10-Q 1 dlth-20180429x10q.htm 10-Q 20180429 Q1 10-Q DLTH

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________





 

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



For the quarterly period ended April 29, 2018



OR





 

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



For the transition period from             to              



Commission File Number 001-37641

_________________________________________ 

DULUTH HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 _________________________________________





 

Wisconsin

39-1564801

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)



 

170 Countryside Drive

P.O. Box 409

Belleville, Wisconsin

 

53508

(Address of principal executive offices)

(Zip Code)









(608) 424-1544

(Registrant’s telephone number, including area code)



_________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if smaller reporting company)

 

Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  



The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of June 4, 2018, was 3,364,200.

The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of June 4, 2018, was 29,219,063.

 

 

 

 


 

DULUTH HOLDINGS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED April 29, 2018 

INDEX

 



 

 



 

 



Part I—Financial Information

Page

Item 1.

Financial Statements



Condensed Consolidated Balance Sheets as of April 29, 2018 and January 28, 2018 (Unaudited)



Condensed Consolidated Statements of Operations for the three months ended April 29, 2018 and April 30, 2017 (Unaudited)



Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended April 29, 2018 and April 30, 2017 (Unaudited)



Condensed Consolidated Statement of Shareholders’ Equity for the three months ended April 29, 2018 (Unaudited)



Condensed Consolidated Statements of Cash Flows for the three months ended April 29, 2018 and April 30, 2017 (Unaudited)



Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

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

18 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26 

Item 4.

Controls and Procedures

26 



Part II—Other Information

 

Item 1.

Legal Proceedings

26 

Item 1A.

Risk Factors

27 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27 

Item 6.

Exhibits

28 



 

 

Signatures

 

29 





 

2

 


 

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements

DULUTH HOLDINGS INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands)





 

 

 

 

 

 



 

 

 

 

 

 



 

April 29, 2018

 

January 28, 2018

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$

1,179 

 

$

2,865 

Accounts receivable

 

 

30 

 

 

52 

Other receivables

 

 

581 

 

 

273 

Inventory, less reserve for excess and obsolete items
of $2,569 and $1,866, respectively

 

 

97,997 

 

 

89,548 

Prepaid expenses & other current assets

 

 

9,707 

 

 

7,642 

Deferred catalog costs

 

 

67 

 

 

1,446 

Total current assets

 

 

109,561 

 

 

101,826 

Property and equipment, net

 

 

129,221 

 

 

109,705 

Restricted cash

 

 

2,923 

 

 

4,218 

Available-for-sale security

 

 

6,323 

 

 

6,323 

Goodwill

 

 

402 

 

 

402 

Other assets, net

 

 

579 

 

 

628 

Total assets

 

$

249,009 

 

$

223,102 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Trade accounts payable

 

$

14,595 

 

$

17,320 

Accrued expenses and other current liabilities

 

 

25,800 

 

 

25,261 

Income taxes payable

 

 

7,359 

 

 

7,631 

Line of credit

 

 

21,250 

 

 

Bank overdrafts

 

 

478 

 

 

Current maturities of long-term debt

 

 

85 

 

 

84 

Total current liabilities

 

 

69,567 

 

 

50,296 

Finance lease obligations under build-to-suit leases

 

 

34,204 

 

 

26,578 

Long-term debt, less current maturities

 

 

1,403 

 

 

1,424 

Deferred rent obligations, less current maturities

 

 

3,680 

 

 

3,355 

Deferred tax liabilities

 

 

1,763 

 

 

2,100 

Total liabilities

 

 

110,617 

 

 

83,753 

Commitments and contingencies

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, no par value; 10,000 shares authorized; no shares
   issued or outstanding as of April 29, 2018 and January 28, 2018

 

 

 —

 

 

Common stock (Class A), no par value; 10,000 shares authorized;
   3,364 shares issued and outstanding as of April 29, 2018 and January 28, 2018

 

 

 —

 

 

Common stock (Class B), no par value; 200,000 shares authorized;
   29,207 shares issued and 29,202 shares outstanding as of April 29, 2018 and
   29,101 shares issued and 29,098 shares outstanding as of January 28, 2018

 

 

 —

 

 

Treasury stock, at cost; 5 and 3 shares as of April 29, 2018 and
   January 28, 2018, respectively

 

 

(92)

 

 

(57)

Capital stock

 

 

88,452 

 

 

88,043 

Retained earnings

 

 

46,745 

 

 

48,084 

Total shareholders' equity of Duluth Holdings Inc.

 

 

135,105 

 

 

136,070 

Noncontrolling interest

 

 

3,287 

 

 

3,279 

Total shareholders' equity

 

 

138,392 

 

 

139,349 

Total liabilities and shareholders' equity

 

$

249,009 

 

$

223,102 





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



3

 


 



DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share figures)

 









 

 

 

 

 

 



 

Three Months Ended



 

April 29, 2018

 

April 30, 2017

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

 

 

 

 

60 

Net (loss) income attributable to controlling interest

 

$

(691)

 

$

355 

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

 

 

 

 

 

 

Weighted average shares of
   common stock outstanding

 

 

32,046 

 

 

31,822 

Net (loss) income per share attributable
   to controlling interest

 

$

(0.02)

 

$

0.01 

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

 

 

 

 

 

 

Weighted average shares and
   equivalents outstanding

 

 

32,046 

 

 

32,320 

Net (loss) income per share attributable
   to controlling interest

 

$

(0.02)

 

$

0.01 





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

 

4

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Amounts in thousands)







 

 

 

 

 

 



 

Three Months Ended



 

April 29, 2018

 

April 30, 2017

Net (loss) income

 

$

(683)

 

$

415 

Other comprehensive income:

 

 

 

 

 

 

Comprehensive (loss) income

 

 

(683)

 

 

415 

Comprehensive income attributable
    to noncontrolling interest

 

 

 

 

60 

Comprehensive (loss) income attributable
   to controlling interest

 

$

(691)

 

$

355 





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

 

5

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statement of Shareholders’ Equity

(Unaudited)

(Amounts in thousands)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 



 

Capital stock

 

 

 

 

interest in

 

Total



 

 

 

Treasury

 

Retained

 

variable interest

 

shareholders'



 

Shares

 

Amount

 

stock

 

earnings

 

entity

 

equity

Balance at January 28, 2018

 

32,462 

 

$

88,043 

 

$

(57)

 

$

48,084 

 

$

3,279 

 

$

139,349 

Cumulative effect from adoption of
ASC 606 (Footnote 1)

 

 

 

 

 

 

 

(648)

 

 

 

 

(648)

Balance at January 29, 2018

 

32,462 

 

$

88,043 

 

$

(57)

 

$

47,436 

 

$

3,279 

 

$

138,701 

Issuance of common stock

 

106 

 

 

 

 

 

 

 

 

 

 

Amortization of stock-based compensation

 

 

 

409 

 

 

 

 

 

 

 

 

409 

Restricted stock surrendered for taxes

 

(2)

 

 

 

 

(35)

 

 

 

 

 

 

(35)

Net income

 

 

 

 

 

 

 

(691)

 

 

 

 

(683)

Balance at April 29, 2018

 

32,566 

 

$

88,452 

 

$

(92)

 

$

46,745 

 

$

3,287 

 

$

138,392 





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

 

6

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)









 

 

 

 

 

 



 

Three Months Ended



 

April 29, 2018

 

April 30, 2017

Cash flows from operating activities:

 

 

 

 

 

 

Net (loss) income

 

$

(683)

 

$

415 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,309 

 

 

1,552 

Amortization of stock-based compensation

 

 

409 

 

 

324 

Deferred income taxes

 

 

40 

 

 

(22)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

22 

 

 

14 

Other receivables

 

 

(308)

 

 

(751)

Inventory

 

 

(10,363)

 

 

(4,453)

Prepaid expense & other current assets

 

 

(1,527)

 

 

189 

Deferred catalog costs

 

 

(814)

 

 

1,449 

Trade accounts payable

 

 

(1,441)

 

 

188 

Income taxes payable

 

 

(421)

 

 

253 

Accrued expenses and deferred rent obligations

 

 

1,790 

 

 

(2,702)

Net cash used in operating activities

 

 

(10,987)

 

 

(3,544)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(14,000)

 

 

(8,327)

Change in other assets

 

 

43 

 

 

(27)

Net cash used in investing activities

 

 

(13,957)

 

 

(8,354)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from line of credit

 

 

37,464 

 

 

Payments on line of credit

 

 

(16,214)

 

 

Payments on long term debt

 

 

(19)

 

 

(10)

Payments on capital lease obligations

 

 

(1)

 

 

(5)

Change in bank overdrafts

 

 

478 

 

 

Proceeds from finance lease obligations

 

 

266 

 

 

512 

Capital contributions to variable interest entity

 

 

 

 

269 

Shares withheld for tax payments on vested restricted shares

 

 

(35)

 

 

Other

 

 

24 

 

 

Net cash provided by financing activities

 

 

21,963 

 

 

773 

Decrease in cash and restricted cash

 

 

(2,981)

 

 

(11,125)

Cash and restricted cash at beginning of period

 

 

7,083 

 

 

25,477 

Cash and restricted cash at end of period

 

$

4,102 

 

$

14,352 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Interest paid

 

$

737 

 

$

140 

Income taxes paid

 

$

149 

 

$

Supplemental disclosure of non-cash information:

 

 

 

 

 

 

Property and equipment acquired under build-to-suit leases

 

$

7,331 

 

$

903 

Unpaid liability to acquire property and equipment

 

$

2,507 

 

$

2,350 





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

 

 

7

 


 

Table of Contents

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

 

1.    NATURE OF OPERATIONS AND BASIS OF PRESENTATION

A.    Nature of Operations

Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through the Company’s own direct and retail channels. The direct segment, consisting of the Company’s website and catalogs, offers products nationwide. In 2010, the Company added retail to its omni-channel platform with the opening of its first store. Since then, Duluth Trading has expanded its retail presence, and as of April 29, 2018, the Company operated 30 retail stores and three outlet stores. The Company’s products are marketed under the Duluth Trading brand, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise.

The Company has two classes of authorized common stock: Class A common stock and Class B common stock. The rights of holders of Class A common stock and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to ten votes per share and is convertible at any time into one share of Class B common stock. Each share of Class B common stock is entitled to one vote per share. The Company’s Class B common stock trades on the NASDAQ Global Select Market under the symbol “DLTH.”

B.    Basis of Presentation

The condensed consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Company consolidates Schlecht Retail Ventures LLC (“SRV”) as a variable interest entity (see Note 6 “Variable Interest Entity”). All intercompany balances and transactions have been eliminated.

The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2018 is a 53-week period and ends on February 3, 2019.  Fiscal 2017 was a 52-week period and ended on January 28, 2018.  The three months of fiscal 2018 and fiscal 2017 represent the Company’s 13-week periods ended April 29, 2018 and April 30, 2017, respectively. 

The accompanying condensed consolidated financial statements as of and for the three months ended April 29, 2018 and April 30, 2017 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations as of and for the three months ended April 29, 2018 and April 30, 2017. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the fiscal year ended January 28, 2018.  

C.    Seasonality of Business

The Company’s business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, the Company has recognized a significant portion of its revenue and operating profit in the fourth fiscal quarter of each year as a result of increased sales during the holiday season.

D.   Restricted Cash and Reconciliation of cash and restricted cash to the condensed statement of cash flows

The Company’s restricted cash is held in escrow accounts and is used to pay a portion of the construction loans entered into by third party landlords (the “Landlords”) in connection with the Company’s retail store leases. The restricted cash is disbursed based on the escrow agreements entered into by and among the Landlords, the Company and the escrow agent.

The following table provides a reconciliation of cash and restricted cash reported within the Condensed Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows.







 

 

 



 

April 29, 2018

(in thousands)

 

 

Cash

 

$

1,179 

Restricted cash

 

 

2,923 

Total cash and restricted cash shown in the condensed statement of cash flows

 

$

4,102 

8

 


 

Table of Contents

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

 



E.    Build-to-Suit Lease

The Company may at times be involved in the construction of stores  to be leased by the Company and, depending on the extent to which the Company is involved, the Company may be deemed the owner of the leased premises for accounting purposes during the store construction period. Similarly, the Company’s lease for its new headquarters is also treated as a build-to-suit lease transaction for accounting purposes during the construction period. For leases that the Company is deemed the owner of the property during the construction period, upon commencement of the construction project, the Company is required to capitalize the cash and non-cash assets contributed by the landlord for construction as property and equipment on the Company’s Condensed Consolidated Balance Sheets. Upon the completion of the construction project, the Company performs an analysis on the lease to determine if the Company qualifies for sale-leaseback treatment. For those qualifying leases, the finance lease obligation and the associated property and equipment are removed and the difference is reclassified to either prepaid or deferred rent and amortized over the lease term as an increase or decrease to rent expense. If the lease does not qualify for sale-leaseback treatment, the finance lease obligation is amortized over the lease term based on the rent payments in the lease agreement and the associated property and equipment are depreciated over the estimated useful life.

As of April 29, 2018, the Company capitalized $46.6 million in property and equipment and $0.4 million in accumulated depreciation and recorded a $34.2 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes. As of January 28, 2018, the Company capitalized $36.5 million in property and equipment and $0.3 million in accumulated depreciation and recorded a $26.6 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes.



F.    Significant Accounting Policies

Except as disclosed below, there have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended January 28, 2018.

Recently Adopted Accounting Pronouncements

On January 29, 2018, the Company 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. The Company adopted ASC 606 utilizing the modified retrospective approach, with the cumulative effect of initially applying 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 following effect beginning with the Company’s 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 the Company expects 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 returns reserve is presented within prepaid expense and other current assets rather than netted in product returns reserve within accrued expenses and other current liabilities on the condensed consolidated balance sheets. The adoption of ASC 606 did not have a material impact on the Company’s condensed consolidated financial statements.

On January 29, 2018, the Company 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, the Company no longer discloses changes in restricted cash on the statement of cash flows and discloses a reconciliation to the total cash and restricted cash balances on the condensed consolidated balance sheets (see item D above).

On January 29, 2018, the Company 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 the Company’s condensed consolidated financial statements.



9

 


 

Table of Contents

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

 

G.    Reclassifications

As discussed above in the significant accounting policies section, with the adoption of ASC 230, the prior year cash flows from investing activities have been reclassified:





 

 

 



 

April 30, 2017

(in thousands)

 

 

 

Net cash used in investing activities:

 

 

 

As previously reported

 

$

(7,687)

Reclassification based on adoption of ASC 230

 

 

(667)

As reclassified

 

$

(8,354)







2.    REVENUES

Effective January 29, 2018, the Company adopted ASC 606 using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements is not restated and is reported under the accounting standards in effect for those periods presented. See Note 1 under “Significant Accounting Policies” for a discussion of the significant changes resulting from the adoption of ASC 606. 

The Company’s revenue primarily consists of the sale of apparel, footwear and hard goods. For the Company’s direct segment, revenues are recognized upon shipment, which is when the customer obtains control of the product and has the ability to direct the use of the product, including, among other options, the ability to redirect the product to a different shipping destination. For the Company’s retail segment, revenues are recognized at the point of sale. The Company provides the customer the right of return on the product and revenue is adjusted based on an estimate of the expected returns based on historical rates as well as events that may cause changes to historical rates. The Company considers the sale of products in either the direct or retail segment as a single performance obligation. Shipping and processing revenue generated from customer orders are included as a component of net sales and shipping and processing expense, including handling expense, is included as a component of selling, general and administrative expenses. Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included in accrued expenses.

The Company’s contract liabilities primarily consist of gift card liabilities and are recorded in accrued expenses and other current liabilities under deferred revenue (see Note 4 “Accrued Expenses and Other Current Liabilities”) on the Company’s condensed consolidated balance sheets. Upon the issuance of a gift card, a liability is established for its cash value. The gift card liability is relieved and revenues on gift cards are recorded at the time of redemption by the customer. Based on historical redemption patterns, gift cards are generally redeemed within one year and gift card breakage is not material.

The following table presents the impact of the adoption of ASC 606 on the Company’s condensed consolidated balance sheets as of January 29, 2018, the first day of fiscal 2018:





 

 

 

 

 

 

 

 

 



 

January 28, 2018

 

Adjustments due to ASC 606

 

January 29, 2018

(in thousands)

 

 

 

 

 

 

 

 

 

Inventory, net

 

$

89,548 

 

$

(629)

 

$

88,919 

Prepaid expenses & other current assets

 

 

7,642 

 

 

1,073 

 

 

8,715 

Deferred catalog costs

 

 

1,446 

 

 

(1,365)

 

 

81 

Total current assets

 

 

101,826 

 

 

(921)

 

 

100,905 

Total assets

 

 

223,102 

 

 

(921)

 

 

222,181 



 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

 

25,261 

 

 

(45)

 

 

25,216 

Income taxes payable

 

 

7,631 

 

 

149 

 

 

7,780 

Total current liabilities

 

 

50,296 

 

 

104 

 

 

50,400 

Deferred tax liabilities

 

 

2,100 

 

 

(377)

 

 

1,723 

Total liabilities

 

 

83,753 

 

 

(273)

 

 

83,480 

Total shareholders' equity

 

 

139,349 

 

 

(648)

 

 

138,701 

Total liabilities and shareholders' equity

 

 

223,102 

 

 

(921)

 

 

222,181 



10

 


 

Table of Contents

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

 



The following tables present  the effects of the adoption of ASC 606 on the Company’s condensed consolidated balance sheets as of April 29, 2018 and the Company’s condensed consolidated statements of operations for the three months ended April 29, 2018:





 

 

 

 

 

 

 

 

 



 

April 29, 2018



 

As Reported

 

Adjustments due to ASC 606

 

Balances without Adoption of ASC 606

(in thousands)

 

 

 

 

 

 

 

 

 

Inventory, net

 

$

97,997 

 

$

1,156 

 

$

99,153 

Prepaid expenses & other current assets

 

 

9,707 

 

 

(425)

 

 

9,282 

Deferred catalog costs

 

 

67 

 

 

268 

 

 

335 

Total current assets

 

 

109,561 

 

 

999 

 

 

110,560 

Total assets

 

 

249,009 

 

 

999 

 

 

250,008 



 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

 

25,800 

 

 

2,117 

 

 

27,917 

Total current liabilities

 

 

69,567 

 

 

2,117 

 

 

71,684 

Deferred tax liabilities

 

 

1,763 

 

 

(290)

 

 

1,473 

Total liabilities

 

 

110,617 

 

 

1,827 

 

 

112,444 

Total shareholders' equity

 

 

138,392 

 

 

(828)

 

 

137,564 

Total liabilities and shareholders' equity

 

 

249,009 

 

 

999 

 

 

250,008 







 

 

 

 

 

 

 

 

 



 

Three Months Ended April 29, 2018



 

As Reported

 

Adjustments due to ASC 606

 

Balances without Adoption of ASC 606

(in thousands)

 

 

 

 

 

 

 

 

 

Net sales

 

$

100,207 

 

$

(1,832)

 

$

98,375 

Cost of goods sold (excluding depreciation and amortization)

 

 

44,267 

 

 

(833)

 

 

43,434 

Gross profit

 

 

55,940 

 

 

(999)

 

 

54,941 

Selling, general and administrative expenses

 

 

56,197 

 

 

996 

 

 

57,193 

Operating (loss) income

 

 

(257)

 

 

(1,995)

 

 

(2,252)

Interest expense

 

 

821 

 

 

 

 

821 

Other income, net

 

 

163 

 

 

 

 

163 

(Loss) income before income taxes

 

 

(915)

 

 

(1,995)

 

 

(2,910)

Income tax (benefit) expense

 

 

(232)

 

 

(519)

 

 

(751)

Net (loss) income

 

 

(683)

 

 

(1,476)

 

 

(2,159)

Less: Net income attributable to noncontrolling interest

 

 

 

 

 

 

Net (loss) income attributable to controlling interest

 

$

(691)

 

$

(1,476)

 

$

(2,167)







3.    DEBT AND LINE OF CREDIT

Debt consists of the following:





 

 

 

 

 

 



 

April 29, 2018

 

January 28, 2018

(in thousands)

 

 

 

 

SRV Mortgage Term A Note

 

$

681 

 

$

690 

SRV Mortgage Term B Note

 

 

773 

 

 

783 

Line of credit

 

 

21,250 

 

 

Capitalized lease obligations

 

 

34 

 

 

35 



 

$

22,738 

 

$

1,508 

Less: current maturities

 

 

(21,335)

 

 

(84)

Long-term debt

 

$

1,403 

 

$

1,424 



11

 


 

Table of Contents

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

 

Schlecht Retail Ventures LLC

SRV entered into a mortgage note (“SRV Term A Note”) with an original balance of $0.8 million. The SRV Term A Note was scheduled to mature in  September 2017 and required monthly payments of $3,300 plus interest at 3.1%, with a final balloon payment due in September 2017. On July 20,  2017, SRV refinanced the SRV Term A Note, which extended the maturity date to September 2022, with a final balloon payment in September 2022, and changed the interest rate to 3.69%. The required monthly payments of $3,300 did not change.

On July 20, 2017, SRV entered into a mortgage note (“SRV Term B Note”) with an original balance of $0.8 million. The SRV Term B Note matures in September 2022 and requires monthly payments of $3,300 plus interest at 3.69%, with a final balloon payment in September 2022.

The SRV Term A Note and SRV Term B Note are guaranteed by the Company’s majority shareholder and collateralized by certain real property owned by SRV in Mt. Horeb, Wisconsin.

Line of Credit

On September 29, 2017, the Company entered into a first amendment to the Amended and Restated Loan Agreement dated as of October 7, 2016 (the “Amended and Restated Agreement”),  providing for borrowing availability of up to $60.0 million from September 29, 2017 through July 31, 2019. Effective November 1, 2017, the Company entered into a second amendment to the Amended and Restated Agreement, providing for borrowing availability of up to $80.0 million from November 1, 2017 through December 31, 2017 and borrowing availability of up to $60.0 million from January 1, 2018 through July 31, 2019.  The Amended and Restated Agreement 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 was 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 Amended and Restated Agreement did not contain borrowing base limits.

Effective May 17, 2018, the Company entered into a new credit agreement and subsequently terminated its 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. See Note 13 “Subsequent Events,” 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.

 

4.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:





 

 

 

 

 

 



 

April 29, 2018

 

January 28, 2018

(in thousands)

 

 

 

 

Salaries and benefits

 

$

2,142 

 

$

5,370 

Deferred revenue

 

 

4,746 

 

 

7,285 

Freight

 

 

2,092 

 

 

4,062 

Product returns

 

 

1,315 

 

 

1,080 

Catalog costs

 

 

10 

 

 

839 

Unpaid purchases of property & equipment

 

 

2,507 

 

 

2,028 

Accrued advertising

 

 

7,537 

 

 

1,011 

Other

 

 

5,451 

 

 

3,586 

Total accrued expenses and other current liabilities

 

$

25,800 

 

$

25,261 



 

 

 

 

 

 











12

 


 

Table of Contents

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

 

5.    INVESTMENT

ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”),  defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., an exit price). The exit price is based on the amount that the holder of the asset or liability would receive or need to pay in an actual transaction (or in a hypothetical transaction if an actual transaction does not exist) at the measurement date. ASC 820 describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable, as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying value of the Company’s available-for-sale security was valued based on a discounted cash flow method (Level 3).







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

April 29, 2018

 

 

January 28, 2018



 

Cost or

 

Gross

 

Gross

 

 

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

Estimated



 

Cost  

 

Gains

 

Losses

 

Fair Value

 

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 security:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate trust

 

$

6,323 

 

$

 

$

 

$

6,323 

 

 

$

6,323 





The following table presents future receipts related to the Company’s available-for-sale security by contractual maturity as of April 29, 2018. Cost and estimated fair value are equal.







 

 

 

 



 

 

Estimated



 

 

Fair Value

(in thousands)

 

 

 

Within one year

 

 

$

56 

After one year through five years

 

 

 

759 

After five years through ten years

 

 

 

1,236 

After ten years

 

 

 

4,272 

Total

 

 

$

6,323 











6.    VARIABLE INTEREST ENTITY

Based upon the criteria set forth in ASC 810, Consolidation, the Company has determined that it was the primary beneficiary of one variable interest entity (“VIE”) as of April 29, 2018 and January 28, 2018, as the Company absorbs significant economics of the entity and has the power to direct the activities that are considered most significant to the entity.

The Company leases certain retail store facilities and office buildings from SRV, a VIE whose primary purpose and activity is to own this real property. SRV is a Wisconsin limited liability company that is owned by the majority shareholder of the Company. The Company considers itself the primary beneficiary for SRV as the Company is expected to receive a majority of SRV’s expected residual returns based on the activity of SRV. As the Company is the primary beneficiary, it consolidates SRV and the leases are eliminated in consolidation.

13

 


 

Table of Contents

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

 

The condensed consolidated balance sheets include the following amounts as a result of the consolidation of SRV as of April 29, 2018 and January 28, 2018:









 

 

 

 

 

 



 

April 29, 2018

 

January 28, 2018

(in thousands)

 

 

 

 

 

 

Cash

 

$

695 

 

$

655 

Other receivables

 

 

17 

 

 

10 

Property and equipment, net

 

 

4,085 

 

 

4,114 

Other assets, net

 

 

13 

 

 

53 

Total assets

 

$

4,810 

 

$

4,832 



 

 

 

 

 

 

Other current liabilities

 

$

150 

 

$

160 

Long-term debt

 

 

1,373 

 

 

1,393 

Noncontrolling interest in VIE

 

 

3,287 

 

 

3,279 

Total liabilities and shareholders' equity

 

$

4,810 

 

$

4,832 





On August 18, 2017, the Company entered into a lease agreement with TRI Holdings, LLC (“TRI”), the developer of the Company’s future headquarters in Mt. Horeb, Wisconsin.  The Company expects to take occupancy of the future headquarters on November 1, 2018. The Company determined it had a variable interest in TRI, however, the Company does not consolidate TRI, as the Company is not the primary beneficiary. In conjunction with the lease, the Company invested $6.3 million in a trust (see Note 5 Investment) that loaned funds to TRI for the construction of the Company’s future headquarters. The Company does not consolidate the trust as the Company is not the primary beneficiary.



7.    EARNINGS PER SHARE

Earnings per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings per share is based on the weighted average number of common shares plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock. The reconciliation of the numerator and denominator of the basic and diluted earnings per share calculation is as follows:







 



 

 

 

 

 

 



 

Three Months Ended



 

April 29, 2018

 

April 30, 2017

(in thousands, except per share data)

 

 

 

 

 

 

Numerator - net (loss) income attributable
   to controlling interest

 

$

(691)

 

$

355 

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

 

 

 

 

 

 

Basic

 

 

32,046 

 

 

31,822 

Dilutive shares

 

 

 

 

498 

Diluted

 

 

32,046 

 

 

32,320 

(Loss) earnings per share (Class A and Class B)

 

 

 

 

 

 

Basic

 

$

(0.02)

 

$

0.01 

Diluted

 

$

(0.02)

 

$

0.01 



The computation of diluted earnings per share for the three months ended April 29, 2018, excludes 0.4 million shares of unvested restricted stock because their inclusion would be anti-dilutive due to a net loss.



14

 


 

Table of Contents

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

 

8.    STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plan in accordance with ASC 718, Stock Compensation, which requires the Company to measure all share-based payments at grant date fair value and recognize the cost over the requisite service period of the award.

Total stock compensation expense associated with restricted stock recognized by the Company was $0.4 million and $0.3 million for the three months ended April 29, 2018 and April 30, 2017, respectively. The Company’s total stock compensation expense is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.

A summary of the activity in the Company’s unvested restricted stock during the three months ended April 29, 2018 is as follows:





 

 

 

 

 

 



 

 

 

 

Weighted



 

 

 

 

average



 

 

 

 

fair value



 

 

Shares

 

per share

Outstanding at January 28, 2018

 

 

536,471 

 

$

7.60 

Granted

 

 

106,196 

 

 

18.15 

Vested

 

 

(130,310)

 

 

4.38 

Outstanding at April 29, 2018

 

 

512,357 

 

$

10.32 

At April 29, 2018, the Company had unrecognized compensation expense of $3.6 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.6 years.

 

9.    PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

 





 

 

 

 

 

 



 

April 29, 2018

 

January 28, 2018

(in thousands)

 

 

 

 

 

 

Land and land improvements

 

$

3,055 

 

$

3,055 

Leasehold improvements

 

 

26,310 

 

 

20,985 

Buildings

 

 

36,638 

 

 

33,906 

Vehicles

 

 

161 

 

 

177 

Warehouse equipment

 

 

5,877 

 

 

5,850 

Office equipment and furniture

 

 

25,392 

 

 

22,161 

Computer equipment

 

 

3,885 

 

 

3,573 

Software

 

 

7,631 

 

 

7,540 



 

 

108,949 

 

 

97,247 

Accumulated depreciation and amortization

 

 

(25,008)

 

 

(22,739)



 

 

83,941 

 

 

74,508 

Construction in progress

 

 

45,280 

 

 

35,197 

Property and equipment, net

 

$

129,221 

 

$

109,705 



 



10.    SEGMENT REPORTING

The Company has two operating segments, which are also its reportable segments: direct and retail. The direct segment includes net sales from the Company’s website and catalogs. The retail segment includes net sales from the Company’s retail and outlet stores. These two operating segments are components of the Company for which separate financial information is available and for which operating results are evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing performance of the segments.

15

 


 

Table of Contents

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

 

Income tax expense, and corporate expenses, which include but are not limited to: human resources, legal, finance, information technology, design and other corporate-related expenses are included in the Company’s direct segment. Interest expense, depreciation and amortization, and property and equipment expenditures,  are recognized in each segment. Advertising expenses are generally included in the Company’s direct segment, except for specific store advertising, which is included in the Company’s retail segment.

Net sales by product is not presented because providing the information is impracticable. Net sales outside of the United States were insignificant. Variable allocations of assets are not made for segment reporting. The Company does not have any assets outside of the United States.

Segment information is presented in the following table:





 

 

 

 

 

 



 

Three Months Ended



 

April 29, 2018

 

April 30, 2017

(in thousands)

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

Direct

 

$

66,212 

 

$

63,775 

Retail

 

 

33,995 

 

 

19,912 

Total net sales

 

$

100,207 

 

$

83,687 

Operating (loss) income

 

 

 

 

 

 

Direct

 

$

(2,128)

 

$

(157)

Retail

 

 

1,871 

 

 

906 

Total operating (loss) income

 

 

(257)

 

 

749 

Interest expense

 

 

821 

 

 

166 

Other income, net

 

 

163 

 

 

57 

(Loss) income before income taxes

 

$

(915)

 

$

640 



Net sales by business is presented in the following table:





 

 

 

 

 

 



 

Three Months Ended



 

 

 

 

 

 



 

April 29, 2018

 

April 30, 2017

(in thousands)

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

Men's

 

$

67,919 

 

$

58,634 

Women's

 

 

27,161 

 

 

20,806 

Hard goods/other

 

 

5,127 

 

 

4,247 

Total net sales

 

$

100,207 

 

$

83,687 



Segment total assets is presented in the following table:















 

 

 

 

 

 



 

April 29, 2018

 

January 28, 2018

(in thousands)

 

 

 

 

 

 

Direct

 

$

141,651 

 

$

133,866 

Retail

 

 

107,358 

 

 

89,236 

Total assets at period end

 

$

249,009 

 

$

223,102 

 











16

 


 

Table of Contents

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

 

11.    INCOME TAXES

The provision for income taxes for the interim period is based on an estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Management judgment is required in projecting ordinary income to estimate the Company’s annual effective tax rate. The effective tax rate related to controlling interest was 25% and 39% for the three months ended April 29, 2018 and April 30, 2017, respectively.  The decrease in the Company’s effective tax rate was primarily due to U.S. tax reform, which was effective January 1, 2018. The income from SRV was excluded from the calculation of the Company’s effective tax rate, as SRV is an “S” corporation and not subject to income taxes.



12.    RECENT ACCOUNTING PRONOUNCEMENTS

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on the balance sheets (right-of-use asset and lease liability), but recognize expenses on the income statements in a manner that is similar to the current lease standard. The provisions of ASU 2016-02 are effective for public entities with fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company will adopt ASU 2016-02 on February 4, 2019, the first day of the Company’s first quarter for the fiscal year ending February 2, 2020, the Company’s fiscal year 2019. The Company conducts its retail operations through leased stores and therefore, the Company expects the adoption of ASU 2016-02 to have an increase in assets and liabilities on its consolidated financial statements, due to recording of right-to-use assets and the corresponding lease liabilities, which is expected to be material.



13.    SUBSEQUENT EVENTS

Management of the Company evaluated its April 29, 2018 unaudited condensed consolidated financial statements for subsequent events through June 6, 2018, the date the financial statements were available to be issued. Management is not aware of any subsequent events which would require recognition or additional disclosure in the financial statements, except as noted below.

Effective May 17, 2018, the Company terminated its Amended and Restated Agreement and entered into a new credit agreement (the “Credit Agreement”) which provides for borrowing availability of up to $80.0 million in revolving credit (the “Revolver”), and borrowing availability of up to $50.0 million in a delayed draw term loan (“DDTL”), for a total credit facility of $130.0 million. The $80.0 million revolving credit matures on May 17, 2023. The $50.0 million DDTL is available to draw upon in differing amounts through May 17, 2020, and matures on May 17, 2023.  The outstanding balance of $27.5 million under the Amended and Restated Agreement was paid off with borrowings under the Credit Agreement. The Credit Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the Credit Agreement. At the Company’s option, the interest rate applicable to the Revolver or DDTL will be a floating rate equal to: (i) the base rate plus a margin of 25 to 100 basis points (“bps”), based upon the Company’s rent adjusted leverage ratio, or (ii) a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR for such interest period plus a margin of 125 to 200 bps, based upon the Company’s rent adjusted leverage ratio. In addition, outstanding balances under the DDTL requires quarterly principal payments with a final balloon payment at maturity.





 

17

 


 

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 months of fiscal 2018 and fiscal 2017 represent our 13-week periods ended April 29, 2018 and April 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 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 presence, and as of April 29, 2018, we operated 30 retail stores and three outlet stores. Net sales for our retail segment represented 33.9% and 23.8% of our consolidated  net sales for the three months ended April 29, 2018 and April 30, 2017, respectively.

We offer a comprehensive line of innovative, durable and functional products, such as our Longtail T® shirts, Buck NakedTM underwear, Fire Hose® work pants, and No-Yank® Tank, which reflect our position as the Modern, Self-Reliant American Lifestyle brand. Our brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic for everyday and on-the-job use.

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 consecutive quarters through April 29, 2018;

·

Net sales in fiscal 2018 first quarter increased by 19.7%  over the prior year first quarter to $100.2 million;

·

Net loss of $0.7 million in fiscal 2018 first quarter compared to the prior year first quarter net income of $0.4 million; 

·

Adjusted EBITDA in fiscal 2018 first quarter decreased by 2.2% over the prior year first quarter to $2.6 million;

18

 


 

·

We opened 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 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 purchased merchandise; inventory shrinkage; inventory adjustments due to obsolescence, including excess and slow-moving inventory and lower of cost and net realizable reserves; inbound freight; and freight from our distribution centers to our retail stores. The primary drivers of the costs of individual goods are raw material costs. Depreciation and amortization are excluded from gross profit. We expect gross profit to increase to the extent that we successfully grow our net sales. Given the size of our direct segment sales relative to our total net sales, shipping and handling revenue has had a significant impact on our gross profit and gross profit margin. Historically, this revenue has partially offset shipping and handling expense included in selling, general and administrative expenses. We have experienced declines in shipping and handling revenues, and this trend is expected to continue. Declines in shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling expense. Our gross profit may not be comparable to other retailers, as we do not include distribution network and store occupancy expenses in calculating gross profit, but instead we include them in selling, general and administrative expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include all payroll and payroll-related expenses and occupancy expenses related to our stores and to our operations at our headquarters, including utilities, depreciation and amortization. They also include marketing expense, which primarily includes television advertising, catalog production, mailing and print advertising costs, as well as all logistics costs associated with shipping product to our customers, consulting and software expenses and professional services fees. Selling, general and administrative expenses as a percentage of net sales is usually higher in lower-volume quarters and lower in higher-volume quarters because a portion of the costs are relatively fixed.  

Our historical sales growth has been accompanied by increased selling, general and administrative expenses. The most significant components of these increases are advertising, marketing and payroll costs. While we expect these expenses to increase as we continue to open new stores, increase brand awareness and grow our organization to support our growing business, we believe these expenses will decrease as a percentage of sales over time.

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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.

 

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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

 

 

 

 

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 

%



Three Months Ended April 29, 2018 Compared to Three Months Ended April 30, 2017

Net Sales

Net sales increased  $16.5 million, or 19.7%, to $100.2 million in the three months ended April 29, 2018 compared to $83.7 million in the 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 million, or 70.7%, respectively,  with gains across virtually all product categories and in both men’s and women’s business. Our website visits increased 14% in the three months ended April 29, 2018 compared to the three months ended April 30, 2017.  The increase in retail net sales was primarily due to having 13 more stores during the three months ended April 28, 2018 as compared to the three months ended April 30, 2017.

Gross Profit

Gross profit increased $7.3 million, or 15.0%, to $55.9 million in the three months ended April 29, 2018 compared to $48.6 million in  the three months ended April 30, 2017. As a percentage of net sales, gross margin decreased 230 basis points to 55.8% of net sales in the three months ended April 29, 2018, compared to 58.1% of net sales in the three months ended April 30, 2017.  The decrease in gross margin rate was primarily attributable to a decrease in product margins due to product mix,

21

 


 

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 administrative expenses increased $8.3 million, or 17.3%, to $56.2 million in the three  months ended April 29, 2018 compared to $47.9 million in the three months ended April 30, 2017.  Selling, general and administrative expenses as a percentage of net sales decreased 110 basis points to 56.1% in the three months ended April 29, 2018, compared to 57.2% in the three months ended April 30, 2017.  The increase in selling, general and administrative expenses was attributable to an increase of $0.6 million in advertising 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 decreased 360 basis points to 21.6% in the three months ended April 29, 2018, compared to 25.2% in the three months ended April 30, 2017.  The 360 basis point decrease in advertising and marketing costs 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 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 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 three months ended April 29, 2018, compared to 14.6% in the three months ended April 30, 2017, primarily due to an increase of 140 basis points in customer service due to our growth in retail and an increase of 60 basis points in distribution labor,  which was partially offset by a decrease of 60 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 100 basis points to 18.4% in the three months ended April 29, 2018,  compared to 17.4% in the three months ended April 30,  2017.  The 110 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 exception of retail-specific advertising. As such, our direct segment is generally burdened 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 months ended April 30, 2017. The 300 basis point decline was primarily due to a decline of 230 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 increased distribution costs and an increase of 150 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 180 basis points in advertising and marketing. The decrease of 180 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 months 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 410 basis points in general and administrative expenses 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 the three months ended April 29, 2018, compared to $0.2 million in the three months ended April 29, 2017. The increase in interest expense was primarily attributable to an increase in our build-to-suit retail stores.

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Income Tax (Benefit) Expense 

Income tax benefit was $0.2 million  in the three months ended April 29, 2018, compared to income tax expense of $0.2 million in the 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 months ended April 30, 2017.  Our 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 rate 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 three 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. 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



 

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, Adjusted EBITDA decreased $0.1 million, or 2.2%, to $2.6 million in the three months ended April 29, 2018 compared to $2.7 million in the three months ended April 30, 2017. As a percentage of net sales, Adjusted EBITDA decreased 60 basis points to 2.6% of net sales in the three months ended April 29, 2018 compared to 3.2% of net sales in the three 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 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 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.

23

 


 

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 flows from operations for the three months ended April 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 three months ended April 29, 2018, net cash used in operating activities was $11.0 million, which consisted of net loss of $0.7 million, non-cash depreciation and amortization of $2.3 million and stock based compensation of $0.4 million, offset by cash used in operating assets and liabilities of $13.1 million. The cash used in operating assets and liabilities of $13.1 million primarily consisted of $10.4 million increase in inventory, primarily due to the increase in the number of our retail stores,  $1.5 million increase in prepaid expenses 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 operating 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 investing activities 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 activities 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 interest in our variable interest entity Schlecht Retail Ventures LLC (“SRV”), proceeds from finance lease obligations and capital contributions to SRV.

For the three months ended April 29, 2018, net cash provided by financing activities was $22.0  million, primarily consisting of proceeds of $21.3 million, net from our revolving line of credit to fund working capital and capital expenditures,  

24

 


 

$0.5 million in change in bank overdraft, and $0.3 million from finance lease obligations in connection with our build-to-suit lease transactions.

For the three months ended April 30, 2017, net cash provided by financing activities 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 the Amended and Restated Loan Agreement dated as of October 7, 2016 (the “Amended and Restated Agreement”), providing for borrowing availability of up to $60.0 million from September 29, 2017 through July 31, 2019. Effective November 1, 2017, the Company entered into a second amendment to the Amended and Restated Agreement, providing for borrowing availability of up to $80.0 million from November 1, 2017 through December 31, 2017 and borrowing availability of up to $60.0 million from January 1, 2018 through July 31, 2019. The Amended and Restated Agreement 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 was 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 Amended and Restated Agreement did not contain borrowing base limits.

Effective 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 13 “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 applying 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 following 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

25

 


 

product; (2) catalog costs are expensed upon receipt by customers; and (3) the estimated cost of inventory associated with sales returns 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.   

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in the market risks described in our 2017 Form 10-K. See Note 3 “Debt and Line of Credit,” of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q, for disclosure on our interest rate related to our line of credit.



Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Section 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires management of an issuer subject to the Exchange Act to evaluate, with the participation of the issuer’s principal executive and principal financial officers, or persons performing similar functions, the effectiveness of the issuer’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of each fiscal quarter. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.



PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, financial condition, operating results or cash flows. We establish reserves for specific legal matters when we determine that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable.

26

 


 

Item 1A.   Risk Factors

We operate in a rapidly changing environment that involves a number of risks that may have a material adverse effect on our business, financial condition and results of operations. For a detailed discussion of the risks that affect our business, please refer to the section entitled “Risk Factors” in our 2017 Form 10-K. There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.



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

We did not sell any equity securities during the quarter ended April 29, 2018, which were not registered under the Securities Act.

The following table contains information of shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ restricted stock during the quarter ended April 29, 2018.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Total number

 

Approximate dollar



 

 

 

 

 

 

of shares purchased

 

value of shares that



 

Total number

 

 

 

 

as part of publicly

 

may yet to be



 

of shares

 

Average price

 

announced plans

 

purchased under the

Period

 

purchased

 

paid per share

 

or programs

 

plans or programs

January 29 - February 25, 2018

 

 

$

 

 

$

February 26 - April 1, 2018

 

 

 

 

 

 

April 2 - April 29, 2018

 

1,823 

 

 

19.47 

 

 

 

Total

 

1,823 

 

$

19.47 

 

 

$



27

 


 



Item 6.    Exhibits

EXHIBIT INDEX



 



 



 

Exhibit No.

 

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

XBRL Instance Document**

101.SCH

XBRL Taxonomy Extension Schema Document**

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF

XBRL Taxonomy Extension Definition Document**

101.LAB

XBRL Taxonomy Extension Label Linkbase Document**

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document**







 

+

Indicates management contract or compensation plan or arrangement

*

Filed herewith

**

In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





 

 

Date:  June 6, 2018

 



DULUTH HOLDINGS INC.
(Registrant)



 

/s/ DAVID LORETTA



 

David Loretta



 

Senior Vice President and Chief Financial Officer



 

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



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