Lands’ End, Inc. — Form 10-Q Summary
Period discrepancy: The request identifies “2019 Q2,” but the supplied filing is for the 13 and 26 weeks ended July 31, 2020, with comparisons to periods ended August 2, 2019.
Business context and reporting period
Lands’ End is a multichannel retailer of clothing, accessories, footwear and home products, operating through eCommerce, Outfitters and Retail. The filing reports second-quarter and year-to-date fiscal 2020 results. COVID-19 materially affected demand and operations; interim results may not indicate full-year performance.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenue | $312.1m | $298.3m | $529.1m | $560.7m |
| Gross profit / margin | $135.4m / 43.4% | $129.1m / 43.3% | $229.6m / 43.4% | $249.0m / 44.4% |
| Operating income (loss) | $11.2m | ($0.6m) | ($13.5m) | ($5.3m) |
| Net income (loss) | $4.4m | ($3.0m) | ($16.3m) | ($9.8m) |
| Diluted earnings (loss) per share | $0.13 | ($0.09) | ($0.50) | ($0.30) |
| Adjusted EBITDA (non-GAAP) | $23.9m | $6.8m | $12.3m | $9.9m |
Q2 selling and administrative expense was $111.5m, or 35.7% of revenue, versus $122.3m, or 41.0%, a year earlier. YTD operating cash flow was $8.0m versus $17.0m; capital expenditures were $19.8m versus $24.8m. Cash, cash equivalents and restricted cash totaled $64.5m at July 31, including $62.6m of unrestricted cash.
At July 31, total debt principal was $382.8m and long-term debt net of issuance costs was $381.9m. The company reported no ABL borrowings and $188.0m of availability under the then-current facility, after $12.0m of letters of credit. Inventory was $441.5m, up from $375.7m at January 31, 2020. Current assets were $578.4m and current liabilities $307.3m.
Material changes versus comparable periods
- Q2 revenue rose 4.6%, driven by eCommerce growth of 23.6% to $270.2m. Outfitters revenue fell 42.8% to $37.4m and Retail fell 68.5% to $4.5m.
- YTD revenue declined 5.6%. eCommerce grew 5.7%, while Outfitters fell 36.2% and Retail fell 67.0%.
- Q2 gross margin edged up about 10 basis points; YTD margin declined about 100 basis points, reflecting promotional activity and seasonal inventory liquidation.
- Q2 operating results improved to income, supported by lower selling and administrative expense and higher eCommerce revenue. YTD net loss widened, with lower revenue and additional impairment and restructuring charges.
- YTD interest expense declined to $10.2m from $14.1m, reflecting lower rates and the prior-year $100m voluntary term-loan prepayment.
Outlook, risks and unusual items
- COVID-19: All 26 U.S. stores temporarily closed in March and reopened during Q2; four stores opened in Q2. Management said eCommerce demand rebounded, but Outfitters and Retail remained pressured. The duration and economic effects of the pandemic, consumer demand and potential supply-chain disruption remain uncertain.
- Cost actions: The company reduced salaries, furloughed staff, eliminated merit increases, suspended its 401(k) match and cut discretionary spending. It permanently reduced corporate staff by about 10%; related severance was approximately $3.0m, with $1.2m unpaid at July 31.
- Impairment: In Q1, the company recorded a $3.3m impairment of Japan eCommerce goodwill and a $0.5m long-lived-asset impairment. Management warned that further goodwill or trade-name impairment could occur if pandemic conditions worsen.
- Refinancing after quarter-end: On September 9, 2020, the company refinanced the maturing term loan with a new $275m term loan and $125m of ABL borrowings, repaying the prior term loan and financing costs. The new term loan matures in 2025, amortizes 1.25% quarterly and bears interest at adjusted LIBOR plus 9.75% (1% floor) or base rate plus 8.75%; a 3% upfront fee was paid. The amended ABL facility increased maximum commitments to $275m and added financial covenants and a cash-maintenance restriction. Management concluded the refinancing provided sufficient liquidity for at least 12 months after issuance and removed the previously disclosed substantial-doubt conclusion about going concern.
- Other exposures: The company is defending consolidated class-action litigation alleging health events and property damage related to uniforms it supplied to Delta employees. Management could not estimate a potential loss but believes resolution should not materially affect the company. The filing also notes ordinary-course legal matters and foreign-currency and variable-rate interest exposure.
- Guidance: The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management said it could not reasonably estimate the pandemic’s duration or ultimate business impact, while expressing belief that the company could emerge positioned for long-term growth.
Most important facts for investors to verify
- Actual post-refinancing debt balances, borrowing costs, liquidity and compliance with the new term-loan covenants and ABL cash restriction.
- Whether eCommerce growth continues and Outfitters and Retail recover, particularly as store conditions and consumer demand change.
- Inventory levels, cash conversion and operating cash flow, given higher inventory and weaker YTD operating cash generation.
- Whether pandemic-related conditions lead to additional impairment, restructuring costs or supply-chain disruption.
- Developments in the Delta uniform litigation and any other contingencies; the filing does not provide a clear estimate of potential loss.