Lands’ End, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q2, but the supplied filing is for the 13 and 26 weeks ended August 3, 2018, with comparisons to periods ended July 28, 2017. This summary reflects the filing provided.
Business context and reporting period
Lands’ End is a multichannel retailer of clothing, accessories, footwear, and home products, operating through its Direct segment (e-commerce and catalogs) and Retail segment (stores). The filing covers the second quarter and first half of fiscal 2018. The company notes that results are seasonal, with historically about 35% of annual revenue generated in the fourth quarter.
Financial results
| Metric | 13 weeks ended Aug. 3, 2018 | 13 weeks ended July 28, 2017 | 26 weeks ended Aug. 3, 2018 | 26 weeks ended July 28, 2017 |
|---|---|---|---|---|
| Net revenue | $307.9 million | $302.2 million | $607.8 million | $570.6 million |
| Gross profit / margin | $136.8 million / 44.4% | $134.2 million / 44.4% | $269.8 million / 44.4% | $256.8 million / 45.0% |
| Operating income (loss) | $0.9 million | $0.2 million | $3.4 million | $(6.5) million |
| Net loss | $(5.3) million | $(3.9) million | $(7.9) million | $(11.7) million |
| Diluted loss per share | $(0.16) | $(0.12) | $(0.25) | $(0.37) |
| Adjusted EBITDA | $7.7 million | $6.8 million | $16.8 million | $8.1 million |
Quarterly revenue rose 1.9%, while first-half revenue increased 6.5%. For the quarter, Direct revenue grew 6.4% to $276.6 million, primarily from the Delta Airlines business and U.S. consumer growth; Retail revenue fell 25.8% to $31.3 million. For the first half, Direct revenue rose 12.6% to $550.0 million and Retail revenue declined 29.7% to $57.8 million.
First-half operating results improved from an operating loss to operating income, and the net loss narrowed. However, second-quarter net loss widened year over year despite higher revenue and Adjusted EBITDA. First-half gross margin declined 0.6 percentage points, reflecting promotional activity and the lower-margin Delta Airlines business.
Cash flow, debt, and liquidity
- First-half operating cash flow was $24.8 million, compared with cash used of $13.2 million in the prior-year period. Management attributed the improvement primarily to inventory management, payment timing, and collections of receivables related to the Delta launch.
- Capital expenditures were $22.2 million, versus $20.2 million. The company expected fiscal 2018 capital expenditures of approximately $35 million to $45 million, mainly for ERP and other technology investments.
- At August 3, 2018, cash and cash equivalents were $194.4 million, restricted cash was $2.0 million, and long-term debt, net, was $484.4 million. Term-loan principal was $493.1 million; the ABL facility was undrawn except for $14.9 million of letters of credit, leaving stated borrowing availability of $160.1 million.
- Cash and cash equivalents less term-loan principal were approximately $298.7 million. The term loan carried a 5.34% rate and matures in April 2021. The company reported compliance with debt covenants.
- Management said cash on hand, operating cash flows, and the ABL facility were expected to meet capital and operating needs for at least the next 12 months. Availability under the ABL is subject to a borrowing base and covenant trigger.
Management commentary, outlook, and risks
- Management cited Direct-segment growth, improved cost leverage, and tighter seasonal inventory management as positive factors. Retail performance remained pressured by declining Sears shop locations and same-store sales.
- Retail same-store sales fell 5.8% in the quarter and 12.4% year to date. The company had 147 Lands’ End Shops at Sears and 15 company-operated stores at quarter end, compared with 204 Sears shops and 14 company-operated stores a year earlier.
- Interest expense increased to $7.0 million for the quarter and $13.9 million year to date, which management attributed to rising interest rates. Debt is variable-rate; a one-percentage-point rate change on the term loan would change annual cash interest expense by about $4.9 million.
- The company provided no specific full-year revenue or earnings guidance in the supplied filing. Management highlighted seasonal dependence on fourth-quarter performance and working-capital needs that typically rise as inventory builds ahead of peak selling.
- Tax benefits reflected the Tax Act and, year to date, favorable state tax audit settlements concerning pre-Separation periods. The filing reports $3.5 million of first-half other expense, primarily from reversals of Sears Holdings indemnification assets for unrecognized tax benefits and accrued interest.
- Sears Holdings remained a related party. First-half costs charged by Sears Holdings for Sears shops and general corporate services totaled $21.2 million. The company also reported ordinary-course legal matters whose outcomes and potential losses could not be estimated; management did not expect their resolution to have a material adverse effect.
- The company adopted new revenue-recognition guidance in the first quarter. It reported no significant impact on revenue or operating income, but changed the presentation of product-return assets and liabilities and recorded a $1.1 million cumulative adjustment related to gift-card breakage. A new lease standard was expected to materially increase reported assets and liabilities; the overall impact was still under evaluation.
Important facts for investors to verify
- Whether Direct-segment growth, including the Delta Airlines business, can offset continued Retail declines and any associated margin effects.
- Retail same-store sales trends, further changes in the Sears shop footprint, and the economics of company-operated stores.
- Inventory levels, seasonal cash requirements, and whether operating cash flow remains positive as the business moves into its peak period.
- Debt-service capacity and sensitivity to interest rates, including borrowing-base availability and the ABL covenant trigger.
- Progress, costs, and control impacts of the ERP implementation, as well as the eventual balance-sheet effect of the new lease standard.
- Resolution of tax-related matters with Sears Holdings, the recoverability of related indemnification amounts, and any material developments in legal proceedings.