Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and related notes of Duluth Holdings Inc. included in Item 1of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended
January 28, 2018
(“2017 Form 10-K”).
The three and six months of fiscal 2018 and fiscal 2017 represent our 13 and 26-week periods ended
July 29, 2018
and
July 30, 2017
, respectively.
Unless the context indicates otherwise, the terms the “Company,” “Duluth,” “Duluth Trading,” “we,” “our,” or “us” are used to refer to Duluth Holdings Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. All statements other than statements of historical or current facts included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “could,” “estimate,” “expect,” “project,” “plan,” “potential,” “intend,” “believe,” “may,” “might,” “will,” “objective,” “should,” “would,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenue, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 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
represented
55.0% and 60.3
% of
our
consolidated net sales for the three and six months ended
July 29, 2018
, respectively, and 66.9% and 71.5% of our consolidated net sales for the three and six months ended July 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 presence, and
as of
July 29, 2018
, we operated
36
retail stores and three outlet stores. Net sales for our retail segment
represented
45.0
% and
39.7
% of
our
consolidated
net sales for the three and six months ended
July 29, 2018
and 33.1% and 28.5% of consolidated net sales for the three and six months ended July 30, 2017, respectively.
We offer a comprehensive line of innovative, durable and functional products, 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 34 consecutive quarters through
July 29, 2018
;
|
|
·
|
|
Net sales in fiscal 2018 second
quarter
increased
by
28.
3
% o
ver the prior year second
quarter to
$110.
7
million
and net sales in the first six months of fiscal 2018
increased
by 24.1
% over the first six months of the prior year to $
210.9
million
;
|
|
·
|
|
Net income
in fiscal 2018 second quarter
increased
by 48.
9
% over the p
rior year second quarter to $6.
4
million and net income in the first six months of
fiscal 201
8
increased
by
2
2.6
% over the first six months of the
prior year
to $5.7
million;
|
|
·
|
|
Adjusted EBITDA in fiscal 201
8 second quarter increased by 38.6
% over the prior year second quarter to $
13.1
million and adjusted EBITDA in the first six months
of fiscal 2018 increased by 29.6
% over the first six
months of the prior year to $15.7
million;
|
|
·
|
|
We opened six
new stores in fiscal 2018 second quarter a
nd eight
new stores in the first six months of fiscal 2018, adding approximately 132,000
of
gross square footage in fiscal 2018; and
|
|
·
|
|
Our retail stores have achieved and are expected to
continue to ach
i
e
ve
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 measures. See also the information under the heading “Adjusted EBITDA” in the section “How We Assess the Performance of Our Business” for our definition of Adjusted EBITDA.
Our business is seasonal, and as a result, our net sales fluctuate from quarter to quarter, which often affects the comparability of our results between quarters. Net sales are historically higher in the fourth quarter of our fiscal year due to the holiday selling season.
We are pursuing several strategies to continue our growth, including building brand awareness to continue customer acquisition, 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 financial metrics 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 Adjusted EBITDA as one of the key financial metrics in determining our annual bonus compensation for our employees.
We define Adjusted EBITDA as consolidated net income (loss) before depreciation and amortization, interest expense and provision for income taxes adjusted for the impact of certain items, including non-cash and other items we do not consider representative of our ongoing operating performance. We believe Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other items.
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
|
|
Six Months Ended
|
|
|
|
July 29, 2018
|
|
July 30, 2017
|
|
July 29, 2018
|
|
July 30, 2017
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct net sales
|
|
$
|
60,833
|
|
$
|
57,667
|
|
$
|
127,045
|
|
$
|
121,442
|
|
Retail net sales
|
|
|
49,820
|
|
|
28,559
|
|
|
83,815
|
|
|
48,471
|
|
Net sales
|
|
|
110,653
|
|
|
86,226
|
|
|
210,860
|
|
|
169,913
|
|
Cost of goods sold (excluding depreciation
and amortization
|
|
|
48,413
|
|
|
37,303
|
|
|
92,680
|
|
|
72,347
|
|
Gross profit
|
|
|
62,240
|
|
|
48,923
|
|
|
118,180
|
|
|
97,566
|
|
Selling, general and administrative expenses
|
|
|
52,344
|
|
|
41,534
|
|
|
108,541
|
|
|
89,428
|
|
Operating income
|
|
|
9,896
|
|
|
7,389
|
|
|
9,639
|
|
|
8,138
|
|
Interest expense
|
|
|
1,234
|
|
|
372
|
|
|
2,055
|
|
|
538
|
|
Other income, net
|
|
|
2
|
|
|
45
|
|
|
165
|
|
|
102
|
|
Income before income taxes
|
|
|
8,664
|
|
|
7,062
|
|
|
7,749
|
|
|
7,702
|
|
Income tax expense
|
|
|
2,212
|
|
|
2,709
|
|
|
1,980
|
|
|
2,934
|
|
Net income
|
|
|
6,452
|
|
|
4,353
|
|
|
5,769
|
|
|
4,768
|
|
Less: Net income attributable to
noncontrolling interest
|
|
|
75
|
|
|
69
|
|
|
83
|
|
|
129
|
|
Net income attributable to controlling interest
|
|
$
|
6,377
|
|
$
|
4,284
|
|
$
|
5,686
|
|
$
|
4,639
|
|
Percentage of Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct net sales
|
|
|
55.0
|
%
|
|
66.9
|
%
|
|
60.3
|
%
|
|
71.5
|
%
|
Retail net sales
|
|
|
45.0
|
%
|
|
33.1
|
%
|
|
39.7
|
%
|
|
28.5
|
%
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold (excluding depreciation
and amortization
|
|
|
43.8
|
%
|
|
43.3
|
%
|
|
44.0
|
%
|
|
42.6
|
%
|
Gross profit
|
|
|
56.2
|
%
|
|
56.7
|
%
|
|
56.0
|
%
|
|
57.4
|
%
|
Selling, general and administrative expenses
|
|
|
47.3
|
%
|
|
48.2
|
%
|
|
51.5
|
%
|
|
52.6
|
%
|
Operating income
|
|
|
8.9
|
%
|
|
8.6
|
%
|
|
4.6
|
%
|
|
4.8
|
%
|
Interest expense
|
|
|
1.1
|
%
|
|
0.4
|
%
|
|
1.0
|
%
|
|
0.3
|
%
|
Other income, net
|
|
|
0.0
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
Income before income taxes
|
|
|
7.8
|
%
|
|
8.2
|
%
|
|
3.7
|
%
|
|
4.5
|
%
|
Income tax expense
|
|
|
2.0
|
%
|
|
3.1
|
%
|
|
0.9
|
%
|
|
1.7
|
%
|
Net income
|
|
|
5.8
|
%
|
|
5.0
|
%
|
|
2.7
|
%
|
|
2.8
|
%
|
Less: Net income attributable to
noncontrolling interest
|
|
|
0.1
|
%
|
|
0.1
|
%
|
|
0.0
|
%
|
|
0.1
|
%
|
Net income attributable to controlling interest
|
|
|
5.8
|
%
|
|
5.0
|
%
|
|
2.7
|
%
|
|
2.7
|
%
|
Three Months Ended
July 29, 2018
Compared to Three Months Ended
July 30, 2017
Ne
t Sales
Net sales
increased
$24.5
million, or
28.
3
%, to $110.7
million in the three months ended
July 29, 2018
compared to $86.2 million in the three months ended
July 30, 2017
, driven by gains in both di
rect and retail segments of $3.2 million, or 5.5%, and $21.3 million, or 74.4
%, respectively, with gains across virtually all product categories and in both men’s and women’s business.
Our website visits increased 15
% in the three months ended
July 29, 2018
compared to the three months ended
July 30, 2017
. The increase in retail net sale
s was primarily due to having 1
6
more stores during the three months ended
July 29, 2018
as compared to the three months ended
July 30, 2017
.
Gross Profit
Gros
s profit
increased
$13.3 million, or 27.2%, to $62.2
million in the
three mont
hs
ended
July 29, 2018
compared
to $48.9
million in t
he three months
ended
July 30, 2017
.
As a percentage of net sales, gross margin
decreased
50
basis points to
56.2
% of net sales in the three months
ended
July 29, 2018
, compared to 56.7% of net sales in the three months ended
July 30, 2017
.
The decrease in gross margin rate was primarily attributable to
a
decline in shipping revenues and an increase in freight cost
, partially offset by a slight increase in product margin
.
Selling, General and Administrative Expenses
Selling, general and adm
inistrative
expenses increased
$
10.8
million, or
26.0%, to $52.3
million
in the thre
e months ended
July 29, 2018
compared to $41.5 million in the three months ended
July 30, 2017
.
Selling, general and administrative expenses as a percentage of net sales
decreased
90
basis points to
47.3
% in the three months ended
July 29, 2018
, compared to 48.2% in the three months ended
July 30, 2017
. The increase in selling, general and administrative expenses was att
ributable to an increase of $0.9
million in advertising and marke
ting costs, $4.1
million in selling expenses
and $5.8
million in general and administrative expenses.
As a percentage of net sales, advertising and marketing
costs decreased
310
basis points to
14.3
% in the three months ended
July 29, 2018
, compared to 17.4% in the three months ended
July 30, 2017
.
The
310
basis point
decrease
in advertising and marketing costs as a percentage of net sales was primarily attributable to
a decrease of 150
basis points in catal
og costs due to a planned decrease in catalog spend as a percentage of net sales, coupled with advertising leverage gained from a higher mix of retail sales as compared to the three months ended July 30, 2017.
As a percentage of net sales, selling expenses
increased
60
basis points
to 14.7
% in the three months ended
July 29, 2018
, compared to 14.1% in the three months ended
July 30, 2017
, primaril
y due to
an increase
in customer service
due to our growth in retail
,
partially offset by a decrease in shipping expenses due to leverage from an increase in the proportion of retail net sales.
As a percentage of net sales, general and administrative
expenses increased
160
basis points to
18.3
% in the three months
ended
July 29, 2018
, compared to 16.7% in the three months ended
July 30, 2017
. The
160
basis point
increase
was primarily at
tributable to an increase in depreciation
and
occupancy cost due to
growth of our
business.
Segment Operating Income
Corporate expenses are included in our direct segment and the majority of advertising costs are included in our direct segment, with the exc
eption of retail-specific advertis
ing
.
As such, our direct segment is generally burden
ed
with higher overhead and advertising expenses.
In addition, for our build to suit leases, a portion of the lease expense is included in interest expense.
Direct segment operating
income was $1.1 million
in the three
months ended
July 29, 2018
compared to
income
of $3.1 million in the three months ended
July 30, 2017
. Direct segment operating
income
as a percentage of direct
net sales
decreased
360 basis points to 1.8
% in the three months
ended
July 29, 2018
compared to 5.4
% in the three months ended
July 30, 2017
. The 36
0
basis point decline was primarily due t
o a decline
of 60
basis points in direct gross margins, based on the factors discussed above in gross profit, coupled with an in
crease in selling expenses of 110
basis points due to
increased distribution costs,
an increase
of 310
basis points in general and administrative expenses due to an increase in personnel costs and
consulting
fees and outside services to support the growth of our direct business, partially offset by a decline
of 110
basis points in advertising and marketing. The decrease
of 110
basis points in advertising and marketing costs was primarily due to a decrease in catalog costs
as discussed above.
Retail segment operating income
increased
$
4.5
million to $
8.8
million in the
three months ended
July 29, 2018
compared to $4.3 million in the three months ended
July 30, 2017
. Retail segment operating income as a percentage of retail net sales i
ncreased 280 basis points to 17.7
% in the three months ended
July 29, 2018
compared to 14.9% in the three months ended
July 30, 2017
. The 280
ba
sis point increase was
due to
a
n increase of 20 basis point in retail gross margins, based on the factors discussed
above in gross profit, in addition to
a
decrease of
260
basis points in
selling,
general and a
dministrative expenses
due to leverage gai
ned from higher retail net sales.
Interest Expense
Interest expense
was $
1.2
million in t
he three months
ended
July 29, 2018
, compared to $0.4 million in the three months ended
July 30, 2017
.
The increase
in interest expense was primarily attributable to
an increase in
our build-to-suit retail stores
, coupled with a higher outstanding debt balance during the quarter as compared to the prior year.
Income
Tax Expense
Income tax
expense
was $
2.2
million
i
n the thre
e months ended
July 29, 2018
, compared to $2.7 million in the three months ended
July 30, 2017
.
Our effective tax rate related to controlling interest
was
26
%
and
39
%
for the three months
ended
July 29, 2018
and
July 30, 2017
, respectively. The
decrease
in our effective t
ax rate was primarily due to the U.S. tax reform, which was effective January 1, 2018.
Net Income
Net income
increased $2.1 million, or 48.9
% to
$
6.4
million,
in the three months
ended
July 29, 2018
compared to $4.3 million in the three months ended
July 30, 2017
, primarily due to the factors discussed above.
Six Months
Ended
July 29, 2018
Compared to
Six Months
Ended
July 30, 2017
Ne
t Sales
Net sales
increased
$41.0
million, or
24.1
%, to $
210.9 million in the
six months ended July 29, 2018
compared to $
169.9
million in t
he
six months ended July 30, 2017
, driven
by gains
in both direct and retail segments of $
5.6
million, or
4.6
%, and $
35.3
million, or
72.9
%, respectively
, with gains across virtually all product categories and in both men’s and women’s business.
Our website visits increased
15% in the
six months ended July 29, 2018
compared to t
he
six months ended July 30, 2017
.
The increase
in retail net sales was primarily
attributable to the same factors discussed above for the three months ended
July 29, 2018
compared to the three months ended
July 30, 2017
.
Gros
s
profit increased
$20.6 million, or 21.1%, to $118.2
million in the
six months ended July 29, 2018
compared to $97.6
million in t
he
six months ended July 30, 2017
. As a percentage of net sales, gross margin
decreased
140
basis points to
56.0% of net sales in the
six months ended July 29, 2018
, compared to
57.4% of net sales in the
six months ended July 30, 2017
. The decrease in gross margin rate was
primarily attributable
to
the continued decline in shipping revenue and
a slight decrease in product margin due to
an increase in clearance sales from the first quarter of fiscal 2018
.
Selling, General and Administrative Expenses
Selling, general and adm
inistrative
expenses increased
$
19.1
million, or
21.4%, to $108.5
million
in th
e
six months ended July 29, 2018
compared t
o $89.4
million
in the
six months ended July 30, 2017
. Selling, general and administrative expenses as a percentage of net
sales decreased
110
basis points to
51.5
% in the
six months ended July 29, 2018
, com
pared to 52.6% in the
six months ended July 30, 2017
. The
increase
in selling, general and administrative expenses was
attributable to an
increase
of $
1.4
million in advertising and marketing costs, $
8.0
million in selling expenses and $
9.7
million in general and administrative expenses.
As a percentage of net sales, advertising and marketing costs
decreased
340
basis points to
17.8% in the
six months ended July 29, 2018
, compared to
21.2
% in the
six months ended July 30, 2017
.
The 340
basis
point decrease
in advertising and marketing costs as a percentage of net sales was primarily attributable to a
decrease
of
230
basis points in catalog costs due to the adoption of the new 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 with advertising leverage gained from a higher mix of retai
l sales as compared to the six months ended July
30, 2017.
As a percentage of net sales, selling
expenses increased
100
basis points to
15.3
% in the
six months ended July 29, 2018
, compared to 14.
3
% in t
he
six months ended July 30, 2017
, primarily due to
an increase
in customer service due to our growth
in retail
,
partially
offset by a decrease
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
130
basis points to
18.4
% in the
six months ended July 29, 2018
,
compared to 17.1
% in
the
six months ended July 30, 2017
. The
130
basis point increase was primarily
attributable to an increase
in
depreciation
and
occupancy cost due to
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
eption of retail-specific advertis
ing
.
As such, our direct segment is generally burden
ed
with higher overhead and advertising expenses.
In addition, for our build to suit leases, a portion of the lease expense is included in interest expense.
Direct segment operating loss of $1.0 million
in the
six months ended July 29, 2018
compared to operating income of
$
3.0 million in the
six months ended July 30, 2017
. Direct segment operating (loss) income
as a percentage of direct net sales decreased
320
basis points to
(0.8)% in the
six months ended July 29, 2018
compared to 2.4% in the
six months ended July 30, 2017
. The
320
basis point decline was primarily due to a decline
of 150
basis points in direct gross margins, based on the factors discussed above in gross profit, coupled with an increase in selling
, general and administrative
expenses of
180
basis points
was primarily
attributable to the same factors discussed above for the three months ended
July 29, 2018 compared to the three months ended July 30, 2017.
Retail segment operating
income increased
$
5.4
million to $
10.6 million in the
six months ended July 29, 2018
compared to $
5.2 million in
six months ended July 30, 2017
. Retail segment operating income as a percentage of retail net sales increased
200
basis points to
12.7% in the
six months ended July 29, 2018
compared to 10.7
% in t
he
six months ended July 30, 2017
. The 200
basis point increase was primarily due to a decline
of 60
basis points in retail gross margins,
based on the factors discussed above in gross profit
,
coupled with a decrease
in
s
elling
, general and administrative
expenses of
26
0
basis points
was primarily
attributable to the same factors discussed above for the three months ended
July 29, 2018 compared to the three months ended July 30, 2017.
Interest Expense
Interest expense was $2.1
million in t
he
six months ended July 29, 2018
, compared to
$0.5
million in th
e
six months ended July 30, 2017
. The increase in interest expense was primarily attributable to
an increase in
our build-to-suit retail stores
, coupled with a higher outstanding debt balance during the quarter as compared to the prior year.
Income
Tax Expense
Income tax expense
was $
2.0
million
i
n the
six months ended July 29, 2018
, compared to
income tax expense of $2.9
millio
n in the
six months ended July 30, 2017
.
Our effective tax rate related to controlling interest
was 26
%
and 39%, for the six months ended
July 29, 2018
and July 30, 2017
, respectively
.
Net
Income
Net income increased $1.0 million, or 22.6%
to
$
5.7
million,
in the
six months ended July 29, 2018
compared to a net income of $4.6
million in the
six months ended July 30, 2017
, 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-U.S. GAAP financial measures, for the periods indicated below. See the above section titled “How We Assess the Performance of Our Business,” for our definition of Adjusted EBITDA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
July 29, 2018
|
|
July 30, 2017
|
|
July 29, 2018
|
|
July 30, 2017
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,452
|
|
$
|
4,353
|
|
$
|
5,769
|
|
$
|
4,768
|
Depreciation and amortization
|
|
|
2,760
|
|
|
1,728
|
|
|
5,069
|
|
|
3,280
|
Interest expense
|
|
|
1,234
|
|
|
372
|
|
|
2,055
|
|
|
538
|
Income tax expense
|
|
|
2,212
|
|
|
2,709
|
|
|
1,980
|
|
|
2,934
|
EBITDA
|
|
$
|
12,658
|
|
$
|
9,162
|
|
$
|
14,873
|
|
$
|
11,520
|
Non-cash stock based compensation
|
|
|
449
|
|
|
293
|
|
|
858
|
|
|
617
|
Adjusted EBITDA
|
|
$
|
13,107
|
|
$
|
9,455
|
|
$
|
15,731
|
|
$
|
12,137
|
As a result
of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA
increased $3.
7
million, or 38.6%, to $13.1
million in the
three
months ended
July 29, 2018
compared to $9.5
million in the three months ended
July 30, 2017
. As a percentage of net sales, Adjusted EBITDA
increased 80
basis points to
11.8
% of net sales in the three months ended
July 29, 2018
compared to 11.0
% of net sales in the three months ended
July 30, 2017
.
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $3.6 million, or 29.6%, to $15.7 million in the
six months ended July 29, 2018
compared to $12.1 million in the
six months ended July 30, 2017
. As a percentage of net sales, Adjusted EBITDA increased 40 basis points to 7.5% of net sales in the
six months ended July 29, 2018
compared to 7.1% of net sales in the
six months ended July 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 technology. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities.
We expect to
spend
approximately $45.0 million to $55.0 million in fiscal 2018 on capital 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
July 29, 2018
, our net working capital
was $
73.9
million,
including $
2.4
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.
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|
|
|
|
|
|
Six Months Ended
|
|
|
July 29, 2018
|
|
July 30, 2017
|
(in thousands)
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(12,585)
|
|
$
|
(12,168)
|
Net cash used in investing activities
|
|
|
(27,325)
|
|
|
(26,617)
|
Net cash provided by financing activities
|
|
|
36,404
|
|
|
17,188
|
Decrease in cash and restricted cash
|
|
$
|
(3,506)
|
|
$
|
(21,597)
|
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 flows from operations for
the
six months ended July 29, 2018
is negative, primarily driven by the seasonal nature of our business, we expect cash flows from operations for the full year fiscal 2018 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
six months ended July 29, 2018
, net cash used in operating activities was $
12.6
mill
ion, which consisted of net incom
e
of $
5.8
million, non-cash depreciation and amortization of $
5.1
million and stock based compensation of $
0.9
million, offset by cash used in operating assets and liabilities of $
24.0
million. The cash used in operating assets and liabilities of $
24.0
million primarily consisted of
a
$
12.1
million increase in inventory, primarily due to
our
sales increase and
building up of inventory for the opening of new retail stores during fiscal 2018 and our peak season
,
a
$
2.3
million increase in prepaid expenses and other current assets due to
an
increase in estimated
expected inventory returns,
a
$
5.5
million decrease in
income tax payable
prim
arily
due to timing of payments, and
a
$3.3 million decrease in accrued expenses and deferred rent obligations.
For the
six months ended July 30, 2017
,
net cash used in
operating activities was $12.2
million, which
consisted of net income of $4.8
million, non-cash depre
ciation and amortization of $3.3
million and stock based compensation of $
0.6
million, offset by cash used in operating assets and liabilities
of $20.4
million. The cash used in operat
ing assets and liabilities of $20.4
million primarily consisted of
a
$
12.9
million
increase in inventory, primarily due to sales increase and building up of inventory for the opening of new retail stores during fiscal 2017
and our peak season
,
a
$7.5 million decrease in accrued expenses and deferred rent obligations and
a
$4.9 million decrease in income taxes payable primarily due to timing of payments,
which was partially offset by
an increase in trade accounts payable of $6.6 million.
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
six months ended July 29, 2018
, net cash used in investing activities
was $27.3
million and was primarily driven by capital expenditures of $
26.8
million
for new retail stores and retail store build-out, as well as
investments in information technology
.
For the
six months ended July 30, 2017
, net cash used in investing activ
ities was $26.6
million and was primarily driven by capital expenditures
of $20.1 million for the opening of seven
new retail stores
and investments in information technology
and
$6.5 million increase in other assets primarily related to funds advanced to the Company’s developer in connection
with building our headquarters
(
see Note 6 “Variable Interest Entities,” of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q
)
.
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 contributions to
SRV
.
Fo
r the
six months ended July 29, 2018
, net cash provided by financing activities was $
36.4
million, primarily consisting of proceeds
of $35.0
million, net fro
m our revolving line of credit to fund working capital and capital expenditures
and $1.0
million from finance lease obligations in connection with our build-to-suit leas
e transactions
.
For the
six months ended July 30, 2017
, net cash provided by financing activi
ties was $17.2
million, primarily consisting
of proceeds of $11.9 million, net from our revolving line of credit, $0.8 million from long-term debt, $2.3 million in change in bank overdraft, $1.3
million
from our finance lease obligations in connection with our build-to-suit lease transactions and $0
.
8
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
.
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 3
“
Debt and Line of Credit
,”
included in this Quarterly Report on Form 10-Q
for further information.
As of July 29, 2018 and for the six
months then ended, the Company was in compliance with all financial and non-financial covenants
for all debts discussed above and expect
s
to be in compliance for the remainder of fiscal 2018.
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
authoritative guidance related to revenue recognition from contracts with customers using
the modified retrospective
(cumulative-effect) approach
.
As
such, the comparative prior period information has not been restated and continues to be reported under the accounting standar
ds in effect for those periods. Beginning with the first quarter of fiscal 2018, our financial results reflect adoption of the standard.
On January 29, 2018, we adopted
authoritative guidance related to
restricted cash
, which requires companies to include
restricted cash
in total cash and cash equivalents on the state
ment of cash flows. As a result
, 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
authoritative guidance related to financial instruments,
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 did not have a material impact on our condensed con
solidated financial statements.
See Note 1 “Nature of Operations and Basis of Presentation,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q for further information regarding recently adopted accounting pronouncements.
Recent Accounting Pronouncements
See Note 12 “Recent Accounting Pronouncements,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q for information regarding recent accounting pronouncements.