Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended August 3, 2018
-OR-
¨
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to                      to                     .
Commission File Number: 001-09769

Lands’ End, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
36-2512786
(State or Other Jurisdiction of
Incorporation of Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1 Lands’ End Lane
Dodgeville, Wisconsin
 
53595
(Address of Principal Executive Offices)
 
(Zip Code)
(608) 935-9341
(Registrant’s Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
Large accelerated filer
 
¨
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
¨
 
 
 
 
 
Emerging growth company
 
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x
As of September 4, 2018 the registrant had 32,212,290 shares of common stock, $0.01 par value, outstanding.



LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED AUGUST 3, 2018
TABLE OF CONTENTS
 
 
 
 
 
Page
 
 
 
 
 
 
PART I FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Operations
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
 
Controls and Procedures
 
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
 
 
 
 
Item 1A.
 
Risk Factors
 
 
 
 
 
 
Item 6.
 
Exhibits
 
 
 
 
 
 
 
 
Signatures
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDS’ END, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands, except per share data)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Net revenue
 
$
307,945


$
302,190

 
$
607,770

 
$
570,555

Cost of sales (excluding depreciation and amortization)
 
171,179

 
168,025

 
337,979

 
313,748

Gross profit
 
136,766

 
134,165

 
269,791

 
256,807

 
 
 
 
 
 
 
 
 
Selling and administrative
 
129,041

 
127,336

 
253,041

 
248,682

Depreciation and amortization
 
6,897


6,175

 
13,058

 
12,683

Other operating (income) expense, net
 
(47
)
 
480

 
290

 
1,988

Operating income (loss)
 
875

 
174

 
3,402

 
(6,546
)
Interest expense
 
7,001

 
6,167

 
13,913

 
12,292

Other (income) expense, net
 
(412
)
 
(494
)
 
3,452

 
(1,236
)
Loss before income taxes
 
(5,714
)
 
(5,499
)
 
(13,963
)
 
(17,602
)
Income tax benefit
 
(429
)
 
(1,619
)
 
(6,048
)
 
(5,883
)
NET LOSS
 
$
(5,285
)

$
(3,880
)
 
$
(7,915
)
 
$
(11,719
)
NET LOSS PER COMMON SHARE
 
 
 
 
 
 
 
 
Basic:
 
$
(0.16
)

$
(0.12
)
 
$
(0.25
)
 
$
(0.37
)
Diluted:
 
$
(0.16
)
 
$
(0.12
)
 
$
(0.25
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
32,212


32,079

 
32,168

 
32,054

Diluted weighted average common shares outstanding
 
32,212


32,079

 
32,168

 
32,054

 


See accompanying Notes to Condensed Consolidated Financial Statements.
1

Table of Contents

LANDS’ END, INC.
Condensed Consolidated Statements of Comprehensive Operations
(Unaudited)
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
NET LOSS
 
$
(5,285
)
 
$
(3,880
)
 
$
(7,915
)
 
$
(11,719
)
Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(1,540
)

622

 
(3,176
)
 
1,139

COMPREHENSIVE LOSS
 
$
(6,825
)
 
$
(3,258
)
 
$
(11,091
)
 
$
(10,580
)


See accompanying Notes to Condensed Consolidated Financial Statements.
2

Table of Contents

LANDS’ END, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
 
August 3, 2018
 
July 28, 2017
 
February 2, 2018
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
194,391


$
176,955

 
$
195,581

Restricted cash
 
1,953


3,300


2,356

Accounts receivable, net
 
25,925

 
24,632

 
49,860

Inventories, net
 
349,597

 
370,470

 
332,297

Prepaid expenses and other current assets
 
40,967

 
36,216

 
26,659

Total current assets
 
612,833

 
611,573

 
606,753

Property and equipment, net
 
142,261

 
126,825

 
136,501

Goodwill
 
110,000


110,000


110,000

Intangible asset, net
 
257,000


257,000


257,000

Other assets
 
8,349

 
17,007

 
13,881

TOTAL ASSETS
 
$
1,130,443


$
1,122,405


$
1,124,135

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Accounts payable
 
$
186,207

 
$
181,685

 
$
155,874

Other current liabilities
 
91,747

 
85,415

 
100,257

Total current liabilities
 
277,954

 
267,100

 
256,131

Long-term debt, net
 
484,350


488,146


486,248

Long-term deferred tax liabilities
 
58,420

 
91,015

 
59,137

Other liabilities
 
10,494

 
14,144

 
15,526

TOTAL LIABILITIES
 
831,218

 
860,405

 
817,042

Commitments and contingencies
 

 

 

STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Common stock, par value $0.01 authorized: 480,000,000 shares; issued and outstanding: 32,212,290, 32,087,532 and 32,101,793, respectively
 
320

 
320

 
320

Additional paid-in capital
 
349,338

 
345,139

 
347,175

Accumulated deficit
 
(36,665
)
 
(72,172
)
 
(29,810
)
Accumulated other comprehensive loss
 
(13,768
)

(11,287
)

(10,592
)
Total stockholders’ equity
 
299,225

 
262,000

 
307,093

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,130,443

 
$
1,122,405

 
$
1,124,135



See accompanying Notes to Condensed Consolidated Financial Statements.
3

Table of Contents

LANDS’ END, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net loss
 
$
(7,915
)
 
$
(11,719
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
13,058

 
12,683

Amortization of debt issuance costs
 
965

 
856

Loss on property and equipment
 
284

 
62

Stock-based compensation
 
2,696

 
1,800

Deferred income taxes
 
128

 
(88
)
Change in operating assets and liabilities:
 
 
 
 
Inventories
 
(20,223
)
 
(43,493
)
Accounts payable
 
33,678

 
22,434

Other operating assets
 
18,545

 
5,603

Other operating liabilities
 
(16,384
)
 
(1,333
)
Net cash provided by (used in) operating activities
 
24,832

 
(13,195
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Purchases of property and equipment
 
(22,203
)
 
(20,223
)
Net cash used in investing activities
 
(22,203
)

(20,223
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Payments on term loan facility
 
(2,575
)
 
(2,575
)
Payments of employee withholding taxes on share-based compensation
 
(533
)
 
(629
)
Net cash used in financing activities
 
(3,108
)
 
(3,204
)
Effects of exchange rate changes on cash, cash equivalents and restricted cash
 
(1,114
)
 
469

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
(1,593
)
 
(36,153
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD
 
197,937

 
216,408

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
 
$
196,344

 
$
180,255

SUPPLEMENTAL CASH FLOW DATA
 
 
 
 
Unpaid liability to acquire property and equipment
 
$
4,990

 
$
4,438

Income taxes paid, net of refunds
 
$
1,349

 
$
3,802

Interest paid
 
$
12,938

 
$
11,257


See accompanying Notes to Condensed Consolidated Financial Statements.
4

Table of Contents

LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business and Separation
Lands' End, Inc. ("Lands' End" or the "Company") is a leading multi-channel retailer of casual clothing, accessories, footwear and home products. We offer products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and seek to deliver timeless style for women, men, kids and the home.
Terms that are commonly used in the Company's notes to Condensed Consolidated Financial Statements are defined as follows:
• ABL Facilities - Collectively, the Prior ABL Facility and the Current ABL Facility
• Adjusted EBITDA - Net loss net of Income tax benefit, Other income, net, Interest expense, Depreciation and amortization and certain significant items
• ASC - FASB Accounting Standards Codification
• ASU - FASB Accounting Standards Update
• CAM - Common area maintenance for leased properties
• Company Operated stores - Lands' End retail stores
• Current ABL Facility - Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
• Debt Facilities - Collectively, the Current ABL Facility and the Term Loan Facility
• Deferred Awards - Time vesting stock awards
• EPS - Earnings (loss) per share
• ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
• FASB - Financial Accounting Standards Board
• First Quarter 2018 - The thirteen weeks ended May 4, 2018
• Fiscal 2018 - The fifty-two weeks ending February 1, 2019
• Fiscal 2020 - The fifty-two weeks ending January 29, 2021
• Fourth Quarter 2017 - The fourteen weeks ended February 2, 2018
• GAAP - Accounting principles generally accepted in the United States
• Lands' End Shops at Sears - Lands' End shops operated within Sears stores
• LIBOR - London inter-bank offered rate
• Option Awards - Stock option awards
• Performance Awards - Performance-based stock awards
• Prior ABL Facility - Asset-based senior secured credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders, terminated November 16, 2017

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Table of Contents

• Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries (other than, for all periods following the Separation, Lands' End)
• SEC - United States Securities and Exchange Commission
Second Quarter 2018 - The thirteen weeks ended August 3, 2018.
Second Quarter 2017 - The thirteen weeks ended July 28, 2017
Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
• SHMC - Sears Holdings Management Corporation, a subsidiary of Sears Holdings Corporation
• SYW - Shop Your Way member loyalty program
• Target Shares - Shares to be delivered to participants based on achievement of target performance metrics
• Tax Act - The Tax Cuts and Jobs Act passed by the United States government on December 22, 2017
• Tax Sharing Agreement - A tax sharing agreement entered into by Sears Holdings Corporation and Lands' End in connection with the Separation
• Term Loan Facility - Term loan credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
• UTBs - Gross unrecognized tax benefits
Year-to-Date 2018 - The twenty-six weeks ended August 3, 2018
Year-to-Date 2017 - The twenty-six weeks ended July 28, 2017
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Lands' End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected. Dollar amounts are reported in thousands, except per share data, unless otherwise noted. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Lands' End Annual Report on Form 10-K filed with the SEC on March 29, 2018.
Reclassifications
In the First Quarter 2018, the Company adopted ASU 2016-18, Restricted Cash, which changed the required presentation of Restricted cash on the Condensed Consolidated Statements of Cash Flows to include those amounts generally described as Restricted cash or restricted cash equivalents with Cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown. As a result of the adoption, the Company reclassified the amount of beginning-of-period cash, cash equivalents, and restricted cash presented in the Condensed Consolidated Statement of Cash Flows to include Restricted cash.

6


Table of Contents

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. In First Quarter 2018, the Company adopted the guidance using the modified retrospective method resulting in only those contracts that were open as of the date of adoption requiring assessment. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenue, gross margin or income from operations.
Revenues include sales of merchandise and delivery revenues related to merchandise sold. Substantially all of the Company's revenue is recognized when control of product passes to customers, which for the Direct segment is when the merchandise is expected to be received by the customer and for the Retail segment, is at the time of sale in the store. Revenues are adjusted for estimated returns and volume rebates with a corresponding liability recorded. Effective in the First Quarter 2018, the Company changed its balance sheet presentation for estimated product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet. Prior to adoption, product return assets were netted against deferred revenue and reported within Other current liabilities. The impact of the adoption was recorded as a non-cash transaction in other operating assets and other operating liabilities in the condensed consolidated statement of cash flows.The returns liability and payments received from customers for future delivery of products are reported within Other current liabilities in the Condensed Consolidated Balance Sheet. The adoption of this guidance did not have an impact on the recording of these liabilities.
The Company recorded a decrease to opening Accumulated deficit and Other current liabilities in the Condensed Consolidated Balance Sheet of $1.1 million due to the cumulative impact related to the accounting for gift card breakage.
The impact of adoption on the Condensed Consolidated Balance Sheet as of February 3, 2018 was:
(in thousands)
 
February 2, 2018(As reported)
 
Impact of Adoption
 
February 3, 2018
Assets:
 
 
 
 
 
 
   Prepaid expenses and other current assets
 
$
26,659

 
$
10,425

 
$
37,084

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
   Other current liabilities
 
100,257

 
9,365

 
109,622

 
 
 
 
 
 
 
Stockholders' Equity:
 
 
 
 
 
 
   Accumulated deficit
 
(29,810
)
 
1,060

 
(28,750
)


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Table of Contents

The impact of the new revenue recognition guidance on our Condensed Consolidated Balance Sheet as of August 3, 2018 was:
 
 
August 3, 2018
(in thousands)
 
Balances Without Adoption
 
Impact of Adoption
 
As Reported
Assets:
 
 
 
 
 
 
   Prepaid expenses and other current assets
 
$
31,757

 
$
9,210

 
$
40,967

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
   Other current liabilities
 
83,657

 
8,090

 
91,747

 
 
 
 
 
 
 
Stockholders' Equity:
 
 
 
 
 
 
   Accumulated deficit
 
(37,785
)
 
1,120

 
(36,665
)

See Note 12, Revenue for additional disclosures.
Recognition of Breakage for Certain Prepaid Stored-Value Products
In March 2016, the FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. This update clarifies when it is acceptable to recognize the unredeemed portion of prepaid gift cards into income. The Company has evaluated the impacts of this ASU and has identified a change in the timing of recognition of revenue from gift cards. The Company will recognize breakage income over the breakage period for the estimated portion of unredeemed gift cards that is unlikely to be redeemed where the Company does not have an obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. This guidance was adopted by the Company during First Quarter 2018 and resulted in a cumulative impact to be recognized as a reduction in Accumulated deficit and Other current liabilities of $1.1 million for estimated gift card breakage occurring prior to Fiscal 2018, under the modified retrospective approach described under the preceding Revenue from Contracts with Customers section.
Restricted Cash
In November 2016, the FASB issued ASU 2016-18, Restricted Cash. This ASU requires the inclusion of Restricted cash with Cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Condensed Consolidated Statement of Cash Flows. This guidance was adopted by the Company during First Quarter 2018. As a result of the adoption, the Company changed the presentation in its Condensed Consolidated Statements of Cash Flows for all periods presented.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases, which will replace the existing guidance in ASC 840, Leases. This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. This guidance will be effective for the Company in the first quarter of its fiscal year ending January 31, 2020. While it is expected that the standard will result in a material increase in the assets and liabilities recorded on the Company's Consolidated Balance Sheet, the Company is still evaluating the overall impact on the Company's Condensed Consolidated Financial Statements.

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Table of Contents

NOTE 3. LOSS PER SHARE
The numerator for both basic and diluted EPS is net loss. The denominator for basic EPS is based upon the number of weighted average shares of Lands’ End common stock outstanding during the reporting periods. The denominator for diluted EPS is based upon the number of weighted average shares of Lands' End common stock and common stock equivalents outstanding during the reporting periods using the treasury stock method in accordance with the ASC. Potentially dilutive securities for the diluted EPS calculations consist of nonvested equity shares of common stock and in-the-money outstanding stock options, if any, to purchase the Company’s common stock.
The following table summarizes the components of basic and diluted EPS:
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands, except per share amounts)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Net loss
 
$
(5,285
)
 
$
(3,880
)
 
$
(7,915
)
 
$
(11,719
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
32,212

 
32,079

 
32,168

 
32,054

Dilutive effect of stock awards
 

 

 

 

Diluted weighted average common shares outstanding
 
32,212

 
32,079

 
32,168

 
32,054

 
 
 
 
 
 
 
 
 
Basic loss per share
 
$
(0.16
)
 
$
(0.12
)
 
$
(0.25
)
 
$
(0.37
)
Diluted loss per share
 
$
(0.16
)
 
$
(0.12
)
 
$
(0.25
)
 
$
(0.37
)
Stock awards are considered anti-dilutive based on the application of the treasury stock method or in the event of a net loss. There were 440,906, 41,080, 454,433, and 69,239 anti-dilutive shares excluded from the diluted weighted average shares outstanding for Second Quarter 2018, Second Quarter 2017, Year-to-Date 2018, and Year-to-Date 2017, respectively.
NOTE 4. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income encompasses all changes in equity other than those arising from transactions with stockholders, and is comprised solely of foreign currency translation adjustments.
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Beginning balance: Accumulated other comprehensive loss (net of tax of $3,250, $6,189, $2,816 and $6,691, respectively)
 
$
(12,228
)
 
$
(11,909
)
 
$
(10,592
)
 
$
(12,426
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (net of tax of $410, $(135), $844, and $(637), respectively)
 
(1,540
)
 
622

 
(3,176
)
 
1,139

Ending balance: Accumulated other comprehensive loss (net of tax of $3,660, $6,054, $3,660, and $6,054, respectively)
 
$
(13,768
)
 
$
(11,287
)
 
$
(13,768
)
 
$
(11,287
)
No amounts were reclassified out of Accumulated other comprehensive loss during any of the periods presented.

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Table of Contents

NOTE 5. DEBT
The Company's debt consisted of the following:
 
 
August 3, 2018
 
July 28, 2017
 
February 2, 2018
(in thousands)
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
Term Loan Facility, maturing April 4, 2021
 
$
493,113

 
5.34
%
 
$
498,263

 
4.48
%
 
$
495,688

 
4.82
%
Current ABL Facility, maturing November 16, 2022(1)
 

 
%
 

 
%
 

 
%
 
 
493,113

 
 
 
498,263

 
 
 
495,688

 
 
Less: Current maturities in Other current liabilities
 
5,150

 
 
 
5,150

 
 
 
5,150

 
 
Less: Unamortized debt issuance costs
 
3,613

 
 
 
4,967

 
 
 
4,290

 
 
Long-term debt, net
 
$
484,350

 
 
 
$
488,146

 
 
 
$
486,248

 
 
(1) July 28, 2017 amounts pertain to Prior ABL Facility.

The following table summarizes the Company's borrowing availability under the ABL Facilities:
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
February 2, 2018
Current ABL Facility maximum borrowing(1)
 
$
175,000

 
$
175,000

 
$
175,000

Outstanding Letters of Credit(1)
 
14,862

 
10,362

 
22,328

Borrowing availability under ABL(1)
 
$
160,138

 
$
164,638

 
$
152,672

(1) July 28, 2017 amounts pertain to Prior ABL Facility.
Interest; Fees
The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL Facilities is subject to adjustment based on the average excess availability under the ABL Facilities for the preceding fiscal quarter. LIBOR borrowings will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.
Customary agency fees are payable pursuant to the terms of the Debt Facilities. The ABL Facilities fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of August 3, 2018.
The Debt Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances.

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Table of Contents

NOTE 6. STOCK-BASED COMPENSATION
The Company expenses the fair value of all stock awards over their respective vesting periods, ensuring that, the amount of cumulative compensation cost recognized at any date is at least equal to the portion of the grant-date value of the award that is vested at that date. The Company has elected to adjust compensation expense for an estimated forfeiture rate for those shares not expected to vest and to recognize compensation cost on a straight-line basis for awards that only have a service requirement with multiple vest dates.
The Company has granted the following types of stock awards to employees at management levels and above:
i.
Time vesting stock awards ("Deferred Awards") are in the form of restricted stock units and only require each recipient to complete a service period for the awards to be earned. Deferred Awards generally vest over three years. The fair value of Deferred Awards is based on the closing price of the Company's common stock on the grant date and is reduced for estimated forfeitures of those awards not expected to vest due to employee turnover.
ii.
Stock option awards ("Option Awards") provide the recipient with the option to purchase a set number of shares at a stated exercise price over the term of the contract, which is ten years for all Option Awards currently outstanding. Options are granted with a strike price equal to the stock price on the date of grant.
iii.
Performance-based stock awards ("Performance Awards") are in the form of restricted stock units and have, in addition to a service requirement, performance criteria that must be achieved for the awards to be earned. Performance Awards granted prior to Fiscal 2018 had annual vesting, but due to the performance criteria, were not eligible for straight-line expensing. All Performance Awards granted prior to Fiscal 2018 were forfeited during the period. For Performance Awards granted in Fiscal 2018, the Target Shares earned can range from 0% to 200% and depend on the achievement of Adjusted EBITDA and revenue performance measures for the cumulative three-fiscal year performance period from Fiscal 2018 to Fiscal 2020. The applicable percentage of the Target Shares, as determined by performance, vest after the completion of the applicable three year performance period, and unearned Target Shares are forfeited. The fair value of the Performance Awards granted in Fiscal 2018 is based on the closing price of the Company’s common stock on the grant date. Stock-based compensation expense is recognized ratably over the related service period reduced for estimated forfeitures of those awards not expected to vest due to employee turnover and adjusted based on the Company's estimate of the percentage of the aggregate Target Shares expected to be earned.
The following table provides a summary of the Company's stock-based compensation expense, which is included in Selling and administrative expense in the Condensed Consolidated Statements of Operations:
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Deferred Awards
 
$
1,231

 
$
1,015

 
$
1,940

 
$
1,436

Option Awards
 
187

 
185

 
374

 
276

Performance Awards
 
312

 
21

 
382

 
88

Total stock-based compensation expense

$
1,730

 
$
1,221

 
$
2,696

 
$
1,800


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Table of Contents

The following table provides a summary of the activities for stock awards for Year-to-Date 2018:
 
 
Deferred Awards
 
Option Awards
 
Performance Awards
(in thousands, except per share amounts)
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
 
Number of Shares(1)
 
Weighted Average Grant Date Fair Value per Share
Unvested as of February 2, 2018
 
497

 
$
22.07

 
343

 
$
8.73

 
15

 
$
21.94

Granted
 
289

 
22.00

 

 

 
195

 
21.90

Vested
 
(137
)
 
21.85

 
(86
)
 
8.73

 

 

Forfeited or expired
 
(16
)
 
22.13

 

 

 
(18
)
 
21.93

Unvested as of August 3, 2018
 
633

 
21.86

 
257

 
8.73

 
192

 
21.90

(1) For those awards with respect to which the performance period is not yet complete, the number of unvested shares in the table above is based on the participants earning their Target Shares at 100%; however, the cumulative expense recognized reflects changes in estimated achievement of the performance measures as they occur.
Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $10.0 million as of August 3, 2018, which is expected to be recognized ratably over a weighted average period of 2.2 years. Deferred Awards granted to various employees during Fiscal 2018 generally vest ratably over a period of three years.
Total unrecognized stock-based compensation expense related to unvested Option Awards was approximately $2.0 million as of August 3, 2018, which is expected to be recognized ratably over a weighted average period of 2.6 years. The Option Awards have a life of ten years and vest ratably over a period of four years. The fair value of each Option Award was estimated on the grant date using the Black-Scholes option pricing model. As of August 3, 2018, 85,784 shares related to Option Awards were exercisable. No options have been exercised as of August 3, 2018.
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $3.3 million as of August 3, 2018, which is expected to be recognized ratably over a weighted average period of 2.6 years. Performance Awards granted to various employees during Fiscal 2018 vest, if earned, after completion of the applicable three year performance period.
NOTE 7. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
Restricted cash is reflected on the Condensed Consolidated Balance Sheets at fair value. The fair value of restricted cash was $2.0 million, $3.3 million and $2.4 million as of August 3, 2018, July 28, 2017 and February 2, 2018, respectively based on Level 1 inputs. Restricted cash amounts are valued based upon statements received from financial institutions.
The carrying amount of the Company's Cash and cash equivalents, Accounts receivable, Accounts payable and Other current liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.
Carrying values and fair values of long-term debt, including the short-term portion, in the Condensed Consolidated Balance Sheets are as follows:
 
 
August 3, 2018
 
July 28, 2017
 
February 2, 2018
(in thousands)
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt, including short-term portion
 
$
493,113

 
$
476,470

 
$
498,263

 
$
418,541

 
$
495,688

 
$
443,641

Long-term debt, including short-term portion was valued utilizing Level 2 valuation techniques based on the closing inactive market bid price on August 3, 2018, July 28, 2017, and February 2, 2018. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of August 3, 2018, July 28, 2017, and February 2, 2018.

12



NOTE 8. INCOME TAXES
The Company recorded a tax benefit for the Second Quarter 2018 and Year-to-Date 2018, with effective tax rates of 7.5% and 43.3%, respectively. This compares to effective tax rates of 29.4% and 33.4% for the Second Quarter 2017 and Year-to-Date 2017. The lower effective tax rate was primarily due to the Tax Act. The Year-to-Date 2018 rate also reflects the reversal of UTBs reported in the First Quarter 2018 driven by favorable state tax audit settlements for periods prior to separation from Sears Holdings Corporation, partially offset by impacts of the Tax Act.
The Tax Act was enacted on December 22, 2017. In connection with the Tax Act, the Company re-measured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future under the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, a provisional amount for the change in law was recorded in Fourth Quarter 2017. As these estimates are refined and potential planning opportunities present themselves, the Company will revise its estimate. The Company will continue its assessment of the impact of the Tax Act on the business and Consolidated Financial Statements throughout the one-year measurement period as provided by SAB 118.
As of August 3, 2018, the Company had UTBs of $1.9 million. Of this amount, $1.5 million would, if recognized, impact its effective tax rate, with the remaining amount being comprised of UTBs related to gross temporary differences or other indirect benefits. Pursuant to the Tax Sharing Agreement, Sears Holdings Corporation is generally responsible for all United States federal, state and local UTBs, through the date of the Separation and, as such, an indemnification asset from Sears Holdings Corporation for the pre-Separation UTBs is recorded in Other assets in the Condensed Consolidated Balance Sheets. The indemnification asset was $2.6 million, $11.8 million and $7.4 million as of August 3, 2018, July 28, 2017, and February 2, 2018, respectively.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is party to various claims, legal proceedings and investigations arising in the ordinary course of business. Some of these actions involve complex factual and legal issues and are subject to uncertainties. At this time, the Company is not able to either predict the outcome of these legal proceedings or reasonably estimate a potential range of loss with respect to the proceedings. While it is not feasible to predict the outcome of such pending claims, proceedings and investigations with certainty, management is of the opinion that their ultimate resolution should not have a material adverse effect on results of operations, cash flows or financial position taken as a whole.
NOTE 10. RELATED PARTY TRANSACTIONS
According to statements on Schedule 13D filed with the SEC by ESL, ESL beneficially owns significant portions of both the Company's and Sears Holdings Corporation's outstanding shares of common stock. Therefore, Sears Holdings Corporation, the Company's former parent company, is considered a related party. In connection with and subsequent to the Separation, the Company entered into various agreements with Sears Holdings which, among other things, (i) govern specified aspects of the Company's relationship following the Separation, especially with regards to the Lands’ End Shops at Sears, and (ii) establish terms pursuant to which subsidiaries of Sears Holdings Corporation are providing services to the Company. Descriptions of these transactions are included in the Company's Fiscal 2017 Form 10-K filed with the SEC on March 29, 2018 and proxy statement filed with the SEC on April 6, 2018.
The components of the transactions between the Company and Sears Holdings, which exclude pass-through payments to third parties, are as follows:

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Table of Contents

Lands’ End Shops at Sears
Related party costs charged by Sears Holdings to the Company related to Lands’ End Shops at Sears are as follows:
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands, except for number of stores)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Rent, CAM and occupancy costs
 
$
4,027

 
$
5,597

 
$
8,521

 
$
11,506

Retail services, store labor
 
3,723

 
5,594

 
7,853

 
11,142

Financial services and payment processing
 
452

 
676

 
841

 
1,148

Supply chain costs
 
106

 
200

 
236

 
391

Total expenses
 
$
8,308

 
$
12,067

 
$
17,451

 
$
24,187

Number of Lands’ End Shops at Sears at period end
 
147

 
204

 
147

 
204

General Corporate Services
Related party costs charged by Sears Holdings to the Company for general corporate services are as follows:
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Sourcing
 
$
1,497

 
$
2,682

 
$
3,314

 
$
5,080

Shop Your Way
 
215

 
321

 
382

 
697

Shared services
 
48

 
48

 
95

 
95

Total expenses
 
$
1,760

 
$
3,051

 
$
3,791

 
$
5,872

The Company's contract under which it receives sourcing services from an affiliate of Sears Holdings runs through June 30, 2020. The Company continues to participate in the Shop Your Way program.
Use of Intellectual Property or Services
Related party revenue and costs charged by the Company to and from Sears Holdings for the use of intellectual property or services is as follows:
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Call center services
 
$

 
$

 
$

 
$
1,160

Lands' End business outfitters revenue
 
293

 
271

 
618

 
542

Credit card revenue
 
169

 
221

 
322

 
433

Royalty income
 
86

 
86

 
113

 
114

Gift card (expense)
 
(4
)
 
(7
)
 
(8
)
 
(13
)
Total income
 
$
544

 
$
571

 
$
1,045

 
$
2,236

Call Center Services
The Company had entered into a contract with SHMC to provide call center services in support of Sears Holdings’ SYW. This income was net of agreed upon costs directly attributable to the Company providing these services. The income was included in Net revenue and costs are included in Selling and administrative expenses in the Condensed Consolidated Statements of Operations. The contract for call center services expired on April 30, 2017.

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Table of Contents

Additional Balance Sheet Information
At August 3, 2018, July 28, 2017 and February 2, 2018, the Company included $1.9 million, $3.0 million and $2.0 million in Accounts receivable, net, respectively, and $2.0 million, $3.6 million and $2.9 million in Accounts payable, respectively, in the Condensed Consolidated Balance Sheets to reflect amounts due from and owed to Sears Holdings.
At August 3, 2018, July 28, 2017 and February 2, 2018, respectively, a $2.6 million, $11.8 million and $7.4 million receivable was recorded by the Company in Other assets in the Condensed Consolidated Balance Sheets to reflect the indemnification by Sears Holdings Corporation of the pre-Separation UTBs (including penalties and interest) for which Sears Holdings Corporation is responsible under the Tax Sharing Agreement.
NOTE 11. SEGMENT REPORTING
The Company is a leading multi-channel retailer of casual clothing, accessories, footwear, and home products, and has two reportable segments: Direct and Retail. Product revenue is divided by product categories: Apparel and Non-apparel. The Non-apparel revenue includes accessories, footwear, and home goods. Services and other revenue includes embroidery, monogramming, gift wrapping, shipping and other services. Net revenue is aggregated by product category in the following table:

 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Net revenue:
 
 
 
 
 
 
 
 
Apparel
 
$
256,457

 
$
250,318

 
$
515,740

 
$
481,255

Non-apparel
 
30,584

 
29,665

 
56,476

 
53,736

Service and other
 
20,904

 
22,207

 
35,554

 
35,564

Total net revenue
 
$
307,945

 
$
302,190

 
$
607,770

 
$
570,555

The Company identifies reportable segments according to how business activities are managed and evaluated. Each of the Company’s reportable segments are strategic business units that offer similar products and services but are either shipped directly from its warehouses (Direct) or sold through retail stores (Retail). Adjusted EBITDA is the primary measure used to make decisions on allocating resources and assessing performance of each operating segment. Adjusted EBITDA is computed as Net loss appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net, Interest expense, Depreciation and amortization and certain significant items that while periodically affecting the Company's results, may vary significantly from period to period and may have a disproportionate effect in a given period, which may affect comparability of results. Reportable segment assets are those directly used in or clearly allocable to an operating segment’s operations. Depreciation, amortization, and property and equipment expenditures are recognized in each respective segment. There were no material transactions between reporting segments for any periods presented.
The Direct segment sells products through the Company’s e-commerce websites and direct mail catalogs. Operating costs consist primarily of direct marketing costs (catalog and e-commerce marketing costs); order processing and shipping costs; direct labor and benefits costs and facility costs. Assets primarily include goodwill and trade name intangible assets, inventory, accounts receivable, prepaid expenses (deferred catalog costs), technology infrastructure, and property and equipment.
The Retail segment sells products and services through dedicated Lands’ End Shops at Sears across the United States and through Company Operated stores. Operating costs consist primarily of labor and benefits costs; rent, CAM and occupancy costs; distribution costs; and in-store marketing costs. Assets primarily include retail inventory, fixtures and leasehold improvements.
Corporate overhead and other expenses include unallocated shared-service costs, which primarily consist of employee services and financial services, legal and corporate expenses. These expenses include labor and benefits costs, corporate headquarters occupancy costs and other administrative expenses. Assets include corporate headquarters and facilities, corporate cash and cash equivalents and deferred income taxes.

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Table of Contents

Financial information by segment is presented in the following tables.
SUMMARY OF SEGMENT DATA

 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Net revenue:
 



 
 
 
 
Direct
 
$
276,602


$
259,938

 
$
549,975

 
$
488,228

Retail
 
31,343


42,252

 
57,795

 
82,327

Total net revenue
 
$
307,945

 
$
302,190

 
$
607,770

 
$
570,555

 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Adjusted EBITDA:
 
 
 
 
 
 
 
 
Direct
 
$
15,761

 
$
13,080

 
$
38,095

 
$
24,918

Retail
 
398

 
1,859

 
(4,168
)
 
(1,288
)
Corporate / other
 
(8,434
)
 
(8,110
)
 
(17,177
)
 
(15,505
)
Total adjusted EBITDA
 
$
7,725

 
$
6,829

 
$
16,750

 
$
8,125

(Gain) loss on property and equipment
 
(52
)
 

 
284

 
62

Transfer of corporate functions
 
5

 
480

 
6

 
1,926

Depreciation and amortization
 
6,897

 
6,175

 
13,058

 
12,683

Operating income (loss)
 
$
875

 
$
174

 
$
3,402

 
$
(6,546
)
Interest expense
 
7,001

 
6,167

 
13,913

 
12,292

Other (income) expense, net
 
(412
)
 
(494
)
 
3,452

 
(1,236
)
Income tax benefit
 
(429
)
 
(1,619
)
 
(6,048
)
 
(5,883
)
NET LOSS
 
$
(5,285
)
 
$
(3,880
)
 
$
(7,915
)
 
$
(11,719
)
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Depreciation and amortization:
 
 
 
 
 
 
 
 
Direct
 
$
6,234

 
$
5,489

 
$
11,805

 
$
11,267

Retail
 
293

 
353

 
575

 
707

Corporate / other
 
370

 
333

 
678

 
709

Total depreciation and amortization
 
$
6,897

 
$
6,175

 
$
13,058

 
$
12,683

(in thousands)
 
August 3, 2018
 
July 28, 2017
 
February 2, 2018
Total Assets:
 
 
 
 
 
 
Direct
 
$
856,293

 
$
846,313

 
$
856,986

Retail
 
53,379

 
73,953

 
49,933

Corporate / other
 
220,771

 
202,139

 
217,216

Total assets
 
$
1,130,443

 
$
1,122,405

 
$
1,124,135


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Table of Contents

 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Capital expenditures:
 
 
 
 
 
 
 
 
Direct
 
$
9,874

 
$
8,832

 
$
20,462

 
$
20,213

Retail
 
1,581

 
9

 
1,741

 
10

Total capital expenditures
 
$
11,455

 
$
8,841

 
$
22,203

 
$
20,223

NOTE 12. REVENUE
The Company adopted authoritative guidance related to the recognition of revenue from contracts with customers effective First Quarter 2018 using the modified retrospective method. The comparative information presented in the Condensed Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented. See Note 2, Recent Accounting Pronouncements, for a discussion of the significant changes resulting from adoption of the guidance. The adoption of the guidance did not have a significant impact on revenue.
Revenues include sales of merchandise and delivery revenues related to merchandise sold. Substantially all of the Company's revenue is recognized when control of product passes to customers which for the Direct segment is when the merchandise is expected to be received by the customer and for the Retail segment is at the time of sale in the store. The Company recognizes revenue, including shipping and handling fees billed to customers, in the amount expected to be received when control of the Company's products transfers to customers, and is presented net of various forms of promotions, which range from contractually-fixed percentage price reductions to sales returns, discounts, and other incentives that may vary in amount. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available. There were no changes to estimates in Second Quarter 2018.
The Company's revenues are disaggregated by product categories and geographic location. Revenue by product category is presented in Note 11, Segment Reporting. Revenue by geographic location was:
 
 
13 Weeks Ended
 
26 Weeks Ended
(in thousands)
 
August 3, 2018
 
July 28, 2017
 
August 3, 2018
 
July 28, 2017
Net revenue:
 
 
 
 
 
 
 
 
United States
 
$
271,011

 
$
264,830

 
$
527,178

 
$
497,155

Europe
 
25,938

 
26,808

 
57,105

 
52,205

Asia
 
10,996

 
10,552

 
23,487

 
21,195

Total Net revenue
 
$
307,945

 
$
302,190

 
$
607,770

 
$
570,555

The Company elected to exclude from revenue, taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities, and as a result there is no change in presentation from prior comparative periods.
Contract Liabilities
Contract liabilities consist of payments received in advance of the transfer of control to the customer. As products are delivered and control transfers, the Company recognizes the deferred revenue in Net revenue in the Condensed Consolidated Statements of Operations. The following table summarizes the deferred revenue associated with payments received in advance of the transfer of control to the customer reported in Other current liabilities in the Condensed Consolidated Balance Sheets and amounts recognized through Net revenues for each period presented. The remainder of deferred revenue as of August 3, 2018 is expected to be recognized in Net revenue in the fiscal quarter ending November 2, 2018, as products are delivered to customers.

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Table of Contents

 
 
August 3, 2018
(in thousands)
 
13 Weeks Ended
26 Weeks Ended
Deferred Revenue Beginning of Period
 
$
15,890

 
$
12,838

Deferred Revenue Recognized in Period
 
(15,890
)
 
(12,838
)
Revenue Deferred in Period
 
8,460

 
8,460

Deferred Revenue End of Period
 
$
8,460

 
$
8,460

The Company's policy with respect to gift cards is to record revenue when the gift cards are redeemed for merchandise. The Company recognizes gift card breakage income in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage and the Company determines that it does not have an obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Gift card breakage is recorded within Net revenue in the Condensed Consolidated Statements of Operations. Prior to their redemption, gift cards are recorded as a liability, included within Other current liabilities in the Condensed Consolidated Balance Sheets. The total contract liability related to gift cards issued was $16.6 million, $18.0 million and $19.3 million as of August 3, 2018, July 28, 2017 and February 2, 2018, respectively. The liability is estimated based on expected breakage that considers historical patterns of redemption. The following table provides the reconciliation of the contract liability related to gift cards:
 
 
August 3, 2018
(in thousands)
 
13 Weeks Ended
26 Weeks Ended
Balance as of Beginning of Period
 
$
19,290

 
$
19,272

Gift cards sold
 
9,281

 
25,353

Gift cards redeemed
 
(11,683
)
 
(26,347
)
Gift card breakage
 
(262
)
 
(1,652
)
Balance as of August 3, 2018
 
$
16,626

 
$
16,626

Refund Liabilities
Refund liabilities, primarily associated with product sales returns and retrospective volume rebates represent variable consideration and are estimated and recorded as a reduction to Net revenue based on historical experience. As of August 3, 2018, July 28, 2017 and February 2, 2018, $18.6 million, $9.6 million and $11.1 million, respectively, of refund liabilities, primarily associated with product returns, were reported in Other current liabilities in the Condensed Consolidated Balance Sheets. Prior to adoption, product return assets and return liabilities were reported within Other current liabilities. As of the adoption date, the product return assets were reclassified and reported as a component of Prepaid expenses and other current assets, and return liabilities continued to be reported in Other current liabilities in the Company's Condensed Consolidated Balance Sheet. See Note 2, Recent Accounting Pronouncements, for additional details on the impact of this change.

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Table of Contents

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. See "Cautionary Statements Concerning Forward-Looking Statements" below and "Item 1A. Risk Factors" in our Annual Report filed on Form 10-K for the year ended February 2, 2018, for a discussion of the uncertainties, risks and assumptions associated with these statements.

As used in this Quarterly Report on Form 10-Q, references to the "Company", "Lands' End", "we", "us", "our" and similar terms refer to Lands' End, Inc. and its subsidiaries. Our fiscal year ends on the Friday preceding the Saturday closest to January 31. Other terms that are commonly used in this Quarterly Report on Form 10-Q are defined as follows:
ABL Facilities - Collectively the Prior ABL Facility and the Current ABL Facility
Company Operated stores - Retail stores operated by Lands' End
Current ABL Facility - Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
Debt Facilities - Collectively, the ABL Facilities and the Term Loan Facility
ERP - Enterprise resource planning software solutions
ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
Fiscal 2018 - the fifty-two weeks ending February 1, 2019
Fiscal November 2018 - the four week fiscal month ending November 30, 2018
Second Quarter 2018 - the thirteen weeks ended August 3, 2018
Second Quarter 2017 - the thirteen weeks ended July 28, 2017
GAAP - Accounting principles generally accepted in the United States
Lands' End Shops at Sears - Lands' End shops operated within Sears stores
LIBOR - London inter-bank offered rate
Prior ABL Facility - Asset-based senior secured credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders, terminated November 16, 2017
Same Store Sales - Net revenue, from stores that have been open for at least 12 full months where selling square footage has not changed by 15% or more within the past year
Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries (other than, for all periods following the Separation, Lands' End)
SEC - United States Securities and Exchange Commission
Separation - On April 4, 2014 Sears Holdings distributed 100% of the outstanding common stock of Lands' End to its shareholders
Term Loan Facility - Term loan credit agreements, dated as of April 4, 2014, with Bank of America, N.A. and certain other lenders
UK Borrower - A United Kingdom subsidiary borrower of Lands’ End under the Prior ABL Facility

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Table of Contents

UTBs - Gross unrecognized tax benefits
Year-to-Date 2018 - The twenty-six weeks ended August 3, 2018
Year-to-Date 2017 - The twenty-six weeks ended July 28, 2017

Introduction
Management's discussion and analysis of financial condition and results of operations accompanies our Condensed Consolidated Financial Statements and provides additional information about our business, financial condition, liquidity and capital resources, cash flows and results of operations. We have organized the information as follows:
Executive overview. This section provides a brief description of our business, accounting basis of presentation and a brief summary of our results of operations.
Discussion and analysis. This section highlights items affecting the comparability of our financial results and provides an analysis of our segment results of operations for Second Quarter 2018, Second Quarter 2017, Year-to-Date 2018 and Year-to-Date 2017.
Liquidity and capital resources. This section provides an overview of our historical and anticipated cash and financing activities. We also review our historical sources and uses of cash in our operating, investing and financing activities.
Contractual Obligations and Off-Balance-Sheet Arrangements. This section provides details of the Company's off-balance-sheet arrangements and contractual obligations for the next five years and thereafter.
Financial Instruments with Off-Balance-Sheet Risk. This section discusses financial instruments of the Company that could have off-balance-sheet risk.
Application of critical accounting policies and estimates. This section summarizes the accounting policies that we consider important to our financial condition and results of operations and which require significant judgment or estimates to be made in their application.
Recent accounting pronouncements. This section summarizes recently issued accounting pronouncements and the impact or expected impact on the Company's financial statements.
Executive Overview
Description of the Company
Lands' End, Inc. is a leading multi-channel retailer of casual clothing, accessories, footwear and home products. We offer products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and seek to deliver timeless style for women, men, kids and the home.
Lands’ End was founded in 1963 in Chicago by Gary Comer and his partners to sell sailboat hardware and equipment by catalog. While our product focus has shifted significantly over the years, we have continued to adhere to our founder’s motto as one of our guiding principles: "Take care of the customer, take care of the employee and the rest will take care of itself."
The Company identifies reportable segments according to how business activities are managed and evaluated. Each of the Company’s reportable segments are strategic business units that offer similar products and services but are either shipped directly from our warehouses (Direct) or sold through retail stores (Retail).
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Lands' End, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.

20


Table of Contents

Related party
Following the Separation, we began operating as a separate, publicly traded company, independent from Sears Holdings. According to statements on Schedule 13D filed with the SEC by ESL, ESL beneficially owns significant portions of both the Company's and Sears Holdings Corporation's outstanding shares of common stock. Therefore Sears Holdings Corporation, the Company's former parent company, is considered a related party both prior to and subsequent to the Separation.
Seasonality
We experience seasonal fluctuations in our net revenue and operating results and historically have realized a significant portion of our net sales and earnings for the year during our fourth fiscal quarter. We generated an average of 35% of our Net revenue in the fourth fiscal quarter of the past three years. Thus, lower than expected fourth quarter net revenue could have an adverse impact on our annual operating results.
Working capital requirements typically increase during the third quarter of the fiscal year as inventory builds to support our peak shipping/selling period and, accordingly, typically decrease during the fourth quarter of the fiscal year as inventory is shipped/sold. Cash provided by operating activities is typically higher in the fourth quarter of the fiscal year due to reduced working capital requirements during that period.
Results of Operations
The following table sets forth, for the periods indicated, selected income statement data:

 
13 Weeks Ended

 
August 3, 2018
 
July 28, 2017
(in thousands)
 
$'s

% of
Net revenue
 
$’s
 
% of
Net revenue
Net revenue
 
$
307,945

 
100.0
 %
 
$
302,190

 
100.0
 %
Cost of sales (excluding depreciation and amortization)
 
171,179

 
55.6
 %
 
168,025

 
55.6
 %
Gross profit
 
136,766

 
44.4
 %
 
134,165

 
44.4
 %
Selling and administrative
 
129,041

 
41.9
 %
 
127,336

 
42.1
 %
Depreciation and amortization
 
6,897

 
2.2
 %
 
6,175

 
2.0
 %
Other operating (income) expense, net
 
(47
)
 
 %
 
480

 
0.2
 %
Operating income (loss)
 
875

 
0.3
 %
 
174

 
0.1
 %
Interest expense
 
7,001

 
2.3
 %
 
6,167

 
2.0
 %
Other (income) expense, net
 
(412
)
 
(0.1
)%
 
(494
)
 
(0.2
)%
Loss before income taxes
 
(5,714
)
 
(1.9
)%
 
(5,499
)
 
(1.8
)%
Income tax benefit
 
(429
)
 
(0.1
)%
 
(1,619
)
 
(0.5
)%
NET LOSS
 
$
(5,285
)
 
(1.7
)%
 
$
(3,880
)
 
(1.3
)%

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Table of Contents

 
 
26 Weeks Ended
 
 
August 3, 2018
 
July 28, 2017
(in thousands)
 
$’s
 
% of
Net revenue
 
$’s
 
% of Net revenue
Net revenue
 
$
607,770

 
100.0
 %
 
$
570,555

 
100.0
 %
Cost of sales (excluding depreciation and amortization)
 
337,979

 
55.6
 %
 
313,748

 
55.0
 %
Gross profit
 
269,791

 
44.4
 %
 
256,807

 
45.0
 %
Selling and administrative
 
253,041

 
41.6
 %
 
248,682

 
43.6
 %
Depreciation and amortization
 
13,058

 
2.1
 %
 
12,683

 
2.2
 %
Other operating (income) expense, net
 
290

 
 %
 
1,988

 
0.3
 %
Operating income (loss)
 
3,402

 
0.6
 %
 
(6,546
)
 
(1.1
)%
Interest expense
 
13,913

 
2.3
 %
 
12,292

 
2.2
 %
Other (income) expense, net
 
3,452

 
0.6
 %
 
(1,236
)
 
(0.2
)%
Loss before income taxes
 
(13,963
)
 
(2.3
)%
 
(17,602
)
 
(3.1
)%
Income tax benefit
 
(6,048
)
 
(1.0
)%
 
(5,883
)
 
(1.0
)%
NET LOSS
 
$
(7,915
)
 
(1.3
)%
 
$
(11,719
)
 
(2.1
)%
Depreciation and amortization is not included in our cost of sales because we are a reseller of inventory and do not believe that including depreciation and amortization is meaningful. As a result, our gross margins may not be comparable to other entities that include depreciation and amortization related to the sale of their product in their gross margin measure.
Net Loss and Adjusted EBITDA
We recorded Net losses of $5.3 million and $7.9 million in the Second Quarter 2018 and Year-to-Date 2018, respectively compared to $3.9 million and $11.7 million in the Second Quarter 2017 and Year-to-Date 2017, respectively. In addition to our Net loss determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net loss appearing on the Condensed Consolidated Statements of Operations net of Income tax benefit, Other income, net, Interest expense, Depreciation and amortization, and certain significant items set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our businesses for comparable periods, and as an executive compensation metric. Adjusted EBITDA should not be used by investors or other third parties as the sole basis for formulating investment decisions as it excludes a number of important cash and non-cash recurring items.
While Adjusted EBITDA is a non-GAAP measurement, management believes that it is an important indicator of operating performance, and useful to investors, because:
EBITDA excludes the effects of financings, investing activities and tax structure by eliminating the effects of interest, depreciation and income tax costs or benefits.
Other significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of results. We have adjusted our results for these items to make our statements more comparable and therefore more useful to investors as the items are not representative of our ongoing operations.
Transfer of corporate functions - severance and contract losses associated with a transition of certain corporate activities from our New York office to our Dodgeville headquarters.
Gain or loss on property and equipment - management considers the gains or losses on asset valuation to result from investing decisions rather than ongoing operations.
 

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Table of Contents



13 Weeks Ended


August 3, 2018

July 28, 2017
(in thousands)

$’s

% of
Net revenue

$’s

% of
Net revenue
Net loss

$
(5,285
)

(1.7
)%

$
(3,880
)

(1.3
)%
Income tax benefit

(429
)

(0.1
)%

(1,619
)

(0.5
)%
Other (income) expense, net

(412
)

(0.1
)%

(494
)

(0.2
)%
Interest expense

7,001


2.3
 %

6,167


2.0
 %
Operating income (loss)

875


0.3
 %

174


0.1
 %
Depreciation and amortization

6,897


2.2
 %

6,175


2.0
 %
Transfer of corporate functions

5


 %

480


0.2
 %
(Gain) on property and equipment

(52
)

 %



 %
Adjusted EBITDA

$
7,725


2.5
 %

$
6,829


2.3
 %
 
 
26 Weeks Ended
 
 
August 3, 2018
 
July 28, 2017
(in thousands)
 
$’s
 
% of
Net revenue
 
$’s
 
% of
Net revenue
Net loss
 
$
(7,915
)
 
(1.3
)%
 
$
(11,719
)
 
(2.1
)%
Income tax benefit
 
(6,048
)
 
(1.0
)%
 
(5,883
)
 
(1.0
)%
Other (income) expense, net
 
3,452

 
0.6
 %
 
(1,236
)
 
(0.2
)%
Interest expense
 
13,913

 
2.3
 %
 
12,292

 
2.2
 %
Operating income (loss)
 
3,402

 
0.6
 %
 
(6,546
)
 
(1.1
)%
Depreciation and amortization
 
13,058

 
2.1
 %
 
12,683

 
2.2
 %
Transfer of corporate functions
 
6

 
 %
 
1,926

 
0.3
 %
Loss on property and equipment
 
284

 
 %
 
62

 
 %
Adjusted EBITDA
 
$
16,750

 
2.8
 %
 
$
8,125

 
1.4
 %
In assessing the operational performance of our business, we consider a variety of financial measures. We operate in two reportable segments: Direct (sold through e-commerce websites and direct mail catalogs) and Retail (sold through stores). A key measure in the evaluation of our business is revenue performance by segment. We also consider gross margin and Selling and administrative expenses in evaluating the performance of our business.
To evaluate revenue performance for the Direct segment we use Net revenue. For our Retail segment, we use Same Store Sales as a key measure in evaluating performance. A store is included in Same Store Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15% or more as a result of a remodel, expansion, reduction or relocation are excluded from Same Store Sales calculations until the first day they have comparable prior year sales. Online sales and sales generated through our in-store computer kiosks are considered revenue in our Direct segment and are excluded from Same Store Sales.
Discussion and Analysis
Second Quarter 2018 compared with Second Quarter 2017
Net Revenue
Net revenue for Second Quarter 2018 was $307.9 million, compared with $302.2 million in the comparable period of the prior year, an increase of $5.8 million, or 1.9%. The increase was comprised of an increase in our Direct segment of $16.7 million and a decrease in our Retail segment of $10.9 million.
Direct segment Net revenue was $276.6 million for Second Quarter 2018, an increase of $16.7 million, or 6.4%, from the comparable period of the prior year. The increase in the Direct segment was primarily attributable to the remainder of the launch of our Delta Airlines business as well as the continued growth in our U.S. consumer business. We continued to increase our buyer file and our conversion rate in our U.S. consumer business helping to drive the increase, particularly in key items in our assortment such as swimwear, shorts, cover ups, and dresses.

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Table of Contents

Retail segment Net revenue was $31.3 million for Second Quarter 2018, a decrease of $10.9 million, or 25.8%, from the comparable period of the prior year. Same Store Sales declined 5.8% as compared to the same period of the prior year. The decrease was primarily attributable to a reduction of 57 of our Lands’ End Shops at Sears locations and a 6.7% decrease in Lands' End Shops at Sears Same Store Sales. Company Operated stores experienced a decrease of 0.6% in Same Store Sales. On August 3, 2018, the Company had 147 Lands’ End Shops at Sears and 15 Company Operated stores compared with 204 Lands’ End Shops at Sears and 14 Company Operated stores on July 28, 2017.
Gross Profit
Gross profit increased $2.6 million to $136.8 million and gross margin increased slightly to 44.4% of total Net revenue, in Second Quarter 2018, compared with $134.2 million, or 44.4% of total Net revenue, in Second Quarter 2017. The Gross profit increase was comprised of an increase in our Direct segment of $7.5 million and a decrease in our Retail segment of $4.9 million.
Direct segment Gross profit increased $7.5 million to $122.4 million in Second Quarter 2018 from $115.0 million in Second Quarter 2017. Direct segment gross margin increased approximately 10 basis points to 44.3% of total Net revenue in Second Quarter 2018, compared with 44.2% of total Net revenue in Second Quarter 2017. The gross margin increase was driven by stronger merchandise margins and tighter inventory management of our seasonal assortment offset by the lower margin Delta Airlines business. Retail segment Gross profit decreased $4.9 million to $14.3 million in Second Quarter 2018 from $19.1 million in Second Quarter 2017. Retail segment gross margin increased approximately 40 basis points to 45.7% of Net revenue, in Second Quarter 2018, compared to 45.3% of Net revenue, in Second Quarter 2017 through effective inventory management of our seasonal assortment, which led to a reduction in clearance sales and stronger merchandise margins.
Selling and Administrative Expenses
Selling and administrative expenses increased $1.7 million to $129.0 million, a decrease of approximately 20 basis points to 41.9% of total Net revenue, in Second Quarter 2018, compared with $127.3 million, or 42.1% of Net revenue, in Second Quarter 2017. The increase in Selling and administrative expenses was due to an increase of $4.8 million in the Direct Segment and $0.3 million in Corporate expenses, offset by a decrease of $3.4 million in the Retail segment.
Direct segment Selling and administrative expenses were $106.7 million, a decrease of approximately 60 basis points to 38.6% of Net revenue, in Second Quarter 2018, compared with $101.9 million, or 39.2% of Net revenue, in Second Quarter 2017. The basis point decrease was largely attributable to the leveraging of existing marketing expenses to drive higher sales volume, partially offset by increased incentive compensation.
Retail segment Selling and administrative expenses were $13.9 million, an increase of approximately 340 basis points to 44.4% of Net revenue, in Second Quarter 2018, compared with $17.3 million, or 41.0% of Net revenue, in Second Quarter 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative same store sales.
Corporate / other Selling and administrative expenses were $8.4 million compared with $8.1 million for Second Quarter 2018 and Second Quarter 2017, respectively. The $0.3 million, or 3.7%, increase was largely attributable to an increase in incentive compensation expenses.
Depreciation and Amortization
Depreciation and amortization expense was $6.9 million in Second Quarter 2018, an increase of $0.7 million or 11.7%, compared with $6.2 million in Second Quarter 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating expense, net was insignificant in Second Quarter 2018 compared to $0.5 million in Second Quarter 2017, primarily due to severance charges associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters in Second Quarter 2017.

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Table of Contents

Operating Income (Loss)
Operating income was $0.9 million in Second Quarter 2018 compared to $0.2 million in Second Quarter 2017 primarily due to increased revenue driven by the Direct Segment and the leveraging of the existing cost structure.
Interest Expense
Interest expense was $7.0 million in Second Quarter 2018 compared to $6.2 million in Second Quarter 2017, reflective of a rising interest rate environment.
Other (Income) Expense, Net
Other income, net was $0.4 million in Second Quarter 2018 compared to $0.5 million in Second Quarter 2017.
Income Tax Benefit
The Income tax benefit was $0.4 million for Second Quarter 2018 compared to $1.6 million in Second Quarter 2017. The effective tax rate was 7.5% in Second Quarter 2018 compared with 29.4% in Second Quarter 2017. The lower benefit is primarily due to the Tax Act.
Net Loss
As a result of the above factors, Net loss was $5.3 million and diluted loss per share was $0.16 in Second Quarter 2018 compared with a Net loss of $3.9 million and diluted loss per share of $0.12 in Second Quarter 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased to $7.7 million in Second Quarter 2018 from $6.8 million in Second Quarter 2017.
Year-to-Date 2018 compared with Year-to-Date 2017
Net Revenue
Net revenue for Year-to-Date 2018 was $607.8 million, compared with $570.6 million in the comparable period of the prior year, an increase of $37.2 million or 6.5%. The increase was comprised of an increase in our Direct segment of $61.7 million and a decrease in our Retail segment of $24.5 million.
Direct segment Net revenue was $550.0 million for Year-to-Date 2018, an increase of $61.7 million, or 12.6%, from the comparable period of the prior year. The increase in the Direct segment was largely attributable to the launch of Delta Airlines business and an increase in our U.S. consumer business. In our U.S. consumer business, we increased our buyer file and conversion rate helping to drive increased revenue across our assortment.
Retail segment Net revenue was $57.8 million for Year-to-Date 2018, a decrease of $24.4 million, or 29.7%, from the comparable period of the prior year primarily due to the reduction of Lands' End Shops at Sears. Same Store Sales declined 12.4% compared to the same period of the prior year. The decrease was primarily attributable to a reduction of 57 of our Lands' End Shops at Sears locations and a 13.6% decrease in Lands' End Shops at Sears Same Store Sales. Company Operated stores experienced a decrease of 5.1% in Same Store Sales. On August 3, 2018, the Company operated 147 Lands’ End Shops at Sears and 15 global Lands’ End stores compared with 204 Lands’ End Shops at Sears and 14 Company Operated stores on July 28, 2017.
Gross Profit
Gross profit increased $13.0 million to $269.8 million and gross margin decreased approximately 60 basis points to 44.4% of Net revenue in Year-to-Date 2018, compared with $256.8 million, or 45.0% of Net revenue, in Year-to-Date 2017. The Gross profit increase was comprised of an increase in our Direct segment of $22.9 million offset by a decrease in our Retail segment of $9.9 million.
Direct segment Gross profit increased 10.3% to $245.5 million in Year-to-Date 2018 from $222.6 million in Year-to-Date 2017. Direct segment gross margin decreased approximately 100 basis points to 44.6% of Net revenue for Year-to-Date 2018, compared with 45.6% of Net revenue for Year-to-Date 2017. The gross margin decrease was

25



primarily attributable to increased promotional activity in the highly competitive retail environment as well as the launch of the lower margin Delta Airlines business.
Retail segment Gross profit decreased 28.7% to $24.3 million in Year-to-Date 2018 from $34.1 million in Year-to-Date 2017. Retail segment gross margin increased approximately 50 basis points to 42.0% of Net revenue, for Year-to-Date 2018, compared to 41.5% of Net revenue for Year-to-Date 2017 primarily attributable to tighter inventory management requiring lower markdowns of our assortment.
Selling and Administrative Expenses
Selling and administrative expenses increased 1.7% to $253.0 million, a decrease of approximately 200 basis points to 41.6% of Net revenue, in Year-to-Date 2018, compared with $248.7 million, or 43.6% of Net revenue, in Year-to-Date 2017. The increase in Selling and administrative expenses was primarily due to an increase of $9.7 million in the Direct segment and $1.7 million in Corporate expenses, partially offset by a decrease of $7.0 million in the Retail segment.
Direct segment Selling and administrative expenses were $207.4 million, a decrease of approximately 280 basis points to 37.7% of Net revenue, in Year-to-Date 2018, compared with $197.7 million, or 40.5% of Net revenue, for Year-to-Date 2017. The basis point decrease was largely attributable to improved cost leverage, partially offset by increased incentive compensation expense.
Retail segment Selling and administrative expenses were $28.5 million, an increase of approximately 620 basis points to 49.3% of Net revenue, in Year-to-Date 2018, compared with $35.5 million, or 43.2% of Net revenue, in Year-to-Date 2017. The basis point increase was largely attributable to the reduction in the number of Lands' End Shops at Sears and negative same store sales.
Corporate / other Selling and administrative expenses were $17.2 million compared with $15.5 million in Year-to-Date 2018 and Year-to-Date 2017, respectively. The $1.7 million, or 11.0%, increase was primarily due to an increase in incentive compensation expenses.
Depreciation and Amortization
Depreciation and amortization expense was $13.1 million in Year-to-Date 2018, an increase of $0.4 million, or 3.0%, compared with $12.7 million in Year-to-Date 2017, primarily attributable to an increase in depreciation associated with our ongoing multi-year ERP system implementation.
Other Operating (Income) Expense, Net
Other operating expense (income), net was expense of $0.3 million in Year-to-Date 2018 compared to $2.0 million in the Year-to-Date 2017, due to severance charges in the Year-to-Date 2017 associated with the transition of certain corporate activities from the New York office to the Company's Dodgeville headquarters.
Operating Income (Loss)
Operating income was $3.4 million in Year-to-Date 2018 compared to Operating loss of $6.5 million in Year-to-Date 2017. The increase was primarily due to improved growth in our Direct business, partially offset by closures of Lands' End Shops at Sears.
Interest Expense
Interest expense was $13.9 million in Year-to-Date 2018 compared to $12.3 million in Year-to-Date 2017, reflective of a rising interest rate environment.
Other (Income) Expense, Net
Other expense, net was $3.5 million in Year-to-Date 2018 compared to Other income, net of $1.2 million in Year-to-Date 2017. Other expense in Year-to-Date 2018 was primarily attributable to the reversal of indemnification assets from Sears Holdings Corporation for UTBs and accrued interest due to favorable state tax audit settlements for periods prior to the Separation.

26



Income Tax Benefit
Income tax benefit was $6.0 million for Year-to-Date 2018 compared to $5.9 million in Year-to-Date 2017. The effective tax rate was 43.3% in Year-to-Date 2018 compared with 33.4% in Year-to-Date 2017. The higher benefit resulted from the reversal of UTBs as a consequence of the favorable state tax audit settlements for periods prior to the Separation, partially offset by impacts of the Tax Act.
Net Loss
As a result of the above factors, Net loss was $7.9 million and diluted loss per share was $0.25 in Year-to-Date 2018 compared with Net loss of $11.7 million and diluted loss per share of $0.37 in Year-to-Date 2017.
Adjusted EBITDA
As a result of the above factors, Adjusted EBITDA increased to $16.8 million in Year-to-Date 2018 from $8.1 million in Year-to-Date 2017.

27


Table of Contents

Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures, debt service and for general corporate purposes. Our cash and cash equivalents and the Current ABL Facility serve as sources of liquidity for short-term working capital needs and general corporate purposes. We expect that our cash on hand and cash flows from operations, along with our Current ABL Facility, will be adequate to meet our capital requirements and operational needs for at least the next 12 months. Cash generated from our net sales and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionate amount of Net revenue and operating cash flows generally occurring in the fourth fiscal quarter of each year.
Description of Material Indebtedness
Debt Arrangements
On November 16, 2017, the Company entered into the Current ABL Facility, which provides for maximum borrowings of $175.0 million for the Company, subject to a borrowing base. The Current ABL Facility has a letter of credit sub-limit of $70.0 million. The Current ABL Facility is available for working capital and other general corporate purposes and was undrawn other than for $14.9 million in outstanding letters of credit.
Also on November 16, 2017, the Company terminated all loan related documents of the Prior ABL Facility and repaid all outstanding amounts thereunder.

The Prior ABL Facility provided for maximum borrowings of $175.0 million for Lands' End, subject to a borrowing base, with a $30.0 million sub facility for the UK Borrower. The Prior ABL Facility had a sub-limit of $70.0 million for domestic letters of credit and a sub-limit of $15.0 million for letters of credit for the UK Borrower. The Prior ABL Facility was available for working capital and other general corporate purposes and was undrawn other than for letters of credit.
On April 4, 2014, Lands’ End entered into the $515.0 million Term Loan Facility of which proceeds were used to pay a dividend of $500.0 million to a subsidiary of Sears Holdings Corporation immediately prior to the Separation and to pay fees and expenses associated with the Debt Facilities of approximately $11.4 million, with the remaining proceeds used for general corporate purposes.
Maturity; Amortization and Prepayments
The Term Loan Facility amortizes at a rate equal to 1% per annum, and is subject to mandatory prepayment in an amount equal to a percentage of the borrower’s excess cash flows (as defined in the Term Loan Facility) in each fiscal year, ranging from 0% to 50% depending on Lands’ End’s secured leverage ratio, and the proceeds from certain asset sales and casualty events.
The Term Loan Facility matures on April 4, 2021 while the Current ABL Facility will mature no later than November 16, 2022.
Guarantees; Security
All domestic obligations under the Debt Facilities are unconditionally guaranteed by the Company and, subject to certain exceptions, each of its existing and future direct and indirect wholly-owned domestic subsidiaries. The Current ABL Facility in secured by a first priority security interest in certain working capital of the borrowers and guarantors consisting primarily of accounts receivable and inventory. The Term Loan Facility is secured by a second priority security interest in the same collateral, with certain exceptions.
The Term Loan Facility also is secured by a first priority security interest in certain property and assets of the borrowers and guarantors, including certain fixed assets and stock of subsidiaries. The Current ABL Facility is secured by a second priority security interest in the same collateral.

The Prior ABL Facility had the same terms to those stated above. In addition, the obligations of the UK Borrower under the Prior ABL Facility were guaranteed by its existing and future direct and indirect subsidiaries organized in the United Kingdom.

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Table of Contents

Interest; Fees
The interest rates per annum applicable to the loans under the Debt Facilities are based on a fluctuating rate of interest measured by reference to, at the borrowers’ election, either (i) an adjusted LIBOR rate plus a borrowing margin, or (ii) an alternative base rate plus a borrowing margin. The borrowing margin is fixed for the Term Loan Facility at 3.25% in the case of LIBOR loans and 2.25% in the case of base rate loans. For the Term Loan Facility, LIBOR is subject to a 1% interest rate floor. The borrowing margin for the ABL Facilities is subject to adjustment based on the average excess availability under the ABL Facilities for the preceding fiscal quarter. In the case of LIBOR borrowings this adjustment will range from 1.25% to 1.75% and 1.50% to 2.00% for the Current ABL Facility and Prior ABL Facility, respectively. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facilities.
Customary agency fees are payable pursuant to the terms of the Debt Facilities. The ABL Facilities fees also include (i) commitment fees in an amount equal to 0.25% and 0.25% to 0.375% of the daily unused portions of the Current ABL Facility and Prior ABL Facility, respectively, and (ii) customary letter of credit fees.
Representations and Warranties; Covenants
Subject to specified exceptions, the Debt Facilities contain various representations and warranties and restrictive covenants that, among other things, restrict the ability of Lands’ End and its subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, make dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers or change the nature of their business. In addition, if excess availability under the Current ABL Facility falls below the greater of 10% of the loan cap amount or $15.0 million, Lands’ End will be required to comply with a minimum fixed charge coverage ratio of 1.0 to 1.0. The Debt Facilities do not otherwise contain financial maintenance covenants. The Company was in compliance with all financial covenants related to the Debt Facilities as of August 3, 2018.
The Debt Facilities contain certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances.
Events of Default
The Debt Facilities include customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross defaults related to certain other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, and material judgments and change of control.
Cash Flows from Operating Activities
Net cash provided by operating activities increased to $24.8 million in the Year-to-Date 2018 from a net cash use of $13.2 million in the Year-to-Date 2017, primarily driven by improved working capital management through:
Improved inventory management reducing both overall and aged inventory,
Lower Accounts payable payments in Fiscal 2018 due to timing of inventory receipts and payments,
Higher receipts from Accounts receivable, net in Fiscal 2018 due to high customer receivables outstanding at the beginning of the year related to the Delta Airlines launch.
Cash Flows from Investing Activities
Net cash used in investing activities was $22.2 million and $20.2 million for Year-to-Date 2018 and Year-to-Date 2017, respectively. Cash used in investing activities for both periods was primarily u