140 

 

$

38 

Income taxes paid

 

$

 

$

1,310 

Property and equipment acquired under build-to-suit leases

 

$

903 

 

$

Unpaid liability to acquire property and equipment

 

$

2,350 

 

$





The accompanying notes are an integral part of these condensed consolidated financial statements.

 



 

7

 


 

Table of Contents

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 Co mpany’s website and catalogs,   offers products natio nwide . In 2010, the Comp any added retail to it s omni-channel platform with the opening of its first store. Since then, Duluth Trading has expanded its retail presence, and as of April 30, 2017 , the Company operated 1 8 retail stores and tw o outlet stores across the Midwestern and Eastern United States . The Company’s products are marketed under the Duluth Trading brand, with the majority of   products being exclusively devel oped and sold as Duluth Trading   branded merchandise.

The Company has two cla sses 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 i dentical, 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, Duluth 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”) as a variable interest entity (see Note 4 “Variable Interest Entity ”). 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 2017 is a 52-we ek period and ends on January 28, 2018 .   Fiscal 2016 was a 52-w eek peri od and ended on January 29, 2017 . The three months of fiscal 201 7 and fiscal 201 6 represe nt the Company’s 13- week periods ended April 30, 2017 and May 1, 2016 , respectively .  

The accompanying condensed consolidated financial statements as of and for the three months ended April 30, 2017 and May 1, 2016   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 note 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   months ended April 30, 2017 and May 1, 2016 . These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual r eport on Form 10-K for the   fiscal year ended January 29 , 201 7 .  

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 Compa ny’s restricted cash is held in   escrow account s   and is used to pay a portion of the construction loan s entered i nto by third party l andlord s (the “Landlord s ”) in connection with the Company’s   retail store lease s . The restricted cash is disburs ed based on the escrow agreement s entered into by and among the Landlord s , the Company and the escrow agent .

E .    Build-to-Suit Lease

The Company may at times be involved in the construction of store s   to be leased by 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.   For leases that the Company is deemed the owner of the property during the construction period , upon commencement of the construction project, the Company is required to capitalize the cash and non-cash assets contributed by the landlord for construction as property and equipment on the Company’s Condensed Consolidated

8

 


 

Table of Contents

DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Balance Sheets.   U pon the completion of the construction project , the Company performs an analysis on the lease to determine if the Company qualifies 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 decrease to rent expense. If the lease does not qualify for sale-leaseback treatment, the finance lease obligation is amortized over the lease term based on the rent payments in the lease agreement and the associated property and equipment are depreciated over the estimated useful life .

As of April 30, 2017 , the Company capitalized $ 9 . 6 million in property and equipment and   $0 . 04   million in accumulated depreciation and recorded a $4. 8 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes. A s 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:





 

 

 

 

 

 



 

April 30, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

SRV Mortgage Note due September 2017

 

$

717 

 

$

727 

Capitalized lease obligations

 

 

45 

 

 

50 



 

$

762 

 

$

777 

Less: current maturities

 

 

(728)

 

 

(742)

Long-term debt

 

$

34 

 

$

35 



Schlecht Retail Ventures LLC

SRV entered into a mortgage note (“SRV 2017 Note”) with an original balance of $ 0.8 million. The SRV 2017 Note expires in September 2017 and requires monthly payments of $ 3,300 plus interest at 3.1% , with a final balloon payment due in September 2017.

The SRV 2017 Note is guaranteed by the Company’s majority shareholder and collateralized by certain real property owned by SRV in Mt. Horeb, Wisconsin.

Line of Credit

On October 7, 2016, the Company a mended and restated its Amended and Restated Loan Agreement dated as of June 13, 2011, as amended (the “Amended and Restated Agreement”). The Amended and Restated Agreement provides for borrowing availability of up to $ 40.0 million from October 7, 2016 through July 31, 2017, up to $ 50.0 million from August 1, 2017 through July 31, 2018, and up to $ 60.0 million from August 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 Rest at ed Agreement (effective rate of 2.2 %  a t   April 30, 2017 ). The Amended and Restated 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 worth and a minimum trailing twelve month EBITDA. In addition, the Amended and Restated Agreement does not contain borrowing base limits.

As of April 30, 2017 and for the three months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above.

 







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Table of Contents

DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

3.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consists of the following:





 

 

 

 

 

 



 

April 30, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

Salaries and benefits

 

$

1,250 

 

$

3,885 

Deferred revenue

 

 

4,845 

 

 

5,590 

Freight

 

 

2,143 

 

 

1,574 

Product returns

 

 

514 

 

 

1,088 

Catalog costs

 

 

 

 

556 

Unpaid purchases of property & equipment

 

 

2,350 

 

 

3,485 

Accrued advertising

 

 

5,888 

 

 

1,060 

Other

 

 

2,879 

 

 

2,584 

Total accrued expenses and other current liabilities

 

$

19,869 

 

$

19,822 



 

 

 

 

 

 

















4 .     VARIABLE INTEREST ENTITY

Based upon the criteria set for th in ASC 810, Consolidation , the Company has determined that it was the primary beneficiary of one variable interest entity (“VIE”) as of April 30, 2017 and January 29, 2017 , 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 buildings from SRV, a VIE 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 SRV as the Company is expected to receive a majority of SRV’s expected residual returns based on the activity of SRV. As the Company is the primary beneficiary, it c onsolidates SRV and the leases are eliminated in consolidation.

The condensed consolidated balance sheets include the following amounts as a result of the consolidation of SRV as of April 30, 2017 and January 29, 2017 :









 

 

 

 

 

 



 

April 30, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

 

 

Cash

 

$

167 

 

$

139 

Other receivables

 

 

10 

 

 

Property and equipment, net

 

 

3,533 

 

 

3,248 

Other assets, net

 

 

 

 

Total assets

 

$

3,712 

 

$

3,401 



 

 

 

 

 

 

Other current liabilities

 

$

774 

 

$

792 

Noncontrolling interest in VIE

 

 

2,938 

 

 

2,609 

Total liabilities and shareholders' equity

 

$

3,712 

 

$

3,401 



 

 

 

 

 

 



















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Table of Contents

DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5 .     EARNINGS PER SHARE

Earnings per share is computed under the provisions of ASC 260 , Earnings Per Share . Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings 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 per share calculation is as follows:







 



 

 

 

 

 

 



 

Three Months Ended



 

April 30, 2017

 

May 1, 2016

(in thousands, except per share data)

 

 

 

 

 

 

Numerator - net income attributable
   to controlling interest

 

$

355 

 

$

3,241 

Denominator - weighted average shares
   (Class A and Class B)

 

 

 

 

 

 

Basic

 

 

31,822 

 

 

31,520 

Dilutive shares

 

 

498 

 

 

733 

Diluted

 

 

32,320 

 

 

32,253 

Earnings per share (Class A and Class B)

 

 

 

 

 

 

Basic

 

$

0.01 

 

$

0.10 

Diluted

 

$

0.01 

 

$

0.10 



 



6 .     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 al l 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 C ompany was $0.3 million for both the three months e nded April 30, 2017   and May 1, 2016 . 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 th e activity in the Company’s un vested r estricted stock during the three months ended April 30, 2017 is as follows:





 

 

 

 

 

 



 

 

 

 

Weighted



 

 

 

 

average



 

 

 

 

fair value



 

 

Shares

 

per share

Outstanding at January 29, 2017

 

 

794,712 

 

$

4.34 

Granted

 

 

72,706 

 

 

19.48 

Vested

 

 

(246,708)

 

 

2.06 

Forfeited

 

 

(6,841)

 

 

22.66 

Outstanding at April 30, 2017

 

 

613,869 

 

$

6.84 

At April 30, 2017 , the Company had unrecognized compensation expense of $ 2 . 9   million related to the restricted stock awards, which is expected to be recognized ove r a weighted average period of 2 . 0 years .

 

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Table of Contents

DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

7 .     PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

 





 

 

 

 

 

 



 

April 30, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

 

 

Land and land improvements

 

$

3,055 

 

$

2,986 

Leasehold improvements

 

 

15,522 

 

 

12,752 

Buildings

 

 

18,576 

 

 

16,178 

Vehicles

 

 

177 

 

 

177 

Warehouse equipment

 

 

4,179 

 

 

3,939 

Office equipment and furniture

 

 

14,172 

 

 

11,125 

Computer equipment

 

 

2,721 

 

 

2,509 

Software

 

 

6,849 

 

 

6,659 



 

 

65,251 

 

 

56,325 

Accumulated depreciation and amortization

 

 

(17,061)

 

 

(15,529)



 

 

48,190 

 

 

40,796 

Construction in progress

 

 

14,290 

 

 

11,636 

Property and equipment, net

 

$

62,480 

 

$

52,432 



 



8 .     SEGMENT REPORTING

The Company has two   operating segments, which are also its reportable segments: direct and retail. The direct segment include s net sales from the Company’s website and catalogs. The retail segment include s 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.

Interest expense, income tax expense, and corporate expenses, which include but are not limited to: human resources, legal, finance, information technol ogy, design and other corporate- related expenses are included in the Company’s direct segment. Depreciation and amortization, and property and equipment expenditures ,  a re 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.

12

 


 

Table of Contents

DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Segment information is presented in the following tables:





 

 

 

 

 

 



 

Three Months Ended



 

April 30, 2017

 

May 1, 2016

(in thousands)

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

Direct

 

$

63,775 

 

$

60,325 

Retail

 

 

19,912 

 

 

8,307 

Total net sales

 

$

83,687 

 

$

68,632 

Operating income

 

 

 

 

 

 

Direct

 

$

(157)

 

$

4,191 

Retail

 

 

906 

 

 

1,150 

Total operating income

 

 

749 

 

 

5,341 

Interest expense

 

 

166 

 

 

38 

Other income, net

 

 

57 

 

 

70 

Income before income taxes

 

$

640 

 

$

5,373 



Segment total assets















 

 

 

 

 

 



 

April 30, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

 

 

Direct

 

$

108,245 

 

$

115,239 

Retail

 

 

51,745 

 

 

40,728 

Total assets at period end

 

$

159,990 

 

$

155,967 

 









9 .     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 r ate. The effective tax rate related to controlling interest was 39 % for both the three months ended April 30, 2017 , and May 1, 2017.   The income from SRV was excluded from the calculation of the Company’s effective tax rate, as SRV is an “S” corporation and not subject to income taxes.





10 .     RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

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. The Company adopted ASU 2015-11 as of January 30, 2017, the first day of the Company’s fiscal year 2017 and there was no significant impact to the Company’s consolidated financial statements.



13

 


 

Table of Contents

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 review is ongoing 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.

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 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. 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.



14

 


 

Table of Contents

DULUTH HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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.









 

15

 


 

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 includ ed in our Annual Re port on Form 10-K for the   fiscal year ended January 29, 2017 (“2016 Form 10-K”).

The three months of fiscal 2017 and fiscal 2016 represent our 13-week periods ended April 30, 2017 and May 1, 2016 , respectively.

Unless the context indicates ot herwise, the terms the “Company,” “Duluth, ” “Duluth Trading,” “we,” “our,” or “us” are used to refer to Duluth Holdings Inc. and its subsidiary and affiliates 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 unce rtainties described under Part I, Item 1A “Risk Factors , ” in our Annual R eport on F orm 10-K for the fiscal year ended January 29, 2017 , which factors are incorporated by reference herein . Moreover, we operate in an evolving environment. 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 repr esented 76.2% and 87.9% of our   consolidated net sales for the three months ended April 30, 2017 and May 1, 2016 . In 2010, we added retail to our omni-channel platform with the opening of our first store. Since then, we have expanded our retail pres ence, and as of April 30, 2017 , we operated 18 retail stores and two outlet stores. Net sales for our retail segment represented 23.8 % and 12.1 % of consolidated n et sales for the three months ended   April 30, 2017 and May 1, 2016 .

We offer a comprehensive line of innovative, durable and functional product s , such as our Longtail T ® shirts, Buck Naked TM underwear, and Fire Hose ® work pants, 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.

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 29 consecuti ve quarters through April 30, 2017 ;

·

Net sales in fiscal 2017 first quarter increased by 21.9 % over the prior year first quarter to $83.7 million ;

·

Net income in fiscal 201 7 first quarter decreased by   89.0 % over the prior year first quar ter to $0.4 million ;  

·

Adjusted EBITDA in fiscal 2017 first quarter   de creased by 59.1 % over the prior year first quarter to $2. 7 million; and

16

 


 

·

Our retail stores have achieved an average payback of less than two years.

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 measure s . 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 profitable growth, including building brand awareness to continue customer acquisition, accelerating 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 receipt of the product, while retail sales are recognized at the point of sale. We also use net sales as one of the key financ ial metrics we measure against 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 per forming by measuring the change in period over-period net sales in stores that have been open for twelve fis cal months or more. Some of our competitors and other retailers calculate comparable store sales different ly than we do; as a result, our comparable store sales may not be comparable to similar data made available by other companies. W e have excluded c omparable store sales data from this Form 10-Q due to the limited number of comparab le retail stores as of April 30, 2017 . Although retail store expansion is part of our growth strategy, we expect a majority of our net sales to come from our direct segment for the foreseeable future.

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 p urchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slo w-moving inventory and lower of cost or market reserves; inbound freight; and freight from our distribution ce nters to our retail stores. The primary drivers of the costs of individual goods are raw material costs. 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. 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 ex tent there are not commensurate declines, or if there are increases, in our shipping and handling expense. Our gro ss profit may not be comparable to other retailers, as we do not include distribution network and store occupanc y expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.

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 exp enses 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, catalo g 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

17

 


 

administrative expenses as a percentage of   net sales is usually higher in lower-volume quarters and lower in higher-volume qu arters because a portion of the costs are relatively fixed .  

Our historical sales growth has been accompanied by increased selling, gener al and administrative expenses. The most significant components of these increases are advertising, market ing and payroll costs. While we expect these expenses to increase as we continue to open new stores, increa se brand awareness and grow our organization to support our growing business, we believe these expenses will de crease 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 A djusted EBITDA as one of the k ey financial metrics we measure against 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.

 

18

 


 

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.





 

 

 

 

 

 

 



 

Three Months Ended

 



 

April 30, 2017

 

May 1, 2016

 

(in thousands)

 

 

 

 

 

 

 

Direct net sales

 

$

63,775 

 

$

60,325 

 

Retail net sales

 

 

19,912 

 

 

8,307 

 

Net sales

 

 

83,687 

 

 

68,632 

 

Cost of goods sold (excluding depreciation and amortization)

 

 

35,044 

 

 

28,941 

 

Gross profit

 

 

48,643 

 

 

39,691 

 

Selling, general and administrative expenses

 

 

47,894 

 

 

34,350 

 

Operating income

 

 

749 

 

 

5,341 

 

Interest expense

 

 

166 

 

 

38 

 

Other income, net

 

 

57 

 

 

70 

 

Income before income taxes

 

 

640 

 

 

5,373 

 

Income tax expense

 

 

225 

 

 

2,061 

 

Net income

 

 

415 

 

 

3,312 

 

Less: Net income attributable to
   noncontrolling interest

 

 

60 

 

 

71 

 

Net income attributable to controlling interest

 

$

355 

 

$

3,241 

 

Percentage of Net sales:

 

 

 

 

 

 

 

Direct net sales

 

 

76.2 

%

 

87.9 

%

Retail net sales

 

 

23.8 

%

 

12.1 

%

Net sales

 

 

100.0 

%

 

100.0 

%

Cost of goods sold (excluding depreciation and amortization)

 

 

41.9 

%

 

42.2 

%

Gross profit

 

 

58.1 

%

 

57.8 

%

Selling, general and administrative expenses

 

 

57.2 

%

 

50.0 

%

Operating income

 

 

0.9 

%

 

7.8 

%

Interest expense

 

 

0.2 

%

 

0.1 

%

Other income, net

 

 

0.1 

%

 

0.1 

%

Income before income taxes

 

 

0.8 

%

 

7.8 

%

Income tax expense

 

 

0.3 

%

 

3.0 

%

Net income

 

 

0.5 

%

 

4.8 

%

Less: Net income attributable to
   noncontrolling interest

 

 

0.1 

%

 

0.1 

%

Net income attributable to controlling interest

 

 

0.4 

%

 

4.7 

%





Thr ee Months Ended April 30, 2017 Compared to Thr ee Months Ended May 1, 2016

Ne t Sales

Net sales increase d   $15.1 million, or 2 1.9%, to $83.7 million in the thr ee months ended April 30, 2017 compared to $68.6 million in t he three months ended May 1, 2016 , driven by gains in both direct and retail segments of $ 3.5 million, or 5.7%, and $11.6 mi llion, or 139.7 %, respectively, with gains achieved across   the majority of product categorie s . Our website visits increased 16.5 % in the thr ee months ended April 30, 2017 compared to t he t hree months ended May 1, 2016 .   The increase in retail net sales was primarily due to having 11 more stores during the three months ended April 30, 2017 as compared to the three months ended Ma y 1, 2016.

Gross Profit

Gros s profit increased $9.0 million, or 22.6%, to $48.6 million in the thr ee months ended April 30, 2017 compared to $39.7 million in  t he three months ended May  1 , 2016 . As a percentage of net s ales, gross margin increased 3 0 basis points to

19

 


 

58.1 % of net sales in the thr ee months end ed April 30, 2017 , compared to 57.8 % of net sales in the three m onths e nded May 1, 2016 . Th e increase in gross profit was primarily driven by an increase in net sales as discussed above. The increase in gross margin rate reflected a strong product margin, due to product mix coupled with strategic promotions, which was partially offset by a decline in shipping revenues.

Selling, General and Administrative Expenses

Selling, general and adm inistrative expenses increased $13.5 million, or 39.4%, to $47 .9 million in th e thre e months ended April 30, 2017 compared to $34 . 4 million in the three months ended May 1, 2016 .   Selling, general and administrative expenses as a percentage of net sales in c reased 720 basis points to 57.2 % in the three months ended April 30, 2017 , compared to 50.0 % in the thr ee months ended May 1, 2016 .   The increase in selling, general a nd administrative expenses was  a tt ributable to an increase of $5.9 million in adver tising and marketing costs, $4.9 million in general and administrative expenses and $2 .7 million in selling expenses.  

As a percentage of net sales, advertising and marketing costs increased   32 0 basis points to 25.2 % in the three mo nths ended April 30, 2017 , compared to 22.0 % in the three months ended May 1, 2016 .   The 320 basis point in crease in advertising and marketing cos ts as a percentage of net sales was primarily attributable to launching our women’s television advertising campaign in the first quarter of fiscal 2017, as compared to the second quarter of fiscal 2016.  

As a percentage of net sales, general and admi nistrative expenses increased 32 0 bas is points to 17.4 % in the three months ended April 30, 2017, compared to 14.2% in the three months ended May 1, 2016. The 32 0 basis point increase was primarily a ttributable to an increase of 21 0 basis points in rent expense and related store opening costs, an increase of 6 0 basis points in depreciation and an increase of 30 basis points in personnel expense as a result of increase in headcount to supp ort the growth of our business. In the three months ended April 30, 2017, we opened four new stores compared to none in the prior-year three months ended May 1, 2016.

As a percentage of net sales, selling expenses increased 80 basis points to 14.6 % in the thr ee months ended April 30, 2017, compared to 13.8% in the three months ended May 1, 2016, pr imarily due to an increase of 140 basis points in customer service due to growth in r etail, offset by a decrease of 5 0 basis points in shipping expenses due to leverage from increase in retail net sales.

Interest Expense

Interest expense was $0. 2 million in t he three months ended April 30, 2017 , compared to $0.04 million in th e three months ended May 1, 2016 . The increase in interest expense was primarily attributable to our build-to-suit retail stores.  

Provision for Income Taxes

Income tax expense was $0.2 mi llion in the three months ended April 30, 2017, compared to $2.1 million in the three months ended May 1, 2016. O ur effective tax rate related to controlling interest was 39 %, for both the three months ended April 30, 2017 and May 1, 2016 .  

Net Income

Net income de creased   $2.9 million, or 89.0 % , to $0.4 million in the thr ee months ended April 30, 2017 , compared t o $3.2 million in the thr ee months ended May 1, 2016 , primarily due to the factors discussed above.





20

 


 

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- G AAP financial measure s , 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



 

April 30, 2017

 

May 1, 2016

(in thousands)

 

 

 

 

 

 

Net income

 

$

415 

 

$

3,312 

Depreciation and amortization

 

 

1,552 

 

 

869 

Interest expense

 

 

166 

 

 

38 

Income tax expense

 

 

225 

 

 

2,061 

EBITDA

 

$

2,358 

 

$

6,280 

Non-cash stock based compensation

 

 

324 

 

 

280 

Adjusted EBITDA

 

$

2,682 

 

$

6,560 

As a result of the factors discussed above in the “Results of Operations ” section, A djusted EBITDA de creased $3.9 million, or 59.1%, to $2.7 million in the thr ee months ended April 30, 2017 compared to $6.6 million in t he three months ended May 1, 2016 . As a percentage of net sales, A djusted EBITDA d ecreased 640 basis points to 3.2 % of net sales in the thr ee months ended April 30, 2017 compared to 9.6 % of net sales in the thr ee months ended May 1, 2016 .  







Liquidity and Capital Resources

General

Our business relies on cash from operating activities as well as cash on hand and a $40 .0 million revolving line of credit as our primary sources of liquidity. Effective August 1, 2017, our revolving line of credit increases by $10.0 million allowing borrowings of up to $50.0 million through July 31, 2018. Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, capital expenditures associated with opening new stores, infrastructure and information technol ogy . The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities.

We expect to spend approximatel y $31.0 million to $35.0 million in fiscal 2017 on capi tal expenditures, including a total of approximately $2 3 .0 million to $27 .0 million for new retail store expansion. We expect it will take approximately $2.0 million to $2 .6 million in capital expenditures and startin g inventory to open a new store. At April 30, 2017 , our net working capital was $ 59.1 million,   including $13.6 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 April 30, 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.



21

 


 

Cash Flow Analysis

A summary of operating, investing and financing activities is shown in the following table.





 

 

 

 

 

 



 

Three Months Ended



 

April 30, 2017

 

May 1, 2016

(in thousands)

 

 

 

 

 

 

Net cash used in operating activities

 

$

(3,544)

 

$

(3,829)

Net cash used in investing activities

 

 

(7,687)

 

 

(3,476)

Net cash provided by (used in) financing activities

 

 

773 

 

 

(265)

Decrease in cash

 

$

(10,458)

 

$

(7,570)

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 flow s from operations for the three months ended April 30, 2017 is negative, primarily driven by the seasonal nature of our business, we expect cash flow s from operatio ns for the full year fiscal 2017 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 three months ended April 30, 2017, net cash used in operating activities was $3.5 million, which consisted of net income of $0.4 million, non-cash depre ciation and amortization of $1.6 million and stock based compensation of $0.3 million, offset by cash used in operatin g assets and liabilities of $5.8 million. The cash used in operat ing assets and liabilities of $5.8 mil lion primarily consisted of $4.5 million increase in inventory, primarily due to sales increase and building up of inventory for the opening of new retail stores during fiscal 2017 , which was partially offset by decreases in deferred catalog costs and accrued expenses of $1.4 million and $2.7 million, respectively , primarily due to timing .

For the three months ended May 1, 2016, net cash used in operating activities was $3.8 million, which consisted of net income of $3.3 million, non-cash depreciation and amortization of $0.9 million and stock based compensation of $0.3 million, offset by cash used in operating assets and liabilities of $8.3 million. The cash used in operating assets and liabilities of $8.3 million primarily consisted of $2.8 million increase in inventory, due to building up of inventory for the opening of new retail stores in fiscal 2016, which was partially offset by decreases in deferred catalog costs, trade accounts payable and accrued expenses of $1.8 million, $4.6 million and $3.1 million, respectively. The decrease in deferred catalog costs were primarily attributable to the timing and number of catalogs shipped compared to fiscal year end. The decreases in trade accounts payable and accrued expenses were primarily attributable to the timing of payments subsequent to our fiscal year end.

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 .  

For the three months ended April 30, 2017 , net cash used in inves ting activ ities was $7.7 million and was primarily driven by capital expenditures of $8.3 million for the opening of four   new retail stores , which was partially offset by a change in restricted cash of $0.7 million.

For the three months ended May 1, 2016, net cash used in investing activities was $3.5 million and was primarily driven by capital expenditures of $1.4 million for the expansion of our Belleville distribution center and $1.7 million for our two new retail stores, which are expected to open during our fiscal second quarter.

Net Cash Provided by   (used in) 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 noncontrolling intere st in variable interest entity , proceeds from finance lease obligations and capital con tributions to Schlecht Retail Ventures LLC.

22

 


 

For the three months ended April 30, 2017 , net cash provided b y financing activi ties was $0.8  m illion, primarily consisting of proceeds of $0.5 million from our finance lease obligations in connection with our build-to-suit lease transactions and $0.3 million for capital contributions to SRV .

For the three months ended May 1, 2016, net cash used in financing activities was $0.3 million, primarily consisting of the final $0.2 million distributions to our then shareholders due to our “S” corporation status prior to our IPO and $0.1 million payments on long-term debt.

Line of Credit

On October 7, 2016, we amended and restated our Amended and Restated Loan Agreement dated as of June 13, 2011, as amended (the “Amended and Restated Agreement”). The Amended and Restated Agreement provides for bo rrowing availability of up to $ 40.0 million from October 7, 2016 through July 31, 2017, up to $ 50.0 million from Augus t 1, 2017 through July 31, 2018 and up to $ 60.0 million from August 1, 2018 through July 31, 2019. The Amended and Restated Agreement matures on July 31, 2019 , and bears interest, payable monthly, a t a rate equal to the adjusted LIBOR rate, as defined in the Amended and Res ta ted Agreement (effective rate of 2.2 % at April 30, 2017 ) . The Amended and Restated 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 Amended and Restated Agreement does not contain borrowing base limits.   As of April 30, 2017 and for the three months then en ded, we were in compliance with all financial and non-financial covenant s, and we expect to be in compliance with all financial and non-financial covenants for the remainder of fiscal 2017 .  



Contractual Obligations

There have been no significant changes to our contractual obligations as described in our Annual Report on Form 10-K for the fiscal year ended January 29, 2017 .

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements, except for operating leases .

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 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 Annual Report on Form 10-K for the fiscal year ended Ja nuary 29, 2017 .

Recently Issued Accounting Pronouncements

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, 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,

23

 


 

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 review is ongoing and we have 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 e arly 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 per mitted. We adopted ASU 2015-17 as of January 31, 2016 and have reported deferred tax assets and liabilities as noncurrent on the consolidated balance sheet s .

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 the accounting for share-based payment transac tions. 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 year s, earl y adoption is permitted. We adopted ASU 20 16-09 as of May 1, 2016 and there was no significant impact to our 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. 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.

 

24

 


 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Interest Risk Factors

We are subject to interest rate risk in connection with borrowings under our revolving line of credit, which bears interest at a rate equal to the adjusted LIBOR rate, as defined in the Amended and Restated Agreement (effective rate of 2.2 % at April 30, 2017 ) . As of April 30, 2017 , no balance was outstanding under the revolving line of credit. As of April 30, 2017 , the undrawn borrowing availability under the revolving line of credit   was $40.0  million. Based on the average interest rate on the revolving line   of credit during the first three months of fiscal 2017 , and to the extent that borrowings were outstanding, we do not believe that a 10% change in the interest rate would have a material effect on our consolidated results of operations or financial condition.  

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you our business will not be affected in the future by inflation.

Foreign Exchange Rate Risk

We source a substantial majority of our merchandise from various suppliers in Asia and the vast majority of purchases are denominated in U.S. dollars. We do not hedge foreign currency risk using any derivative instruments, and historically we have not been impacted by changes in exchange rates.



Item 4.    C ontrols 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, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change 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.



PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

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.

Item 1A.   Risk Factors

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 Annual Report on Form 10-K for the fi scal year ended January 29, 2017 . There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.

25

 


 



Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

We did not sell any equity securities during the quarter ended April 30, 2017, which were not registered under the Securities Act.



Item 6.    Exhibits

Please refer to the Exhibit Index.

26

 


 

SIGNATURES

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 7, 2017

 



DULUTH HOLDINGS INC.
(Registrant)



 

/s/ MARK M. DEORIO



 

Mark M. DeOrio



 

Senior Vice President and Chief Financial Officer



 

(On behalf of the Registrant as Principal Financial Officer and Principal Accounting Officer)



 

27

 


 

EXHIBIT INDEX



 



 



 

Exhibit No.

 

31.1

Certification of Chi ef Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Sec urities and Exchange Act , as amended . *

31.2

Certification of Chi ef Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended . *

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

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**







 

*

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.”

 

28

 


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