Lands' End, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2018 Q1, but this filing covers the 13 weeks ended May 3, 2019 (First Quarter 2019), compared with the 13 weeks ended May 4, 2018.
Business context
Lands' End is a multi-channel retailer of casual apparel, accessories, footwear, and home products, selling through eCommerce, Outfitters, and retail. It reported one aggregated external segment. Results are seasonal: management says the fourth quarter has historically generated an average 35.1% of annual revenue over the prior three years.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $262.4 million | $299.8 million |
| Gross profit / margin | $119.9 million / 45.7% | $133.0 million / 44.4% |
| Operating income (loss) | $(4.7) million | $2.5 million |
| Net loss | $(6.8) million | $(2.6) million |
| Diluted loss per share | $(0.21) | $(0.08) |
| Adjusted EBITDA (non-GAAP) | $3.0 million | $9.0 million |
| Cash used in operating activities | $(36.3) million | $(41.2) million |
| Capital expenditures | $15.0 million | $10.7 million |
Gross margin improved by about 130 basis points, attributed to the prior-year Delta Air Lines launch’s lower-margin sales not recurring, better inventory management, and improved full-price selling mix. Selling and administrative expense fell to $116.8 million from $124.0 million, but rose as a share of revenue to 44.5% from 41.4%, reflecting deleverage. Depreciation and amortization increased to $7.6 million, primarily due to ERP and digital infrastructure investments. Interest expense increased to $7.8 million from $6.9 million.
Cash, cash equivalents, and restricted cash were $42.0 million at quarter-end, down from $195.4 million at fiscal year-end. The company used $102.0 million in financing cash, primarily for a voluntary $100 million term-loan prepayment. Long-term debt, net, was $381.5 million; gross term-loan principal was $389.3 million, at a reported 5.75% rate. The ABL facility was undrawn except for $11.2 million of letters of credit, leaving $163.8 million of reported borrowing availability. Current assets were $424.2 million and current liabilities $196.7 million.
Changes and drivers versus prior year
- Revenue declined 12.5%. eCommerce revenue rose 5.1% to $208.9 million, while Outfitters fell 42.3% to $43.1 million, largely because the Delta Air Lines launch had concluded, and Retail fell 60.5% to $10.4 million, primarily following fewer Lands' End Shops at Sears.
- The company had 39 Lands' End Shops at Sears and 21 company-operated stores, versus 159 and 14, respectively, a year earlier. Company-operated U.S. same-store sales increased 12.0%; consolidated same-store sales decreased 7.0%.
- Net loss widened despite higher gross margin, with lower revenue and reduced operating leverage contributing to the shift from operating income to operating loss. Prior-year other income included a benefit from favorable state tax audit settlements and reversal of uncertain tax benefits.
Outlook, risks, and unusual items
- Management expected cash on hand, operating cash flows, and the ABL facility to meet capital and operating needs for at least the next 12 months. It planned approximately $40 million of fiscal 2019 capital expenditures, mainly for ERP, technology, and infrastructure.
- The company adopted lease accounting guidance effective February 2, 2019. At May 3, it reported a $29.3 million operating lease right-of-use asset and $33.6 million present value of lease liabilities. Adoption included a $1.7 million reduction to opening accumulated equity for identified lease-asset impairments.
- Management cited seasonal working-capital needs and foreign-exchange and variable-interest-rate exposure. A 1 percentage-point change in term-loan rates would change annual cash interest by about $3.9 million. It held $12.6 million in foreign-currency cash and reported no use of derivatives.
- The term loan matures April 4, 2021. Debt covenants restrict certain actions; a minimum fixed-charge coverage ratio applies if ABL availability falls below specified thresholds. The company reported covenant compliance at quarter-end.
- Ordinary-course legal proceedings were disclosed; management did not expect their resolution to materially adversely affect the company, but said outcomes and potential losses could not be estimated. Sears Holdings rejected a tax-sharing agreement in its bankruptcy proceedings; the related indemnification receivable was zero because collection remained substantially uncertain.
- The filing reported no material changes to the risk factors in the most recent 10-K. Management’s statements about liquidity and future spending are forward-looking and subject to risks.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q1 2019, not Q1 2018.
- Assess whether eCommerce growth can offset continued Outfitters and retail declines, including the effects of Sears-related store closures.
- Track cash generation, seasonal working-capital requirements, planned capital expenditures, and the remaining term-loan balance and maturity.
- Review the assumptions behind management’s 12-month liquidity assessment and monitor ABL availability and covenant thresholds.
- Consider the comparability of reported earnings and Adjusted EBITDA, including prior-year tax-settlement effects and the Delta Air Lines launch.