Results

Duluth Holdings Inc.

12/03/2021 | Press release | Distributed by Public on 12/03/2021 10:48

Quarterly Report (Form 10-Q)

dlth-20211031x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________

þ

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

For the quarterly period ended October 31, 2021

OR

o

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)

201 East Front Street

Mount Horeb, Wisconsin

53572

(Address of principal executive offices)

(Zip Code)

(608) 424-1544

(Registrant's telephone number, including area code)

_________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class B Common Stock, No Par Value

DLTH

NASDAQGlobal Select Market

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 þNo o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þNo o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

o

Accelerated Filer

þ

Non-accelerated Filer

o

Smaller Reporting Company

þ

Emerging Growth Company

o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oNo þ

The number of shares outstanding of the Registrant's Class A common stock, no par value, as of December 1, 2021, was 3,364,200.

The number of shares outstanding of the Registrant's Class B common stock, no par value, as of December 1, 2021, was 29,698,318.

DULUTH HOLDINGS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED October 31, 2021

INDEX

Part I-Financial Information

Page

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets as of October 31, 2021 and January 31, 2021 (Unaudited)

3

Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2021 and November 1, 2020 (Unaudited)

5

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 31, 2021 and November 1, 2020 (Unaudited)

6

Condensed Consolidated Statement of Shareholders' Equity for the nine months ended October 31, 2021 (Unaudited)

7

Condensed Consolidated Statement of Shareholders' Equity for the nine months ended November 1, 2020 (Unaudited)

8

Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2021 and November 1, 2020 (Unaudited)

9

Notes to Condensed Consolidated Financial Statements (Unaudited)

10

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

28

Part II-Other Information

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 6.

Exhibits

30

Signatures

31


2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DULUTH HOLDINGS INC.

Condensed Consolidated Balance Sheets - Assets

(Unaudited)

(Amounts in thousands)

October 31, 2021

January 31, 2021

ASSETS

Current Assets:

Cash and cash equivalents

$

20,390

$

47,221

Receivables

5,133

2,270

Income tax receivable

605

-

Inventory, less reserves of $1,439and $1,600, respectively

165,078

149,052

Prepaid expenses & other current assets

14,787

10,203

Prepaid catalog costs

635

1,014

Total current assets

206,628

209,760

Property and equipment, net

114,579

124,237

Operating lease right-of-use assets

124,164

117,490

Finance lease right-of-use assets, net

50,866

53,468

Available-for-sale security

6,598

6,111

Other assets, net

5,382

4,511

Total assets

$

508,217

$

515,577

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


3

Table of Contents

DULUTH HOLDINGS INC.

Condensed Consolidated Balance Sheets - Liabilities and Shareholders' Equity

(Unaudited)

(Amounts in thousands)

October 31, 2021

January 31, 2021

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Trade accounts payable

$

59,157

$

33,647

Accrued expenses and other current liabilities

41,832

37,686

Income taxes payable

-

7,579

Current portion of operating lease liabilities

12,362

11,050

Current portion of finance lease liabilities

2,679

2,629

Current portion of Duluth long-term debt

-

2,500

Current maturities of TRI long-term debt

675

623

Total current liabilities

116,705

95,714

Operating lease liabilities, less current maturities

110,370

104,287

Finance lease liabilities, less current maturities

40,954

43,299

Duluth long-term debt, less current maturities

-

45,750

TRI long-term debt, less current maturities

26,773

27,229

Deferred tax liabilities

8,092

8,200

Total liabilities

302,894

324,479

Shareholders' equity:

Preferred stock, nopar value; 10,000shares authorized; noshares

issued or outstanding as of October 31, 2021 and January 31, 2021

-

-

Common stock (Class A), nopar value; 10,000shares authorized;

3,364shares issued and outstanding as of October 31, 2021 and January 31, 2021

-

-

Common stock (Class B), nopar value; 200,000shares authorized;

29,782shares issued and 29,703shares outstanding as of October 31, 2021 and

29,530shares issued and 29,477shares outstanding as of January 31, 2021

-

-

Treasury stock, at cost; 79and 53shares as of October 31, 2021 and

January 31, 2021, respectively

(998)

(628)

Capital stock

94,815

92,875

Retained earnings

113,509

101,166

Accumulated other comprehensive income

494

48

Total shareholders' equity of Duluth Holdings Inc.

207,820

193,461

Noncontrolling interest

(2,497)

(2,363)

Total shareholders' equity

205,323

191,098

Total liabilities and shareholders' equity

$

508,217

$

515,577

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


4

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 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

Net sales

$

145,277

$

135,531

$

427,823

$

382,823

Cost of goods sold (excluding depreciation and amortization)

61,627

64,494

196,204

186,982

Gross profit

83,650

71,037

231,619

195,841

Selling, general and administrative expenses

78,792

68,189

211,779

202,175

Operating income (loss)

4,858

2,848

19,840

(6,334)

Interest expense

900

1,643

3,390

4,771

Other (loss) income, net

(265)

87

(193)

(104)

Income (loss) before income taxes

3,693

1,292

16,257

(11,209)

Income tax expense (benefit)

930

393

4,048

(2,827)

Net income (loss)

2,763

899

12,209

(8,382)

Less: Net loss attributable to noncontrolling interest

(43)

(41)

(134)

(128)

Net income (loss) attributable to controlling interest

$

2,806

$

940

$

12,343

$

(8,254)

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

Weighted average shares of common stock outstanding

32,649

32,476

32,605

32,431

Net income (loss) per share attributable to controlling interest

$

0.09

$

0.03

$

0.38

$

(0.25)

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

Weighted average shares and equivalents outstanding

32,761

32,606

32,825

32,431

Net income (loss) per share attributable to controlling interest

$

0.09

$

0.03

$

0.38

$

(0.25)

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


5

Table of Contents

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

Three Months Ended

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

Net income (loss)

$

2,763

$

899

$

12,209

$

(8,382)

Other comprehensive income

Securities available-for sale:

Unrealized security (loss) income arising during the period

(94)

51

595

(314)

Income tax (benefit) expense

(24)

13

149

(82)

Other comprehensive (loss) income

(70)

38

446

(232)

Comprehensive income (loss)

2,693

937

12,655

(8,614)

Comprehensive loss attributable to noncontrolling interest

(43)

(41)

(134)

(128)

Comprehensive income (loss) attributable
to controlling interest

$

2,736

$

978

$

12,789

$

(8,486)

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


6

Table of Contents

DULUTH HOLDINGS INC.

Condensed Consolidated Statement of Shareholders' Equity

(Unaudited)

(Amounts in thousands)

Nine Months Ended October 31, 2021

Accumulated

Noncontrolling

Capital stock

other

interest in

Total

Treasury

Retained

comprehensive

variable interest

shareholders'

Shares

Amount

stock

earnings

income

entity

equity

Balance at January 31, 2021

32,841

$

92,875

$

(628)

$

101,166

$

48

$

(2,363)

$

191,098

Issuance of common stock

101

132

-

-

-

-

132

Stock-based compensation

-

371

-

-

-

-

371

Restricted stock forfeitures

(1)

-

-

-

-

-

-

Restricted stock surrendered for taxes

(24)

-

(358)

-

-

-

(358)

Other comprehensive loss

-

-

-

-

202

-

202

Net income (loss)

-

-

-

544

-

(46)

498

Balance at May 2, 2021

32,917

$

93,378

$

(986)

$

101,711

$

250

$

(2,409)

$

191,944

Issuance of common stock

142

139

-

-

-

-

139

Stock-based compensation

-

563

-

-

-

-

563

Restricted stock forfeitures

(2)

-

-

-

-

-

-

Restricted stock surrendered for taxes

-

-

(5)

-

-

-

(5)

Other comprehensive income

-

-

-

-

314

-

314

Net income (loss)

-

-

-

8,992

-

(45)

8,947

Balance at August 1, 2021

33,057

$

94,080

$

(991)

$

110,703

$

564

$

(2,454)

$

201,902

Issuance of common stock

13

171

-

-

-

-

171

Stock-based compensation

-

564

-

-

-

-

564

Restricted stock forfeitures

(2)

-

-

-

-

-

-

Restricted stock surrendered for taxes

(1)

-

(7)

-

-

-

(7)

Other comprehensive income

-

-

-

-

(70)

-

(70)

Net income (loss)

-

-

-

2,806

-

(43)

2,763

Balance at October 31, 2021

33,067

$

94,815

$

(998)

$

113,509

$

494

$

(2,497)

$

205,323

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


7

Table of Contents

DULUTH HOLDINGS INC.

Condensed Consolidated Statement of Shareholders' Equity

(Unaudited)

(Amounts in thousands)

Nine Months Ended November 1, 2020

Accumulated

Noncontrolling

Capital stock

other

interest in

Total

Treasury

Retained

comprehensive

variable interest

shareholders'

Shares

Amount

stock

earnings

income

entity

equity

Balance at February 2, 2020

32,536

$

90,902

$

(407)

$

87,589

$

188

$

(2,166)

$

176,106

Issuance of common stock

227

115

-

-

-

-

115

Stock-based compensation

-

434

-

-

-

-

434

Restricted stock forfeitures

(1)

-

-

-

-

-

-

Restricted stock surrendered for taxes

(18)

-

(107)

-

-

-

(107)

Other comprehensive loss

-

-

-

-

(518)

-

(518)

Net loss

-

-

-

(15,135)

-

(44)

(15,179)

Balance at May 3, 2020

32,744

$

91,451

$

(514)

$

72,454

$

(330)

$

(2,210)

$

160,851

Issuance of common stock

98

98

-

-

-

-

98

Stock-based compensation

-

372

-

-

-

-

372

Restricted stock forfeitures

(15)

-

-

-

-

-

-

Restricted stock surrendered for taxes

(13)

-

(67)

-

-

-

(67)

Other comprehensive income

-

-

-

-

248

-

248

Net income (loss)

-

-

-

5,941

-

(43)

5,898

Balance at August 2, 2020

32,814

$

91,921

$

(581)

$

78,395

$

(82)

$

(2,253)

$

167,400

Issuance of common stock

17

133

-

-

-

-

133

Stock-based compensation

-

331

-

-

-

-

331

Restricted stock forfeitures

(3)

-

-

-

-

-

-

Restricted stock surrendered for taxes

-

-

(41)

-

-

-

(41)

Other comprehensive income

-

-

-

-

38

-

38

Net income (loss)

-

-

-

940

-

(41)

899

Balance at November 1, 2020

32,828

$

92,385

$

(622)

$

79,335

$

(44)

$

(2,294)

$

168,760

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


8

Table of Contents

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

Nine Months Ended

October 31, 2021

November 1, 2020

Cash flows from operating activities:

Net income (loss)

$

12,209

$

(8,382)

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

Depreciation and amortization

21,822

21,209

Stock based compensation

1,612

1,263

Deferred income taxes

(257)

3,463

Loss on disposal of property and equipment

404

304

Changes in operating assets and liabilities:

Receivables

(2,863)

(64)

Income taxes receivable

(605)

(3,549)

Inventory

(16,026)

(65,554)

Prepaid expense & other current assets

(1,571)

1,154

Software hosting implementation costs, net

(2,939)

-

Deferred catalog costs

379

94

Trade accounts payable

24,944

21,424

Income taxes payable

(7,579)

(3,427)

Accrued expenses and deferred rent obligations

4,117

2,667

Other assets

(918)

-

Noncash lease impacts

29

784

Net cash provided by (used in) operating activities

32,758

(28,614)

Cash flows from investing activities:

Purchases of property and equipment

(9,108)

(11,059)

Capital contributions towards build-to-suit stores

-

(520)

Principal receipts from available-for-sale security

108

96

Proceeds from disposals

55

-

Net cash used in investing activities

(8,945)

(11,483)

Cash flows from financing activities:

Proceeds from line of credit

5,000

84,588

Payments on line of credit

(5,000)

(60,894)

Proceeds from delayed draw term loan

-

32,500

Payments on delayed draw term loan

(48,250)

(3,625)

Payments on TRI long term debt

(457)

(354)

Payments on finance lease obligations

(1,894)

(1,325)

Payments of tax withholding on vested restricted shares

(370)

(215)

Other

327

(18)

Net cash (used in) provided by financing activities

(50,644)

50,657

(Decrease) increase in cash, cash equivalents

(26,831)

10,560

Cash, cash equivalents and restricted cash at beginning of period

47,221

2,240

Cash, cash equivalents and restricted cash at end of period

$

20,390

$

12,800

Supplemental disclosure of cash flow information:

Interest paid

$

3,328

$

4,730

Income taxes paid

$

12,585

$

40

Supplemental disclosure of non-cash information:

Unpaid liability to acquire property and equipment

$

2,518

$

657

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 primarily through the Company's own omnichannel platform. 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 identifies its operating segments according to how its business activities are managed and evaluated. The Company continues to report onereportable external segment, consistent with the Company's omnichannel business approach. The Company's revenues generated outside the United States were insignificant.

The Company has twoclasses 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 tenvotes 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 onevote 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 TRI Holdings, LLC ("TRI") as a variable interest entity (see Note 6 "Variable Interest Entity" for further information). All significant intercompany balances and transactions have been eliminated in consolidation.

The Company's fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2021 is a 52-week period and ends on January 30, 2022. Fiscal 2020 was a 52-week period and ended on January 31, 2021. The three months of fiscal 2021 and fiscal 2020 represent the Company's 13 week periods ended October 31, 2021 and November 1, 2020, respectively.

The accompanying condensed consolidated financial statements as of and for the three and nine months ended October 31, 2021 and November 1, 2020 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 31, 2021 and November 1, 2020. 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 31, 2021.

C. COVID-19

In March 2020, a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place. These impacts are discussed within these notes to the condensed consolidated financial statements.

The ultimate impact of COVID-19 on our operational and financial performance still depends on future developments outside of our control. Given the uncertainty, we cannot reasonably estimate the continued impact on our business and whether that impact will be different than what we have already experienced.

D. Impairment Analysis

As of October 31, 2021 and for the three and nine months then ended, no triggering events or indicators of asset impairment were noted.

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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

E. Inventory

Inventory, consisting of purchased product, is valued at the lower of cost or net realizable value, under the first-in, first-out method. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. Both estimates have calculations that require the Company to make assumptions and apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. Inventory is adjusted periodically to reflect current market conditions, which requires management's judgment that may significantly affect the ending inventory valuation, as well as gross margin.

The reserve for inventory shrinkage is adjusted to reflect the trend of historical physical inventory count results. The Company performs its retail store physical inventory counts in July and the difference between actual and estimated shrinkage, recorded in Cost of goods sold, may cause fluctuations in second fiscal quarter results.

F. Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following:

October 31, 2021

January 31, 2021

(in thousands)

Prepaid expenses & other current assets

Pending returns inventory, net

$

1,993

$

2,490

Current software hosting implementation costs, net

1,432

1,149

Other prepaid expenses

11,362

6,564

Prepaid expenses & other current assets

$

14,787

$

10,203

Other assets, net

Goodwill

$

402

$

402

Intangible assets, net

251

264

Non-current software hosting implementation costs

2,866

2,755

Other assets, net

1,863

1,090

Other assets, net

$

5,382

$

4,511

G. Seasonality of Business

The Company's business is affected by the pattern of seasonality common to most 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.

H. Cash and cash equivalents

The Company considers short-term investments with original maturities of three months or less when purchased to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within 2 to 4 days of the original sales transaction and are considered to be cash equivalents.

I. Reclassifications

Certain reclassifications have been made to the 2020 financial statements in order to conform to the 2021 presentation. There were no changes to previously reported shareholders' equity or net income (loss) as a result of the reclassifications.

J. Significant Accounting Policies

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 31, 2021.


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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

2. LEASES

Based on the criteria set forth in ASC Topic 842, Leases ("ASC 842"), the Company recognizes ROU assets and lease liabilities related to leases on the Company's consolidated balance sheets. The Company determines if an arrangement is, or contains, a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities reflect the obligation to make lease payments arising from the lease. At any given time during the lease term, the lease liability represents the present value of the remaining lease payments and the ROU asset is measured at the amount of the lease liability, adjusted for pre-paid rent, unamortized initial direct costs and the remaining balance of lease incentives received. Both the lease ROU asset and liability are reduced to zeroat the end of the lease.

The Company leases retail space under non-cancelable lease agreements, which expire on various dates through 2041. Substantially all of these arrangements are store leases. Store leases generally have initial lease terms ranging from five yearsto fifteen yearswith renewal options and rent escalation provisions. At the commencement of a lease, the Company includes only the initial lease term as the option to extend is not reasonably certain. The Company does not record leases with a lease term of 12 months or less on the Company's consolidated balance sheets.

When calculating the lease liability on a discounted basis, the Company applies its estimated discount. The Company bases this discount on a collateralized interest rate as well as publicly available data for instruments with similar characteristics.

In addition to rent payments, leases for retail space contain payments for real estate taxes, insurance costs, common area maintenance, and utilities that are not fixed. The Company accounts for these costs as variable payments and does not include such costs as a lease component.

The expense components of the Company's leases reflected on the Company's consolidated statement of operations were as follows:

Consolidated Statement

Three Months Ended

Nine Months Ended

of Operations

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands)

Finance lease expenses

Amortization of right-of-use
assets

Selling, general and
administrative expenses

$

840

$

778

$

2,518

$

2,092

Interest on lease liabilities

Interest expense

479

483

1,460

1,356

Total finance lease expense

$

1,319

$

1,261

$

3,978

$

3,448

Operating lease expense

Selling, general and
administrative expenses

$

4,806

$

3,915

$

12,606

$

12,149

Amortization of build-to-suit
leases capital contribution

Selling, general and
administrative expenses

321

329

970

977

Variable lease expense

Selling, general and
administrative expenses

2,141

2,744

6,367

6,782

Total lease expense

$

8,587

$

8,249

$

23,921

$

23,356


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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Other information related to leases were as follows:

Nine Months Ended

October 31, 2021

November 1, 2020

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Financing cash flows from finance leases

$

1,894

$

1,325

Operating cash flows from finance leases

$

1,460

$

1,356

Operating cash flows from operating leases

$

11,774

$

11,537

Weighted-average remaining lease term (in years):

Finance leases

12

13

Operating leases

9

10

Weighted-average discount rate:

Finance leases

4.4%

4.4%

Operating leases

4.1%

4.3%

Future minimum lease payments under the non-cancellable leases are as follows as of October 31, 2021:

Fiscal year

Finance

Operating

(in thousands)

2021 (remainder of fiscal year)

$

1,137

$

4,017

2022

4,523

17,520

2023

4,551

17,741

2024

4,736

17,130

2025

5,099

16,380

Thereafter

37,218

74,550

Total future minimum lease payments

$

57,264

$

147,338

Less - Discount

(13,631)

(24,606)

Lease liability

$

43,633

$

122,732

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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

3. DEBT AND CREDIT AGREEMENT

Debt consists of the following:

October 31, 2021

January 31, 2021

(in thousands)

TRI Senior Secured Note

$

23,948

$

24,352

TRI Note

3,500

3,500

$

27,448

$

27,852

Less: current maturities

675

623

TRI long-term debt

$

26,773

$

27,229

Duluth Delayed draw term loan

-

48,250

$

-

$

48,250

Less: current maturities

-

2,500

Duluth long-term debt

$

-

$

45,750

TRI Holdings, LLC

TRI entered into a senior secured note ("TRI Senior Secured Note") with an original balance of $26.7million. The TRI Senior Secured Note is scheduled to mature on October 15, 2038and requires installment payments with an interest rate of 4.95%. See Note 6 "Variable Interest Entities" for further information.

TRI entered into a promissory note ("TRI Note") with an original balance of $3.5million. The TRI Note is scheduled to mature in November 2038 and requires annual interest payments at a rate of 3.05%, with a final balloon payment due in November 2038.

While the above notes are consolidated in accordance with ASC Topic 810, Consolidation, the Company is not the guarantor nor obligor of these notes.

Credit Agreement

On May 17, 2018, the Company entered into a credit agreement (the "Credit Agreement") which provided for borrowing availability of up to $80.0million in revolving credit (the "Revolver"), and borrowing availability of up to $50.0million in a delayed draw term loan ("DDTL"), for a total credit facility of $130.0million. The $80.0million revolving credit facility was scheduled to mature on May 17, 2023. The $50.0million DDTL was available to draw upon in differing amounts through May 17, 2020 and was scheduled to mature on May 17, 2023. Outstanding balances under the DDTL required quarterly principal payments with a final balloon payment at maturity. The Credit Agreement was secured by essentially all Company assets and required 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.

On April 30, 2020, the Credit Agreement was amended to include an incremental DDTL of $20.5million (the "Incremental DDTL") that was available to draw upon before March 31, 2021, and matured on April 29, 2021, for a total credit facility of $150.5million. The loan covenants were also amended to allow for greater flexibility during the Company's peak borrowing periods in fiscal 2020. The interest rate applicable to the Revolver or DDTL was a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR (with a 1% floor) for such interest period plus a margin of 225to 300basis points, based upon the Company's rent adjusted leverage. The interest rate applicable to the Incremental DDTL was also a fixed rate over the aforementioned interest periods equal to LIBOR (with a 1% floor) for such interest period plus a margin of 275to 350basis points.

On May 14, 2021, the Company terminated the Credit Agreement, and entered into a new credit agreement (the "New Credit Agreement"), which was treated as a modification for accounting purposes. The New Credit Agreement matures on May 14, 2026and provides for borrowings of up to $150.0million that are available under a revolving senior credit facility, with a $5.0million sublimit for issuance of standby letters of credit, as well as a $10.0million sublimit for swing line loans. At the Company's option, the interest rate applicable to the revolving senior credit facility will be a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate ("BSBY") plus the applicable rate of 1.25% to 2.00% determined based on the Company's rent adjusted leverage ratio, or (ii) the base rate plus the applicable rate of 0.25% to 1.00% based on the Company's rent adjusted leverage ratio. The New Credit Agreement is secured by essentially all Company assets and requires the Company

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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 New Credit Agreement

As of October 31, 2021 and for the nine months then ended, the Company was in compliance with all financial and non-financial covenants contained within the New Credit Agreement.

4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

October 31, 2021

January 31, 2021

(in thousands)

Salaries and benefits

$

11,181

$

8,826

Deferred revenue

7,400

9,944

Freight

4,939

6,769

Product returns

5,037

5,304

Catalog costs

64

-

Unpaid purchases of property & equipment

1,126

503

Accrued advertising

3,621

1,377

Other

8,464

4,963

Total accrued expenses and other current liabilities

$

41,832

$

37,686

5. FAIR VALUE

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 fair value of the Company's available-for-sale security was valued based on a discounted cash flow method (Level 3), which incorporates the U.S. Treasury yield curve, credit information and an estimate of future cash flows. During the nine months ended October 31, 2021, certain changes in the inputs did impact the fair value of the available-for-sale security. The calculated fair value is based on estimates that are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.


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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The amortized cost and fair value of the Company's available-for-sale security and the corresponding amount of gross unrealized gains and losses recognized in accumulated other comprehensive income are as follows:

October 31, 2021

Cost or

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

(in thousands)

Level 3 security:

Corporate trust

$

5,939

$

659

$

-

$

6,598

January 31, 2021

Cost or

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated

Cost

Gains

Losses

Fair Value

(in thousands)

Level 3 security:

Corporate trust

$

6,047

$

64

$

-

$

6,111

The Company does not intend to sell the available-for-sale-security in the near term and does not believe that it will be required to sell the security. The Company reviews its securities on a quarterly basis to monitor its exposure to other-than-temporary impairment.

Noother-than-temporary impairment was recorded in the unaudited condensed consolidated statements of operations for the nine months ended October 31, 2021 or November 1, 2020.

The following table presents future principal receipts related to the Company's available-for-sale security by contractual maturity as of October 31, 2021.

Amortized

Estimated

Cost

Fair Value

(in thousands)

Within one year

$

159

$

197

After one year through five years

1,077

1,271

After five years through ten years

1,662

1,856

After ten years

3,041

3,274

Total

$

5,939

$

6,598

The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows:

October 31, 2021

January 31, 2021

Carrying Amount

Fair Value

Carrying Amount

Fair Value

(in thousands)

TRI Long-term debt, including short-term portion

$

27,448

$

27,944

$

27,852

$

28,697

The above long-term debt, including short-term portion is attributable to the consolidation of TRI in accordance with ASC Topic 810, Consolidation. The fair value was also based on a discounted cash flow method (Level 3) based on credit information and an estimate of future cash flows.

As of January 31, 2021, the carrying value of the delayed draw term loan approximated its fair value.

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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

6. VARIABLE INTEREST ENTITY

Based upon the criteria set forth in ASC 810, Consolidation, the Company consolidates variable interest entities ("VIEs") in which it has a controlling financial interest and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance; and (b) the obligation to absorb the VIE losses and the right to receive benefits that are significant to the VIE. The Company has determined that it was the primary beneficiary of onevariable interest entity ("VIE") as of October 31, 2021 and January 31, 2021.

The Company leases the Company's headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company invested $6.3million in a trust that loaned funds to TRI for the construction of the Company's headquarters. TRI is a Wisconsin limited liability company whose primary purpose and activity is to own this real property. The Company considers itself the primary beneficiary for TRI as the Company has both the power to direct the activities that most significantly impact the entity's economic performance and is expected to receive benefits that are significant to TRI. As the Company is the primary beneficiary, it consolidates TRI and the lease is eliminated in consolidation. The Company does not consolidate the trust as the Company is not the primary beneficiary.

The condensed consolidated balance sheets include the following amounts as a result of the consolidation of TRI as of October 31, 2021 and January 31, 2021:

October 31, 2021

January 31, 2021

(in thousands)

Cash

$

751

$

747

Property and equipment, net

24,334

24,800

Total assets

$

25,085

$

25,547

Other current liabilities

$

134

$

58

Current maturities of long-term debt

675

623

TRI Long-term debt

26,773

27,229

Noncontrolling interest in VIE

(2,497)

(2,363)

Total liabilities and shareholders' equity

$

25,085

$

25,547

7. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings (loss) per share is based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) 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 and are considered only for dilutive earnings (loss) per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share calculation is as follows:

Three Months Ended

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands, except per share data)

Numerator - net income (loss) attributable to
controlling interest

$

2,806

$

940

$

12,343

$

(8,254)

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

Basic

32,649

32,476

32,605

32,431

Dilutive shares

112

130

220

-

Diluted

32,761

32,606

32,825

32,431

Earnings (loss) per share (Class A and Class B)

Basic

$

0.09

$

0.03

$

0.38

$

(0.25)

Diluted

$

0.09

$

0.03

$

0.38

$

(0.25)

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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The computation of diluted loss per share for the nine months ended November 1, 2020 excluded (0.1) million shares of unvested restricted stock, respectively, because their inclusion would be anti-dilutive.

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 $0.6million and $1.6million for the three and nine months ended October 31, 2021, respectively and $0.3million and $1.1million for the three and nine months ended November 1, 2020, 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 31, 2021 is as follows:

Weighted

average

fair value

Shares

per share

Outstanding at January 31, 2021

338,239

$

9.74

Granted

227,740

15.13

Vested

(150,688)

8.13

Forfeited

(4,165)

14.12

Outstanding at October 31, 2021

411,126

$

13.43

At October 31, 2021, the Company had unrecognized compensation expense of $4.2million related to the restricted stock awards, which is expected to be recognized over a weighted average period of 2.4years.

9. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

October 31, 2021

January 31, 2021

(in thousands)

Land and land improvements

$

4,486

$

4,486

Leasehold improvements

46,988

47,451

Buildings

35,344

35,344

Vehicles

161

161

Warehouse equipment

17,469

14,685

Office equipment and furniture

52,898

52,614

Computer equipment

7,919

9,861

Software

34,180

34,003

199,445

198,605

Accumulated depreciation and amortization

(91,092)

(75,958)

108,353

122,647

Construction in progress

6,226

1,590

Property and equipment, net

$

114,579

$

124,237

10. REVENUE

The Company's revenue primarily consists of the sale of apparel, footwear and hard goods. Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon shipment. Store revenue is

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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

recognized at the point of sale, net of returns, and excludes taxes. 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.

Sales disaggregated based upon sales channel is presented below.

Three Months Ended

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands)

Direct-to-consumer

$

85,200

$

86,392

$

258,830

$

273,503

Stores

60,077

49,139

168,993

109,320

$

145,277

$

135,531

$

427,823

$

382,823

Contract Assets and Liabilities

The Company's contract assets primarily consist of the right of return for amounts of inventory to be returned that is expected to be resold and is recorded in Prepaid expenses and other current assets on the Company's consolidated balance sheets. 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 consolidated balance sheets. Upon 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.

Contract assets and liabilities on the Company's consolidated balance sheets are presented in the following table:

October 31, 2021

January 31, 2021

(in thousands)

Contract assets

$

1,993

$

2,490

Contract liabilities

$

7,400

$

9,788

Revenue from gift cards is recognized when the gift card is redeemed by the customer for merchandise or as a gift card breakage, an estimate of gift cards which will not be redeemed. The Company does not record breakage revenue when escheat liability to the relevant jurisdictions exists. Gift card breakage is recorded within Net sales on the Company's consolidated statement of operations. The following table provides the reconciliation of the contract liability related to gift cards for the nine months ended:

October 31, 2021

November 1, 2020

(in thousands)

Balance as of beginning of period

$

9,788

$

9,790

Gift cards sold

6,097

5,740

Gift cards redeemed

(8,112)

(7,381)

Gift card breakage

(373)

(1,119)

Balance as of end of period

$

7,400

$

7,030

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% for the three months ended October 31, 2021 and 25% for the nine months ended October 31, 2021. The income from TRI was excluded from the calculation of the Company's effective tax rate, as TRI is a limited liability company and not subject to income taxes.

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DULUTH HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

12. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," ("ASU 2016-13"), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as "CECL". In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. On November 15, 2019, the FASB issued ASU No. 2019-10 "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815, and Leases (Topic 842),"(ASU 2019-10"), which provides framework to stagger effective dates for future major accounting standards and amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. ASU 2019-10 amends the effective dates for ASU 2016-13 for smaller reporting companies with fiscal years beginning after December 15, 2022, and interim periods within those years. The Company expects to adopt ASU 2016-13 on January 30, 2023, the first day of the Company's first quarter for the fiscal year ending January 28, 2024, the Company's fiscal year 2023. The Company is evaluating the impact adopting ASU 2016-13 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 31, 2021 ("2020 Form 10-K").

The Company's fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2021 is a 52-week period and ends on January 30, 2022. Fiscal 2020 was a 52-week period and ended on January 31, 2021. The three and nine months of fiscal 2021 and fiscal 2020 represent our 13 and 39 week periods ended October 31, 2021 and November 1, 2020, 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 initiatives, or strategies 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 2020 Form 10-K, and other SEC filings, which factors are incorporated by reference herein. Theserisks and uncertainties include, but are not limited to, the following: the prolonged effects of COVID-19 on store traffic and disruptions to our distribution network, supply chains and operations; our ability to maintain and enhance a strong brand image; effectively adapting to new challenges associated with our expansion into new geographic markets; generating adequate cash from our existing stores to support our growth; effectively relying on sources for merchandise located in foreign markets; transportation delays and interruptions, including port congestion; inability to timely and effectively obtain shipments of products from our suppliers and deliver merchandise to our customers; 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 in global market constraints; 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. 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 lifestyle brand of men's and women's casual wear, workwear and accessories sold primarily through our own omnichannel platform. We offer products nationwide through our website and catalog. In 2010, we initiated our omnichannel platform with the opening of our first store. Since then, we have expanded our retail presence, and as of October 31, 2021, we operated 62 retail stores and three outlet stores.

We offer a comprehensive line of innovative, durable and functional products, such as our Longtail T®shirts, Buck NakedTMunderwear, 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.


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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 in fiscal 2021 third quarter increased by 7.2% over the prior year third quarter to $145.3 million, and net sales in the first nine months of fiscal 2021 increased by 11.8% over the first nine months of the prior year to $427.8 million;

Net income of $2.8 million in fiscal 2021 third quarter compared to the prior year third quarter net income of $0.9 million, and net income in the first nine months of fiscal 2021 of $12.3 million compared to a net loss in the first nine months of fiscal 2020 of $8.3 million; and

Adjusted EBITDA increased to $13.2 million in fiscal 2021 third quarter compared to the prior year third quarter Adjusted EBITDA of $11.4 million, and Adjusted EBITDA in the first nine months of fiscal 2021 increased to $44.9 million compared to $16.6 million for the first nine months of the prior year.

See the "Reconciliation of Net Income (Loss) to EBITDA and EBITDA to Adjusted EBITDA" section for a reconciliation of our net income (loss) 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.

The Company continues to progress on further defining and executing the "Big Dam Blueprint," which management believes will unlock the Company's full potential for long-term, sustainable growth. As introduced in the second quarter of 2021, the Big Dam Blueprint focuses on the following key strategic areas:

Begin with a digital-first mindsetthat integrates technology into all areas of the business, fundamentally changing how we operate and deliver value to customers.

Intensify efforts to optimize Duluth Trading's owned retail channelsby increasing focus and investments in our direct channel as our primary growth vehicle. We are conducting strategic research that will inform decisions on future stores regarding new locations and market share potential, size and layout.

Evolve the Company's multi-brand platform as a new pathway to grow the business.Create unique brand positions, across men's and women's, for Duluth, 40Grit, Alaskan Hardgear, Buck Naked, and Best Made to address customer needs for various occasions including work, outdoor recreation, casual lifestyle, and first layer. Invest in the evolution of the Duluth Trading platform to enable the integration of new brands, expand our offerings and broaden our customer base.

Carefully test and learn to unlock long-term growth potential.Explore new opportunities to engage current and potential customers through products, services and touchpoints that they expect and value.

Increase and, in some areas, accelerate investments to future proof the business. Areas under analysis include greater automation across the logistics network; technology that will improve operations, generate positive impact and sustainable returns; support growth through multiple brands and seamlessly integrate new brands into the portfolio; and attract the talent, skillsets and expertise needed to scale the business.

Our management's discussion and analysis includes market sales metrics for our stores, website and catalog sales. Market areas are determined by a third-party that divides the United States and Puerto Rico into 280 unique geographical areas. Our store market sales metrics include sales from our stores, website and catalog. Our non-store market sales metrics include sales from our website and catalog.

COVID-19

In March 2020, a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization. This pandemic has negatively affected the U.S. and global economies, disrupted global supply chains and financial markets, led to significant travel and transportation restrictions, including mandatory business closures and orders to shelter in place.

The ultimate impact of COVID-19 on our operational and financial performance still depends on future developments outside of our control, including the duration and spread of the pandemic and related actions taken by federal, state and local government officials, and international governments to prevent disease spread. Given the uncertainty, we cannot reasonably estimate store traffic patterns and the prolonged impact on overall consumer demand. We continue to actively evaluate all federal, state and local regulations to ensure compliance by our store operations.

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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-to-consumer sales are recognized upon shipment of the product and store sales are recognized at the point of sale.

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. 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 digital and 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, rent/occupancy and payroll costs. While we expect these expenses to increase as we continue to grow our organization to support our growing business and increase brand awareness, 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 define Adjusted EBITDA as consolidated net income 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. We also use Adjusted EBITDA as the key financial metric in determining our fiscal 2021 bonus compensation for our employees. This non-GAAP measure may not be comparable to similarly titled measures used by other companies.

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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 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands)

Net sales

$

145,277

$

135,531

$

427,823

$

382,823

Cost of goods sold (excluding depreciation and amortization)

61,627

64,494

196,204

186,982

Gross profit

83,650

71,037

231,619

195,841

Selling, general and administrative expenses

78,792

68,189

211,779

202,175

Operating income (loss)

4,858

2,848

19,840

(6,334)

Interest expense

900

1,643

3,390

4,771

Other (loss) income, net

(265)

87

(193)

(104)

Income (loss) before income taxes

3,693

1,292

16,257

(11,209)

Income tax expense (benefit)

930

393

4,048

(2,827)

Net income (loss)

2,763

899

12,209

(8,382)

Less: Net loss attributable to noncontrolling interest

(43)

(41)

(134)

(128)

Net income (loss) attributable to controlling interest

$

2,806

$

940

$

12,343

$

(8,254)

Percentage of Net sales:

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

Cost of goods sold (excluding depreciation
and amortization)

42.4

%

47.6

%

45.9

%

48.8

%

Gross margin

57.6

%

52.4

%

54.1

%

51.2

%

Selling, general and administrative expenses

54.2

%

50.3

%

49.5

%

52.8

%

Operating income (loss)

3.3

%

2.1

%

4.6

%

(1.7)

%

Interest expense

0.6

%

1.2

%

0.8

%

1.2

%

Other (loss) income, net

-

%

0.1

%

-

%

-

%

Income (loss) before income taxes

2.5

%

1.0

%

3.8

%

(2.9)

%

Income tax expense (benefit)

0.6

%

0.3

%

0.9

%

(0.7)

%

Net income (loss)

1.9

%

0.7

%

2.9

%

(2.2)

%

Less: Net loss attributable to noncontrolling interest

-

%

-

%

-

%

-

%

Net income (loss) attributable to controlling interest

1.9

%

0.7

%

2.9

%

(2.2)

%

Three Months Ended October 31, 2021 Compared to Three Months Ended November 1, 2020

Net Sales

Net sales increased $9.7 million, or 7.2%, to $145.3 million in the three months ended October 31, 2021 compared to $135.5 million in the three months ended November 1, 2020. The increase was primarily due to an increase in store market sales.

Store market sales increased $9.4 million, or 10.5%, to $103.0 million in the three months ended October 31, 2021 compared to $93.6 million in the three months ended November 1, 2020. The year-over-year sales difference was primarily driven by continued increases in store traffic and conversion as compared to the prior year. Non-store market sales increased slightly by $0.3 million, or 0.7%, to $41.1 million in the three months ended October 31, 2021 compared to $40.7 million in the three months ended November 1, 2020.


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Gross Profit

Gross profit increased $12.6 million, or 17.8%, to $83.6 million in the three months ended October 31, 2021 compared to $71.0 million in the three months ended November 1, 2020. As a percentage of net sales, gross margin increased to 57.6% of net sales in the three months ended October 31, 2021, compared to 52.4% of net sales in the three months ended November 1, 2020. The increase in gross margin rate was driven by a higher mix of full price sales due to lower clearance inventory and fewer promotional events as compared to the same period in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $10.6 million, or 15.5%, to $78.8 million in the three months ended October 31, 2021 compared to $68.2 million in the three months ended November 1, 2020. Selling, general and administrative expenses as a percentage of net sales increased to 54.2% in the three months ended October 31, 2021, compared to 50.3% in the three months ended November 1, 2020.

The increase in selling, general and administrative expense was primarily due to higher personnel costs, coupled with increased advertising spend as advertising was limited in the prior year based on our uncertainty about customer demand resulting from the pandemic.

Income Taxes

Income tax expense was $0.9 million in the three months ended October 31, 2021, compared to an income tax expense of $0.4 million in the three months ended November 1, 2020. The effective tax rate related to controlling interest was 25% for the three months ended October 31, 2021 compared to 29% for the three months ended November 1, 2020.

Net Income Attributable to Controlling Interest

Net income attributable to controlling interest was $2.8 million, in the three months ended October 31, 2021 compared to net income of $0.9 million in the three months ended November 1, 2020, due to the factors discussed above.

Nine Months Ended October 31, 2021 Compared to Nine Months Ended November 1, 2020

Net Sales

Net sales increased $45.0 million, or 11.8%, to $427.8 million in the nine months ended October 31, 2021 compared to $382.8 million in the nine months ended November 1, 2020. The increase was also due to an increase in store market sales, partially offset by a decrease in non-store market sales.

Store market sales increased $49.7 million, or 19.9%, to $300.0 million in the nine months ended October 31, 2021 compared to $250.3 million in the nine months ended November 1, 2020. The year-over-year sales difference was driven by temporary store closures in fiscal 2020 beginning on March 20, 2020 through the third week of June, as well as growth in online sales from both existing customers and new buyers. Non-store market sales decreased $5.0 million, or 3.9%, to $123.8 million in the nine months ended October 31, 2021 compared to $128.8 million in the nine months ended November 1, 2020 also due to heavy volume in the prior year as customer purchasing patterns migrating online, coupled with extended free shipping offers, higher promotions and deeper investments in digital prospecting in the prior year.

Gross Profit

Gross profit increased $35.8 million, or 18.3%, to $231.6 million in the nine months ended October 31, 2021 compared to $195.8 million in the nine months ended November 1, 2020. As a percentage of net sales, gross margin increased to 54.1% of net sales in the nine months ended October 31, 2021, compared to 51.2% of net sales in the nine months ended November 1, 2020. The increase in gross margin rate was driven by a higher mix of full price sales due to lower clearance inventory and fewer promotional events, as well as improved gross margin rates on both full price and clearance items.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $9.6 million, or 4.8%, to $211.8 million in the nine months ended October 31, 2021 compared to $202.2 million in the nine months ended November 1, 2020. Selling, general and administrative expenses as a percentage of net sales decreased to 49.5% in the nine months ended October 31, 2021, compared to 52.8% in the nine months ended November 1, 2020. The positive leverage was primarily due to shifting to a more efficient digital marketing approach, as well as lower shipping expenses driven in part by a shift in channel mix resulting from higher store traffic during the current year.

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The increase in selling, general and administrative expense was primarily due to increased wages due to Company retail locations being open for the full fiscal year, wage increases at both the stores and distribution centers, as well as increased depreciation expense associated with investments in technology.

Income Taxes

Income tax expense was $4.0 million in the nine months ended October 31, 2021, compared to an income tax benefit of $2.8 million in the nine months ended November 1, 2020. The effective tax rate related to controlling interest was 25% for the nine months ended October 31, 2021 compared to 26% for the nine months ended November 1, 2020.

Net Income Attributable to Controlling Interest

Net income attributable to controlling interest was $12.3 million, in the nine months ended October 31, 2021 compared to a net loss of $8.3 million in the nine months ended November 1, 2020, due to the factors discussed above.

Reconciliation of Net Income (Loss) 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

Nine Months Ended

October 31, 2021

November 1, 2020

October 31, 2021

November 1, 2020

(in thousands)

Net income (loss)

$

2,763

$

899

$

12,209

$

(8,382)

Depreciation and amortization

7,306

7,917

21,822

21,209

Amortization of internal-use software hosting

subscription implementation costs

478

-

1,252

-

Interest expense

900

1,643

3,390

4,771

Amortization of build-to-suit operating leases
capital contribution

198

199

595

596

Income tax expense (benefit)

930

393

4,048

(2,827)

EBITDA

$

12,575

$

11,051

$

43,316

$

15,367

Stock based compensation

605

382

1,612

1,263

Adjusted EBITDA

$

13,180

$

11,433

$

44,928

$

16,630

As a result of the factors discussed above in the "Results of Operations" section, Adjusted EBITDA increased $1.8 million to $13.2 million in the three months ended October 31, 2021 compared to $11.4 million in the three months ended November 1, 2020. As a percentage of net sales, Adjusted EBITDA increased to 9.1% of net sales in the three months ended October 31, 2021 compared to 8.4% of net sales in the three months ended November 1, 2020.

As a result of the factors discussed above in the "Results of Operations" section, Adjusted EBITDA increased $28.3 million to $44.9 million in the nine months ended October 31, 2021 compared to $16.6 million in the nine months ended November 1, 2020. As a percentage of net sales, Adjusted EBITDA increased to 10.5% of net sales in the nine months ended October 31, 2021 compared to 4.3% of net sales in the nine months ended November 1, 2020.

Liquidity and Capital Resources

General

Our business relies on cash from operating activities and a credit facility as our primary sources of liquidity. Our primary cash needs have been for inventory, marketing and advertising, payroll, store leases, capital expenditures associated with infrastructure, information technology, and opening new stores. The most significant components of our working capital are cash, inventory, accounts payable and other current liabilities. At October 31, 2021, our net working capital was $89.9 million, including $20.4 million of cash and cash equivalents.

We expect to spend approximately $18.5 million in fiscal 2021 on capital expenditures, inclusive of software hosting implementation costs. Capital expenditures includes a total of approximately $16.4 million related to investments in technology and $2.1 million for the one planned new retail store that opened in the third quarter. Due to the seasonality of our business, a

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significant amount of cash from operating activities is generated during the fourth quarter of our fiscal year. We also use cash in our investing activities for capital expenditures throughout all four quarters of our fiscal year.

We believe that our cash flow from operating activities and the availability of cash under our credit facility will be sufficient to cover working capital requirements and anticipated capital expenditures for the foreseeable future.

Cash Flow Analysis

A summary of operating, investing and financing activities is shown in the following table.

Nine Months Ended

October 31, 2021

November 1, 2020

(in thousands)

Net cash provided by (used in) operating activities

$

32,758

$

(28,614)

Net cash used in investing activities

(8,945)

(11,483)

Net cash (used in) provided by financing activities

(50,644)

50,657

(Decrease) increase in cash, cash equivalents

$

(26,831)

$

10,560

Net Cash Provided by (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 operating assets and liabilities.

For the nine months ended October 31, 2021, net cash provided by operating activities was $32.8 million, which primarily consisted of net income of $12.2 million, non-cash depreciation and amortization of $21.8 million, and cash used in operating assets and liabilities of $3.0 million. The cash used in operating assets and liabilities of $3.0 million primarily consisted of a $16.0 million increase in inventory and a $7.6 million decrease in income taxes payable offset by a $4.1 million increase in accrued expenses and a $24.9 million increase in trade accounts payable.

For the nine months ended November 1, 2020, net cash used in operating activities was $28.6 million, which consisted of net loss of $8.4 million and cash used in operating assets and liabilities of $46.5 million, partially offset by non-cash depreciation and amortization of $21.2 million, stock based compensation of $1.3 million and deferred income taxes of $3.5 million. The cash used in operating assets and liabilities of $46.5 million primarily consisted of a $65.6 million increase in inventory in advance of our peak season, partially offset by a $21.4 million increase in trade accounts payable.

Net Cash Used in Investing Activities

Investing activities consist primarily of capital expenditures for growth related to investments in infrastructure, information technology, and new store openings.

For the nine months ended October 31, 2021, net cash used in investing activities was $8.9 million and was primarily driven by capital expenditures of $9.1 million for a new distribution center and one new retail store, as well as investments in information technology.

For the nine months ended November 1, 2020, net cash used in investing activities was $11.5 million and was primarily driven by capital expenditures of $11.1 million for new retail stores, as well as investments in information technology.

Net Cash (Used in) Provided by Financing Activities

Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-term debt, as well as payments on finance lease obligations.

For the nine months ended October 31, 2021, net cash used in financing activities was $50.6 million, primarily consisting of the full paydown of Duluth's debt.

For the nine months ended November 1, 2020, net cash provided by financing activities was $50.7 million, primarily consisting of proceeds of $28.9 million, net from our term loan and proceeds of $23.7 million, net from our revolving line of credit to fund working capital.

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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 31, 2021.

Off-Balance Sheet Arrangements

We are not a party to any material off-balance sheet arrangements.

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 2020 Form 10-K.

Recent Accounting Pronouncements

See Note 12 "Recent Accounting Pronouncements," of Notes to Condensed Consolidated Financial Statements included in Part 1, Item 1, of this quarterly report on Form 10-Q for information regarding recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in the market risks described in our 2020 Form 10-K. See Note 3 "Debt and Credit Agreement," 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 borrowings under our credit agreement.

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 were no changes 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 have materially affected, or are 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.

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 2020 Form 10-K, or other SEC filings. There have been no material changes to our risk factors as previously disclosed in our fiscal 2020 Annual Report on Form 10-K.

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

We did not sell any equity securities during the quarter ended October 31, 2021, 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 three months ended October 31, 2021.

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

August 2, 2021 - August 29, 2021

949

$

15.59

-

$

-

August 30, 2021 - October 3, 2021

1,020

14.31

-

-

October 4, 2021 - October 31, 2021

-

-

-

-

Total

1,969

$

14.95

-

$

-


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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**

104

The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2021 has been formatted in Inline XBRL (Inline Extensible Business Reporting Language and contained in Exhibits 101).

*

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: December 3, 2021

DULUTH HOLDINGS INC.
(Registrant)

/s/ David Loretta

David Loretta

Senior Vice President and Chief Financial Officer

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

/s/ Michael Murphy

Michael Murphy

Vice President and Chief Accounting Officer

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

31