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
and nine
months of fiscal 2017 and fiscal 2016
represent our 13
and 39
-week
periods ended
October 29, 2017
and
October 30, 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. a
nd 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 unce
rtainties described under Part
I, Item 1A
“Risk Factors
,
” in our
2016 Form 10-K,
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
64.7
% and
69.2
% of our
consolidated
net sales
for the three
and nine months ended October 29
, 2017
, respectively,
and
78.0
% and
82.6
% of
our consolidated
net sales for the three and nine
months
ended October
30, 2016, 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 pres
ence, and
as of
October 29, 2017
, we
operated
23
retail
stores and three
outlet stores. Net sales for our
retail segment
represented
35.3
%
and
30.8
%
of consolidated
n
et sales for the three
and nine
months ended
October 29, 2017
, and
22
.0% and 17.4
% of consolidated
net sales for the three
and nine months ended October 3
0
, 2016, respectively
.
We offer a comprehensive line of innovative, durable and functional product
s
, such as our Longtail T
®
shirts, Buck Naked
TM
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.
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:
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|
·
|
|
Net sales have
increased year-over-year for
31
consecuti
ve quarters through
October 29, 2017
;
|
|
|
·
|
|
Net sales in fiscal 2017 third
quarter
increased by
25.0
%
o
ver the prior year third
quarter to
$83.7
million
and n
et sales in the
fiscal 2017
nine months
increased
by
25.9
%
over
the prior year
nine months
to
$253.6
million
;
|
|
|
·
|
|
Net loss
of $0.8 million
in fiscal 201
7
third
quarter
compared to
the prior year
third
quar
ter net income of $0.5 million
and net i
ncome in the
fiscal 2017
nine months
decreased by
47.8
%
over the
prior year
nine months
to
$3.8
million
;
|
|
|
·
|
|
Adjusted EBITDA in
fiscal
2017
third
quarter
de
creased
by
24.9
%
over the prior year third
quarter to
$
1.9
million
and adjusted EB
ITDA in the
fiscal 2017
nine months
decreased by
15
.
2
% over the
prior year
nine months
to
$
14.0
million
;
and
|
|
|
·
|
|
Our retail stores have achieved
and are expected to have
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
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 metri
cs
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
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 p
urchased merchandise; inventory
shrinkage; inventory adjustments due to obsolescence, including excess and slo
w-moving inventory
and lower of
cost and net realizable
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.
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. 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 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
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.
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
|
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct net sales
|
|
$
|
54,146
|
|
$
|
52,271
|
|
$
|
175,588
|
|
$
|
166,437
|
|
|
Retail net sales
|
|
|
29,583
|
|
|
14,737
|
|
|
78,054
|
|
|
35,026
|
|
|
Net sales
|
|
|
83,729
|
|
|
67,008
|
|
|
253,642
|
|
|
201,463
|
|
|
Cost of goods sold (excluding depreciation and amortization)
|
|
|
36,302
|
|
|
28,260
|
|
|
108,649
|
|
|
84,102
|
|
|
Gross profit
|
|
|
47,427
|
|
|
38,748
|
|
|
144,993
|
|
|
117,361
|
|
|
Selling, general and administrative expenses
|
|
|
48,039
|
|
|
37,929
|
|
|
137,467
|
|
|
105,215
|
|
|
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
|
|
|
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
|
|
|
Percentage of Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct net sales
|
|
|
64.7
|
%
|
|
78.0
|
%
|
|
69.2
|
%
|
|
82.6
|
%
|
|
Retail net sales
|
|
|
35.3
|
%
|
|
22.0
|
%
|
|
30.8
|
%
|
|
17.4
|
%
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of goods sold (excluding depreciation and amortization)
|
|
|
43.4
|
%
|
|
42.2
|
%
|
|
42.8
|
%
|
|
41.7
|
%
|
|
Gross profit
|
|
|
56.6
|
%
|
|
57.8
|
%
|
|
57.2
|
%
|
|
58.3
|
%
|
|
Selling, general and administrative expenses
|
|
|
57.4
|
%
|
|
56.6
|
%
|
|
54.2
|
%
|
|
52.2
|
%
|
|
Operating (loss) income
|
|
|
(0.7)
|
%
|
|
1.2
|
%
|
|
3.0
|
%
|
|
6.0
|
%
|
|
Interest expense
|
|
|
0.8
|
%
|
|
0.0
|
%
|
|
0.5
|
%
|
|
0.1
|
%
|
|
Other income, net
|
|
|
0.1
|
%
|
|
0.0
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
(Loss) income before income taxes
|
|
|
(1.4)
|
%
|
|
1.2
|
%
|
|
2.6
|
%
|
|
6.1
|
%
|
|
Income tax (benefit) expense
|
|
|
(0.5)
|
%
|
|
0.5
|
%
|
|
1.0
|
%
|
|
2.3
|
%
|
|
Net (loss) income
|
|
|
(0.9)
|
%
|
|
0.8
|
%
|
|
1.6
|
%
|
|
3.7
|
%
|
|
Less: Net income attributable to
noncontrolling interest
|
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
Net (loss) income attributable to controlling interest
|
|
|
(1.0)
|
%
|
|
0.7
|
%
|
|
1.5
|
%
|
|
3.6
|
%
|
Thr
ee Months Ended
October 29, 2017
Compared to Thr
ee Months Ended
October 30, 2016
Ne
t Sales
Net sales
increase
d
$16.7
million
,
or 25.0
%,
to $83.7
million in the thr
ee months ended
October 29
, 2017
compared to
$67.0
million in t
he three months ended October 30
, 2016
, driven by gains in both direct and retail segments of
$
1.
9 million, or 3.6
%, and $14.8
mi
llion, or
100.7
%, respectively,
with gains across
virtually
all
product categorie
s
and in both men’s and women’s business
. Our website visits increased
3.7
% in the thr
ee months ended October 29
, 2017
compared to t
he t
hree months ended October 30
, 2016
.
The increase in retail net sale
s was primarily due t
o having 12
more stores dur
ing the three months
ended October 29
, 2017 as compared to the three months
ended October 30
, 2016.
Gross Profit
Gros
s profit
increased
$8.7
million, or 22.
4
%, to $47.4
million in the
thr
ee mont
hs ended October 29, 2017 compared to $38.7
million in
t
he three months ended October 30
, 2016
. As a percentage of net s
ales, gross margin
de
creased
12
0
basis points to
56.
6
% of net sales in the thr
ee months end
ed
October 29
, 2017
,
compared to
57.8
% of net sales in the three m
onths e
nded October 30
, 2016
.
The de
crease in gross margin
rate
was primarily attributable to a
continuing
decline in shipp
ing 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.
Selling, General and Administrative Expenses
Selling, general and adm
inistrative
expenses
increased
$
10.
1
million, or
26.7
%, to $48.
0
million
in
th
e thre
e months ended October 29
, 2017 compared t
o $37
.9
million
in the three months
ended
October 30
, 2016
.
Selling, general and administrative expenses as a
percentage of net sales
increased
8
0
basis points to
57.4
% in the three months ended
October 29
, 2017
,
com
pared to 56.6
% in the thr
ee months ended
October 30
, 2016
.
The increase in selling, general a
nd
administrative expenses was
a
tt
ributable to an increase of $
2.3
million in adver
tising and marketing costs,
$3.0
million in selling expenses and
$4
.8
million in general
and
administrative expenses
.
As
a percentage of net sales, advertising and marketing
costs
de
creased
16
0 basis points
to
20.2
% in
the three mo
nths ended October 29
, 2017
,
compared to
21
.8
% in the
three
months ended
October 30
, 2016
.
The 160
basis point de
crease in advertising and marketing cos
ts as a percentage
of net sales
was primarily attributable to
a decrease of
14
0 basis points in digital advertising
and a decrease of 13
0 basis points
in
catalog costs
due to leverage gained from increase in retail net sales
as discussed above
,
which
was
partially offset by an increase of 90 basis points in television
and retail store
advertising.
As a percentage of net sales, selling expenses
increased 6
0 basis points
to 15.8
% in the thr
ee month
s ended October 29
, 2017, compared
to 15.2% in the three months ended October 30
, 2016, pr
imarily due to an increase of 110
basis points in customer service due to
our
growth in r
etail,
which was partially
offset by a decrease of 6
0 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
17
0
basis points to 21.
4
% in
the three months ended October 29
, 2017,
compared to 19.7
% i
n the three months ended October 30
,
2016.
T
he
17
0
basis point
increase was primarily attributable to an
increase
of
7
0 basis
points in occupancy
and equipment
cost
due
to growth in retail
,
an increase of 70 basis points in personn
el exp
enses primarily due to an
e
xpense
in connection with
the retirement of a senior management employee
and an increase of 3
0
basis points in depreciation
.
Interest Expense
Interest expense
was $0.
7
million
in t
he three months ended October 29
, 2017
, compared to
$0.0
3
million in th
e 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
mi
llion
i
n the three months ended October 29
, 2017, compared to
income tax expense of $0
.3
milli
o
n 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.
O
ur effective tax
rate
related to controlling interest
was 36
%
and 40%, for the three months ended October 29, 2017 and October
30
, 2016
, respectively
.
Net
(Loss)
Income
Net
loss was
$0
.
8
million,
in the three months ended October 29, 2017 compared to a net income of $0.5 million in the three months ended October 30, 2016, primarily
due to the factors discussed above.
Nine Months Ended October 29, 2017 Compared to Nine Months Ended October 30
, 2016
Ne
t 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 ga
ins across all
product categories. Our
website visits increased
13.2%
in the nine months ended October 29, 2017 compared to the nine
months en
ded October 30
, 2016
.
The increase in retail net sales was primarily
attributable to the same factor
s
discussed above for the three
months ended October 29
, 20
17 compared to the three
months ended October 30
, 2016.
Gross Profit
Gros
s 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 en
ded October 29
,
2017, compare
d to 58.3% of net sales in the nine months ended October 30
, 20
16
.
The de
crease 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 adm
inistrative expenses
increased
$32.3 million, or 30.7%, to $137.5
million
in
the nine
months ende
d 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 in
crea
sed 20
0 basis points to
54.2
%
in the nine months ended October 29, 2017, compared to 52.2
% in t
he nine months ended October 30
, 2016. The increase in selling, general and administrative expenses was att
ributable 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
mo
nths ended October 29
, 2017,
compared to
21.6% in the nine
mo
nths ended
October 30
, 2016.
The 7
0 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 4
0 basis points
in digital advertising
, partially offset by an increase
of 8
0 basis points in television adv
ertising.
As a percentage of net sales, selling
expenses increased
8
0 basis points to 14.
8% in the nine
months
ended October 29, 2017, compared to 14.0
% in the
nine
months en
ded October 30
, 2016, pr
imarily due to an increase of 13
0 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 admi
nistrative expenses
in
creased 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 19
0
basis point increase was primarily attributable to an increase
of 12
0 basis
points in
occupancy and equipment costs
due to retail growth and
an increase of 4
0 basis points in d
epreciation.
Interest Expense
Interest expense was
$1.2
million i
n the nine
months ended
October 29
, 2017, compared to $0.1
million in the nine
months ended July 3
1, 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 t
o $7.3 million in the nine months ended October 30
, 2016
, primarily due to the factors discussed above.
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
|
|
Nine Months Ended
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
October 29, 2017
|
|
October 30, 2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(746)
|
|
$
|
514
|
|
$
|
4,022
|
|
$
|
7,510
|
|
Depreciation and amortization
|
|
|
1,824
|
|
|
1,264
|
|
|
5,104
|
|
|
3,215
|
|
Interest expense
|
|
|
661
|
|
|
33
|
|
|
1,199
|
|
|
108
|
|
Income tax (benefit) expense
|
|
|
(454)
|
|
|
305
|
|
|
2,480
|
|
|
4,691
|
|
EBITDA
|
|
$
|
1,285
|
|
$
|
2,116
|
|
$
|
12,805
|
|
$
|
15,524
|
|
Non-cash stock based compensation
|
|
|
569
|
|
|
354
|
|
|
1,186
|
|
|
969
|
|
Adjusted EBITDA
|
|
$
|
1,854
|
|
$
|
2,470
|
|
$
|
13,991
|
|
$
|
16,493
|
As a result
of the factors discussed above in the “Results of Operations
” section,
A
djusted EBITDA
de
creas
ed
$0
.
6 million, or 24.9
%, to $1.9
million in the
three
months ended
October 29, 2017
compared to $2
.5
million in t
he three months ended
October 30, 2016
. As a percentage of net sales,
A
djusted EBITDA
de
creased 15
0 basis points to
2.2
% of net sales in the thr
ee months ended
October 29, 2017
compared to 3.7
% of net sales in the thr
ee 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
October 29, 2017 compared to $16.5
million in t
he nine
months ended
October 30
, 2016
. As a percentage of net sales, Adjusted
EBITDA
d
ecreased 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.
Liquidity and Capital Resources
General
Our business relies on cash from operating activities
,
as well as cash on hand
and a
revolving line of credit as our primary sources of liquidity
, which was increased e
ffective November 1, 2017
,
to $80.0 million throu
gh December 31, 2017 and then
to $60.0 million from January 1, 2018 through July 31, 2019
.
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 $
42.0 million to $44
.0 million
in fiscal 2017
on capi
tal expenditures,
net of proceeds from finance lease obligations,
including a
total of
approximately $
31
.0 million to
$33
.0 million
for new retail store expansion
and remodels
. We expect
capital expenditures of
approximately $2.0 million
and
starting inventory of $0.6 million
to open a new store. At
October 29, 2017
, our
net
working capital
was $
86.6
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.
Cash Flow Analysis
A summary of operating, investing and financing activities is shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 29, 2017
|
|
October 30, 2016
|
|
(in thousands)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(34,957)
|
|
$
|
(26,783)
|
|
Net cash used in investing activities
|
|
|
(44,643)
|
|
|
(22,473)
|
|
Net cash provided by financing activities
|
|
|
56,516
|
|
|
11,556
|
|
Decrease in cash
|
|
$
|
(23,084)
|
|
$
|
(37,700)
|
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 nine months ended October 29
, 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
nine months ended October 29
, 2017, net cash used
in
operati
ng activities was $3
5
.
0
million, which
consisted of net income of $4.0
million, non-cash depre
ciation and amortization of $5.1
million and
stock based compensatio
n of $1.2
million, offset by cash used in operatin
g assets and liabilities
of $45
.
2
million. The cash used in operat
in
g
assets and liabilities of $4
5
.
2
mil
l
ion primarily consisted of $57.0
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 i
n trade accounts payable of $1
8
.
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 $40.9 million increase in inventory, due to building up of inventory for our peak season, coupled with the increase in
the number of our
retail stores during fiscal 2016, and $3.0 million increase in other receivables primarily due to refunds for excess income tax payments, which was partially offset by a $6.7 million increase 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
.
For the nine months ended October 29
, 2017
, net cash used in inves
ting activ
ities
was $44
.
6
million and was primarily driven by capital expenditures
of $3
7
.
5
million
for the opening of ten
new retail stores
and investments in information technology
,
$6.3
million
purchase of available-for-sale security,
and
a c
hange in restricted
cash of $
0
.7
million.
For the nine months ended October 30, 2016, net cash used in investing activities was $22.5 million and was primarily driven by capital expenditures of $21.0 million for the expansion of our Belleville distribution center, the opening of five new retail stores, and 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 noncontrolling intere
st in variable interest entity
, proceeds from finance lease obligations
and capital con
tributions to
Schlecht Retail Ventures LLC.
Fo
r the nine
months
ended October 29
, 2017
, net cash provided b
y financing activi
ties was $56.5
m
illion, primarily consisting
of proceeds
of $50.1
million, net from our revolving line of credit, $0.8 m
illion from long-term debt, $2.9
million in
change in bank ov
erdraft, $2.4 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.
Line of Credit
On September 29, 2017, we entered into a first amendment to
t
he 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, we 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, a
t a rate equal to the
adjusted LIBOR rate, as defined in the Amended and Res
ta
ted Agreement (effective
rate
of
2.5
%
at
October
29
, 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 October 29, 2017 and for the nine
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
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 payment
s of $1.8 million, increasing 2.0% each year
through the first 20 years, then beginning in year 21, the annual lease payments rese
t 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,
t
here have been no significant
changes to our contractual obligations
as described in
our
2016 Form 10-K.
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
2016 Form 10-K
.
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, 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 c
ontain 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 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.