Lands’ End, Inc. — Form 10-Q Summary
Period note: The request metadata says 2021 Q3, but the supplied filing is for the 13 weeks ended October 28, 2022, with year-to-date results for the 39 weeks ended that date. Comparisons below are with the corresponding 2021 periods.
Business context and reporting period
Lands’ End is a multichannel retailer of apparel, accessories, footwear, and home products, selling through eCommerce, Outfitters, third-party marketplaces, and company-operated stores. The filing reports one external segment. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Revenue | $371.0 million | $375.8 million | $1,025.8 million | $1,081.2 million |
| Gross profit / margin | $148.4 million / 40.0% | $166.8 million / 44.4% | $421.6 million / 41.1% | $492.3 million / 45.5% |
| Operating income | $2.7 million | $19.5 million | $12.2 million | $62.7 million |
| Net income (loss) | $(4.7) million | $7.4 million | $(9.2) million | $26.3 million |
| Diluted EPS | $(0.14) | $0.22 | $(0.28) | $0.78 |
| Adjusted EBITDA | $16.7 million | $29.8 million | $46.3 million | $93.6 million |
Q3 gross margin declined 440 basis points. Management attributed the pressure to higher transportation costs, industry-wide promotions, and sales mix from growth in Third Party. Year-to-date transportation costs were $32.9 million higher than in the comparable period. Selling and administrative expense fell in dollars, reflecting expense controls and lower digital marketing spend.
Q3 revenue declined 1.3%. Third Party revenue rose 59.9% to $30.9 million, while International revenue fell 19.6% to $38.0 million. U.S. eCommerce fell 1.3%, Outfitters fell 6.2%, and Retail rose 9.7%; U.S. store same-store sales increased 13.0%. Year-to-date revenue declined 5.1%, with growth in Outfitters and Third Party offset by declines in U.S. eCommerce and International.
Cash flow, debt, and liquidity
- Year-to-date operating cash flow was a use of $126.0 million, versus a use of $6.4 million in 2021. The company cited lower earnings and inventory growth as primary drivers.
- Inventory was $564.9 million at October 28, 2022, up $85.1 million from October 29, 2021 and $180.6 million from January 28, 2022. Management attributed the increase to earlier fall and holiday receipts and carried-over basics inventory.
- Year-to-date investing cash outflow was $20.5 million, primarily for digital and technology infrastructure. Financing provided $140.1 million, chiefly reflecting increased ABL borrowings.
- Cash and cash equivalents were $28.8 million; restricted cash was $1.8 million. ABL borrowings were $160.0 million, with $11.8 million in letters of credit and $103.2 million of availability based on the borrowing base.
- Term Loan principal was $247.5 million, with a disclosed annual interest rate of 12.87%. The ABL borrowing rate was 4.91%. Interest expense rose to $10.8 million in Q3 from $8.3 million, primarily due to higher rates and ABL balances.
- The company reported compliance with debt covenants at quarter-end and stated that cash, operating cash flows, and ABL availability should meet requirements for at least the next 12 months. The Term Loan matures September 2025; ABL maturity is generally July 2026, subject to an earlier June 2025 date if the Term Loan has not been refinanced, extended, or repaid.
Material changes, outlook, and risks
- Management said inflationary pressures and higher costs for materials, labor, energy, and distribution were affecting margins and expected those pressures to continue through the remainder of Fiscal 2022. It also warned that inflation and weaker consumer discretionary spending could reduce demand and require more promotions.
- The company approved the closure of its Japan eCommerce subsidiary by the end of Fiscal 2022. It recorded $3.0 million of estimated one-time closure costs, with $4.0 million accrued at quarter-end; liquidation sales began in September. The filing does not present Japan as discontinued operations.
- No specific revenue or earnings guidance is provided. Management planned approximately $42.0 million of Fiscal 2022 capital expenditures and noted that sales and cash generation are seasonal, with a significant portion historically occurring in Q4.
- The company authorized a $50.0 million share repurchase program through February 2, 2024. It had repurchased 416,000 shares for $5.2 million year to date, with $44.8 million remaining. Management was assessing the effect of the Inflation Reduction Act’s stock-buyback excise tax.
- The company faces lawsuits alleging health effects and property damage related to uniforms. The court granted summary judgment for the company on personal injury claims in the consolidated Wisconsin action; property-damage and warranty claims remained. Management said the matters were being defended and did not expect their resolution to materially harm the company, but outcomes and potential losses could not be estimated.
- Other exposures include variable interest rates and foreign currency movements. The company reported $5.5 million of foreign-currency cash and does not use derivatives to hedge these risks.
Important facts for investors to verify
- Whether elevated inventory converts to sales without additional markdowns, and how Q4 demand and seasonal cash flow develop.
- Whether gross-margin pressure from freight, promotions, and product/channel mix persists beyond Fiscal 2022.
- Current ABL borrowing-base availability, covenant headroom, and the implications of higher floating-rate debt costs.
- The final cash cost and timing of the Japan closure, and the post-closure contribution of International revenue.
- Updates to the uniform-related litigation, including remaining claims and any change in management’s assessment of potential exposure.