Lands’ End, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended July 30, 2021 (fiscal second quarter and first half of 2021), not 2020 Q2 as stated in the request. Comparisons below are to the periods ended July 31, 2020. Dollar figures are in millions unless noted.
Business context and reporting period
Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products, selling through eCommerce, Outfitters, third-party marketplaces and wholesale customers, and company-operated stores. It reports one external segment. The filing describes 2020 as materially affected by COVID-19 and says interim results may not indicate full-year performance; the business is seasonal, with a significant share of annual revenue and earnings historically generated in Q4.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $384.1 | $312.1 | $705.4 | $529.1 |
| Gross profit / margin | $177.8 / 46.3% | $135.4 / 43.4% | $325.5 / 46.1% | $229.6 / 43.4% |
| Operating income (loss) | $31.3 | $11.2 | $43.2 | ($13.5) |
| Net income (loss) | $16.2 | $4.4 | $18.9 | ($16.3) |
| Diluted EPS | $0.48 | $0.13 | $0.56 | ($0.50) |
| Adjusted EBITDA | $41.4 | $23.9 | $63.9 | $12.3 |
Q2 revenue increased 23.1% year over year and was 28.8% above Q2 2019. First-half revenue rose 33.3% year over year and was 25.8% above the first half of 2019. First-half revenue growth included U.S. eCommerce up 22.7%, International up 22.0%, Outfitters up 53.6%, Third Party up $24.3 million, and Retail up 181.5% versus 2020. Against 2019, Outfitters was down 2.0% and Retail down 7.6% for the first half.
Gross margin improved mainly on stronger merchandise margins in U.S. eCommerce, attributed to promotional strategy and pricing and inventory analytics. Higher shipping costs and surcharges, and a greater mix of lower-margin Third Party sales, partly offset the improvement. Q2 selling and administrative expense was $136.6 million, or 35.6% of revenue, versus $111.5 million, or 35.7%; first-half expense was $262.2 million, or 37.2%, versus $217.3 million, or 41.1%. Higher spending reflected digital marketing investment and comparison with pandemic-related cost reductions in 2020.
Interest expense increased to $8.8 million in Q2 from $4.9 million and to $17.9 million for the first half from $10.2 million, primarily due to the higher rates on the current term loan. First-half cash from operations was $30.5 million, compared with $8.0 million; investing used $12.0 million versus $19.8 million, and financing used $12.9 million versus $3.0 million. The operating cash improvement reflected higher net income, partly offset by working-capital movements, including an $82.0 million inventory cash use.
Liquidity, debt and balance sheet
At July 30, 2021, cash and cash equivalents were $39.2 million and restricted cash was $2.1 million. Current assets were $566.9 million against current liabilities of $361.4 million. Inventory was $464.3 million, up from $382.1 million at January 29, 2021.
Gross principal borrowings comprised $264.7 million under the term loan and $25.0 million under the ABL facility; the balance sheet presents $240.0 million of long-term debt net of issuance costs and $13.8 million as current debt. The term loan bears a variable rate of adjusted LIBOR (minimum 1.00%) plus 9.75%, or the alternative base rate plus 8.75%, and matures September 2025. The $275 million ABL facility had $25.0 million drawn, $16.7 million of letters of credit, and reported availability of $233.3 million, subject to the borrowing base. The company said cash on hand, operating cash flow and ABL borrowings should meet needs for at least 12 months. It was in compliance with debt covenants at quarter-end.
Capital expenditures were $12.0 million in the first half; management planned approximately $26 million for fiscal 2021, primarily for technology and general corporate needs.
Changes, outlook and risks
- On July 29, 2021, the company amended the ABL facility, lowering specified borrowing margins, reducing the LIBOR floor to zero, eliminating a cash-maintenance provision, and extending maturity to July 2026, subject to an earlier June 2025 date if the term loan has not been refinanced, extended or repaid as specified.
- Management expected pandemic-related supply-chain disruption and cost increases to continue through the rest of fiscal 2021 and into fiscal 2022. Port congestion, freight capacity constraints, manufacturing and logistics delays, carrier surcharges and late inventory could affect product availability, sales and gross margin, particularly in fall and holiday periods.
- Management cited continued customer response to product assortments and digital capabilities, and said it expected to emerge well positioned for long-term growth, while noting uncertainty around the pandemic’s duration, economic effects and consumer demand. The filing provides no quantified sales or earnings guidance.
- Three lawsuits concern alleged health events and property damage related to uniforms supplied by Lands’ End. On August 18, 2021, the court denied class certification for certain claims and granted Lands’ End partial summary judgment on certain warranty claims; the individual plaintiff count was 603. Plaintiffs sought appellate review of the class-certification decision on September 1. The company said it was vigorously defending the cases; potential loss could not be reasonably estimated.
- Foreign-currency and variable-rate interest exposure remain. The company held $13.5 million in foreign-currency cash and reported no use of derivative hedges. A one-percentage-point rate change above the term-loan LIBOR floor would change annual cash interest by approximately $2.6 million.
Most important facts to verify
- Confirm the intended reporting period: this filing covers Q2 2021, not Q2 2020.
- Review the pace and cost of inventory receipts, freight and other supply-chain constraints, and any effect on holiday sales and margins.
- Assess the term loan’s high variable interest rate, scheduled amortization, covenant tests and refinancing requirements alongside reported ABL availability.
- Track channel-level trends, especially Third Party’s lower-margin mix, Retail traffic versus conversion, and Outfitters recovery relative to 2019.
- Monitor developments in the uniform-related lawsuits, including the appeal on class certification and any updated assessment of potential exposure.
- Consider seasonality: management notes that Q4 historically contributes a substantial share of annual revenue and earnings.