Lands’ End, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 31, 2014, with comparisons to periods ended November 1, 2013. Although the request metadata says 2013 Q3, the filing itself is for 2014 Q3. Lands’ End operates Direct (e-commerce and catalogs) and Retail channels. It became an independent public company on April 4, 2014, following its separation from Sears Holdings; therefore, the comparative financial statements include pre-separation combined results and are not fully comparable in all respects.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Revenue | $373.1m | $383.9m | $1,050.8m | $1,032.4m |
| Gross profit / margin | $183.3m / 49.1% | $174.5m / 45.4% | $513.7m / 48.9% | $478.7m / 46.4% |
| Operating income / margin | $35.1m / 9.4% | $23.3m / 6.1% | $79.2m / 7.5% | $53.6m / 5.2% |
| Net income | $18.0m | $14.3m | $40.7m | $32.9m |
| Diluted EPS | $0.56 | $0.45 | $1.27 | $1.03 |
| Adjusted EBITDA | $39.9m | $28.5m | $93.9m | $69.9m |
Q3 revenue declined 3%, as Direct sales fell 1% and Retail sales fell 12%; Retail same-store sales decreased 3.1%. For the 39-week period, revenue increased 2%, driven by 3% growth in Direct, partly offset by a 6% Retail decline; Retail same-store sales rose 1%. Management attributed stronger gross margin primarily to merchandise assortment improvements and more targeted promotions. The Q3 and year-to-date Retail margin comparisons also benefited from an inventory adjustment in the prior-year period.
Selling and administrative expense was $143.4m in Q3, down 2% but up to 38.4% of revenue from 38.0%. Year to date, it increased to $419.9m from $408.8m, or 40.0% of revenue versus 39.6%. The 2014 periods included incentive compensation and stand-alone public-company costs, which were absent from the 2013 comparisons. Interest expense was $6.2m in Q3 and $14.3m year to date; the prior-year periods had no reported interest expense.
Cash, debt and liquidity
- Cash and cash equivalents were $105.6m at October 31, 2014, compared with $16.3m a year earlier and $22.4m at January 31, 2014. Restricted cash was $3.3m.
- Operating cash flow was $85.6m for the 39 weeks, versus cash used of $10.9m in 2013. Management cited improved inventory management, separation-related changes in settlement practices and higher operating income; interest payments partly offset the improvement. Capital expenditures were $11.1m.
- Term debt was $512.4m, with a reported carrying amount of $512.4m including the current portion. The term loan’s stated interest rate was 4.25% at period end and it matures in 2021. Cash less term debt implies net debt of approximately $406.9m.
- The $175m asset-based revolving facility was undrawn except for letters of credit; availability was $161.5m after $13.5m of letters of credit. The company reported covenant compliance. A minimum fixed-charge coverage covenant applies if availability falls below specified thresholds.
- Management said cash, operating cash flows and ABL capacity should be adequate for capital and operating needs. It forecast 2014 capital expenditures of approximately $20m–$25m and approximately $20.5m of interest costs for the ten months the facilities were in place. No specific revenue or earnings guidance was provided.
Separation, outlook and risks
- The $515m term loan funded a $500m dividend to a Sears Holdings subsidiary immediately before separation and approximately $11.4m of debt issuance costs. This materially changed the company’s capital structure and introduced recurring debt service.
- Management estimated incremental annual stand-alone operating costs of $8m–$10m and one-time separation-related IT costs of $2m–$3m. It also estimated 2014 net annual Shop Your Way costs would increase by $6m–$8m, expected to be offset by incremental revenue and reduced promotions and advertising.
- The Retail business depends in part on Lands’ End Shops located within Sears stores. Sears’ store closures, sales or relocations could adversely affect the business; Lands’ End reported 242 Shops at Sears at quarter-end, versus 275 a year earlier. The company also cited seasonality, with historically about 34% of annual sales in the fourth quarter.
- Other disclosed risks include consumer demand and product trends, promotional and inventory management, vendor and supply-chain performance, technology and data security, foreign currency and international exposure, and the costs and execution risks of operating independently.
- The company reported $9.0m of gross unrecognized tax benefits, including pre-separation positions subject to the tax-sharing and indemnification arrangements with Sears Holdings. It also disclosed ordinary-course legal matters that it could not quantify, while stating it did not expect current proceedings to materially affect the company overall.
- Outstanding Dodgeville property-tax claims were not recorded in the financial statements; management said pending claims could yield $3.2m or more, with a separate 2014 administrative claim potentially yielding $0.7m or more.
Most important facts for investors to verify
- Whether revenue and same-store sales trends improve, particularly in Retail, and whether Direct growth can offset the shrinking Sears shop footprint.
- Whether gross-margin gains persist after accounting for prior-year inventory adjustments, promotions, and Shop Your Way costs.
- Cash generation and seasonal inventory needs relative to the $512.4m term debt, interest costs, and scheduled principal payments.
- Actual stand-alone, IT, and loyalty-program costs versus management’s estimates, and the degree to which those costs are offset by operating benefits.
- The availability and covenant headroom under the ABL facility, and developments affecting Sears-related leases, services, or tax indemnifications.