Lands’ End, Inc. — Form 10-Q Summary
Period and filing date: The filing covers the 13 and 26 weeks ended July 28, 2017, compared with periods ended July 29, 2016. Although the request metadata says 2016 Q2, the supplied filing is for 2017 Q2. Dollar amounts below are in millions unless noted.
Business context and results
Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products, selling through direct channels (e-commerce and catalogs) and retail stores, including Lands’ End Shops at Sears.
| Metric | 13 weeks ended July 28, 2017 | Prior-year quarter | 26 weeks ended July 28, 2017 | Prior-year period |
|---|---|---|---|---|
| Revenue | $302.2 | $292.0 | $570.6 | $565.4 |
| Gross profit / margin | $134.2 / 44.4% | $136.2 / 46.6% | $256.8 / 45.0% | $265.8 / 47.0% |
| Operating income (loss) | $0.2 | $2.7 | $(6.5) | $(0.8) |
| Net loss | $(3.9) | $(2.0) | $(11.7) | $(7.7) |
| Diluted loss per share | $(0.12) | $(0.06) | $(0.37) | $(0.24) |
| Adjusted EBITDA (non-GAAP) | $6.8 | $7.3 | $8.1 | $7.9 |
Financial position, cash flow and liquidity
- At July 28, 2017, cash and cash equivalents were $177.0, inventory was $370.5, and total current assets and liabilities were $611.6 and $267.1, respectively.
- Long-term debt, net, was $488.1; gross term-loan borrowings, including current maturities, were $498.3. The term loan’s stated rate was 4.48%. The ABL facility was undrawn, with $164.6 of availability after letters of credit.
- For the first half, operating activities used $13.2 of cash, compared with $2.1 provided a year earlier. Investing activities used $20.2, primarily for technology and property/equipment; financing activities used $3.2, mainly for term-loan payments. Cash declined by $36.2 to $177.0.
- Management said cash, operating cash flows and ABL availability should meet capital and operating needs for at least the next 12 months. Fiscal 2017 capital expenditures were expected to be approximately $35–$45, principally for ERP, other technology and infrastructure.
- The company reported compliance with debt-facility financial covenants. A minimum fixed-charge coverage test applies if ABL availability falls below the specified threshold; the facilities otherwise have no financial maintenance covenants.
Material changes and management commentary
- Quarterly revenue rose 3.5%, led by Direct revenue growth of 5.5%; Retail revenue fell 7.4%. Same-store sales increased 3.8% in the quarter and 3.0% year to date, while the number of Lands’ End Shops at Sears declined from 224 to 204 year over year.
- Gross margin contracted 220 basis points in the quarter and 200 basis points year to date. Management cited promotional activity, higher shipping and net duty costs, and unfavorable currency effects in Direct. Retail’s quarterly margin improved year over year, partly because certain prior-year liquidation activity did not recur.
- Quarterly selling and administrative expense declined to $127.3, but the lower gross profit and increased depreciation contributed to lower operating income and a larger net loss. Depreciation and amortization increased 37.6% in the quarter, primarily due to ERP assets placed in service.
- First-half results included $2.0 of severance-related other operating expense for transferring corporate functions from New York to Dodgeville. The company placed $30.7 of ERP-related assets in service year to date.
- Historically, about 33% of revenue was generated in the fourth quarter over the preceding three years. Management noted that seasonal working-capital needs typically increase in the third quarter.
Risks, contingencies and notable items
- Sears Holdings had disclosed substantial doubt about its ability to continue as a going concern, while stating it expected actions to mitigate its liquidity needs. Lands’ End relies on Sears-related stores and services and reported ongoing negotiations to extend sourcing and Shop Your Way agreements. Call-center service income ended after the contract expired April 30, 2017.
- The company identified competition and promotional reliance, inventory management, customer demand, IT and ERP implementation, vendor and delivery performance, foreign currency and interest rates, and its Sears relationship among relevant risks. It also warned that weaker-than-expected fourth-quarter sales could adversely affect annual results.
- The company had $40.2 of cash denominated in foreign currencies and no derivative hedges. A one-percentage-point rate change on the term loan would change annual cash interest expense by approximately $5.1.
- The annual impairment test for the trade name was scheduled for fiscal November 2017. No trade-name impairment was recorded year to date; the filing cautions that changes in assumptions or results could lead to future impairment charges. Ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes and potential losses could not be estimated.
- The filing states disclosure controls were effective as of July 28, 2017. ERP implementation may affect financial-reporting processes and requires continued effectiveness testing.
Important facts for investors to verify
- Whether Direct growth and improving same-store sales can offset Sears-store closures and declining Retail revenue.
- Whether gross-margin pressure from promotions, shipping, duties and currency moderates, and whether reported revenue growth converts to positive operating cash flow.
- Progress, remaining cost and benefits of the ERP program, alongside the company’s capital-expenditure plan.
- Sears Holdings’ financial condition and the status and terms of Lands’ End’s sourcing, Shop Your Way and store-related arrangements.
- ABL availability, debt-service capacity, seasonal inventory funding needs, and the outcome of the planned trade-name impairment test.