Lands' End, Incorporated
Dec 10, 2014

Lands' End Announces Third Quarter of Fiscal 2014 Results

Third Quarter Operating Income Increased 50.8% to $35.1 Million

DODGEVILLE, Wis., Dec. 10, 2014 (GLOBE NEWSWIRE) -- Lands' End, Inc. (Nasdaq:LE) today announced financial results for the third quarter ended October 31, 2014.

Third Quarter Highlights:

Edgar Huber, Lands' End's President and Chief Executive Officer, stated, "We delivered another quarter of strong operating margin increases driven by a better assortment of product, a more targeted promotional strategy and disciplined expense controls. Profitable growth and price integrity are critical components of the Lands' End's brand strategy and this represents the sixth consecutive quarter in which we have delivered better than 20% growth in operating income. I want to congratulate and thank the Lands' End team for their hard work and achievement. The changes we have made to the merchandise architecture, brand positioning and digital shopping experience have resonated in the marketplace. We continue our focus on delivering exceptional quality, value and service to our customers and executing our strategic initiatives to build Lands' End into a global lifestyle brand."

Third Quarter Results

Merchandise sales and services, net decreased 2.8% to $373.1 million in the third quarter of 2014 from $383.9 million in the third quarter of 2013. Merchandise sales and services, net in the Direct segment decreased 1.2% to $320.3 million primarily attributable to a decrease in our International business, partially offset by an increase in U.S. business and school uniform sales. Merchandise sales and services, net in the Retail segment decreased 11.5% to $52.8 million driven by a decrease in the number of Lands' End Shops at Sears, a decrease in Shop Your Way redemption credits resulting from the commercial agreements entered into with Sears Holdings Corporation and its subsidiaries as part of the Company's separation, and a decrease in same store sales. Same store sales in the Retail segment decreased 3.1%, driven by lower sales in the Company's Lands' End Shops at Sears. On October 31, 2014, the Company operated 242 Lands' End Shops at Sears, 14 global Lands' End Inlet stores and five newly opened international shop-in-shops compared to 275 Lands' End Shops at Sears and 16 global Lands' End Inlets on November 1, 2013.

Gross profit increased 5.1% to $183.3 million and gross margin increased 370 basis points to 49.1% in the third quarter of 2014 compared with $174.5 million and 45.4%, respectively, in the third quarter of 2013. The increase in gross margin was driven by increases in both the Direct and Retail segments. Gross Margin in the Direct segment increased 260 basis points to 49.8% and gross margin in the Retail segment increased 910 basis points to 45.1%. The Gross margin increase in both the Direct and Retail segments was primarily attributable to improved merchandise assortment architecture and a more targeted promotional strategy. The Retail segment Gross margin improvement was also due to an unfavorable inventory adjustment in the third quarter of last year.

Selling and administrative expenses decreased 1.7% to $143.4 million in the third quarter of 2014 from $145.9 million in the third quarter of 2013. The third quarter of 2014 included approximately $3.2 million of incentive compensation expenses and $2.0 million of stand-alone public company related expenses. There were no incentive compensation expenses or stand-alone public company costs in the third quarter of 2013. As a percentage of Merchandise sales and services, net, Selling and administrative expenses increased approximately 40 basis points to 38.4% during the third quarter of 2014 from 38.0% during the third quarter last year. The deleveraging of Selling and administrative expenses was primarily attributable to increased incentive compensation expenses and stand alone costs, partially offset by expense management.

Depreciation and amortization expense decreased 8.6% to $4.8 million in the third quarter of 2014 from $5.3 million in the third quarter of 2013 primarily attributable to an increase in fully depreciated assets.

Operating income increased 50.8% to $35.1 million in the third quarter of 2014 from $23.3 million in the third quarter of 2013.

Interest expense was $6.2 million in the third quarter of 2014 and was attributable to higher debt levels and costs related to the issuance of the term loan used to pay a $500 million dividend to a subsidiary of Sears Holdings Corporation immediately prior to the separation.

Income tax expense was $11.4 million for the third quarter of 2014 compared with $9.0 million in the third quarter of 2013. The effective tax rate was 38.8% in the third quarter of 2014 compared with 38.7% in the third quarter of 2013.

Net income increased 26.0% to $18.0 million and diluted earnings per share increased 24.4% to $0.56 in the third quarter of 2014 compared with Net income of $14.3 million and diluted earnings per share of $0.45 per diluted share, in the third quarter of 2013.

Adjusted EBITDA1 increased 39.9% to $39.9 million in the third quarter of 2014 from $28.5 million in the third quarter of 2013.

Balance Sheet and Cash Flow Highlights

Cash was $105.6 million on October 31, 2014 compared to $16.3 million on November 1, 2013. Net cash provided by operations for the 39 weeks ended October 31, 2014 was $96.5 million more than the same period last year primarily due to:

Inventory decreased 12.9% to $403.9 million on October 31, 2014 from $464.0 million on November 1, 2013.

The net effect of changes in settlement methods with our former parent company and certain suppliers included approximately $24 million in Accounts payable less $6 million in Accounts receivable as of October 31, 2014. These items would have been included in equity as part of Net parent company investment prior to our separation on April 4, 2014 from Sears Holdings Corporation.

The Company had $161.5 million of availability under its asset-based senior secured credit facility and had long-term debt of $507.3 million as of October 31, 2014.

About Lands' End, Inc.

Lands' End, Inc. (Nasdaq:LE) 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, primarily at Lands' End Shops at Sears® and standalone Lands' End Inlet® Stores. 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.

Forward-Looking Statements

This press release contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, without limitation, information concerning our future financial performance, business strategy, plans, goals and objectives. Statements preceded or followed by, or that otherwise include, the words "believes," "expects," "anticipates," "intends," "project," "estimates," "plans," "forecast," "is likely to" and similar expressions or future or conditional verbs such as "will," "may," "would," "should" and "could" are generally forward-looking in nature and not historical facts. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: our ability to offer merchandise and services that customers want to purchase; changes in customer preference for our branded merchandise; customers' use of our digital platform; the success of our overall marketing strategies; our dependence on information technology and a failure of information technology systems, including with respect to our e-commerce operations, or an inability to upgrade or adapt our systems; fluctuations and increases in the costs of raw materials; impairment of our relationships with our vendors; our failure to maintain the security of customer, employee or company information; our failure to compete effectively in the apparel industry; the performance of our "store within a store" business model; if Sears, Roebuck and Co. sells or disposes of its retail stores or if its retail business does not attract customers or does not adequately promote the Lands' End Shops at Sears; legal, regulatory, economic and political risks associated with international trade and those markets in which we conduct business and source our merchandise; our failure to protect or preserve the image of our brands and our intellectual property rights; increases in postage, paper and printing costs; failure by third parties who provide us with services in connection with certain aspects of our business to perform their obligations; our failure to timely and effectively obtain shipments of products from our vendors and deliver merchandise to our customers; reliance on promotions and markdowns to encourage consumer purchases; our failure to efficiently manage inventory levels; unseasonal or severe weather conditions; the seasonal nature of our business; the adverse effect on our reputation if our independent vendors do not use ethical business practices or comply with applicable laws and regulations; assessments for additional state taxes; our exposure to periodic litigation and other regulatory proceedings, including with respect to product liability claims; incurrence of charges due to impairment of goodwill, other intangible assets and long-lived assets; our failure to retain our executive management team and to attract qualified new personnel; the impact on our business of adverse worldwide economic and market conditions, including economic factors that negatively impact consumer spending on discretionary items; the inability of our past performance generally, as reflected on our historical financial statements, to be indicative of our future performance; the impact of increased costs due to a decrease in our purchasing power following the separation from Sears Holdings and other losses of benefits associated with being a subsidiary of Sears Holdings; the failure of Sears Holdings or its subsidiaries to perform under various transaction agreements that have been executed in connection with the separation or our failure to have necessary systems and services in place when certain of the transaction agreements expire; potential indemnification liabilities to Sears Holdings pursuant to the separation and distribution agreement; our inability to engage in certain corporate transactions after the separation; our difficulty in operating as a separate entity following the separation; our failure to achieve some or all of the expected benefits of the separation, and adverse effects of the separation on our business; potential liabilities under fraudulent conveyance and transfer laws and legal capital requirements; increases in our expenses and administrative burden in relation to becoming a public company, in particular to bring us into compliance with certain provisions of the Sarbanes-Oxley Act of 2002; and other risks, uncertainties and factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2014. We intend the forward-looking statements to speak only as of the time made and do not undertake to update or revise them as more information becomes available, except as required by law.

-Financial Tables Follow-

LANDS' END, INC.
Condensed Consolidated and Combined Balance Sheets
(Unaudited)
 
 October 31,November 1,January 31,
(in thousands, except share data) 2014 20132014
ASSETS      
Current assets      
Cash and cash equivalents $105,574 $16,331 $22,411
Restricted cash 3,300 3,300 3,300
Accounts receivable, net 39,459 38,648 33,617
Inventories, net 403,938 463,957 369,928
Prepaid expenses and other current assets 40,361 37,602 21,993
Total current assets 592,632 559,838 451,249
Property and equipment, net 99,070 99,162 101,096
Goodwill 110,000 110,000 110,000
Intangible assets, net 529,369 531,999 531,342
Other assets 22,942 617 588
TOTAL ASSETS $1,354,013 $1,301,616 $1,194,275
LIABILITIES AND STOCKHOLDERS' EQUITY      
Current liabilities      
Accounts payable $157,674 $139,393 $115,387
Deferred tax liabilities 2,850 7,954 4,019
Other current liabilities 121,924 97,086 83,955
Total current liabilities 282,448 244,433 203,361
Long-term debt 507,275
Long-term deferred tax liabilities 172,930 194,966 195,534
Other liabilities 17,439 3,233 3,066
TOTAL LIABILITIES 980,092 442,632 401,961
Commitments and contingencies      
STOCKHOLDERS' EQUITY      
Common stock, par value $0.01- authorized: 480,000,000 shares; issued and outstanding: 31,956,521 320
Additional paid-in capital 342,130
Retained earnings 35,782
Net parent company investment 862,041 794,309
Accumulated other comprehensive loss (4,311) (3,057) (1,995)
Total stockholders' equity 373,921 858,984 792,314
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,354,013 $1,301,616 $1,194,275
 
 
LANDS' END, INC.
Condensed Consolidated and Combined Statements of Comprehensive Operations
 (Unaudited)
 
 13 Weeks Ended39 Weeks Ended
(in thousands except per share data)October
31, 2014
November
1, 2013
October
31, 2014
November
1, 2013
REVENUES        
Merchandise sales and services, net $373,082 $383,851 $1,050,787 $1,032,447
COSTS AND EXPENSES        
Cost of sales (excluding depreciation and amortization) 189,787 209,401 537,064 553,735
Selling and administrative 143,370 145,917 419,859 408,782
Depreciation and amortization 4,802 5,255 14,629 16,253
Other operating expense, net 25 7 45 59
Total costs and expenses 337,984 360,580 971,597 978,829
Operating income 35,098 23,271 79,190 53,618
Interest expense 6,194 14,324
Other income, net 507 10 847 33
Income before income taxes 29,411 23,281 65,713 53,651
Income tax expense 11,420 9,002 25,009 20,747
NET INCOME $17,991 $14,279 $40,704 $32,904
Other comprehensive income (loss), net of tax        
Foreign currency translation adjustments (2,698) 1,273 (2,316) 104
COMPREHENSIVE INCOME $15,293 $15,552 $38,388 $33,008
NET INCOME PER COMMON SHARE ATTRIBUTABLE TO STOCKHOLDERS        
Basic: $0.56 $0.45 $1.27 $1.03
Diluted: $0.56 $0.45 $1.27 $1.03
         
Basic weighted average common shares outstanding 31,957 31,957 31,957 31,957
Diluted weighted average common shares outstanding 31,971 31,957 31,965 31,957

Use and Definition of Non-GAAP Financial Measures

1Adjusted EBITDA-In addition to our Net income determined in accordance with accounting principles generally accepted in the United States ("GAAP"), for purposes of evaluating operating performance, we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), which is adjusted to exclude certain significant items as set forth below. Our management uses Adjusted EBITDA to evaluate the operating performance of our business, as well as for executive compensation metrics, for comparable periods. 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:

LANDS' END, INC.
Adjusted EBITDA Reconciliation
(Unaudited)
 
 13 Weeks Ended
 October 31, 2014November 1, 2013
(in thousands)
$'s
% of
Net Sales

$'s
% of
Net Sales
Net income $17,991 4.8% $14,279 3.7%
Income tax expense 11,420 3.1% 9,002 2.3%
Other income, net (507) (0.1)% (10) —%
Interest expense 6,194 1.7% —%
Operating income 35,098 9.4% 23,271 6.1%
Depreciation and amortization 4,802 1.3% 5,255 1.4%
Loss on disposal of property and equipment 25 —% 7 —%
Adjusted EBITDA $39,925 10.7% $28,533 7.4%

 

LANDS' END, INC.
Adjusted EBITDA Reconciliation
(Unaudited)
 
 39 Weeks Ended
 October 31, 2014November 1, 2013
(in thousands)
$'s
% of
Net Sales

$'s
% of
Net Sales
Net income $40,704 3.9% $32,904 3.2%
Income tax expense 25,009 2.4% 20,747 2.0%
Other income, net (847) (0.1)% (33) —%
Interest expense 14,324 1.4% —%
Operating income 79,190 7.5% 53,618 5.2%
Depreciation and amortization 14,629 1.4% 16,253 1.6%
Loss on disposal of property and equipment 45 —% 59 —%
Adjusted EBITDA $93,864 8.9% $69,930 6.8%

 

LANDS' END, INC.
Condensed Consolidated and Combined Statements of Cash Flows
(Unaudited)
 
 39 Weeks Ended
(in thousands)October
31, 2014
November
1, 2013
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income $40,704 $32,904
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 14,629 16,253
Amortization of debt issuance costs 1,092
Loss on disposal of property and equipment 45 59
Stock-based compensation 1,954
Deferred income taxes 7,730 3,407
Change in operating assets and liabilities:    
Inventories (36,306) (84,982)
Accounts payable 44,989 30,010
Other operating assets (23,402) (22,991)
Other operating liabilities 34,123 14,394
Net cash provided by (used in) operating activities 85,558 (10,946)
CASH FLOWS FROM INVESTING ACTIVITIES    
Proceeds from sale of property and equipment 9
Purchases of property and equipment (11,141) (3,629)
Net cash used in investing activities (11,141) (3,620)
CASH FLOWS FROM FINANCING ACTIVITIES    
Contributions from / (distributions to) Sears Holdings, net 8,784 2,739
Proceeds from issuance of long-term debt 515,000
Payments on term loan facility (2,575)
Debt issuance costs (11,433)
Dividend paid to a subsidiary of Sears Holdings Corporation (500,000)
Net cash provided by financing activities 9,776 2,739
Effects of exchange rate changes on cash (1,030) (99)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 83,163 (11,926)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,411 28,257
CASH AND CASH EQUIVALENTS, END OF PERIOD $105,574 $16,331
SUPPLEMENTAL INFORMATION:    
Supplemental Cash Flow Data:    
Unpaid liability to acquire property and equipment $2,030 $1,584
Income taxes paid $13,013 $4,659
Interest paid $13,020 $—

Financial information by segment is presented in the following tables for the 13 and 39 weeks ended October 31, 2014 and November 1, 2013, respectively.

LANDS' END, INC.
Segment Financial Information
(Unaudited)
 
(in thousands)
Direct

Retail
Corporate/
Other

Total
13 Weeks Ended October 31, 2014        
Merchandise sales and services, net $320,286 $52,776 $20 $373,082
Costs and expenses:        
Cost of sales (excluding depreciation and amortization) 160,807 28,980 189,787
Selling and administrative 111,712 22,980 8,678 143,370
Depreciation and amortization 3,822 643 337 4,802
Other operating expense, net 25 25
Total costs and expenses 276,341 52,603 9,040 337,984
Operating income (loss) 43,945 173 (9,020) 35,098
Interest expense 6,194 6,194
Other income, net 507 507
Income (loss) before income taxes 43,945 173 (14,707) 29,411
Interest expense 6,194 6,194
Other income, net 507 507
Depreciation and amortization 3,822 643 337 4,802
Loss on disposal of property and equipment 25 25
Adjusted EBITDA $47,767 $816 $(8,658) $39,925
         
Total assets $1,127,221 $80,406 $146,386 $1,354,013
       
Capital expenditures $4,962 $310 $153 $5,425

 

LANDS' END, INC.
Segment Financial Information
(Unaudited)
 
(in thousands)
Direct

Retail
Corporate/
Other

Total
13 Weeks Ended November 1, 2013        
Merchandise sales and services, net $324,179 $59,639 $33 $383,851
Costs and expenses:        
Cost of sales (excluding depreciation and amortization) 171,226 38,175 209,401
Selling and administrative 114,111 25,636 6,170 145,917
Depreciation and amortization 4,035 882 338 5,255
Other operating expense, net 7 7
Total costs and expenses 289,372 64,693 6,515 360,580
Operating income (loss) 34,807 (5,054) (6,482) 23,271
Other income, net 10 10
Income (loss) before income taxes 34,807 (5,054) (6,472) 23,281
Other income, net 10 10
Depreciation and amortization 4,035 882 338 5,255
Loss on disposal of property and equipment 7 7
Adjusted EBITDA $38,842 $(4,172) $(6,137) $28,533
         
Total assets $1,176,621 $90,149 $34,846 $1,301,616
         
Capital expenditures $1,618 $— $249 $1,867
 
 
LANDS' END, INC.
Segment Financial Information
(Unaudited)
 
(in thousands)
Direct

Retail
Corporate/
Other

Total
39 Weeks Ended October 31, 2014        
Merchandise sales and services, net $888,889 $161,831 $67 $1,050,787
Costs and expenses:        
Cost of sales (excluding depreciation and amortization) 448,519 88,545 537,064
Selling and administrative 324,820 69,184 25,855 419,859
Depreciation and amortization 11,682 1,938 1,009 14,629
Other operating expense, net 45 45
Total costs and expenses 785,021 159,667 26,909 971,597
Operating income (loss) 103,868 2,164 (26,842) 79,190
Interest expense 14,324 14,324
Other income, net 847 847
Income (loss) before income taxes 103,868 2,164 (40,319) 65,713
Interest expense 14,324 14,324
Other income, net 847 847
Depreciation and amortization 11,682 1,938 1,009 14,629
Loss on disposal of property and equipment 45 45
Adjusted EBITDA $115,550 $4,102 $(25,788) $93,864
         
Total assets $1,127,221 $80,406 $146,386 $1,354,013
         
Capital expenditures $10,393 $452 $296 $11,141

 

LANDS' END, INC.
Segment Financial Information
(Unaudited)
 
(in thousands)
Direct

Retail
Corporate/
Other

Total
39 Weeks Ended November 1, 2013        
Merchandise sales and services, net $860,774 $171,596 $77 $1,032,447
Costs and expenses:        
Cost of sales (excluding depreciation and amortization) 455,794 97,941 553,735
Selling and administrative 316,882 75,476 16,424 408,782
Depreciation and amortization 12,590 2,655 1,008 16,253
Other operating expense, net 59 59
Total costs and expenses 785,266 176,072 17,491 978,829
Operating income (loss) 75,508 (4,476) (17,414) 53,618
Other income, net 33 33
Income (loss) before income taxes 75,508 (4,476) (17,381) 53,651
Other income, net 33 33
Depreciation and amortization 12,590 2,655 1,008 16,253
Loss on disposal of property and equipment 59 59
Adjusted EBITDA $88,098 $(1,821) $(16,347) $69,930
         
Total assets $1,176,621 $90,149 $34,846 $1,301,616
         
Capital expenditures $3,355 $1 $273 $3,629
CONTACT: ICR

         John Rouleau / Rachel Schacter

         203-682-8200

         John.Rouleau@icrinc.com

         Rachel.Schacter@icrinc.com

         

         Lands' End, Inc.

         Michele Casper

         Director of Public Relations

         (608) 935-4633

         Michele.Casper@landsend.com

         

         Lands' End, Inc.

         Mike Rosera

         Chief Operating Officer and Chief Financial Officer

         (608) 935-9341