Lands’ End, Inc. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended November 1, 2019, not 2018 Q3 as stated in the request metadata. Dollar amounts below are in millions unless noted.
Business context and results
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products, selling through eCommerce, Outfitters and Retail. Results are seasonal; the company says its fourth quarter typically contributes a significant share of annual revenue and earnings.
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Revenue | $340.0 | $341.6 | $900.7 | $949.3 |
| Gross profit / margin | $154.2 / 45.3% | $151.0 / 44.2% | $403.1 / 44.8% | $420.8 / 44.3% |
| Operating income / margin | $10.9 / 3.2% | $8.5 / 2.5% | $5.6 / 0.6% | $11.9 / 1.3% |
| Net income (loss) | $3.6 | $3.3 | $(6.2) | $(4.6) |
| Diluted EPS | $0.11 | $0.10 | $(0.19) | $(0.14) |
| Adjusted EBITDA | $18.8 | $15.7 | $28.6 | $32.4 |
Q3 revenue fell 0.5%; eCommerce grew 4.7% and Outfitters 1.3%, offset by a 48.4% decline in Retail. Year-to-date revenue fell 5.1%: eCommerce rose 5.6%, while Outfitters declined 16.5% and Retail declined 54.5%. The Outfitters comparison was affected by a Delta Air Lines launch in the prior year; Retail weakness reflected fewer Lands’ End Shops at Sears.
Cash, debt and liquidity
- Cash and cash equivalents were $15.9 at November 1, 2019, down from $193.4 at February 1, 2019. Including restricted cash, the ending balance was $17.7.
- Year-to-date operating cash flow was $(125.0), versus $(52.2) a year earlier. The filing attributes the larger use primarily to inventory for the expected American Airlines launch and accelerated shipments ahead of tariffs. Investing cash flow was $(28.5); financing cash flow was $(24.6). The combined operating and investing cash outflow was $153.4.
- Inventory was $499.9, up from $321.9 at fiscal year-end and $432.0 a year earlier. Current assets were $603.2 and current liabilities $369.2.
- Total borrowings were $466.7: $386.7 under the Term Loan Facility and $80.0 under the ABL Facility. The balance sheet reports $85.2 of current borrowings and short-term debt and $379.6 of long-term debt, net of issuance costs. ABL availability was $82.5 after $12.5 of letters of credit.
- The Term Loan matures April 2021; the ABL Facility matures no later than November 2022. The company reported compliance with financial covenants. Management said cash, operating cash flows and ABL availability should cover capital and operating needs for at least the next 12 months.
Changes, outlook and risks
- Q3 gross margin improved about 110 basis points, which management attributed primarily to more disciplined promotions. Q3 operating income and Adjusted EBITDA increased year over year. Year-to-date operating income and Adjusted EBITDA declined despite higher gross margin, reflecting lower revenue and expense deleverage.
- Year-to-date interest expense declined to $20.2 from $21.2, reflecting a $100 million voluntary term-loan prepayment, partly offset by higher rates. The company made that prepayment in Q1 using excess cash on hand.
- Management expected approximately $40 million of capital expenditures for fiscal 2019, principally for enterprise order management and other technology, store expansion and infrastructure. The filing does not provide a clear revenue or earnings forecast.
- The company expected Q3 ABL borrowings to be repaid in full in Q4 from operating cash flows. Seasonal inventory needs and cash generation make Q4 execution important.
- ASC 842 lease accounting adoption added a $27.5 right-of-use asset and $31.6 of lease liabilities at adoption; the company also recorded a $1.7 after-tax opening retained-earnings adjustment for identified lease-asset impairments. At November 1, lease liabilities totaled $37.3.
- Variable-rate debt creates interest-rate exposure: a one-percentage-point rate change on the Term Loan would change annual cash interest by approximately $3.9. Legal claims and investigations are described as ordinary-course matters; management does not expect their resolution to have a material adverse effect, but says outcomes and potential losses cannot be estimated. The filing reports no material risk-factor changes from the prior 10-K.
Important facts for investors to verify
- Whether Q4 sales and cash generation convert elevated inventory into cash as expected, including inventory tied to the American Airlines launch and tariff-related shipments.
- Current borrowing availability, covenant headroom and the company’s ability to refinance or repay the Term Loan due in April 2021.
- Whether eCommerce growth and company-operated store performance can offset declines in Outfitters and the Sears-based retail channel.
- The assumptions behind management’s liquidity assessment and approximately $40 million fiscal-year capital expenditure expectation.
- The status and potential implications of related-party arrangements with Transform Holdco and Sears Holdings, including any remaining claims or contingent exposures.