LANDS' END, INC. annual report, FY2017

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Lands’ End, Inc. — Form 10-K Summary

Period clarification: The request metadata says “2016 Q4,” but the supplied filing is the annual report for Fiscal 2017, the 53 weeks ended February 2, 2018. Comparisons below are primarily with Fiscal 2016, the 52 weeks ended January 27, 2017.

Business context and reporting period

Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products, selling mainly through e-commerce and catalogs, with a smaller retail segment that includes Lands’ End Shops at Sears. Direct sales represented 87.7% of Fiscal 2017 revenue; Retail represented 12.3%. Fiscal 2017 included an extra week, contributing approximately $25.9 million of revenue.

Financial performance and liquidity

  • Revenue: $1.407 billion, up 5.3% reported from $1.336 billion; excluding the extra week, revenue increased 3.4%. Direct revenue rose 7.4% reported (5.3% excluding the extra week) to $1.234 billion. Retail revenue fell 7.5% to $172.6 million.
  • Profit and margins: Gross profit was $597.2 million, up 3.6%; gross margin declined 70 basis points to 42.5%. Operating income was $29.1 million versus an operating loss of $152.6 million. Net income was $28.2 million, or $0.88 per diluted share, versus a net loss of $109.8 million, or $3.43 per share.
  • Adjusted EBITDA: $58.3 million, up from $39.8 million. This non-GAAP measure excludes specified items and should not be treated as a substitute for GAAP results.
  • Cash flow and investment: Operating cash flow was $28.4 million; investing cash use was $37.1 million, principally capital expenditures; financing cash use was $7.4 million, primarily term-loan payments. Cash and cash equivalents ended at $195.6 million, down from $213.1 million.
  • Debt and liquidity: Long-term debt, net, was $486.2 million; term-loan principal was $495.7 million, maturing April 2021. The $175 million asset-based revolver was undrawn except for letters of credit; borrowing availability was $152.7 million. The company reported compliance with debt covenants at year-end.
  • Balance sheet: Total assets were $1.124 billion, total liabilities $817.0 million and stockholders’ equity $307.1 million. Inventory was $332.3 million and current liabilities were $256.1 million.

Material changes versus the prior comparable period

  • Revenue increased, led by Direct, while Retail revenue declined as the number of Sears locations fell from 216 to 174. Excluding the extra week, same-store sales increased 2.2% at Lands’ End Shops at Sears and 6.2% at Lands’ End stores.
  • Gross margin contracted in both segments. Direct margin fell 50 basis points to 43.2%, primarily due to higher shipping costs and promotional activity; Retail margin fell 290 basis points to 36.9%, reflecting store closures and more aggressive pricing.
  • The swing to operating income largely reflects the absence of the prior-year $173.0 million non-cash trade-name impairment. Fiscal 2017 had no impairment charge; prior-year net loss also included that write-down.
  • Fiscal 2017 net income benefited from the Tax Act, including a provisional $30.6 million tax benefit. The year’s $27.7 million income tax benefit and near break-even pre-tax income make the reported effective tax rate unusually distorted.
  • The company entered a new $175 million ABL facility with Wells Fargo in November 2017, terminating and repaying amounts under the prior facility. It also recorded $3.9 million of restructuring charges tied to reducing New York office activities and moving functions to Dodgeville.

Outlook, management commentary and risks

  • Management described Fiscal 2017 as a year of stabilizing the brand and planned to build momentum through product, digital, distribution and process initiatives. Plans included testing new standalone stores, enhancing digital personalization and continuing ERP and order-management investments.
  • No specific revenue or earnings guidance is provided in the supplied filing text. Planned Fiscal 2018 capital expenditures were approximately $35 million to $45 million, primarily for technology and infrastructure.
  • Management expected cash on hand, operating cash flow and ABL availability to meet capital and operating needs for at least the following 12 months. This is a forward-looking assessment, not a guarantee.
  • Key risks include fashion and customer-demand shifts, promotional pressure and margin erosion, inventory planning, foreign sourcing and trade costs, system implementation and cybersecurity, and seasonal dependence on fourth-quarter sales.
  • Exposure to Sears is material: Sears provides services and locations for Shops at Sears, and its financial condition or store closures could impair sales and operations. Of 174 Shops at Sears at year-end, leases for 94 were scheduled to expire in Fiscal 2018 and 80 in Fiscal 2019.
  • Debt is substantial and largely variable-rate; the term loan’s large scheduled principal payment falls in the period ending in 2021. Debt covenants restrict certain actions, including dividends. The company did not expect to pay common-stock dividends in the foreseeable future.
  • ESL beneficially owned 67.1% of outstanding shares as of January 25, 2018, according to the filing, creating significant concentrated ownership and potential alignment risks.
  • Ordinary-course legal matters were disclosed; management did not expect their resolution, taken as a whole, to materially affect results, cash flows or financial position, but could not predict outcomes or estimate potential losses.

Important facts for investors to verify

  • Confirm the requested period: this is Fiscal 2017, not a 2016 fourth-quarter filing; Fiscal 2017’s fourth quarter was 14 weeks and generated $510.6 million of revenue.
  • Assess whether revenue growth excluding the extra week is sustainable and whether Direct growth can offset declining Sears-related Retail revenue.
  • Track gross-margin trends, promotional intensity, shipping costs and inventory reserves; the excess and obsolete inventory reserve fell to $12.1 million from $20.1 million.
  • Separate recurring operating performance from the $30.6 million provisional Tax Act benefit and the prior-year impairment when evaluating earnings comparisons.
  • Review term-loan repayment capacity, interest-rate sensitivity, revolver availability and the large maturity schedule, alongside planned capital spending.
  • Monitor Sears store closures, lease expirations and the company’s ability to replace that channel with profitable standalone stores and digital sales.
  • Follow progress, costs and control testing for ERP and other technology implementations; the filing identifies implementation disruption as a risk.