Lands’ End, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2014 Q3, but the supplied filing is for the 13 and 39 weeks ended October 30, 2015, compared with periods ended October 31, 2014.
Business context and reporting period
Lands’ End is a multichannel retailer of apparel, accessories, footwear, and home products, selling through Direct (e-commerce and catalogs) and Retail (stores) channels. The filing is for the third quarter and year to date of fiscal 2015. The company was spun off from Sears Holdings on April 4, 2014; therefore, the prior-year comparative statements include pre-separation combined results.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Revenue | $334.4 million | $373.1 million | $946.2 million | $1,050.8 million |
| Gross profit / margin | $162.4 million / 48.6% | $183.3 million / 49.1% | $453.5 million / 47.9% | $513.7 million / 48.9% |
| Operating income / margin | $23.3 million / 7.0% | $35.1 million / 9.4% | $49.7 million / 5.3% | $79.2 million / 7.5% |
| Net income | $10.7 million | $18.0 million | $19.9 million | $40.7 million |
| Diluted EPS | $0.33 | $0.56 | $0.62 | $1.27 |
| Adjusted EBITDA | $26.5 million | $39.9 million | $59.2 million | $93.9 million |
For the 39 weeks, operating cash flow was negative $94.8 million, versus positive $85.6 million a year earlier, primarily reflecting inventory investment and lower earnings. Capital expenditures were $18.1 million. Cash and equivalents were $105.0 million at October 30, 2015, down from $221.5 million at fiscal year-end. Long-term debt was $502.1 million, with total term-loan principal of $507.3 million; the term loan carried a stated rate of 4.25%. The undrawn ABL facility had $156.5 million of availability after letters of credit. Management said cash, operating cash flows, and the ABL facility should cover needs for the next 12 months.
Material changes versus the prior comparable periods
- Revenue fell 10.4% in Q3 and 9.9% year to date. Direct revenue declined 10.1% and 9.3%, respectively; Retail revenue declined 11.7% and 13.4%.
- Q3 Retail same-store sales declined 8.9%; year-to-date same-store sales declined 9.6%. The company operated 227 Lands’ End Shops at Sears, compared with 242 a year earlier.
- Net income fell 40% in Q3 and 51% year to date. Adjusted EBITDA declined 33.5% and 36.9%, respectively. Selling and administrative costs decreased in dollars but increased as a share of revenue.
- Foreign exchange reduced reported revenue by $5.0 million in Q3 and $22.1 million year to date; management estimated an after-tax net-income impact of negative $1.4 million and $6.2 million, respectively.
- Year-to-date interest expense increased to $18.6 million from $14.3 million; the filing attributes part of the difference to two additional months of interest in the comparative periods following the separation timing.
Outlook, commentary, risks, and unusual items
- Management cited reduced promotions, lower catalog circulation, insufficient customer acceptance of the product assortment, a promotional retail environment, and unseasonably warm weather as factors weighing on sales. New marketing strategies partly offset these pressures.
- No formal revenue or earnings guidance is provided. Planned fiscal 2015 capital expenditures were approximately $25–$30 million, primarily for ERP and other technology investments.
- The company recognized $3.4 million year-to-date of income from reversing part of a prior product-recall accrual and receiving a vendor payment; the remaining accrual was $0.1 million. Management reported below-estimated customer return rates for recalled children’s sleepwear.
- Sears-related store exposure is a key risk: Sears can close or sell stores containing Lands’ End Shops, and Seritage or joint ventures have recapture rights at certain locations. Management noted that less attractive relocation options or further store dispositions could hurt results.
- The company reported an ordinary-course legal caseload that it did not believe would materially affect results. It estimated a possible additional $2.8–$4.6 million recovery in its property-tax dispute with Dodgeville; no amount was recorded. Sears Holdings is responsible under the tax-sharing agreement for specified pre-separation tax liabilities; the company reported $8.2 million of gross unrecognized tax benefits.
- The company warned that continued revenue declines could reduce the value of its trade name and potentially lead to impairment. The filing reported no impairment to date. Other cited risks include merchandise acceptance, consumer spending, inventory management, technology and ERP execution, currency, and dependence on Sears relationships.
Most important facts for investors to verify
- Whether subsequent results show a recovery in Direct sales, Retail same-store sales, and gross margin after the reported declines.
- Whether inventory levels and working-capital requirements convert into improved operating cash flow during the seasonally important fourth quarter.
- Term-loan repayment capacity, ABL availability, covenant compliance, and sensitivity to variable interest rates.
- Progress and customer response to product, marketing, catalog, and ERP initiatives, including effects on brand value and impairment risk.
- Developments in Sears store closures, lease recapture rights, related-party arrangements, and the unrecorded property-tax recovery claim.