Lands’ End, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 13 weeks ended April 30, 2021 (First Quarter 2021), although the request metadata identifies 2020 Q1. Comparisons below are primarily with the 13 weeks ended May 1, 2020; the company also provides selected comparisons with First Quarter 2019.
Business context and results
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products. Its channels include U.S. eCommerce, International, Outfitters, Third Party and Retail. First Quarter 2020 was materially affected by COVID-19, including temporary U.S. store closures, so the year-over-year comparison is against a disrupted period.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net revenue | $321.3 million | $217.0 million |
| Gross profit / margin | $147.7 million / 46.0% | $94.2 million / 43.4% |
| Operating income (loss) | $11.9 million | $(24.7) million |
| Net income (loss) | $2.6 million; $0.08 diluted EPS | $(20.6) million; $(0.64) diluted EPS |
| Adjusted EBITDA (non-GAAP) | $22.5 million | $(11.6) million |
| Net cash used in operating activities | $(38.7) million | $(80.2) million |
Revenue, margins and material changes
- Revenue increased 48.1% year over year and 22.4% compared with First Quarter 2019. U.S. eCommerce rose 46.6% year over year; International rose 37.0%; Outfitters rose 27.9%; Third Party increased to $11.8 million from $1.5 million, primarily following the Kohl’s launch; and Retail rose 139.8% from the store-closure-affected prior period.
- Compared with First Quarter 2019, Outfitters revenue was down 5.6% and Retail revenue was down 15.8%. Retail sales were affected by lower traffic, partly offset by improved conversion.
- Gross margin improved 2.6 percentage points year over year, reflecting U.S. eCommerce merchandise-margin expansion and improved pricing and inventory analytics. Higher shipping costs and surcharges, and a greater mix of lower-margin Third Party sales, partly offset the improvement.
- Selling and administrative expense rose to $125.5 million from $105.8 million, but fell to 39.1% of revenue from 48.8%. The prior period benefited from COVID-related furloughs and temporary pay and expense reductions; the lower expense ratio principally reflected sales leverage.
- Interest expense increased to $9.1 million from $5.3 million, primarily due to the higher interest rates on the replacement term loan. First Quarter 2020 included a $3.3 million Japan eCommerce goodwill impairment; no impairment was recorded in Q1 2021.
Cash, debt and liquidity
- At April 30, 2021, cash and cash equivalents were $36.2 million and restricted cash was $2.3 million. Inventory was $394.3 million.
- Debt included $80.0 million outstanding under the ABL Facility and $268.1 million of term-loan principal; the term loan’s net carrying amount was $256.5 million after unamortized issuance costs. ABL borrowing availability was $178.1 million, after outstanding borrowings and letters of credit.
- The term loan matures September 9, 2025 and carries a stated rate of 10.75% at quarter-end; the ABL Facility matures November 16, 2022. Both facilities have variable-rate exposure. The company reported compliance with debt covenants at April 30, 2021.
- Operating cash use improved from $80.2 million to $38.7 million. Investing cash use was $4.9 million, primarily for technology infrastructure; financing provided $46.5 million, primarily from ABL borrowings. Cash, cash equivalents and restricted cash totaled $38.5 million at quarter-end.
- Management said cash on hand, operating cash flows and ABL availability should cover capital requirements and operating needs for at least the next 12 months. Planned Fiscal 2021 capital expenditures are approximately $26 million.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance is provided in the filing. Management said it believes the company is positioned for long-term growth, but cannot estimate the duration or severity of the pandemic’s ultimate effects.
- COVID-19-related manufacturing and transportation disruptions may continue; management said their potential impact and timing cannot be reasonably estimated and may not be mitigated. The business is seasonal, with historically significant revenue and earnings in the fourth quarter and working-capital needs typically rising in the second and third quarters.
- Debt-related risks include high term-loan interest costs, variable rates, restrictive covenants, liquidity tests and potential ABL fixed-charge coverage requirements if availability falls below specified thresholds. A one-percentage-point rate change above the term loan’s LIBOR floor would change annual cash interest by approximately $2.7 million, according to the filing.
- The company is defending lawsuits alleging health effects and property damage related to uniforms it manufactured. It says it cannot predict outcomes or estimate a loss range, but does not expect the proceedings, taken as a whole, to materially adversely affect its financial position, results or cash flows.
- Management reported no material changes to the risk factors in its latest 10-K. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether sales growth and improved gross margin persist beyond comparisons with the pandemic-affected Q1 2020, including performance versus Q1 2019.
- Whether operating cash flow improves as inventory and seasonal working-capital needs develop, and whether the stated 12-month liquidity expectation remains supportable.
- Debt balances, borrowing availability, variable-rate interest expense and continued covenant compliance.
- The effect of supply-chain disruptions, shipping costs and channel mix on margins and product availability.
- Developments in the uniform-related lawsuits and any resulting financial exposure.