Duluth Holdings Inc. reported earnings rose 52.5 percent in the second quarter ended August 1 as sales grew 8.6 percent. The apparel retailer also unveiled a new Big Dam Blueprint improvement program that follows the appointment of Sam Sato as CEO.

Highlights For The Second Quarter Ended August 1, 2021

  • Net sales increased 8.6 percent to $149.1 million compared to $137.4 million in the second quarter of 2020 and increased 22.3 percent when compared to the same period in 2019;
  • Gross margin improved 180 basis points to 54.6 percent compared to 52.8 percent in the prior-year second quarter;
  • Operating income increased 33.7 percent, or $3.3 million, to $13.1 million compared to $9.8 million in the prior-year second quarter;
  • Net income was $9.0 million, or $0.27 per diluted share, compared to net income of $5.9 million, or $0.18 per diluted share in the prior-year second quarter; and
  • Adjusted EBITDA increased 29.0 percent to $21.6 million compared to $16.8 million in the prior year second quarter.

Management Commentary
“Our solid performance this quarter reflects the strong relationships we have with our customers and the underlying strength of our business. Our initiatives continue to deliver the planned results, and we’re excited to build upon them,” said Sato.

“My first one hundred days in the role of CEO were busy, productive and incredibly energizing after meeting personally with most of our team members. I am very impressed with the depth of talent, level of commitment and excitement this team brings day in and day out. With our senior leaders, we continued our comprehensive review of our current operations, logistics networks, marketing and technology capabilities, and our unique brands and products. Following our deep-dive analysis, we formulated our ‘Big Dam Blueprint’, which we believe will unlock our full potential for long-term, sustainable growth that serves all of our stakeholders.”

Big Dam Blueprint

  • Begin with a digital-first mindset that integrates technology into all areas of the business, fundamentally changing how it operates and delivers value to customers.
  • Intensify efforts to optimize Duluth Trading’s owned DTC channels by increasing focus and investments in its direct channel as its primary growth vehicle. The company is conducting strategic research to 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 the first layer. Invest in the evolution of the Duluth Trading platform to enable the integration of new brands, expand its offerings and broaden its 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 it expects and values.
  • Increase and, in some areas, accelerate investments to future proof the business. Areas under analysis include greater automation across its logistics network, technology that will improve operations, generating a positive impact and sustainable returns, support growth through multiple brands and seamlessly integrate new brands into its portfolio, and attract the talent, skillsets and expertise to scale the business.

Sato continued, “We believe our Big Dam Blueprint is sound and necessary to continue to strengthen our relationship with the customer, lead as a competitive force, and meet our long-term growth objectives by the end of 2025, which are to achieve at least $1 billion in sales, high-single to low-double-digit operating margins, generate positive free cash flow, and maintain balance sheet flexibility. Our blueprint provides a clear path to ongoing and sustainable profitability and sales growth and our entire team are very excited about the opportunities ahead of us.”

Operating Results for the Second Quarter Ended August 1, 2021
Net sales increased 8.6 percent to $149.1 million, compared to $137.4 million in the same period a year ago and increased 22.3 percent versus the second quarter of 2019. Retail store net sales increased by 73.6 percent to $63.9 million, a significant increase over last year’s second quarter when store traffic was adversely affected by the pandemic. For a more normalized comparison, retail store sales were up 3.5 percent compared with the second quarter of 2019. Direct-to-consumer net sales decreased by 15.2 percent to $85.2 million compared to the second quarter last year when consumers were under stay-at-home orders and online shopping surged. For a more normalized comparison, direct-to-consumer sales increased 41.5 percent compared to the second quarter of fiscal 2019.

Net sales in store markets increased 19.8 percent to $107.1 million, compared to $89.4 million in the same period a year ago. The increase was driven by a continued ramp-up in store traffic as compared to the prior year. Net sales in non-store markets decreased 12.7 percent, to $40.7 million, compared to heavy volume, extended free shipping offers, due to higher promotions and digital prospecting during that period.

Men’s apparel net sales increased 6.5 percent driven by growth in knits and woven shirts. Women’s apparel net sales growth outpaced men’s for the quarter, increasing 10.0 percent driven by strength in woven shirts, bottoms, and footwear.

Gross profit increased 12.4 percent to $81.4 million, or 54.6 percent of net sales, compared to $72.5 million, or 52.8 percent of net sales, in the corresponding prior-year period. The increase in gross profit was driven by a higher mix of full-price sales and improved gross margins, particularly in the Women’s division.

Selling, general and administrative expenses increased 9.0 percent to $68.3 million, compared to $62.7 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses slightly increased to 45.8 percent, compared to 45.6 percent in the corresponding prior-year period.

The increase in selling, general and administrative expense was primarily due to adding back temporary expense reductions taken during the pandemic coupled with annual base salary merit increases, the addition of fixed costs from the three stores opened in the back half of 2020, and higher depreciation expense.

The effective tax rate related to controlling interest was 25 percent compared to 24 percent in the corresponding prior-year period.

Balance Sheet and Liquidity
The company ended the quarter with a cash balance of approximately $18.9 million, net working capital of $84.2 million, and no outstanding balance on its $150.0 million revolving senior credit facility.

On May 14, 2021, the company terminated its Credit Agreement, dated as of May 17, 2018, as amended, and entered into a new credit agreement (the “New Credit Agreement”). The New Credit Agreement matures on May 14, 2026, and provides for borrowings of up to $150.0 million that are available under a revolving senior credit facility, with a $5.0 million sub-limit for issuance of standby letters of credit and a $10.0 million sublimit for swing line loans. At the company’s option, the interest rate applicable to the Revolver will be a floating rate equal to the Bloomberg Short-Term Bank Yield Index rate (“BSBY”) plus the applicable rate of 1.25 percent to 2.00 percent determined based on the company’s rent adjusted leverage ratio, or the base rate plus the applicable rate of 0.25 percent to 1.00 percent based on the company’s rent adjusted leverage ratio. The New 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 New Credit Agreement.

Fiscal 2021 Outlook
The company updated its fiscal 2021 outlook as follows:

  • Net sales in the range of $700 million to $715 million;
  • Adjusted EBITDA in the range of $70 million to $72 million;
  • EPS in the range of $0.71 to $0.76 per diluted share; and
  • Capital expenditures, inclusive of software hosting implementation costs, of approximately $18 million.

Photo courtesy Duluth Trading Company