Lands’ End, Inc. — Form 10-Q Summary
Reporting period: 13 and 26 weeks ended July 29, 2022. The filing compares results with the periods ended July 30, 2021; the “2021 Q2” period label in the request does not match the filing’s reporting period.
Business context and financial results
Lands’ End sells apparel, accessories, footwear and home products through eCommerce, Outfitters, third-party marketplaces and company-operated retail stores. It reports one external segment.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $351.2 million | $384.1 million | $654.8 million | $705.4 million |
| Gross profit / margin | $144.0 million / 41.0% | $177.8 million / 46.3% | $273.2 million / 41.7% | $325.5 million / 46.1% |
| Operating income | $5.5 million | $31.3 million | $9.4 million | $43.2 million |
| Net income (loss) | $(2.2) million | $16.2 million | $(4.6) million | $18.9 million |
| Diluted EPS | $(0.07) | $0.48 | $(0.14) | $0.56 |
| Adjusted EBITDA | $15.8 million | $41.4 million | $29.6 million | $63.9 million |
Q2 selling and administrative expense was $128.6 million, or 36.6% of revenue, versus $136.6 million, or 35.6%, a year earlier. Interest expense was $8.8 million in Q2 and $17.0 million for the first half. Adjusted EBITDA is a non-GAAP measure and the company cautions that it should not be used alone to make investment decisions.
Material changes and operating drivers
- Q2 revenue declined 8.6%; first-half revenue declined 7.2%. Management attributed lower U.S. and international eCommerce sales chiefly to delayed product receipts amid supply-chain and macroeconomic challenges.
- Q2 U.S. eCommerce revenue fell 14.4% and International fell 23.9%. Outfitters rose 7.7%, supported by school uniform and national-account demand; Third Party rose 42.9%, led by marketplace growth. Retail revenue declined 2.8%; comparable-store sales fell 0.9% in Q2.
- Gross margin fell about 530 basis points in Q2. Management cited $11.7 million of incremental transportation costs, increased promotions and sales mix from Third Party growth. First-half incremental transportation costs were $26.1 million.
- Operating income and Adjusted EBITDA fell substantially year over year as lower gross profit outweighed lower selling and administrative expense.
Cash flow, liquidity and debt
- First-half operating cash flow was $(117.5) million, versus $30.5 million provided in the prior-year period. The company cited lower earnings, inventory investment and changes in other current liabilities. Inventory was $569.2 million at July 29, versus $384.2 million at fiscal year-end and $464.3 million a year earlier.
- Investing cash outflow was $14.8 million, primarily for digital technology infrastructure. Fiscal 2022 capital expenditures were expected to be approximately $37 million.
- Financing cash inflow was $121.5 million, reflecting increased ABL borrowing. Cash and cash equivalents were $23.5 million; restricted cash was $2.1 million. The company reported $25.6 million in combined cash, cash equivalents and restricted cash at period-end.
- ABL borrowings were $135.0 million; the $275 million facility had $126.2 million of borrowing availability, subject to the borrowing-base/loan-cap provisions. Letters of credit totaled $13.8 million. Term Loan Facility principal was $250.9 million, at a disclosed 12.12% rate; its carrying amount, net of current portion and issuance costs, was $228.9 million.
- The company said cash on hand, operating cash flow and ABL availability should meet capital and operating needs for at least 12 months. It was in compliance with debt covenants at July 29, 2022. Term Loan maturity is September 2025; ABL maturity is generally July 2026, but may move to June 2025 if the term loan has not been refinanced, extended or repaid as specified.
Outlook, risks and unusual items
- Management expected supply-chain disruption, elevated transportation and distribution costs, and inflationary pressures to continue through the rest of Fiscal 2022. No specific sales, earnings or margin guidance is provided in the supplied filing text.
- Management noted that inflation could pressure discretionary consumer demand and increase costs for materials, labor, energy and distribution. Seasonal working-capital needs typically rise in the second and third quarters; a significant portion of annual revenue and operating cash flow is generally generated in the fourth quarter.
- In July 2022, the board approved a wind-down of Lands’ End Japan KK. The company said the closure was not a strategic shift with a major consolidated effect and did not expect associated costs to be material, though costs could not yet be estimated.
- The company authorized up to $50 million of share repurchases through February 2, 2024. It repurchased and retired approximately 212,000 shares in Q2 for $2.4 million, at an average $11.10 per share; $47.6 million remained authorized.
- On August 16, 2022, the Inflation Reduction Act was signed into law, including a corporate minimum tax and a 1% excise tax on stock buybacks. The company was assessing potential effects.
- In the consolidated Wisconsin uniform litigation, the court granted summary judgment for the company on personal-injury claims and excluded plaintiffs’ expert opinions. Property-damage and warranty claims remained; the company said it would continue to defend the cases. It could not estimate potential losses for its broader ordinary-course legal matters.
Important facts for investors to verify
- Whether delayed product receipts, inventory levels and supply-chain costs normalize, and how they affect holiday-season sales, margins and cash conversion.
- Current borrowing-base availability, covenant headroom, variable-rate debt costs and the term-loan/ABL maturity interaction.
- The progress and cost of the Japan wind-down, and any resulting impairment or other charges.
- Developments in the uniform-related lawsuits and the financial impact, if any, of the Inflation Reduction Act.
- Actual capital spending and repurchase activity versus the stated plans, alongside the company’s seasonal liquidity needs.