Lands’ End, Inc. — Form 10-Q Summary
Period note: The request metadata says 2015 Q2, but the supplied filing is for the 13 and 26 weeks ended July 29, 2016; comparisons are to periods ended July 31, 2015.
Business context and reporting period
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products. Its Direct segment sells through catalogs and e-commerce; Retail includes Lands’ End Shops at Sears, outlet stores and international shop-in-shops. Results are unaudited. The company notes that its business is seasonal, with a significant share of annual sales and earnings typically occurring in the fourth quarter.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net revenue | $292.0 million | $312.4 million | $565.4 million | $611.8 million |
| Gross margin | 46.6% | 46.3% | 47.0% | 47.6% |
| Operating income (loss) | $2.7 million | $17.9 million | ($0.8) million | $26.4 million |
| Net income (loss) | ($2.0) million | $7.5 million | ($7.7) million | $9.2 million |
| Diluted EPS | ($0.06) | $0.23 | ($0.24) | $0.29 |
| Adjusted EBITDA | $7.3 million | $19.6 million | $7.9 million | $32.7 million |
Q2 revenue fell 6.5% year over year; first-half revenue fell 7.6%. Q2 gross margin improved 30 basis points, but first-half gross margin declined 60 basis points. Selling and administrative expense was $128.9 million in Q2 (44.1% of revenue), versus $124.9 million (40.0%) a year earlier; first-half expense was $257.9 million (45.6%), versus $258.4 million (42.2%).
First-half operating cash flow was $1.7 million, compared with $3.4 million a year earlier. Capital expenditures were $18.0 million; cash and cash equivalents were $210.7 million at July 29, 2016. Long-term debt, net, was $491.9 million; gross term-loan principal was $503.4 million at a stated rate of 4.25%. The ABL facility was undrawn apart from letters of credit, with $165.6 million of availability. The company reported compliance with debt covenants.
Material changes and management commentary
- Direct revenue declined 6.9% in Q2 and 7.6% year to date, amid a difficult retail environment, aggressive promotions and lower website traffic. Management cited incremental Q2 improvement after increasing catalog circulation and improving presentation.
- Retail revenue declined 4.3% in Q2 and 7.3% year to date. Same-store sales fell 2.5% in Q2 and 4.7% year to date; management cited competition, declining traffic at Sears shops and fewer Lands’ End Shops at Sears.
- Q2 Direct gross margin rose to 47.1%, while Retail gross margin decreased to 44.2%. First-half Retail gross margin declined to 42.0% from 45.2%, reflecting promotional activity and deeper discounts.
- Adjusted EBITDA declined substantially year over year. This non-GAAP measure excludes specified items and should not be viewed as a substitute for GAAP results.
Outlook, risks, contingencies and unusual items
- Management expects cash on hand, operating cash flow and ABL availability to meet capital and operating needs for at least the next 12 months. Planned fiscal 2016 capital expenditures are approximately $40–$45 million, mainly for ERP, technology and infrastructure.
- Key risks include competitive discounting, demand and marketing effectiveness, inventory management, execution of the ERP investment, foreign currency and interest-rate exposure, and Sears store closures or relocations that could affect the Retail segment. The filing reports no material changes to previously disclosed risk factors.
- Q2 included approximately $1.3 million of property-tax recovery related to Dodgeville claims, primarily recorded in selling and administrative expense. The company estimated additional potential recovery of $1.8–$3.0 million on unresolved tax-year claims; this amount was not recorded.
- Prior-year Q2 and first-half results included a $2.4 million reversal of a product-recall accrual, which increased prior-year net income by $1.4 million after tax. No comparable recall adjustment was recorded in 2016.
- The company recorded a $98.3 million non-cash trade-name impairment in fiscal 2015. No impairment was recorded year to date 2016; management cautioned that future impairment could result if estimates or performance differ from assumptions.
- Various ordinary-course legal matters remain unresolved. Management said their ultimate resolution is not expected to have a material adverse effect, but outcomes and potential losses could not be estimated for certain matters.
Most important facts for investors to verify
- Confirm the intended reporting year: this filing covers Q2 2016, not Q2 2015 as stated in the request metadata.
- Track whether revenue, same-store sales and margins stabilize, particularly in Direct and Sears-based Retail.
- Assess cash generation against planned capital expenditures, debt service and the seasonal inventory build.
- Monitor Sears store changes, ABL availability and covenant headroom, and progress and costs of the ERP investment.
- Review the assumptions behind the trade-name valuation and the status of unresolved property-tax and other legal matters.