Lands’ End, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2020, ended October 30, 2020. The filing’s comparable periods ended November 1, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and results
Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products, operating through eCommerce, Outfitters and Retail. COVID-19 materially affected its business: eCommerce demand rebounded and remained strong, while Outfitters and Retail continued to be pressured. All U.S. stores had reopened by October 30, 2020.
| Metric | Q3 2020 | Q3 2019 | Year to date 2020 | Year to date 2019 |
|---|---|---|---|---|
| Revenue | $360.0 | $340.0 | $889.1 | $900.7 |
| Gross profit / margin | $163.5 / 45.4% | $154.2 / 45.3% | $393.0 / 44.2% | $403.1 / 44.8% |
| Operating income | $18.7 | $10.9 | $5.2 | $5.6 |
| Net income (loss) | $7.2 | $3.6 | $(9.1) | $(6.2) |
| Diluted earnings (loss) per share | $0.22 | $0.11 | $(0.28) | $(0.19) |
| Adjusted EBITDA (non-GAAP) | $28.6 | $18.8 | $40.9 | $28.6 |
Performance and material changes
- Q3 revenue rose 5.9%, led by eCommerce, up 19.6% to $289.8 million. Outfitters revenue fell 25.6% to $62.0 million and Retail fell 43.0% to $8.2 million.
- Q3 gross margin increased 10 basis points; management cited improved promotions and analytics, partly offset by higher shipping costs and sales mix. Selling and administrative expense declined $0.5 million, and fell to 37.5% of revenue from 39.8%, reflecting cost controls.
- For the first 39 weeks, revenue declined 1.3%. eCommerce increased 10.7%, while Outfitters declined 31.6% and Retail declined 58.1%. Gross margin decreased 60 basis points. Lower selling and administrative expense helped keep operating income near the prior-year level, but the company’s net loss widened.
- Year-to-date cash flow from operations was negative $26.1 million, compared with negative $125.0 million in 2019. Investing cash outflow was $25.6 million; financing provided $30.8 million. Cash, cash equivalents and restricted cash totaled $58.3 million at period-end.
Debt, liquidity and unusual items
- In September 2020, the company refinanced its prior term loan with a $275 million term loan due in 2025 and drew $125 million under its amended ABL facility. At October 30, total borrowings were $430 million gross: $275 million term debt and $155 million ABL borrowings. The term loan rate was 10.75%; the reported ABL rate was 2.27%.
- ABL borrowing availability was $104.7 million after outstanding borrowings and letters of credit. Cash and cash equivalents were $56.1 million. The company reported compliance with its debt covenants and said cash, operating cash flows and ABL availability were expected to cover needs for at least 12 months.
- The new term loan includes leverage and minimum-liquidity tests, capital expenditure limits, restrictions on certain transactions and mandatory prepayment provisions. The ABL facility includes a $75 million cash cap when borrowings reach specified levels.
- Year-to-date other operating expense included approximately $3.0 million of severance related to a 10% corporate staff reduction and a $3.3 million goodwill impairment for Japan eCommerce. Adjusted EBITDA also excluded long-lived asset impairment; the filing reports $3.844 million of combined goodwill and long-lived asset impairment adjustments.
Outlook, risks and contingencies
Management said the pandemic’s duration, severity and effects on demand, the economy and consumer preferences remain uncertain, and that future supply-chain disruption is possible though none had been significant to date. The company cited fourth-quarter seasonality: historically, a significant share of annual revenue and earnings is generated in that quarter. It provided no specific revenue or earnings guidance in the supplied filing text.
Potential additional goodwill or trade-name impairment was identified as a risk if pandemic conditions worsen. Other key risks include variable-rate debt, substantial debt service, covenant compliance and limited financial flexibility. The company is defending consolidated class-action litigation alleging health events and property damage related to uniforms; management considers the action without merit, but the filing says outcomes and potential losses cannot currently be estimated. Management did not expect resolution of pending legal matters, taken as a whole, to materially harm results, cash flows or financial position.
Important facts for investors to verify
- Whether strong eCommerce demand can offset continued weakness in Outfitters and Retail, particularly as pandemic conditions and consumer behavior change.
- Fourth-quarter sales, margins, inventory conversion and operating cash flow, given the business’s seasonal reliance on that quarter.
- Debt liquidity and covenant headroom under the 10.75% term loan and ABL facility, including the effect of variable rates and required repayments.
- Whether further goodwill or trade-name impairments, supply-chain disruptions, or material litigation developments arise.
- The composition and usefulness of Adjusted EBITDA, a non-GAAP measure that excludes specified items and may not be comparable across companies.