Lands’ End, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 31, 2015, compared with the periods ended August 1, 2014. The request metadata says “2014 Q2,” but the filing itself is for the second quarter of 2015.
Business context
Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products, selling through direct channels (websites and catalogs) and retail locations. Sears Holdings distributed the company to its shareholders in April 2014; accordingly, prior-year statements include pre-separation combined results, which may not be fully comparable with post-separation results.
Financial performance
| Metric | Q2 2015 | Q2 2014 | 26 weeks 2015 | 26 weeks 2014 |
|---|---|---|---|---|
| Revenue | $312.4 million | $347.2 million | $611.8 million | $677.7 million |
| Gross profit / margin | $144.5 million / 46.3% | $168.4 million / 48.5% | $291.1 million / 47.6% | $330.4 million / 48.8% |
| Operating income | $17.9 million | $25.3 million | $26.4 million | $44.1 million |
| Net income | $7.5 million | $11.8 million | $9.2 million | $22.7 million |
| Diluted EPS | $0.23 | $0.37 | $0.29 | $0.71 |
| Adjusted EBITDA | $19.6 million | $30.1 million | $32.7 million | $53.9 million |
For the quarter, revenue declined 10%; Direct revenue fell 10% and Retail revenue fell 12.9%. Same-store sales declined 7.5% in the quarter and 10% year to date. For the first half, revenue declined 10% and Adjusted EBITDA declined 39%. Selling and administrative expense fell in dollars, but rose as a share of first-half revenue to 42.2% from 40.8%. Adjusted EBITDA is a non-GAAP measure.
Management attributed weaker sales to customer response to the Spring/Summer assortment and a reduced promotional approach falling short of the prior year. Currency movements reduced reported international revenue by $8.2 million in the quarter and $17.1 million year to date. Gross margin was pressured by currency, competition, merchandise margin and air-freight costs from West Coast port congestion; the port disruption was described as resolved.
Cash flow, debt and liquidity
- First-half operating cash flow was $3.4 million, down from $105.2 million in the prior-year period. Management cited increased inventory purchases, lower operating income and prior-year cash-flow effects from transactions with Sears Holdings.
- Cash and cash equivalents were $208.4 million at July 31, 2015, versus $221.5 million at January 30, 2015. First-half capital expenditures were $13.5 million.
- Total term-loan debt was $508.6 million, including $5.2 million current maturities; the stated rate was 4.25%. The ABL facility was undrawn, with $163.7 million available after letters of credit.
- The company reported compliance with debt covenants. A minimum fixed-charge coverage test applies if ABL availability falls below specified thresholds. Management stated cash, operating cash flows and ABL availability should meet operating and capital needs for the next 12 months.
- Planned fiscal 2015 capital expenditures were approximately $25 million to $30 million, primarily for ERP, technology and infrastructure investments.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management described initiatives to strengthen products, marketing, the Direct shopping experience and international business, while cautioning that customer acceptance and results are uncertain.
- The Sears relationship is a material business risk: 229 Lands’ End Shops operated within Sears stores at quarter-end, down from 247 a year earlier. Sears’ Seritage transaction and potential store closures, space recapture or less attractive relocations could adversely affect the Retail business.
- A children’s sleepwear recall resulted in a $4.7 million accrual in fiscal 2014. The company reversed $2.4 million in Q2 2015 because returns were below estimates; $0.8 million remained accrued. The reversal increased Q2 net income by $1.4 million after tax and EPS by $0.05.
- Potential additional property-tax recoveries from Dodgeville were estimated at $2.8 million to $4.6 million and were not recorded. Litigation outcomes and potential losses were not clearly estimable; management did not expect current proceedings to materially affect the company overall.
- The trade name’s estimated fair value exceeded carrying value by 12% at the latest annual impairment test. Management warned that continued revenue declines could reduce forecast value and increase impairment risk.
- Other exposures include seasonal sales concentration (about 34% of annual sales historically in Q4), currency and variable-rate interest exposure, execution of the ERP program, and ongoing dependence on Sears services and store locations.
Most important facts for investors to verify
- Whether sales trends, same-store sales and margins stabilize, and whether the product and marketing initiatives improve customer response.
- Inventory levels and operating cash flow, given the first-half cash-flow decline and inventory build.
- Debt service capacity, ABL availability and covenant headroom if operating performance weakens.
- The effect of Sears store closures, Seritage-related rights and changes to Lands’ End Shops at Sears.
- Recall accrual adequacy, unresolved property-tax claims and the sensitivity of the trade-name valuation to further revenue declines.
- Comparability of the prior-year results, which include pre-separation combined financial statements.