Business context and reporting period
Lands’ End, Inc. is a multi-channel apparel, accessories, footwear and home-products retailer, selling through direct mail and e-commerce (Direct) and retail stores (Retail). This 10-K covers fiscal 2014, the 52 weeks ended January 30, 2015; fiscal 2013 was also 52 weeks. Although the request metadata refers to “2013 Q4,” the filing is an annual report for fiscal 2014 and includes unaudited quarterly data. The company separated from Sears Holdings on April 4, 2014, so fiscal 2014 combines pre-separation results with results as an independent public company; historical comparisons may not represent stand-alone costs.
Financial performance and liquidity
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Revenue | $1,555.4 million | $1,562.9 million |
| Gross profit / margin | $735.9 million / 47.3% | $710.3 million / 45.5% |
| Operating income / margin | $139.6 million / 9.0% | $128.3 million / 8.2% |
| Net income / diluted EPS | $73.8 million / $2.31 | $78.8 million / $2.47 |
| Adjusted EBITDA | $164.3 million | $150.0 million |
| Operating cash flow | $211.1 million | $114.9 million |
Revenue declined 0.5%. Direct revenue rose 1% to $1,320.6 million, while Retail revenue fell 9% to $234.6 million; Retail same-store sales decreased 2%. Gross margin improved 180 basis points, reflecting better merchandise assortment and more targeted promotions. Selling and administrative expense rose to $573.3 million, or 36.9% of revenue, from 35.9%. Operating income increased 9%, but net income declined 6% as the company incurred $20.5 million of interest expense after the separation.
Cash and cash equivalents were $221.5 million at year-end, compared with $22.4 million a year earlier. Total term-loan debt was $511.1 million, including $5.2 million due within one year. The $175 million asset-based revolving facility was undrawn, apart from letters of credit; reported availability was $159.5 million. Total assets were $1,353.4 million and stockholders’ equity was $404.2 million. Management said cash, operating cash flow and the ABL facility should meet capital and operating needs for the next 12 months.
Material changes, outlook and risks
- The separation introduced stand-alone public-company and financing costs. Fiscal 2014 included $8.5 million of stand-alone costs for the ten months after separation. A $515 million term loan funded a $500 million dividend to a Sears Holdings subsidiary immediately before separation, plus fees and other uses.
- Fiscal 2014 operating cash flow increased substantially, with management citing improved inventory management and changes in settlement arrangements after separation. Inventory was $301.4 million, down from $369.9 million.
- The filing does not provide specific fiscal 2015 revenue or earnings guidance. Management expected approximately $35 million of fiscal 2015 capital expenditures, principally for technology and infrastructure.
- A recall of selected children’s sleepwear that did not meet federal flammability standards reduced fiscal 2014 revenue by $3.4 million, operating income by $4.7 million and net income by $2.8 million. The filing anticipated additional fiscal 2015 recall costs, which management did not expect to be material.
- Key risks include reliance on Sears stores and services, potential store closures or relocations, execution of the planned ERP and other technology upgrades, seasonal demand and inventory risk, vendor and sourcing concentration, competition and foreign-exchange exposure. Sears Holdings’ retail strategy could affect Lands’ End Shops at Sears; the effect of planned Sears real-estate transactions was uncertain.
- The company disclosed unresolved Dodgeville property-tax claims with a potential additional recovery of $2.8 million to $4.0 million, none recorded. Management did not believe existing legal proceedings would materially affect the company overall. The auditor reported effective internal control over financial reporting.
- CEO Federica Marchionni joined in February 2015. ESL beneficially owned 48.6% of the company’s shares according to an April 2014 filing. No dividends were expected for the foreseeable future.
Important facts for investors to verify
- How Direct-channel growth and Retail declines, including Sears-related store exposure, have developed since fiscal 2014.
- Current debt, cash, ABL availability, covenant compliance and interest-rate exposure; the term loan carries a variable rate.
- Whether reported margin gains and inventory improvements persisted after fiscal 2014, and how promotional activity affected margins.
- Actual fiscal 2015 spending and financial results, including ERP implementation costs and the final cost of the sleepwear recall.
- Terms and financial effects of ongoing Sears Holdings arrangements, related-party balances, and the unrecorded property-tax recovery claims.