Duluth Holdings Inc. reported a modest decline in earnings on a 1.4 percent slide in sales in the fourth quarter ended January 31. Strong online sales continued to offset steep declines in-store sales. Sales have recovered to show mid-teens growth early in fiscal 2021.

Highlights for the Fourth Quarter Ended January 31, 2021

  • Net sales decreased 1.4 percent to $256.0 million compared to $259.6 million in the prior-year fourth quarter;
  • Gross margin increased to 53.0 percent compared to 52.8 percent in the prior-year fourth quarter;
  • Operating income decreased 7.8 percent to $30.5 million, or 11.9 percent of net sales, compared to $33.1 million, or 12.8 percent of net sales in the prior-year fourth quarter;
  • Net income was $21.8 million, or $0.67 per diluted share, compared to $24.4 million, or $0.75 per diluted share in the prior-year fourth quarter; and
  • Adjusted EBITDA decreased 3.1 percent to $38.7 million compared to $39.9 million in the prior-year fourth quarter.

Highlights for the Fiscal Year Ended January 31, 2021

  • Net sales increased 3.8 percent to $638.8 million compared to $615.6 million in the prior year;
  • Gross margin decreased to 51.9 percent compared to 53.3 percent in the prior year;
  • Operating income decreased 13.9 percent to $24.2 million, or 3.8 percent of net sales, compared to $28.1 million, or 4.6 percent of net sales in the prior year;
  • Net income was $13.6 million, or $0.42 per diluted share, compared to $18.9 million, or $0.58 per diluted share in the prior year
  • Adjusted EBITDA increased 6.8 percent to $55.5 million compared to $51.9 million in the prior year;
  • Free cash flow was $38.5 million compared to a negative $22.4 million in the prior year; and
  • The company opened 4 retail stores, totaling approximately 58,700 gross square feet, and ended the year with a total of 65 stores.

Management Commentary
“I am very proud of what our team accomplished in fiscal year 2020. Their agility and resourcefulness delivered full-year net sales of $639 million, up nearly 4 percent year-over-year; adjusted EBITDA of $55 million, up 7 percent, and free cash flow of $38.5 million,” said Steve L. Schlecht, executive chairman and CEO, Duluth Trading.

“Fortunately, our strong omnichannel presence allowed customers, who traditionally shopped in stores, to shift their buying patterns to online purchases. When our stores closed, we also ramped up digital marketing and promotions to draw current and new customers to our website. Overall, direct sales closed the retail gap and ended the year accounting for 72 percent of total 2020 sales.

“Early 2021 sales are off to a good start and are trending up in the mid-teens to last year. We are confident in our future based on the strength of our brand, our innovative product development resonating with customers and our ability to enhance profitability,” concluded Schlecht.

Operating Results For The Fourth Quarter Ended January 31, 2021
Net sales decreased 1.4 percent to $256.0 million, compared to $259.6 million in the same period a year ago. Retail store net sales were $68.6 million and direct-to-consumer sales were $187.3 million. Retail store net sales declined by 29.1 percent while direct-to-consumer net sales grew 15.1 percent. The decrease in retail store net sales was due to continued COVID-19 safety concerns keeping store traffic at subdued levels. The increase in direct-to-consumer net sales was driven by a shift of existing customers to online.

Net sales in non-store markets increased 12.9 percent, to $85.1 million, compared to $75.3 million in the same period a year ago. The increase was driven by effective digital advertising to promote targeted sales events. Net sales in store markets decreased 6.4 percent, to $168.1 million, compared to $179.7 million in the same period a year ago. The decrease was driven by COVID-19’s continuing impact on store traffic during its peak holiday season. However, the decline in store markets was partially offset by a 20.1 percent increase in direct-to-consumer sales within those store markets.

In Q4 2020, direct-to-consumer net sales had a 7.2 percent boost in markets where it has stores versus non-store markets, which continues to demonstrate the importance of its retail stores in building brand awareness and expanding a loyal customer base.

Women’s apparel net sales decreased 3.5 percent and men’s apparel net sales decreased 2.3 percent. This decrease was primarily attributed to slower store traffic due to the COVID-19 and reduced national TV ad spend, partially offset by growth strength in women’s comfortable basics and men’s core products.

Gross profit decreased 1.0 percent to $135.7 million, or 53.0 percent of net sales, compared to $137.1 million, or 52.8 percent of net sales, in the corresponding prior-year period. The increase in gross margin rate was primarily due to reduced discounts on temporary promotions and achieving a higher gross margin rate on clearance activity, partially offset by lower shipping revenues.

Selling, general and administrative expenses increased 1.2 percent to $105.1 million, compared to $103.9 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses increased to 41.1 percent, compared to 40.0 percent in the corresponding prior-year period.

The increase in selling, general and administrative expenses was primarily due to increased shipping costs to support website sales, which included $1.6M of COVID-19 carrier surcharges during the fourth quarter and increased depreciation expense primarily associated with investments in technology, partially offset by advertising leverage driven by reduced national TV advertising.

Balance Sheet and Liquidity
The company ended the quarter with a cash balance of approximately $47.2 million, net working capital of $114.6 million, $48.3 million outstanding on Duluth Trading’s $50.0 million term loan, and $12.3 million of fiscal 2020 capital expenditures.

Other Developments
Effective as of the close of the 2021 annual meeting, E. David Coolidge III is retiring from the Board of Directors and will not be standing for election. Coolidge has served on our Board since September 2015 and had served on the advisory board since 2001.

The Board of Directors nominated Brett L. Paschke to stand for election as a director of Duluth Trading at the 2021 annual meeting. Paschke is a partner and managing director at William Blair & Company, L.L.C., an investment banking and money management firm, and he has been a partner since 2002. Paschke led the Equity Capital Markets Group at William Blair from 2009 to 2020, and under his leadership, William Blair served as an underwriter on almost 800 equity offerings raising a cumulative $200 billion, including approximately 20 percent of all U.S.-listed IPOs. He was a member of William Blair’s firm-wide leadership group from 2013 to 2019 and led the Business and Financial Services Investment Banking Group at William Blair from 2004 to 2009.

The company announced that it entered a partnership agreement with Tractor Supply Company to offer Duluth Trading’s Buck Naked underwear for men in 13 Tractor Supply stores. If this pilot program is mutually successful, it will be rolled out to other Tractor Supply stores over the course of 2021.

Fiscal 2021 Outlook
As uncertainties related to COVID-19 begin to slowly decline, the company expects to see a steady improvement in demand in fiscal 2021. The company provided the following fiscal 2021 outlook:

  • Net sales in the range of $680 million to $700 million;
  • Adjusted EBITDA1 in the range of $66 million to $70 million;
  • EPS in the range of $0.64 to $0.70 per diluted share; and
  • Capital expenditures, inclusive of the software hosting implementation costs, of approximately $15 million.

Photo courtesy Duluth Trading Company