Lands’ End, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 1, 2015 (the company’s first quarter of fiscal 2015), compared principally with the 13 weeks ended May 2, 2014. Although the request metadata identifies 2014 Q1, the filing itself is for 2015 Q1. The prior-year period is not fully comparable: Lands’ End separated from Sears Holdings on April 4, 2014, so the statements present combined results before separation and consolidated results afterward.
Business context and key financial metrics
Lands’ End is a multichannel retailer of apparel, accessories, footwear and home products, selling through Direct channels (e-commerce and catalogs) and Retail locations, including Lands’ End Shops at Sears. Dollar amounts below are in U.S. dollars.
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales and services | $299.4 million | $330.5 million |
| Gross profit / gross margin | $146.6 million / 49.0% | $162.0 million / 49.0% |
| Operating income / operating margin | $8.5 million / 2.8% | $18.8 million / 5.7% |
| Net income / diluted EPS | $1.7 million / $0.05 | $10.9 million / $0.34 |
| Adjusted EBITDA | $13.1 million | $23.8 million |
| Operating cash flow | $(31.5) million | $31.4 million |
| Capital expenditures | $11.0 million | $1.5 million |
Selling and administrative expense was $133.5 million, or 44.6% of sales, versus $138.2 million, or 41.8%. Interest expense was $6.2 million versus $1.9 million. Income tax expense was $1.1 million versus $6.1 million; effective tax rates were 38.8% and 36.1%, respectively.
At May 1, 2015, cash and cash equivalents were $177.8 million, inventory was $284.6 million, and current assets and current liabilities were $542.4 million and $195.5 million. Total assets were $1.308 billion. Debt was $509.9 million, including $5.2 million of current maturities; long-term debt was reported at $504.7 million. The $175 million asset-based revolving facility was undrawn apart from letters of credit; borrowing availability, net of $19.2 million of letters of credit, was $155.8 million. The company reported compliance with its financial covenants.
Material changes versus the prior comparable period
- Sales declined $31.1 million, or 9%. Direct sales fell 8% to $253.4 million; management attributed much of the international decline to currency effects, including an estimated $9 million negative sales impact. U.S. Direct sales also declined at a low-single-digit rate, with an estimated $2 million impact from West Coast port delays.
- Retail sales fell 16% to $46.0 million. Same-store sales declined 12.1%, and Lands’ End Shops at Sears decreased to 235 from 251 year over year. Retail segment sales also reflected fewer shops.
- Gross margin held at 49.0%, but lower sales reduced gross profit. Operating margin declined to 2.8% as selling and administrative costs rose as a share of sales. Net income fell to $1.7 million and Adjusted EBITDA to $13.1 million.
- Interest expense increased partly because Q1 FY2015 included two additional months of interest expense compared with Q1 FY2014, as well as higher debt levels and costs associated with the term loan.
- Operating cash flow shifted from $31.4 million provided to $31.5 million used. Management cited the effects of items settled through Sears Holdings before separation, lower net income and working-capital effects. Cash decreased $43.6 million during the quarter.
Outlook, commentary, risks and unusual items
- Management expects cash on hand, operating cash flow and ABL availability to be adequate for capital requirements and operating needs over the next 12 months. It planned approximately $35 million of capital expenditures for fiscal 2015, primarily for ERP, other technology and infrastructure investments. No specific revenue or earnings guidance is provided in the filing.
- The business is seasonal: historically, approximately 34% of sales occurred in the fourth fiscal quarter. Working capital typically rises during Q3 as inventory is built and cash generation is generally strongest in Q4.
- Sears Holdings’ store and real-estate plans create uncertainty for the Retail segment. Lands’ End said approximately 77 Sears stores containing Lands’ End Shops had been or were intended to be sold and leased back; the impact was unknown. Sears may also close stores or offer less attractive relocation premises.
- Management announced a multidimensional strategy spanning product and merchandising, branding and marketing, operations and technology, distribution channels, and talent. The filing cautions that success is not assured.
- The term loan matures in 2021 and the ABL facility in 2019. Both facilities have variable-rate exposure. A one-percentage-point rate change would affect annual cash interest by approximately $0.9 million on the term loan; the filing estimates $1.8 million if the ABL were fully drawn.
- The company disclosed ordinary-course legal proceedings that management did not expect to materially affect the business. Separately, it estimated a possible additional $2.8 million to $4.6 million recovery in its Dodgeville property-tax dispute; this amount was not recorded. The filing states that pending claims and their outcomes remain uncertain.
- Gross unrecognized tax benefits were $9.0 million, including $8.7 million of pre-separation positions for which Sears Holdings was generally responsible under the tax-sharing agreement; the company recorded an indemnification asset. Management did not expect UTBs to fluctuate over the next 12 months due to settlements or statute expirations.
Important facts for investors to verify
- Whether Direct and Retail sales trends, particularly the 12.1% Retail same-store sales decline, improved after quarter-end.
- The effect of Sears store closures, sales and leasebacks, and possible relocations on Lands’ End Shops and Retail results.
- Whether the planned ERP and other technology investments stay within the approximately $35 million fiscal-year capital expenditure plan and deliver expected benefits.
- How cash generation, inventory and liquidity evolve through the seasonal build and peak-selling periods, and whether ABL availability remains adequate.
- Debt-service and interest-rate exposure, including compliance with facility terms if ABL availability falls below the specified threshold.
- The outcome and timing of the unrecorded Dodgeville tax recovery claim, tax matters covered by the Sears Holdings indemnity, and any material legal developments.