Business context and reporting period
Lands’ End, Inc. is a multichannel retailer of apparel, accessories, footwear and home products, selling mainly through e-commerce and catalogs, as well as Lands’ End stores and Lands’ End Shops at Sears. This Form 10-K covers Fiscal 2016, the 52 weeks ended January 27, 2017, and compares results with the 52 weeks ended January 29, 2016 (Fiscal 2015). The request metadata says “2015 Q4,” which does not match the filing period; the filing is an annual report for Fiscal 2016.
Direct accounted for 86% of Fiscal 2016 revenue and Retail for 14%. The company was formerly part of Sears Holdings, which distributed Lands’ End to its shareholders in April 2014.
Financial results and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Net revenue | $1,335.8 million | $1,419.8 million |
| Gross profit / margin | $576.4 million / 43.2% | $652.6 million / 46.0% |
| Operating income (loss) | $(152.6) million | $(5.1) million |
| Net income (loss) | $(109.8) million; $(3.43) per diluted share | $(19.5) million; $(0.61) per diluted share |
| Adjusted EBITDA | $39.8 million | $107.3 million |
| Cash from operating activities | $23.7 million | $35.9 million |
| Capital expenditures | $33.3 million | $22.2 million |
Revenue declined 5.9%. Direct revenue fell 5.4% to $1,149.1 million; Retail revenue fell 8.9% to $186.4 million, including a 6.0% decrease in Retail same-store sales. Apparel revenue was $1,086.4 million, non-apparel $168.9 million, and services and other $80.4 million.
At January 27, 2017, cash and cash equivalents were $213.1 million, inventory $325.3 million, current assets $607.4 million and current liabilities $248.9 million. Total assets were $1,114.4 million and stockholders’ equity $271.4 million. Term-loan principal was $500.8 million; the ABL facility was undrawn except for letters of credit, with $155.3 million of availability. Long-term debt, net of issuance costs, was $490.0 million, with $5.2 million classified as current. Operating cash flow less capital expenditures was approximately negative $9.6 million.
Material changes versus the prior comparable period
- Gross margin contracted 280 basis points, primarily due to deeper discounting in a highly promotional retail environment. The underperforming Canvas by Lands’ End collection reduced Direct gross margin by approximately 70 basis points.
- Selling and administrative expense declined 1.6% to $536.6 million, but increased as a share of revenue to 40.2% from 38.4%.
- The company recorded a $173.0 million non-cash impairment of its Lands’ End trade name, compared with a $98.3 million impairment in Fiscal 2015. The larger impairment and weaker trading results contributed to the increased net loss.
- Adjusted EBITDA fell 62.9% to $39.8 million. Direct segment Adjusted EBITDA was $78.6 million, down from $141.9 million; Retail segment Adjusted EBITDA was negative $5.6 million.
- Operating cash flow decreased by $12.2 million. Cash and cash equivalents fell $15.3 million to $213.1 million, while capital expenditures increased, principally for technology and ERP projects.
- The trade name’s carrying value declined to $257.0 million from $430.0 million. Goodwill remained $110.0 million; its estimated fair value exceeded carrying value by 17.1%, down from 23.8% a year earlier.
Outlook, management commentary and key risks
- Management stated that cash on hand, operating cash flows and the ABL facility were expected to be adequate for capital and operating needs for the next 12 months. Fiscal 2017 capital expenditures were estimated at approximately $40 million to $50 million, mainly for technology and infrastructure. No specific revenue or earnings guidance was provided in the filing text.
- The company is investing in ERP, e-commerce and digital capabilities. Management identified implementation complexity, cost, possible data issues and operational disruption as risks.
- Sears Holdings disclosed substantial doubt about its ability to continue as a going concern. Lands’ End relies on Sears-related leases, store services and systems for its Shops at Sears. It operated 216 such shops at year-end, and Sears or property owners have rights that could affect locations. Sears Holdings’ financial condition could also affect its performance under agreements and related indemnification obligations.
- ESL beneficially owned 58.5% of Lands’ End’s outstanding shares, according to a January 2017 filing, and purchased approximately $10.7 million of the company’s debt at a discount in Fiscal 2016. The debt discount was treated as cancellation-of-debt income for tax purposes and triggered additional current-period tax payments.
- Other significant risks include weak discretionary spending, fashion and product acceptance, promotional pressure, inventory management, dependence on overseas suppliers and shipping, currency and trade-policy uncertainty, seasonality, and further impairment charges. The company does not expect to pay dividends for the foreseeable future.
- Ordinary-course legal matters were disclosed; management did not expect their resolution, taken as a whole, to materially adversely affect results, cash flows or financial position. Claims for certain property-tax years remained pending. The filing does not provide a clear estimate of potential losses for the general legal proceedings.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing is Fiscal 2016, not “2015 Q4”; review the Fiscal 2016 fourth-quarter results, including revenue of $458.8 million and a $94.8 million net loss, which included the $173.0 million impairment.
- Assess whether sales, gross margin and Adjusted EBITDA can stabilize without continued deep promotions, and whether product assortment and Canvas performance improve.
- Review liquidity and debt maturities, including the $500.8 million term loan and the large scheduled principal maturity in the fourth-to-fifth-year period, as well as ABL availability and covenant headroom.
- Monitor Sears Holdings’ financial condition, shop closures or relocations, and the continuity of Sears-provided retail, technology and other services.
- Track ERP spending and implementation progress, capital expenditures, inventory reserves and the assumptions behind future trade-name and goodwill valuations.
- Consider reliance on non-GAAP Adjusted EBITDA alongside GAAP losses and operating cash flow; the measure excludes significant expenses and should not be considered a substitute for GAAP results.