Duluth Holdings Inc. the holding company of Duluth Trading, reported only a modest sales decline in the first quarter of May 3 as an acceleration of online sales helped to make up for store closures tied to COVID-19. Losses doubled in the traditionally-slow period for the brand.
Highlights For The First Quarter Ended May 3, 2020
- Net sales decreased 3.8 percent to $109.9 million compared to $114.2 million in the prior-year first quarter;
- Retail store net sales decreased by 51.8 percent due to the temporary closure of all stores for approximately seven weeks due to COVID-19;
- Website and catalog net sales increased 31.7 percent, including a 69.0 percent increase in website and catalog sales since the stores closed on March 20, 2020, as compared to the same six-week period in the prior year;
- April total net sales exceeded last year by 5.3 percent while stores were closed;
- Gross margin decreased to 47.6 percent compared to 53.3 percent in the prior-year first quarter;
- Operating loss of $19.0 million compared to operating loss of $9.7 million in the prior-year first quarter
- Net loss of $15.1 million, or 47 cents per diluted share, compared to a net loss of $7.6 million, or $0.23 per diluted share, in the prior-year first quarter. The current quarter net loss included $1.6 million, or $0.05 per diluted share of non-recurring COVID-19 related expenses;
- Adjusted EBITDA of $(11.6) million compared to $(4.4) million in the prior-year first quarter;
- The company opened one retail store in Richmond, VA adding at approximately 17,000 gross square feet; and
- All stores were closed March 20, 2020, and began to re-open May 3, 2020. As of June 4, 2020, Duluth has re-opened 58 of 62 retail stores in some capacity.
“I am proud of our Duluth team’s resiliency and swift call to action during this major shock to the system from the COVID-19 pandemic. We were able to seamlessly pivot our resources to support the direct business and fill customer demand at levels we don’t typically see outside of the peak holiday season. As people sheltered in place, the surge we saw in online demand was significant and it drove direct product sales to increase 32 percent year-over-year in Q1. While our stores were closed during the month of April, total company sales for April exceeded last year by over 5 percent,” said Steve Schlecht, executive chairman and chief executive officer of Duluth Trading. “Our stores are now open for business with health and safety precautions in place for customers and employees. Given the success we’ve seen in our omnichannel sales during this time, we have high conviction in the strength of the Duluth Trading brand and are excited about our future.”
Operating Results For The First Quarter Ended May 3, 2020
Net sales decreased 3.8 percent, to $109.9 million, compared to $114.2 million in the same period a year ago. The decrease was attributed to a 51.8 percent decrease in retail net sales partially offset by a 31.7 percent increase in website and catalog net sales. The decrease in retail store net sales is due to the temporary closure of all stores due to COVID-19 beginning on March 20, 2020 through May 3, 2020. The increase in the website and catalog net sales was driven by a shift of existing customers to online as well as new buyer growth within its women’s products. New buyer growth increased by 58.8 percent compared to the same period a year ago.
Net sales in-store markets decreased $12.6 million, or 15.8 percent, due to store closures, partially mitigated by a 40.0 percent increase in website and catalog sales in-store markets. Net sales in non-store markets increased $8.7 million, or 26.4 percent primarily due to an increase in digital advertising to promote our online warehouse clearance and global sale events, coupled with extended free shipping offers. We believe the difference in the increase in website and catalog sales between the store and non-store markets demonstrates the importance of our retail stores in building brand awareness and expanding our loyal customer base.
Women’s business net sales increased 9.9 percent driven by the garden collection, comfortable basics, plus line and Mother’s Day gift webpage. Men’s business net sales decreased 8.7 percent due to the stores being closed with impacts to the core Duluth categories, partially offset by growth in Alaskan Hardgear.
Gross profit decreased 14.1 percent, to $52.3 million, or 47.6 percent of net sales, compared to $60.9 million, or 53.3 percent of net sales, in the corresponding prior-year period. The decrease in gross margin rate was primarily driven by extending the clearance events and adding a new sitewide sale event in April to continue moving inventory during the period of store closures and uncertainty in customer demand.
Selling, general and administrative expenses increased 1.0 percent to $71.3 million, compared to $70.6 million in the same period a year ago. As a percentage of net sales, selling, general and administrative expenses increased to 64.9 percent, compared to 61.8 percent in the corresponding prior-year period.
The increase in selling, general and administrative expenses was due to the aforementioned $1.6 million of non-recurring COVID-19 related expenses, increased retail overhead costs, digital advertising spend and shipping costs to support website sales along with increased depreciation expense for investments in technology, partially offset by reduced catalog spend.
Balance Sheet And Liquidity
During the quarter, the Company amended its credit agreement to include an incremental delayed draw term loan of $20.5 million and amended the loan covenants to provide greater flexibility during peak borrowing periods in fiscal 2020.
The Company ended the quarter with a cash balance of $8.9 million, an inventory balance of $175.0 million, net working capital of $114.4 million, $49.7 million outstanding on its $70.5 million term loan, and $35.0 million outstanding on its $80.0 million revolving line of credit.
Fiscal 2020 Outlook
Given the unpredictability of the effects from the pandemic on, among other things, consumer behavior, store traffic, store closings, production capabilities, the timing of deliveries, its employees, economic activity, and the market generally in the coming weeks and months, the Company is unable to provide specific earnings guidance at this time.
In response to expected impacts to sales plans, the Company has reduced its planned capital spend levels by 50 percent to approximately $15 million primarily by decreasing fiscal 2020 new store openings to four and deferring certain technology and infrastructure projects as well as continuing to focus on managing expense, extending payment terms and adjusting inventory receipt plans.
The following table recaps the Company’s fiscal 2020 stores opened as well as signed new store leases and the anticipated opening timeframes which reflect the Company’s plan to reduce fiscal 2020 store openings to four.
Location Timing Square Footage
- Short Pump, VA, opened March 5, 2020, 16,828 square feet
- Springfield, OR, Q3 Fiscal 2020, 20,388 square feet
- Orland Park, IL, Q3 Fiscal 2020, 10,000 square feet
- Florence, KY, Q3 Fiscal 2020, 11,441 square feet
- Cherry Hill, NJ, Fiscal 2021, 11,441 square feet
Photo courtesy Duluth Trading