Lands’ End, Inc. — Form 10-K Summary
Period clarification: Request metadata refers to “2018 Q4,” but the supplied filing is the Form 10-K for fiscal 2019, the 52 weeks ended January 31, 2020. Comparatives are fiscal 2018, ended February 1, 2019. Amounts below are in U.S. dollars.
Business context and reporting period
Lands’ End is a global, single-reportable-segment retailer of clothing, accessories, footwear, and home products. It sells through eCommerce, Outfitters (organizational uniform and related sales), and retail stores. Fiscal 2019 revenue was concentrated in eCommerce (76.2%); the company operated 25 U.S. stores at year-end. Approximately 14.0% of revenue was shipped outside the United States.
Key financial metrics
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Revenue | $1,450.2 million | $1,451.6 million |
| Gross profit / margin | $621.9 million / 42.9% | $616.1 million / 42.4% |
| Operating income / margin | $45.4 million / 3.1% | $42.6 million / 2.9% |
| Net income / diluted EPS | $19.3 million / $0.60 | $11.6 million / $0.36 |
| Adjusted EBITDA (non-GAAP) | $77.9 million | $70.5 million |
| Cash from operations | $27.3 million | $48.2 million |
| Cash and cash equivalents at year-end | $77.1 million | $193.4 million |
| Long-term debt, net | $378.7 million | $482.5 million |
- Gross margin improved 50 basis points; selling and administrative expense declined slightly to 37.5% of revenue. Depreciation and amortization rose 13.0% to $31.1 million, largely reflecting ERP and digital investments and more company-operated stores.
- Operating cash flow fell $20.9 million, primarily due to the timing of the American Airlines launch and working-capital movements. Capital expenditures were $38.9 million; investing cash outflow was $38.0 million.
- Fiscal 2019 financing cash outflow was $105.9 million, including a $100 million voluntary Term Loan repayment. The ABL Facility was undrawn at year-end, with $151.7 million available after letters of credit. Current assets were $545.4 million and current liabilities $283.6 million.
Material changes versus fiscal 2018
- Total revenue was nearly flat, down 0.1%. eCommerce grew 6.2% to $1,104.8 million; Outfitters declined 1.2% to $285.8 million; Retail fell 51.3% to $59.6 million, principally as Lands’ End Shops at Sears closed. Retail’s revenue share declined from 8.4% to 4.1%.
- Higher gross profit and lower interest expense helped lift operating income 6.7% and net income 66.4%. Fiscal 2019 interest expense was $26.0 million, down from $28.9 million, mainly following the debt paydown.
- Other income was $1.9 million versus other expense of $4.1 million in fiscal 2018, when the company reserved against a Sears-related tax indemnification asset. That asset was zero at fiscal 2019 year-end.
- Cash declined substantially, in part reflecting the term-loan prepayment and capital spending. Inventory increased to $375.7 million from $321.9 million.
Outlook, risks, contingencies, and unusual items
- Management planned fiscal 2020 capital expenditures of approximately $35–$45 million, primarily for technology and infrastructure. Its stated priorities included product, digital customer experience, distribution, and more efficient business processes. No quantified revenue or earnings guidance is provided.
- Management stated that cash, operating cash flow, and the ABL Facility were expected to meet capital and operating needs for at least 12 months. The Term Loan, with $385.4 million principal outstanding at January 31, 2020, matured April 4, 2021; the company said it was seeking to refinance. The company reported covenant compliance at year-end.
- COVID-19 was identified as a material emerging risk. After year-end, the company closed its 26 U.S. stores for several weeks, reported lower customer demand, and said the financial impact could not be reasonably estimated. Management did not anticipate a significant near-term inventory or supply-chain impact at that time. The 10-K’s liquidity outlook predates the pandemic’s full impact.
- Four lawsuits seek class certification over alleged health effects related to Delta Air Lines uniforms; plaintiffs seek damages, and the company said it was vigorously defending the cases and believed them meritless. Management could not estimate potential losses but did not expect ordinary-course proceedings overall to materially adversely affect the company.
- The company’s $385.4 million term loan bears variable-rate interest and is secured; the debt’s April 2021 maturity creates refinancing risk. The filing also cites variable-rate exposure, seasonal sales and inventory risk, vendor and international sourcing exposure, technology implementation and cybersecurity risks, and ESL’s substantial influence (63.3% beneficial ownership reported in December 2019).
- Other notable items: a $1.4 million impairment of assets at one retail location; adoption of lease accounting that added $38.7 million of right-of-use assets and $45.7 million of lease liabilities at year-end; and a 9.7% effective tax rate, reflecting, in part, an election to treat certain foreign entities as U.S. branches.
Important facts for investors to verify
- Current liquidity, borrowing availability, cash generation, and the effects of COVID-19 on demand, store operations, fulfillment, and working capital.
- Progress and terms of refinancing the Term Loan due April 2021, including covenants, collateral, interest costs, and any required repayments.
- Whether eCommerce growth and Outfitters performance can offset the loss of Sears-related retail revenue and any further store-related declines.
- Inventory quality, markdown exposure, and the cash-flow implications of seasonal purchasing and contractual purchase obligations.
- Developments in the Delta uniform lawsuits and any resulting financial exposure; also monitor the company’s exposure to Sears-related tax and separation matters.
- Adjusted EBITDA is a non-GAAP measure; compare it with GAAP earnings and operating cash flow, and review the company’s reconciliation and exclusions.