UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95)(cid:95)(cid:3)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 2021
OR
(cid:133)(cid:3)TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file No. 001-37641
DULUTH HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Wisconsin
(State or other jurisdiction of
incorporation or organization)
201 East Front Street, Mount Horeb, Wisconsin
(Address of principal executive offices)
39-1564801
(I.R.S. Employer
Identification Number)
53572
(Zip Code)
Title of each class
Class B Common Stock, No Par Value
Registrant’s telephone number, including area code: (608) 424-1544
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol
Name of each exchange on which registered
DLTH
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:95)
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 (cid:95) No (cid:133)
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 (cid:95) No (cid:133)
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
Non-accelerated filer
Emerging Growth Company
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Accelerated filer
Smaller reporting company
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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. (cid:133)(cid:3)
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report. (cid:95)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:95)
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $84.3 million based upon the closing
price on the last business day of the registrant’s most recently completed second fiscal quarter (August 2, 2020).
The number of shares outstanding of the Registrant’s Class A common stock, no par value, as of March 23, 2021, was 3,364,200. The number of
shares outstanding of the Registrant’s Class B common stock, no par value, as of March 23, 2021 was 29,548,011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed within 120 days of January 31, 2021 are incorporated by reference in this
Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
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1
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 fact included in this Annual Report on Form 10-K 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,” “design,” “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 or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking
statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ
materially from those that we expected, including:
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prolonged effects of the COVID-19 on store traffic and disruptions to our distribution network, supply chains and
operations;
our ability to maintain and enhance a strong brand and sub-brand image;
our ability to successfully open new stores;
effectively adapting to new challenges associated with our expansion into new geographic markets;
our ability to meet customer delivery time expectations;
natural disasters, unusually adverse weather conditions, boycotts, prolonged public health crises, epidemics or
pandemics and unanticipated events;
generating adequate cash from our existing stores to support our growth;
the impact of changes in corporate tax regulations and sales tax;
identifying and responding to new and changing customer preferences;
the success of the locations in which our stores are located;
adapting to declines in consumer confidence and decreases in consumer spending;
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;
the potential increase in price and availability of raw materials;
our dependence on third-party vendors to provide us with sufficient quantities of merchandise at acceptable prices;
increases in costs of fuel or other energy, transportation or utility costs and in the costs of labor and employment;
the susceptibility of the price and availability of our merchandise to international trade conditions;
failure of our vendors and their manufacturing sources to use acceptable labor or other practices;
our dependence upon key executive management or our inability to hire or retain the talent required for our
business;
failure of our information technology systems to support our current and growing business, before and after our
planned upgrades;
disruptions in our supply chain and distribution centers;
our inability to protect our trademarks or other intellectual property rights;
infringement on the intellectual property of third parties;
acts of war, terrorism or civil unrest;
the impact of governmental laws and regulations and the outcomes of legal proceedings;
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changes in U.S. and non-U.S. laws affecting the importation and taxation of goods, including imposition of
unilateral tariffs on imported goods;
our ability to secure the personal and/or financial information of our customers and comply with the security
standards for the credit card industry; and
our failure to maintain adequate internal controls over our financial and management systems.
We make many of our forward-looking statements based on our operating budgets and forecasts, which are based upon
detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the
impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
See the “Risk Factors” section of this Annual Report on Form 10-K for a more complete discussion of the risks and
uncertainties mentioned above and for discussion of other risks and uncertainties. All forward-looking statements attributable to
us are expressly qualified in their entirety by these cautionary statements as well as others made in this annual report and
hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us
in the context of these risks and uncertainties.
We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you.
Furthermore, the forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof.
We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future
events or otherwise, except as otherwise required by law.
3
ITEM 1.
BUSINESS
PART I
Unless the context indicates otherwise, the terms the “Company,” “Duluth,” “Duluth Trading,” “Duluth Holdings,”
“Duluth Trading Co.,” “we,” “our” or “us” are used to refer to Duluth Holdings Inc.
The following discussion contains references to fiscal years 2020 and 2019, which refer to our fiscal years ended
January 31, 2021 and February 2, 2020, respectively. Fiscal years 2020 and 2019 were 52-week periods.
Duluth Trading is a lifestyle brand of men’s and women’s casual wear, workwear and accessories primarily sold 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 January
31, 2021, we operated 62 retail stores and three outlet stores. In fiscal 2020, we opened a total of 4 retail stores adding
approximately 60,000 gross square feet to our stores.
Duluth Trading was founded in 1989 when two brothers in the home construction industry were tired of dragging tools
from job to job using discarded five-gallon drywall compound buckets. The two brothers were never satisfied with the status
quo and believed “there’s gotta be a better way.” So, they invented the Bucket Boss® - a ruggedly durable canvas tool
organizer that fits around a drywall bucket and transformed the way construction workers organized their tools. Capitalizing on
their initial success, these brothers launched a catalog that later became known as Duluth Trading Company. Under the initial
philosophy of “Job Tough, Job Smart,” this catalog was dedicated to improving and expanding on existing methods of tool
storage, organization and transport. In December 2000, GEMPLER’S Inc., a Wisconsin corporation and an agricultural and
horticultural supply catalog business founded and owned by Stephen L. Schlecht, acquired Duluth Trading and brought the two
mail order companies together. Both catalogs had customers who worked outside and embraced the spirit of hands-on, self-
reliant Americans. In February 2003, the GEMPLER’s catalog business was sold to W.W. Grainger (NYSE:GWW) and
proceeds from that sale were used to fund the growth of Duluth Trading. With that transaction, GEMPLER’S changed its
corporate name to Duluth Holdings Inc.
From what began as an idea aimed at those working in the building trades, Duluth Trading has become a widely
recognized brand and proprietary line of innovative and functional apparel and gear. We have created strong brand awareness,
built a loyal customer base and generated robust sales momentum. We believe the foundation of our success is our culture of
“poking average in the eye” by seeing things for what they could be and should be and finding a way to make them exactly that,
and we like to do it all with a big, toothy grin.
Our Growth Strategies
Our goal is to expand the reach of the Duluth Trading brand, using strategies that will further drive growth and
profitability:
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Evolving into a Portfolio of Distinct Brands within the Duluth Trading Co. Ecosystem. At the center of Duluth
Trading Co’s success has been the consistent ability to develop and grow our brands and sub-brands. We’ve used
our unique combination of forward-thinking product development, memorable storytelling and direct relationship
with the customer to evolve and grow the Duluth Trading Men’s sub-brand. We used the same formula on the
Duluth Trading Women’s sub-brand and, more recently, the Alaskan Hardgear sub-brand. This continued success
gives us the confidence to enter the next phase of our evolution: Duluth Trading Co. as a direct to consumer brand
platform. We plan to leverage our infrastructure investments and direct marketing expertise to launch and grow
closely guarded digitally native brands that cater to an ever-growing definition of a “can-do” customer. Men and
Women across all walks of life can rely on Duluth Trading Co. portfolio of brands for quality, innovative products
to support hands-on work, active hobbies and modern, self-reliant lifestyle. 40Grit and Best Made are our latest
platform sub-brands. 40Grit is a workwear basics line tailored to our younger, more budget conscious consumer.
Best Made is a premium offering with design-focused hardgoods and apparel. Over time, we will plan to add more
sub-brands as we see whitespace or as acquisition opportunities emerge.
Growing Sales in Existing Store and Non-Store Markets. Based on our experience to date, we believe the
combination of our high brand awareness and agile digital advertising tools allow us to grow our business in both
store markets and non-store markets, while also navigating through the unprecedented disruptions to store traffic
that the COVID-19 pandemic brought on. Our significant shift between physical and digital channel sales in 2020,
yet realizing growth in sales overall for the year, highlight the flexibility and resiliency of our direct order
fulfillment model. Once we begin to return to normal retail operations, one of our top priorities will be to drive
awareness of and traffic to our stores with total market growth being our primary goal.
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We believe our retail stores provide ancillary marketing benefits by complementing our digital presence to enable
brand discovery, experience and superior service. We believe that our customers’ desire to shop in stores,
combined with the compelling unit economics of our existing retail stores, provide us with the opportunity to
continue to grow our store market sales, but to be selective on new store formats and locations based on changing
shopping behavior. We plan to scale our distribution model to meet customer’s expectations across brands in a
cost-effective manner. We will also plan to develop strategic partnerships to extend the reach of our brands into
new channels or to provide unique product offerings.
Strengthening the Core Men’s Duluth Brand. We believe there is opportunity to fortify and grow our men’s
business by selectively broadening our assortment in certain product categories that cement Duluth as the most
innovative workwear destination. Our Duluth Trading Men’s sub-brand will remain focused on our long-standing
key to success by introducing products that solve a problem and serve a purpose. Our Duluth Trading Men’s
collection of workwear apparel and accessories includes our most well-known base layer and underwear category,
where we will continue to develop innovative products in our Center for Underwear Advancement initiative.
Growing Our Women’s Duluth Brand. We believe that we have a significant opportunity to continue to grow our
Duluth Trading Women’s sub-brand through customer acquisition, and we plan to leverage all of our marketing
tools to do so. We expect that our Duluth Trading Women’s sub-brand will continue to represent an increasing
portion of our net sales, and accordingly, we are allocating a higher percentage of our total advertising budget to
the women’s sub-brand. With our Duluth Women’s Brand relaunch in 2020, our focus shifted to hands-on capable
women through our WAYFORGER™ customer features and Maker’s Collection of workwear. Also, our expansion
of base layer basics featuring a broadened assortment of sizes and unique fabrications establish Duluth as the
Destination for Comfort. We believe that as we continue to capture share in an increasingly fragmented women’s
apparel market, our business will continue to grow and be driven by solution-based products that fits the Modern,
Self-Reliant American Lifestyle and will appeal to a wider range of female customers.
Omnichannel
Our omnichannel business strategy allows our sales channels to work in synergy to seamlessly deliver a consistent brand
experience to the customer, including consistent marketing, pricing and product presentation. All sales channels are fully
integrated, including stores, website, catalogs and customer contact centers. Our omnichannel services include order-in-store,
buy-online-pickup-in-store, and ship-from-store as well as retail store and mobile shopping experiences.
Retail Store Environment
Our retail stores are designed to bring our brand to life by creating a unique and entertaining experience, including
engaging sales associates, a compelling and complete product assortment, custom made fixtures to fit our brand, free wireless
Internet and complimentary coffee and water. We also showcase unique attractions at each retail store that celebrate the
heritage of the local area, such as the tool museum in our Mt. Horeb, Wisconsin store and the “Exploded Tractor” exhibit in our
Ankeny, Iowa store. We believe these local community elements help promote customer loyalty and drive repeat purchases.
Our Products
We offer a comprehensive line of innovative, durable and functional casual wear, workwear and accessories for both men
and women. Our product assortment includes shirts, pants, underwear, outerwear, footwear, accessories and hard goods. Our
products feature proprietary designs and distinct names, such as our Longtail T® shirts, Buck NakedTM underwear, Fire Hose®
work pants and No-YankTM Tank.
Our stable product assortment appeals to our customers for their everyday and on-the-job use. The majority of our
products represent enduring styles that go beyond short-lived fashion trends. We believe many of our customers’ purchases are
driven by our thoughtful design and high quality craftsmanship, and our best-selling styles tend to be items that carry over year
to year with only minor updates.
We believe the authenticity of our products is driven by a number of factors, including our solution-based design process,
use of technical materials, sophisticated manufacturing methods and innovative product features. Our products are sold at
competitive prices and are designed to offer superior performance with added features such as underarm panels for more
freedom of movement, triple-stitched seams for durability and mid-leg utility pockets for functionality. We also collaborate
with our suppliers to develop advanced fabrics that we sell under our trademarks. For example, we incorporate our Duluthflex®
Fire Hose® cotton canvas into products to provide strength and abrasion resistance with stretch for freedom of movement.
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Product Development
We are focused on developing apparel and gear that builds upon the Duluth Trading brand’s product heritage of “there’s
gotta be a better way,” resulting in distinctive products with enhanced features. We primarily use an innovative feedback-based
design process through which we actively seek the input of our customers, including a group of more than 100 products testers
with expertise in the trades industry. These trades panel members have become an integral part of our product development
process, as they test and evaluate select products in intense conditions, providing real-time feedback on performance and
functionality. Members of our product development team also regularly read online customer product reviews, attend
tradeshows and collaborate with our vendors, which facilitates new product innovation. Our product development team
incorporates all of this input to develop new product solutions and features, ensure consistent fit, style and color and design
functional and durable fabrics.
Marketing
Our marketing strategy is designed to build brand awareness, acquire new customers, enhance customer loyalty and drive
sales transactions. We are nationally known for our creative, irreverent and quirky advertising that features our Giant Angry
Beaver, Buck Naked Guy and Grab-Happy Grizzly characters to showcase our brand philosophy, humor and innovation. We
also feature testimonials in our marketing campaigns, which put our products in context, tying them to the individuals who
represent our core customer, who leads a hands-on lifestyle, values a job well-done and is often outdoors for work and hobbies.
We believe our customers identify with the inspiring stories of real men and women, recognize our products’ versatility and
appreciate the extreme and demanding conditions our products can withstand.
We pursue our marketing strategy through multiple forms of media, which gives our products an identity and enhances
our brand:
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Digital and Email Marketing. We employ a variety of digital and online advertising strategies. These efforts
include display advertising, digital video advertising, search engine marketing and optimization and targeted email,
which we send to customers to introduce new products and offer promotions on select merchandise.
Television. We advertise on cable and broadcast television networks to build brand awareness for both men’s and
women’s products and to reach a large, national audience. These advertisements feature both our animated
characters and female models, and are intended to be humorous, irreverent and quirky in order to grab the viewer’s
attention, while highlighting the particularly innovative, solution-based features of our core products and the
Duluth Trading name.
Social Media. We have an engaged social media community, which allows us to personally connect with our
customers online, and we believe further raises brand awareness. We maintain a social media presence on
Facebook, Instagram, Pinterest, YouTube and Twitter.
Catalogs. Our catalogs are an important part of our heritage and represent a tangible vehicle for our authentic and
humorous storytelling. Our catalogs serve as an important customer acquisition tool by driving visits to our website
and retail stores.
Customer Service
We are committed to providing outstanding customer service and believe in treating our customers like next-door
neighbors. Our retail stores are stocked with a comprehensive assortment of our products and staffed with knowledgeable and
well trained sales associates. We stand behind all purchases with our “No Bull Guarantee.” Our call center is open for calls
from 5 A.M. to 1 A.M. Central Time, seven days a week and is staffed with friendly, knowledgeable representatives dedicated
to making every customer experience positive. As a convenience to our customers, we offer live chat through our website,
which is available from 7 A.M. to 8 P.M. Central Time on weekdays and 8 A.M. to 5 P.M. Central Time on weekends.
Manufacturing
We do not own or operate any manufacturing facilities. Instead, we arrange with third-party vendors for the
manufacturing of our merchandise. We have built strong, long-term relationships with our vendors. In fiscal 2020, 60% of our
purchases came from our largest supplier, an agent partner in Hong Kong who manages multiple factories across Asia,
including Cambodia, China, Indonesia and Vietnam. Approximately 10% of our purchases in fiscal 2020 came from our second
largest supplier, which is based in Thailand. We believe sourcing inventory through these agents allows us to leverage the
agents’ purchasing power with multiple factories, as well as transportation and logistics capabilities, allowing our internal team
to focus on our core competencies of product development, storytelling and serving customers, rather than factory and mill
management or logistics.
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Our sourcing strategy focuses on identifying and employing vendors that provide quality materials and fine craftsmanship
that our customers expect of our brand. To ensure that our high standards of quality and timely delivery of merchandise are
met, we work closely with our third-party agent partners. All of our products are produced according to our specifications, and
we require all of our manufacturers to adhere to strict regulatory compliance and standards of conduct. We seek to ensure the
consistent quality by employing Duluth Trading-certified factory auditors to selectively examine pre-production samples,
conduct periodic site visits to certain of our vendors’ production facilities and inspect inbound shipments at our distribution
centers.
Distribution Centers
We operate distribution centers located in Belleville, Wisconsin and Dubuque, Iowa. We plan to open a new distribution
center before the peak holiday shopping season in Salt Lake City, Utah to further expand our shipping capacity and store
replenishment capabilities. The approximate square footage of each facility is included in Item 2 of Part I of this report. We
also contracted with two third-party logistics (“3PLs”) centers in Sparks, Nevada and Carlisle, Pennsylvania. Our contracts with
the 3PLs ended in the second quarter of fiscal 2020. Orders are generally assigned to the distribution center closest to the
customer’s ship-to location.
Returns Center
We currently lease a warehouse space located in Verona, Wisconsin. The approximate square footage is included in Item
2 of Part I of this report. Our returns center handles the majority of direct-to-consumer sales returns.
Information Technology
We use technology to provide customer service, business process support and business intelligence across our sales
channels. We continually aim to have more efficient supply chain and distribution systems operations. Our distributed order
management systems provide us with omnichannel capabilities that have a global view of available-to-promise inventory
management.
Competition
We operate primarily in the apparel, footwear and accessories industry, which is highly competitive. We compete with a
diverse group of direct-to-consumer companies and retailers, including men’s and women’s specialty apparel chains,
department stores, outdoor specialty stores, apparel catalog businesses and online apparel businesses. We compete principally
on the basis of brand recognition, innovation, product quality, customer service and price. To stay ahead of our competition, we
continue to develop innovative solution-based products for which we create unique selling propositions that incorporate humor
and storytelling.
Intellectual Property
Our trademarks are important to our marketing efforts. We own or have the rights to use certain trademarks, service
marks and trade names that are registered with the U.S. Patent and Trademark Office, trademark offices in other jurisdictions,
or exist under common law in the United States and other jurisdictions. The “Duluth Trading Co” trade name and trademark is
used both in the United States and internationally and is material to our business. Trademarks that are important in identifying
and distinguishing our products and services are Alaskan Hardgear®, Armachillo®, Ballroom®, Cab Commander®, Crouch
Gusset®, Dry on the Fly®, Duluth Trading Co®, Duluthflex®, Fire Hose®, Longtail T®, No Polo Shirt®, No Yank® and Wild Boar
Mocs®. Our rights to some of these trademarks may be limited to select markets. We also own domain names, including
“duluthtrading.com.”
Employees
As of January 31, 2021, we employed 1,030 full-time and 1,947 part-time and flexible part-time employees, 1,630 of
which were employed at our retail stores. The number of employees, particularly part-time employees, fluctuates depending
upon seasonal needs. Our employees are not represented by a labor union and are not party to a collective bargaining
agreement. We consider our relations with our employees to be good.
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Seasonality
Our business experiences seasonal fluctuations. Our net sales and net income are generally highest in the fourth fiscal
quarter, which includes the holiday sales period. The following table presents net sales and net income for the fourth quarter as
a percentage of the fiscal year.
Fiscal Year
(in thousands)
2020
2019
4Q
Net Sales
4Q Net Sales
% of Fiscal year
4Q
Net Income
4Q Net Income
% of Fiscal Year
$
$
255,960
259,649
40.1 %
42.2 %
$
$
21,831
24,375
160.8 %
128.8 %
Regulation and Legislation
We are subject to labor and employment laws, truth-in-advertising laws, privacy laws, safety regulations, consumer
protection regulations and other laws that regulate retailers and govern the promotion and sale of merchandise and the operation
of stores and warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with
applicable laws.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
are made available free of charge on or through our website at www.duluthtrading.com under the “Investors” tab as soon as
reasonably practicable after such reports are filed with, or furnished to the SEC.
Additional Information
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 Company has focused on protecting the health and safety of our employees, customers and suppliers,
working with our customers, landlords, suppliers and vendors to minimize potential disruptions and supporting our community,
while managing our business in these unprecedented times. All retail stores were temporarily closed beginning March 20, 2020
and began re-opening the first week of May through the third week of June. All of our retail stores are open, but prolonged
COVID-19 safety concerns have kept store traffic at subdued levels.
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, international governments to prevent disease spread, and the availability, safety and efficiency of a
vaccine. We continue to actively evaluate all federal, state and local regulations to ensure compliance with store operations.
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ITEM 1A.
RISK FACTORS
Certain factors may have a material adverse effect on our business, financial condition and results of operations. You
should consider carefully the risks and uncertainties described below, in addition to other information contained in this Annual
Report on Form 10-K, including our financial statements and related notes. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not
material, may also become important factors that adversely affect our business. If any of the following risks actually occurs,
our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that
event, the trading price of our Class B common stock could decline, and you could lose part or all of your investment.
Risks Related to the COVID-19 Global Pandemic
The Coronavirus pandemic may continue to adversely affect our business operations, store traffic, employee availability,
financial condition, liquidity, and cash flow for an extended period of time.
The outbreak of the Coronavirus (“COVID-19”) continues to affect our business operations and it is impossible to predict
the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving.
As the pandemic continues, consumer fear about becoming ill with the virus and recommendations and/or mandates from
federal, state and local authorities to avoid large gatherings of people or self-quarantine may continue to increase, which may
continue to adversely affect traffic to our stores, result in further reduced store hours or result in store closures. Ongoing
significant reductions in customer visits to, and spending at, our stores caused by COVID-19 would result in further loss of
retail store sales and profits and other material adverse effects. The extent of the impact of COVID-19 on our business,
financial results, liquidity and cash flows will depend largely on future developments, including the effectiveness and rollout
timing of the vaccine, new information that may emerge concerning the severity and action taken to contain or prevent further
spread within the U.S. and the related impact on consumer confidence and spending, all of which are highly uncertain and
cannot be predicted.
These and other potential impacts of COVID-19, could therefore materially and adversely affect our business, financial
condition and results of operations.
Strategic Risks
If we fail to offer products that customers want to purchase, our business and results of operations could be adversely
affected.
Our products must satisfy the desires of customers, whose preferences change over time. In order to be successful, we
must design, obtain and offer to customers innovative and high-quality products on a continuous and timely basis. Failure to
effectively respond to customer needs and preferences, or convey a compelling brand image or price-to-value equation to
customers may result in lower net sales and gross profit margins.
Our success depends in part on management’s ability to effectively anticipate or identify customer needs and preferences
and respond quickly with marketable product offerings in advance of the actual time of sale to the customer. Even if we are
successful in anticipating or identifying our customers’ needs and preferences, we must continue to develop and introduce
innovative, high-quality products and product features in response to changing consumer demand.
Factors that could affect our ability to accurately forecast consumer demand for our products include:
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a failure in our solution-based design process to accurately identify the problems our customers are experiencing
with commonly available apparel and gear or a lack of customer acceptance of new products or product features we
design;
customer unwillingness to attribute premium value to our new products or product features we design relative to
the commonly available apparel and gear they were intended to replace;
new, well-received product introductions by competitors;
weak economic conditions or consumer confidence, which reduce demand for our products; and
terrorism, civil unrest or acts of war, or the threat thereof, which adversely affect consumer confidence and
spending and/or interrupt production and distribution of products and raw materials.
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There can be no assurance that we will be able to successfully anticipate or identify our customers’ needs and preferences
and design products and product features in response. These risks could have a material adverse effect on our brand as well as
our results of operations and financial condition.
Our business depends on our ability to maintain strong brands and sub-brands. We may not be able to maintain and
enhance the Duluth Trading brands if we receive unfavorable complaints, negative publicity or otherwise fail to live up to
consumers’ expectations, which could materially adversely affect our business, results of operations and growth prospects.
We currently offer a differentiated brand to our customers defined by solution-based products manufactured with high
quality craftsmanship, humorous and distinctive marketing, and an outstanding customer experience. Maintaining and
enhancing the Duluth Trading brand is critical to expanding our base of customers. If we fail to maintain our brand, or if we
incur excessive expenses in this effort, our business, operating results and financial condition may be materially adversely
affected. We anticipate that, as we raise our profile nationally and attract an increasing amount of competition, maintaining and
enhancing our brand may become increasingly difficult and expensive and may require us to make substantial additional
investments in areas such as marketing, store operations, merchandising, technology and personnel.
Customer complaints or negative reactions to, or unfavorable publicity about, our product quality or product features, our
storytelling or irreverent advertising, the shopping experience on our website or in our retail stores, product delivery times,
customer data privacy and security practices or customer support, especially on blogs, social media, other third-party websites
and our website, could rapidly and severely diminish consumer use of our website and catalogs, visits to our retail stores and
consumer confidence in us and result in harm to our brand. Furthermore, these factors could cause our customers to no longer
feel a personal connection with the Duluth Trading brand, which could result in the loss of customers and materially adversely
affect our business, results of operations and growth prospects.
We may face risks and new challenges associated with our geographic expansion.
Our expansion into new geographic markets could result in increased competitive, merchandising, distribution and other
challenges. We may encounter difficulties in attracting customers in our new retail store locations due to a lack of customer
familiarity with our brand, our lack of familiarity with local customer preferences, competition with new competitors or with
existing competitors with a large, established market presence and seasonal differences in the market. Our ability to expand
successfully into other geographic markets will depend on acceptance of our retail store experience by customers in those
markets, including our ability to design our stores in a manner that resonates locally and to offer the correct product assortment
to appeal to consumers in such markets. There can be no assurance that any newly opened stores will be received as well as, or
achieve net sales or profitability levels consistent with, our projected targets or be comparable to those of our existing stores in
the time periods estimated by us, or at all. If our stores fail to achieve, or are unable to sustain, acceptable net sales and
profitability levels, our business, results of operations and growth prospects may be materially adversely affected.
Furthermore, our retail stores may be located in regions that will be far from our Mount Horeb, Wisconsin headquarters
and will require additional management time and attention. Failure to properly supervise the operation and maintain the
consistency of the customer experience in those retail stores could result in loss of customers and potentially harm future net
sales prospects.
The success of our direct-to-consumer channel depends on customers’ use of our digital platform, including our website,
and response to catalogs and digital marketing; if our overall marketing strategies are not successful, including our
maintenance of a robust customer list and ability to effectively customize our marketing efforts based on understanding
customers preferences, our business and results of operations could be materially adversely affected.
The level of customer traffic and volume of customer purchases through our direct-to-consumer channel is substantially
dependent on our ability to provide a content-rich and user-friendly website, widely distributed and informative catalogs, a fun,
easy and hassle-free customer experience and reliable delivery of our products. If we are unable to maintain and increase
customers’ use of our e-commerce platform, including our website, and the volume of purchases decline, our business and
results of operations could be adversely affected.
Customer response to our digital marketing and catalogs is substantially dependent on merchandise assortment,
merchandise availability and creative presentation, as well as the selection of customers to whom our digital marketing is
directed and our catalogs are sent. Our maintenance of a robust customer list, which we believe includes desirable demographic
characteristics for the products we offer, has also been a key component of our overall strategy. If the performance of our
website, catalogs and email declines, or if our overall marketing strategy is not successful, our business, results of operations
and stock price could be adversely affected.
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If we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to increase net
revenue or profit per active customer.
Our success depends on our ability to acquire customers in a cost-effective manner. In order to expand our customer base,
we must appeal to and acquire customers who identify with the Duluth Trading brand. We have made significant investments
related to customer acquisition and expect to continue to spend significant amounts to acquire additional customers. For
example, our national television advertising campaigns are expensive and may not result in the cost-effective acquisition of
customers. Furthermore, as our brand becomes more widely known in the market, future marketing campaigns may not result in
the acquisition of new customers at the same rate as past campaigns.
We also use other paid and non-paid advertising. Our paid advertising includes search engine marketing, display
advertising and paid social media. Our non-paid advertising efforts include search engine optimization, non-paid social media
and email. We obtain a significant amount of traffic via search engines and, therefore, rely on search engines such as Google,
Yahoo! and Bing. Search engines frequently update and change the logic that determines the placement and display of results
of a user’s search, such that the purchased or algorithmic placement of links to our sites can be negatively affected. Moreover, a
search engine could, for competitive or other purposes, alter its search algorithms or results, causing our sites to place lower in
search query results. A major search engine could change its algorithms in a manner that negatively affects our paid or non-paid
search ranking, and competitive dynamics could impact the effectiveness of search engine marketing or search engine
optimization. We also obtain a significant amount of traffic via social networking websites or other channels used by our
current and prospective customers. As e-commerce and social networking continue to rapidly evolve, we must continue to
establish relationships with these channels and may be unable to develop or maintain these relationships on acceptable terms.
Additionally, digital advertising costs may continue to rise and as our usage of these channels expands, such costs may impact
our ability to acquire new customers in a cost-effective manner. If the level of usage of these channels by our customer base
does not grow as expected, we may suffer a decline in customer growth or net sales. A significant decrease in the level of usage
or customer growth would have a material adverse effect on our business, financial condition and operating results.
We cannot assure you that the net profit from new customers we acquire will ultimately exceed the cost of acquiring
those customers. If we fail to deliver an outstanding customer experience, or if consumers do not perceive the products we offer
to be manufactured with high quality craftsmanship, we may not be able to acquire new customers. If we are unable to acquire
new customers, our growth prospects may be materially adversely affected.
If we cannot compete effectively in the apparel, footwear and accessories industry, our business and results of operations
may be adversely affected.
The apparel, footwear and accessories industry is highly competitive. We compete with a diverse group of direct-to-
consumer companies and retailers, including men’s and women’s specialty apparel chains, outdoor specialty stores, apparel
catalog businesses and online apparel businesses that sell competing lines of merchandise. Our competitors may be able to
adopt more aggressive pricing policies, adapt to changes in customers’ needs and preferences more quickly, devote greater
resources to the design, sourcing, distribution, marketing and sale of their products or generate greater national brand
recognition than us. In addition, as our business continues to expand, our competitors may seek to increase efforts to imitate our
product designs, which could adversely affect our business and results of operations. An inability to overcome these potential
competitive disadvantages or effectively market our products relative to our competitors could have an adverse effect on our
business and results of operations.
We may engage in strategic transactions that could negatively impact our liquidity, increase our expenses and present
significant distractions to management.
We may consider strategic transactions and business arrangements, including, but not limited to, acquisitions, asset
purchases, partnerships, joint ventures, restructurings and investments. Any such transaction may require us to incur non-
recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or
disrupt our management or business, which could harm our operations and financial results.
Operational Risks
We rely on sources for merchandise located in foreign markets, and our business may therefore be adversely affected by
legal, regulatory, economic and political risks associated with international trade and those markets.
Our reliance on suppliers in foreign markets creates risks inherent in doing business in foreign jurisdictions, including:
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transportation delays and interruptions, including due to port congestion and the failure of suppliers or distributors
to comply with import regulations;
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the burdens of complying with a variety of foreign laws and regulations, including trade and labor restrictions,
import/export laws and regulations, and local intellectual property laws and rights owned by third parties;
changes in U.S. and non-U.S. laws (or changes in the enforcement of those laws) affecting the importation and
taxation of goods, including disallowance of tax deductions for imported merchandise, imposition of unilateral
tariffs on imported goods, duties, quotas, enhanced security measures at U.S. ports or imposition of new legislation
relating to import quotas;
economic and political instability in the countries and regions where our suppliers are located;
compliance with U.S. and other country laws relating to foreign operations, including the Foreign Corrupt Practices
Act, which prohibits U.S. companies from making improper payments to foreign officials for the purpose of
obtaining or retaining business;
increases in shipping, labor, fuel, travel and other transportation costs;
the imposition of anti-dumping or countervailing duty proceedings resulting in the potential assessment of special
anti-dumping or countervailing duties;
political instability and acts of terrorism; and
the occurrence of a natural disaster, unusual weather conditions, or prolonged public health crises, epidemics or
pandemics in foreign countries from which we source our products.
The occurrence of one or more of these events could result in disruptions to our operations, which in turn could increase
our cost of goods sold, decrease our gross profit, or impact our ability to deliver to our customers. For example, the recent
outbreak of COVID-19 has led to work and travel restrictions as well as temporary closure of production and logistics
constraints due to workforce availability. If the COVID-19 outbreak continues and persists for an extended period of time, there
may be significant and material disruptions to our supply chain and operations, and delays in the manufacture and shipment of
our products, which may then have a material adverse effect on our business and results of operations.
New initiatives may be proposed in the United States that may have an impact on the trading status of certain countries
and may include retaliatory duties or other trade sanctions that, if enacted, would increase the cost of products purchased from
suppliers in such countries with which we do business. Any inability on our part to rely on our foreign sources of production
due to any of the factors listed above could have an adverse effect on our business, results of operations and financial condition.
If we fail to timely and effectively obtain shipments of products from our suppliers and deliver merchandise to our
customers, our business and operating results could be adversely affected.
We do not own or operate any manufacturing facilities and therefore depend upon independent third-party suppliers for
the manufacture of our merchandise. We cannot control all of the various factors that might affect timely and effective
procurement of supplies of product from our third-party suppliers and delivery of merchandise to our customers. A majority of
the products that we purchase must be shipped to our distribution centers in Wisconsin and Iowa. While our reliance on a
limited number of distribution centers provides certain efficiencies, it also makes us more vulnerable to natural disasters,
weather-related disruptions, accidents, system failures, public health pandemics, such as the ongoing COVID-19 outbreak or
other unforeseen causes that could delay or impair our ability to fulfill customer orders and/or ship merchandise to our stores,
which could adversely affect sales. Our ability to mitigate the adverse impacts of these events depends in part upon the
effectiveness of our disaster preparedness and response planning, as well as our business continuity planning. Our use of
imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things, risks
of damage, destruction or confiscation of products while in transit to a distribution center or at points of export or import,
organized labor strikes and work stoppages, transportation and other delays in shipments, including as a result of heightened
security screening and inspection processes or other port-of-entry limitations or restrictions in the United States, unexpected or
significant port congestion, lack of freight availability and freight cost increases. In addition, if we experience a shortage of a
popular item, we may be required to arrange for additional quantities of the item, if available, to be delivered through airfreight,
which is significantly more expensive than standard shipping by sea. We may not be able to obtain sufficient freight capacity
on a timely basis or at favorable shipping rates and, therefore, may not be able to receive merchandise from suppliers or deliver
products to customers in a timely and cost-effective manner.
Competitive pricing pressures with respect to shipping our products to our customers may harm our business and results
of operations.
Given the size of our direct-to-consumer net sales relative to our total net sales, shipping and handling revenue has had a
significant impact on our gross profit and gross profit margin. Historically, this revenue has partially offset our shipping and
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handling expense included in selling, general and administrative expenses. Online and omnichannel retailers are increasing
their focus on delivery services, with customers increasingly seeking faster, guaranteed delivery times and low-price or free
shipping. Higher direct-to-consumer net sales has and may continue to also result in additional peak surcharges assessed by our
delivery partners. To remain competitive, we have been required to offer discounted, free or other more competitive shipping
options to our customers, which has resulted in declines in our shipping and handling revenue and increased shipping and
handling expense. We expect further declines in shipping and handling revenues as compared to prior years. Further declines in
shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as our
Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling
expense.
We rely on third-party service providers, such as UPS and the United States Postal Service (“USPS”), to deliver products
purchased through our direct-to-consumer channel to our customers and our business could be negatively impacted by
disruptions in the operations of these third-party service providers.
Relying on third-party service providers puts us at risk from disruptions in their operations, such as employee strikes,
inclement weather and their inability to meet our shipping demands. For example, due to COVID-19, during the fourth quarter
UPS increased surcharges and provided shipping thresholds, which were mitigated by engaging additional shipping partners
during our peak selling season. Our efforts to mitigate the impact of future thresholds may not be successful or may result in
similar surcharges. Moreover, we may be unable to obtain terms as favorable as those received from the transportation
providers we currently use, which would further increase our costs. In addition, if our products are not delivered to our
customers on time, our customers may cancel their orders or we may lose business from these customers in the future. We may
be subject to shipping surcharges and thresholds during the peak holiday shopping season, which may have a negative impact
on our earnings. These factors may negatively impact our financial condition and results of operations.
Dependence on our e-commerce sales channel subjects us to numerous risks that could have a material adverse effect on
our business, financial condition and results of operations.
Our results of operations and financial condition are dependent on maintaining our e-commerce business and expanding
our e-commerce business is an important part of our growth strategy. Dependence on our e-commerce business and its
continued growth subjects us to certain risks, including:
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diversion of traffic from our stores;
liability for online content;
the need to keep pace with rapid technological change;
government regulation of the Internet, including taxation; and
threats to the computer systems that operate our website and related support systems, including viruses, malware
and other malicious code, misconfiguration, systems failure or inadequacy, compromise or unauthorized access and
similar disruptions.
Our failure to successfully respond to these risks and uncertainties could reduce our e-commerce sales, increase our costs,
diminish our growth prospects, and damage our brand, which could negatively impact our business, financial condition and
results of operations.
Increases in the price of raw materials, fuel and labor, or their reduced availability, could increase our cost of goods and
cause delays.
The price and availability of raw materials may fluctuate substantially, depending on a variety of factors, including
demand, acreage devoted to cotton crops and crop yields, weather patterns, supply conditions, transportation costs, energy
prices, work stoppages, government regulation and government policy, economic climates, market speculation and other
unpredictable factors. Fluctuations in the price and availability of fuel, labor and raw materials, such as cotton, could affect our
cost of goods and an inability to mitigate these cost increases, unless sufficiently offset with our pricing actions, might cause a
decrease in our profitability, while any related pricing actions might cause a decline in our sales volume. Additionally, any
decrease in the availability of raw materials could impair our ability to meet our production or purchasing requirements in a
timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may have an
adverse impact on our cash flow and working capital needs as well as those of our suppliers.
We rely upon third-party land-based and air freight carriers for merchandise shipments from our distribution centers to
customers and our retail stores. Accordingly, we are subject to the risks, including labor disputes, union organizing activity,
inclement weather and increased transportation costs, associated with such carriers’ ability to provide delivery services to meet
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outbound shipping needs. In addition, if the cost of fuel rises, the cost to deliver merchandise from distribution centers to
customers and our retail stores may rise and, although some of these costs are paid by our customers, such costs could have an
adverse impact on our profitability. Failure to procure suppliers of products from our third-party suppliers and deliver
merchandise to customers and our retail stores in a timely, effective and economically viable manner could damage our
reputation and adversely affect our business. In addition, any increase in distribution costs and expenses could adversely affect
our future financial performance.
If our key suppliers or service providers were unable or unwilling to provide the products and services we require, our
business could be adversely affected.
Our products are sourced through third-party purchasing agents and a variety of domestic and international suppliers. If
these suppliers are unable or unwilling to provide the products or services that we require or materially increase their costs, our
ability to offer and deliver our products on a timely and profitable basis could be impaired, which could have a material adverse
effect on our business, financial condition and results of operations. We do not have written agreements with our top suppliers,
and we cannot assure that any or all of our relationships will not be terminated or that such relationships will continue as
presently in effect. Furthermore, if any of our significant suppliers were to become subject to bankruptcy, receivership or
similar proceedings, customs actions, or other legal actions, we may be unable to arrange for alternate or replacement
relationships on terms as favorable as our current terms, which could adversely affect our sales and operating results.
Our growth strategy is influenced by the willingness and ability of our suppliers to efficiently manufacture our products
in a manner that is consistent with our standards for quality and value. If we cannot obtain a sufficient amount and variety of
quality products at acceptable prices, it could have a negative impact on our competitive position. This could result in lower
revenue and decreased customer interest in our product offerings, which, in turn, could adversely affect our business and results
of operations. Our arrangements with our suppliers are generally not exclusive. As a result, our suppliers might be able to sell
similar or identical products to certain of our competitors, some of which purchase products in significantly greater volume.
Our competitors may enter into arrangements with suppliers that could impair our ability to obtain our products from those
suppliers, including by requiring suppliers to enter into exclusive arrangements, which could limit our access to such
arrangements or products.
If we cannot successfully implement future retail store expansion, our growth and profitability could be adversely
impacted.
Our ability to open new retail stores in a timely manner and operate them profitably depends on a number of factors,
many of which are beyond our control, including:
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our ability to manage the financial and operational aspects of our retail store growth strategy, including making
appropriate investments in our software systems, information technology and operational infrastructure;
our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data
to accurately determine consumer demand for our products in the locations we select;
our ability to negotiate favorable lease agreements;
our ability to properly assess the profitability and payback period of potential new retail store locations;
the availability of financing on favorable terms;
our ability to secure required governmental permits and approvals;
our ability to abide by environmental standards;
our ability to hire and train skilled store operating personnel, especially management personnel;
the availability of construction materials and labor and the absence of significant construction delays or cost
overruns;
our ability to provide a satisfactory mix of merchandise that is responsive to the needs of our customers living in
the areas where new retail stores are built;
our ability to establish a supplier and distribution network able to supply new retail stores with inventory in a
timely manner;
our competitors building or leasing stores near our retail stores or in locations we have identified as targets for a
new retail store;
consumer demand for our products, which drives traffic to our retail stores; and
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general economic and business conditions affecting consumer confidence and spending and the overall strength of
our business.
We rely on third parties to provide us with services in connection with certain aspects of our business, and any failure by
these third parties to perform their obligations could have an adverse effect on our business and results of operations.
We have entered into agreements with third parties for logistics services, information technology systems (including
hosting our website), operating our call center during certain hours, software development and support, catalog production,
select marketing services, processing gift card activity, distribution and packaging and employee benefits. Services provided by
any of our third-party suppliers could be interrupted as a result of many factors, such as acts of nature or contract disputes. Any
failure by a third party to provide us with services for which we have contracted on a timely basis or within service level
expectations and performance standards could result in a disruption of our business and have an adverse effect on our business
and results of operations.
Inventory shrinkage could have a material adverse effect on our business, financial condition and results of operations.
We are subject to the risk of inventory loss and theft. Although our inventory shrinkage rates have not been material, or
fluctuated significantly in recent years, we cannot assure you that actual rates of inventory loss and theft in the future will be
within our estimates or that the measures we are taking will effectively reduce the problem of inventory shrinkage. Although
some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory
shrinkage or incur increased security costs to combat inventory theft, it could have a material adverse effect on our business,
financial condition and results of operations.
We are subject to data security and privacy risks that could negatively affect our results, operations or reputation.
In the normal course of business we often collect, retain and transmit customer personal and credit card information,
employee personal information, and other sensitive and confidential information. The protection of customer and employee
information, and the Company’s intellectual property, from potential threats is vitally important to the Company. Consumers
and employees continue to have significant concerns about the security of personal information, especially when transmitted
over the Internet, and the use, retention, disclosure, and privacy of such information. We continually evaluate and upgrade our
information systems, security measures, and practices to combat the ever-evolving cyber risks and to comply with our legal and
regulatory obligations, and we provide cybersecurity awareness training around phishing, social engineering, and other cyber
risks to our employees, in an effort to elevate our cybersecurity posture and give our workforce the skills to both avoid and
report cyber threats. Despite our risk management efforts, vendor due diligence, and security measures, our facilities and
systems and those of our third-party service providers, are subject to increasingly complex cyber risks, including cyber
extortion, data breaches, unauthorized access, denial of service, vendor or employee misconduct, ransomware and other
malicious software, and data exfiltration. We and our employees and customers could suffer significant harm if any personal,
financial, or credit card information was accessed or disclosed by an unauthorized third party, or our information technology
systems or those of our third party providers were compromised or subject to data loss, exfiltration, corruption, or disruption.
Any security incident or data breach could severely damage our reputation and our relationships with customers, business
partners and employees, cause us to incur significant costs and expenses to investigate, remediate and notify affected
individuals, and expose us to an increased risk of litigation, regulatory enforcement, fines and penalties, and other losses and
liabilities. In addition, the media and public scrutiny of information security and privacy has become more intense and the
regulatory environment has become more complex and uncertain due to recent high-profile privacy and security incidents and
legislative efforts across the globe. As a result, we may incur significant costs to comply with laws regarding the use, retention,
disclosure, security, and privacy of personal information.
We rely significantly on information technology, and any inadequacy, interruption, integration failure or security failure
of this technology could harm our ability to effectively operate our business.
Our ability to effectively manage and operate our business depends significantly on information technology systems. We
rely heavily on information technology to track sales and inventory and manage our supply chain. We are also dependent on
information technology, including the Internet, for our direct-to-consumer sales, including our e-commerce and catalog
operations and retail business credit card transaction authorization. Despite our preventative efforts, our systems and those of
our third-party service providers may be vulnerable to damage or interruption. The failure of these systems to operate
effectively, problems with transitioning to upgraded or replacement systems, difficulty in integrating new systems or systems of
acquired businesses or a breach of security of these systems could adversely impact the operations of our business, including
disruption of our ability to accept and fulfill customer orders, effective management of inventory, inefficient ordering and
replenishment of products, e-commerce operations, retail business credit card transaction authorization and processing,
corporate email communications and our interaction with the public on social media.
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Our failure to retain our executive management team and to attract qualified new personnel could adversely affect our
business and results of operations.
We depend on the talents and continued efforts of our executive management team. The loss of members of our executive
management may disrupt our business and adversely affect our results of operations. Furthermore, our ability to manage further
expansion will require us to continue to attract, motivate and retain additional qualified personnel. We believe that having an
executive management team with qualified personnel who are passionate about our brand, have extensive industry experience
and have a strong customer service ethic has been an important factor in our historical success, and we believe that it will
continue to be important to growing our business. Competition for these types of personnel is intense, and we may not be
successful in attracting, integrating and retaining the personnel required to grow and operate our business profitably.
An inability to attract and retain qualified employees to meet our staffing needs in our corporate office, stores,
distribution center or call center could result in higher payroll costs and adversely affect our operating results.
Our performance is dependent on attracting and retaining a large number of qualified employees. Many of our strategic
initiatives require that we hire and/or develop associates with appropriate experience. Attracting and retaining a sufficient
number of qualified employees to meet our staffing needs may be difficult, since the competition for these types of personnel is
intense. Many of our staffing needs in our stores, fulfillment centers and call center are entry-level or part-time positions with
historically high rates of turnover. If we cannot attract and retain employees with the qualifications we deem necessary to meet
our staffing needs in our corporate office, stores, fulfillment centers and call center, our ability to effectively operate may be
adversely affected. In addition, our staffing needs are especially high during the peak holiday season. We cannot be sure that
we will be able to attract and retain a sufficient number of qualified personnel in future periods.
Our business is seasonal, and if we do not efficiently manage inventory levels, our results of operations could be
adversely affected.
Our business is subject to seasonal influences, with increased net sales and net income realized during the fourth quarter
of our fiscal year, which includes the holiday season. See Part I, Item 1 Business, under the heading “Seasonality,” for our net
sales and net income realized during the fourth quarter of our fiscal year for each of the past three fiscal years.
We must maintain sufficient inventory levels to operate our business successfully, but we must also avoid accumulating
excess inventory, which increases working capital needs and potentially lowers gross margins. We obtain substantially all of
our inventory from suppliers located outside the United States. Some of these suppliers often require lengthy advance notice of
order requirements in order to be able to manufacture and supply products in the quantities requested. This usually requires us
to order our products, and enter into commitments for the purchase of our products, well in advance of the time these products
will be offered for sale. As a result, it may be difficult to respond to changes in customer demand. If we do not accurately
anticipate the future demand for a particular product or the time it will take to obtain new inventory, inventory levels will not be
appropriate and our results of operations could be adversely affected.
We expect a disproportionate amount of our net sales to occur during our fourth quarter. If we do not stock or restock
popular products in amounts sufficient to meet customer demand, it could significantly affect our revenue and our future
growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs and incur
commitment costs, which could reduce profitability. We may experience an increase in our net shipping cost due to
complimentary upgrades, split-shipments and additional long-zone shipments necessary to ensure timely delivery for the
holiday season. Furthermore, if too many customers access our website within a short period of time due to increased holiday
demand, we may experience system interruptions that could make our website unavailable or prevent us from efficiently
fulfilling orders, which may reduce the volume of products we sell as well as the attractiveness of our product offerings. In
addition, we or our third-party service providers may be unable to adequately staff our fulfillment and customer service centers
during these peak periods, and our delivery service providers and other fulfillment companies may be unable to meet the peak
seasonal demand.
As a result of holiday sales, inventories, accounts payable and borrowings under our revolving line of credit typically
reach their highest levels in October or November of each year (other than as a result of cash flow provided by or used in
investing and financing activities). Inventories, accounts payable and borrowings under our revolving line of credit then
typically decline steadily during the holiday season, resulting in our cash typically reaching its highest level, and borrowings
under our revolving line of credit reaching their lowest level, typically near December 31 of each year.
If we fail to manage our growth effectively, our business, financial condition and operating results could be harmed.
To manage our growth effectively, we must continue to implement our operational plans and strategies, improve and
expand our infrastructure of people, information systems and facilities and expand, train and manage our employee base. To
16
support continued growth, we must effectively integrate, develop and motivate a large number of employees. Failure to
improve and expand our infrastructure of employees may have a material adverse effect on our business, financial condition
and operating results.
Additionally, the growth of our business places significant demands on our management and other employees. The
growth of our business may require significant additional resources to meet these daily demands, which may not scale in a cost-
effective manner or may negatively affect the quality of our website, retail stores, call center and other aspects of the customer
experience. We are also required to manage relationships with a growing number of suppliers, customers and other third
parties. Our information technology systems and our internal controls and procedures may not be adequate to support future
growth of these relationships. If we are unable to manage the growth of our organization effectively, our business, financial
condition and operating results may be materially adversely affected.
Financial Risks
Our net sales and profits depend on the level of consumer spending for apparel, footwear and accessories, which is
sensitive to general economic conditions and other factors. An economic recession or a decline in consumer spending could
have a material adverse effect on our business and results of operations.
The apparel, footwear and accessories industry has historically been subject to cyclical variations and is particularly
affected by adverse trends in the general economy. The success of our business depends on consumer spending. There are a
number of factors that influence consumer spending, including actual and perceived economic conditions, disposable consumer
income, interest rates, consumer credit availability, unemployment, stock market performance, extreme weather conditions,
energy prices and tax rates in the national, regional and local markets where we sell our products. A decline in actual or
perceived economic conditions or other factors could negatively impact the level of consumer spending and have a material
adverse impact on our business and results of operations.
We are subject to payment-related risks.
We accept payments using a variety of methods, including credit cards, debit cards, Paypal, gift cards and physical bank
checks. For existing and future payment methods we offer to our customers, we may become subject to additional regulations
and compliance requirements (including obligations to implement enhanced authentication processes that could result in
increased costs and reduce the ease of use of certain payment methods), as well as fraud. For certain payment methods,
including credit and debit cards, we pay interchange and other fees, which may increase over time, raising our operating costs
and lowering profitability. We rely on third-party service providers for payment processing services, including the processing
of credit and debit cards. In each case, it could disrupt our business if these third-party service providers suffer a data breach, or
become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules,
including data security rules, certification requirements and rules governing electronic funds transfers, which could change or
be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if
our systems containing payment information are breached or compromised, we may be liable for card issuing banks’ costs,
subject to fines and higher transaction fees and/or lose our ability to accept credit and debit card payments from our customers
and process electronic funds transfers or facilitate other types of payments, and our business and operating results could be
adversely affected.
We depend on cash generated from our operations to support our growth, which could strain our growth.
We primarily rely on cash flow generated from our direct-to-consumer and retail store sales and borrowings under our
credit facility to fund our current operations and our growth initiatives. As we expand our business, we will need significant
amounts of cash to pay our existing and future lease obligations, purchase inventory, pay personnel and invest in our
infrastructure and facilities. If our business does not generate sufficient cash flow from operations to fund these activities and
sufficient funds are not otherwise available from our existing revolving credit facility or future credit facilities, we may need
additional equity or debt financing. If such financing is not available to us on satisfactory terms, our ability to operate and
expand our business or to respond to competitive pressures would be limited and we could be required to delay, curtail or
eliminate planned store openings. Moreover, if we raise additional capital by issuing equity securities or securities convertible
into equity securities, your ownership may be diluted. Any debt financing we may incur may impose on us covenants that
restrict our operations and will require interest payments that would create additional cash demands and financial risk for us.
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We maintain debt that could adversely affect our operating flexibility and put us at a competitive disadvantage.
The borrowings under our revolving credit facility typically peak during our third or fourth fiscal quarter.
Our level of debt and the limitations imposed on us by our credit agreement could have important consequences for
investors, including the following:
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we may not be able to obtain additional debt financing for future working capital, capital expenditures, to support
our growth plans, or other corporate purposes or may have to pay more for such financing;
borrowings under our revolving credit facility are at a variable interest rate, making us more vulnerable to increases
in interest rates; and
we could be less able to take advantage of significant business opportunities and to react to changes in market or
industry conditions.
We may be unable to accurately forecast our operating results and growth rate, and our growth rate may decline over
time.
We may not be able to accurately forecast our operating results and growth rate. We use a variety of factors in our
forecasting and planning processes, including historical results, recent history and assessments of economic and market
conditions, among other things. The growth rates in net sales and profitability that we have experienced historically may not be
sustainable as our customer base expands and we achieve higher market penetration rates, and our percentage growth rates may
decrease. The growth of our sales and profitability depends on the continued growth of demand for the products we offer, and
our business is affected by general economic and business conditions. A softening of demand, whether caused by changes in
customer preferences or a weakening of the economy or other factors, may result in decreased net sales or growth. In addition,
we experience seasonal trends in our business, and this variability may make it difficult to predict net sales and could result in
significant fluctuations in our operating results from period to period. Furthermore, most of our expenses and investments are
fixed, and we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our net
sales results. Failure to accurately forecast our operating results and growth rate could cause our actual results to be materially
lower than anticipated, and if our growth rates decline as a result, investors’ perceptions of our business may be adversely
affected, and the market price of our Class B common stock could decline.
Our failure to comply with restrictive covenants under our revolving credit facility and other debt instruments could
trigger prepayment obligations.
Our failure to comply with the restrictive covenants under our revolving credit facility and other debt instruments could
result in an event of default, which, if not cured or waived, could result in us being required to repay these borrowings before
their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial
condition could be adversely affected by increased costs and rates.
Legal, Tax, Compliance, Reputable and Other Risks
We may be subject to increased labor costs due to external factors, including changes in laws and regulations, and we
may be subject to unionization, work stoppages or slowdowns.
Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels,
prevailing wage rates, minimum wage legislation, actions by our competitors with respect to compensation levels and changing
demographics. Currently none of our employees are represented by a union, but our employees have the right to under the
National Labor Relations Act. Changes that adversely impact our ability to meet our labor needs in a cost-effective manner
could adversely affect our operating results. In addition, the employer mandate provisions of the Patient Protection and
Affordable Health Care Act (the “PPACA”), changes in regulations under the PPACA, changes in federal and state minimum
wage laws and other laws and regulations relating to employee benefits could cause us to incur additional wage and benefit
costs, which could negatively impact our business, financial condition and results of operations.
Unseasonal or severe weather conditions may adversely affect our merchandise sales.
Our business is adversely affected by unseasonal weather conditions. Sales of certain seasonal apparel items, especially
outerwear, are dependent in part on the weather and may decline in years in which weather conditions do not favor the use of
these products. Sales of our spring and summer products, which traditionally consist of lighter weight clothing, are adversely
affected by cool or wet weather. Similarly, sales of our fall and winter products, which are traditionally weighted toward
outerwear, are adversely affected by mild, dry or warm weather. Severe weather events may impact our ability to supply our
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retail stores, deliver orders to customers on schedule and staff our retail stores, fulfillment centers and call center, which could
have an adverse effect on our business and results of operations.
Our product designs are not protected by substantial intellectual property rights.
Due to the rapid pace of change in the apparel, footwear and accessories industry, the length of time it takes to obtain
patents and the expense and uncertainty of obtaining patent protection, we have not taken steps to obtain patent protection for
our innovative product designs. Competitors have attempted to copy our product designs in the past, and we expect that if we
are able to raise our national profile, our products may be subject to greater imitation by existing and new competitors. If we
are not able to continue rapid innovation of new products and product features, our brand may be harmed and our results of
operations may be materially adversely affected.
If we are unable to protect or preserve our brand image and our proprietary rights, our business may be adversely
affected.
We regard our trademarks, copyrights, trade secrets and similar proprietary rights as critical to our success. As such, we
rely on trademark and copyright law, trade secret protection and confidentiality agreements with our associates, consultants,
suppliers and others to protect our proprietary rights. Nevertheless, the steps we take to protect our proprietary rights may be
inadequate and we may experience difficulty in effectively limiting the unauthorized use of our trademarks and other
intellectual property worldwide. Unauthorized use of our trademarks, copyrights, trade secrets or other intellectual property
rights may cause significant damage to our brand and our ability to effectively represent ourselves to agents, suppliers, vendors,
licensees and/or customers. While we intend to enforce our intellectual property rights, there can be no assurance that we are
adequately protected in all countries or that we will prevail when defending our trademark and proprietary rights. If we are
unable to protect or preserve the value of our trademarks, copyrights or other intellectual property rights for any reason, or if we
fail to maintain our brand image due to merchandise and service quality issues, actual or perceived, adverse publicity,
governmental investigations or litigation or other reasons, our brand and reputation could be damaged and our business may be
adversely affected.
We may be subject to liability if we infringe upon the intellectual property rights of third parties.
Third parties may sue us for alleged infringement of their proprietary rights or use intellectual property rights to interfere
with or attempt to interfere with the manufacture of products for us or the supply of products to us. The party claiming
infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and
devote significant management resources to defend against such litigation. If the party claiming infringement were to prevail,
we could be forced to discontinue the use of the related trademark or design and/or pay significant damages or enter into
expensive royalty or licensing arrangements with the prevailing party, assuming these royalty or licensing arrangements are
available at all on an economically feasible basis, which they may not be. We could also be required to pay substantial
damages. Such infringement claims could harm the Duluth Trading brand. In addition, any payments we are required to make
and any injunction we are required to comply with as a result of such infringement could adversely affect our financial results.
If our independent suppliers do not use ethical business practices or comply with applicable regulations and laws, our
reputation could be materially harmed and our business and results of operations may be adversely affected.
Our reputation and customers’ willingness to purchase our products depend in part on our suppliers’ compliance with
ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination, freedom of
association, unlawful inducements, safe and healthy working conditions and with all legal and regulatory requirements relating
to the conduct of their business. While we operate compliance and monitoring programs to promote ethical and lawful business
practices, we do not exercise ultimate control over our independent suppliers or their business practices and cannot guarantee
their compliance with ethical and lawful business practices. Violation of labor or other laws by our suppliers, or the divergence
of a supplier’s labor practices from those generally accepted as ethical in the United States, could materially hurt our reputation,
which could have an adverse effect on our business and results of operations.
We may be subject to assessments for additional taxes, including sales taxes, which could adversely affect our business.
In accordance with current law, we pay, collect and/or remit taxes in those states where we or our subsidiary, as
applicable, maintain a physical presence. While we believe that we have appropriately remitted all taxes based on our
interpretation of applicable law, tax laws are complex and their application differs from state to state. It is possible that some
taxing jurisdictions may attempt to assess additional taxes and penalties on us or assert either an error in our calculation, a
change in the application of law or an interpretation of the law that differs from our own, which may, if successful, adversely
affect our business and results of operations.
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An increasing number of states have considered or adopted laws that attempt to impose tax collection obligations on out-
of-state companies. Additionally, the Supreme Court of the United States ruled in South Dakota v. Wayfair, Inc. et al, or
Wayfair, that online sellers can be required to collect sales and use tax despite not having a physical presence in the buyer’s
state. In response to Wayfair, or otherwise, states or local governments have adopted, or begun to enforce, laws requiring us to
calculate, collect and remit taxes on sales in their jurisdictions. A successful assertion by one or more states requiring us to
collect taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect some
taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition by
state governments or local governments of sales tax collection obligations on out-of-state sellers could also create additional
administrative burdens for us and decrease our future sales, which could have an impact on our business, financial condition
and results of operations.
We may become involved in a number of legal proceedings and audits, and outcomes of such legal proceedings and
audits could adversely affect our business, financial condition and results of operations.
Our business requires compliance with many laws and regulations, including labor and employment, customs, truth-in-
advertising, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern
the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. Failure to achieve
compliance could subject us to lawsuits and other proceedings, and could also lead to damage awards, fines and penalties. We
may become involved in a number of legal proceedings and audits including government and agency investigations, and
consumer, employment, tort and other litigation. We cannot predict with certainty the outcomes of these legal proceedings and
other contingencies. The outcome of some of these legal proceedings, audits and other contingencies could require us to take,
or refrain from taking, actions which could negatively affect our operations or require us to pay substantial amounts of money
adversely affecting our financial condition and results of operations. Additionally, defending against these lawsuits and
proceedings may be necessary, which could result in substantial costs and diversion of management’s attention and resources,
causing a material adverse effect on our business, financial condition and results of operations. There can be no assurance that
any pending or future legal proceedings and audits will not have a material adverse effect on our business, financial condition
and results of operations.
Changes to accounting rules or regulations could significantly affect our financial results.
Our consolidated financial statements are prepared in accordance with U.S. GAAP. New accounting rules or regulations
and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changes to
accounting rules or regulations could negatively affect our results of operations and financial condition through increased
compliance costs.
Risks Related to Ownership of our Class B Common Stock
The dual class structure of our common stock and the existing ownership of common stock by our executive officers,
directors and their affiliates have the effect of concentrating voting control with our executive officers, directors and their
affiliates for the foreseeable future, which will limit your ability to influence corporate matters.
Our Class A common stock has ten votes per share, and our Class B common stock has one vote per share. Given the
greater number of votes per share attributed to our Class A common stock, our Executive Chairman and Chief Executive
Officer, Stephen L. Schlecht, who is our only Class A shareholder, beneficially owns shares representing more than 50% of the
voting power of our outstanding capital stock. As a result of our dual class ownership structure, Mr. Schlecht will be able to
exert a significant degree of influence or actual control over our management and affairs and over matters requiring shareholder
approval, including the election of directors, a merger, consolidation or sale of all or substantially all of our assets and any other
significant transaction. Mr. Schlecht together with our other executive officers, directors and their affiliates, owns shares
representing the majority of the voting power of our outstanding capital stock. This concentrated control will limit your ability
to influence corporate matters for the foreseeable future. For example, these shareholders will be able to control elections of
directors, amendments of our articles of incorporation or bylaws, increases to the number of shares available for issuance under
our equity incentive plans or adoption of new equity incentive plans and approval of any merger or sale of assets for the
foreseeable future. This control may materially adversely affect the market price of our Class B common stock.
Additionally, the holder of our Class A common stock may cause us to make strategic decisions or pursue acquisitions
that could involve risks to you or may not be aligned with your interests. The holder of our Class A common stock will also be
entitled to a separate vote in the event we seek to amend our articles of incorporation in a manner that alters or changes the
powers, preferences or special rights of the Class A common stock in a manner that affects its holder adversely.
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We are a controlled company within the meaning of the NASDAQ rules, and as a result, we rely on exemptions from
certain corporate governance requirements that provide protection to shareholders of other companies.
Mr. Schlecht controls more than 50% of the total voting power of our common stock, and we are considered a controlled
company under the NASDAQ corporate governance listing standards. As a controlled company, certain exemptions under the
NASDAQ listing standards exempt us from the obligation to comply with certain NASDAQ corporate governance
requirements, including the requirements:
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(cid:120)
(cid:120)
that a majority of our board of directors consist of independent directors, as defined under the rules of NASDAQ;
that we have a nominating committee that is composed entirely of independent directors with a written charter
addressing the committee’s purpose and responsibilities; and
that we have a compensation committee that is composed entirely of independent directors with a written charter
addressing the committee’s purpose and responsibilities.
Although we have a majority of independent directors on our board even though we will are a controlled company, there
is no guarantee that we will not take advantage of this exemption in the future. Accordingly, as long as we are a controlled
company, holders of our Class B common stock may not have the same protections afforded to shareholders of companies that
are subject to all of the NASDAQ corporate governance requirements.
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses
for investors.
The market price of our Class B common stock may fluctuate significantly in response to numerous factors, many of
which are beyond our control, including:
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(cid:120)
(cid:120)
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(cid:120)
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(cid:120)
(cid:120)
(cid:120)
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(cid:120)
actual or anticipated fluctuations in our results of operations, particularly in our segment growth rates and margins;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or
ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations
of investors;
announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships,
joint ventures, operating results or capital commitments;
changes in operating performance and stock market valuations of other technology or retail companies generally, or
those in our industry in particular;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
changes in our board of directors or management;
sales of large blocks of our Class B common stock, including sales by our executive officers, directors and
significant shareholders;
lawsuits threatened or filed against us;
changes in laws or regulations applicable to our business;
changes in our capital structure, such as future issuances of debt or equity securities;
short sales, hedging and other derivative transactions involving our capital stock;
general economic conditions in the United States and abroad; and
other events or factors, including those resulting from pandemics, war, incidents of terrorism or responses to these
events.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many retail and e-commerce companies. Stock prices of many retail companies
and e-commerce companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those
companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If
we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of
management from our business and materially adversely affect our business, financial condition and operating results.
21
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about
our business, our share price and trading volume could decline.
The trading market for our Class B common stock will depend in part on the research and reports that securities or
industry analysts publish about us or our business, our market and our competitors. We do not have any control over these
analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share
price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports
on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
The requirements of being a public company may strain our resources, divert management’s attention and affect our
ability to attract and retain additional executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the
Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the NASDAQ Global Select Market
and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and
financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems
and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to
our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective
disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve
our disclosure controls and procedures and internal control over financial reporting, significant resources and management
oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could
materially adversely affect our business and results of operations. We will need to hire additional employees or engage outside
consultants to comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating
uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-
consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of
specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and
governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws,
regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of
management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new
laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related
to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be
materially adversely affected.
As a result of disclosure of information in this annual report and in filings required of a public company, our business and
financial condition will become more visible, which we believe may result in threatened or actual litigation, including by
competitors and other third parties. If such claims are successful, our business and results of operations could be materially
adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and
resources necessary to resolve them, could divert the resources of our management and materially adversely affect our business,
financial condition and operating results.
Anti-takeover provisions in our charter documents and under Wisconsin law could make an acquisition of our company
more difficult, limit attempts by our shareholders to replace or remove our current management and limit the market price
of our Class B common stock.
Provisions in our amended and restated articles of incorporation and amended and restated bylaws may have the effect of
delaying or preventing a change of control or changes in our management. In addition to the dual class structure of our common
stock, our amended and restated articles of incorporation and amended and restated bylaws include provisions that:
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permit the board of directors to establish the number of directors and fill any vacancies and newly created
directorships;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a
shareholder rights plan;
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for election to our board of directors or for proposing
matters that can be acted upon by shareholders at annual or special shareholder meetings.
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These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management
by making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing
the members of our management. In addition, because we are incorporated in Wisconsin, the Wisconsin control share
acquisition statute and Wisconsin’s “business combination” provisions would apply and limit the ability of an acquiring person
to engage in certain transactions or to exercise full voting power of acquired shares under certain circumstances. As a result,
offers to acquire us, which may represent a premium over the available market price of our Class B common stock, may be
withdrawn or otherwise fail to be realized.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.
PROPERTIES
The following table sets forth the location, primary use and size of our leased and owned facilities as of January 31, 2021.
Location
Number of Stores
Primary Use
Gross Sq Ft
Leased/Owned
Retail Stores
North East
Connecticut
Maine
Massachusetts
New Jersey
Pennsylvania
Rhode Island
Midwest
Illinois
Indiana
Iowa
Kansas
Michigan
Minnesota
Missouri
Nebraska
North Dakota
Ohio
South Dakota
Wisconsin
South
Alabama
Arkansas
Florida
Georgia
Kentucky
North Carolina
Oklahoma
Tennessee
Texas
Virginia
West
Alaska
Colorado
Oregon
Utah
Washington
Cherry Hill, NJ1
Mount Horeb, WI
Belleville, WI
Oshkosh, WI
Red Wing, MN
Mount Horeb, WI
Belleville, WI
Dubuque, IA
Dubuque, IA
Salt Lake City, UT2
Verona, WI
1To open in Q4 fiscal 2021
2To open in Q3 fiscal 2021
1
1
1
1
2
1
3
1
1
1
3
5
2
1
1
4
1
4
2
1
1
1
2
2
1
2
6
2
1
3
2
1
1
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Store
Leased to Open New Store
Store
Other
Photo Studio
Outlet store
Outlet store
Outlet store
Corporate headquarters
Distribution center
Distribution center
Distribution center
Distribution center
Returns center
9,792
12,951
16,360
13,300
34,945
14,528
38,410
14,557
12,249
15,385
45,588
63,563
27,692
20,801
14,557
58,420
9,166
53,646
31,312
15,656
14,557
20,041
28,582
41,672
15,536
27,325
92,212
31,828
25,409
52,840
39,463
15,602
15,656
11,441
7,000
17,890
12,777
15,560
108,000
220,000
220,685
216,000
228,800
38,687
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
The leases on our retail stores expire at various times and are subject to renewal options and rent escalation provisions.
We consider these properties to be in good condition and believe that our facilities are adequate for our operations and provide
sufficient capacity to meet our anticipated requirements.
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ITEM 3.
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 4.
MINE SAFETY DISCLOSURES
Not applicable.
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Information about our Executive Officers
The following is a list of names and ages of executive officers of Duluth Trading indicating all positions and offices held
by each such person and each such person’s principal occupation(s) or employment during the past five years. Officers are
appointed annually by the Board of Directors at the meeting of directors immediately following the annual meeting of
shareholders. There are no family relationships among these officers, except as disclosed below, arrangements or
understandings between any officer and any other person pursuant to which the officer was selected. The information presented
below is as of March 26, 2021.
Name
Stephen L. Schlecht
Age Office
73 Mr. Schlecht is the founder of our Company and has served as Executive Chairman of the
David Loretta
Board since February 2015 and as Chief Executive Officer since August 2019. Mr. Schlecht
has served on our Board of Directors since our founding in 1986. Mr. Schlecht previously
served as our Chairman of the Board of Directors and Chief Executive Officer from
February 2003 to February 2015, as President from February 2003 to February 2012 and as
President and Chief Executive Officer of GEMPLER’S, Inc., which he founded in 1986,
until February 2003. Mr. Schlecht holds a B.S.B.A. degree and an M.B.A. from
Northwestern University. Mr. Schlecht has over 50 years of experience in the direct
marketing and retail industries and has extensive leadership experience and strategic vision.
Mr. Schlecht is the father of Richard W Schlecht, our Senior Vice President of Product
Development, Visual Merchandise and Creative.
53 Mr. Loretta has been our Chief Financial Officer since July 2017. Mr. Loretta previously
served four years as President and Chief Financial Officer of Nordstrom Bank and led all
financial and operating functions of their proprietary card operations. During his tenure,
Mr. Loretta was responsible for financial reporting, budgeting, forecasting and long-range
strategic planning as well as operational leadership. Previously at Nordstrom, Inc., he
served as corporate Vice President and Treasurer overseeing treasury, investor relations and
corporate development. Before his 13 years with Nordstrom, Mr. Loretta was Director of
Planning and Analysis for Restoration Hardware, Inc., where he developed a companywide
budgeting, forecasting and reporting process for the retail stores, catalog direct mail and e-
commerce. Following his time at Nordstrom, Mr. Loretta launched and operated his own
company, Pacific Time, LLC, a unique food and beverage business, from 2014 to 2016.
Mr. Loretta holds a B.A. in Business Economics from the University of California,
Riverside and earned an MBA from San Diego State University.
Christopher M. Teufel 52 Mr. Teufel has served as our Senior Vice President of Information Technology and
David S. Homolka
Richard W. Schlecht
Logistics since February 2020 and served as Chief Information Officer from October 2017
to February 2020. He also previously served as our Vice President of Information
Technology and Logistics from April 2019 to February 2020, and Chief Information
Officer from October 2017 to April 2019. Mr. Teufel has also previously served as Vice
President and Senior Director of Technology at Nordstrom from 2001 to April 2016. Mr.
Teufel holds a B.S. in Accounting from the Daniels College of Business at the University of
Denver.
54 Mr. Homolka has served as our Senior Vice President of Human Resources, Retail Store
Operations and Contact Center Operations since February 2020 and previously served as
our Vice President of Human Resources, Store Operations and Asset Protection from
January 2019 to February 2020, and Vice President of Human Resources from February
2017 to January 2019. Mr. Homolka previously served as Chief Property and Design
Officer and Vice President of Real Estate, Store Design and Construction at Cabela’s from
October 2015 to February 2017 and Vice President of Human Resources and Asset
Protection from January 2012 to October 2015.
40 Mr. Schlecht has served as our Senior Vice President of Product Development, Visual
Merchandise and Creative since February 2020 and has previously served as our Vice
President of Product Development from March 2016 to February 2020 and Director of
Product Development from September 2013 to March 2016. Mr. Schlecht holds a B.S.B.A.
with a minor in Statistics from Denver University. Mr. Schlecht is the son of Stephen L.
Schlecht, our Executive Chairman and Chief Executive Officer.
26
PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Listing and Trading
Our Class B common stock is traded on the NASDAQ Global Select Market under the symbol “DLTH,” since our initial
public offering on November 19, 2015. Our Class A common stock is neither listed nor traded on an exchange.
Shareholders of Record
As of March 22, 2021, there were approximately 92 holders of record, based upon data provided by our transfer agent, of
our Class B common stock, one of whom is the sole holder of our Class A common stock. We believe the number of beneficial
holders of the Company’s Class B common stock is in excess of this amount.
Dividends
Our Class B common stock began trading on November 20, 2015, since that time, we have not declared any cash
dividends, and we do not anticipate declaring any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding our equity compensation plans is set forth in Part III, Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Shareholder Matters.
27
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of the financial condition and results of operations should be read in conjunction
with the consolidated financial statements and the accompanying notes and information contained in other sections included
elsewhere in this annual report, particularly, “Risk Factors,” and “Business.” This discussion and analysis is based on the
beliefs of our management, as well as assumptions made by, and information currently available to our management. The
statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital
resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See
“Forward-Looking Statements.” These forward-looking statements are subject to numerous risks and uncertainties, including
those described under “Risk Factors.” Our actual results could differ materially from those suggested or implied by any
forward-looking statements.
Management’s discussion focuses on fiscal 2020 results compared to fiscal 2019. Fiscal year 2020 and 2019 were 52-
week periods. For a discussion of fiscal 2019 results compared to fiscal 2018, refer to the Company’s Annual Report on Form
10-K for the year ended February 2, 2020.
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 January 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
NakedTM underwear, 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.
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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Net sales in fiscal 2020 increased by 3.8% over the prior year to $638.8 million;
Net income in fiscal 2020 decreased compared to the prior year to $13.4 million;
Adjusted EBITDA in fiscal 2020 increased 6.8% over the prior year to $55.5 million; and
Cash flow from operations in Fiscal 2020 increased to $55.8 million and Free Cash Flow increased $60.9 million
over the prior year to $38.5 million.
See “Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA” section for a reconciliation of our
net income 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.
See “Free Cash Flow” section for a reconciliation of Net cash provided by operating activities to Free Cash Flow. See
also the information under the heading “Free Cash Flow” in the section “How We Assess the Performance of Our Business” for
our definition of Free Cash Flow.
With an emphasis on profitable growth we are pursuing several strategies, including building brand awareness to
continue customer acquisition, continuing selective retail expansion, strengthening the core Men’s Duluth sub-brand and
growing our Women’s Duluth sub-brand.
28
We continue to grow our omnichannel distribution network which allows the consumer to interact with us through a
consistent customer experience whether on the company website or at company stores. As we expand our distribution network,
and in conjunction with assessing the similar nature of products sold, production process, distribution process, target customers
and economic characteristics between our sales channels, we have determined that the historical structure of separate reporting
segments for direct and retail was no longer representative of the way in which we manage our business. Therefore, as of
February 3, 2020, we have updated our segment reporting to one reportable external segment, consistent with our omnichannel
business approach.
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, and led to significant travel and transportation restrictions, including mandatory business closures and orders
to shelter in place.
The Company has focused on protecting the health and safety of our employees, customers and suppliers, working with
our customers, landlords, suppliers and vendors to minimize potential disruptions and supporting our community, while
managing our business in these unprecedented times. The Company took the following significant actions during the first fiscal
quarter as a response to the pandemic:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Beginning March 20, 2020 temporarily closed all stores for a period of seven weeks;
Made operational changes to accommodate social distancing within our distribution centers;
Made work from home accommodations for corporate employees;
Amended our 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;
Partnered with landlords, suppliers and vendors to materially reduce costs, extend payment terms and cancel
merchandise receipts;
Initiated furloughs of varying lengths with benefits intact for 68% of salaried staff;
Began a six-month pay reduction for senior leadership ranging from 10 to 20 percent;
The Company’s Chief Executive Officer (“CEO”) agreed to temporarily forgo his base salary;
The Board of Directors agreed to forgo cash retainers for the second and third quarters;
Reduced planned capital spend levels by approximately 40% primarily by decreasing new store openings to four in
fiscal 2020; and
Partnered with the American Red Cross to donate a portion of sales on key apparel items.
While the business environment and above actions have impacted our results for the fiscal year, our strong brand
awareness and loyal customer base were evident by a continued surge in direct sales through the fourth fiscal quarter. As of
June 15, 2020, all of our retail stores were re-opened in some capacity, but prolonged COVID-19 safety concerns did impact
store traffic levels throughout the year, including during our peak selling season.
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, and the availability, safety and efficiency of a
vaccine. 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 with store
operations.
29
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 to a customer, while store sales are recognized at the
point of sale. Although we did not do so in fiscal 2020, we also have historically used net sales as one of the key financial
metrics in determining our annual bonus compensation for our employees.
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. Given the size of our sales through our direct-to-consumer sales channel relative
to our total net sales, shipping and handling revenue has had a significant impact on our gross profit and gross profit margin.
Historically, this revenue has partially offset shipping and handling expense included in selling, general and administrative
expenses. We have experienced declines in shipping and handling revenues, and this trend is expected to continue. Declines in
shipping and handling revenues may have a material adverse effect on our gross profit and gross profit margin, as well as
Adjusted EBITDA to the extent there are not commensurate declines, or if there are increases, in our shipping and handling
expense. 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 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, marketing, rent/occupancy and payroll costs. While we expect these
expenses to increase as we continue to open new stores, increase brand awareness and grow our organization to support our
growing business, we believe these expenses will decrease as a percentage of sales over time. Our shipping and handling
expenses increased during the second half of the year because of additional surcharges due to the strained distribution network.
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. This non-GAAP measure may not be comparable to
similarly titled measures used by other companies.
30
Free Cash Flow
We believe Free Cash Flow is a useful measure of performance as an indication of our financial strength and provides
additional perspective on our ability to efficiently use capital in executing our growth strategy. We use Free Cash Flow to
facilitate a comparison of our operating performance on a consistent basis from period-to-period and our ability to generate
cash.
We define Free Cash Flow as net cash provided by operating activities less purchase of property and equipment and
capital contributions towards build-to-suit stores. This non-GAAP measure may not be comparable to similarly titled measures
used by other companies.
31
Results of Operations
The following table summarizes our consolidated results of operations for the periods indicated, both in dollars and as a
percentage of net sales.
(in thousands)
Net sales
Cost of goods sold (excluding depreciation and amortization)
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income, net
Income before income taxes
Income tax expense
Net income
Less: Net loss attributable to noncontrolling interest
Net income attributable to controlling interest
Percentage of Net sales:
Net sales
Cost of goods sold (excluding depreciation and amortization)
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income, net
Income before income taxes
Income tax expense
Net income
Less: Net loss attributable to noncontrolling interest
Net income attributable to controlling interest
Fiscal 2020 Compared to Fiscal 2019
Net Sales
$
Fiscal Year Ended
January 31, 2021
February 2, 2020
638,783
307,257
331,526
307,311
24,215
6,263
65
18,017
4,637
13,380
(197)
13,577 $
100.0 %
48.1 %
51.9 %
48.1 %
3.8 %
1.0 %
— %
2.8 %
0.7 %
2.1 %
— %
2.1 %
615,624
287,475
328,149
300,041
28,108
4,471
291
23,928
5,429
18,499
(422)
18,921
100.0 %
46.7 %
53.3 %
48.7 %
4.6 %
0.7 %
0.0 %
3.9 %
0.9 %
3.0 %
(0.1) %
3.1 %
Net sales increased $23.2 million, or 3.8%, to $638.8 million in fiscal 2020 compared to $615.6 million in fiscal 2019.
The increase was due to an increase in non-store market sales partially offset by a decrease in store market sales.
Net sales in non-store markets increased $46.0 million, or 27.5%, to $213.1 million in fiscal 2020 compared to $167.1
million in fiscal 2019. The increase was driven by new buyer growth and effective digital advertising to promote Mother’s Day,
Father’s Day, the Pink Buck Naked event, our Big Dam Birthday, online warehouse clearance and global sales events, coupled
with extended free shipping offers. Store market sales decreased $20.0 million, or 4.6%, to $419.1 million in fiscal 2020
compared to $439.1 million in fiscal 2019. The decrease was driven by a decline of in-store market sales due to the temporary
closure of all stores beginning on March 20, 2020 until they re-opened beginning the first week of May through the third week
of June, as well as slower store traffic throughout the year due to the pandemic, partially offset by growth in online sales from
both existing customers and new buyers.
Gross Profit
Gross profit increased $3.4 million, or 1.0%, to $331.5 million in fiscal 2020 compared to $328.1 million in fiscal 2019.
As a percentage of net sales, gross margin decreased to 51.9% of net sales in fiscal 2020 compared to 53.3% of net sales in
fiscal 2019. The decrease in gross margin rate was driven by promotional events, extending clearance events and sitewide sales
events to continue moving inventory during the period of store closures and uncertainty in customer demand. The decrease was
partially offset by reduced store delivery costs from lower store sales volumes and lower product returns.
32
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.3 million, or 2.4%, to $307.3 million in fiscal 2020 compared
to $300.0 million in fiscal 2019. Selling, general and administrative expenses as a percentage of net sales decreased in fiscal
2020 to 48.1% of net sales, compared to 48.7% of net sales for fiscal 2019. The positive leverage was primarily due to shifting
to a more efficient digital marketing approach as customer purchasing patterns migrated to online.
The increase in selling, general and administrative expense was due to increased shipping costs to support website sales
coupled with additional surcharges during our peak shopping season, higher retail overhead costs driven by new store growth,
increased depreciation expense primarily associated with investments in technology, and increased incentive compensation.
These increases were partially offset by reduced catalog spend and national TV advertising.
Interest Expense
Interest expense increased $1.8 million to $6.3 million in fiscal 2020 compared to $4.5 million in fiscal 2019. The
increase in interest expense was primarily attributable to an increase in borrowings on our revolving line of credit and delayed
draw term loan, particularly during the first six months of fiscal 2020 as compared to the same period in the prior year, and
interest expense relating to two additional finance leases during fiscal 2020.
Income Taxes
Income tax expense was $4.6 million in fiscal 2020 compared to $5.4 million in fiscal 2019. Our effective tax rate related
to controlling interest was 25.5% and 22.3% in fiscal 2020 and fiscal 2019, respectively.
Net Income Attributable to Controlling Interest
Net income attributable to controlling interest was $13.6 million in fiscal 2020 compared to $18.9 million in fiscal 2019,
primarily due to the factors discussed above.
Non-GAAP Financial Measures
See the above section titled “How We Asses the Performance of Our Business,” for our definition of Adjusted EBITDA
and Free Cash Flow.
Reconciliation of Net Income to EBITDA and EBITDA to Adjusted EBITDA
The following table represents reconciliations of net income to EBITDA and EBITDA to Adjusted EBITDA for the
periods indicated below.
(in thousands)
Net income
Depreciation and amortization
Amortization of internal-use software hosting
subscription implementation costs
Interest expense
Amortization of build-to-suit operating
leases capital contribution
Income tax expense
EBITDA (non-GAAP)
Stock based compensation
Adjusted EBITDA (non-GAAP)
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
$
13,380
28,520
$
229
6,263
794
4,637
53,823
1,629
55,452
$
18,499
22,083
—
4,471
784
5,429
51,266
647
51,913
As a result of the factors discussed above in the “Results of Operations” section, Adjusted EBITDA increased $3.5
million, or 6.8%, to $55.5 million in fiscal 2020 compared to $51.9 million in fiscal 2019. As a percentage of net sales,
Adjusted EBITDA increased to 8.7% of net sales in fiscal 2020 compared to 8.4% of net sales in fiscal 2019.
33
Free Cash Flow
The following table represents a reconciliation of Net cash provided by operating activities, the most comparable U.S.
GAAP financial measure, to free cash flow.
(in thousands)
Net cash provided by operating activities
Purchases of property and equipment
Capital contributions towards build-to-suit stores
Free Cash Flow (non-GAAP)
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
$
50,751
(11,743)
(520)
38,488
$
$
8,347
(24,435)
(6,354)
(22,442)
Free cash flow increased $60.9 million to $38.5 million in fiscal 2020 compared to $(22.4) million in fiscal 2019. The
increase was primarily driven by moderating inventory levels back in line with net sales growth as well as reducing capital
expenditures during fiscal 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
opening new stores, infrastructure and information technology. The most significant components of our working capital are
cash, inventory, accounts payable and other current liabilities. At January 31, 2021 our working capital was $114.6 million,
which includes cash of $47.2 million.
We spent $12.3 million in fiscal 2020 on capital expenditures, as well as, $4.1 million of additional investments in
implementation costs to enhance the value of hosting arrangements, which are included in Prepaid expenses & other current
assets on the Company’s Consolidated Balance Sheets. We expect to spend approximately $10.0 million in fiscal 2021 on
capital expenditures, primarily due to investments in technology, as well as $5.0 million of additional investments in
implementations costs to enhance the value of hosting arrangements. Due to the seasonality of our business, a significant
amount of cash from operating activities is generated during the fourth quarter of our fiscal year. During the first three quarters
of our fiscal year, we typically are net users of cash in our operating activities as we acquire inventory in anticipation of our
peak selling season, which occurs in 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.
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
$
50,751 $
(12,132)
6,362
44,981 $
8,347
(30,687)
21,495
(845)
34
Net Cash Provided by 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 assets and liabilities.
For fiscal 2020, net cash provided by operating activities was $50.8 million, which consisted of net income of $13.4
million, non-cash depreciation and amortization of $28.5 million and amortization of stock-based compensation of $1.6 million
and cash provided by operating assets and liabilities of $7.2 million. The cash provided by operating assets and liabilities of
$7.2 million primarily consisted of a $7.7 million increase in accrued expenses and deferred rent obligations due to $3.5 million
of deferred payroll taxes afforded by the CARES Act, a $4.2 million increase in income tax payable, a $2.6 million decrease in
prepaid expenses, offset by a $1.2 million increase in inventory, a $4.1 million increase in hosting software implementation
costs and a $1.5 million decrease in trade accounts payable.
For fiscal 2019, net cash provided by operating activities was $8.3 million, which consisted of net income of $18.5
million, non-cash depreciation and amortization of $22.1 million and amortization of stock-based compensation of $0.6 million
offset by deferred income taxes of $1.2 million and cash used in operating assets and liabilities of $31.7 million. The cash used
in operating assets and liabilities of $31.7 million primarily consisted of a $50.2 million increase in inventory due to growth
and supply of inventory for our new retail stores in the first quarter of fiscal 2019, which was partially offset by a $5.4 decrease
in prepaid expenses, coupled with a $3.2 million increase in income taxes payable and a $7.6 million increase in trade accounts
payable. The increase in trade accounts payable was primarily due to an increase in inventory and timing of payments.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth related to new stores and information technology.
For fiscal 2020, net cash used in investing activities was $12.1 million, primarily driven by capital expenditures of $11.7
million, due mainly to the opening of 4 new stores, as well as investments in information technology.
For fiscal 2019, net cash used in investing activities was $30.7 million, primarily driven by capital expenditures of $24.4
million, due mainly to the opening of 15 new stores, as well as investments in information technology and $6.3 million of
capital contributions towards our build-to-suit stores.
Net Cash Provided by Financing Activities
Financing activities consist primarily of borrowings and payments related to our revolving line of credit and other long-
term debts, as well as proceeds from finance lease obligations.
For fiscal 2020, net cash provided by financing activities was $6.4 million, primarily consisting of proceeds of $28.3
million, net from our term loan and payments of $19.3 million, net from our revolving line of credit to fund working capital.
For fiscal 2019, net cash provided by financing activities was $21.5 million, which included borrowings of $271.8
million on our revolving line of credit and $20.0 million on our delayed draw term loan to support our capital expenditures
discussed above and working capital needs, offset by payments of $269.0 million on our revolving line of credit.
Credit Agreement
On May 17, 2018, we entered into a credit agreement (the “Credit Agreement”) which provides for borrowings of up to
$80.0 million on a revolving line of credit and an additional $50.0 million in a delayed draw term loan. The $80.0 million
revolving line of credit matures on May 17, 2023 and we had the option to draw in various amounts on the $50.0 million term
loan through May 17, 2020, with a maturity on May 17, 2023. On April 30, 2020, the Credit Agreement was amended to
include an incremental delayed draw term loan of $20.5 million that is available to draw upon before March 31, 2021, and
matures on April 29, 2021, for a total credit facility of $150.5 million. As of and for the fiscal year ended January 31, 2021, no
amount of the incremental delayed draw term loan was funded. See Note 4 “Debt and Credit Agreement,” included in this
Annual Report on Form 10-K for further information.
As of and for the fiscal year ended January 31, 2021, we were in compliance with all financial and non-financial
covenants.
35
Contractual Obligations
We enter into long term contractual obligations and commitments in the normal course of business. As of January 31,
2021, our contractual cash obligations were as follows:
Total
2021
Maturing in:
2022
to
2023
2024
to
2025
2026
and
after
48,250
29,154
141,008
61,135
279,547 $
2,500
623
15,721
4,575
23,419 $
45,750
1,461
31,884
9,136
88,231 $
—
1,778
29,976
9,902
41,656 $
—
25,292
63,427
37,522
126,241
$
(in thousands)
Delayed draw term loan
VIE Debt (1)
Operating leases (2)
Finance leases (2)
Total
_____________________________
(1) Consists of debt based on the consolidation of the VIE, TRI. The TRI debt listed above includes financing fees which are a direct deduction from the
carrying value of the related debt liability on the Company’s Consolidated Balance Sheets. See Note 4 “Debt and Credit Agreement,” included in this
Annual Report on Form 10-K for further information.
(2) Our store leases generally have initial lease terms of 5-15 years and include renewal options and rent escalation provisions.
Off-Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements, except for operating leases, as discussed in “Contractual
Obligations” section above.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect amounts reported in our consolidated financial statements
and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. 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.
We evaluated the development and selection of our critical accounting estimates and believe that the following involve a
higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position,
and are therefore discussed as critical.
Product Return Reserve
The Company currently estimates product return reserve using available industry data and its own historical sales
information. The Company regularly assesses and adjusts the estimate of accrued sales returns by updating return rates for
actual industry and company trends and projected costs. While returns have historically been within our expectations, future
return rates may differ from those experienced in the past. Changes in these estimates can have a material impact on our
financial statements. We believe the accounting estimate related to product returns is a critical accounting estimate because it
requires us to make assumptions about future potential returns and changes in demand, both of which are highly uncertain.
Fair Value
The use of fair values is required in determining the carrying values of certain assets and liabilities, as well as for specific
disclosures. In determining the fair value of financial instruments, market prices of the same or similar instruments are used
whenever such prices are available. If observable market prices are unavailable or impracticable to obtain, we are required to
make judgments about assumptions that market participants would use in estimating the fair value of the financial instrument.
Fair value is estimated using modeling techniques and incorporates assumptions about interest rates, duration, future
expected cash flows, market conditions, risks inherent in a particular valuation technique and the risk of nonperformance.
These assumptions are inherently subjective as they require material estimates, all of which may be susceptible to significant
change. The models used to determine fair value adjustments are periodically evaluated by management for relevance under
36
current facts and circumstances. We believe the accounting estimate related to the fair value of available-for-sale securities to
be a critical accounting estimate because it requires us to make assumptions where observable market prices are unavailable.
Critical Accounting Policies
With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can
potentially have a materially favorable or unfavorable impact on subsequent results of operations. However, our historical
results for the periods presented in the consolidated financial statements have not been materially impacted by such variances.
More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting
Policies” of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Leases
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 zero at the end of the
lease. See Note 3 “Leases,” of Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Revenue Recognition
Revenue for merchandise that is shipped to our customers from our distribution centers and stores is recognized upon
shipment following customer payment, which is when the customer obtains control of the product and has the ability to direct
the use of the product, including, among other options, the ability to redirect the product to a different shipping destination.
Store revenue is recognized at the point of sale. This represents the point at which the customer obtains control of the product
and has the ability to direct the use of the product.
We recognize shipping and handling fees as revenue included in net sales when generated from a customer order upon
shipment or at the point of sale. Costs of shipping and handling are included in selling, general and administrative expenses.
Sales tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities.
We reserve for projected merchandise returns based on both historical and actual experience, as well as various other
assumptions that we believe to be reasonable. Actual merchandise returns are monitored regularly and have not been materially
different from the estimates recorded. Product returns often represent merchandise that can be resold. Amounts refunded to
customers are generally made by issuing the same payment tender as used in the original purchase. Merchandise exchanges of
the same product and price are not considered merchandise returns and are therefore excluded when calculating the sales
returns reserve.
Inventories
Our inventories are composed of finished goods and are stated at the lower of cost or net realizable value, with cost
determined using the first-in, first-out method. Net realizable value is defined as the “estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal and transportation.” The inventory value is
adjusted periodically, if needed, to reflect current market conditions, which requires our judgments that may significantly affect
the ending inventory valuation, as well as gross margin. 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. We
adjust our inventory for obsolescence based on historical trends, aging reports, specific identification, current retail prices and
our estimates of future retail sales prices.
Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have calculations that
require us to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling
environment, historical results and current inventory trends. If actual observed obsolescence or periodic updates of our
shrinkage estimates differ from our original estimates, we adjust our inventory reserves accordingly throughout the period. We
do not believe that changes in the assumptions used in these estimates would have a significant effect on our net income or
inventory balances. We have not made any material changes to our assumptions included in the calculations of the
obsolescence and shrinkage reserves during the periods presented, nor have we recorded significant adjustments related to the
physical inventory process.
37
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.
Long-Lived Assets
Long-lived assets, such as property and equipment are reviewed for impairment during the fourth quarter, or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may
indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that
could affect the value of an asset, a product recall or an adverse action or an assessment by a regulator. If the sum of the
estimated undiscounted future cash flows related to the asset is less than the carrying value, we recognize a loss equal to the
difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis of
the asset. Impairment charges are included in selling, general and administrative expenses.
We evaluate long-lived tangible assets at an individual store level, which is the lowest level at which independent cash
flows can be identified. We evaluate corporate assets or other long-lived assets that are not store-specific at the consolidated
level.
Since there is typically no active market for our long-lived tangible assets, we estimate fair values based on the expected
future cash flows. We estimate future cash flows based on store-level historical results, current trends, and operating and cash
flow projections. Our estimates are subject to uncertainty and may be affected by a number of factors outside our control,
including general economic conditions and the competitive environment. While we believe our estimates and judgments about
future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected,
do not occur or if events change requiring us to revise our estimates.
Income Taxes
We account for income taxes and the related accounts using the liability method in accordance with ASC Topic 740,
Income Taxes (“ASC 740”). Under this method, we accrue income taxes payable or refundable and recognize deferred tax
assets and liabilities based on differences between U.S. GAAP and tax bases of assets and liabilities. We measure deferred tax
assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse, and
recognize the effect of a change in enacted rates in the period of enactment.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making
such determination, we consider all available positive and negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation
allowance is established if it is more likely than not that some portion or all of the deferred income tax asset will not be
realized.
We establish assets and liabilities for uncertain tax positions taken or expected to be taken in income tax returns, using a
more-likely-than-not recognition threshold. We recognize penalties and interest related to uncertain tax positions as income tax
expense.
See Note 9 “Income Taxes,” of Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K.
38
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2021 and February 2, 2020
Consolidated Statements of Operations for Fiscal Years Ended January 31, 2021 and February 2,
2020
Consolidated Statements of Comprehensive Income for Fiscal Years Ended January 31, 2021 and
February 2, 2020
Consolidated Statements of Shareholders’ Equity for Fiscal Years Ended January 31, 2021 and
February 2, 2020
Consolidated Statements of Cash Flows for Fiscal Years Ended January 31, 2021 and February 2,
2020
Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts
Page
40
43
44
45
46
47
48
66
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Duluth Holdings Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Duluth Holdings Inc, a Wisconsin corporation, and affiliate
(collectively, the “Company”) as of January 31, 2021 and February 2, 2020, the related consolidated statements of operations,
comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended January 31, 2021,
and the related notes and financial statement schedule included under Item 15 (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of January 31, 2021 and February 2, 2020, and the results of its operations and its cash flows for each of the two
years in the period ended January 31, 2021, in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of January 31, 2021, based on criteria established in the
2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), and our report dated March 26, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the
accounts or disclosures to which it relates.
Segment reporting
As described in Note 1 to the consolidated financial statements, the Company has historically disclosed two reportable
segments, direct and retail. As a result of the Company’s continued growth of its omnichannel distribution network, resulting in
a consistent online and in-store customer experience, and in conjunction with an assessment of the similarities of qualitative
and quantitative characteristics between the two former reportable segments, the Company has determined that the historical
structure of separate reportable segments for direct and retail is no longer representative. Therefore, as of February 3, 2020, the
Company updated its segment reporting to one reportable segment. We identified the aggregation of reportable segments as a
critical audit matter.
The principal considerations for our determination that the aggregation of reportable segments is a critical audit matter are the
qualitative and economic aggregation criteria and the appropriate period in which to reflect the change, which involved
significant management judgment. As such, auditing this change required a high degree of auditor judgment when performing
audit procedures and evaluating the results of those procedures.
40
Our audit procedures related to the aggregation of reportable segments included the following, among others:
(cid:120) We tested the Company’s internal control specific to management’s periodic assessment of the identification and
disclosure of reportable segments. Following management’s conclusion that an updated assessment was necessary
relative to reportable segments, we tested the Company’s accounting analysis control that included the factors
specified below.
(cid:120)
In consultation with our national office resources, we evaluated the time period in which management concluded it
was appropriate to aggregate and disclose the two previously disclosed reportable segments. This included evaluating
the continued maturation of the Company as an omni-store business, as well as the evolution of various omni-store
initiatives that have been implemented by the Company including buy online and pick up in-store and ship from store.
Our consultation included the following:
o We considered our experience as the Company’s auditor of record in evaluating management’s identification
of the Chief Executive Officer as the Chief Operating Decision Maker (“CODM”).
o We corroborated management’s conclusion that the Company’s operating segments consist of direct and
retail through the report that is periodically provided to the CODM to assist with business decisions.
o We evaluated management’s assessments related to the qualitative and economic aggregation criteria that
were considered to aggregate two previously disclosed reportable segments. The qualitative criteria we
evaluated included (i) the nature of the Company’s products and services, (ii) the nature of the Company’s
production process, (iii) the type of customer that the Company targets, and (iv) the methods used to
distribute the Company’s products. The quantitative criteria we evaluated included (i) the mix of product
sales between the aggregated components, and (ii) the similarity of long-term gross margins of the aggregated
components. We corroborated management’s conclusions through our understanding of the Company’s
products and customers and audited historical financial data.
o We assessed management’s presentation and disclosure against the objectives and principles outlined in
relevant accounting literature.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2002.
Chicago, Illinois
March 26, 2021
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Duluth Holdings Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Duluth Holdings Inc., a Wisconsin corporation, and affiliate (the “Company”)
as of January 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 31, 2021, based on criteria established in the 2013 Internal Control—
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
consolidated financial statements of the Company as of and for the year ended January 31, 2021, and our report dated March 26, 2021
expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Chicago, Illinois
March 26, 2021
42
DULUTH HOLDINGS INC.
Consolidated Balance Sheets
(Amounts in thousands)
January 31, 2021
February 2, 2020
ASSETS
Current Assets:
Cash and cash equivalents
Receivables
Inventory, net
Prepaid expenses & other current assets
Prepaid catalog costs
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Finance lease right-of-use assets, net
Restricted cash
Available-for-sale security
Other assets, net
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable
Accrued expenses and other current liabilities
Income tax payable
Current portion of operating lease liabilities
Current portion of finance lease liabilities
Current maturities of Duluth long-term debt
Current maturities of TRI long-term debt
Total current liabilities
Operating lease liabilities, less current portion
Finance lease liabilities, less current portion
Duluth long-term debt, less current maturities
TRI long-term debt, less current maturities
Deferred tax liabilities
Total liabilities
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; 10,000 shares authorized; no shares
issued or outstanding as of January 31, 2021 and February 2, 2020
Common stock (Class A), no par value; 10,000 shares authorized;
3,364 shares issued and outstanding as of January 31, 2021 and
February 2, 2020
Common stock (Class B), no par value; 200,000 shares authorized;
29,530 shares issued and 29,477 shares outstanding as of January 31, 2021 and
29,191 shares issued and 29,172 outstanding as of February 2, 2020
Treasury stock, at cost; 53 and 19 shares as of January 31, 2021 and
February 2, 2020, respectively
Capital stock
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity of Duluth Holdings Inc.
Noncontrolling interest
Total shareholders' equity
Total liabilities and shareholders' equity
$
$
$
47,221 $
2,820
149,052
10,203
1,014
210,310
124,237
117,490
53,468
—
6,111
3,961
515,577 $
33,647 $
37,686
7,579
11,050
2,629
2,500
623
95,714
104,287
43,299
45,750
27,229
8,200
324,479
—
—
—
2,189
1,470
147,849
9,503
1,181
162,192
137,071
120,431
46,677
51
6,432
1,196
474,050
33,053
29,464
3,427
10,674
1,600
1,000
557
79,775
106,120
37,434
38,332
27,778
8,505
297,944
—
—
—
(628)
92,875
101,166
48
193,461
(2,363)
191,098
515,577 $
(407)
90,902
87,589
188
178,272
(2,166)
176,106
474,050
$
The accompanying notes are an integral part of these consolidated financial statements.
43
DULUTH HOLDINGS INC.
Consolidated Statements of Operations
(Amounts in thousands, except per share figures)
Net sales
Cost of goods sold (excluding depreciation and amortization)
Gross profit
Selling, general and administrative expenses
Operating income
Interest expense
Other income, net
Income before income taxes
Income tax expense
Net income
Less: Net loss attributable to noncontrolling interest
Net income attributable to controlling interest
Basic earnings per share (Class A and Class B):
Weighted average shares of
common stock outstanding
Net income per share attributable
to controlling interest
Diluted earnings per share (Class A and Class B):
Weighted average shares and
equivalents outstanding
Net income per share attributable
to controlling interest
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
$
638,783 $
307,257
331,526
307,311
24,215
6,263
65
18,017
4,637
13,380
(197)
13,577 $
32,447
$
0.42
$
32,580
$
0.42
$
615,624
287,475
328,149
300,041
28,108
4,471
291
23,928
5,429
18,499
(422)
18,921
32,309
0.59
32,371
0.58
The accompanying notes are an integral part of these consolidated financial statements.
44
DULUTH HOLDINGS INC.
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
Net income
Other comprehensive income
Securities available-for-sale:
Unrealized security (loss) income
Income tax (benefit) expense
Other comprehensive (loss) income
Comprehensive income
Comprehensive loss attributable
to noncontrolling interest
Comprehensive income attributable
to controlling interest
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
13,380 $
18,499
(190)
(50)
(140)
13,240
(197)
254
66
188
18,687
(422)
$
13,437
$
19,109
The accompanying notes are an integral part of these consolidated financial statements.
45
DULUTH HOLDINGS INC.
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands)
Balance at February 3, 2019
Shares Amount
32,574 $ 89,849 $
stock
earnings
loss
entities
equity
(92) $ 70,592 $
— $
(239) $ 160,110
Capital stock
other
interest in
Total
Treasury Retained
comprehensive variable interest shareholders'
Accumulated Noncontrolling
Cumulative effect from adoption of
—
ASC 842
Issuance of common stock
211
Consolidation of TRI Holdings, LLC —
Restricted stock forfeitures
(234)
Stock-based compensation
—
Restricted stock surrendered
for taxes
Other comprehensive income
Net income
—
554
—
—
499
—
—
—
—
—
(1,924)
—
—
—
—
(15)
—
—
32,536 $ 90,902 $
—
—
—
(315)
—
—
—
—
18,921
(407) $ 87,589 $
355
—
(16)
515
1,458
—
—
—
—
—
—
—
—
—
—
—
—
—
188
—
188 $
—
—
—
—
—
(1,505)
—
—
(1,924)
554
(1,505)
—
499
—
(422)
(315)
188
18,499
(2,166) $ 176,106
515
1,458
—
—
—
—
(34)
—
—
32,841 $ 92,875 $
—
—
—
(221)
—
—
—
—
13,577
(628) $ 101,166 $
—
(140)
—
48 $
—
—
(197)
(221)
(140)
13,380
(2,363) $ 191,098
Balance at February 2, 2020
Issuance of common stock
Stock-based compensation
Restricted stock forfeitures
Restricted stock surrendered
for taxes
Other comprehensive loss
Net income
Balance at January 31, 2021
The accompanying notes are an integral part of these consolidated financial statements.
46
DULUTH HOLDINGS INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Stock-based compensation
Deferred income taxes
Loss on disposal of property and equipment
Changes in operating assets and liabilities:
Receivables
Income taxes receivable
Inventory
Prepaid expense & other assets
Software hosting implementation costs, net
Deferred catalog costs
Trade accounts payable
Income taxes payable
Accrued expenses and deferred rent obligations
Noncash lease impacts
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Capital contributions towards build-to-suit stores
Principal receipts from available-for-sale security
Change in other assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from line of credit
Payments on line of credit
Proceeds from delayed draw term loan
Payments on delayed draw term loan
Payments on TRI long term debt
Payments on finance lease obligations
Shares withheld for tax payments on vested restricted stock
Other
Net cash provided by financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid
Supplemental disclosure of non-cash information:
Unpaid liability to acquire property and equipment
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
13,380 $
18,499
28,520
1,629
(255)
324
(1,350)
—
(1,203)
2,615
(4,089)
167
(1,464)
4,152
7,719
606
50,751
(11,743)
(520)
131
—
(12,132)
95,388
(114,720)
30,000
(1,750)
(483)
(1,958)
(221)
106
6,362
44,981
2,240
47,221 $
6,435 $
830 $
962 $
22,083
647
(1,151)
—
877
2,292
(50,164)
5,429
—
1,322
7,564
3,209
(2,260)
—
8,347
(24,435)
(6,354)
117
(15)
(30,687)
271,754
(268,965)
20,000
—
(495)
(891)
(315)
407
21,495
(845)
3,085
2,240
4,565
562
1,414
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
47
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 Company brand, with the majority of products being exclusively
developed and sold as Duluth Trading branded merchandise.
The Company has historically identified two operating segments, direct and retail. The direct segment, consisting of the
Company’s website and catalogs, offers products nationwide. In 2010, the Company initiated its omnichannel platform with the
opening of its first store. Since then, Duluth Trading has expanded its retail presence, and as of January 31, 2021, the Company
operated 62 retail stores and three outlet stores. The Company identifies its operating segments according to how its business
activities are managed and evaluated. The Company continues to grow its omnichannel distribution network which allows the
consumer to interact with the Company through a consistent customer experience whether on the Company website or at
Company stores. As the Company expands its distribution network, and in conjunction with assessing the similar nature of
products sold, production process, distribution process, target customers and economic characteristics between the two
segments, the Company determined that the historical structure of separate reporting segments for direct and retail was no
longer representative. Therefore, as of February 3, 2020, the Company updated its segment reporting to one reportable external
segment, consistent with the Company’s omnichannel business approach. The Company’s revenues generated outside the
United States were insignificant.
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.”
Basis of Presentation
The consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles
(“U.S. GAAP”). 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 2020 and Fiscal 2019
ended on January 31, 2021 and February 2, 2020, respectively. Fiscal 2020 and Fiscal 2019 were a 52-week period.
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 Company’s business operations and financial performance for the year ended January 31, 2021 were
impacted by COVID-19. These impacts are discussed within these notes to the 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.
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.
48
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements consist of the accounts of Duluth Holdings Inc. and TRI Holdings,
LLC (“TRI”) as a variable interest entity. See Note 6 “Variable Interest Entities” for further information.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
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 following customer payment,
which is when the customer obtains control of the product and has the ability to direct the use of the product, including, among
other options, the ability to redirect the product to a different shipping destination. Store revenue is recognized at the point of
sale. The Company provides the customer the right of return on the product and revenue is adjusted based on an estimate of the
expected returns based on historical rates as well as events that may cause changes to historical rates. See Note 5 “Accrued
Expense and Other Liabilities” for the Company’s product returns reserve. 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. A liability is recognized at the time a gift card
is sold, and revenue is recognized at the time the gift card is redeemed for merchandise. See Note 8 “Revenue” for further
information.
Cost of Goods Sold and Selling, General and Administrative Expenses
The following table illustrates the primary costs classified in cost of goods sold and selling, general and administrative
expenses:
Cost of Goods Sold
(cid:120)(cid:3) Direct cost of purchased merchandise
(cid:120)(cid:3) Inventory shrinkage and inventory adjustments due to
Selling, General and Administrative Expenses
(cid:120)(cid:3) Payroll and payroll-related expenses
(cid:120)(cid:3) Third party logistics ("3PL")
obsolescence
(cid:120)(cid:3) Inbound freight
(cid:120)(cid:3) Occupancy expenses related to stores and operations at the
Company's headquarters, including utilities
(cid:120)(cid:3) Freight from the Company's distribution centers to its stores
(cid:3)
(cid:120)(cid:3) Depreciation and amortization
(cid:120)(cid:3) Advertising expenses including: television, digital and
social media advertising; catalog production and mailing;
and print advertising costs
(cid:120)(cid:3) Freight associated with shipping product to customers
(cid:120)(cid:3) Consulting and professional fees
Advertising and Catalog Expenses
The Company’s non-direct response advertising primarily consists of billboards, web marketing programs, social media
and radio and television advertisements, which are expensed as they are incurred. The Company’s direct-response advertising
consists of producing, printing and mailing catalogs, which are expensed upon receipt by customers.
Advertising and Catalog expenses were $72.4 million and $93.9 million for fiscal 2020 and fiscal 2019, respectively.
49
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Shipping and Processing
Shipping and processing revenue generated from customer orders has been classified as a component of net sales.
Shipping and processing expense, including handling expense, has been classified as a component of selling, general and
administrative expenses. Shipping and handling expenses increased in fiscal 2020 due to the shift to online shopping, as well as
additional surcharges during our peak holiday season resulting from the strained distribution network. The Company incurred
shipping and processing expenses of $46.9 million and $31.3 million for fiscal 2020 and fiscal 2019, respectively.
Income Taxes
The Company accounts for income taxes and related accounts using the liability method in accordance with ASC Topic
740, Income Taxes (“ASC 740”). Under ASC 740, the Company accrues income taxes payable or refundable and recognizes
deferred tax assets and liabilities based on differences between U.S. GAAP and tax bases of assets and liabilities. The Company
measures deferred tax assets and liabilities using enacted tax rates in effect for the years in which the differences are expected
to reverse, and recognizes the effect of a change in enacted rates in the period of enactment. A valuation allowance is
established if it is more likely than not that some portion or all of the deferred income tax asset will not be realized.
The Company establishes assets and liabilities for uncertain tax positions taken or expected to be taken in income tax
returns, using a more-likely-than-not recognition threshold. The Company recognizes penalties and interest related to uncertain
tax positions as income tax expense. See Note 9 “Income Taxes,” of these Notes to Consolidated Financial Statements for
further discussion.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash
deposits. At various times during the year, the Company has certain cash balances deposited in financial institutions in excess
of federally insured limits. The Company has not experienced any losses in such accounts and management believes it is not
exposed to any significant credit risk.
Restricted Cash and Reconciliation of cash and cash equivalents and restricted cash to the statement of cash flows
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. There
was no restricted cash held in escrow accounts as of January 31, 2021.
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.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the
Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statement of Cash
Flows.
(in thousands)
Cash and cash equivalents
Restricted Cash
Total cash, cash equivalents and restricted cash shown in the
consolidated statement of cash flows
Significant Suppliers
January 31, 2021 February 2, 2020
$
47,221 $
-
2,189
51
$
47,221 $
2,240
The Company’s principal supplier of inventory accounted for 60% and 54% of total inventory expenditures in fiscal 2020
and fiscal 2019, respectively. The Company also had a second supplier that accounted for 10% and 12% of total inventory
expenditures in fiscal 2020 and fiscal 2019, respectively.
50
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Inventories
Inventory consists of finished goods stated at the lower of cost or net realizable value, with cost determined using the
first-in, first-out valuation method. The Company records an inventory reserve for the anticipated loss associated with selling
inventories below cost. Inventory reserve for excess and obsolete items was $1.6 million and $1.8 million as of January 31,
2021 and February 2, 2020, respectively.
Property and Equipment
Property and equipment consist of the following:
(in thousands)
Land and land improvements
Leasehold improvements
Buildings
Vehicles
Warehouse equipment
Office equipment and furniture
Computer equipment
Software
Accumulated depreciation and amortization
Construction in progress
Property and equipment, net
January 31, 2021
February 2, 2020
$
$
4,486
47,451
35,344
161
14,685
52,614
9,861
34,003
198,605
(75,958)
122,647
1,590
124,237
$
$
4,486
42,784
35,905
161
14,379
49,756
8,135
31,500
187,106
(53,255)
133,851
3,220
137,071
The Company recorded depreciation expense of $24.2 million and $19.2 million for fiscal 2020 and fiscal 2019,
respectively. The Company expenses as incurred all routine repair and maintenance costs that do not extend the estimated
useful life of the asset.
Property and equipment are carried at cost and are generally depreciated using the straight-line method over the estimated
useful lives. Leasehold improvements are depreciated over the shorter of the lease term or estimated useful life. Depreciable
lives by major classification are as follows:
Land improvements
Leasehold improvements
Buildings
Vehicles
Warehouse equipment
Office equipment and furniture
Computer equipment
Software
Years
15 - 40
3 - 15
39
5 - 10
5 - 10
5 - 10
3 - 5
3 - 5
51
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
(in thousands)
Prepaid expenses & other current assets
Pending returns inventory, net
Current software hosting implementation costs, net
Other prepaid expenses
Prepaid expenses & other current assets
Other assets, net
Goodwill
Intangible assets, net
Non-current software hosting implementation costs
Other assets, net
Other assets, net
Software Hosting Implementation Costs
January 31, 2021
February 2, 2020
$
$
$
$
2,490 $
1,149
6,564
10,203 $
402 $
264
2,755
540
3,961 $
1,932
—
7,571
9,503
402
283
—
511
1,196
Software hosting implementation costs includes costs of implementation activities of certain cloud computing
arrangements in accordance with Accounting Standards Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use
Software (Subtopic 350-40). Amortization expense and accumulated amortization was $0.2 million for fiscal 2020. See Note 13
“Recent Accounting Pronouncements” for more information.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired. ASC Topic 350, Intangibles-
Goodwill and Other, requires that goodwill be tested for impairment annually, or more often if an event or circumstance
indicates that an impairment loss may have been incurred. The Company’s management uses its judgment in assessing whether
goodwill may have become impaired between annual impairment tests. Indicators such as unexpected adverse business
conditions, economic factors, competitive activities, loss of key personnel and acts by governments may signal that an asset has
become impaired.
The Company determined that the effects of COVID-19 may represent indicators of asset impairment, and as a result
performed an interim qualitative assessment for the Company’s goodwill at May 3, 2020. The Company determined that it was
more likely than not that the fair value was greater than its carrying value and no impairment loss had been incurred. There
were no triggering events subsequent to the quarter ended May 3, 2020 and through the year ended January 31, 2021.
Management performed its annual qualitative assessment of goodwill as of December 31, 2020 and 2019 and determined
that it was more likely than not that the fair value of the Company was greater than its carrying amount; as such, no further
evaluation of goodwill was deemed necessary. No impairment was recognized for the years ended January 31, 2021 or
February 2, 2020.
Intangible Assets and Other Assets
Intangible assets and other assets include loan origination fees and trade names which are amortized over their estimated
useful lives ranging from three years to fifteen years. Other assets also include security deposits required by certain of the
Company’s lease agreements and prepaid expenses. Amortization expense was $0.2 million for fiscal 2020 and $0.1 million for
fiscal 2019. Accumulated amortization was $0.7 million and $0.5 million as of January 31, 2021 and February 2, 2020,
respectively.
52
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Scheduled future amortization of amortizable other assets are as follows as of January 31, 2021:
Fiscal year
(in thousands)
2021
2022
2023
2024
2025
Thereafter
$
$
210
193
71
18
17
28
537
Impairment of Long-Lived Assets
The Company’s long-lived assets are reviewed for impairment during the fourth quarter, or whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows
is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair
value and the carrying value of the asset or group of assets. Such analyses necessarily involve judgment.
The Company determined that the effects of COVID-19 may represent indicators of asset impairment, and as a result,
performed an interim impairment assessment at May 3, 2020. In the first fiscal quarter of 2020, the Company performed
undiscounted cash flow analyses on certain long-lived assets, including retail stores at the individual store level and determined
that the estimated undiscounted future cash flows exceeded the net carrying values. There were no triggering events subsequent
to the quarter ended May 3, 2020 and through the year ended January 31, 2021. Consequently, there were no long-lived asset
impairment charges recorded for fiscal 2020.
For fiscal 2019, management did not identify any events or changes in circumstances that indicated the potential
impairment of long-lived assets.
Store Pre-opening Costs
Store pre-opening costs are expensed as incurred and are included in selling, general and administrative expenses.
Stock-Based Compensation
In connection with the IPO, the Company adopted the 2015 Equity Incentive Plan of Duluth Holdings Inc. (“2015 Plan”),
which provides compensation alternatives such as stock options, shares, restricted stock, restricted stock units, deferred stock
and performance share units, using or based on the Company’s Class B common stock.
The Company accounts for its stock-based compensation plan in accordance with ASC Topic 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. Restricted stock issued to board members generally vests over a period of one year.
Restricted stock issued to key employees and executives typically vests over a period of three years to five years based on the
terms for each individual award. The fair value of the restricted stock is determined based on the market value of the
Company’s Class B common stock on the grant date. Restricted stock forfeitures are recognized as incurred.
Total stock compensation expense associated with restricted stock recognized by the Company was $1.5 million and $0.5
million for fiscal 2020 and fiscal 2019, respectively, and is included in selling, general and administrative expenses on the
Consolidated Statements of Operations.
53
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
The following is a summary of the activity in the Company’s unvested restricted stock during the years ended January 31,
2021 and February 2, 2020:
Outstanding at February 3, 2019
Granted
Vested
Forfeited
Outstanding at February 2, 2020
Granted
Vested
Forfeited
Outstanding at January 31, 2021
Weighted average
grant date
fair value
per share
14.29
17.67
18.90
12.65
17.71
7.13
16.21
10.42
9.74
Shares
321,657
165,730
(61,647)
(233,646)
192,094
283,063
(120,592)
(16,326)
338,239 $
At January 31, 2021, the Company had unrecognized compensation expense of $2.2 million related to the restricted stock
awards, which is expected to be recognized over a weighted average period of 2.4 years.
Treasury Stock
Treasury stock consists of shares withheld in lieu of tax payments when restricted stock vests using the treasury cost
method and is classified in the Consolidated Balance Sheets as a reduction to shareholders’ equity.
Taxes Collected from Customers
The Company presents all non-income government-assessed taxes (sales, use and value-added taxes) collected from its
customers and remitted to governmental agencies on a net basis (excluded from revenue) in its consolidated financial
statements.
Other Comprehensive Income
Other comprehensive income or loss represents the change in equity from non-shareholder or non-member transactions,
which is not included in the statements of earnings but is reported as a separate component of shareholders’ equity. For fiscal
2020 and fiscal 2019, other comprehensive income consists of changes in unrealized gains and losses on available-for-sale
securities, net of taxes.
Fair Value Measurements
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.
54
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
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 fiscal
2020, 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 judgement and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect the estimates.
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.
(in thousands)
Level 3 security:
Corporate trust
(in thousands)
Level 3 security:
Corporate trust
January 31, 2021
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
6,047 $
64 $
$
6,111
February 2, 2020
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
6,178 $
254 $
$
6,432
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 security on a quarterly basis to monitor its exposure to other-than-
temporary impairment.
No other-than-temporary impairment was recorded in the Consolidated Statements of Operations in fiscal 2020 or fiscal
2019.
The following table presents the future receipts related to the Company’s available-for-sale security by contractual
maturity as of January 31, 2021.
(in thousands)
Within one year
After one year through five years
After five years through ten years
After ten years
Total
Amortized
Cost
Estimated
Fair Value
$
$
147
1,004
1,563
3,333
6,047
$
$
150
1,022
1,581
3,358
6,111
The carrying values and fair values of other financial instruments in the Consolidated Balance Sheets are as follows:
(in thousands)
TRI Long-term debt, including short-term portion
January 31, 2021
February 2, 2020
Carrying
Amount
Fair Value
Carrying
Amount
$
27,852 $
28,697 $
28,335 $
Fair Value
30,238
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, and February 2, 2020, the carrying values of the long-term delayed draw term loan and long-term
line of credit both approximated its fair value.
55
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Reclassifications
Certain reclassifications have been made to the 2019 financial statements in order to conform to the 2020 presentation.
There were no changes to previously reported shareholders' equity or net income as a result of the reclassifications.
3. 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 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 years 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 rate. The
Company bases this discount rate 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.
Due to the adverse impacts of COVID-19, the Company has negotiated rent deferral and payback periods with a number
of the Company’s store landlords for the months of April and May 2020. Based on the guidance set forth in the Financial
Accounting Standards Board (“FASB”) issued Staff Q&A “Topic 842 and Topic 840: Accounting for Lease Concessions
Related to the Effects of the COVID-19 Pandemic” the Company has accounted for these deferrals as if no changes to the lease
contract were made and will not elect to apply the lease modification guidance under ASC 842. As of January 31, 2021 the
Company has deferred rent of approximately $0.8 million which was recorded within accrued expenses and other current
liabilities and will be paid in accordance with the concession arrangements.
The expense components of the Company’s leases reflected on the Company’s Consolidated Statement of Operations
were as follows:
Consolidated Statement of Operations
January 31, 2021
February 2, 2020
(in thousands)
Finance lease
Amortization of right-of-use
assets
Interest on lease liabilities
Total finance lease expense
Operating lease expense
Amortization of build-to-suit leases
capital contribution
Variable lease expense
Total lease expense
Selling, general and administrative expenses
Interest expense
Selling, general and administrative expenses
Selling, general and administrative expenses
Selling, general and administrative expenses
$
$
$
$
2,929 $
1,858
4,787 $
16,141 $
1,309
9,453
31,690 $
1,362
1,230
2,592
15,636
1,129
7,347
26,704
56
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Other information related to leases were as follows:
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases
Operating cash flows from finance leases
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for lease liabilities:
Finance leases
Operating leases
Weighted-average remaining lease term (in years):
Finance leases
Operating leases
Weighted-average discount rate:
Finance leases
Operating leases
January 31, 2021
February 2, 2020
$
$
$
$
$
1,958 $
1,858 $
15,652 $
8,966 $
11,642 $
13
9
4.4%
4.3%
891
1,230
13,621
41,566
17,629
15
10
4.5%
4.3%
Future minimum lease payments under the non-cancellable leases are as follows as of January 31, 2021:
Fiscal year
(in thousands)
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less - Discount
Lease liability
Finance
Leases
Operating
Leases
4,575 $
4,554
4,582
4,769
5,133
37,522
61,135 $
15,207
45,928 $
15,721
15,851
16,033
15,383
14,593
63,427
141,008
25,671
115,337
$
$
$
Total rent expense under non-cancellable leases was $17.1 million and $16.2 million for fiscal 2020 and fiscal 2019,
respectively.
57
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
4. DEBT AND CREDIT AGREEMENT
Debt consists of the following:
(in thousands)
TRI Senior Secured Note
TRI Note
Less: current maturities
TRI Long-term debt
Duluth Line of credit
Duluth Delayed draw term loan
Less: current maturities
Duluth long-term debt
TRI Holdings, LLC
January 31, 2021
February 2, 2020
$
$
$
$
$
$
24,352 $
3,500
27,852 $
623
27,229 $
— $
48,250
48,250 $
2,500
45,750 $
24,835
3,500
28,335
557
27,778
19,332
20,000
39,332
1,000
38,332
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 the obligor of these notes.
Credit Agreement
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 and associated swing line (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 was available to draw upon in differing amounts through
May 16, 2020 and matures on May 17, 2023. Outstanding balances under the DDTL require quarterly principal payments with
a final balloon payment at maturity. 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.
On April 30, 2020, the Credit Agreement was amended to include an incremental DDTL of $20.5 million (the
“Incremental DDTL”) that is available to draw upon before March 31, 2021, and matures on April 29, 2021, for a total credit
facility of $150.5 million. As of and for the fiscal year ended January 31, 2021, no amount of the Incremental DDTL was
funded. 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 will be 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 225 to 300 basis points, based upon
the Company’s rent adjusted leverage ratio (effective rate of 3.5% for the Revolver and the DDTL at January 31, 2021). The
interest rate applicable to the Incremental DDTL will also be a fixed rate over the aforementioned interest periods equal to
LIBOR (with a 1% floor) for such interest period plus a margin of 275 to 350 basis points.
As of January 31, 2021, and for the fiscal year then ended, the Company was in compliance with all financial and non-
financial covenants for all debts discussed above.
58
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Future principal maturities of all TRI debt, excluding financing fees of $1.3 million associated with the TRI debt, and the
Company’s Credit Agreement, are as follows as of January 31, 2021:
Fiscal year
(in thousands)
2021
2022
2023
2024
2025
Thereafter
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
(in thousands)
Salaries and benefits
Deferred revenue
Freight
Product returns
Catalog costs
Unpaid purchases of property & equipment
Accrued advertising
Other
Total accrued expenses and other current liabilities
6. VARIABLE INTEREST ENTITIES
$
$
3,123
3,193
44,018
847
931
25,292
77,404
January 31, 2021
February 2, 2020
$
$
8,826 $
9,944
6,769
5,304
396
503
981
4,963
37,686 $
2,775
9,946
5,404
3,508
542
971
633
5,685
29,464
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 VIE as of January 31, 2021 and February 2,
2020.
The Company leases the Company’s headquarters in Mt. Horeb, Wisconsin from TRI. In conjunction with the lease, the
Company originally 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.
59
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
The Consolidated Balance Sheets include the following amounts as a result of the consolidation of TRI as of January 31,
2021 and February 2, 2020.
(in thousands)
Cash
Property and equipment, net
Total assets
Other current liabilities
Current maturities of TRI long-term debt
TRI long-term debt
Noncontrolling interest in VIE
Total liabilities and shareholders' equity
7. EARNINGS PER SHARE
January 31, 2021
February 2, 2020
$
$
$
$
747 $
24,800
25,547 $
58 $
623
27,229
(2,363)
25,547 $
279
25,981
26,260
91
557
27,778
(2,166)
26,260
Earnings per share is computed under the provisions of ASC 260, Earnings Per Share. Basic earnings per share is based
on the weighted average number of common shares outstanding for the period. Diluted earnings 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 per share unless considered anti-dilutive. The reconciliation of the numerator and denominator of the basic
and diluted earnings per share calculation is as follows:
(in thousands, except per share data)
Numerator - net income attributable to controlling interest
Denominator - weighted average shares (Class A and Class B)
Basic
Dilutive shares
Diluted
Earnings per share (Class A and Class B)
Basic
Diluted
8. REVENUE
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
13,577
$
32,447
133
32,580
0.42
0.42
$
$
$
$
18,921
32,309
62
32,371
0.59
0.58
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
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.
(in thousands)
Direct-to-consumer
Stores
January 31, 2021
February 2, 2020
$
$
460,839 $
177,944
638,783 $
350,371
265,253
615,624
60
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
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 upon issuance in Accrued
expenses and other current liabilities under deferred revenue (see Note 5 “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:
(in thousands)
Contract assets
Contract liabilities
January 31, 2021
February 2, 2020
$
$
2,490 $
9,788 $
1,932
9,790
Revenue from gift cards is recognized when the gift card is redeemed by the customer for merchandise, or as 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:
(in thousands)
Balance as of Beginning of Period
Gift cards sold
Gift cards redeemed
Gift card breakage
Gift card escheat
Balance as of End of Period
January 31, 2021
February 2, 2020
$
$
9,790 $
17,098
(14,766)
(2,334)
-
9,788 $
8,508
17,523
(15,137)
(1,047)
(57)
9,790
61
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
9. INCOME TAXES
The components of income tax expense were as follows:
(in thousands)
Current:
Federal
State
Noncurrent:
Federal
State
Deferred:
Federal
State
Total income tax expense
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
$
$
3,350 $
1,283
4,633
168 $
91
259
353
(608)
(255)
4,637 $
4,727
1,308
6,035
—
—
—
(568)
(38)
(606)
5,429
The tax effects of unrealized gains and losses on securities are components of other comprehensive income and therefore
excluded from deferred tax expense.
The reconciliation of income tax expense to the amount computed at the federal statutory rate was as follows:
(in thousands)
Federal taxes at statutory rate
State and local income taxes, net of federal benefit
Research and development tax credits
Other
Total income tax expense
Fiscal Year Ended
January 31, 2021
February 2, 2020
$
$
3,824
786
(151)
178
4,637
21.0 % $
4.3 %
(0.8) %
1.0 %
25.5 % $
5,114
965
(487)
(163)
5,429
21.0 %
4.0 %
(2.0) %
(0.7) %
22.3 %
62
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary differences between U.S. GAAP and tax bases of assets
and liabilities. Significant components of deferred tax assets and liabilities were as follows:
January 31, 2021
February 2, 2020
(in thousands)
Deferred tax assets:
Returns allowance
Uniform capitalization
Deferred rent
Accruals
Stock-based compensation
Advance payments
Unrecognized tax benefits
Total deferred tax assets
Deferred tax liabilities:
Property and equipment
Unrealized gain on investment
Inventory
Prepaid expenses
Goodwill and intangibles
Capital lease
Revenue recognition method adjustment
Total deferred tax liabilities
Net deferred tax liabilities
Uncertain Tax Positions
$
$
1,330 $
3,425
205
1,841
231
685
2
7,719
13,202
16
223
868
66
1,454
90
15,919
8,200 $
912
2,930
—
388
352
820
—
5,402
10,346
66
27
857
66
2,358
187
13,907
8,505
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in thousands)
Balance beginning of year
Additions for tax positions in prior year
Additions for tax positions in current year
Balance at end of year
January 31, 2021
February 2, 2020
$
$
— $
214
45
259 $
—
—
—
—
If recognized, $0.3 million of the Company’s unrecognized tax benefits as of January 31, 2021, would affect the
Company’s effective tax rate. The Company does not anticipate that there will be a material change in the balance of the
unrecognized tax benefits in the next 12 months. Any interest and penalties related to uncertain tax positions are recorded in
income tax expense. There were no amounts recorded as tax expense for interest or penalties for the years ended February 2,
2020.
The Company files income tax returns in the United States federal jurisdiction and in various state jurisdictions. Federal
tax returns for tax years beginning January 1, 2017, and state tax returns for tax years beginning January 1, 2016, are open for
examination.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed. The CARES Act,
among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security
payments, alternative minimum tax credit refunds and modifications to net interest deduction limitations. The Company has
concluded the analysis of these provisions as of year-end and the CARES Act did not have a material impact on the Company’s
income taxes for the year ended January 31, 2021.
63
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
10. RETIREMENT PLAN
The Company has a contributory 401(k) profit sharing plan (the “Plan”) which covers all employees who have attained
age 21 and who have met minimum service requirements. The Company makes quarterly non-discretionary “safe harbor”
matching contributions to the Plan equal to 100% of the basic contribution made by each participant on the first 3% of his or
her compensation plus 50% of the basic contribution made by each participant on the next 2% of his or her compensation.
The Company is also permitted to make discretionary profit sharing contributions to the Plan. There were no profit
sharing contributions for the plan year ended December 31, 2020.
The Company’s total expenses under the Plan were $1.6 million and $1.5 million for fiscal 2020 and fiscal 2019,
respectively.
11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company becomes involved in lawsuits and other claims arising from its ordinary course of
business. Because of the uncertainties related to the incurrence, amount and range of loss on any pending litigation or claim,
management is currently unable to predict the ultimate outcome of any litigation or claim, determine whether a liability has
been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome.
Management believes, after considering a number of factors and the nature of any outstanding litigation or claims, that the
outcome will not have a material effect upon the Company’s results of operations, financial condition or cash flows. However,
because of the unpredictable nature of these matters, the Company cannot provide any assurances regarding the outcome of any
litigation or claim to which it is a party or the impact on it of an adverse ruling in such matters.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except earnings per share)
Net sales
Gross profit
Operating (loss) income
$
Net (loss) income attributable to
controlling interest
Basic (loss) earnings per share
attributable to controlling interest
(Class A and Class B)
Diluted (loss) earnings per share
attributable to controlling interest
(Class A and Class B)
First
Quarter
% of Net
Sales
Second
Quarter
% of Net
Sales
Third
Quarter
% of Net
Sales
Fourth
Quarter
% of Net
Sales
Fiscal 2020
109,917
52,332
(18,974)
100.0% $
47.6%
(17.3)%
137,375
72,472
9,792
100.0% $
52.8%
7.1%
135,531
71,037
2,848
100.0% $
52.4%
2.1%
255,960
135,685
30,549
100.0%
53.0%
11.9%
(15,135)
(13.8)%
5,941
4.3%
940
0.7%
21,831
8.5%
(0.47)
0.18
0.03
0.67
(0.47)
0.18
0.03
0.67
64
DULUTH HOLDINGS INC.
Notes to Consolidated Financial Statements
(in thousands, except earnings per share)
Net sales
Gross profit
Operating (loss) income
$
Net (loss) income attributable to
controlling interest
Basic (loss) earnings per share
attributable to controlling interest
(Class A and Class B)
Diluted (loss) earnings per share
attributable to controlling interest
(Class A and Class B)
First
Quarter
% of Net
Sales
Second
Quarter
% of Net
Sales
Third
Quarter
% of Net
Sales
Fourth
Quarter
% of Net
Sales
Fiscal 2019
114,244
60,918
(10,104)
100.0% $
53.3%
(8.8)%
121,963
64,804
3,735
100.0% $
53.1%
3.1%
119,768
65,365
1,328
100.0% $
54.6%
1.1%
259,649
137,062
33,149
100.0%
52.8%
12.8%
(7,572)
(6.6)%
1,936
1.6%
182
0.2%
24,375
9.4%
(0.23)
0.06
0.01
0.75
(0.23)
0.06
0.01
0.75
Subsequent to the issuance of the May 5, 2019 interim financial statements, the Company identified a reclass error for
disclosure purposes between selling, general and administration and interest expense, which had no impact on net income for
the May 5, 2019 unaudited Consolidated Statement of Operations. The reclass error has been corrected in the above table. The
Company assessed the reclass error and determined it is immaterial to the interim financial statements.
13. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
Intangibles – Goodwill and Other – Internal-use Software
On February 3, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill
and Other – Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”) which provides additional guidance on the accounting
for costs of implementation activities performed in a cloud computing arrangement that is a service contract. ASU 2018-15
requires a customer in a cloud computing arrangement that is a service contract to follow the new internal-use software
guidance to determine which implementation costs to capitalize as assets or expense as incurred. The new internal-use software
guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred
during the preliminary project and post-implementation stages be expensed as they are incurred. The Company adopted ASU
2018-15 using the prospective method. In fiscal 2020, $3.9 million of capitalized costs associated with implementation
activities, net of amortization are classified within Prepaid expenses & other current assets on the Company’s Consolidated
Balance Sheets and $0.2 million of related amortization costs are included in Selling, general and administrative expenses on
the Company’s Consolidated Statement of Operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments
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 level
of impact adopting ASU 2016-13 will have on the Company’s consolidated financial statements.
65
DULUTH HOLDINGS INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended January 31, 2021 and February 2, 2020
(Amounts in thousands)
Beginning
Balance
Charged to
Cost and
Expenses
Charged to
Other
Accounts
Deductions
Ending
Balance
Inventory reserve
Year ended January 31, 2021
Year ended February 2, 2020
$
1,826 $
2,420
— $
—
Product returns reserve
Year ended January 31, 2021
Year ended February 2, 2020
$
3,508 $
2,088
1,796 $
1,420
— $
—
— $
—
(226) $
(594)
— $
—
1,600
1,826
5,304
3,508
See accompanying Report of Independent Registered Public Accounting Firm.
66
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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. The Company carried out an
evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures at the
reasonable assurance level pursuant to Rule 13a-15 of the Exchange Act. 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 at the
reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined
in Rules 13a-15(f) under the Exchange Act). Management assessed the effectiveness of its internal control over financial
reporting as of January 31, 2021. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in the Internal Control-Integrated Framework (2013), or the
COSO Report. Based on this assessment, management concluded that our internal control over financial reporting is effective
as of January 31, 2021.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements
included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the
effectiveness of our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under
the Exchange Act) that occurred during our fiscal fourth quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
There were no material impacts, due to COVID-19 and the resulting need to close our books remotely, or our ability to
maintain internal control over financial reporting and disclosure controls and procedures for the fiscal year ended January 31,
2021.
ITEM 9B.
OTHER INFORMATION
None.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Information required by this Item concerning our directors, audit committee, and audit committee financial experts and
compliance with Section 16(a) of the Exchange Act is incorporated by reference to information under the captions “Proposal
One: Election of Directors” and “Delinquent Section 16(a) Reports” in our definitive proxy statement for our 2021 annual
meeting of shareholders to be held on May 27, 2021 (the “Proxy Statement”). It is anticipated that our Proxy Statement will be
filed with the Securities and Exchange Commission on or about April 9, 2021.
67
We have adopted a code of business conduct and ethics that applies to our directors, officers and employees, including
our principal executive officer, principal financial officer and principal accounting officer. We have posted the code of business
conduct and ethics on our website at http://ir.duluthtrading.com under the tab “Corporate Governance—Documents &
Charters—Code of Business Conduct and Ethics.” We intend to satisfy our disclosure requirements under Item 5.05 of Form 8-
K regarding amendments to, or waiver of, any provisions of our code of business conduct and ethics that applies to our
principal executive officer, principal financial officer and principal accounting officer and our directors by posting such
information to our website.
Our code of business conduct and ethics is available in print for any shareholder who requests it by writing to: Secretary,
Duluth Holdings Inc., 201 East Front Street, Mount Horeb, Wisconsin, 53572. We are not including the information available
on or through our website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Pursuant to General Instruction G(3), certain information with respect to our executive officers is set forth under the
caption “Information about Our Executive Officers” as of March 26, 2021 in this Annual Report on Form 10-K.
ITEM 11.
EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference to the sections of the Proxy Statement entitled “Executive
Compensation,” “Director Compensation,” and “Compensation Committee Interlocks and Insider Participation.”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
Information required by this Item is incorporated by reference to the sections of the Proxy Statement entitled “Security
Ownership of Certain Beneficial Owners.”
Equity Compensation Plan Information
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not approved
by security holders(2)
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in first column)(1)
— $
—
— $
—
—
—
4,031,532
—
4,031,532
_____________________________
(1) 2,702,456 shares are available under the Company’s 2015 Equity Incentive Plan and 1,329,076 shares are available under the Company’s Employee Stock
Purchase Plan.
(2) All of our existing equity compensation plans have been approved by shareholders.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this Item is incorporated by reference to the sections of the Proxy Statement entitled “Certain
Relationships and Related Party Transactions” and “Proposal One: Election of Directors.”
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item is incorporated by reference to the section of the Proxy Statement entitled “Audit
Committee Report.”
68
ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULE
Financial Statements and Financial Statement Schedule
PART IV
See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. Schedule II is
included in Part II, Item 8. All other financial statement schedules have been omitted because they are not required or are not
applicable or because the information required in those schedules either is not material or is included in the consolidated
financial statements or the accompanying notes.
Exhibits
The exhibits listed in the accompanying index to exhibits are filed or incorporated as part of this Annual Report on Form
10-K.
Exhibit No.
3.1
3.2
4.1
10.1+
10.10+
10.11+
10.12+
10.14
10.15
10.16
10.17
10.18
10.19+
EXHIBIT INDEX
Amended and Restated Articles of Incorporation of Duluth Holdings Inc., incorporated by reference to
Exhibit 3.1 of Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File
No. 333-207300), filed November 9, 2015.
Amended and Restated Bylaws of Duluth Holdings Inc., incorporated by reference to Exhibit 3.2 of the Pre-
Effective Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-207300),
filed November 9, 2015.
Description of Registrant’s Securities.
Employment Agreement between Duluth Holdings Inc. and Stephen L. Schlecht, incorporated by reference
to Exhibit 10.1 of the Company’s Registration Statement on Form S-1 (File No. 333-207300), filed October
6, 2015.
Summary of Outside Director Compensation Program.
2015 Equity Incentive Plan of Duluth Holdings Inc., incorporated by reference to Exhibit 10.7 of the
Company’s Quarterly Report on Form 10-Q, filed December 18, 2015.
Form of Restricted Stock Agreement for non-employee directors under the 2015 Equity Incentive Plan,
incorporated by reference to Exhibit 10.17 of the Company’s Registration Statement on Form S-1 (File No.
333-207300), filed October 6, 2015.
Commercial Lease between Schlecht Retail Ventures LLC and Duluth Holdings Inc., dated February 14,
2010 (100 West Main Street, Mt. Horeb, Wisconsin), incorporated by reference to Exhibit 10.19 of the
Company’s Registration Statement on Form S-1 (File No. 333-207300), filed October 6, 2015.
Retail Space Lease between LDC-728 Milwaukee, LLC and Duluth Holdings Inc., dated January 23, 2012
(108 North Franklin Street, Port Washington, Wisconsin), incorporated by reference to Exhibit 10.20 of the
Company’s Registration Statement on Form S-1 (File No. 333-207300), filed October 6, 2015.
First Amendment to Retail Lease between LDC-728 Milwaukee, LLC and Duluth Holdings Inc., dated
January 23, 2012 (108 North Franklin Street, Port Washington, Wisconsin), incorporated by reference to
Exhibit 10.21 of the Company’s Registration Statement on Form S-1 (File No. 333-207300), filed October 6,
2015.
Second Amendment to Retail Lease between Schlecht Port Washington LLC and Duluth Holdings Inc.,
dated January 23, 2012 (108 North Franklin Street, Port Washington, Wisconsin), incorporated by reference
to Exhibit 10.22 of the Company’s Registration Statement on Form S-1 (File No. 333-207300), filed October
6, 2015.
Form of S Corporation Termination, Tax Allocation and Indemnification Agreement among Duluth Holdings
Inc. and shareholders of Duluth Holdings Inc., incorporated by reference to Exhibit 10.23 of Pre-Effective
Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-207300), filed
October 13, 2015.
Annual Incentive Plan, As Amended February 21, 2018.
69
10.20+
10.21+
10.22+
10.23
10.24
10.25
23.1
24.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Form of Restricted Stock Agreement for executives under the 2015 Equity Incentive Plan, incorporated by
reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q dated May 1, 2016.
Offer Letter Dated July 14, 2017 by and between Dave Loretta and Duluth Holdings Inc., incorporated by
reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated July 24, 2017.
Form of Restrictive Covenant Agreement, incorporated by reference to Exhibit 10.2 of the Company’s
Current Report on Form 8-K dated July 24, 2017.
Credit Agreement, dated as of May 17, 2018, among Duluth Holdings Inc., as the borrower, BMO Harris
Bank N.A., as Administrative Agent, Swingline Lender and L/C Issuer, the Other Lenders Party Thereto, and
BMO Capital Markets Corp., as Sole Lead Arranger and Sole Book Runner, incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K dated May 17, 2018.
General Security Agreement, dated of May 17, 2018, by and between Duluth Holdings Inc. and BMO Harris
Bank N.A., incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K dated
May 17, 2018.
Amendment No. 1, dated as of April 30, 2020, to Credit Agreement, dated as of May 17, 2018, among
Duluth Holdings Inc., as the borrower, BMO Harris Bank N.A., as Administrative Agent, Swingline Lender
and L/C Issuer, the Other Lender party thereto, and BMO Capital Markets Corp., as Sole Lead Arranger and
Sole Bookrunner, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-
Q filed June 5, 2020.
Consent of Independent Registered Public Accounting Firm.*
Power of Attorney*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities and
Exchange Act, as amended.*
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.*
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.*
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.*
XBRL Instance Document**
XBRL Taxonomy Extension Schema Document**
XBRL Taxonomy Extension Calculation Linkbase Document**
XBRL Taxonomy Extension Definition Document**
XBRL Taxonomy Extension Label Linkbase Document**
XBRL Taxonomy Extension Presentation Linkbase Document**
Cover Page interactive data file (formatted as inline XBRL and contained in Exhibit 101)
+ Indicates a management contract or compensation plan or arrangement
* Filed herewith
** In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report on Form 10-K shall be
deemed to be “furnished” and not “filed.”
ITEM 16.
FORM 10-K SUMMARY
Not applicable.
70
Pursuant to the requirements of Section 13 or 15(d) 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.
Signatures
DULUTH HOLDINGS INC.
By:
/s/ Stephen L. Schlecht
Stephen L. Schlecht
Executive Chairman and Chief Executive Officer
DATE: March 26, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
Name
Title
/s/ Stephen L. Schlecht
Stephen L. Schlecht
/s/ David Loretta
David Loretta
/s/ Michael Murphy
Michael Murphy
Executive Chairman and
Chief Executive Officer
(Principal Executive Officer)
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Date
March 26, 2021
March 26, 2021
March 26, 2021
Directors: Stephen L. Schlecht, E. David Coolidge III, Francesca M. Edwardson, Thomas G. Folliard, David C. Finch, Brenda
I. Morris and Scott K. Williams.
By:
/s/ Dave Loretta
David Loretta
Attorney-In-Fact*
March 26, 2021
*Pursuant to authority granted by powers of attorney, copies of which are filed herewith.
71