Lands’ End, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2023, ended July 28, 2023; comparisons are with the periods ended July 29, 2022. Lands’ End sells apparel, home products, and uniform solutions through eCommerce, Outfitters, third-party marketplaces, and company-operated stores. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net revenue | $323.4 | $351.2 | $632.9 | $654.8 |
| Gross profit / margin | $139.6 / 43.2% | $144.0 / 41.0% | $277.5 / 43.8% | $273.2 / 41.7% |
| Operating income | $5.8 | $5.5 | $15.7 | $9.4 |
| Interest expense | $12.0 | $8.8 | $24.3 | $17.0 |
| Net loss | $(8.0) | $(2.2) | $(9.7) | $(4.6) |
| Diluted loss per share | $(0.25) | $(0.07) | $(0.30) | $(0.14) |
| Adjusted EBITDA (non-GAAP) | $15.8 | $15.8 | $35.3 | $29.6 |
- Q2 revenue decreased 7.9%; first-half revenue decreased 3.3%. Q2 gross profit fell despite a 220-basis-point gross-margin improvement; first-half gross profit rose 1.6% on a 210-basis-point margin improvement.
- For the first half, operating cash flow was $54.8 versus cash used of $117.5 a year earlier. Management attributed the improvement mainly to lower, better-timed inventory purchases and payment timing.
- Cash and cash equivalents were $26.6 at July 28, 2023; restricted cash was $1.8. Current assets were $492.8 and current liabilities $276.4.
- Debt borrowings comprised $70.0 under the revolving ABL Facility and $237.2 of term-loan principal, or $307.2 combined principal. ABL availability was $128.8 after borrowings and letters of credit. Term-loan carrying value, net of current portion and issuance costs, was $218.0.
- First-half capital expenditures were $22.9. Fiscal 2023 planned capital expenditures were approximately $35.0.
Material changes and management commentary
- Q2 channel revenue declined in U.S. eCommerce (3.6%), International (37.3%), Outfitters (3.8%), Third Party (10.6%), and Retail (9.7%). International’s decline reflected assortment reductions, lower markdown inventory, and the closure of Japan eCommerce; excluding Japan, International revenue declined 20.8%.
- Outfitters Q2 revenue was affected by the conclusion of the Delta Air Lines contract; school uniform revenue grew at a high-single-digit rate. First-half Outfitters revenue rose 13.9%, partly reflecting Delta-related inventory sales in the contract’s final quarter.
- Management attributed improved gross margin to stronger swim and adjacent categories, fewer markdown sales, and lower supply-chain costs. Lower revenue drove selling and administrative expenses higher as a percentage of sales, partly offset by reduced digital marketing and cost controls.
- Interest expense increased with higher borrowing rates. The reported tax expense included a one-time write-off of deferred tax benefits related to stock-based compensation.
- Debt facilities transitioned from LIBOR to SOFR during the quarter; the company reported no material rate impact from the amendments. The term loan’s reported rate was 14.97% at quarter-end.
Outlook, risks, contingencies, and unusual items
- Management said cash on hand, operating cash flows, and ABL borrowings are expected to meet capital and operating needs for at least the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management cited inflation and rising input costs, as well as the risk that pressure on consumer discretionary spending could weaken demand or require increased promotions. Results are seasonal, with a significant share of annual revenue and earnings typically in the fourth quarter.
- The term loan matures September 9, 2025; the ABL facility may mature earlier, June 9, 2025, if the term loan has not been refinanced, extended, or repaid as specified. The company reported compliance with debt covenants at quarter-end. The term loan includes leverage and liquidity tests; ABL availability below specified thresholds can trigger a fixed-charge coverage test.
- Foreign exchange movements affect reported results; management estimated a 10% currency-rate change would alter first-half revenue by approximately $4.8. The company does not use derivatives to hedge currency exposure. Variable-rate debt also creates interest-rate exposure.
- Remaining costs for the Lands’ End Japan closure were approximately $0.1 in the first half, with about $45,000 accrued at quarter-end. Ordinary-course legal proceedings remain, and management did not expect their resolution to materially adversely affect the company. In a consolidated uniform-related lawsuit, the parties reported a settlement in principle on July 19, 2023 for remaining property-damage claims.
Important facts for investors to verify
- Whether revenue trends improve, particularly in International, U.S. eCommerce, and Third Party, and whether Outfitters can offset the Delta contract’s conclusion through school uniform growth.
- Whether gross-margin gains persist and translate into operating profit and cash generation, given higher interest expense and ongoing selling costs.
- Liquidity, ABL borrowing availability, variable interest rates, covenant headroom, and the required refinancing or repayment plan ahead of the term-loan maturity.
- Progress against the approximately $35.0 million fiscal-year capital expenditure plan and management’s 12-month liquidity assessment.
- Final resolution and financial impact of the uniform-related litigation settlement and any other contingencies.