Quarterly Report (10-q)

Date : 12/06/2019 @ 5:43PM
Source : Edgar (US Regulatory)
Stock : Duluth Holdings Inc (DLTH)
Quote : 8.66  0.15 (1.76%) @ 5:00AM
Duluth share price Chart
After Hours
Last Trade
Last $ 8.66 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________________





 

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



For the quarterly period ended November 3, 2019



OR





 

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



For the transition period from             to              



Commission File Number 001-37641

_________________________________________ 

DULUTH HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 _________________________________________





 

Wisconsin

39-1564801

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)



 

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

NASDAQ Global 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      No  



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      No  



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





 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company



 

Emerging growth company



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



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



The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of December 3, 2019, was 3,364,200.

The number of shares outstanding of the Registrant’s Class B common stock, no par value, as of December 3, 2019,  was 29,160,616.

 

 

 


 

DULUTH HOLDINGS INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED November 3, 2019 

INDEX





 

 



 

 



Part I—Financial Information

Page

Item 1.

Financial Statements



Condensed Consolidated Balance Sheets as of November 3, 2019 and February 3, 2019 (Unaudited)



Condensed Consolidated Statements of Operations for the three and nine months ended November 3, 2019 and October 28, 2018 (Unaudited)



Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended November 3, 2019 and October 28, 2018 (Unaudited)



Condensed Consolidated Statement of Shareholders’ Equity for the nine months ended November 3, 2019 (Unaudited)



Condensed Consolidated Statement of Shareholders’ Equity for the nine months ended October 28, 2018 (Unaudited)



Condensed Consolidated Statements of Cash Flows for the nine months ended November 3, 2019 and October 28, 2018 (Unaudited)



Notes to Condensed Consolidated Financial Statements (Unaudited)

10 

Item 2.

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

20 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28 

Item 4.

Controls and Procedures

28 



Part II—Other Information

 

Item 1.

Legal Proceedings

29 

Item 1A.

Risk Factors

29 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29 

Item 6.

Exhibits

30 



 

 

Signatures

 

31 



 

2

 


 

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements

DULUTH HOLDINGS INC.

Condensed Consolidated Balance Sheets - Assets

(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, less reserve for excess and obsolete items
of $2,054 and $2,420, respectively

 

 

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 of accumulated amortization
of $294 and $280, respectively

 

 

287 

 

 

306 

Other assets, net

 

 

1,120 

 

 

641 

Total assets

 

$

518,117 

 

$

295,305 







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

3

 


 

DULUTH HOLDINGS INC

Condensed Consolidated Balance Sheets – Liabilities and Equity

(Unaudited)

(Amounts in thousands)





 

 

 

 

 

 



 

 

 

 

 

 



 

November 3, 2019

 

February 3, 2019

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 debt

 

 

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 maturities

 

 

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:

 

 

 

 

 

 

Preferred stock, no par value; 10,000 shares authorized; no shares
   issued or outstanding as of November 3, 2019 and February 3, 2019

 

 

 —

 

 

Common stock (Class A), no par value; 10,000 shares authorized;
   3,364 shares issued and outstanding as of November 3, 2019 and February 3, 2019

 

 

 —

 

 

Common stock (Class B), no par value; 200,000 shares authorized;

   29,180 shares issued and 29,161 shares outstanding as of November 3, 2019 and

  29,215 shares issued and 29,210 shares outstanding as of February 3, 2019

 

 

 —

 

 

Treasury stock, at cost; 19 and 5 shares as of November 3, 2019 and
   February 3, 2019, respectively

 

 

(406)

 

 

(92)

Capital stock

 

 

90,451 

 

 

89,849 

Retained earnings

 

 

63,214 

 

 

70,592 

Accumulated other comprehensive income

 

 

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 





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

4

 


 

DULUTH HOLDINGS INC.

Condensed 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 

 

 

 

 

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 





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

 

5

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statements of Comprehensive Income

(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 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized security gains arising during the period

 

 

289 

 

 

 

 

289 

 

 

Income tax expense

 

 

75 

 

 

 

 

75 

 

 

Other comprehensive income

 

 

214 

 

 

 

 

214 

 

 

Comprehensive income (loss)

 

 

303 

 

 

(3,076)

 

 

(5,495)

 

 

2,693 

Comprehensive (loss) income attributable to
noncontrolling interest

 

 

(93)

 

 

74 

 

 

(256)

 

 

157 

Comprehensive income (loss) attributable to
controlling interest

 

$

396 

 

$

(3,150)

 

$

(5,239)

 

$

2,536 





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

 

6

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statement of Shareholders’ Equity

(Unaudited)

(Amounts in thousands)

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended November 3, 2019



 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Noncontrolling

 

 

 



 

Capital stock

 

 

 

 

other

 

interest in

 

Total



 

 

 

Treasury

 

Retained

 

comprehensive

 

variable interest

 

shareholders'



 

Shares

 

Amount

 

stock

 

earnings

 

income

 

entity

 

equity

Balance at February 3, 2019

 

32,574 

 

$

89,849 

 

$

(92)

 

$

70,592 

 

$

 

$

(239)

 

$

160,110 

Cumulative effect from
adoption of ASC 842

 

 

 

 

 

 

 

(1,924)

 

 

 

 

 

 

(1,924)

Balance at February 4, 2019

 

32,574 

 

 

89,849 

 

 

(92)

 

 

68,668 

 

 

 

 

(239)

 

 

158,186 

Issuance of common stock

 

149 

 

 

134 

 

 

 

 

 

 

 

 

 

 

134 

Stock-based compensation

 

 

 

433 

 

 

 

 

 

 

 

 

 

 

433 

Restricted stock forfeitures

 

(6)

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock surrendered for taxes

 

(15)

 

 

 

 

(277)

 

 

 

 

 

 

 

 

(277)

Net loss

 

 

 

 

 

 

 

(7,572)

 

 

 

 

(73)

 

 

(7,645)

Balance at May 5, 2019

 

32,703 

 

$

90,416 

 

$

(369)

 

$

61,096 

 

$

 

$

(312)

 

$

150,831 

Issuance of common stock

 

32 

 

 

146 

 

 

 

 

 

 

 

 

 

 

146 

Stock-based compensation

 

 

 

513 

 

 

 

 

 

 

 

 

 

 

513 

Restricted stock forfeitures

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock surrendered for taxes

 

 

 

 

 

(36)

 

 

 

 

 

 

 

 

(36)

Net income (loss)

 

 

 

 

 

 

 

1,936 

 

 

 

 

(90)

 

 

1,846 

Balance at August 4, 2019

 

32,733 

 

$

91,075 

 

$

(405)

 

$

63,032 

 

$

 

$

(402)

 

$

153,300 

Issuance of common stock

 

16 

 

 

149 

 

 

 

 

 

 

 

 

 

 

149 

Stock-based compensation

 

 

 

(773)

 

 

 

 

 

 

 

 

 

 

(773)

Restricted stock forfeitures

 

(224)

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock surrendered for taxes

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

(1)

Other comprehensive income

 

 

 

 

 

 

 

 

 

214 

 

 

 

 

214 

Net income (loss)

 

 

 

 

 

 

 

182 

 

 

 

 

(93)

 

 

89 

Balance at November 3, 2019

 

32,525 

 

$

90,451 

 

$

(406)

 

$

63,214 

 

$

214 

 

$

(495)

 

$

152,978 





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

 

7

 


 

DULUTH HOLDINGS INC.

Condensed Consolidated Statement of Shareholders’ Equity

(Unaudited)

(Amounts in thousands)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended October 28, 2018



 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 



 

Capital stock

 

 

 

 

interest in

 

Total



 

 

 

Treasury

 

Retained

 

variable interest

 

shareholders'



 

Shares

 

Amount

 

stock

 

earnings

 

entity

 

equity

Balance at January 28, 2018

 

32,462 

 

$

88,043 

 

$

(57)

 

$

48,084 

 

$

3,279 

 

$

139,349 

Cumulative effect from
adoption of ASC 606

 

 

 

 

 

 

 

(648)

 

 

 

 

(648)

Balance at January 29, 2018

 

32,462 

 

$

88,043 

 

$

(57)

 

$

47,436 

 

$

3,279 

 

$

138,701 

Issuance of common stock

 

106 

 

 

 

 

 

 

 

 

 

 

Restricted stock surrendered for taxes

 

(2)

 

 

 

 

(35)

 

 

 

 

 

 

(35)

Stock-based compensation

 

 

 

409 

 

 

 

 

 

 

 

 

409 

Net (loss) income

 

 

 

 

 

 

 

(691)

 

 

 

 

(683)

Balance at April 29, 2018

 

32,566 

 

$

88,452 

 

$

(92)

 

$

46,745 

 

$

3,287 

 

$

138,392 

Issuance of common stock

 

20 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

449 

 

 

 

 

 

 

 

 

449 

Net income

 

 

 

 

 

 

 

6,377 

 

 

75 

 

 

6,452 

Balance at July 29, 2018

 

32,586 

 

$

88,901 

 

$

(92)

 

$

53,122 

 

$

3,362 

 

$

145,293 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

Restricted stock forfeitures

 

(2)

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

434 

 

 

 

 

 

 

 

 

434 

Net (loss) income

 

 

 

 

 

 

 

(3,150)

 

 

74 

 

 

(3,076)

Balance at October 28, 2018

 

32,587 

 

$

89,335 

 

$

(92)

 

$

49,972 

 

$

3,436 

 

$

142,651 





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

8

 


 

DULUTH HOLDINGS INC.

Condensed 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 





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

 

9

 


 

Table of Contents

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

 

1.    NATURE OF OPERATIONS AND BASIS OF PRESENTATION

A.    Nature of Operations

Duluth Holdings Inc. (“Duluth Trading” or the “Company”), a Wisconsin corporation, is a lifestyle brand of men’s and women’s casual wear, workwear and accessories sold exclusively through the Company’s own direct and retail channels. The direct segment, consisting of the Company’s website and catalogs, offers products nationwide. In 2010, the Company added retail to its omni-channel platform with the opening of its first store. Since then, Duluth Trading has expanded its retail presence, and as of November 3, 2019, the Company operated 55 retail stores and three outlet stores. The Company’s products are marketed under the Duluth Trading brand, with the majority of products being exclusively developed and sold as Duluth Trading branded merchandise.

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

B.    Basis of Presentation

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

The Company’s fiscal year ends on the Sunday nearest to January 31 of the following year. Fiscal 2019 is a 52-week period and ends on February 2, 2020. Fiscal 2018 was a 53-week period and ended on February 3, 2019. The three and nine months of fiscal 2019 and fiscal 2018 represent the Company’s 13 and 39-week periods ended November 3, 2019 and October 28, 2018, respectively.

The accompanying condensed consolidated financial statements as of and for the three and nine months ended November 3, 2019 and October 28, 2018 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 November 3, 2019 and October 28, 2018. 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 February 3, 2019.

C.    Seasonality of Business

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

D.    Restricted Cash

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



E.    Significant Accounting Policies

Except as disclosed below, there have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended February 3, 2019.

10

 


 

Table of Contents

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

 

F.    Reclassifications

Certain reclassifications have been made to the 2018 financial statements in order to conform to the 2019 presentation. There were no changes to previously reported shareholders’ equity or net income as a result of the reclassifications.

Recently Adopted Accounting Pronouncements

On February 4, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) and related amendments. ASC 842 requires lessees to (i) recognize a right-of-use asset and a lease liability that is initially measured at the present value of the remaining lease payments, on the consolidated balance sheets, (ii) recognize a single lease cost, calculated over the lease term on a straight-line basis and (iii) classify lease related cash payments within operating and financing activities.

The Company adopted ASC 842 utilizing the optional transition method, which allows guidance to be initially applied at the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected the package of practical expedients, which allows the Company to forgo reassessing prior conclusions on lease definition, classification and initial direct costs related to existing leases as of the adoption date. The Company elected not to recognize short-term leases on the consolidated balance sheets and all non-lease components, such as common area maintenance, were excluded.

The Company’s existing lease arrangements consist of both operating leases and build-to-suit leases. Under ASC 842, the Company is still required to evaluate whether it is deemed to be the owner of the leased property for accounting purposes during the store construction period, however, the prescriptive rules under ASC 840 have been removed. The Company evaluated its existing build-to-suit leases as of the adoption date and determined that the Company is not the owner of the leased premises during the construction period, which resulted in the derecognition of its build-to-suit assets and liabilities that were previously reported on the Company’s consolidated balance sheets. As of February 4, 2019, substantially all of the previous build-to-suit leases are classified as operating leases.

The impact of the adoption was a $121.8 million right-of-use asset (“ROU asset”) with an offsetting $115.5 million lease liability, which is net of $4.9 million of previously recognized straight-line operating lease adjustments on existing leases and $11.2 million of unamortized initial direct costs. The lease liabilities at February 4, 2019 reflect remaining lease payments discounted using an incremental borrowing rate based on the remaining lease term (the “Discount”), as an implicit rate was not readily determinable for any of the Company’s existing leases. See Note 2 “Leases,” for further information.



2.    LEASES

Effective February 4, 2019, the Company adopted ASC 842, which resulted in a recognition of 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 zero at the end of the lease.

The Company leases retail space under non-cancelable lease agreements, which expire on various dates through 2036. Substantially all of these arrangements are store leases. Store leases generally have initial lease terms ranging from five to fifteen years with 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.

11

 


 

Table of Contents

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

 

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







 

 

 

 

 

 

 

 



 

 

 

Three Months Ended

 

Nine Months Ended



 

Consolidated Statement of Operations

 

November 3, 2019

 

November 3, 2019

(in thousands)

 

 

 

 

 

 

 

 

Finance lease

 

 

 

 

 

 

 

 

  Amortization of right-of-use assets

 

Selling, general and
administrative expenses

 

$

542 

 

$

1,168 

  Interest on lease liabilities

 

Interest expense

 

 

368 

 

 

802 

Total finance lease expense

 

 

 

$

910 

 

$

1,970 

Operating lease expense

 

Selling, general and
administrative expenses

 

$

3,935 

 

$

11,094 

Amortization of build-to-suit leases
capital contribution

 

Selling, general and
administrative expenses

 

 

311 

 

 

790 

Variable lease expense

 

Selling, general and
administrative expenses

 

 

1,672 

 

 

5,324 

Total lease expense

 

 

 

$

6,828 

 

$

19,178 

Other information related to leases were as follows:







 

 

 



 

Nine Months Ended



 

November 3, 2019

(in thousands)

 

 

 

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

 

 

 

  Financing cash flows from finance leases

 

$

523 

  Operating cash flows from finance leases

 

$

802 

  Operating cash flows from operating leases

 

$

9,841 



 

 

 

Right-of-use assets obtained in exchange for lease liabilities:

 

 

 

  Finance leases

 

$

41,932 

  Operating leases

 

$

12,688 



 

 

 

Weighted-average remaining lease term (in years):

 

 

 

  Finance leases

 

 

15 

  Operating leases

 

 

10 



 

 

 

Weighted-average discount rate:

 

 

 

  Finance leases

 

 

4.5% 

  Operating leases

 

 

4.3% 

Future minimum lease payments under the non-cancellable leases are as follows as of November 3, 2019:







 

 

 

 

 

 

Fiscal year

 

Finance

 

Operating

(in thousands)

 

 

 

 

 

 

2019 (remainder of fiscal year)

 

$

823 

 

$

3,775 

2020

 

 

3,342 

 

 

14,745 

2021

 

 

3,342 

 

 

14,193 

2022

 

 

3,342 

 

 

14,391 

2023

 

 

3,363 

 

 

14,579 

Thereafter

 

 

41,078 

 

 

81,286 

Total future minimum lease payments

 

$

55,290 

 

$

142,969 

Less – Discount

 

 

15,523 

 

 

28,321 

Lease liability

 

$

39,767 

 

$

114,648 



12

 


 

Table of Contents

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

 

Prior to the adoption of ASC 842, the minimum lease payments under non-cancellable operating leases were as follows as of February 3, 2019:







 

 

 

 

 

 

 

 

 



 

Operating Leases

 

 

 



 

Related

 

 

 

 

Fiscal year

 

party

 

Other

 

Total

(in thousands)

 

 

 

 

 

 

 

 

 

2019

 

$

147 

 

$

15,598 

 

$

15,745 

2020

 

 

144 

 

 

16,013 

 

 

16,157 

2021

 

 

147 

 

 

15,327 

 

 

15,474 

2022

 

 

149 

 

 

15,444 

 

 

15,593 

2023

 

 

136 

 

 

15,648 

 

 

15,784 

Thereafter

 

 

 

 

112,098 

 

 

112,098 

Total future minimum lease payments

 

$

723 

 

$

190,128 

 

$

190,851 







3.    DEBT AND LINE OF CREDIT

Debt consists of the following:





 

 

 

 

 

 



 

November 3, 2019

 

February 3, 2019

(in thousands)

 

 

 

 

TRI Senior Secured Note

 

$

24,921 

 

$

25,251 

TRI Note

 

 

3,500 

 

 

3,500 

Capital lease obligations

 

 

 

 

32 



 

$

28,421 

 

$

28,783 

Less: current maturities

 

 

541 

 

 

500 

Long-term debt

 

$

27,880 

 

$

28,283 



 

 

 

 

 

 

Line of credit

 

$

70,470 

 

$

16,542 

Delayed draw term loan

 

$

20,000 

 

$

TRI Holdings, LLC

TRI entered into a senior secured note (“TRI Senior Secured Note”) with an original balance of $26.7 million. The TRI Senior Secured Note is scheduled to mature on October 15, 2038 and 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 $3.5 million. 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.

13

 


 

Table of Contents

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

 

Line of Credit

On May 17, 2018, the Company entered into a credit agreement (the “Credit Agreement”) which provides for borrowing availability of up to $80.0 million in revolving credit (the “Revolver”), and borrowing availability of up to $50.0 million in a delayed draw term loan (“DDTL”), for a total credit facility of $130.0 million. The $80.0 million revolving credit matures on May 17, 2023. The $50.0 million DDTL is available to draw upon in differing amounts through May 17, 2020, and matures on May 17, 2023. The Credit Agreement is secured by essentially all Company assets and requires the Company to maintain compliance with certain financial and non-financial covenants, including a maximum rent adjusted leverage ratio and a minimum fixed charge coverage ratio as defined in the Credit Agreement. At the Company’s option, the interest rate applicable to the Revolver or DDTL will be a floating rate equal to: (i) the base rate plus a margin of 25 to 100 basis points (“bps”), based upon the Company’s rent adjusted leverage ratio, or (ii) a fixed rate for a one-, two-, three- or six-month interest period equal to LIBOR for such interest period plus a margin of 125 to 200 bps, based upon the Company’s rent adjusted leverage ratio (effective rate of 3.8% for the Revolver and 4% for the DDTL at November 3, 2019). In addition, outstanding balances under the DDTL require quarterly principal payments with a final balloon payment at maturity.

As of November 3, 2019 and for the nine months then ended, the Company was in compliance with all financial and non-financial covenants for all debts discussed above.

4.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:







 

 

 

 

 

 



 

November 3, 2019

 

February 3, 2019

(in thousands)

 

 

 

 

Salaries and benefits

 

$

3,685 

 

$

2,328 

Deferred revenue

 

 

6,947 

 

 

8,493 

Freight

 

 

2,947 

 

 

4,141 

Product returns

 

 

2,997 

 

 

2,088 

Catalog costs

 

 

328 

 

 

503 

Unpaid purchases of property & equipment

 

 

378 

 

 

433 

Accrued advertising

 

 

4,374 

 

 

389 

Other

 

 

6,094 

 

 

8,155 

Total accrued expenses and other current liabilities

 

$

27,750 

 

$

26,530 









5.    INVESTMENT

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

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

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

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

14

 


 

Table of Contents

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

 

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. The following table presents the amortized cost, fair value, and the corresponding amount of gross unrealized gains recognized in accumulated other comprehensive income of the Company’s available-for-sale security as of November 3, 2019.







 

 

 

 

 

 

 

 

 

 

 

 



 

November 3, 2019



 

Cost or

 

Gross

 

Gross

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Estimated



 

Cost  

 

Gains

 

Losses

 

Fair Value

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Level 3 security:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate trust

 

$

6,210 

 

$

289 

 

$

 

$

6,499 

As of February 3, 2019, the $6.3 million amortized cost of the Company’s available-for-sale security approximated its fair value.

The following table presents future principal receipts related to the Company’s available-for-sale security by contractual maturity as of November 3, 2019.





 

 

 

 

 

 



 

Amortized

 

Estimated



 

Cost

 

Fair Value

(in thousands)

 

 

 

 

Within one year

 

$

128 

 

$

143 

After one year through five years

 

 

887 

 

 

963 

After five years through ten years

 

 

1,408 

 

 

1,484 

After ten years

 

 

3,787 

 

 

3,909 

Total

 

$

6,210 

 

$

6,499 













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 one variable interest entity (“VIE”) as of November 3, 2019 and February 3, 2019.

The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the Company invested $6.3 million 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.

15

 


 

Table of Contents

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

 

The condensed consolidated balance sheets include the following amounts as a result of the consolidation of TRI as of November 3, 2019 and February 3, 2019:





 

 

 

 

 

 



 

November 3, 2019

 

February 3, 2019

(in thousands)

 

 

 

 

 

 

Cash

 

$

427 

 

$

434 

Property and equipment, net

 

 

27,320 

 

 

28,146 

Other assets, net

 

 

327 

 

 

Total assets

 

$

28,074 

 

$

28,580 



 

 

 

 

 

 

Other current liabilities

 

$

148 

 

$

68 

Long-term debt

 

 

28,421 

 

 

28,751 

Noncontrolling interest in VIE

 

 

(495)

 

 

(239)

Total liabilities and shareholders' equity

 

$

28,074 

 

$

28,580 















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. 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



 

November 3, 2019

 

October 28, 2018

 

November 3, 2019