Lands’ End, Inc. — Form 10-K Summary
Period clarification: The filing is the annual report for the 52 weeks ended January 29, 2016 (Fiscal 2015), filed April 1, 2016. This does not match the request metadata of “2014 Q4.” Fiscal 2014, the comparable year, ended January 30, 2015.
Business context
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products. It sells through direct channels—e-commerce and catalogs—and retail locations, including Lands’ End shops inside Sears stores. Direct generated about 86% of Fiscal 2015 revenue. The year’s results include post-Separation operations as an independent public company; pre-April 4, 2014 financial information is combined information derived from Sears Holdings’ records and may not be directly comparable.
Financial performance
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Net revenue | $1.420 billion | $1.555 billion |
| Gross profit / margin | $652.6 million / 46.0% | $735.9 million / 47.3% |
| Operating income (loss) | $(5.1) million | $139.6 million |
| Net income (loss) | $(19.5) million | $73.8 million |
| Diluted earnings (loss) per share | $(0.61) | $2.31 |
| Adjusted EBITDA | $107.3 million | $164.3 million |
| Cash provided by operating activities | $35.9 million | $211.1 million |
| Capital expenditures | $22.2 million | $16.6 million |
Revenue declined 8.7%. Direct revenue fell 8% to $1.215 billion; Retail revenue fell 13% to $204.6 million, and Retail same-store sales decreased 9.3%. The filing attributes weaker Direct sales to lower catalog circulation, a reduced promotional approach and weaker customer acceptance of the assortment; foreign exchange also reduced Direct revenue by approximately $26.7 million. Apparel, non-apparel and services revenue all declined.
Gross margin contracted 130 basis points. Management cited deeper discounting in a promotional retail environment; currency movements reduced Direct gross margin by approximately 90 basis points. Selling and administrative expense fell to $545.3 million from $573.3 million, but increased as a percentage of revenue, from 36.9% to 38.4%.
Fiscal 2015 included a non-cash $98.3 million trade-name impairment charge, following lower revenue and reduced future revenue forecasts. Excluding this item, the filing reports Adjusted EBITDA of $107.3 million, down 34.7% year over year; this is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Financial position, liquidity and debt
At January 29, 2016, cash and cash equivalents were $228.4 million, inventory was $329.2 million, current assets were $617.9 million and current liabilities were $230.1 million. Total assets were $1.289 billion. Long-term debt, including current maturities, was $506.0 million; reported long-term debt was $500.8 million. The Term Loan Facility carried a 4.25% interest rate and matures in 2021. The $175 million asset-based revolving facility was undrawn except for letters of credit; available borrowing capacity was $150.7 million.
Operating cash flow fell sharply, which management primarily attributed to lower earnings before non-cash items, increased inventory purchases, tax and incentive-compensation payments, and prior-year separation-related cash-flow effects. The company said cash on hand, operating cash flows and ABL availability were expected to meet capital and operating needs for the next 12 months. It planned approximately $40–$45 million of Fiscal 2016 capital expenditures, primarily for technology and infrastructure. No mandatory excess-cash-flow prepayment on the term loan was required based on Fiscal 2015 results. The company was in compliance with debt covenants at year-end.
Material changes, outlook and risks
- Fiscal 2015 performance deteriorated from Fiscal 2014: revenue, gross profit, operating income, net income, Adjusted EBITDA and operating cash flow all declined.
- The trade-name impairment reduced reported earnings and left the trade name recorded at $430 million; goodwill remained $110 million, with no goodwill impairment recorded.
- Fourth-quarter revenue was $473.5 million versus $504.6 million a year earlier. Fourth-quarter operating loss was $54.8 million, including the impairment charge; fourth-quarter net loss was $39.5 million.
- Management’s stated priorities included refining merchandise and product assortment, improving brand marketing and digital shopping, investing in technology and ERP systems, and adapting the retail and distribution mix. The filing provides no specific revenue or earnings forecast.
- Key risks include continued sales and margin pressure, reliance on catalog and digital marketing, fashion and inventory execution, foreign sourcing and currency exposure, and the cost and operational disruption risk of ERP implementation.
- Retail exposure is tied substantially to Sears: 227 Lands’ End Shops at Sears were operating at year-end, and Sears/related property owners had rights that could affect store locations or leases. The filing also describes potential recapture rights affecting some Sears properties.
- Other notable risks include significant leverage and variable-rate debt, supplier concentration (top 10 vendors represented 60% of merchandise purchases), dependence on Sears for certain services, and ESL’s reported 53.7% beneficial ownership. No dividends were expected in the foreseeable future.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. A property-tax dispute remained unresolved; the company estimated possible additional recovery of $2.8–$4.6 million, none recorded. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether revenue trends, Direct customer response and Retail same-store sales improved after the reported year.
- How much of ongoing profitability and cash generation remains after separating the non-cash impairment and other adjustments from GAAP results.
- Inventory quality, markdown requirements and working-capital cash needs, given year-end inventory growth and sharply lower operating cash flow.
- Debt repayment capacity, interest-rate sensitivity, covenant headroom and the availability of the ABL borrowing base.
- Whether Sears store closures, property recapture rights or service changes affect Lands’ End’s retail sales and costs.
- Progress, spending and operational impact of the ERP and other technology projects, alongside the planned Fiscal 2016 capital expenditures.
- Assumptions supporting the $430 million trade-name valuation and the risk of further impairment if revenue forecasts weaken.