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 November 1, 2019
-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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
LE
The NASDAQ Stock Market LLC

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 every Interactive Data File required to be submitted 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 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 December 2, 2019 the registrant had 32,372,693 shares of common stock, $0.01 par value, outstanding.



LANDS’ END, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED NOVEMBER 1, 2019
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
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders' Equity
 
 
 
 
 
 
 
 
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
 
39 Weeks Ended
(in thousands, except per share data)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Net revenue
 
$
340,023


$
341,570

 
$
900,723

 
$
949,340

Cost of sales (excluding depreciation and amortization)
 
185,848

 
190,608

 
497,589

 
528,587

Gross profit
 
154,175

 
150,962

 
403,134

 
420,753

 
 
 
 
 
 
 
 
 
Selling and administrative
 
135,417

 
135,274

 
374,521

 
388,315

Depreciation and amortization
 
8,076


7,361

 
23,101

 
20,420

Other operating (income) expense, net
 
(225
)
 
(158
)
 
(99
)
 
132

Operating income
 
10,907

 
8,485

 
5,611

 
11,886

Interest expense
 
6,121

 
7,303

 
20,190

 
21,216

Other (income) expense, net
 
(166
)
 
1,866

 
(1,640
)
 
5,317

Income (loss) before income taxes
 
4,952

 
(684
)
 
(12,939
)
 
(14,647
)
Income tax expense (benefit)
 
1,346

 
(3,978
)
 
(6,713
)
 
(10,026
)
NET INCOME (LOSS)
 
$
3,606


$
3,294

 
$
(6,226
)
 
$
(4,621
)
NET INCOME (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
 
Basic:
 
$
0.11


$
0.10

 
$
(0.19
)
 
$
(0.14
)
Diluted:
 
$
0.11

 
$
0.10

 
$
(0.19
)
 
$
(0.14
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
32,371


32,211

 
32,333

 
32,182

Diluted weighted average common shares outstanding
 
32,398


32,314

 
32,333

 
32,182

 


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
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
NET INCOME (LOSS)
 
$
3,606

 
$
3,294

 
$
(6,226
)
 
$
(4,621
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
2,290


(39
)
 
(178
)
 
(3,215
)
COMPREHENSIVE INCOME (LOSS)
 
$
5,896


$
3,255

 
$
(6,404
)
 
$
(7,836
)


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)
 
November 1, 2019
 
November 2, 2018
 
February 1, 2019
ASSETS
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
15,859


$
105,933

 
$
193,405

Restricted cash
 
1,830


2,069


1,948

Accounts receivable, net
 
38,125

 
41,496

 
34,549

Inventories, net
 
499,855

 
431,950

 
321,905

Prepaid expenses and other current assets
 
47,538

 
49,001

 
36,574

Total current assets
 
603,207

 
630,449

 
588,381

Property and equipment, net
 
155,051

 
145,808

 
149,894

Operating lease right-of-use asset
 
31,380

 

 

Goodwill
 
110,000


110,000


110,000

Intangible asset, net
 
257,000


257,000


257,000

Other assets
 
5,204

 
5,461

 
5,636

TOTAL ASSETS
 
$
1,161,842


$
1,148,718


$
1,110,911

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
Current borrowings and short-term debt
 
$
85,150

 
$
5,150

 
$
5,150

Accounts payable
 
174,312

 
179,036

 
123,827

Lease liability - current
 
6,344

 

 

Other current liabilities
 
103,396

 
111,217

 
112,274

Total current liabilities
 
369,202

 
295,403

 
241,251

Long-term debt, net
 
379,606


483,401


482,453

Lease liability - long-term
 
30,971

 

 

Long-term deferred tax liabilities
 
56,109

 
58,462

 
58,670

Other liabilities
 
5,469

 
7,246

 
5,826

TOTAL LIABILITIES
 
841,357

 
844,512

 
788,200

Commitments and contingencies (Note 9)
 

 

 

STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Common stock, par value $0.01 authorized: 480,000,000 shares; issued and outstanding: 32,372,693, 32,211,641 and 32,220,080, respectively
 
324

 
320

 
320

Additional paid-in capital
 
358,648

 
351,064

 
352,733

Accumulated deficit
 
(25,126
)
 
(33,371
)
 
(17,159
)
Accumulated other comprehensive loss
 
(13,361
)

(13,807
)

(13,183
)
Total stockholders’ equity
 
320,485

 
304,206

 
322,711

TOTAL LIABILITIES AND STOCKHOLDERS’
          EQUITY
 
$
1,161,842

 
$
1,148,718

 
$
1,110,911



See accompanying Notes to Condensed Consolidated Financial Statements.
3

Table of Contents

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

 
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net loss
 
$
(6,226
)
 
$
(4,621
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
23,101

 
20,420

(Gain) loss on property and equipment
 
(99
)
 
121

Amortization of debt issuance costs
 
1,293

 
1,394

Stock-based compensation
 
6,632

 
4,432

Noncash lease impacts
 
1,837

 

Deferred income taxes
 
(1,899
)
 
180

Change in operating assets and liabilities:
 
 
 
 
Inventories
 
(178,016
)
 
(103,177
)
Accounts payable
 
50,173

 
26,742

Other operating assets
 
(14,755
)
 
(2,864
)
Other operating liabilities
 
(6,992
)
 
5,125

Net cash used in operating activities
 
(124,951
)
 
(52,248
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Sales of property and equipment
 

 
127

Purchases of property and equipment
 
(28,487
)
 
(33,160
)
Net cash used in investing activities
 
(28,487
)

(33,033
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Proceeds from borrowing under ABL Facility
 
95,000

 

Payments of borrowings under ABL Facility
 
(15,000
)
 

Payments of term-loan
 
(103,863
)
 
(3,865
)
Payments of employee withholding taxes on share-based compensation
 
(713
)
 
(543
)
Net cash used in financing activities
 
(24,576
)
 
(4,408
)
Effects of exchange rate changes on cash, cash equivalents and restricted cash
 
350

 
(246
)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
(177,664
)
 
(89,935
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
 
195,353

 
197,937

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
 
$
17,689

 
$
108,002

SUPPLEMENTAL CASH FLOW DATA
 
 
 
 
Unpaid liability to acquire property and equipment
 
$
5,494

 
$
4,707

Income taxes paid, net of refunds
 
$
3,225

 
$
1,420

Interest paid
 
$
18,455

 
$
19,792


See accompanying Notes to Condensed Consolidated Financial Statements.
4

Table of Contents

LANDS' END, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
 
Common Stock Issued
 
Additional Paid-in
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
(in thousands except share data)
Shares
 
Amount
 
Balance at February 1, 2019
32,220,080

 
$
320

 
$
352,733

 
$
(17,159
)
 
$
(13,183
)
 
$
322,711

Net loss

 

 

 
(6,818
)
 

 
(6,818
)
Cumulative translation adjustment, net of tax

 

 

 

 
(234
)
 
(234
)
Change in accounting principle related to lease accounting

 

 

 
(1,741
)
 

 
(1,741
)
Stock-based compensation expense

 

 
1,974

 

 

 
1,974

Vesting of restricted shares
185,052

 
4

 
(4
)
 

 

 

Restricted stock shares surrendered for taxes
(41,912
)
 

 
(687
)
 

 

 
(687
)
Balance at May 3, 2019
32,363,220

 
$
324

 
$
354,016

 
$
(25,718
)
 
$
(13,417
)
 
$
315,205

Net loss

 

 

 
(3,014
)
 

 
(3,014
)
Cumulative translation adjustment, net of tax

 

 

 

 
(2,234
)
 
(2,234
)
Stock-based compensation expense

 

 
2,329

 

 

 
2,329

Vesting of restricted shares
9,096

 

 

 

 

 

Restricted stock shares surrendered for taxes
(2,338
)
 

 
(21
)
 

 

 
(21
)
Balance at August 2, 2019
32,369,978

 
$
324

 
$
356,324

 
$
(28,732
)
 
$
(15,651
)
 
$
312,265

Net income

 

 

 
3,606

 

 
3,606

Cumulative translation adjustment, net of tax

 
 
 

 

 
2,290

 
2,290

Stock-based compensation expense

 

 
2,329

 

 

 
2,329

Vesting of restricted shares
3,242

 

 

 

 

 

Restricted stock shares surrendered for taxes
(527
)
 

 
(5
)
 

 

 
(5
)
Balance at November 1, 2019
32,372,693

 
$
324

 
$
358,648

 
$
(25,126
)
 
$
(13,361
)
 
$
320,485



See accompanying Notes to Condensed Consolidated Financial Statements.
5

Table of Contents

 
Common Stock Issued
 
Additional Paid-in
Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
(in thousands except share data)
Shares
 
Amount
 
Balance at February 2, 2018
32,101,793

 
$
320

 
$
347,175

 
$
(29,810
)
 
$
(10,592
)
 
$
307,093

Net loss

 

 

 
(2,630
)
 

 
(2,630
)
Cumulative translation adjustment, net of tax

 

 

 

 
(1,636
)
 
(1,636
)
Change in accounting principle related to revenue recognition

 

 

 
1,060

 

 
1,060

Stock-based compensation expense

 

 
967

 

 

 
967

Vesting of restricted shares
132,620

 

 

 

 

 

Restricted stock shares surrendered for taxes
(26,295
)
 

 

 

 

 

Balance at May 4, 2018
32,208,118

 
$
320

 
$
348,142

 
$
(31,380
)
 
$
(12,228
)
 
$
304,854

Net loss

 

 

 
(5,285
)
 

 
(5,285
)
Cumulative translation adjustment, net of tax

 

 

 

 
(1,540
)
 
(1,540
)
Stock-based compensation expense

 

 
1,729

 

 

 
1,729

Vesting of restricted shares
6,173

 

 

 

 

 

Restricted stock shares surrendered for taxes
(2,001
)
 

 
(533
)
 

 

 
(533
)
Balance at August 3, 2018
32,212,290

 
$
320

 
$
349,338

 
$
(36,665
)
 
$
(13,768
)
 
$
299,225

Net income

 

 

 
3,294

 

 
3,294

Cumulative translation adjustment, net of tax

 

 

 

 
(39
)
 
(39
)
Stock-based compensation expense

 

 
1,736

 

 

 
1,736

Vesting of restricted shares
1,320

 

 

 

 

 

Restricted stock shares surrendered for taxes
(1,969
)
 

 
(10
)
 

 

 
(10
)
Balance at November 3, 2018
32,211,641

 
320

 
351,064

 
(33,371
)
 
(13,807
)
 
$
304,206



See accompanying Notes to Condensed Consolidated Financial Statements.
6

Table of Contents

LANDS’ END, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Description of Business
Lands' End, Inc. ("Lands' End" or the "Company") is a leading uni-channel retailer of casual clothing, accessories, footwear and home products. We offer products online at www.landsend.com, on third party online marketplaces 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 men, women, kids and the home.
Terms that are commonly used in the Company's notes to Condensed Consolidated Financial Statements are defined as follows:
• ABL Facility - Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
• Adjusted EBITDA - Net loss net of Income tax benefit, Other income (expense), net, Interest expense, Depreciation and amortization and certain significant items
• ASC - FASB Accounting Standards Codification, which serves as the source for authoritative GAAP, as supplemented by rules and interpretive releases by the SEC which are also sources of authoritative GAAP for SEC registrants
• ASU - FASB Accounting Standards Update
• CAM - Common area maintenance for leased properties
• Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility
• Deferred Awards - Time vesting stock awards
• EPS - Earnings per share
• ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
• FASB - Financial Accounting Standards Board
• First Quarter 2019 - The 13 weeks ended May 3, 2019
• Fiscal 2018 - The 52 weeks ended February 1, 2019
• Fiscal 2019 - The 52 weeks ending January 31, 2020
• Fourth Quarter 2019 - the 13 weeks ending January 31, 2020
• 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
• Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries
• SEC - United States Securities and Exchange Commission

7


Table of Contents

• 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
• Third Quarter 2018 - The 13 weeks ended November 2, 2018
• Third Quarter 2019 - The 13 weeks ended November 1, 2019
• Transform Holdco - Transform Holdco LLC, an affiliate of ESL, which on February 11, 2019 acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern
• UTBs - Gross unrecognized tax benefits
Year-to-Date 2018 - The 39 weeks ended November 2, 2018
Year-to-Date 2019 - The 39 weeks ended November 1, 2019
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 28, 2019.


8


Table of Contents

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

Leases

In February 2016 the FASB issued ASU 2016-02, Leases (“ASC 842”), which changed how companies account for leases. On February 2, 2019, the Company adopted the guidance using the Comparatives under 840 option approach which waives the requirement to apply ASC 842 in the comparative periods presented within the financial statements in the year of adoption. Lands' End elected the practical expedient package, which among other practical expedients, includes the option to retain the historical classification of leases entered into prior to February 2, 2019. The Company also elected the practical expedient to combine lease and non-lease components.

The Company is a lessee under various lease agreements for its equipment and retail operations. The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease possession (date in which the Company takes possession of the asset). At lease possession the Company also measures and recognizes a right-of-use asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease, if it is reasonably certain that the option will be exercised. For the purposes of recognizing right-of-use assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient of not recognizing a right-of-use asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The Company's leases are classified as operating leases, which are included in the Operating lease right-of-use asset, Lease liability - current and Lease liability - long-term on the Company's Condensed Consolidated Balance sheets.

Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments, over the lease term, as of the possession date. Minimum lease payments include the fixed lease component of the agreement as well as any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to renew. If it is determined the lease will more likely than not be renewed, the right-of-use asset and lease liability for that lease will be adjusted to reflect the updated lease term. The Company does not have any leases with residual value guarantees or restrictions or covenants imposed by the lease.

The Company reviews its long-lived assets, including Operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset group exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset, the Company performs an impairment analysis. An impairment charge is recognized to the extent the sum of the estimated discounted future cash flows from the use of the asset is less than the carrying value. This charge is then allocated pro-rata to the assets in the asset group, including the Operating lease right-of-use asset. No assets are written down below their indicated fair value which, for the Operating lease right-of-use assets, can be based on market comparisons of rent. 

Due to the absence of an implicit rate in the Company’s lease contracts, the Company estimates its incremental borrowing rate for each lease based on the lease term, lease currency and the Company’s credit spread. The yield curve selected at the lease possession date represents one notch above the Company’s unsecured credit rating, and therefore is considered a close proxy for the incremental borrowing rate the Company would incur for secured debt.

Lease expense is recognized on a straight-line basis over the lease term and is included in Selling and administrative expense in the Condensed Consolidated Statements of Operations. Variable lease payments that do not depend on a rate or index and short-term rentals (leases with terms less than 12 months) are expensed as incurred.

The impact of adoption of the new lease guidance on the Condensed Consolidated Balance Sheets as of February 2, 2019 was:

9


Table of Contents

(in thousands)
 
February 1, 2019 (As reported)
 
Impact of Adoption
 
February 2, 2019
Assets:
 
 
 
 
 
 
   Operating lease right-of-use asset
 
$

 
$
27,494

 
$
27,494

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
   Lease liability - current
 

 
9,892

 
9,892

   Lease liability - long-term
 

 
21,700

 
21,700

 
 
 
 
 
 
 
Stockholders' Equity:
 
 
 
 
 
 
   Accumulated deficit
 
(17,159
)
 
(1,741
)
(1) 
(18,900
)

(1) At the time of implementation, the Company determined certain Operating lease right-of-use assets were impaired and recorded an adjustment to beginning retained earnings related to these impairments, net of tax.

See Note 13, Leases for additional disclosures.

NOTE 3. EARNINGS/(LOSS) PER SHARE
The numerator for both basic and diluted EPS is net income (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 U.S. GAAP. Potentially dilutive securities for the diluted EPS calculations consist of nonvested equity shares of common stock and in-the-money outstanding options where the current stock price exceeds the option strike price, if any, to purchase the Company’s common stock.
The following table summarizes the components of basic and diluted EPS:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands, except per share amounts)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Net income (loss)
 
$
3,606

 
$
3,294

 
$
(6,226
)
 
$
(4,621
)
 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
32,371

 
32,211

 
32,333

 
32,182

Dilutive effect of stock awards
 
28

 
103

 

 

Diluted weighted average common shares outstanding
 
32,398

 
32,314

 
32,333

 
32,182

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
$
0.11

 
$
0.10

 
$
(0.19
)
 
$
(0.14
)
Diluted earnings (loss) per share
 
$
0.11

 
$
0.10

 
$
(0.19
)
 
$
(0.14
)
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 653,235, 484,743, 763,163 and 714,530 anti-dilutive shares excluded from the diluted weighted average shares outstanding for Third Quarter 2019, Third Quarter 2018, Year-to-Date 2019 and Year-to-Date 2018, respectively.


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Table of Contents

NOTE 4. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) 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
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Beginning balance: Accumulated other comprehensive loss (net of tax of $4,165, $3,660, $3,505 and $2,816 respectively)
 
$
(15,651
)
 
$
(13,768
)
 
$
(13,183
)
 
$
(10,592
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (net of tax expense (benefit) of $(613), $10, $47 and $854 respectively)
 
2,290

 
(39
)
 
(178
)
 
(3,215
)
Ending balance: Accumulated other comprehensive loss (net of tax of $3,552, $3,670, $3,552 and $3,670 respectively)
 
$
(13,361
)
 
$
(13,807
)
 
$
(13,361
)
 
$
(13,807
)

No amounts were reclassified out of Accumulated other comprehensive income (loss) during any of the periods presented.

NOTE 5. DEBT
The Company's debt consisted of the following:
 
 
November 1, 2019
 
November 2, 2018
 
February 1, 2019
(in thousands)
 
Amount
 
Rate
 
Amount
 
Rate
 
Amount
 
Rate
Term Loan Facility, maturing April 4, 2021
 
$
386,675

(1) 
5.29
%
 
$
491,825

 
5.49
%
 
$
490,538

 
5.77
%
ABL Facility, maturing November 16, 2022
 
80,000

 
3.54
%
 

 
%
 

 
%
 
 
466,675

 
 
 
491,825

 
 
 
490,538

 
 
Less: Current maturities in Current liabilities
 
85,150

 
 
 
5,150

 
 
 
5,150

 
 
Less: Unamortized debt issuance costs
 
1,919

 
 
 
3,274

 
 
 
2,935

 
 
Long-term debt, net
 
$
379,606

 
 
 
$
483,401

 
 
 
$
482,453

 
 
(1) Reflects voluntary prepayment of $100 million to the Term Loan Facility in First Quarter 2019.

The following table summarizes the Company's borrowing availability under the ABL Facility:
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
February 1, 2019
ABL Facility maximum borrowing
 
$
175,000

 
$
175,000

 
$
175,000

Current borrowings under ABL
 
80,000

 

 

Outstanding letters of credit
 
12,531

 
22,621

 
21,111

Borrowing availability under ABL
 
$
82,469

 
$
152,379

 
$
153,889


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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 Facility is subject to adjustment based on the average excess availability under the ABL Facility for the preceding fiscal quarter. LIBOR borrowings will range from 1.25% to 1.75% for the ABL Facility. Base rate borrowings will range from 0.50% to 1.00% for the ABL Facility.
Customary agency fees are payable in respect of the Debt Facilities. The ABL Facility fees also include (i) commitment fees in an amount equal to 0.25% of the daily unused portions of the ABL Facility, 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 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 November 1, 2019.
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.

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 fair 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 award 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.
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. For Performance Awards granted in Fiscal 2018 and after, the Target Shares earned can range from 50% to 200% once minimum thresholds have been reached, and depend on the achievement of Adjusted EBITDA and revenue performance measures for the cumulative three-fiscal year performance period beginning in the fiscal year of the grant date. 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 and after are 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

12


Table of Contents

Target Shares expected to be earned. Based on performance to date, the Company is currently accruing for Performance Awards based on a 100% payout, which is reflected in the financial information below.
iii.
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 and vest ratably over a four year period.
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
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Deferred Awards
 
$
1,531

 
$
1,237

 
$
4,429

 
$
3,177

Performance Awards
 
611

 
312

 
1,642

 
694

Option Awards
 
187

 
187

 
561

 
561

Total stock-based compensation expense

$
2,329

 
$
1,736

 
$
6,632

 
$
4,432

The following table provides a summary of the Deferred Awards activity for Year-to-Date 2019:
 
 
Deferred Awards
(in thousands, except per share amounts)
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
Unvested as of February 1, 2019
 
594

 
$
21.96

Granted
 
416

 
15.67

Vested
 
(197
)
 
22.11

Forfeited or expired
 
(49
)
 
20.29

Unvested as of November 1, 2019
 
764

 
18.57


Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $8.8 million as of November 1, 2019, which is expected to be recognized ratably over a weighted average period of 1.8 years. Deferred Awards granted to employees during Fiscal 2019 vest ratably over a period of three years.

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Table of Contents

The following table provides a summary of the Performance Awards activity for Year-to-Date 2019:
 
 
Performance Awards
(in thousands, except per share amounts)
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
Unvested as of February 1, 2019
 
176

 
$
21.93

Granted
 
265

 
15.73

Vested
 

 

Forfeited or expired
 
(20
)
 
19.09

Unvested as of November 1, 2019
 
421

 
18.15

 
Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $4.6 million as of November 1, 2019, which is expected to be recognized ratably over a weighted average period of 2.0 years. Performance Awards granted to employees during Fiscal 2019 vest, if earned, after completion of the applicable three-year performance period.
The following table provides a summary of the Options Award activity for Year-to-Date 2019:
 
 
Option Awards
(in thousands, except per share amounts)
 
Number of Shares
 
Weighted Average Grant Date Fair Value per Share
Unvested as of February 1, 2019
 
257

 
$
8.73

Granted
 

 

Vested
 
(86
)
 
8.73

Forfeited or expired
 

 

Unvested as of November 1, 2019
 
171

 
8.73


Total unrecognized stock-based compensation expense related to unvested Option Awards was approximately $1.0 million as of November 1, 2019, which is expected to be recognized ratably over a weighted average period of 1.4 years. The Option Awards have a life of ten years and vest ratably over the first four years. The fair value of each Option Award was estimated on the grant date using the Black-Scholes option pricing model. As of November 1, 2019, 171,567 shares related to Option Awards were exercisable. No options have been exercised as of November 1, 2019.

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 $1.8 million, $2.1 million and $1.9 million as of November 1, 2019, November 2, 2018 and February 1, 2019, 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, net, Accounts payable, Current borrowings, 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:
 
 
November 1, 2019
 
November 2, 2018
 
February 1, 2019
(in thousands)
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt, including short-term portion
 
$
386,675

 
$
372,175

 
$
491,825

 
$
475,226

 
$
490,538

 
$
460,493

Long-term debt, including short-term portion was valued utilizing Level 2 valuation techniques based on the closing inactive market bid price on November 1, 2019, November 2, 2018, and February 1, 2019. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of November 1, 2019, November 2, 2018, and February 1, 2019.


NOTE 8. INCOME TAXES

Provision for Income Taxes

The Company recorded an income tax expense for the Third Quarter 2019 of 27.2%. This results in an income tax benefit Year-to-Date 2019 of 51.9%. Comparatively, the Company reported an income tax benefit of 581.6% and 68.5% for Third Quarter 2018 and Year-to-Date 2018 respectively. The difference between the Third Quarter 2019 tax rate and the Third Quarter 2018 tax rate was primarily due to revised estimates of the impact of the Tax Act as more fully described below. The Year-to-Date 2019 tax rate reflects the benefit of the Company’s election to treat certain

14



foreign entities as a U.S. branch. The Year-to-Date 2018 rate reflects revised estimates related to the Tax Act and the benefits of favorable state tax audit settlements for periods prior to Separation.

Tax Act

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. Pursuant to Staff Accounting Bulletin No. 118, the Company revised estimates related to the Tax Act and recorded a benefit of $3.7 million in the Third Quarter 2018.

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.

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.
On February 11, 2019 Transform Holdco acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern. The Company believes that ESL holds a significant portion of the membership interest of Transform Holdco and therefore considers that entity to be a related party as well.
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. Some of these agreements have been assumed by and assigned to Transform Holdco in connection with the proceedings related to the Sears Filing (as defined below).
The components of the transactions between the Company and Sears Holdings or Transform Holdco, which exclude pass-through payments to or from third parties, are as follows:
Lands’ End Shops at Sears
Related party costs charged by Sears Holdings or Transform Holdco to the Company related to Lands’ End Shops at Sears are as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands, except for number of stores)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Rent, CAM and occupancy costs
 
$
907

 
$
3,483

 
$
2,990

 
$
12,004

Retail services, store labor
 
779

 
3,231

 
2,637

 
11,084

Financial services and payment processing
 
106

 
350

 
249

 
1,191

Supply chain costs
 
5

 
126

 
93

 
362

Total expenses
 
$
1,797

 
$
7,190

 
$
5,969

 
$
24,641

Number of Lands’ End Shops at Sears at period end
 
36

 
125

 
36

 
125

General Corporate Services
Related party costs charged by Sears Holdings or Transform Holdco to the Company for general corporate services are as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Sourcing
 
$
3,192

 
$
2,830

 
$
6,173

 
$
6,144

Shop Your Way
 
25

 
251

 
79

 
633

Shared services
 
48

 
48

 
143

 
143

Total expenses
 
$
3,265

 
$
3,129

 
$
6,395

 
$
6,920

Use of Intellectual Property or Services
Related party revenue and costs charged by the Company to and from Sears Holdings or Transform Holdco for the use of intellectual property or services is as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Lands' End business outfitters revenue
 
$
1

 
$
216

 
$
4

 
$
834

Credit card revenue
 
92

 
184

 
248

 
506

Royalty income
 
30

 
43

 
131

 
156

Gift card expense
 
(3
)
 
(4
)
 
(8
)
 
(12
)
Total income
 
$
120

 
$
439

 
$
375

 
$
1,484


Additional Balance Sheet Information

On October 15, 2018, Sears Holdings Corporation and certain of its subsidiaries filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of Title 11 of the United States Code (collectively the “Sears Filing"). Following the Sears Filing, the Company began netting payables due to Sears Holdings or Transform Holdco, as applicable, against receivables due from Sears Holdings or Transform Holdco if and as allowed under its contracts. As a result, receivables and payables have been netted, and are presented as a net receivable balance in Accounts receivable, net in the Condensed Consolidated Balance Sheets.


15


Table of Contents

The Company recorded an Accounts receivable, net balance of $1.2 million and $1.0 million from Sears Holdings or Transform Holdco in the Condensed Consolidated Balance Sheets as of November 1, 2019 and November 2, 2018 respectively. The Company recorded an Accounts receivable, net balance of $0.1 million from Sears Holdings or Transform Holdco in the Consolidated Balance Sheets as of February 1, 2019.

In the Third Quarter 2018, the Company recorded a non-cash charge of $2.6 million in Other expense, net, in its Condensed Statement of Operations to reflect a reserve relating to pre-Separation UTBs (including penalties and interest) for which Sears Holdings Corporation indemnified the Company under a Tax Sharing Agreement entered into in connection with the Separation, the recovery of which had become uncertain as a result of the Sears Filing. Sears Holdings rejected the Tax Sharing Agreement, per an order approved on April 4, 2019. There was not an indemnification receivable as of November 1, 2019 and February 1, 2019.

NOTE 11. SEGMENT REPORTING
The Company is a leading multi-channel retailer of casual clothing, accessories, footwear and home products. Lands' End is growing its multi-channel distribution network which is designed to allow the consumer to interact with the Company with a consistent customer experience whether on Company websites, third party marketplaces, at Company Operated stores or other distribution channels. As the Company expands this distribution network, and in
conjunction with the accelerated closures of Lands' End Shops at Sears, the historical structure of separate reportable segments for retail stores and direct-to-consumer was no longer representative of the way the current Chief Operating Decision Maker evaluates the business units and allocates resources.
Therefore, as of February 1, 2019, the Company updated its segment reporting to better align with this multi-channel strategy. The Company's operating segments consist of U.S. eCommerce, Outfitters, Europe eCommerce, Japan eCommerce and Retail. The Company determined that each of the operating segments share similar economic and other qualitative characteristics thus the results of the operating segments are aggregated into one reportable external segment, consistent with the Company's multi-channel business approach. Prior year information has been restated to reflect this change.
Net revenue is presented by product channel in the following table:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Net revenue:
 
 
 
 
 
 
 
 
eCommerce
 
$
242,328

 
$
231,517

 
$
669,880

 
$
634,082

Outfitters
 
83,342

 
82,261

 
191,877

 
229,671

Retail
 
14,353

 
27,792

 
38,966

 
85,587

Total net revenue
 
$
340,023

 
$
341,570

 
$
900,723

 
$
949,340

 
NOTE 12. REVENUE
Revenue includes sales of merchandise and delivery revenue related to merchandise sold. Substantially all of the Company's revenue is recognized when control of product passes to customers, which for the eCommerce and Outfitters channels is when the merchandise is expected to be received by the customer and for the Retail channel 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 Third Quarter 2019.
The Company's revenue is disaggregated by product channel and geographic location. Revenue by product channel is presented in Note 11, Segment Reporting. Revenue by geographic location was:
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Net revenue:
 
 
 
 
 
 
 
 
United States
 
$
297,166

 
$
295,070

 
$
768,609

 
$
812,746

Europe
 
28,344

 
31,190

 
87,870

 
89,287

Asia
 
9,633

 
10,273

 
33,271

 
35,033

Other
 
4,880

 
5,037

 
10,973

 
12,274

Total Net revenue
 
$
340,023

 
$
341,570

 
$
900,723

 
$
949,340

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

16


Table of Contents

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, which is reported in Other current liabilities in the Condensed Consolidated Balance Sheets, as well as amounts recognized through Net revenue for each period presented. The remainder of deferred revenue as of November 1, 2019 is expected to be recognized in Net revenue in the fiscal quarter ending January 31, 2020, as products are delivered to customers.
 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Deferred Revenue Beginning of Period
 
$
9,411

 
$
8,796

 
$
9,051

 
$
12,993

Deferred Revenue Recognized in Period
 
(9,411
)
 
(8,796
)
 
(9,051
)
 
(12,993
)
Revenue Deferred in Period
 
15,178

 
22,117

 
15,178

 
22,117

Deferred Revenue End of Period
 
$
15,178

 
$
22,117

 
$
15,178

 
$
22,117


Revenue from gift cards is recognized when (i) the gift card is redeemed by the customer for merchandise, or (ii) as gift card breakage, an estimate of gift cards which will not be redeemed where the Company does not have a legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions. 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 $20.7 million, $16.0 million and $18.2 million as of November 1, 2019, November 2, 2018 and February 1, 2019, 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:

 
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
 
November 1, 2019
 
November 2, 2018
 
November 1, 2019
 
November 2, 2018
Balance as of Beginning of Period
 
$
20,443

 
$
16,626

 
$
18,191

 
$
19,272

Gift cards sold
 
17,473

 
14,790

 
46,497

 
40,143

Gift cards redeemed
 
(17,041
)
 
(15,258
)
 
(43,121
)
 
(41,605
)
Gift card breakage
 
(171
)
 
(183
)
 
(863
)
 
(1,835
)
Balance as of November 1, 2019
 
$
20,704

 
$
15,975

 
$
20,704

 
$
15,975

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 November 1, 2019, November 2, 2018 and February 1, 2019, $22.9 million, $23.7 million and $22.2 million, respectively, of refund liabilities, primarily associated with product returns, were reported in Other current liabilities in the Condensed Consolidated Balance Sheets. An asset for product returns is recorded in Prepaid expenses and other current assets in the Condensed Consolidated Balance sheets.

NOTE 13. LEASES

The Company is a lessee under various lease agreements for its retail operations and equipment including a master lease agreement for its Lands' End Shops at Sears. Refer also to Note 10, Related Party Transactions. All leases are classified as operating leases. The Company’s leases have remaining terms of less than one year to ten years and contain various renewal options. The period which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. Options to extend are reviewed within two years of the option date.


17


Table of Contents

The components of lease expense are as follows:
 
13 Weeks Ended
 
39 Weeks Ended
(in thousands)
November 1, 2019
 
November 1, 2019
Operating lease expense
$
2,380

 
$
6,780

Variable lease expense
432

 
1,228

Lease expense
$
2,812

 
$
8,008


Short-term lease cost was not material for Third Quarter 2019 and Year-to-Date 2019.

Supplemental balance sheet information related to operating leases are as follows:
(in thousands, except as noted below)
November 1, 2019
Operating lease right-of-use asset
$
31,380

Lease liability - current
6,344

Lease liability - long-term
30,971

Weighted average remaining lease term in years
7.72 years

Weighted average discount rate
6.47
%

Supplemental cash flow information related to operating leases are as follows:
 
39 Weeks Ended
(in thousands)
November 1, 2019
Operating cash outflows from operating leases
7,783


Maturities of operating lease liabilities as of November 1, 2019 are as follows (in thousands):
2019, excluding the 39 weeks ended November 1, 2019
$
2,847

2020
7,422

2021
6,237

2022
5,499

2023
4,732

Thereafter
21,806

Total operating lease payments
$
48,543

Less imputed interest
11,228

Present value of lease liabilities
$
37,315



Total future commitments under the Company’s operating leases as of February 1, 2019 were as follows for the fiscal years ending (in thousands):
2019
$
10,851

2020
6,338

2021
4,873

2022
3,828

2023
2,839

Thereafter
10,590

Total minimum payments required
$
39,319



18


Table of Contents

The table above was updated from the version previously included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2019 within the Notes to Consolidated Financial Statements to adjust for certain inconsistencies that management identified in First Quarter 2019 during the implementation of ASC 842, Leases. Specifically, the Company corrected the schedule to include additional lease commitments for lease contracts signed in Fiscal 2018, with commencement dates in Fiscal 2019.

In Year-to-Date 2019, the Company took possession of retail spaces that resulted in an increase in Operating lease right-of-use asset of $9.9 million, Lease liability - current of $0.7 million and Lease liability - long-term of $11.3 million. Additionally, in Third Quarter 2019, the Company entered into several leases where possession of a retail space will occur in Fourth Quarter 2019.

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 risks, 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 1, 2019 and "Part II, Item 1A Risk Factors" of this Quarterly Report on Form 10-Q, 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 Facility -Asset-based senior secured credit agreements, dated as of November 16, 2017, with Wells Fargo Bank, N.A. and certain other lenders
Company Operated stores - Lands' End retail stores in the Retail channel
Debt Facilities - Collectively, the ABL Facility and the Term Loan Facility
ERP - Enterprise resource planning software solutions
ESL - ESL Investments, Inc. and its investment affiliates, including Edward S. Lampert
First Quarter 2019 - The 13 weeks ended May 3, 2019
Fiscal 2018 - The 52 weeks ended February 1, 2019
Fiscal 2019 - The 52 weeks ending January 31, 2020
Fourth Quarter 2019 - the 13 weeks ending January 31, 2020
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
Sears Holdings or Sears Holdings Corporation - Sears Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries
SEC - United States Securities and Exchange Commission
Third Quarter 2018 - The 13 weeks ended November 2, 2018
Third Quarter 2019 - The 13 weeks ended November 1, 2019
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

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Transform Holdco - Transform Holdco LLC, an affiliate of ESL, which on February 11, 2019 acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern
Year-to-Date 2018 - The 39 weeks ended November 2, 2018
Year-to-Date 2019 - The 39 weeks ended November 1, 2019

Executive Overview

Description of the Company

Lands' End is a leading uni-channel retailer of casual clothing, accessories, footwear and home products. We offer products online at www.landsend.com, on third party online marketplaces 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 men, women, kids and the home.

Lands’ End was founded in 1963 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."

As the Company evolves its uni-channel strategy, and in conjunction with the accelerated closures of Lands' End Shops at Sears, during Fiscal 2018 we determined it was more appropriate to combine the previously disclosed external reportable segments of Direct and Retail, into one combined external reportable segment as it more closely represents how we are managing the Company. We identify our operating segments according to how our business activities are managed and evaluated. Our operating segments consist of U.S. eCommerce, Retail, Outfitters, Europe eCommerce and Japan eCommerce. We have determined that each of our operating segments share similar economic and other qualitative characteristics, and therefore the results of our operating segments are aggregated into one external reportable segment.
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.
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 owned 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. On February 11, 2019, Transform Holdco acquired from Sears Holdings substantially all of the go-forward retail footprint, and other assets and component businesses of Sears Holdings as a going concern. We believe that ESL holds a significant portion of the membership interests of Transform Holdco and therefore consider that entity to be a related party as well.
Seasonality
We experience seasonal fluctuations in our net revenue and operating results and historically have realized a significant portion of our net revenue and earnings for the year during our fourth fiscal quarter. We generated an average of 35.1% 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 second and third quarter of the fiscal year as inventory builds to support 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.

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Results of Operations
The following table sets forth, for the periods indicated, selected income statement data:

 
13 Weeks Ended

 
November 1, 2019
 
November 2, 2018
(in thousands)
 
$'s

% of
Net revenue
 
$’s
 
% of
Net revenue
Net revenue
 
$
340,023

 
100.0
 %
 
$
341,570

 
100.0
 %
Cost of sales (excluding depreciation and amortization)
 
185,848

 
54.7
 %
 
190,608

 
55.8
 %
Gross profit
 
154,175

 
45.3
 %
 
150,962

 
44.2
 %
Selling and administrative
 
135,417

 
39.8
 %
 
135,274

 
39.6
 %
Depreciation and amortization
 
8,076

 
2.4
 %
 
7,361

 
2.2
 %
Other operating income, net
 
(225
)
 
(0.1
)%
 
(158
)
 
 %
Operating income
 
10,907

 
3.2
 %
 
8,485

 
2.5
 %
Interest expense
 
6,121

 
1.8
 %
 
7,303

 
2.1
 %
Other (income) expense, net
 
(166
)
 
 %
 
1,866

 
0.5
 %
Income (loss) before income taxes
 
4,952

 
1.5
 %
 
(684
)
 
(0.2
)%
Income tax expense (benefit)
 
1,346

 
0.4
 %
 
(3,978
)
 
(1.2
)%
NET INCOME
 
$
3,606

 
1.1
 %
 
$
3,294

 
1.0
 %
 
 
39 Weeks Ended
 
 
November 1, 2019
 
November 2, 2018
(in thousands)
 
$'s
 
% of
Net revenue
 
$’s
 
% of
Net revenue
Net revenue
 
$
900,723

 
100.0
 %
 
$
949,340

 
100.0
 %
Cost of sales (excluding depreciation and amortization)
 
497,589

 
55.2
 %
 
528,587

 
55.7
 %
Gross profit
 
403,134

 
44.8
 %
 
420,753

 
44.3
 %
Selling and administrative
 
374,521

 
41.6
 %
 
388,315

 
40.9
 %
Depreciation and amortization
 
23,101

 
2.6
 %
 
20,420

 
2.2
 %
Other operating income (expense), net
 
(99
)
 
 %
 
132

 
 %
Operating income
 
5,611

 
0.6
 %
 
11,886

 
1.3
 %
Interest expense
 
20,190

 
2.2
 %
 
21,216

 
2.2
 %
Other (income) expense, net
 
(1,640
)
 
(0.2
)%
 
5,317

 
0.6
 %
Loss before income taxes
 
(12,939
)
 
(1.4
)%
 
(14,647
)
 
(1.5
)%
Income tax benefit
 
(6,713
)
 
(0.7
)%
 
(10,026
)
 
(1.1
)%
NET LOSS
 
$
(6,226
)
 
(0.7
)%
 
$
(4,621
)
 
(0.5
)%


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 Income (Loss) and Adjusted EBITDA

We recorded Net income of $3.6 million in Third Quarter 2019 compared to Net income of $3.3 million in the Third Quarter 2018. In addition to our Net income determined in accordance with GAAP, for purposes of evaluating operating performance, we use an Adjusted EBITDA measurement. Adjusted EBITDA is computed as Net income appearing on the Condensed Consolidated Statements of Operations net of Income tax expense/(benefit), 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. The methods used by the

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Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. 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 is 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

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.

Gain or loss on property and equipment - management considers the gains or losses on asset valuation, including impairments, to result from investing decisions rather than ongoing operations.

 


13 Weeks Ended


November 1, 2019

November 2, 2018
(in thousands)

$’s

% of
Net revenue

$’s

% of
Net revenue
Net income

$
3,606


1.1
 %

$
3,294


1.0
 %
Income tax expense (benefit)

1,346


0.4
 %

(3,978
)

(1.2
)%
Other (income) expense, net

(166
)

 %

1,866


0.5
 %
Interest expense

6,121


1.8
 %

7,303


2.1
 %
Operating income

10,907


3.2
 %

8,485