Lands’ End, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the 13 weeks ended May 2, 2014, compared with the 13 weeks ended May 3, 2013. Although the request metadata says “2013 Q1,” the filing covers 2014 Q1. Lands’ End became a separate publicly traded company on April 4, 2014, so the statements combine pre-separation results with post-separation results.
Business context and financial performance
- Lands’ End sells apparel, accessories, footwear, and home products through direct channels (websites and catalogs) and retail locations, including Lands’ End Shops at Sears and standalone Inlet stores.
- Revenue was $330.5 million, up 4% from $319.0 million. Direct revenue rose 5% to $276.0 million, primarily on stronger U.S. consumer sales, including swimwear. Retail revenue fell 2% to $54.4 million; retail same-store sales increased 3.4%.
- Gross profit was $162.0 million, or 49.0% of revenue, versus $154.6 million, or 48.5%. Direct gross margin improved to 49.6% from 48.0%; Retail gross margin declined to 46.1% from 50.6%.
- Operating income was $18.8 million (5.7% margin), compared with $12.0 million (3.7%). Net income was $10.9 million versus $7.3 million; diluted EPS was $0.34 versus $0.23. Adjusted EBITDA, a non-GAAP measure, was $23.8 million versus $17.6 million.
- Operating cash flow was $31.4 million, compared with $19.5 million. Investing used $1.5 million, primarily for technology and property and equipment. Cash at quarter-end was $65.0 million.
- At May 2, 2014, total debt was $509.9 million (including $5.2 million current). The company also had a $175 million asset-based revolver, undrawn except for letters of credit, with $160.2 million of availability. Current assets were $464.7 million and current liabilities $188.6 million.
Material changes and separation effects
- On April 4, Sears Holdings distributed all Lands’ End shares to its shareholders. Immediately before separation, Lands’ End paid Sears Holdings a $500 million dividend funded principally by a new $515 million term loan. Debt issuance costs were approximately $11.3 million; quarterly interest expense was $1.9 million, compared with none in the prior-year quarter.
- Management expects incremental annual standalone operating costs of approximately $8–10 million and one-time separation-related IT costs of $2–3 million. It estimates 2014 interest costs of approximately $19.4 million for the ten months the facilities are effective.
- Net annual Shop Your Way loyalty-program costs are expected to increase by approximately $11–13 million in 2014. Management expects this to be offset by incremental revenue and lower promotional and advertising expense, but those offsets are not assured.
- The prior-year comparison includes a $2.0 million Shop Your Way redemption credit in revenue; following separation, redemption costs are paid to Sears Holdings. The filing cautions that historical combined results and allocated Sears costs may not represent future standalone performance.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects operating cash flow and the ABL facility to fund capital and operating needs; planned 2014 capital expenditures are approximately $25–30 million. The business is seasonal, with about 34% of historical annual sales in the fourth quarter.
- The term loan matures in 2021, has a 1% annual amortization rate, and may require excess-cash-flow prepayments. Its stated interest rate was 4.25% at May 2, 2014. A minimum fixed-charge coverage test applies if revolver availability falls below specified thresholds; the company reported covenant compliance.
- Risks include dependence on Sears for store operations and transition services, the performance of Sears stores, standalone execution and costs, inventory and promotional risk, seasonality, customer demand, technology and data security, sourcing and delivery, and variable-rate debt exposure.
- Outstanding Dodgeville property-tax assessment claims could yield an aggregate recovery of $3.3 million or more; none was recorded. Management said it did not expect current legal proceedings to materially adversely affect the company. Gross unrecognized tax benefits were $8.8 million.
Most important facts for investors to verify
- Whether Direct-channel growth and gross-margin gains continue, and whether Retail margin pressure from clearance and loyalty-program costs eases.
- Actual standalone, Shop Your Way, IT separation, and debt-service costs versus management’s estimates, and whether anticipated offsets materialize.
- Debt, cash generation, revolver availability, covenant headroom, and the effects of seasonal inventory needs and variable interest rates.
- Continued access to Sears stores, services, and customer-facing support, plus the status and potential recovery from the unrecorded tax claims.