Lands’ End, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended August 1, 2014, not 2013 Q2 as stated in the request metadata. Comparisons are with the periods ended August 2, 2013. The 2014 statements include pre-separation combined results and post-separation consolidated results.
Business context and reporting period
Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products, selling through direct channels (e-commerce and catalogs) and retail locations. Sears Holdings distributed all Lands’ End shares to its shareholders on April 4, 2014, making Lands’ End a standalone public company. Historical comparisons therefore reflect periods when Lands’ End operated as a Sears Holdings subsidiary and may not represent standalone costs or future performance.
Financial results and liquidity
| Metric | 13 weeks ended August 1, 2014 | 26 weeks ended August 1, 2014 |
|---|---|---|
| Revenue | $347.2 million, up 5% | $677.7 million, up 4% |
| Gross profit / margin | $168.4 million / 48.5%, up 310 bps | $330.4 million / 48.8%, up 190 bps |
| Operating income | $25.3 million, versus $18.4 million | $44.1 million, versus $30.3 million |
| Net income | $11.8 million, versus $11.3 million | $22.7 million, versus $18.6 million |
| Diluted EPS | $0.37, versus $0.35 | $0.71, versus $0.58 |
| Adjusted EBITDA | $30.1 million, versus $23.8 million | $53.9 million, versus $41.4 million |
For the quarter, Direct revenue grew 7%, supported by spring and summer products, particularly women’s swimwear. Retail revenue fell 3%, while comparable-store sales rose 2.8%. For the six months, Direct revenue rose 6%; Retail revenue fell 3%, while comparable-store sales rose 3.1%. Direct gross margin improved in both periods. Retail gross margin improved in the quarter but declined over six months, reflecting clearance mix and higher Shop Your Way costs.
Selling and administrative expense increased $12.4 million in the quarter and $13.6 million for six months, including higher marketing and incentive compensation and $2.9 million and $4.0 million, respectively, of standalone-company costs. Interest expense was $6.2 million for the quarter and $8.1 million for six months; there was none in the comparable 2013 periods. Six-month effective tax rate was 37.4%, versus 38.7%.
Cash from operating activities was $105.2 million for six months, versus $26.0 million; management attributed the increase to improved inventory management, separation-related settlement changes and higher operating income. Investing cash use was $5.7 million and financing cash provided was $11.1 million. Cash was $132.8 million at August 1, 2014. Inventory was $366.2 million, current assets $555.2 million and current liabilities $264.8 million.
Long-term debt was $508.6 million, with total term-loan principal of $513.7 million including the current portion. The $515 million term loan funded a $500 million dividend to a Sears Holdings subsidiary and facility costs. The term loan’s stated interest rate was 4.25% at quarter-end. The $175 million asset-based revolving facility was undrawn apart from letters of credit; available borrowing capacity was $163.7 million. The company reported compliance with applicable financial covenants.
Material changes and unusual items
- The separation and new debt materially changed the capital structure and added interest expense. Lands’ End also began incurring standalone public-company expenses.
- Management estimated incremental annual standalone operating costs of $8–10 million and one-time separation-related IT costs of $2–3 million. Net annual Shop Your Way program costs were expected to rise by approximately $8–10 million in 2014.
- Six-month operating cash flow included separation-related changes in settlement methods, including approximately $35 million in accounts payable less $5 million in accounts receivable at quarter-end. This affects comparison with the prior period.
- The company recorded a $0.6 million reduction in selling and administrative expense and $0.1 million of other income from a Dodgeville property-tax recovery. Further disputed tax-assessment claims could produce aggregate recovery of $3.2 million or more; no additional recovery was recorded.
Outlook, risks and contingencies
Management expected cash on hand, operating cash flow and the ABL facility to fund capital needs and operations for the remainder of the fiscal year and beyond. Planned fiscal 2014 capital expenditures were approximately $20–25 million. Management estimated interest costs of approximately $19.4 million for the ten months the facilities would be in effect during 2014. No specific revenue or earnings forecast was provided.
The business is seasonal: historically, approximately 34% of annual sales occurred in the fourth fiscal quarter, and inventory needs generally rise in the second and third quarters. Risks cited include customer demand and product appeal, promotions and inventory management, reliance on Sears locations and transition services, technology and cybersecurity, vendor and delivery performance, foreign currency and sourcing risks, and the costs and execution challenges of operating independently. Variable-rate debt creates interest-rate exposure; a one-percentage-point rate change on the term loan would change annual cash interest by approximately $5.2 million. Gross unrecognized tax benefits were $8.9 million, of which $5.8 million would affect the effective tax rate if recognized. Management said current legal matters were not expected to have a material adverse effect overall.
Important facts for investors to verify
- Confirm period alignment: the filing covers Q2 and the first half of fiscal 2014, despite the request metadata identifying 2013 Q2.
- Assess the sustainability of margin and earnings improvement against higher selling and administrative costs and new debt-service expense.
- Review the effect of the $500 million distribution, debt repayment terms, variable interest rates and ABL borrowing availability on future liquidity.
- Separate recurring operating cash generation from working-capital and separation-related timing effects.
- Track standalone and Shop Your Way costs, Sears-related agreements and store exposure, and the status of unrecorded tax-recovery claims.