Form 10-Q DULUTH HOLDINGS INC. For: Oct 29

December 7, 2017 3:31 PM

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 October 29, 2017



OR





 

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



For the transition period from             to              



Commission File Number 001-37641

_________________________________________ 

DULUTH HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 _________________________________________





 

Wisconsin

39-1564801

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)



 

170 Countryside Drive

P.O. Box 409

Belleville, Wisconsin

 

53508

(Address of principal executive offices)

(Zip Code)









(608) 424-1544

(Registrant’s telephone number, including area code)



_________________________________________

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



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



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated 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 December 4, 2017, was 3,364,200.

The number of shares outstanding of the Registrant’s Class B common stock,  no par value, as of December 4, 2017,  was 29,097,107.

 

 

 

 


 

DULUTH HOLDINGS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED October 29, 2017 

INDEX

 



 

 



 

 



Part I—Financial Information

Page

Item 1.

Financial Statements



Condensed Consolidated Balance Sheets as of October 29, 2017 and January 29, 2017 (Unaudited)



Condensed Consolidated Statements of Operations for the three and nine months ended October 29, 2017 and October 30, 2016 (Unaudited)



Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended October 29, 2017 and October 30, 2016 (Unaudited)



Condensed Consolidated Statement of Shareholders’ Equity for the nine months ended 
October 29, 2017 (Unaudited)



Condensed Consolidated Statements of Cash Flows for the nine months ended  
October 29,  2017 and October 30, 2016 (Unaudited)



Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

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

17 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27 

Item 4.

Controls and Procedures

27 



Part II—Other Information

 

Item 1.

Legal Proceedings

27 

Item 1A.

Risk Factors

27 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28 

Item 6.

Exhibits

28 



 

 

Signatures

 

29 





 

2

 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements

DULUTH HOLDINGS INC.

Condensed Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands)





 

 

 

 

 

 



 

 

 

 

 

 



 

October 29, 2017

 

January 29, 2017

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$

958 

 

$

24,042 

Accounts receivable

 

 

62 

 

 

45 

Other receivables

 

 

1,669 

 

 

349 

Inventory, less reserve for excess and obsolete items
of $2,899 and $1,242, respectively

 

 

129,475 

 

 

70,368 

Prepaid expenses

 

 

8,820 

 

 

4,860 

Deferred catalog costs

 

 

4,431 

 

 

1,582 

Total current assets

 

 

145,415 

 

 

101,246 

Property and equipment, net

 

 

98,151 

 

 

52,432 

Restricted cash

 

 

2,169 

 

 

1,435 

Available-for-sale security

 

 

6,323 

 

 

Goodwill

 

 

402 

 

 

402 

Other assets, net

 

 

487 

 

 

452 

Total assets

 

$

252,947 

 

$

155,967 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Trade accounts payable

 

$

30,082 

 

$

9,330 

Accrued expenses and other current liabilities

 

 

25,676 

 

 

19,822 

Income taxes payable

 

 

 

 

5,225 

Bank overdrafts

 

 

2,930 

 

 

Current maturities of long-term debt

 

 

84 

 

 

742 

Total current liabilities

 

 

58,772 

 

 

35,119 

Long-term line of credit

 

 

50,101 

 

 

Finance lease obligations under build-to-suit leases

 

 

18,484 

 

 

3,349 

Long-term debt, less current maturities

 

 

1,445 

 

 

35 

Deferred rent obligations, less current maturities

 

 

3,305 

 

 

2,109 

Deferred tax liabilities

 

 

1,507 

 

 

1,567 

Total liabilities

 

 

133,614 

 

 

42,179 

Commitments and contingencies

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

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

 

 

 —

 

 

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

 

 

 —

 

 

Common stock (Class B), no par value; 200,000 shares authorized;
   29,100 shares issued and 29,097 shares outstanding as of October 29, 2017 and
   29,012 shares issued and outstanding as of January 29, 2017

 

 

 —

 

 

Treasury stock, at cost; 3 and 0 shares as of October 29, 2017 and
   January 29, 2017, respectively

 

 

(57)

 

 

Capital stock

 

 

87,632 

 

 

86,446 

Retained earnings

 

 

28,556 

 

 

24,733 

Total shareholders' equity of Duluth Holdings Inc.

 

 

116,131 

 

 

111,179 

Noncontrolling interest

 

 

3,202 

 

 

2,609 

Total shareholders' equity

 

 

119,333 

 

 

113,788 

Total liabilities and shareholders' equity

 

$

252,947 

 

$

155,967 





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



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Table of Contents

 



DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(Amounts in thousands, except per share figures)

 









 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

October 29, 2017

 

October 30, 2016

 

October 29, 2017

 

October 30, 2016

Net sales

 

$

83,729 

 

$

67,008 

 

$

253,642 

 

$

201,463 

Cost of goods sold (excluding depreciation and amortization)

 

 

36,302 

 

 

28,260 

 

 

108,649 

 

 

84,102 

Gross profit

 

 

47,427 

 

 

38,748 

 

 

144,993 

 

 

117,361 

Selling, general and administrative expenses

 

 

48,039 

 

 

37,929 

 

 

137,467 

 

 

105,215 

Operating (loss) income

 

 

(612)

 

 

819 

 

 

7,526 

 

 

12,146 

Interest expense

 

 

661 

 

 

33 

 

 

1,199 

 

 

108 

Other income, net

 

 

73 

 

 

33 

 

 

175 

 

 

163 

(Loss) income before income taxes

 

 

(1,200)

 

 

819 

 

 

6,502 

 

 

12,201 

Income tax (benefit) expense

 

 

(454)

 

 

305 

 

 

2,480 

 

 

4,691 

Net (loss) income

 

 

(746)

 

 

514 

 

 

4,022 

 

 

7,510 

Less: Net income attributable to noncontrolling interest

 

 

70 

 

 

52 

 

 

199 

 

 

188 

Net (loss) income attributable to controlling interest

 

$

(816)

 

$

462 

 

$

3,823 

 

$

7,322 

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

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of
   common stock outstanding

 

 

31,861 

 

 

31,520 

 

 

31,837 

 

 

31,520 

Net (loss) income per share attributable

   to controlling interest

 

$

(0.03)

 

$

0.01 

 

$

0.12 

 

$

0.23 

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

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares and
   equivalents outstanding

 

 

31,861 

 

 

32,294 

 

 

32,297 

 

 

32,286 

Net (loss) income per share attributable

   to controlling interest

 

$

(0.03)

 

$

0.01 

 

$

0.12 

 

$

0.23 





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

 

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DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Amounts in thousands)







 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

October 29, 2017

 

October 30, 2016

 

October 29, 2017

 

October 30, 2016

Net (loss) income

 

$

(746)

 

$

514 

 

$

4,022 

 

$

7,510 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Change in value of interest rate swap agreement

 

 

 

 

15 

 

 

 

 

27 

Comprehensive (loss) income

 

 

(746)

 

 

529 

 

 

4,022 

 

 

7,537 

Comprehensive income attributable
    to noncontrolling interest

 

 

70 

 

 

52 

 

 

199 

 

 

188 

Comprehensive (loss) income attributable
   to controlling interest

 

$

(816)

 

$

477 

 

$

3,823 

 

$

7,349 





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

 

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Table of Contents

 

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 29, 2017

 

32,376 

 

$

86,446 

 

$

 

$

24,733 

 

$

2,609 

 

$

113,788 

Issuance of common stock

 

109 

 

 

 

 

 

 

 

 

 

 

Restricted stock forfeitures

 

(21)

 

 

 

 

 

 

 

 

 

 

Amortization of stock-based compensation

 

 

 

1,186 

 

 

 

 

 

 

 

 

1,186 

Restricted stock surrendered for taxes

 

(3)

 

 

 

 

(57)

 

 

 

 

 

 

(57)

Capital contributions

 

 

 

 

 

 

 

 

 

794 

 

 

794 

Distributions

 

 

 

 

 

 

 

 

 

(400)

 

 

(400)

Net income

 

 

 

 

 

 

 

3,823 

 

 

199 

 

 

4,022 

Balance at October 29, 2017

 

32,461 

 

$

87,632 

 

$

(57)

 

$

28,556 

 

$

3,202 

 

$

119,333 





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

 

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DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)









 

 

 

 

 

 



 

Nine Months Ended



 

October 29, 2017

 

October 30, 2016

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

4,022 

 

$

7,510 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

5,104 

 

 

3,215 

Amortization of stock-based compensation

 

 

1,186 

 

 

969 

Deferred income taxes

 

 

(60)

 

 

151 

Loss on disposal of property and equipment

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(17)

 

 

(10)

Other receivables

 

 

(1,320)

 

 

(3,007)

Inventory

 

 

(57,020)

 

 

(40,891)

Prepaid expense

 

 

(3,136)

 

 

181 

Deferred catalog costs

 

 

(1,006)

 

 

485 

Trade accounts payable

 

 

18,665 

 

 

6,713 

Income taxes payable

 

 

(5,225)

 

 

(1,308)

Accrued expenses and deferred rent obligations

 

 

3,850 

 

 

(794)

Net cash used in operating activities

 

 

(34,957)

 

 

(26,783)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(37,501)

 

 

(21,026)

Purchase of available-for-sale security

 

 

(6,323)

 

 

Change in restricted cash

 

 

(734)

 

 

(1,367)

Purchases of other assets

 

 

(85)

 

 

(80)

Net cash used in investing activities

 

 

(44,643)

 

 

(22,473)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from line of credit

 

 

76,476 

 

 

18,156 

Payments on line of credit

 

 

(26,375)

 

 

(4,947)

Proceeds from long term debt

 

 

800 

 

 

Payments on long term debt

 

 

(34)

 

 

(4,216)

Payments on capital lease obligations

 

 

(14)

 

 

(14)

Change in bank overdrafts

 

 

2,930 

 

 

2,055 

Distributions to shareholders

 

 

 

 

(192)

Distributions to holders of noncontrolling interest in variable interest entity

 

 

(400)

 

 

(30)

Proceeds from finance lease obligations

 

 

2,358 

 

 

Capital contributions to variable interest entity

 

 

794 

 

 

744 

Shares withheld for tax payments on vested restricted shares

 

 

(57)

 

 

Other

 

 

38 

 

 

Net cash provided by financing activities

 

 

56,516 

 

 

11,556 

Decrease in cash

 

 

(23,084)

 

 

(37,700)

Cash at beginning of period

 

 

24,042 

 

 

37,873 

Cash at end of period

 

$

958 

 

$

173 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Interest paid

 

$

947 

 

$

116 

Income taxes paid

 

$

8,950 

 

$

7,929 

Supplemental disclosure of non-cash information

 

 

 

 

 

 

Property and equipment acquired under build-to-suit leases

 

$

12,739 

 

$

1,957 

Unpaid liability to acquire property and equipment

 

$

4,144 

 

$

3,922 





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

 

 

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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 October 29, 2017, the Company operated 23 retail stores and three outlet stores across the Midwestern, Eastern and Western United States. 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 accompanying condensed consolidated financial statements include the accounts of the parent, Duluth Holdings Inc., and its wholly-owned subsidiary, Duluth Trading Company, LLC. Effective October 3, 2016, Duluth Trading Company, LLC was dissolved and no longer consolidated,  which did not impact the Company’s consolidated financial statements.  The Company also consolidates Schlecht Retail Ventures LLC (“SRV”) as a variable interest entity (see Note 5 “Variable Interest Entity”). All intercompany balances and transactions have been eliminated.

The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2017 is a 52-week period and ends on January 28, 2018.  Fiscal 2016 was a 52-week period and ended on January 29, 2017. The three and nine months of fiscal 2017 and fiscal 2016 represent the Company’s 13-week and 39-week periods ended October 29, 2017 and October 30, 2016, respectively. 

The accompanying condensed consolidated financial statements as of and for the three and nine months ended October 29, 2017 and October 30, 2016 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. Certain information and 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 and nine months ended October 29, 2017 and October 30, 2016. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the fiscal year ended January 29, 2017.  

C.    Seasonality of Business

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

D.    Restricted Cash

The 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.

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. The Company’s lease for its new headquarters is 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

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

 

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 October 29, 2017, the Company capitalized $27.5 million in property and equipment and $0.2 million in accumulated depreciation and recorded an $18.5 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes. As of January 29, 2017, the Company capitalized $6.6 million in property and equipment and $0.01 million in accumulated depreciation and recorded a $3.3 million non-current liability related to build-to-suit transactions in which the Company is considered the owner for accounting purposes.







2.    DEBT AND LINE OF CREDIT

Debt consists of the following:





 

 

 

 

 

 



 

October 29, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

SRV Mortgage Term A Note

 

$

700 

 

$

727 

SRV Mortgage Term B Note

 

 

793 

 

 

Line of credit

 

 

50,101 

 

 

Capitalized lease obligations

 

 

36 

 

 

50 



 

$

51,630 

 

$

777 

Less: current maturities

 

 

(84)

 

 

(742)

Long-term debt

 

$

51,546 

 

$

35 



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 matures on July 31, 2019, and bears interest, payable monthly, at a rate equal to the adjusted LIBOR rate, as defined in the Amended and Restated Agreement (effective rate of 2.5% at October 29, 2017). The Amended and Restated Agreement is secured by essentially all Company assets and requires the Company to

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

 

maintain compliance with certain financial and non-financial covenants, including minimum tangible net worth and a minimum trailing twelve month EBITDA. In addition, the Amended and Restated Agreement does not contain borrowing base limits.

As of October 29, 2017 and for the nine months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above.

 

3.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:





 

 

 

 

 

 



 

October 29, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

Salaries and benefits

 

$

1,645 

 

$

3,885 

Deferred revenue

 

 

6,395 

 

 

5,590 

Freight

 

 

1,539 

 

 

1,574 

Product returns

 

 

642 

 

 

1,088 

Catalog costs

 

 

2,399 

 

 

556 

Unpaid purchases of property & equipment

 

 

4,144 

 

 

3,485 

Accrued advertising

 

 

4,634 

 

 

1,060 

Other

 

 

4,278 

 

 

2,584 

Total accrued expenses and other current liabilities

 

$

25,676 

 

$

19,822 



 

 

 

 

 

 









4.    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  recent purchase in inactive market (Level 3).







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

October 29, 2017

 

 

January 29, 2017



 

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 

 

 

$





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

 

The following table presents future receipts related to the Company’s available-for-sale security by contractual maturity as of October 29, 2017. Cost and estimated fair value are equal.







 

 

 

 



 

 

Estimated



 

 

Fair Value

(in thousands)

 

 

 

Within one year

 

 

$

After one year through five years

 

 

 

719 

After five years through ten years

 

 

 

1,181 

After ten years

 

 

 

4,423 

Total

 

 

$

6,323 



 

 

 

 











5.    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 October 29, 2017 and January 29, 2017, as the Company absorbs significant economics of the entity and has the power to direct the activities that are considered most significant to the entity.

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

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









 

 

 

 

 

 



 

October 29, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

 

 

Cash

 

$

656 

 

$

139 

Other receivables

 

 

20 

 

 

Property and equipment, net

 

 

4,102 

 

 

3,248 

Other assets, net

 

 

14 

 

 

Total assets

 

$

4,792 

 

$

3,401 



 

 

 

 

 

 

Other current liabilities

 

$

177 

 

$

792 

Long-term debt

 

 

1,413 

 

 

Noncontrolling interest in VIE

 

 

3,202 

 

 

2,609 

Total liabilities and shareholders' equity

 

$

4,792 

 

$

3,401 





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.



During the construction phase of the Company’s future headquarters, the Company is considered the owner for accounting purposes, as noted in footnote one, under build-to-suit lease. As of October 29, 2017, the Company capitalized $8.5 million in property & equipment and recorded $8.5 million non-current liability related to build-to-suit transactions, which are included in the balances disclosed under footnote one. 



In conjunction with the headquarters lease, the Company invested $6.3 million in a trust (see Note 4 Investment) that funded the mortgage 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.



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

 

6.    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

 

Nine Months Ended



 

October 29, 2017

 

October 30, 2016

 

October 29, 2017

 

October 30, 2016

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

Numerator - net (loss) income attributable
   to controlling interest

 

$

(816)

 

$

462 

 

$

3,823 

 

$

7,322 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

31,861 

 

 

31,520 

 

 

31,837 

 

 

31,520 

Dilutive shares

 

 

 

 

774 

 

 

460 

 

 

766 

Diluted

 

 

31,861 

 

 

32,294 

 

 

32,297 

 

 

32,286 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03)

 

$

0.01 

 

$

0.12 

 

$

0.23 

Diluted

 

$

(0.03)

 

$

0.01 

 

$

0.12 

 

$

0.23 



 



7.    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 during the three and nine months ended October 29, 2017 was $0.6 million and $1.2 million, respectively, and during the three and nine months ended October 30, 2016 was $0.4 million and $1.0 million, 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 nine months ended October 29, 2017 is as follows:





 

 

 

 

 

 



 

 

 

 

Weighted



 

 

 

 

average



 

 

 

 

fair value



 

 

Shares

 

per share

Outstanding at January 29, 2017

 

 

794,712 

 

$

4.34 

Granted

 

 

109,735 

 

 

19.56 

Vested

 

 

(311,933)

 

 

2.71 

Forfeited

 

 

(21,294)

 

 

22.31 

Outstanding at October 29, 2017

 

 

571,220 

 

$

6.76 

At October 29, 2017, the Company had unrecognized compensation expense of $2.5 million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 1.8 years.

 

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

 

8.    PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

 





 

 

 

 

 

 



 

October 29, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

 

 

Land and land improvements

 

$

3,055 

 

$

2,986 

Leasehold improvements

 

 

19,938 

 

 

12,752 

Buildings

 

 

26,882 

 

 

16,178 

Vehicles

 

 

177 

 

 

177 

Warehouse equipment

 

 

5,789 

 

 

3,939 

Office equipment and furniture

 

 

19,102 

 

 

11,125 

Computer equipment

 

 

3,300 

 

 

2,509 

Software

 

 

7,219 

 

 

6,659 



 

 

85,462 

 

 

56,325 

Accumulated depreciation and amortization

 

 

(20,581)

 

 

(15,529)



 

 

64,881 

 

 

40,796 

Construction in progress

 

 

33,270 

 

 

11,636 

Property and equipment, net

 

$

98,151 

 

$

52,432 



 



9.    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.

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.

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

 

Segment information is presented in the following tables:





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

October 29, 2017

 

October 30, 2016

 

October 29, 2017

 

October 30, 2016

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

54,146 

 

$

52,271 

 

$

175,588 

 

$

166,437 

Retail

 

 

29,583 

 

 

14,737 

 

 

78,054 

 

 

35,026 

Total net sales

 

$

83,729 

 

$

67,008 

 

$

253,642 

 

$

201,463 

Operating (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

$

(2,738)

 

$

(84)

 

$

230 

 

$

8,694 

Retail

 

 

2,126 

 

 

903 

 

 

7,296 

 

 

3,452 

Total operating (loss) income

 

 

(612)

 

 

819 

 

 

7,526 

 

 

12,146 

Interest expense

 

 

661 

 

 

33 

 

 

1,199 

 

 

108 

Other income, net

 

 

73 

 

 

33 

 

 

175 

 

 

163 

(Loss) income before income taxes

 

$

(1,200)

 

$

819 

 

$

6,502 

 

$

12,201 



Segment total assets















 

 

 

 

 

 



 

October 29, 2017

 

January 29, 2017

(in thousands)

 

 

 

 

 

 

Direct

 

$

168,865 

 

$

115,239 

Retail

 

 

84,082 

 

 

40,728 

Total assets at period end

 

$

252,947 

 

$

155,967 

 









10.    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 36% and 39% for the three and nine months ended October 29, 2017, respectively, and 40% and 39% for the three and nine months ended October 30, 2016, respectively. 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.



11.    RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Simplifying the Measurement of Inventory

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”), which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.” ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. The provisions of ASU 2015-11 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-11 as of January 30, 2017, the first day of the Company’s fiscal year 2017, and there was no significant impact to the Company’s consolidated financial statements.



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

 

Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to improve the accounting for share-based payment transactions. ASU 2016-09 changes certain aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The provisions of ASU 2016-09 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those years, early adoption is permitted. The Company adopted ASU 2016-09 as of May 1, 2016 and there was no significant impact to the Company’s consolidated financial statements. 

Balance Sheet Classification of Deferred Taxes

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”), which requires the classification of all deferred tax assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. In addition, an allocation of valuation allowances between current and noncurrent deferred tax assets is not required, because the allowances will be classified as noncurrent. The provisions of ASU 2015-17 are effective for public entities with fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-17 as of January 31, 2016 and has reported deferred tax assets and liabilities as noncurrent on the balance sheet.  



Recently Issued Accounting Pronouncements Not Yet Adopted

Revenue from Contracts with Customers

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition model requires identifying the contract, identifying the performance obligations, determining the transaction price, allocating the transaction price to performance obligations and recognizing the revenue upon satisfaction of the performance obligations. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and change in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt ASU 2014-09 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company expects to adopt ASU 2014-09 retrospectively with the cumulative effect of initially applying the update recognized at the date of the adoption along with additional disclosures. The Company’s revenue is primarily generated from the sale of finished goods to customers and those sales predominately contain a single performance obligation, revenue is recognized at the point of sale for the retail segment or when the products have been delivered to the customer for the direct segment. The Company’s review is ongoing as it specifically relates to sales returns and gift cards, and the Company has not yet identified any material changes in the timing of revenue recognition. The Company continues to evaluate the new disclosure requirements of ASU 2014-09 on its consolidated financial statements.













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

 

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 expects to early adopt ASU 2016-02 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company conducts its retail operations through leased stores and therefore, the Company expects the adoption of ASU 2016-02 to have a significant impact on its consolidated financial statements.



Statement of Cash Flows

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for public entities with fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company expects to adopt ASU 2016-18 on January 29, 2018, the first day of the Company’s first quarter for the fiscal year ending February 3, 2019, the Company’s fiscal year 2018. The Company is evaluating the level of impact of adopting ASU 2016-18 will have on the Company’s consolidated financial statements.











 

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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 29, 2017 (“2016 Form 10-K”).

The three and nine months of fiscal 2017 and fiscal 2016 represent our 13 and 39-week periods ended October 29, 2017 and October 30, 2016, respectively.

Unless the context indicates otherwise, the terms the “Company,” “Duluth,” “Duluth Trading,” “we,” “our,” or “us” are used to refer to Duluth Holdings Inc. and its subsidiary on a consolidated basis.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. All statements other than statements of historical or current facts included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “could,” “estimate,” “expect,” “project,” “plan,” “potential,” “intend,” “believe,” “may,” “might,” “will,” “objective,” “should,” “would,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenue, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties, including the risks and uncertainties described under Part I, Item 1A “Risk Factors,” in our 2016 Form 10-K, which factors are incorporated by reference herein. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements.

We undertake no obligation to update or revise these forward-looking statements, except as required under the federal securities laws.

Overview

We are a rapidly growing lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through our own direct and retail channels. The direct segment, consisting of our website and catalogs, offers products nationwide and represented 64.7% and 69.2% of our consolidated net sales for the three and nine months ended October 29, 2017, respectively, and 78.0% and 82.6% of our consolidated net sales for the three and nine months ended October 30, 2016, respectively. In 2010, we added retail to our omni-channel platform with the opening of our first store. Since then, we have expanded our retail presence, and as of October 29, 2017, we operated 23 retail stores and three outlet stores. Net sales for our retail segment represented 35.3% and 30.8% of consolidated  net sales for the three and nine months ended October 29, 2017, and 22.0% and 17.4% of consolidated net sales for the three and nine months ended October 30, 2016, 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 31 consecutive quarters through October 29, 2017;

·

Net sales in fiscal 2017 third quarter increased by 25.0%  over the prior year third quarter to $83.7 million and net sales in the fiscal 2017 nine months increased by 25.9% over the prior year nine months to $253.6 million;

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·

Net loss of $0.8 million in fiscal 2017  third quarter compared to the prior year third quarter net income of $0.5 million and net income in the fiscal 2017 nine months decreased by 47.8%  over the prior year nine months to $3.8 million; 

·

Adjusted EBITDA in fiscal 2017 third quarter decreased by 24.9% over the prior year third quarter to $1.9 million and adjusted EBITDA in the fiscal 2017 nine months decreased by 15.2% over the prior year nine months to $14.0 million; and

·

Our retail stores have achieved and are expected to have an average payback of less than two years.

See “Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our net income to EBITDA and EBITDA to Adjusted EBITDA, both of which are non-U.S. GAAP financial 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 customer receipt of the product, while retail sales are recognized at the point of sale. We also use net sales as one of the key financial metrics in determining our annual bonus compensation for our employees.

Comparable Store Sales

Comparable store sales are generally calculated based upon retail stores that were open at least twelve full fiscal months as of the end of the reporting period. Our outlet stores are not included in the comparable store sales calculations.

Comparable store sales allow us to evaluate how our retail store base is performing by measuring the change in period over-period net sales in stores that have been open for twelve fiscal months or more. Some of our competitors and other retailers calculate comparable store sales differently than we do; as a result, our comparable store sales may not be comparable to similar data made available by other companies. We have excluded comparable store sales data from this Form 10-Q due to the limited number of comparable retail stores as of October 29, 2017.

Gross Profit

Gross profit is equal to our net sales less cost of goods sold. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of goods sold includes the direct cost of 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. 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.

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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.

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

 

Nine Months Ended

 



 

October 29, 2017

 

October 30, 2016

 

October 29, 2017

 

October 30, 2016

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct net sales

 

$

54,146 

 

$

52,271 

 

$

175,588 

 

$

166,437 

 

Retail net sales

 

 

29,583 

 

 

14,737 

 

 

78,054 

 

 

35,026 

 

Net sales

 

 

83,729 

 

 

67,008 

 

 

253,642 

 

 

201,463 

 

Cost of goods sold (excluding depreciation and amortization)

 

 

36,302 

 

 

28,260 

 

 

108,649 

 

 

84,102 

 

Gross profit

 

 

47,427 

 

 

38,748 

 

 

144,993 

 

 

117,361 

 

Selling, general and administrative expenses

 

 

48,039 

 

 

37,929 

 

 

137,467 

 

 

105,215 

 

Operating (loss) income

 

 

(612)

 

 

819 

 

 

7,526 

 

 

12,146 

 

Interest expense

 

 

661 

 

 

33 

 

 

1,199 

 

 

108 

 

Other income, net

 

 

73 

 

 

33 

 

 

175 

 

 

163 

 

(Loss) income before income taxes

 

 

(1,200)

 

 

819 

 

 

6,502 

 

 

12,201 

 

Income tax (benefit) expense

 

 

(454)

 

 

305 

 

 

2,480 

 

 

4,691 

 

Net (loss) income

 

 

(746)

 

 

514 

 

 

4,022 

 

 

7,510 

 

Less: Net income attributable to
   noncontrolling interest

 

 

70 

 

 

52 

 

 

199 

 

 

188 

 

Net (loss) income attributable to controlling interest

 

$

(816)

 

$

462 

 

$

3,823 

 

$

7,322 

 

Percentage of Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct net sales

 

 

64.7 

%

 

78.0 

%

 

69.2 

%

 

82.6 

%

Retail net sales

 

 

35.3 

%

 

22.0 

%

 

30.8 

%

 

17.4 

%

Net sales

 

 

100.0 

%

 

100.0 

%

 

100.0 

%

 

100.0 

%

Cost of goods sold (excluding depreciation and amortization)

 

 

43.4 

%

 

42.2 

%

 

42.8 

%

 

41.7 

%

Gross profit

 

 

56.6 

%

 

57.8 

%

 

57.2 

%

 

58.3 

%

Selling, general and administrative expenses

 

 

57.4 

%

 

56.6 

%

 

54.2 

%

 

52.2 

%

Operating (loss) income

 

 

(0.7)

%