Lands’ End, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 26 weeks ended August 2, 2019, compared with periods ended August 3, 2018. Request metadata says “2018 Q2,” but the supplied filing is for 2019 Q2.
Business context and results
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products. It reports one external segment, with revenue across eCommerce, Outfitters and Retail.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net revenue | $298.3 million | $307.9 million | $560.7 million | $607.8 million |
| Gross profit / margin | $129.1 million / 43.3% | $136.8 million / 44.4% | $249.0 million / 44.4% | $269.8 million / 44.4% |
| Operating income (loss) | $(0.6) million | $0.9 million | $(5.3) million | $3.4 million |
| Net income (loss) | $(3.0) million | $(5.3) million | $(9.8) million | $(7.9) million |
| Diluted loss per share | $(0.09) | $(0.16) | $(0.30) | $(0.25) |
| Adjusted EBITDA (non-GAAP) | $6.8 million | $7.7 million | $9.9 million | $16.8 million |
Revenue, margins and operating changes
- Q2 revenue fell 3.1%; first-half revenue fell 7.7%. eCommerce grew 7.3% in Q2 and 6.2% year to date, driven by demand for key items and new-customer acquisition.
- Outfitters revenue declined 10.1% in Q2 and 26.4% year to date, primarily reflecting the prior-year Delta Air Lines launch. Retail revenue declined 54.8% and 57.4%, respectively, amid fewer Lands’ End Shops at Sears. Comparable sales at Company Operated U.S. stores rose 7.5% in Q2 and 9.5% year to date.
- Q2 gross margin declined about 110 basis points, which management attributed primarily to industry promotional activity. First-half gross margin was unchanged at 44.4%.
- Q2 selling and administrative expense fell to $122.3 million from $129.0 million, or 41.0% of revenue versus 41.9%. First-half expense was $239.1 million versus $253.0 million, but increased to 42.6% of revenue from 41.6%, reflecting deleverage.
Cash flow, debt and liquidity
- First-half operating cash flow was $17.0 million, down from $24.8 million. Inventory consumed $86.4 million of cash, partly offset by a $111.4 million increase in accounts payable.
- Capital expenditures were $24.8 million versus $22.2 million. Investing cash outflow was $24.8 million. Financing cash outflow was $103.3 million, mainly reflecting a $100 million voluntary term-loan prepayment.
- Cash and cash equivalents were $82.6 million at August 2, 2019, versus $193.4 million at February 1, 2019. Long-term debt, net, was $380.6 million; gross term-loan principal was $388.0 million and matures April 2021. The term-loan rate was 5.65%.
- The $175 million asset-based credit facility was undrawn, apart from $9.5 million of letters of credit, leaving $165.5 million of stated borrowing availability. The company reported covenant compliance.
- Operating lease liabilities totaled $33.9 million. The company adopted the new lease standard in February 2019, recognizing a $29.0 million right-of-use asset at quarter-end.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and the ABL facility were expected to cover capital and operating needs for at least the next 12 months. Fiscal 2019 capital expenditures were expected to be approximately $40 million, mainly for enterprise order management, technology and infrastructure. The filing provides no clear revenue or earnings guidance.
- Results are seasonal: management said an average 35.1% of revenue over the prior three years occurred in the fourth fiscal quarter, while inventory needs typically rise in the second and third quarters.
- Interest expense is exposed to variable rates; management estimated that a one-percentage-point rate change on the term loan would change annual cash interest by $3.9 million. The company reported $14.2 million in foreign-currency-denominated cash and no use of derivative hedges.
- Management attributed the first-half year-over-year decline in Adjusted EBITDA partly to the comparison with the prior-year Delta launch and to changes in channel mix. Prior-year other income included the effect of favorable state tax audit settlements and reversal of uncertain tax benefits.
- Ordinary-course legal claims and investigations remain pending; management said it could not estimate potential losses but did not expect resolution to materially affect results, cash flows or financial position. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether eCommerce growth can offset continued Outfitters and Sears-shop declines, and whether promotional pressure continues to weigh on gross margin.
- Inventory levels, seasonal working-capital needs and the ability to generate cash through the peak selling period.
- Debt repayment capacity and refinancing options ahead of the April 2021 term-loan maturity, including exposure to variable interest rates and facility covenants.
- Execution and returns from planned technology and enterprise order management investments, alongside the $40 million fiscal-year capital expenditure expectation.
- The impact of related-party dealings with Sears Holdings and Transform Holdco, and any developments in the pending legal matters.