Lands’ End, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended April 28, 2017 (first quarter fiscal 2017), compared with the 13 weeks ended April 29, 2016. The request metadata says “2016 Q1,” but the filing itself is for 2017 Q1.
Business context and results
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products, selling through direct channels (websites and catalogs) and retail stores, including Lands’ End Shops at Sears.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net revenue | $268.4 million | $273.4 million |
| Gross profit / margin | $122.6 million / 45.7% | $129.7 million / 47.4% |
| Operating loss | $6.7 million | $3.5 million |
| Net loss | $7.8 million | $5.8 million |
| Diluted loss per share | $0.24 | $0.18 |
| Adjusted EBITDA | $1.3 million | $0.6 million |
| Cash used in operating activities | $60.3 million | $50.1 million |
Financial position and liquidity
- At April 28, 2017, cash and cash equivalents were $139.8 million; restricted cash was $3.3 million. Inventory was $309.9 million.
- Long-term debt, net of issuance costs and current maturities, was $489.1 million; term-loan principal was $499.6 million at a 4.25% rate. The ABL Facility was undrawn except for letters of credit, with $155.0 million of borrowing availability.
- Cash declined $73.3 million during the quarter. Capital expenditures were $11.4 million, primarily for technology and infrastructure; term-loan payments were $1.3 million.
- Management said cash on hand, operating cash flows and ABL availability were expected to meet capital and operating needs for at least the next 12 months. Planned fiscal 2017 capital expenditures were approximately $40–$50 million.
Material changes and management commentary
- Revenue fell 1.9%. Direct revenue declined 1.7%, reflecting lower uniform and international business, partly offset by growth in U.S. consumer sales. Retail revenue declined 2.8%, partly offset by 2.1% same-store sales growth.
- Gross margin declined about 170 basis points in both Direct and Retail, primarily due to increased promotional activity in a competitive retail environment.
- Selling and administrative expense fell $7.7 million, but lower revenue and gross margin contributed to the larger operating loss. Depreciation and amortization rose $2.4 million, mainly due to ERP assets placed in service.
- Adjusted EBITDA improved to $1.3 million from $0.6 million, including a $1.4 million adjustment for severance tied to moving corporate functions from New York to Dodgeville. The company also recognized approximately $1.0 million in property-tax refunds in Q1 2017, recorded primarily in selling and administrative expense.
- The company operated 205 Lands’ End Shops at Sears, down from 225 a year earlier. Sears Holdings had disclosed substantial doubt about its ability to continue as a going concern; Lands’ End’s retail business and leases are exposed to Sears store closures, sales and related property recapture rights.
Risks, contingencies and other items
- Key risks cited include promotional dependence, competition, inventory management, seasonality, ERP implementation and technology reliability, vendor and shipping disruptions, and the performance or disposition of Sears locations. The filing reports no material changes to the risk factors in the prior Form 10-K.
- The trade name intangible asset remained at $257.0 million after a $173.0 million impairment charge in fiscal 2016. No Q1 2017 impairment was recorded; the annual impairment test was scheduled for the end of fiscal November 2017. Further impairment could adversely affect results.
- ESL, a significant shareholder in both Lands’ End and Sears Holdings, bought approximately $4.0 million of Lands’ End debt at a discount in Q1, triggering additional tax payments; ESL owned $14.7 million of company debt at quarter-end.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect. Claims related to excessive Dodgeville property-tax assessments for tax years 2005–2016 were closed; about $1.0 million of refunds was recognized in Q1 2017.
- No earnings or revenue forecast was provided. The company was in compliance with debt covenants at quarter-end. A minimum fixed-charge coverage ratio applies if ABL availability falls below specified thresholds.
Important facts for investors to verify
- Whether sales trends, promotional intensity and gross-margin pressure improved after Q1.
- Actual operating cash flow and seasonal working-capital needs, given the $60.3 million quarterly cash outflow.
- ERP spending, implementation progress and resulting depreciation and control impacts.
- Liquidity and lease exposure related to Sears’ financial condition, store closures and property recapture rights.
- Assumptions supporting the trade name valuation and the outcome of the scheduled impairment test.