Lands’ End, Inc. — Form 10-Q Summary
Period note: The request metadata says 2016 Q3, but the supplied filing is for the 13 and 39 weeks ended October 27, 2017, with comparisons to periods ended October 28, 2016. Figures below reflect the filing; financial statements are unaudited.
Business context and reporting period
Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products. It sells through Direct (websites and catalogs) and Retail (Lands’ End stores and shops within Sears). Results are seasonal: the company says it has historically generated a significant share of annual sales and earnings in the fourth quarter.
Financial results
| Metric | 13 weeks ended Oct. 27, 2017 | 13 weeks ended Oct. 28, 2016 | 39 weeks ended Oct. 27, 2017 | 39 weeks ended Oct. 28, 2016 |
|---|---|---|---|---|
| Revenue | $325.5M | $311.5M | $896.0M | $876.9M |
| Gross profit / margin | $142.0M / 43.6% | $133.7M / 42.9% | $398.8M / 44.5% | $399.5M / 45.6% |
| Operating income (loss) | $5.9M | $(3.4)M | $(0.6)M | $(4.2)M |
| Net income (loss) | $0.2M | $(7.2)M | $(11.6)M | $(15.0)M |
| Diluted EPS | $0.01 | $(0.23) | $(0.36) | $(0.47) |
| Adjusted EBITDA | $12.9M | $1.3M | $21.0M | $9.2M |
Quarterly Direct revenue increased 6.7% to $290.3M; Retail revenue declined 10.8% to $35.1M. Quarterly Direct gross margin improved to 44.8%, while Retail gross margin fell to 34.1%. Year-to-date Direct revenue rose 3.7%; Retail revenue fell 6.9%. Adjusted EBITDA is a non-GAAP measure and excludes specified items.
For the 39 weeks, operating cash flow was $(87.8)M, investing cash flow $(27.5)M and financing cash flow $(4.5)M; cash declined $120.2M to $92.9M. The operating cash outflow was attributed mainly to inventory build and cash use to pay accounts payable. Capital expenditures were $29.1M.
At October 27, 2017, total assets were $1,120.5M, current assets $606.1M and current liabilities $264.2M. Long-term debt, net, was $487.2M; term-loan principal including current maturities was $497.0M. The existing ABL facility was undrawn except for letters of credit and had $157.2M of reported borrowing availability. Stockholders’ equity was $263.1M.
Changes, outlook and risks
- Quarterly revenue growth and return to modest profitability reflected stronger Direct sales, lower selling and administrative costs, and improved gross margin. The comparison also benefited from the absence of a $4.4M Canvas by Lands’ End inventory write-down recorded in Q3 2016.
- Year-to-date revenue rose 2.2%, but gross margin fell 110 basis points; the company attributed pressure to promotions, shipping costs, store closures and competitive conditions. Depreciation and amortization increased, primarily due to the ERP implementation.
- Retail weakness included fewer Lands’ End Shops at Sears: 188 at quarter end versus 219 a year earlier. Quarterly Retail same-store sales declined 1.3%; year-to-date same-store sales increased 1.7%.
- Management expected cash on hand, operating cash flows and the New ABL Facility to meet capital and operating needs for at least 12 months. Fiscal 2017 capital expenditures were projected at approximately $35M–$45M, primarily for ERP, technology and infrastructure. The filing gives no full-year revenue or earnings guidance.
- On November 16, 2017, after quarter end, the company replaced its existing ABL facility with a Wells Fargo facility providing up to $175M, subject to a borrowing base, and maturing no later than November 16, 2022. It reported the new facility undrawn at closing.
- Key risks include seasonal working-capital demands, inventory and promotional execution, competition, ERP implementation, potential impairment of the trade name or goodwill, variable interest rates, and dependence on Sears-related arrangements. Sears Holdings had disclosed substantial doubt about its own ability to continue as a going concern. Lands’ End reported ordinary-course legal matters but could not estimate potential losses; management did not expect their resolution to materially harm the company.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2017, not Q3 2016.
- Track fourth-quarter sales, operating cash generation, inventory levels and liquidity, given seasonality and the year-to-date cash outflow.
- Review Retail performance and the continuing reduction in Sears shop locations against Direct growth.
- Monitor covenant headroom and borrowing-base availability under the new ABL facility, along with interest-rate exposure.
- Check the outcome of the planned fiscal November 2017 intangible-asset impairment test and progress, costs and controls relating to the ERP rollout.
- Assess ongoing exposure to Sears Holdings and the terms and continuity of related-party services and retail arrangements.