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Duluth Holdings Inc. Announces Third Quarter Fiscal 2019 Financial Results

December 5, 2019 8:30 AM

MOUNT HOREB, Wis., Dec. 05, 2019 (GLOBE NEWSWIRE) -- Duluth Holdings Inc. (dba, Duluth Trading Company) (“Duluth Trading” or the “Company”) (NASDAQ: DLTH), a lifestyle brand of men’s and women’s casual wear, workwear and accessories, today announced its financial results for the fiscal third quarter ended November 3, 2019.

Highlights for the Third Quarter Ended November 3, 2019

1See Reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA in the accompanying financial tables.

Management Commentary

“We are pleased to report healthy top-line growth of 12% and improved third-quarter operating margin and earnings growth on a year-over-year basis,” said Stephen L. Schlecht, Founder and Chief Executive Officer of Duluth Trading. “Our entire team has been hard at work to set the stage for the all-important holiday shopping season and I believe we entered the fourth quarter better prepared to serve our customers than any time in the last two years.”

Operating Results for the Third Quarter Ended November 3, 2019

Net sales increased 12.2%, to $119.8 million, compared to $106.7 million in the same period a year ago. Net sales were driven by a 2.9% growth in direct net sales and 24.1% growth in retail net sales, with increases in both our men’s and women’s businesses. At the end of the third quarter, the company had 58 stores compared to 43 stores in the same period a year ago.

Gross profit increased 7.2%, to $65.4 million, or 54.6% of net sales, compared to $61.0 million, or 57.1% of net sales, in the corresponding prior-year period. The 250-basis point decrease in gross margin rate was primarily attributable to a decrease in product margins due to additional global promotions, coupled with recent clearance activity.

Selling, general and administrative expenses increased 0.8% to $64.0 million, compared to $63.5 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses decreased 600 basis points to 53.5%, compared to 59.5% in the corresponding prior-year period. As a percentage of net sales, general and administrative expenses decreased 50 basis points to 22.1%, compared to 22.6% in the corresponding prior-year period, primarily due to leverage gained from a higher mix of retail sales. As a percentage of net sales, selling expenses decreased 110 basis points to 15.4%, compared to 16.5% in the corresponding prior-year period, largely due to gained efficiencies at both the distribution center and call center. As a percentage of net sales, advertising and marketing costs decreased 440 basis points to 16.0%, compared to 20.4% in the corresponding prior-year period, primarily due to lower catalog circulation and advertising leverage gained from a higher mix of retail sales.

Balance Sheet and Liquidity

The Company ended the quarter with a cash balance of $2.2 million, net working capital of $108.7 million, $20.0 million outstanding on its $50.0 million term loan, and $70.5 million outstanding on its $80.0 million revolving line of credit.

Fiscal 2019 Outlook

The Company reaffirmed its fiscal 2019 outlook as follows:

1See Reconciliation of forecasted net income to forecasted EBITDA and forecasted EBITDA to forecasted Adjusted EBITDA in the accompanying financial tables.2Fiscal 2019 capital expenditures primarily include the opening of 15 retail stores, investments in technology and infrastructure improvements.

The following table recaps the Company’s fiscal 2019 stores opened as well as signed new store leases and the anticipated opening timeframes.

Gross
Location Timing Square Footage
Friendswood, TX Opened March 7, 2019 16,026
Katy, TX Opened March 8, 2019 16,000
Wichita, KS Opened March 21, 2019 15,385
Spokane Valley, WA Opened April 11, 2019 15,656
Jacksonville, FL Opened May 2, 2019 14,557
Rogers, AR Opened May 16, 2019 15,656
Danbury, CT Opened May 23, 2019 9,792
Madison, AL Opened June 6, 2019 15,656
Kennesaw, GA Opened June 28, 2019 19,620
Round Rock, TX Opened September 5, 2019 15,536
Hoover, AL Opened September 26, 2019 15,656
Sandy, UT Opened November 1, 2019 15,602
Bloomington, MN Opened November 7, 2019 1,663
Franklin, TN Opened November 14, 2019 11,940
Knoxville, TN Opened November 15, 2019 15,385
Henrico, VA Q1 Fiscal 2020 16,828
Springfield, OR Q1 Fiscal 2020 20,388
Orland Park, IL Q2 Fiscal 2020 10,000
Roseville, CA Q2 Fiscal 2020 15,000
Florence, KY Q3 Fiscal 2020 11,441
Cherry Hill, NJ Fiscal 2021 11,441

Conference Call Information

A conference call and audio webcast with analysts and investors will be held on Thursday, December 5, 2019 at 9:30 am Eastern Time, to discuss the results and answer questions.

Investors can pre-register for the earnings conference call to expedite their entry into the call and avoid waiting for a live operator. To pre-register for the call, please visit http://dpregister.com/10137186 and enter your contact information. You will then be issued a personalized phone number and pin to dial into the live conference call. Investors can pre-register any time prior to the start of the conference call.

About Duluth Trading

Duluth Trading is a rapidly growing lifestyle brand for the Modern, Self-Reliant American. Based in Mount Horeb, Wisconsin, we offer high quality, solution-based casual wear, workwear and accessories for men and women who lead a hands-on lifestyle and who value a job well-done. We provide our customers an engaging and entertaining experience. Our marketing incorporates humor and storytelling that conveys the uniqueness of our products in a distinctive, fun way, and our products are sold exclusively through our content-rich website, catalogs, and “store like no other” retail locations. We are committed to outstanding customer service backed by our “No Bull Guarantee” - if it’s not right, we’ll fix it. Visit our website at www.duluthtrading.com

Non-GAAP Measurements

Management believes that non-GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Within this release, including the tables attached hereto, reference is made to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). See attached Table “Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA,” for a reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA for the three and nine months ended November 3, 2019, versus the three and nine months ended October 28, 2018. See also attached Table “Reconciliation of Forecasted Net Income to Forecasted EBITDA and Forecasted EBITDA to Forecasted Adjusted EBITDA,” for a reconciliation of forecasted net income to forecasted EBITDA and forecasted EBITDA to forecasted adjusted EBITDA for the fiscal year ending February 2, 2020. Adjusted EBITDA is a metric used by management and frequently used by the financial community, which provides insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. The Company provides this information to investors to assist in comparisons of past, present and future operating results and to assist in highlighting the results of on-going operations. While the Company’s management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace the Company’s GAAP financial results and should be read in conjunction with those GAAP results.

Forward-Looking Statements

This press release includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts included in this press release, including statements concerning Duluth Trading's plans, objectives, goals, beliefs, business strategies, future events, business conditions, its results of operations, financial position and its business outlook, business trends and certain other information herein are forward-looking statements, including statements regarding Duluth Trading’s ability to execute on its growth strategies, statements under the heading “Fiscal 2019 Outlook” and the forecasted results of operations in the Table “Reconciliation of Forecasted Net Income to Forecasted EBITDA and Forecasted EBITDA to Forecasted Adjusted EBITDA.” You can identify forward-looking statements by the use of words such as “may,” ”might,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “believe,” “estimate,” “project,” “target,” “predict,” “intend,” “future,” “budget,” “goals,” “potential,” “continue,” “design,” “objective,” “forecasted,” “would” and other similar expressions. The forward-looking statements are not historical facts, and are based upon Duluth Trading's current expectations, beliefs, estimates, and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond Duluth Trading's control. Duluth Trading's expectations, beliefs and projections are expressed in good faith, and Duluth Trading believes there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, estimates, and projections will be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the forward-looking statements, including, among others, the risks, uncertainties, and factors set forth under Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC on April 19, 2019, and other factors as may be periodically described in Duluth Trading’s subsequent filings with the SEC. These risks and uncertainties include, but are not limited to, the following: our ability to maintain and enhance a strong brand image; our ability to successfully open new stores; effectively adapting to new challenges associated with our expansion into new geographic markets; generating adequate cash from our existing stores to support our growth; the inability to maintain the performance of a maturing store portfolio; the impact of changes in corporate tax regulations; identifying and responding to new and changing customer preferences; the success of the locations in which our stores are located; our ability to attract and retain customers in the various retail venues and locations in which our stores are located; competing effectively in an environment of intense competition; our ability to adapt to significant changes in sales due to the seasonality of our business; price reductions or inventory shortages resulting from failure to purchase the appropriate amount of inventory in advance of the season in which it will be sold; increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment; failure of our information technology systems to support our current and growing business, before and after our planned upgrades; and other factors that may be disclosed in our SEC filings or otherwise. Forward-looking statements speak only as of the date the statements are made. Duluth Trading assumes no obligation to update forward-looking statements to reflect actual results, subsequent events or circumstances or other changes affecting forward-looking information except to the extent required by applicable securities laws.

Investor Contacts:Donni Case (310) 622-8224Margaret Boyce (310) 622-8247Financial Profiles, Inc.[email protected]

(Tables Follow)

DULUTH HOLDINGS INC.Condensed Consolidated Balance Sheets(Unaudited) (Amounts in thousands)

November 3, 2019 February 3, 2019
ASSETS
Current Assets:
Cash $2,187 $731
Accounts receivable 340 28
Other receivables 6,559 4,611
Inventory, net 183,115 97,685
Prepaid expenses & other current assets 11,170 12,640
Prepaid catalog costs 892 2,503
Total current assets 204,263 118,198
Property and equipment, net 139,134 167,109
Operating lease right-of-use assets 119,323 —
Finance lease right-of-use assets, net 45,313 —
Restricted cash 1,776 2,354
Available-for-sale security 6,499 6,295
Goodwill 402 402
Other intangible asset, net 287 306
Other assets, net 1,120 641
Total assets $518,117 $295,305
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $55,351 $25,363
Accrued expenses and other current liabilities 27,750 26,530
Income taxes payable — 218
Current portion of operating lease liabilities 10,296 —
Current portion of finance lease liabilities 1,584 —
Current maturities of long-term debt1 541 500
Total current liabilities 95,522 52,611
Operating lease liabilities, less current maturities 104,352 —
Long-term line of credit 70,470 16,542
Finance lease liabilities, less current maturities 38,183 —
Long-term debt, less current maturities1 27,880 28,283
Long-term delayed draw term loan 20,000 —
Deferred tax liabilities 8,732 9,722
Finance lease obligations under build-to-suit leases — 23,034
Deferred rent obligations, less current maturities — 5,003
Total liabilities 365,139 135,195
Commitments and contingencies
Shareholders' equity:
Treasury stock (406) (92)
Capital stock 90,451 89,849
Retained earnings 63,214 70,592
Accumulated other comprehensive income, net 214 —
Total shareholders' equity of Duluth Holdings Inc. 153,473 160,349
Noncontrolling interest (495) (239)
Total shareholders' equity 152,978 160,110
Total liabilities and shareholders' equity $518,117 $295,305
1 Represents debt of the variable interest entity, TRI Holdings, LLC, that is consolidated in accordance with ASC 810, Consolidation. Duluth Trading Company is not the guarantor nor the obligor of this debt.

DULUTH HOLDING INC.Consolidated Statements of Operations(Unaudited)(Amounts in thousands, except per share figures)

Three Months Ended Nine Months Ended
November 3, 2019 October 28, 2018 November 3, 2019 October 28, 2018
Net sales $119,768 $106,701 $355,975 $317,561
Cost of goods sold (excluding depreciation and amortization) 54,403 45,730 164,888 138,410
Gross profit 65,365 60,971 191,087 179,151
Selling, general and administrative expenses 64,037 63,534 196,128 172,075
Operating income (loss) 1,328 (2,563) (5,041) 7,076
Interest expense 1,500 1,583 3,131 3,638
Other income, net 58 3 254 168
(Loss) income before income taxes (114) (4,143) (7,918) 3,606
Income tax (benefit) expense (203) (1,067) (2,209) 913
Net income (loss) 89 (3,076) (5,709) 2,693
Less: Net (loss) income attributable to noncontrolling interest (93) 74 (256) 157
Net income (loss) attributable to controlling interest $182 $(3,150) $(5,453) $2,536
Basic earnings (loss) per share (Class A and Class B):
Weighted average shares of common stock outstanding 32,322 32,098 32,299 32,065
Net income (loss) per share attributable to controlling interest $ 0.01 $ (0.10) $ (0.17) $ 0.08
Diluted earnings (loss) per share (Class A and Class B):
Weighted average shares and equivalents outstanding 32,322 32,098 32,299 32,402
Net income (loss) per share attributable to controlling interest $ 0.01 $ (0.10) $ (0.17) $ 0.08

DULUTH HOLDINGS INC.Consolidated Statements of Cash Flows(Unaudited)(Amounts in thousands)

Nine Months Ended
November 3, 2019 October 28, 2018
Cash flows from operating activities:
Net (loss) income $(5,709) $2,693
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 15,934 8,187
Stock based compensation 282 1,305
Deferred income taxes (914) (150)
Changes in operating assets and liabilities:
Accounts receivable (312) (287)
Other receivables (1,948) (2,554)
Inventory (85,430) (44,776)
Prepaid expense & other current assets 2,568 (4,951)
Deferred catalog costs 1,611 (1,416)
Trade accounts payable 29,862 19,126
Income taxes payable (218) (7,780)
Accrued expenses and deferred rent obligations (3,350) 7,101
Net cash used in operating activities (47,624) (23,502)
Cash flows from investing activities:
Purchases of property and equipment (20,899) (45,878)
Capital contributions towards build-to-suit stores (3,712) —
Principal receipts from available-for-sale security 85 —
Change in other assets (15) (439)
Net cash used in investing activities (24,541) (46,317)
Cash flows from financing activities:
Proceeds from line of credit 225,079 100,982
Payments on line of credit (171,152) (35,982)
Proceeds from other borrowings 20,000 —
Payments on long term debt (362) (60)
Payments on finance lease obligations (528) (4)
Proceeds from finance lease obligations — 941
Shares withheld for tax payments on vested restricted shares (314) (35)
Other 320 87
Net cash provided by financing activities 73,043 65,929
Increase (decrease) in cash and restricted cash 878 (3,890)
Cash and restricted cash at beginning of period 3,085 7,083
Cash and restricted cash at end of period $3,963 $3,193
Supplemental disclosure of cash flow information:
Interest paid $3,301 $3,362
Income taxes paid $555 $10,055
Supplemental disclosure of non-cash information:
Property and equipment acquired under build-to-suit leases $— $3,583
Unpaid liability to acquire property and equipment $378 $3,001

DULUTH HOLDINGS INC.Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA(Unaudited)(Amounts in thousands)

Three Months Ended Nine Months Ended
November 3, 2019 October 28, 2018 November 3, 2019 October 28, 2018
Net income (loss) $89 $(3,076) $(5,709) $2,693
Depreciation and amortization 6,529 3,118 15,934 8,187
Interest expense 1,500 1,583 3,131 3,638
Amortization of build-to-suit operating leases capital contribution 94 — 573 —
Income tax (benefit) expense (203) (1,067) (2,209) 913
EBITDA $8,009 $558 $11,720 $15,431
Stock based compensation (747) 447 282 1,305
Adjusted EBITDA $7,262 $1,005 $12,002 $16,736

DULUTH HOLDINGS INC.Segment Information(Unaudited)(Amounts in thousands)

Three Months Ended Nine Months Ended
November 3, 2019 October 28, 2018 November 3, 2019 October 28, 2018
Net sales
Direct $61,581 $59,827 $187,549 $186,872
Retail 58,187 46,874 168,426 130,689
Total net sales $119,768 $106,701 $355,975 $317,561
Operating income (loss)
Direct $(5,229) $(8,357) $(22,054) $(9,362)
Retail 6,557 5,794 17,013 16,438
Total operating income (loss) 1,328 (2,563) (5,041) 7,076
Interest expense 1,500 1,583 3,131 3,638
Other income, net 58 3 254 168
(Loss) income before income taxes $(114) $(4,143) $(7,918) $3,606

DULUTH HOLDINGS INC.Net Sales by Business(Unaudited)(Amounts in thousands)

Three Months Ended Nine Months Ended
November 3, 2019 October 28, 2018 November 3, 2019 October 28, 2018
Net sales
Men's $80,049 $72,789 $235,939 $216,143
Women's 33,758 28,459 101,673 85,244
Hard goods/other 5,961 5,453 18,363 16,174
Total net sales $119,768 $106,701 $355,975 $317,561

DULUTH HOLDINGS INC.Reconciliation of Forecasted Net Income to Forecasted EBITDA and Forecasted EBITDA to Forecasted Adjusted EBITDAFor the Fiscal Year Ending February 2, 2020(Unaudited)(Amounts in thousands)

Low High
Forecasted
Net income $19,500 $21,500
Depreciation and amortization 19,900 20,900
Interest expense 4,600 4,600
Amortization of build-to-suit operating leases capital contribution 800 800
Income tax expense 5,500 6,300
EBITDA $50,300 $54,100
Stock based compensation 700 900
Adjusted EBITDA $51,000 $55,000

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Source: Duluth Trading Company

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