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 28, 201
8
(“2017
Form 10-K”).
The
three
months of f
iscal 2018 and fiscal 2017
represent our 13-week
periods ended
April 29, 2018
and
April 30, 2017
, 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.
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
2017
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
66.
1
% and 76.2% of
our
consolidated
net sales
for the three
months
ended
April 29, 2018 and April 30, 2017
, 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
April 29, 2018
, we
operated
3
0
retail
stores and three
outlet stores. Net sales for our
retail segment
represented
33.9
%
and
23.8
%
of
our
consolidated
n
et sales for the three months ended
April 29, 2018
and
April 30, 2017, 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:
|
·
|
|
Net sales have
increased year-over-year for
33
consecuti
ve quarters through
April 29, 2018
;
|
|
·
|
|
Net sales in fiscal 2018
first
quarter
increased by
19.7
%
o
ver the prior year first
quarter to
$1
00.2
million
;
|
|
·
|
|
Net loss
of $0.7
million
in fiscal 201
8
first
quarter
compared to
the prior year
first
quar
ter net income of $0.4
million
;
|
|
·
|
|
Adjusted EBITDA in
fiscal
2018 first
quarter
de
creased
by
2.
2
%
over the prior year first
quarter to
$
2
.
6
million;
|
|
·
|
|
We o
pened 2
new stores in fiscal 2018 first quarter, adding approximately
40
,000 gross square footage;
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 shipment
of the product
and
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.
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.
We have experienced declines in shipping and handling revenues, and this trend is expected to continue.
Declines in shipping and handling revenues may have a
material adverse effect on our
gross profit and gross profit margin, as well as Adjusted EBITDA to the 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.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
April 29, 2018
|
|
April 30, 2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
Direct net sales
|
|
$
|
66,212
|
|
$
|
63,775
|
|
Retail net sales
|
|
|
33,995
|
|
|
19,912
|
|
Net sales
|
|
|
100,207
|
|
|
83,687
|
|
Cost of goods sold (excluding depreciation and amortization)
|
|
|
44,267
|
|
|
35,044
|
|
Gross profit
|
|
|
55,940
|
|
|
48,643
|
|
Selling, general and administrative expenses
|
|
|
56,197
|
|
|
47,894
|
|
Operating (loss) income
|
|
|
(257)
|
|
|
749
|
|
Interest expense
|
|
|
821
|
|
|
166
|
|
Other income, net
|
|
|
163
|
|
|
57
|
|
(Loss) income before income taxes
|
|
|
(915)
|
|
|
640
|
|
Income tax (benefit) expense
|
|
|
(232)
|
|
|
225
|
|
Net (loss) income
|
|
|
(683)
|
|
|
415
|
|
Less: Net income attributable to
noncontrolling interest
|
|
|
8
|
|
|
60
|
|
Net (loss) income attributable to controlling interest
|
|
$
|
(691)
|
|
$
|
355
|
|
Percentage of Net sales:
|
|
|
|
|
|
|
|
Direct net sales
|
|
|
66.1
|
%
|
|
76.2
|
%
|
Retail net sales
|
|
|
33.9
|
%
|
|
23.8
|
%
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold (excluding depreciation and amortization)
|
|
|
44.2
|
%
|
|
41.9
|
%
|
Gross profit
|
|
|
55.8
|
%
|
|
58.1
|
%
|
Selling, general and administrative expenses
|
|
|
56.1
|
%
|
|
57.2
|
%
|
Operating (loss) income
|
|
|
(0.3)
|
%
|
|
0.9
|
%
|
Interest expense
|
|
|
0.8
|
%
|
|
0.2
|
%
|
Other income, net
|
|
|
0.2
|
%
|
|
0.1
|
%
|
(Loss) income before income taxes
|
|
|
(0.9)
|
%
|
|
0.8
|
%
|
Income tax (benefit) expense
|
|
|
(0.2)
|
%
|
|
0.3
|
%
|
Net (loss) income
|
|
|
(0.7)
|
%
|
|
0.5
|
%
|
Less: Net income attributable to
noncontrolling interest
|
|
|
0.0
|
%
|
|
0.1
|
%
|
Net (loss) income attributable to controlling interest
|
|
|
(0.7)
|
%
|
|
0.4
|
%
|
Thr
ee Months Ended
April 29, 2018
Compared to Thr
ee Months Ended
April 30, 2017
Ne
t Sales
Net sales
increase
d
$16.5
million,
or 19.
7
%,
to $100.
2
million in the thr
ee months ended
April
29
, 201
8
compared to
$83.7
million in t
he three months ended April
30
, 2017
, driven by gains in both direct and retail segments of
$
2.4 million, or 3.8
%, and $14.1
mi
llion, or
70
.7
%, respectively
,
with gains across
virtually
all
product categorie
s
and in both men’s and women’s business
.
Our website visits increased
14
% in the thr
ee months ended April 29, 2018
compared to t
he t
hree months ended April 30, 2017
.
The increase in retail net sale
s was primarily due t
o having 13
more stores dur
ing the three months
ended April 28, 2018
as compared to the three months
ended April 30, 2017.
Gross Profit
Gros
s profit
increased
$7.3 million, or 15.0%, to $55.9
million in the
thr
ee mont
hs ended April 29, 2018
co
mpared to $48.6
million in
t
he three months ended April 30, 2017
. As a percentage of net s
ales, gross margin
de
creased
2
3
0
basis points to
55.8
% of net sales in the thr
ee months end
ed
April
29
, 2018
,
compared to
58
.
1
% of net sales in the three m
onths e
nded April 30
, 2017
.
The de
crease in gross margin
rate
was primarily attributable to a decrease in product margins due to product mix,
increase in inventory reserve and higher freight cost as a result of retail growth, coupled with a slight decrease in shipping revenues.
Selling, General and Administrative Expenses
Selling, general and adm
inistrative
expenses
increased
$
8.3
million, or
17.3%, to $56.2
million
in
th
e thre
e
months ended April
29
, 2018
compared t
o $47.9
million
in the three months
ended
April 30, 2017
.
Selling, general and administrative expenses as a
percentage of net sales
decreased 1
1
0
basis points to
56.1
% in the three months ended
April 29, 2018
,
com
pared to 57.2
% in the thr
ee months ended
April 30, 2017
.
The increase in selling, general a
nd
administrative expenses was
a
tt
ributable to an increase of $0.6
million in adver
tising and marketing costs,
$3.8
million in selling expenses and
$3.9
million in general and
administrative expenses
.
As a percentage of net sales, advertising and marketing
costs
de
creased
3
6
0 basis points to
21.6
% in the three mo
nths ended April 29, 2018
,
compared to
25.2
% in the
three
months ended
April 30, 2017
.
The 3
6
0
basis point de
crease in advertising and marketing cos
ts as a percentage of net sales
was primarily attributable to
a decrease of
300
basis points in
catalog costs due to the adoption of the n
ew revenue standard
which provides for catalog costs expensed upon customer receipt
and a planned decrease
in catalog spend as a percentage of net sales, coupled w
ith advertising leverage
gain
ed
from a higher mix of retail sales as compared to the three months ended April 30, 2017.
As a percentage of net sales, selling expenses
increased 150
basis points
to 16.1
% in the thr
ee month
s ended April 29, 2018
, compared
to 14.6
% in t
he three months ended April 30, 2017
, pr
imarily due to an increase of 14
0
basis points in customer service due to
our
growth in r
etail
and an increase of 60 basis points in distribution labor
,
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
10
0 basis points to 18.
4
% in
the three months ended April
29
, 2018
,
compared to 17.4
% i
n
the three months ended April
30
,
2017
.
T
he
11
0
basis point increase was primarily attributable to an increase
of
50
basis points in
depreciation as a result of more stores, 30 basis points in
information technology hosting fees and outside services
, and 20 basis points in personnel expense due to increase headcount to support the growth of our business.
Segment Operating
(Loss) Income
Corporate expenses are included in our direct segment and the majority of advertising costs are included in our direct segment, with the exc
e
ption of retail-
specific advertis
ing. As such, our direct segment is generally burden
ed
with higher overhead and advertising expenses.
Direct segment operating loss of
$2.
1
million in the three months ended April 29, 2018 compared to a loss of $0.2 million in the three months ended April 30, 2017. Direct segment operating loss as a percentage of
direct
net sales decreased 300 basis points to 3.2% in the three months ended April 29, 2018 compared to 0.2% in the three month
s
ended Apri
l 30, 2017. The 300 basis point
decline was primarily due to
a decline
of 23
0 basis points in
direct
gross margins, based on the factors discussed above in gross profit, coupled
with an increase
in selling expenses of 90 basis points due to increase
d
distribution costs and a
n increase
of 15
0 basis points in general and administrative expenses due to an increase in personnel costs and
information technology hosting fees and outside services
to support the growth of our
direct
business
, partially offset by a decline
of 18
0 basis points in advertising and marketing.
The decrease
of 18
0 basis points in advertising and marketing costs was
primarily due to a decrease in catalog costs
due to the adoption of the new revenue standard as discussed above, partially offset by
increase in basis points
in web and television advertising as a percentage of net sales.
Retail segment operating income increased $1.0 million to $1.9 million in the three months ended April 29, 2018 compared to $0.9 million in the three months ended April 30, 2017. Retail segment operating income as a percentage of
retail
net sales increased 90 basis points to 5.5% in the three months ended April 29, 2018 compared to 4.6% in the three month
s
ended April 30, 2017. The 90 basis point increase was primarily due to
a decline
of 180 basis points in
retail
gross margins, primarily due to product mix and an increase in retail shrink reserve, coupled with an increase of 160 basis points in selling expenses due to growth of retail, which was more than offset by a decrease of
41
0 basis points in general and administrative exp
enses primarily due to leverage
gained from higher retail net sales
and a decrease of 40 basis points in advertising.
Interest Expense
Interest expense
was $0.
8
million
in t
he three months ended April 29, 2018
, compared to
$0.2
million in th
e three months ended
April 29, 2017
.
The increase in interest expense was primarily attributable to
an increase in
our build-to-suit retail stores
.
Income
Tax (Benefit) Expense
Income tax
benefit
was
$0.
2
mi
llion
i
n t
he three months ended April 29, 2018
, compared to
income tax expense of $0
.2
milli
o
n in t
he three months ended April 30, 2017
.
The
decrease was primarily attributable to a net loss in comparison to a net income in the prior year three mon
ths ended April 30, 2017
.
O
ur effective tax
rate
related to controlling interest
was 25
%
and 39
%, for the three months ended April 29, 2018 and April 30, 2017
, respectively
.
The decrease in our effective tax rat
e was primarily due to the U.S. tax reform
, which was effective January 1, 2018.
Net
(Loss)
Income
Net
loss was
$0
.
7
million,
in the three months ended April 29, 2018
compared to a net income of $0.4
million in the thr
ee months ended April 30, 2017
, primarily
due to the factors discussed above.
Reconciliation of Net
(Loss)
Income to
EBITDA and EBITDA to
Adjusted EBITDA
The following table
presents reconciliations of net income
(loss)
to EBITDA and EBITDA to Adjusted EBITDA,
both of which are
non-
U.S.
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 29, 2018
|
|
April 30, 2017
|
(in thousands)
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(683)
|
|
$
|
415
|
Depreciation and amortization
|
|
|
2,309
|
|
|
1,552
|
Interest expense
|
|
|
821
|
|
|
166
|
Income tax (benefit) expense
|
|
|
(232)
|
|
|
225
|
EBITDA
|
|
$
|
2,215
|
|
$
|
2,358
|
Non-cash stock based compensation
|
|
|
409
|
|
|
324
|
Adjusted EBITDA
|
|
$
|
2,624
|
|
$
|
2,682
|
As a result
of the factors discussed above in the “Results of Operations
” section,
A
djusted EBITDA
de
creas
ed
$0
.
1 million, or 2.2
%, to $2.6
million in the
three
months ended
April 29, 2018
compared to $2
.7
million in t
he three months ended
April 30, 2017
. As a percentage of net sales,
A
djusted EBITDA
de
creased 6
0 basis points to
2.6
% of net sales in the thr
ee months ended
April 29, 2018
compared to 3.2
% of net sales in the thr
ee months ended
April 30, 2017
.
Liquidity and Capital Resources
General
Our business relies on cash from operating activities
and a
credit
facility
as our primary sources of liquidity
. Effective May 17, 2018, we entered into a new credit facility which provides for borrowing of up to $80.0 million on a revolving line of credit and an additional $50.0 million delayed draw term loan. The $80.0 million revolving line of credit matures on May 17, 2023 and we have the option to draw in various amounts on the $50.0 million term loan through May 17, 2020, with
a
maturity on May 17, 2023.
Our primary cash needs have been for inventory,
marketing and advertising,
payroll, store leases, capital expenditures associated with opening new stores, infrastructure and information 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 $
45.0 million to $55.0
million
in fiscal 2018
on capi
tal expenditures,
net of proceeds from finance lease obligations,
including a
total of
approximately $
27
.0 million to
$32
.0 million
for new retail store expansion
and remodels
. We expect
capital expenditures of
approximately $2.0 million
and
starting inventory of $0.5
million
to open a new store. At
April 29, 2018
, our
net
working capital
was $
40.0
million,
including $1.
2
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
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.
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 29, 2018
|
|
April 30, 2017
|
(in thousands)
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(10,987)
|
|
$
|
(3,544)
|
Net cash used in investing activities
|
|
|
(13,957)
|
|
|
(8,354)
|
Net cash provided by financing activities
|
|
|
21,963
|
|
|
773
|
Decrease in cash and restricted cash
|
|
$
|
(2,981)
|
|
$
|
(11,125)
|
Net Cash
used in
Operating Activities
Operating activities consist primarily of net income adjusted for non-cash items that include depreciation and amortization
,
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 29, 2018
is negative, primarily driven by the seasonal nature of our business, we expect cash flow
s
from operatio
ns for the full year fiscal 201
8
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 29, 2018
, net cash
used
in
operati
ng activities was $11
.
0
million, which
consisted of net loss of $0.7
million, non-cash depre
ciation and amortization of $2.3
million and
stock based compensatio
n of $0.4
million, offset by cash used in operatin
g assets and liabilities
of $13.1
million. The cash used in operat
in
g
assets and liabilities of $13.1
mil
l
ion primarily consisted of $10.4
million increase in inventory,
primarily due to
the
increase in
the number
of
our r
etail stores
,
$1.5 million increase in prepaid ex
penses and other current assets
due to
growth and adoption of the
new revenue standard as a result of the increase in estimated expected inventory returns
, and $1.4 million decrease in trade accounts payable
primarily due to timing of payments
.
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 depreciation and amortization of $1.6 million and stock based compensation of $0.3 million, offset by cash used in operating assets and liabilities
of $5.8
million. The cash used in operat
ing assets and liabilities of $5.8
million 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
.
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
.
For
the three months ended April 29, 2018
, net cash used in inves
ting activ
ities
was $14.0
million and was primarily driven by capital expenditures
of $
14.0
million
for
new retail stores and
retail store build-out
, as well as
investments in information technology
.
For the three months ended April 30, 2017, net cash used in investing activ
ities was $8.4
million and was primarily driven by capital expenditures
of $8.3
million for the opening of four new retail stores
.
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
holders of
the
noncontrolling intere
st in
our
variable interest entity
Schlecht Retail Ventures LLC (“SRV”)
, proceeds from finance lease obligations
and capital con
tributions to
SRV
.
Fo
r the three months ended April 29, 2018
, net cash provided b
y financing activi
ties was $
22.0
m
illion, primarily consisting
of proceeds
of $21.3
million, net fro
m our revolving line of credit to fund working capital and capital expenditures
,
$0.5
million in change in bank ov
erdraft,
and $0.3
million from
finance lease obligations in connection with our build-to-suit leas
e transactions
.
For the three
months
ended April 30,
2017, net cash provided by financing activi
ties was $0.8
million, 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.
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, the Company entered into a second amendment to the Amended and Restated Agreement, providing for borrowing availability of up to
$80.0
million from November 1, 2017 through December 31, 2017 and borrowing availability of up to
$60.0
million from January 1, 2018 through July 31, 2019. The Amended and Restated Agreement
was scheduled to mature
on
July 31, 2019
, and bore
interest, payable monthly, at a rate equal to the adjusted LIBOR rate, as defined in the Amended and Restated Agreement (
effective
rate of 3.1% at
April 29, 2018
). The
Amended and Restated Agreement wa
s secured by essentially
all Company assets and required
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 Ame
nded and Restated Agreement did
not contain borrowing base limits.
Eff
ective May 17, 2018, we
entered into a new credit agreement and subsequently terminated our Amended and Restated Agreement. The outstanding balance of $27.5 million under the Amended and Restated Agreement was paid off
with borrowings under the new credit agreement
. The new credit agreement is secured by essentially all Company assets and requires that we maintain compliance with certain financial and non-financial covenants, including a trailing twelve month maximum rent adjusted leverage
ratio
and minimum fixed charge coverage
ratio
.
See
Note 1
3
“Subsequent Events,”
included in this Quarterly Report on Form 10-Q
for further information.
As of April 29, 2018 and for the three months then ended, the Company was in compliance with all financial and non-financial covenants
for all debts discussed above.
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 28, 2018.
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
2017
Form 10-K
, except as discussed below
.
Recently Adopted Accounting Pronouncements
On January 29, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASC 606”), which supersedes the revenue recognition requirements in ASC Topic 605,
Revenue Recognition
. ASC 606 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.
ASC 606 also requires disclosure of the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted ASC 606 utilizing the modified retrospective approach, with the cumulative effect of initially apply
ing
the new standard recognized in retained earnings. As such, the comparative prior period information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of ASC 606 had the fol
lowing effect beginning with
our January 29, 2018 financial statements: (1) revenues on direct sales are recognized upon shipment
, which is when the customer obtains control of the product and reflects the consideration we expect to be entitled to in exchange for the
product
; (
2) catalog
costs are
expensed
upon receipt by customers
; and
(3) the
estimated cost of inventory associated with sales ret
urns reserve is now
presented
within
prepaid and
other current assets rather than netted in product returns
reserve within accrued expenses
. The adoption of ASC 606 did not have a material impact on the Company’s condensed consolidated financial statements.
On January 29, 2018, we adopted ASU No. 2016-08,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASC 230”), 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. As a result of the adoption of ASC 230, we no longer disclose the changes in restricted cash on the statement of cash flows and disclose a reconciliation to the total cash and restricted cash balances on the condensed consolidated balance sheets.
On January 29, 2018, we adopted ASU No. 2016-01,
Financial Instruments (Subtopic 825-10)
(“ASC 825-10”), which amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The most significant impact relates to the accounting for equity instruments. The adoption of ASC 825-10 did not have a material impact on our condensed 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, 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 an increase in assets and liabilities on our consolidated balance sheets, due to recording of right-to-use assets and the corresponding lease liabilities, which is expected to be material.