le-10q_20200501.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended May 1, 2020

-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      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      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

 

 

 

 

 

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  

As of July 20, 2020 the registrant had 32,600,590 shares of common stock, $0.01 par value, outstanding.

 

 


 

 

Explanatory Note

 

In reliance on the Securities and Exchange Commission (the “SEC”) Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, SEC Release No. 34-88465, dated March 25, 2020 (the “Order”), the Company delayed the filing of this Quarterly Report on Form 10-Q, which was originally due on June 10, 2020.

 

The Company required additional time to finalize this Quarterly Report on Form 10-Q due to circumstances related to the coronavirus disease 2019 (COVID-19) pandemic. Areas such as impairment review of goodwill and long-lived assets, inventory reserves, lease accounting, other contingencies and accounting for the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) were complexities due to the impact of the COVID-19 pandemic that the Company deemed it necessary to review further prior to the finalization of the financial statements.  Among other factors, the furlough of a majority of its corporate staff through May 26, 2020 and the “Safer at Home” order that was in effect for the State of Wisconsin from March 26, 2020 to May 14, 2020 materially impacted the Company’s employees, including employees who assist in preparing this Quarterly Report on Form 10-Q.  In addition, since mid-March, management of the Company has been focused on responding to the pandemic and implementing programs and changes at the Company, including those regarding furloughs, workforce reductions, inventory management, liquidity management and financial flexibility, reductions in capital investment, store closures and re-opening plans, and the safety and wellness of employees in operations that have remained operational on its campus (primarily its distribution and customer care centers).  

 


 


 

LANDS’ END, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED MAY 1, 2020

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

1

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Operations

 

2

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders' Equity

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

27

 

 

 

 

Item 4.

Controls and Procedures

 

28

 

 

 

 

 

PART II OTHER INFORMATION

 

29

 

 

 

 

Item 1.

Legal Proceedings

 

29

 

 

 

 

Item 1A.

Risk Factors

 

29

 

 

 

 

Item 6.

Exhibits

 

30

 

 

 

 

 

Signatures

 

31

 

 

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDS’ END, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

13 Weeks Ended

 

(in thousands, except per share data)

 

May 1,

2020

 

 

May 3,

2019

 

Net revenue

 

$

217,008

 

 

$

262,433

 

Cost of sales (excluding depreciation and amortization)

 

 

122,853

 

 

 

142,559

 

Gross profit

 

 

94,155

 

 

 

119,874

 

 

 

 

 

 

 

 

 

 

Selling and administrative

 

 

105,796

 

 

 

116,844

 

Depreciation and amortization

 

 

8,786

 

 

 

7,618

 

Other operating expense, net

 

 

4,285

 

 

 

148

 

Operating loss

 

 

(24,712

)

 

 

(4,736

)

Interest expense

 

 

5,311

 

 

 

7,834

 

Other income, net

 

 

(173

)

 

 

(867

)

Loss before income taxes

 

 

(29,850

)

 

 

(11,703

)

Income tax benefit

 

 

(9,207

)

 

 

(4,885

)

NET LOSS

 

$

(20,643

)

 

$

(6,818

)

NET LOSS PER COMMON SHARE

 

 

 

 

 

 

 

 

Basic:

 

$

(0.64

)

 

$

(0.21

)

Diluted:

 

$

(0.64

)

 

$

(0.21

)

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

32,448

 

 

 

32,261

 

Diluted weighted average common shares outstanding

 

 

32,448

 

 

 

32,261

 

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

 

(in thousands)

 

May 1, 2020

 

 

May 3, 2019

 

NET LOSS

 

$

(20,643

)

 

$

(6,818

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,259

)

 

 

(234

)

COMPREHENSIVE LOSS

 

$

(21,902

)

 

$

(7,052

)

See accompanying Notes to Condensed Consolidated Financial Statements.

2


Table of Contents

 

LANDS’ END, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share data)

 

May 1, 2020

 

 

May 3, 2019

 

 

January 31, 2020

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,134

 

 

$

40,221

 

 

$

77,148

 

Restricted cash

 

 

1,953

 

 

 

1,821

 

 

 

2,149

 

Accounts receivable, net

 

 

35,381

 

 

 

27,510

 

 

 

50,953

 

Inventories, net

 

 

383,163

 

 

 

319,319

 

 

 

375,670

 

Prepaid expenses and other current assets

 

 

46,221

 

 

 

35,304

 

 

 

39,458

 

Total current assets

 

 

525,852

 

 

 

424,175

 

 

 

545,378

 

Property and equipment, net

 

 

155,511

 

 

 

152,405

 

 

 

157,665

 

Operating lease right-of-use asset

 

 

38,621

 

 

 

29,327

 

 

 

38,665

 

Goodwill

 

 

106,700

 

 

 

110,000

 

 

 

110,000

 

Intangible asset, net

 

 

257,000

 

 

 

257,000

 

 

 

257,000

 

Other assets

 

 

4,651

 

 

 

5,473

 

 

 

4,921

 

TOTAL ASSETS

 

$

1,088,335

 

 

$

978,380

 

 

$

1,113,629

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Current borrowings on ABL Facility

 

$

75,000

 

 

$

 

 

$

 

Current borrowings on Term Loan

 

 

382,858

 

 

 

5,150

 

 

 

5,150

 

Accounts payable

 

 

101,445

 

 

 

98,623

 

 

 

158,436

 

Lease liability - current

 

 

5,867

 

 

 

8,786

 

 

 

5,864

 

Other current liabilities

 

 

82,904

 

 

 

84,172

 

 

 

114,116

 

Total current liabilities

 

 

648,074

 

 

 

196,731

 

 

 

283,566

 

Long-term debt, net

 

 

 

 

 

381,504

 

 

 

378,657

 

Lease liability - long-term

 

 

41,388

 

 

 

24,772

 

 

 

39,841

 

Deferred tax liabilities

 

 

65,446

 

 

 

56,108

 

 

 

57,651

 

Other liabilities

 

 

5,529

 

 

 

4,060

 

 

 

5,532

 

TOTAL LIABILITIES

 

 

760,437

 

 

 

663,175

 

 

 

765,247

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $0.01 authorized: 480,000 shares;

   issued and outstanding: 32,596, 32,363 and 32,382, respectively

 

 

326

 

 

 

324

 

 

 

324

 

Additional paid-in capital

 

 

362,072

 

 

 

354,016

 

 

 

360,656

 

Accumulated deficit

 

 

(20,253

)

 

 

(25,718

)

 

 

390

 

Accumulated other comprehensive loss

 

 

(14,247

)

 

 

(13,417

)

 

 

(12,988

)

TOTAL STOCKHOLDERS' EQUITY

 

 

327,898

 

 

 

315,205

 

 

 

348,382

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,088,335

 

 

$

978,380

 

 

$

1,113,629

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3


Table of Contents

 

LANDS’ END, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

13 Weeks Ended

 

(in thousands)

 

May 1, 2020

 

 

May 3, 2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(20,643

)

 

$

(6,818

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,786

 

 

 

7,618

 

Amortization of debt issuance costs

 

 

429

 

 

 

434

 

Loss (gain) on property and equipment

 

 

842

 

 

 

(55

)

Stock-based compensation

 

 

1,828

 

 

 

1,974

 

Deferred income taxes

 

 

8,132

 

 

 

(2,501

)

Goodwill impairment

 

 

3,300

 

 

 

 

Other

 

 

821

 

 

 

(133

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

(8,502

)

 

 

2,234

 

Accounts payable

 

 

(54,084

)

 

 

(20,205

)

Other operating assets

 

 

6,902

 

 

 

10,612

 

Other operating liabilities

 

 

(28,009

)

 

 

(29,450

)

Net cash used in operating activities

 

 

(80,198

)

 

 

(36,290

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(10,789

)

 

 

(15,042

)

Net cash used in investing activities

 

 

(10,789

)

 

 

(15,042

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from borrowings under ABL Facility

 

 

75,000

 

 

 

 

Payments of term-loan

 

 

(1,288

)

 

 

(101,287

)

Payments of employee withholding taxes on share-based compensation

 

 

(410

)

 

 

(687

)

Net cash provided by (used in) financing activities

 

 

73,302

 

 

 

(101,974

)

Effects of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(525

)

 

 

(5

)

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(18,210

)

 

 

(153,311

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH,

      BEGINNING OF PERIOD

 

 

79,297

 

 

 

195,353

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$

61,087

 

 

$

42,042

 

SUPPLEMENTAL CASH FLOW DATA

 

 

 

 

 

 

 

 

Unpaid liability to acquire property and equipment

 

$

4,707

 

 

$

4,901

 

Income taxes paid, net of refunds

 

$

(1,210

)

 

$

12

 

Interest paid

 

$

4,667

 

 

$

6,966

 

Lease liabilities arising from obtaining Operating lease right-of-use assets

 

$

3,074

 

 

$

3,731

 

 

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

 

 

Retained Earnings/ (Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

(in thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit)

 

 

Loss

 

 

Equity

 

Balance at January 31, 2020

 

 

32,382

 

 

$

324

 

 

$

360,656

 

 

$

390

 

 

$

(12,988

)

 

$

348,382

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(20,643

)

 

 

 

 

 

(20,643

)

Cumulative translation adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,259

)

 

 

(1,259

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,828

 

 

 

 

 

 

 

 

 

1,828

 

Vesting of restricted shares

 

 

275

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Restricted stock shares surrendered for taxes

 

 

(61

)

 

 

 

 

 

(410

)

 

 

 

 

 

 

 

 

(410

)

Balance at May 1, 2020

 

 

32,596

 

 

$

326

 

 

$

362,072

 

 

$

(20,253

)

 

$

(14,247

)

 

$

327,898

 

 

 

 

 

Common Stock Issued

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

(in thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at February 1, 2019

 

 

32,220

 

 

$

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, net of tax

 

 

 

 

 

 

 

 

 

 

 

(1,741

)

 

 

 

 

 

(1,741

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,974

 

 

 

 

 

 

 

 

 

1,974

 

Vesting of restricted shares

 

 

185

 

 

 

4

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Restricted stock shares surrendered for taxes

 

 

(42

)

 

 

 

 

 

(687

)

 

 

 

 

 

 

 

 

(687

)

Balance at May 3, 2019

 

 

32,363

 

 

$

324

 

 

$

354,016

 

 

$

(25,718

)

 

$

(13,417

)

 

$

315,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


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. Lands’ End offers products online at www.landsend.com, on third party online marketplaces and through retail locations.

 

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 income (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

 

 

CARES Act – The Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020.

 

 

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 2020 – The 13 weeks ended May 1, 2020

 

 

First Quarter 2019 - The 13 weeks ended May 3, 2019

 

 

Fiscal 2018 - The 52 weeks ended February 1, 2019

 

 

Fiscal 2019 - The 52 weeks ended January 31, 2020

 

 

GAAP - Accounting principles generally accepted in the United States

 

 

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

 

 

Second Quarter 2020 – the 13 weeks ending July 31, 2020

 

6


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

 

 

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 2020 - The 13 weeks ended May 1, 2020

 

 

Year-to-Date 2019 - The 13 weeks ended May 3, 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 23, 2020.

 

Pursuant to ASC 205, Presentation of Financial Statements, the Company is required to and does evaluate at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company’s Term Loan Facility matures on April 4, 2021, which is within one year after the date of the Condensed Consolidated Financial Statements issued with this Quarterly Report on Form 10-Q. As of May 1, 2020, the remaining balance outstanding under the Term Loan Facility was $384.1 million.  In addition, in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the Company’s ABL Facility would mature on January 4, 2021.  Given the amount currently outstanding under the Term Loan Facility and its maturity date of April 4, 2021, and based on the definitions in the relevant accounting standards, management has determined that this condition raises substantial doubt about the Company’s ability to continue as a going concern.  This evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt is deemed to exist, management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.  

 

The Company is in the process of seeking new financing to replace the Term Loan Facility and, to the extent this can be successfully secured, is expected to alleviate the doubt raised by the application of ASC 205.  Due to the Company’s recent trends of profitable growth, management believes that it will be able to refinance the Term Loan Facility on acceptable terms despite the challenging financial environment reflecting the COVID-19 pandemic.  The Company currently has received non-binding term sheets from multiple investors for transactions which would allow it to refinance the Term Loan Facility debt and is in active discussions and negotiations regarding the refinancing.  The Company’s financial forecasts indicate sufficient liquidity for at least the next twelve months under the terms of these proposals.  However, as the ability to secure a refinancing is conditional upon the execution of agreements with new or existing investors, which is considered outside of the Company’s control, for an amount that allows the Company to meet its obligations as they become due within a period of at least one year from the date of issuance of its financial statements, the refinancing is not considered probable of occurring until such time as the refinancing is completed.  The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  

 

Impact of the COVID-19 Pandemic

 

COVID-19 surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic.  During First Quarter 2020 the COVID-19 pandemic had a disruptive impact on the Company’s business operations and an unfavorable impact on the Company’s results of operations.

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Health and Safety of Employees and Consumers

 

From the beginning of the COVID-19 pandemic, the Company’s priority has been the safety of employees and customers. On March 16, 2020, the Company temporarily closed its 26 U.S. stores.  These stores remained closed at the end of First Quarter 2020 with a phased reopening in Second Quarter 2020.  Additionally, the Company has implemented extra precautions in its office and distribution centers.  These precautions were developed in line with guidance from global, federal and state health authorities, including work-from-home policies, social distancing, thermal scanning and partitions in all facilities.

 

Customer Demand

 

In the First Quarter 2020, demand across all operating segments decreased. The ultimate timing and impact of demand levels will depend on the duration and scope of the COVID-19 pandemic, overall economic conditions and consumer preferences.

 

Supply Chain

 

During First Quarter 2020, the Company did not experience any significant disruption of its supply chain.  However, in response to decreased demand, future orders were reduced and some existing product was repurposed.  The Company continues to place a priority on business continuity and contingency planning. The Company may experience additional disruptions in the supply chain as the pandemic continues, though the Company cannot reasonably estimate the potential impact or timing of those events, and the Company may not be able to mitigate such impact.

 

 

Expense Reduction

 

Beginning in First Quarter 2020, the Company took the following actions to reduce overall expense as a response to decreased demand due to the COVID-19 pandemic:

 

Temporarily reduced base salaries, including a reduction of 50% in the base salary of its Chief Executive Officer and President, 20% reductions in the base salaries of the Company’s other senior management members and scaled salary reductions throughout the Company.

 

Furlough of approximately 70% of corporate employees and nearly 100% of retail employees beginning on March 28, 2020. Some personnel returned to work beginning on April 13, 2020, however approximately 49% of the workforce remained furloughed at the end of First Quarter 2020.

 

Fiscal 2020 merit increases were eliminated.

 

The Board of Directors compensation was temporarily reduced.

 

The Company's 401(k) match was temporarily suspended.

 

Planned capital expenditures for Fiscal 2020 were reduced by approximately 50%.

 

Other discretionary operating expenses were significantly reduced.

 

Liquidity and Capital Resources

The Term Loan Facility matures on April 4, 2021.  The ABL Facility matures on November 16, 2022, however in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the ABL Facility would mature on January 4, 2021.  During First Quarter 2020, the Company increased capacity under the ABL Facility by $25.0 million so that maximum borrowings are $200.0 million. The Company is in the process of seeking to refinance the Term Loan Facility however the timeline for this process has been increased due to the impact of the COVID-19 pandemic on the financial markets.

 

Goodwill and Indefinite-Lived Intangible Asset

 

The duration and severity of the COVID-19 pandemic could result in future impairment charges for goodwill and the trade name indefinite-lived intangible asset. The Company considered the COVID-19 pandemic to be a triggering event in First Quarter 2020 for the Outfitters and Japan eCommerce reporting units and therefore completed an interim test for impairment of goodwill for these reporting units as of May 1, 2020.  The interim tests employed the assumption that revenue in the Outfitters and Japan eCommerce reporting units will return to Fiscal 2019 levels by Fiscal 2023 (the 53 weeks ending February 2, 2024).  The testing resulted in no impairment of the Outfitters reporting unit and full impairment of the $3.3 million of goodwill allocated to Japan eCommerce reporting unit.  

 

Lease Modifications

 

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In April 2020, the FASB issued guidance indicating that entities may elect not to evaluate whether a concession provided by lessors is a lease modification.  Under existing lease guidance, an entity would have to determine if a lease concession was the result of a new arrangement reached with the landlord, which would be accounted for under the lease modification framework, or if the concession was under the enforceable rights and obligations that existed in the original lease, which would be accounted for outside the lease modification framework. The FASB guidance provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease. During the First Quarter 2020, the Company did not modify any leases as a result of the COVID-19 pandemic and as a result, the Company has not yet made a policy election with respect to lease modifications.

 

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2016, the FASB issued ASU 2016-13, Financial Statements - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates relating to trade receivables, loans and other financial instruments. The standard is effective for fiscal years beginning after December 15, 2019. The Company adopted this accounting standard in First Quarter 2020.  There was no material impact on the Company's Condensed Consolidated Financial Statements and related disclosures as a result of adoption.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance to improve consistent application. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. Certain amendments within this ASU are required to be applied on a retrospective basis, certain other amendments are required to be applied on a modified retrospective basis and all other amendments on a prospective basis. The Company is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.

 

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 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.

 

The following table summarizes the components of basic and diluted EPS:

 

 

 

13 Weeks Ended

 

(in thousands, except per share amounts)

 

May 1, 2020

 

 

May 3, 2019

 

Net loss

 

$

(20,643

)

 

$

(6,818

)

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

32,448

 

 

 

32,261

 

Dilutive effect of stock awards

 

 

 

 

 

 

Diluted weighted average common shares outstanding

 

 

32,448

 

 

 

32,261

 

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.64

)

 

$

(0.21

)

Diluted loss per share

 

$

(0.64

)

 

$

(0.21

)

 

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 1,205,821 and 796,269 anti-dilutive shares excluded from the diluted weighted average shares outstanding for First Quarter 2020 and First Quarter 2019, respectively.

 

NOTE 4. OTHER COMPREHENSIVE LOSS

 

Other comprehensive loss encompasses all changes in equity other than those arising from transactions with stockholders and is comprised solely of foreign currency translation adjustments.

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13 Weeks Ended

 

(in thousands)

 

May 1, 2020

 

 

May 3, 2019

 

Beginning balance: Accumulated other

      comprehensive loss (net of tax of $3,453

       and $3,505 respectively)

 

$

(12,988

)

 

$

(13,183

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (net of tax benefit of $337 and $61 respectively)

 

 

(1,259

)

 

 

(234

)

Ending balance: Accumulated other

      comprehensive loss (net of tax of $3,790

       and $3,566 respectively)

 

$

(14,247

)

 

$

(13,417

)

 

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

 

NOTE 5. DEBT

 

The Company's debt consisted of the following:

 

 

 

 

May 1, 2020

 

 

May 3, 2019

 

 

January 31, 2020

 

(in thousands)

 

 

Amount

 

 

 

Rate

 

 

Amount

 

 

 

Rate

 

 

Amount

 

 

 

Rate

 

Term Loan Facility, maturing April 4, 2021

 

 

$

384,100

 

 

 

 

4.25

%

 

$

389,250

 

 

 

 

5.75

%

 

$

385,388

 

 

 

 

5.05

%

ABL Facility, maturing November 16, 2022

 

 

 

75,000

 

 

 

 

2.07

%

 

 

 

 

 

—%

 

 

 

 

 

 

—%

 

 

 

 

 

459,100

 

 

 

 

 

 

 

 

389,250

 

 

 

 

 

 

 

 

385,388

 

 

 

 

 

 

Less: Current maturities in Current liabilities

 

 

 

457,858

 

 

 

 

 

 

 

 

5,150

 

 

 

 

 

 

 

 

5,150

 

 

 

 

 

 

Less: Unamortized debt issuance costs

 

 

 

1,242

 

 

 

 

 

 

 

 

2,596

 

 

 

 

 

 

 

 

1,581

 

 

 

 

 

 

Long-term debt, net

 

 

$

 

 

 

 

 

 

 

$

381,504

 

 

 

 

 

 

 

$

378,657

 

 

 

 

 

 

 

 

The following table summarizes the Company's borrowing availability under the ABL Facility:

 

(in thousands)

 

May 1, 2020

 

 

May 3, 2019

 

 

January 31, 2020

 

ABL Facility maximum borrowing

 

$

200,000

 

 

$

175,000

 

 

$

175,000

 

Current borrowings under ABL

 

 

75,000

 

 

 

 

 

 

 

Outstanding letters of credit

 

 

8,656

 

 

 

11,203

 

 

 

23,299

 

Borrowing availability under ABL

 

$

116,344

 

 

$

163,797

 

 

$

151,701

 

 

During First Quarter 2020, the Company increased capacity under the ABL Facility by $25.0 million so that maximum borrowings are $200.0 million.

 

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.  As of the end of First Quarter 2020 the Company had borrowings of $75.0 million on the ABL Facility.  

 

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

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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 May 1, 2020.

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 and Maturity

 

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.  The Term Loan Facility will mature on April 4, 2021. The ABL Facility matures on November 16, 2022, however in the event the Term Loan Facility debt is not extended, repaid or otherwise refinanced at least six months before its maturity date, the ABL Facility would mature on January 4, 2021.

 

Pursuant to ASC 205, Presentation of Financial Statements, the Company is required to and does evaluate at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company’s Term Loan Facility matures on April 4, 2021, which is within one year after the date of the Condensed Consolidated Financial Statements issued with this Quarterly Report on Form 10-Q. As of May 1, 2020, the remaining balance outstanding under the Term Loan Facility was $384.1 million.  Given the amount currently outstanding under the Term Loan Facility and its maturity date of April 4, 2021, and based on the definitions in the relevant accounting standards, management has determined that this condition raises substantial doubt about the Company’s ability to continue as a going concern.  This evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt is deemed to exist, management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.  

 

The Company is in the process of seeking new financing to replace the Term Loan Facility and, to the extent this can be successfully secured, is expected to alleviate the doubt raised by the application of ASC 205.  Due to the Company’s recent trends of profitable growth, management believes that it will be able to refinance the Term Loan Facility on acceptable terms despite the challenging financial environment reflecting the COVID-19 pandemic.  The Company currently has received non-binding term sheets from multiple investors for transactions which would allow it to refinance the Term Loan Facility debt and is in active discussions and negotiations regarding the refinancing.  The Company’s financial forecasts indicate sufficient liquidity for at least the next twelve months under the terms of these proposals.  However, as the ability to secure a refinancing is conditional upon the execution of agreements with new or existing investors, which is considered outside of the Company’s control, for an amount that allows the Company to meet its obligations as they become due within a period of at least one year from the date of issuance of its financial statements, the refinancing is not considered probable of occurring until such time as the refinancing is completed.  The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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.

 

 

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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 Target Shares expected to be earned.

 

 

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 fair value of each Option Award is estimated on the grant date using the Black-Scholes option pricing model.

 

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

 

(in thousands)

 

May 1, 2020

 

 

May 3, 2019

 

Deferred Awards

 

$

1,641

 

 

$

1,365

 

Performance Awards

 

 

 

 

 

422

 

Option Awards

 

 

187

 

 

 

187

 

Total stock-based compensation expense

 

$

1,828

 

 

$

1,974

 

 

The following table provides a summary of the Deferred Awards activity for Year-to-Date 2020:

 

 

 

Deferred Awards

 

(in thousands, except per share amounts)

 

Number of

Shares

 

 

Weighted Average

Grant Date Fair Value

per Share

 

Unvested as of January 31, 2020

 

 

745

 

 

$

18.49

 

Granted

 

 

753

 

 

 

6.85

 

Vested

 

 

(275

)

 

 

19.87

 

Forfeited or expired

 

 

(17

)

 

 

17.21

 

Unvested as of May 1, 2020

 

 

1,206

 

 

 

10.91

 

 

Total unrecognized stock-based compensation expense related to unvested Deferred Awards was approximately $9.7 million as of May 1, 2020, which is expected to be recognized ratably over a weighted average period of 2.1 years. Deferred Awards granted to employees during Fiscal 2020 vest ratably over a period of three years.

 

The following table provides a summary of the Performance Awards activity for Year-to-Date 2020:

 

 

 

Performance Awards

 

(in thousands, except per share amounts)

 

Number of

Shares

 

 

Weighted Average

Grant Date Fair Value

per Share

 

Unvested as of January 31, 2020

 

 

412

 

 

$

18.15

 

Granted

 

 

 

 

 

 

Vested

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

Unvested as of May 1, 2020

 

 

412

 

 

 

18.15

 

 

Total unrecognized stock-based compensation expense related to unvested Performance Awards was approximately $3.2 million as of May 1, 2020, which is expected to be recognized ratably over a weighted average period of 1.6 years. Performance

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Awards granted to employees during Fiscal 2019 and Fiscal 2018 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 2020:

 

 

 

Option Awards

 

(in thousands, except per share amounts)

 

Number of

Shares

 

 

Weighted Average

Grant Date Fair Value

per Share

 

Unvested as of January 31, 2020

 

 

171

 

 

$

8.73

 

Granted

 

 

 

 

 

 

Vested

 

 

(74

)

 

 

8.49

 

Forfeited or expired

 

 

 

 

 

 

Unvested as of May 1, 2020

 

 

97

 

 

 

8.92

 

 

Total unrecognized stock-based compensation expense related to unvested Option Awards was approximately $0.7 million as of May 1, 2020, which is expected to be recognized ratably over a weighted average period of 0.9 years. The Option Awards have a life of ten years and vest ratably over the first four years. As of May 1, 2020, 245,098 shares related to Option Awards were exercisable. No options have been exercised as of May 1, 2020.

 

 

 

NOTE 7. FAIR VALUE MEASUREMENTS 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, $1.8 million and $2.1 million as of May 1, 2020, May 3, 2019 and January 31, 2020, 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 on ABL Facility, 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:

 

 

 

May 1, 2020*

 

 

May 3, 2019

 

 

January 31, 2020

 

(in thousands)

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Long-term debt, including short-term portion

 

$

384,100

 

 

$

299,118

 

 

$

389,250

 

 

$

381,952

 

 

$

385,388

 

 

$

378,643

 

 

* At the end of First Quarter 2020 all debt is short- term.

 

Long-term debt, including short-term portion was valued utilizing Level 2 valuation techniques based on the closing inactive market bid price on May 1, 2020, May 3, 2019, and January 31, 2020. There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis as of May 1, 2020, May 3, 2019, and January 31, 2020.

 

NOTE 8. INCOME TAXES

 

Provision for Income Taxes

 

At the end of each quarter, the Company estimates its effective income tax rate pursuant to ASC 740. The rate for the period consists of the tax rate expected to be applied for the full year to ordinary income adjusted for any discrete items recorded in the period.