Lands’ End, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2019 Q1, but the supplied filing is for the 13 weeks ended May 1, 2020, compared with the 13 weeks ended May 3, 2019. The filing was delayed from its June 10 due date because of COVID-19-related accounting and staffing challenges and was signed July 22, 2020.
Business context and reporting period
Lands’ End is a multichannel retailer of clothing, accessories, footwear and home products, selling through eCommerce, Outfitters and retail. The company reports one external segment. COVID-19 materially disrupted first-quarter operations; all 26 U.S. stores were temporarily closed beginning March 16, and demand weakened across operating channels.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $217.0 million | $262.4 million |
| Gross profit / margin | $94.2 million / 43.4% | $119.9 million / 45.7% |
| Operating loss | $24.7 million | $4.7 million |
| Net loss | $20.6 million | $6.8 million |
| Diluted loss per share | $0.64 | $0.21 |
| Adjusted EBITDA (non-GAAP) | Loss of $11.6 million | Income of $3.0 million |
| Net cash used in operating activities | $80.2 million | $36.3 million |
Revenue fell 17.3%. eCommerce revenue declined 13.1% to $181.5 million, Outfitters declined 26.2% to $31.8 million, and retail declined 64.9% to $3.7 million. Retail’s decrease also reflected the exit from Lands’ End Shops at Sears. Gross margin contracted 2.3 percentage points amid heavier promotions and additional inventory reserves. Selling and administrative expense decreased to $105.8 million, but rose to 48.8% of revenue from 44.5% as sales fell. A $3.3 million goodwill impairment was recorded for Japan eCommerce.
Cash and cash equivalents were $59.1 million at May 1, 2020. Total cash, cash equivalents and restricted cash were $61.1 million. The company used $10.8 million in investing activities, primarily for property, equipment and technology investment, and received $73.3 million in financing cash flow, principally from ABL borrowings. Inventory was $383.2 million, up from $319.3 million a year earlier.
Debt, liquidity and material changes
Total debt was $459.1 million at May 1, 2020: $384.1 million under the Term Loan Facility and $75.0 million under the ABL Facility. All debt was classified as current because the Term Loan matures April 4, 2021. The company had $116.3 million of ABL availability after borrowings and letters of credit; it increased ABL capacity by $25 million to $200 million during the quarter. The $75 million ABL borrowing was repaid by the end of June 2020.
Management stated that the Term Loan maturity raises substantial doubt about the company’s ability to continue as a going concern. The ABL may also mature early, on January 4, 2021, if the Term Loan is not refinanced, extended or repaid at least six months before its maturity. Management was negotiating refinancing and had non-binding term sheets from multiple investors, but stated refinancing was not probable until completed. The company was in compliance with debt covenants at May 1, 2020.
Outlook, management commentary and risks
- Management said the pandemic’s duration, severity and ultimate effect on the business could not be reasonably estimated, and expected adverse effects to continue. No formal financial guidance was provided.
- Management reported that February revenue grew 11.1% year over year before pandemic effects intensified. Global eCommerce revenue rebounded in April and accelerated to double-digit growth in May versus the prior year. These are management-reported post-quarter trends, not quarterly results.
- All 26 U.S. stores were closed at quarter-end; phased reopening began in the second quarter. Outfitters, particularly national accounts tied to travel, was expected to recover more slowly. School-uniform recovery depended on schools reopening in fall.
- Expense actions included furloughs, temporary salary reductions, suspension of the 401(k) match, elimination of merit increases, reduced discretionary spending and an approximately 50% reduction in planned fiscal 2020 capital expenditures.
- The company reported no significant supply-chain disruption during the quarter, but warned of possible future disruptions. Further impairment charges could arise if pandemic effects undermine recovery assumptions; the Japan eCommerce unit’s $3.3 million goodwill was fully impaired.
- Three lawsuits alleged health events and property damage involving uniforms; two cases were consolidated, and the company said it was defending the action and believed it lacked merit. Management could not estimate potential losses for pending proceedings.
Most important facts for investors to verify
- Whether the proposed refinancing was completed on terms sufficient to address the Term Loan maturity and the disclosed going-concern uncertainty.
- Subsequent-period cash, borrowing levels, ABL availability, covenant headroom and the status of the June repayment of ABL borrowings.
- Whether eCommerce recovery continued and whether Outfitters and retail demand improved as stores reopened and customers returned.
- Inventory quality, promotional pressure, return liabilities and any additional impairment or reserve charges.
- Developments in the uniform-related litigation and any material change in potential exposure.