Lands’ End, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended May 4, 2018, compared with the 13 weeks ended April 28, 2017. The request metadata says 2017 Q1, but the supplied filing is for 2018 Q1.
Business context and results
Lands’ End is a multi-channel retailer of apparel, accessories, footwear and home products, operating through its Direct segment (e-commerce and catalogs) and Retail segment. Results are seasonal, with management noting that historically about 35% of annual revenue is generated in the fourth fiscal quarter.
- Revenue increased 11.7% to $299.8 million from $268.4 million. Direct revenue rose 19.7% to $273.4 million, while Retail revenue fell 34.0% to $26.5 million.
- Gross profit increased to $133.0 million from $122.6 million, but gross margin declined to 44.4% from 45.7%.
- Operating income was $2.5 million, versus an operating loss of $6.7 million. Net loss narrowed to $2.6 million, or $0.08 per diluted share, from $7.8 million, or $0.24 per diluted share.
- Adjusted EBITDA, a non-GAAP measure, was $9.0 million versus $1.3 million.
- Direct growth reflected the Delta airline business and U.S. consumer sales. Direct margin declined amid the lower-margin Delta business and increased promotions. Retail same-store sales declined 18.9%; Lands’ End Shops at Sears were down 20.4% and company-operated stores down 9.9%.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $41.2 million, compared with negative $60.3 million. Investing cash outflow was $10.7 million, primarily for technology and property/equipment. Financing cash outflow was $1.9 million, mainly term-loan payments.
- Cash and cash equivalents were $141.6 million at May 4, 2018, down from $195.6 million at February 2, 2018; restricted cash was $2.1 million. The quarter-end total of cash, cash equivalents and restricted cash was $143.7 million.
- Inventory was $304.5 million, versus $332.3 million at fiscal year-end. Current assets were $538.4 million and current liabilities $193.0 million.
- Long-term debt, net, was $485.3 million; term-loan principal was $494.4 million at a 5.13% rate. The $175 million ABL facility was undrawn except for $15.5 million of letters of credit, leaving reported availability of $159.5 million.
- Management said cash on hand, operating cash flows and ABL availability were expected to meet capital and operating needs for at least 12 months. Planned fiscal 2018 capital expenditures were approximately $35 million to $45 million.
Changes, outlook and risks
- Selling and administrative expense rose to $124.0 million, but declined as a share of revenue to 41.4% from 45.2%, as higher Direct sales leveraged existing costs. Other operating expense declined to $0.3 million from $1.5 million, largely because the prior-year quarter included corporate-transition severance and contract charges.
- Interest expense increased to $6.9 million from $6.1 million. Other expense was $3.9 million, compared with other income of $0.7 million, primarily reflecting reversal of uncertain tax positions and accrued interest following favorable state tax audit settlements. The tax benefit was $5.6 million; the effective tax rate was 68.1%, versus 35.2%.
- The company adopted new revenue-recognition guidance using the modified retrospective method; management said it did not materially affect revenue or operating results. Balance-sheet presentation for product returns changed, and adoption included a $1.1 million cumulative adjustment related to gift-card breakage.
- Debt bears variable interest rates. A one-percentage-point rate change on the term loan would change annual cash interest by approximately $4.9 million. The ABL fixed-charge coverage test applies if availability falls below specified thresholds; the company reported compliance with covenants.
- Management identified ordinary-course legal proceedings but could not estimate potential losses; it did not expect their resolution to materially adversely affect the company. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether Direct-segment growth, including Delta-related business, can continue without further margin pressure.
- Whether Retail sales declines and Sears-store contraction continue, and the effect on store economics.
- Cash generation, seasonal working-capital needs, planned capital spending and remaining ABL availability.
- Debt-service exposure to variable rates, covenant headroom and the April 2021 term-loan maturity.
- Effects of tax-audit settlements and remaining tax uncertainties, and any developments in legal proceedings or Sears-related arrangements.