Lands’ End, Inc. — Form 10-Q Summary
Period: Third quarter and first 39 weeks of fiscal 2018, ended November 2, 2018; comparisons are to the corresponding 2017 periods. The request metadata says “2017 Q3,” but the filing itself is for 2018 Q3.
Business context and results
Lands’ End is a multi-channel retailer of apparel, accessories, footwear, and home goods. It reports Direct (e-commerce and catalogs) and Retail segments. Results are seasonal; management says an average of 35% of revenue over the prior three years was generated in the fourth quarter.
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Revenue | $341.6 million | $325.5 million | $949.3 million | $896.0 million |
| Gross profit / margin | $151.0 million / 44.2% | $142.0 million / 43.6% | $420.8 million / 44.3% | $398.8 million / 44.5% |
| Operating income (loss) | $8.5 million | $5.9 million | $11.9 million | $(0.6) million |
| Net income (loss) | $3.3 million | $0.2 million | $(4.6) million | $(11.6) million |
| Adjusted EBITDA | $15.7 million | $12.9 million | $32.4 million | $21.0 million |
Q3 diluted EPS was $0.10 versus $0.01; year-to-date diluted loss per share was $0.14 versus $0.36. Adjusted EBITDA is a non-GAAP measure and excludes specified items; it should not be considered alone as a measure of performance.
Revenue, margins, and material changes
- Q3 revenue rose 4.9%; Direct revenue increased 8.1% to $313.8 million, driven mainly by U.S. e-commerce growth. Retail revenue fell 21.0% to $27.8 million, primarily reflecting fewer Lands’ End Shops at Sears.
- Q3 consolidated same-store sales increased 11.8%; U.S. Company Operated stores increased 15.1%. Sears shop same-store sales increased 11.7%, which management attributed primarily to store liquidations. At period end, there were 125 Sears shops and 18 Company Operated stores, versus 188 and 14 a year earlier.
- Q3 gross margin improved 60 basis points. Direct margin declined about 20 basis points, partly from higher shipping costs; Retail margin improved about 570 basis points, with better full-price mix and fewer markdowns.
- For the first 39 weeks, revenue increased 5.9%, led by Direct growth of 10.9%, including the Delta Airlines business launch and U.S. e-commerce. Retail revenue declined 27.2%. Consolidated same-store sales fell 5.9%; U.S. Company Operated stores increased 1.6%, while Sears shops declined 7.1%.
- Year-to-date gross margin declined 20 basis points. Direct margin was pressured by promotional activity and the lower-margin Delta business; Retail margin improved through lower markdowns. Selling and administrative expense declined as a share of revenue year to date, supporting operating income improvement.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $105.9 million at November 2, 2018, with $2.1 million restricted cash. Cash, cash equivalents, and restricted cash totaled $108.0 million, down $89.9 million from the beginning of the period.
- For the first 39 weeks, operating cash flow was a use of $52.2 million, versus a use of $87.8 million in 2017. Investing cash use was $33.0 million, including $33.2 million of capital expenditures; financing cash use was $4.4 million, primarily term-loan payments.
- Inventory was $432.0 million, up from $332.3 million at fiscal year-end, consistent with seasonal inventory building. Management expects working capital needs to decline as inventory sells in the fourth quarter.
- Long-term debt, net, was $483.4 million; term-loan principal was $491.8 million, with a stated rate of 5.49%. The term loan matures April 2021. The $175 million ABL facility was undrawn except for $22.6 million of letters of credit, leaving $152.4 million of stated borrowing availability.
- The company reported compliance with debt covenants. Management said cash on hand, operating cash flows, and the ABL facility should meet capital and operating needs for at least the next 12 months. Debt bears variable interest rates; a one-percentage-point rate change on the term loan would change annual cash interest by approximately $4.9 million.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management cited continued Direct growth, e-commerce buyer-file and conversion improvements, and planned fiscal 2018 capital expenditures of approximately $40 million, primarily for ERP and other technology investments.
- Sears Holdings filed for Chapter 11 bankruptcy on October 15, 2018. Lands’ End recorded a $2.6 million non-cash charge to reserve its tax indemnification asset; the asset was reduced to zero because recovery under the tax sharing agreement was uncertain. Sears-related activity and store closures remain relevant exposures.
- Q3 included a $3.7 million tax benefit from revised Tax Act estimates and the $2.6 million Sears-related reserve. The unusually high Q3 effective tax benefit rate of 581.6% reflects these items and is not a straightforward indicator of recurring tax expense.
- Other risks include seasonality, inventory and promotional execution, rising interest rates, foreign currency exposure, and the planned implementation of an ERP system. Management expects adoption of the new lease accounting standard in fiscal 2020 to materially increase reported assets and liabilities.
- The company is involved in ordinary-course legal claims and investigations; it said outcomes and potential loss ranges could not be predicted or reasonably estimated, but management did not expect resolution to materially adversely affect the company as a whole.
Investor verification points
- Confirm the reporting period: the filing covers the quarter ended November 2, 2018, despite the request metadata’s 2017 designation.
- Track Direct growth and margins against the continuing decline in Sears-related Retail revenue, shop count, and related-party arrangements.
- Monitor holiday-quarter sales, inventory conversion, and cash generation given the company’s stated seasonal concentration.
- Verify liquidity, ABL availability, variable-rate debt costs, and covenant headroom as operating cash needs change.
- Assess the collectability and remaining implications of Sears-related tax indemnities, along with the impact of one-time tax items on reported earnings.