Lands’ End, Inc. — Form 10-Q summary
Reporting-period note: The request identifies “2020 Q3,” but the supplied filing is for the 13 and 39 weeks ended October 29, 2021 (Third Quarter and year-to-date 2021), compared primarily with periods ended October 30, 2020. The filing was signed December 2, 2021. Dollar figures below are in millions unless stated otherwise.
Business context
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products, selling through U.S. and international eCommerce, Outfitters, third-party marketplaces and retail stores. It reports one external segment. The company notes that results are seasonal, with a significant share of annual revenue and earnings typically generated in the fourth fiscal quarter.
Financial performance
| Metric | 13 weeks ended Oct. 29, 2021 | 13 weeks ended Oct. 30, 2020 | 39 weeks ended Oct. 29, 2021 | 39 weeks ended Oct. 30, 2020 |
|---|---|---|---|---|
| Revenue | $375.8 | $360.0 | $1,081.2 | $889.1 |
| Gross profit / margin | $166.8 / 44.4% | $163.5 / 45.4% | $492.3 / 45.5% | $393.0 / 44.2% |
| Operating income / margin | $19.5 / 5.2% | $18.7 / 5.2% | $62.7 / 5.8% | $5.2 / 0.6% |
| Net income (loss) | $7.4 | $7.2 | $26.3 | $(9.1) |
| Diluted EPS | $0.22 | $0.22 | $0.78 | $(0.28) |
| Adjusted EBITDA (non-GAAP) | $29.8 | $28.6 | $93.6 | $40.9 |
Third-quarter revenue increased 4.4% year over year and 10.5% versus the third quarter of 2019, which management included as a recovery reference. Year-to-date revenue increased 21.6% year over year and 20.0% versus the comparable 2019 period. Third-quarter gross margin fell 1.0 percentage point, mainly from higher shipping costs; year-to-date gross margin rose 1.3 points, reflecting stronger merchandise margin and promotional/pricing discipline, partly offset by shipping costs and sales mix.
For the quarter, U.S. eCommerce revenue declined 3.5% and International declined 15.7%, with management attributing the decreases to delayed product receipts. Outfitters grew 38.9%, supported by travel-related national accounts and school uniforms; Third Party grew 60.8%, partly due to a full quarter and expanded assortment with Kohl’s; Retail grew 12.2%, with U.S. same-store sales up 5.7%. Year-to-date growth was broad-based, led by Outfitters (+46.6%) and Third Party, while U.S. eCommerce rose 12.6% and International 7.1%.
Quarterly net income was nearly unchanged. Year-to-date results improved substantially from the prior-year loss, when results included goodwill impairment and restructuring costs. Year-to-date interest expense increased to $26.2 million from $19.2 million, primarily due to the higher-rate term loan.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was a use of $6.4 million, versus a use of $26.1 million in 2020. Investing cash use was $18.7 million, principally for digital and IT infrastructure; financing provided $28.4 million.
- Cash and cash equivalents were $37.9 million at October 29, 2021; restricted cash was $2.0 million. The company reported $39.9 million in cash, cash equivalents and restricted cash combined.
- Gross borrowings comprised $261.3 million outstanding under the term loan and $70.0 million under the ABL revolver. The term loan’s stated rate was 10.75%. The ABL had $183.6 million of reported borrowing availability after outstanding borrowings and letters of credit.
- The $275 million ABL facility was amended in July 2021, lowering applicable borrowing rates and extending maturity to the earlier of July 29, 2026 or June 9, 2025, subject to the term-loan refinancing/repayment condition. The term loan matures September 9, 2025 and amortizes 1.25% per quarter.
- Management said cash on hand, operating cash flows and ABL availability should meet capital and operating needs for at least the next 12 months. Fiscal 2021 planned capital expenditures were approximately $26 million. The company said it was in compliance with debt covenants at quarter-end.
Outlook, risks and contingencies
- Management expected supply-chain disruption and higher freight and distribution costs to continue through the balance of Fiscal 2021 and into the first half of Fiscal 2022. Delayed receipts and product availability could affect sales, gross margin and earnings.
- Distribution-center labor shortages impeded peak-season staffing and delayed some monogramming and embroidery orders. Further fulfillment delays could discourage or cancel orders and reduce sales or earnings.
- The company cited COVID-19 uncertainty, changing consumer demand, seasonal concentration in the fourth quarter, and variable-rate debt as risks. A one-percentage-point rate change above the term-loan LIBOR floor was estimated to change annual cash interest expense by $2.6 million; the equivalent sensitivity at a fully drawn ABL was $2.8 million.
- Three lawsuits concern alleged health events and property damage related to uniforms manufactured by Lands’ End. In the consolidated Wisconsin action, the court denied class certification for uniform-performance and warranty claims; the Seventh Circuit denied plaintiffs’ petition for interlocutory review. Discovery continued, and the company said it was vigorously defending the cases. Management could not estimate a potential loss range and believed resolution of legal proceedings would not materially adversely affect the company as a whole.
- The filing reports no material changes to previously disclosed risk factors. Management stated disclosure controls were effective and identified no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is Q3 2021, not Q3 2020.
- Track whether supply-chain delays, freight costs and labor constraints ease, and their effects on inventory availability, fulfillment and margins.
- Assess holiday-quarter performance and the company’s ability to convert deferred or delayed demand into sales and operating cash flow.
- Monitor revolver availability, variable-rate interest expense, covenant headroom and the term-loan maturity/refinancing requirements.
- Review developments in the uniform-related litigation and any change in the company’s assessment of exposure.
- Interpret Adjusted EBITDA alongside GAAP results; it is a non-GAAP measure and excludes items that may affect comparability.